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The United States Department of Housing and Urban Development (HUD) has published aproposed rule that would implement changes to the Fair Housing Act passed by Congressunder the Economic Growth and Regulatory Paperwork Act of 1996. The new rule would allowlenders to conduct "self-tests" and perform corrective action based on theresults of the tests. The results of the tests and all materials involved in the testswould be privileged so long as the lender took action to correct any possiblediscrimination. This privilege would allow lenders to keep the results of such tests frompublic agencies and private groups.

Self-tests not limited to paired applicant tests
HUD has defined "self-tests" as any "program, practice, or study that alender voluntarily conducts or authorizes a third party to conduct that creates data orfactual information that is not available, and cannot be derived, from actual loanapplication files or other records related to credit transactions." The self-testswould be used by lenders to determine how well they adhere to regulations of the FairHousing Act and Equal Credit Opportunity Act (ECOA). HUD has stated that self-tests couldbe traditional "paired applicant" tests, using mystery shoppers, but could alsobe surveys of mortgage customers or other programs.

Corrective action required if discrimination is uncovered duringself-tests
In order to keep self-testing information privileged, the lender must take correctiveaction if violations of the Fair Housing Act or the ECOA are uncovered during the test.HUD has stated, in the proposed rule, some acceptable forms of corrective action:Examinations of all loan officer activities, a review to determine if there are potentialvictims of discrimination, training of loan officers and underwriters, offers to extendcredit or provide compensation for damages to victims, notifications to victims regardingtheir legal rights, and institution of a monitoring program.

HUD also outlined several areas where self-testing information would notbe privileged. If a lender uncovers discrimination during other types of self-evaluation(employee reviews, audits, etc.), then the information obtained would not be consideredprivileged. Information from self-tests would not be privileged if the lender was alreadyinvolved in a discrimination lawsuit or if the lender was the subject of an administrativelaw proceeding at the time the self-test was performed. Finally, information would not beprivileged if it was derived by reviewing loan application files, credit transactions, orHome Mortgage Disclosure Act (HMDA) data. The rule also states that the information is nolonger privileged if an official from the lending company releases the information to thepublic.

Rule designed to give lenders incentives forself-testing at the pre-application stage of lending
According to the proposed rule, it was Congress' intent to give lenders incentives forpolicing themselves at the pre-application stage or mortgage lending. In instances ofdiscrimination that may occur before a customer fills out an application, there is seldomdocumented evidence of that discrimination. According to mortgage test data from fairhousing groups around the country, discrimination often occurs before any papers aresigned.