I agree that honesty is the best policy.
I was asked this question during my interview and answered it truthfully - Usually the reason for asking this is WHY you applied to those schools. As long as your reason is consistent with your school selections, you should be good. If not, they will think that you haven't done enough research in your MBA pursuit.
Not sure if it's invasion of privacy. They asked and you have an option to not answer. But you always want to look honest to your interviewer, whether it's MBA or for jobs. If this issue is a messy, grey-area question, I bet there would've been a lawsuit or something

Answer the question and get it out of your mind. Otherwise, god forbids you don't get accepted, you will be like "damn, I should've just answered."
I don't think the schools will talk either. That seems too much work and paperwork on top of all the work and papers that they already have.