QUESTION
Our regulator suggested that we do a self-test of our ECOA Regulation B compliance.
We originate loans in 24 states. Also, we have a multi-billion dollar servicing portfolio.
As the Compliance Officer and General Counsel, I believe there are legal privileges relating to the work product derived from a self-test. However, I can’t find much information about such privilege or whether it also applies to self-correction too.
We are voluntarily conducting the ECOA self-test to ensure compliance with fair lending requirements, among other things. We have done fair lending reviews previously; however, we believe that conducting ECOA self-test and self-correction reviews would provide additional legal protection.
What is the legal privilege provided by conducting ECOA self-tests?
ANSWER
In 1996, amendments were made to the ECOA and the Fair Housing Act (FHA) as part of the Economic Growth and Regulatory Paperwork Reduction Act of 1996. These provisions create a legal privilege for information developed by creditors through voluntary self-tests conducted to determine the level or effectiveness of their compliance with the ECOA and the FHA, provided that appropriate corrective action is taken to address any possible violations discovered.
To elucidate further, a government agency may not obtain privileged information for use in an examination or investigation relating to compliance with the ECOA or the FHA, or by a government agency or credit applicant in any proceeding in which a violation of the ECOA or the FHA is alleged. The 1996 act also provides a challenge to a creditor’s claim of privilege may be filed in any court or administrative law proceeding with appropriate jurisdiction.
The privilege, therefore, serves as an incentive by assuring that evidence of discrimination voluntarily 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.
Consider using our ECOA Tune-up as a tool to review your Regulation B compliance. It will help you gain an overall readout of your ECOA implementation.
Regulations implementing the self-test privilege were adopted under the ECOA as section 1002.15 of Regulation B,[i] and the same was done for the FHA provisions. The rules are virtually the same for both, with the primary difference being the scope of the two laws.
Under the rules, a self-test is defined as
any program, practice, or study designed and specifically used to determine the extent or effectiveness of a creditor’s compliance with the ECOA or the FHA, if that program, practice, or study creates data or factual information that cannot be derived from loan or application files or other records related to credit transactions.
This definition of self-test includes, but is not limited to, the practice of using fictitious applicants for credit (i.e., testers).
A creditor also may develop and use other methods of generating information that is not available in loan and application files, for example, by surveying mortgage loan applicants to assess whether applications were processed appropriately.
However, there is a fundamental distinction: the definition does not include creditor reviews and evaluations of loan and application files, either with or without statistical analysis. Therefore, the self-test privilege does not protect any analysis or review of loan and application files.
Appropriate corrective action is required for the privilege to apply when the self-test shows that it is more likely than not that a violation occurred – even though no violation has been formally adjudicated. That said, taking corrective action is not an admission that a violation occurred.
The
lender must take corrective action that is reasonably likely to remedy the
cause and effect of a likely violation by:
· Identifying the policies or practices that are the likely cause of the violation; and
· Assessing the extent and scope of any violation.
Appropriate corrective action may include both prospective and remedial relief, except that to establish a privilege, the lender:
· Is not required to
provide remedial relief to a tester used in a self-test;
· Is only required to
provide remedial relief to an applicant identified by the self-test as to one
whose rights were more likely than not violated; and
· Is not required to provide remedial relief to a particular applicant if the statute of limitations applicable to the violation expired before the creditor obtained the self-test results or the applicant is otherwise ineligible for such relief.
The report or results of a self-test are not privileged if the lender or a person with lawful access to the report or results:
·
Voluntarily
discloses any part of the report or results, or any other information
privileged under this section, to an applicant, government agency, or the
public;
·
Discloses
any part of the report or results, or any other information privileged under
the self-test rules, as a defense to charges that the creditor has violated the
act or regulation; or
· Fails or is unable to produce written or recorded information about the self-test that must be retained under the rules when the information is needed to determine whether the privilege applies. (In general, self-tests and results must be retained for 25 months after completion.)
Jonathan Foxx, Ph.D., MBAChairman & Managing Director
[i] 12 CFR
1002.15, § 6.14 Incentives for Self-Testing and Self-Correction
