Congress passed a law protecting lenders from having the results of fair lending self-tests used against them. But lawmakers left it to HUD and the Federal Reserve to write the fine print as to how this protection would work. The new rules contain many traps for the unwary.
HUD and the Federal Reserve early this year issued proposed rules implementing the newly created legal privilege for information derived from lenders' fair lending self-tests. The mortgage industry had to wait for these proposed rules because Congress delegated the task of defining the privilege to HUD, which regulates the Fair Housing Act (FHAct), and to the Federal Reserve, which regulates the Equal Credit Opportunity Act (ECOA).
This article discusses the agencies' definitions for "self-test" in the proposed rules as well as the parameters of the privilege. The scope of the privilege is that the report or results of the self-test may not be obtained or used by an aggrieved person, complainant, department or agency in any proceeding or civil action where a violation of the FHAct or ECOA are alleged. The self-testing report or results also may not be obtained or used in any examination or investigation relating to compliance with the FHAct or ECOA or the self-test regulations.
The agencies have attempted to provide lenders with incentives for conducting voluntary self-tests while protecting consumers from discriminatory practices. Balancing these two goals yields a narrow definition for self-tests coupled with an affirmative duty for lenders to correct possible violations. Final rules have not yet been published although Congress directed the agencies to publish a rule by March 31 of this year. According to both HUD and the Federal Reserve, no date has been set for publication of the final rules. However, both agencies indicated that their goal is to publish final rules by year-end.
Three possible reasons for the delay are:
* Congress directed the agencies in the Economic Growth and Regulatory Paperwork Reduction Act (the Economic Act - discussed more fully later) to publish substantially similar rules. Therefore, the two agencies must reach a consensus regarding any issues or modifications prior to publishing their respective final rules.
* Balancing the public's right to be protected from discriminatory behavior with the Congressional mandate to provide an incentive to lenders for self-testing and self-policing is a formidable task - especially given the divergent views expressed in the comment letters received by the agencies.
* The limited resources of both agencies are more stretched than ever. Congress mandated in the Economic Act that the agencies streamline, simplify and unify the disclosure requirements under RESPA and the Truth in Lending Act, which are regulated by HUD and the Federal Reserve, respectively. Since passage of the Economic Act, there have been Federal Reserve hearings as well as Senate hearings that have involved both HUD and the Federal Reserve.
Unfortunately, both agencies declined to comment on changes that may be included in the final rules. Discussed later are the comments received and reviewed by both agencies. It remains to be seen whether the views and suggested changes submitted by industry and consumer representatives will be incorporated into the final rules.
Congress enacted the Economic Act on September 30, 1996. The Economic Act amended the FHAct and ECOA by creating a legal privilege for information gathered and developed during voluntary self-tests conducted by lenders to determine the level of the lenders' compliance with the two fair lending acts.
Rather than mandating a definition for "self-test," Congress directed HUD and the Federal Reserve to create substantially similar definitions and implementing regulations for their respective acts. In addition, Congress authorized the agencies to define by regulation the practices to be covered by the privilege within the guidelines set by the Economic Act. …