The Consumer Financial Protection Bureau (CFPB) is preparing to implement Section 1071, the long-anticipated data collection and reporting regulations for business lending. This section of the Dodd-Frank Act has been under discussion since 2010, and with the new data collection and reporting requirements for lenders on the way at last, it’s time for financial institutions to start preparing.
Although some lenders view the impending rule change with trepidation, the regulatory shift is actually a positive one; Section 1071 attempts to ensure a fair lending environment, improve access to credit and allow better identification of lending needs and opportunities for small businesses and those owned by women and minorities. To achieve these goals, the regulation mandates that lenders collect and report demographic data and other information.
Mandated data includes basic information about the loan. Specifically, the financial institution will be asked to collect and report:
- Date of application – Proposed flexibility to include date on the application form or the day on which the credit request becomes an application, surrounded by a several day grace period
- Loan type – Three sub-components chosen from a specified list – type of loan product, type of guarantee and loan term in months – under consideration by CFPB
- Credit/purpose of loan – Select from a list of purposes provided by CFPB
- Amounts applied for and approved for – CFPB considering phased or multi-tier reporting for these amounts, including initial amounts requested, amount of originated loan, amount approved or credit limit approved
- Action taken – Five categories of action are currently under consideration; CFPB seeks financial institution feedback on current documentation practices, optimal reporting method and whether denial reporting would be more instructive
- Date the lender took action on the loan or issuance of credit
- Loan number
In addition, lenders must request and report certain applicant data:
- Whether the applicant qualifies as a woman-owned, minority-owned and/or small business – CFPB is considering proposals to clarify terminology and base this data request solely on self-reporting, rather than lender determination
- Census tract – Current proposal encourages geocoding, which is the process of using a particular property address to locate geographical coordinates and corresponding census tract
- Gross annual revenue – CFPB seeks applicant’s gross annual revenue for the last fiscal year
- Race, sex and ethnicity of the applicant’s principal owners – Just like the first bullet in this suggestion, CFPB is exploring self-reporting of this information, as well as providing the same categories used for HMDA reporting
Additional discretionary data points may include information regarding pricing, number of employees, time in business and NAICS code.
Given its sensitive nature and relevance to fair lending standards, lenders should take appropriate precautions to limit sharing of Section 1071 data they collect. When possible, underwriters or others responsible for approval decisions should have no access to the demographic information collected from applicants. If access is unavoidable, the financial institution must provide applicants with a notice of the underwriter’s access to such information, along with notice that the information cannot be used as the basis of discrimination in lending decisions.
Organizations should carefully determine which specific data points are relevant to their own lending and create an individual plan to capture the information efficiently and effectively, while maintaining adequate privacy safeguards.
How will Section 1071 implementation impact your financial institution?
With the difficulty of meeting recently implemented Home Mortgage Disclosure Act (HMDA) reporting obligations still fresh in mind, many lenders are understandably anxious about what the new regulations might mean for their organization. In fact, some lenders may already be collecting a portion of the information required under Section 1071 through their HMDA compliance efforts.
The precise impact depends on the type and level of lending at each institution. Lenders serving a high proportion of business borrowers will feel the change more acutely than those with a consumer focus. Commercial lenders with minimal or no involvement in mortgage lending may feel the greatest impact, however, as they may lack familiarity with HMDA requirements.
But whether Section 1071’s implementation means gathering large amounts of additional data, minor tweaks to information collection or simply a change in reporting, navigating any potential hurdles now is a better option than risking the consequences of procrastination.
Make your Section 1071 action plan
To prevent last-minute crises and avoid straining institutional resources, it is critical that lenders prepare early. Adopting a proactive stance now increases the likelihood of having optimal compliance procedures in place once the new requirements go into effect. Here’s how leaders can prepare:
- Understand your responsibilities – What data are you required to report under Section 1071? How much, if any, of the information do you currently gather as part of the lending process?
- Assess current systems and processes – Size up the potential impact to the institution. Will you need to create a new role or roles to implement the changes and/or manage ongoing compliance?
- Make a comprehensive plan – Formulate strategies to address each aspect of your compliance obligations:
- How will you identify the loans?
- Which data points must be added, if any?
- How will you collect the data? Do you have the right systems in place?
- Who will perform the quality control?
- Who will submit the required reporting?
Use this limited pre-implementation window wisely. As you anticipate the updated regulations, it is important to evaluate your preparedness plan in terms of your institution’s unique operating environment. Industry compliance advisors, like the team at RKL, can help you examine current processes and workflows, including systems capabilities and limitations, and identify appropriate remediation strategies where deficiencies exist.
For more strategies to address Section 1071 challenges and help preparing your organization for full compliance, contact your RKL advisor or reach out using the form below.