Do you Know what Section 1071 of the Dodd Frank Act Is?   

As 2014 began, there were a large number of new regulations to consider.  The qualified mortgage rules, mortgage servicing rules and appraisal valuations have all garnered a great deal of attention and focus.  Of course, due to the potential impact of these rules, this attention is well deserved!   However, as the dust settles from getting compliance programs in place, we suggest that some attention should be given to future regulatory requirements.  

One of the most significant of the future regulations is section 1071 of the Dodd Frank Act.  This section amends the equal credit opportunity Act (AKA as Reg. B) to require banks to gather information about applicants for commercial loans.   The information that will be gathered is very similar to information that is currently required by the Home mortgage Disclosure Act (HMDA).   We believe that the time is now to start putting the infrastructure in place to gather and report this information, 

Specifics

It is important to note that for the time being this section of the Dodd Frank Act has been put on hold until the implementing regulations have been written.  Despite the delay, that there is absolutely no indication that this section of the law will be repealed or diluted.  In the very near future, the regulations will be implemented and the reporting requirements will be implemented. 

What is the type of information that is required?  So far, the list of information that is required is as follows: 

‘‘(1) IN GENERAL.—Each financial institution shall compile and maintain, in accordance with regulations of the Bureau, a record of the information provided by any loan applicant pursuant to a request under subsection (b).

‘‘(2) ITEMIZATION.—Information compiled and maintained under paragraph (1) shall be itemized in order to clearly and conspicuously disclose—

‘‘(A) the number of the application and the date on which the application was received;

‘‘(B) the type and purpose of the loan or other credit being applied for;

‘‘(C) the amount of the credit or credit limit applied for, and the amount of the credit transaction or the credit limit approved for such applicant;

‘‘(D) the type of action taken with respect to such application, and the date of such action;

‘‘(E) the census tract in which is located the principal place of business of the women-owned, minority-owned, or small business loan applicant;

‘‘(F) the gross annual revenue of the business in the last fiscal year of the women-owned, minority-owned, or small business loan applicant preceding the date of the application;

‘‘(G) the race, sex, and ethnicity of the principal owners of the business; and

‘‘(H) any additional data that the Bureau determines would aid in fulfilling the purposes of this section.

‘‘(3) NO PERSONALLY IDENTIFIABLE INFORMATION.—In compiling and maintaining any record of information under this section, a financial institution may not include in such record the name, specific address (other than the census tract required under paragraph (1)(E)), telephone number, electronic mail address, or any other personally identifiable information concerning any individual who is, or is connected with, the women owned, minority-owned, or small business loan applicant.

So when the time comes, what will be required?  Why are the regulators doing this to us?   In reverse order, the reason given for this change to the ECOA is as follows:

“The purpose of this section is to facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority owned, and small businesses” [1]

Put another way, the purpose of the collection of this information will be to allow the banks,  economists and regulators to more completely and accurately determine the types of loans that are being requested by minority and women owned business.  Presumably, the collected data will be used to provide regulators with tools to craft legislation  that will expand fair lending laws and rules to the commercial lending area.  The merits of whether or not these regulations should be expanded to the commercial lending area are a discussion for another day and another blog!

There are some unique features to the requirements of this law.  In particular, the lending staff member who is doing the underwriting is NOT ALLOWED to ask the questions required by the law;

Where feasible, no loan underwriter or other officer or employee of a financial institution, or any affiliate of a financial institution, involved in making any determination concerning an application for credit shall have access to any information provided by the applicant pursuant to a request under subsection (b) in connection with such application.[2]

The idea here is that this information must not be part of any credit decision, and the bank is under an obligation to present evidence that this information has been segregated from the credit decision.  Therefore even in cases where there are too few staff members to totally segregate the collection of the information from the loan staff, a protective wall still must be created. 

If a financial institution determines that a loan underwriter or other officer or employee of a financial institution, or any affiliate of a financial institution, involved in making any determination concerning an application for credit should have access to any information provided by the applicant pursuant to a request under subsection (b), the financial institution shall provide notice to the applicant of the access of the underwriter to such information, along with notice that the financial institution may not discriminate on the basis of such information[3]

The time is coming when this information must be collected and the Bank must make sure that once it is collected, that the information has no impact on the credit decision. 

Implications for the Future

What does this regulation mean for the future?  It is of course, difficult to predict the future with any real accuracy.    However, it is clear that the trend for regulations is that the scope and influence of fair lending and equal credit opportunity laws will increase in influence over the next decade.   It will be increasingly important for banks to determine with detail the credit needs of the communities they serve.  Moreover, there will be increased emphasis on banks’ ability to show how the credit products being offered meet the credit  needs of that same community. 

Why not start now?

The obvious question to ask is with all of the regulations that are coming into effect at this point  and the resulting requirements, why start dealing with a regulation that has not come into existence?  Why not cross that bridge when we come to it? 

We suggest that delay will result in higher costs and increase the risk of noncompliance.   Whether or not Section 1071 is implemented within the next year or the next few years, it will be implemented.  Information about the borrowers you serve and the products that you offer to serve them should be part of your strategic plan, fair lending plan and CRA plan.  This information will be a critical component of showing your regulators that you are  a vital part of the local economy and community.  The infrastructure that will be necessary to meet the requirements of the regulation will be complex.  Policies, procedures forms and training will be necessary to prepare staff.  The time is now to start!

---

[1] Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act

[2] Ibid

[3] Ibid