Banks Decry Fed Rule Proposal On Self-Tests' Confidentiality

A Federal Reserve Board proposal does not go far enough to protect the confidentiality of fair-lending self-tests, industry officials charged in comment letters.

"The board's proposed regulations implementing this new self-testing privilege fall far short of what is required by the statute," wrote Paul A. Smith, senior federal counsel at the American Bankers Association.

In particular, bankers argued that the rule is too narrow, prevents institutions from sharing information with regulators, and restricts their ability to compensate bias victims.

Huntington National Bank vice president Daniel W. Morton said the proposal would not protect file reviews and other statistical analyses, which are the most useful way to unearth bias problems.

"Removing from the scope of the privilege the tools that will be most useful render the privilege itself useless," Mr. Morton wrote.

The Fed also should specify in the rule that banks may share documents with regulators without having to worry that the information will be used against them in court, First Virginia Banks assistant general counsel Kathleen A. Kordek wrote.

"By maintaining the privilege where there has been voluntary disclosure to supervisory agencies, the board encourages a cooperative relationship between banks and their regulators," she wrote.

A provision stripping banks of the protection if they disclose results of self-tests to the public could discourage banks from compensating bias victims, warned Warren Lasko, executive vice president of the Mortgage Bankers Association.

"When paying damages to aggrieved borrowers, some explanation referencing the report or its results will have to accompany payment," Mr. Lasko said. "Such a reference could be misinterpreted as a voluntary disclosure."

Community activists, however, said the rule is too broad. "The proposed definition (of self-tests) would restrict availability of information critically necessary to detecting and remedying lending discrimination," according to a letter by the New York Reinvestment Task Force. It recommended limiting the privilege to matched-pair testing, the comparison of how minority and white borrowers with similar financial backgrounds are treated.

The rules got support on Capitol Hill, however. "It was not the intent of Congress to provide legal privilege for activities such as compliance analysis and reviews of loan files," wrote Rep. Maurice D. Hinchey, R-N.Y. "Such a broad definition of self-testing would only serve to provide legal privilege for potentially critical and telling information on creditors' lending practices produced in the ordinary course of business."

Congress passed a measure last year protecting the confidentiality of self-tests but ordered the Fed to write rules enforcing the law. The Fed is expected to adopt the rules within a few months.

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