FTC Supports Federal Reserve Board's Proposed Revisions that Would Implement Recent Amendments to the Equal Credit Opportunity Act

The Federal Trade Commission announced today that it strongly supports the Federal Reserve Board’s proposals to implement recently enacted amendments to the Equal Credit Opportunity Act (" ECOA"). The recent amendments create a legal privilege for a report or results of "self-tests" conducted by creditors to determine the level or effectiveness of their compliance with ECOA. The FTC enforces the ECOA for all non-bank lenders.

The 1996 Act did not define "self-test," but assigned that task to the Federal Reserve Board. Accordingly, on January 2, 1997, the Board published for public comment proposed amendments to Regulation B and the corresponding Official Staff Commentary to implement the ECOA amendments. The Board proposes to define "self-test" as "any program, practice or study that creates data or factual information that is not available and cannot be derived from loan or application files or other records related to transactions, and is used to determine the extent or effectiveness of the creditor’s compliance with the regulation’s prohibition on discrimination or discouraging applications for credit." Under examples given in the proposed commentary, the Board’s definition includes the practice of using testers, or fictitious applicants for credit, but does not include the collection of data required by law or by any governmental authority or a creditor’s review or evaluation of loan files.

In a letter to the Board of Governors of the Federal Reserve System, the FTC said, "The Commission strongly supports the definition of ?self-test’ proposed by the Board." "In particular," the letter says, "the Commission supports a privilege that is limited to self-testing that creates new data, such as matched-pair testing by fictitious applicants. . . . [T]he Commission believes that creditors -- and particularly creditors under the Commission’s jurisdiction -- do not have the same need for this privilege for other types of self-evaluation.

The Commission believes that the potential adverse impact on its ability to enforce the ECOA outweighs any beneficial effect on ECOA compliance that might result from a broader privilege."

The letter also states that "[t]he type of testing that most needs to be encouraged is the kind defined by the Board -- testing that creates new data that cannot be derived from loan files or other records. For example, matched-pair testing often generates data about statements made to potential applicants by loan officers which are not ordinarily captured in the creditor’s records.

It is particularly important for lenders to conduct matched-pair testing, because such testing frequently is the only way to detect discrimination in the preapplication stage," the Commission said. "Without a privilege for this testing, a creditor might have to produce any data created to governmental agencies or private parties, and therefore may choose to never undertake this kind of self-testing."

In addition, the Commission supports the Board’s proposal that a creditor claiming the privilege must disclose certain basic information about the privileged material it is withholding.

The Commission suggested, "it would be helpful if the Board clarified that the creditor should be required to provide a privilege log with information similar to that generally required when the attorney client privilege or work product doctrine is asserted." The FTC also supports the Board’s approach in describing what may be necessary "appropriate corrective action" for any violation uncovered in order to claim the privilege.

The Commission vote to file the comments with the Federal Reserve Board was 5-0.

Copies of the comments are available from the FTC’s Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326- 2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710. FTC news releases and other materials also are available on the Internet at the FTC World Wide Web site at: http://www.ftc.gov (no period).

(FTC File No. S039026)