WASHINGTON - Self-testing for fair-lending violations could return to haunt banks, despite assurances to the contrary from Assistant Attorney General Deval L. Patrick.
Mr. Patrick promised late last month that he would not punish bankers who use self-testing to uncover fair-lending problems. But he left too many potential pitfalls for the comfort of some banking lawyers.
First, Mr. Patrick said that once the department gets a bank into court, the tests are fair game.
Second, he said his promise doesn't affect private litigants, who can subpoena the test results.
And finally, he failed to address whether the banking agencies are covered by his pledge. That means regulators could pass self-testing information on to Justice.
In fact, his pledge affects Justice Department investigations only. He told the attendees at the Independent Bankers Association of America conference in Hawaii that the department "will not initiate any enforcement activity solely on the basis of a lender's self-testing information, and we will not ask lenders to disclose their results to use as part of our investigation.".
A Justice spokesman said the department has no comment on the speech.
Several banking attorneys said these loopholes are big enough to force any institution to avoid self-testing.
"Although the assistant attorney general was trying to give some comfort to banks, that comfort clearly doesn't go far enough," said D. Jean Veta, a partner at Covington & Burling who represents Northern Trust in its fair- lending battle with Justice.
"You would undertake it with good faith," agreed Howard B. Adler, a partner at Gibson, Dunn & Crutcher, "but never with an assurance that it couldn't be used against you."
"It still strikes me as a potentially dangerous thing to have in your files," Mr. Adler added.
Ms. Veta said she is particularly worried about what civil litigants would do with the test results.
Anyone who wants to sue a bank for lending discrimination can seek self- testing results during discovery, a fact-gathering process that occurs before a trial.
Banks do have several legal means to keep litigants from getting the results. For example, they can claim the self-evaluation privilege, which is intended to protect internal reviews. Or, they can claim the attorney- client privilege.
"But, none of these doctrines is bulletproof in all cases," Ms. Veta said.
That means litigants often can get around these two privileges, and secure the test results.
Several litigators said the test results place bankers, who want to fight Justice, in a difficult position.
"I think it would have a tremendous impact on a jury," said M. Hatcher Norris, a partner at Butler, Norris & Gold. "They would look at it as some kind of admission. I think it would be totally devastating evidence against my client."
"Because it comes from the inside, it is much more powerful evidence," agreed William F. Dow 3d, a partner at Jacobs, Grudberg, Belt & Dow. "It is an admission that we fall short."
Mr. Patrick's policy, while not protecting banks at trial, will encourage institutions that self-test to settle discrimination cases.
"It basically says to the lender that if you do self-testing and it shows there is discrimination, then you can settle and not worry about the self-test," said Richard Ritter, a former prosecutor who now consults on fair-lending issues.
Mr. Ritter noted that every bank charged with lending discrimination to date has settled.
"If there is not going to be an explosion of litigation, then this is a good tool to help you resolve your case," he said.
But if a bank is committed to proceeding with self-testing, it should do so with care.
"They need to go about it in the right way and at the right time," Ms. Veta said.
For example, bankers should first subject employees to extensive fair- lending training, she said. "Obviously, the banks want to avoid producing bad results that might be misleading."
