Section 1071 of the Dodd Frank Act- A New Look at Fair Lending -  A Two-Part Series

Part One- Towards a LAR for Commercial Loans

As the dust settled form the financial meltdown of 2008 there were a large number of new significant regulations to consider.  The qualified mortgage rules, mortgage servicing rules and appraisal valuations all garnered a great deal of attention and focus.  Of course, due to the impact of these rules, this attention was well deserved.   However, as the dust settled from getting compliance programs in place, it is time to give attention 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).  Many believe that the future of this regulation is in doubt due to the general hostility of the current presidential administration to the Dodd Frank Act.  Regardless of whether this regulation becomes fully implemented, the information that it requires is well worth considering.

Specifics

For the time being, this section of the Dodd Frank Act has been put on hold until the implementing regulations have been written.  There are many who believe the future of the CFPB is in doubt, but merely hoping things change is not a successful strategy.  Earlier in 2017, the CFPB started taking comments on the regulation with an eye toward developing a final rule early next year. It is likely the regulation will be implemented in some form early in 2018.  

What is the type of information that is required?  So far, the list of information 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.

When the regulation is enacted, 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 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 to help expand fair lending laws and rules to the commercial lending area.  The merits of whether these regulations should be expanded to the commercial lending will be discussed in part two of this blog.

There are some unique features to the requirements of this law.  For example, 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 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? In fact, there is a chance that this law may never get an implementing regulation. 

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, 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.  Moreover, this information should be a critical part of your institutions’ drive to reach out to the new customers who are currently among the large number of unbanked and underbanked.  This pool of potential customers is one of the keys to successful banking in the future.  In fact, whether or not the regulation is ever implemented, developing information on women and minority owned businesses will be a ket strategic advantage for the financial institutions that realize the vast potential that these business owners present. 

In Part two of this blog, we will make the case for collection of information on loans to women and minority owned businesses regardless of regulation requirements.