Some Rabbit's of that era had "combination valves"...on the driver's side of the engine compartment, below the master cylinder on the fenderwell, you'll see a fairly large "T"-shaped block of aluminum with four brake lines, two in and two out and a single wire on top. This is the "combination valve", which regulates pressure to the rear drums, contains the residual valves, and has a left-right bias switch that illuminates the instrument cluster "brake" light if one half of the diagonal braking system fails. That's it.
Other Rabbits (most through 1979 and some 1980 and possibly 1981 diesel Rabbits and Rabbit Convertibles) have a "load sensing brake pressure regulator" at the front of the left rear suspension.
If you have the load sensing regulator, there are a few things to check and/or replace. Make sure the spring that goes from the pin on the rear suspension piece to the lever on the regulator itself is good. It's common for the spring to rust through and break. If it breaks, the regulator senses no load at all and will basically turn off the rear brakes entirely. I'd just replace that spring if you have that setup. There's also a pair of inline "residual pressure valves" in the rear lines that tend to fail and cause minor rear brake issues (usually a slightly longer pedal than you really want, but with good brake operation at the bottom). If your pedal has a lot of dead space at the top, it's worth changing out the residual pressure valves.
I'm very skeptical that any safety inspection would be able to diagnose a failed combination valve. How did they test the car? Did they just drive it over something and apply the brakes? Or did they connect brake pressure guages to a front and rear wheel? If it was any kind of driving test, there's no way they could tell if a VW combination valve is working properly from that. They could probably diagnose a broken spring on the load sensing regulator setup, but they probably can't diagnose a failed residual pressure valve or failed residual pressure section on the combination valve without guages hooked to the brakes.
I would suspect that your leaking wheel cylinder might be the cause. One thing to remember is that the brake system not only controls front to back, but also has 2 separate regions per say.
Front left; Rear right.
Front right; Rear Left.
This is so that is one region fails the other region will still work. One of these systems could be weak like at the master cylinder level. Personally I would just re-do the entire brake system, Master cylinder and wheel cylinders and do a brake flush. It probably needs it anyway and is not that expensive, atleast here in the US. I'd like to find out what kind of prosioning valve you have in the car?...and if it is the early load sensing in the rear or just the proportioning valve on/or near the master cylinder?
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