1071 Preparation:  What Should We Do Now?

In the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) of 2010, Congress directed the Consumer Financial Protection Bureau (CFPB) to adopt regulations that will govern data collection for small business and agricultural lending.

Section 1071 of Dodd-Frank amended the Equal Credit Opportunity Act (ECOA, Reg. B) to require financial institutions to collect and submit specific data to the CFPB. Congress enacted section 1071 for the purpose of:

1. Facilitating enforcement of fair lending laws.
2. Enabling communities, governmental entities, and creditors to identify business and community development needs and opportunities for women-owned, minority-owned, and small businesses.

On September 1, 2021, the CFPB issued a proposed rule to amend Regulation B to implement Section 1071 changes to ECOA.

In the proposed rule, the CFPB outlines a requirement for covered financial institutions to begin collecting and reporting data on small business credit applications including those small businesses owned by minorities and women.

There are two key dates to be aware of:

1. The effective date for the final rule will be 90 days after its publication in the Federal Register.
2. The compliance date for implementing the rule is expected be 18 months after the date of publication of the final rule in the Federal Register.  However, industry speculation is that a partial year could be considered.

What does this mean for your financial institution?

When finalized, it is expected to be one of the largest regulatory changes in the last two decades.

The essence of 1071 is the collection and accurate reporting of small business data to the CFPB.

The purpose of collecting the additional data is to ensure all borrowers receive equal treatment.  Once implemented, lenders, their regulators, and community groups, will have access to the data to review for lending disparity.

We here at Compliance Resource we feel that understanding the proposed requirements, communicating the financial institution specific impact, and proactive preparation will be key to financial institution success.

So, how do you prepare for such a massive requirement?

STEP 1) Conduct a Gap analysis

You do not know what you don’t know!  It is important to understand the process start to finish.   How else can you identify data collection points, risks, and/or single points of failure without digging into the process?  Consider:

• Financial institution specific loan data, it can help you report real facts about your institution to BOD and management, when discussing the impact of implementation and managing this challenging requirement.
• If your institution uses an application compare it to the proposed data collection requirements.
• If you do not use an application – pull files to see what you can use for collection.
• Pull small business and agricultural loans using the proposed rules to understand:
  • Application vs origination numbers. (25 origination makes you a covered FI)
  • The type and consistency of supporting documentation. (i.e., credit reports, applications, corporate, LLC, sole proprietorship papers, financial information, business type etc.)
  • Fee and rate sheets and rate information loan notes
  • Different terms, rates, conditions for same or similar originations
  • Turn times – how long it took to make a decision from application to action taken
• Look at denials - identify areas of disparate treatment.
• Start talking with employees at each stage of the lending process.
  • Job shadow – learn their job, know their back up, and determine how they will be involved in complying
  • How much time does application – origination take today? How will it change with 1071 implementation?
  • Who will you need to be a compliance champion?
  • At what stage is collection, imputing, and validation going to be best?
  • Are there enough resources in the customer facing (first line) to ease the burden these new rules will make
• Start digging into the compliance management process.
  • Are there enough resources to proactively:
    • Test 1071 requirements,
    • What will need to be monitored, and
    • What needs to be report, how will it be done and what is the frequency
  • Who and how you will analyze for fair lending disparities

STEP 2) Raise the Board and senior management awareness:

• What was identified from the Gap analysis:
  • What data you currently collect and what you will need to add or change
  • Any potential fair lending issues you found while conducting the analysis
  • Impact to staff job roles (manual vs automation)
• Lending issues identified in the Gap Analysis:
  • Lack of an application to collect and report data
  • Lack of standards in underwriting and exception practices
  • Inconsistent fees being charged/waived and rates by product type
  • No tracking or monitoring of exceptions
• Budget requests and impact to the financial institution:
  • Request for resources
    • New or updates to automated solutions
    • Hiring of staff
    • Use of consultants
  • Process changes
    • Implementation
    • Impact
    • Testing and monitoring

STEP 3) Get Effective Training

Training is the foundation of any good compliance program. Getting BOD, Management, and commercial employees up to speed and knowledgeable with a clear understanding of expectations and requirements is essential to the success of the financial institution when it comes to 1071 implementation and management of the program.  Understand and embracing ECOA will be a MUST.

The age-old adage of “I’m a commercial lender, regulations do not apply to me” is a thing of the past.

Starting now will go a long way to ensuring buy in and understanding at all levels and help to ensure not only a solid implementation process but your institution’s culture.  This will help to solidify that compliance is a team support and help in the success of a strong foundation in the program.

Focus on areas like accurate data collection, the role an application will play in accuracy, exceptions, consistent rates, fee waivers, and complaints.  Each of these are key indicators of a potential issue, for different treatment.  Training needs to be job function driven so that employees are aware of the role their job plays in the process and the potential impact it can have on disparate treatment.

When considering a training vendor, look for one that has both an extensive library of content and staffed with industry leaders that have real world experience to provide insight and guidance. We at Compliance Resource ask that you consider our company in your search for a training partner.

To dive deeper into 1071, join us in September for Five Critical Section 1071 Steps Needed Now.