A rule that takes effect Jan. 31 will not protect the information a bank produces when it polices its fair-lending compliance, according to industry lawyers.
"This is a horrible rule," said Andrew L. Sandler, a partner in the Washington law firm of Skadden, Arps, Slate, Meagher & Flom. "It is hard to imagine a more disappointing result for lenders seeking to use self-testing to ensure compliance with fair-lending laws."
"This provides no protection," said James D. McLaughlin, director of regulatory and trust affairs at the American Bankers Association. "Bankers are not going to take advantage of it."
Adopted Dec. 18 by the Federal Reserve Board and the Department of Housing and Urban Development, the rule is supposed to shelter these test results from subpoenas.
But lawyers complained that the new rule only applies if the bank has taken "sufficient" steps to remedy problems uncovered in the review. The rule leaves it up to an administrative law judge to decide whether the bank's efforts had been "sufficient."
"This can be challenged," said Warren W. Traiger, a partner in the New York law firm of Butler, Fitzgerald & Potter. "The protection is not absolutely certain."
The rule also only protects quality control efforts such as "mystery shopping" and customer surveys. "This excludes from coverage most useful type of analyses, such as comparative file reviews and statistical pricing analysis," Mr. Sandler said.
Also, a bank loses its privilege if it discloses the results of the test to its regulator, and the rule does not preempt state laws that permit litigants to subpoena banks' self-assessments.
Congress, responding to banking industry pressure after several high- profile fair-lending prosecutions, enacted a law in 1996 barring litigants from using the results of fair-lending self-tests against banks. But it left it up to the Fed and HUD to adopt a rule to enforce the law.
Rather than rely on the protection this rule offers, banks that want to do self-tests are being advised to hire a lawyer so they can take advantage of attorney-client and self-evaluation privileges. These privileges, although not absolute, are much harder for litigants to crack.
"Lenders are essentially in the same place they were before this statute was enacted," Mr. Traiger said.
Another option is to do the test publicly and then commit the bank to correcting any problem, Mr. Traiger said. The advantage of this approach is that it may counteract the perception that banks discriminate, he said.
