Many of us have been waiting since 2010 to understand how the Consumer Financial Protection Bureau (CFPB) was likely to move forward with implementing section 1071 of the Dodd-Frank Act (DFA). This DFA regulation amended the Equal Credit Opportunity Act (ECOA) to require new data collection requirements on loan applications for women-owned, minority-owned, and small businesses.
Basically, it is the Home Mortgage Disclosure Act (HMDA) for small business lending. Once its enacted FIs (financial institutions) will be required to collect similar data fields for small business loans as HMDA currently requires for mortgages.
While the CFPB has been gathering information and planning implementation for a while now, the recent attention the Paycheck Protection Program (PPP) placed on small business access to credit had drawn even more attention to small business lending.
Now the CFPB is in the process of writing those regulations and has released an outline of proposals it is considering.
We already know some of the data points the DFA required to be collected, including:
- Information regarding the individual application.
- The loan purpose.
- The credit decision (action taken and date taken).
- The census tract in which the business is located.
- Financial information regarding the business (e.g. gross annual revenue).
- The race, sex, and ethnicity of the principal owners of the business.
- Any additional data that the Bureau decides would aid in facilitating the enforcement of fair lending laws.
Now we are starting to see how the CFPB is considering addressing other aspects of the rule. Let us review the CFPB’s current thinking:
How is “small business” defined and what will count as an application for credit?
When it comes to data collection and reporting, any application submitted by a small business, as defined by the SBA (Small Business Administration) and any size women-owned or minority-owned business would fall under the requirement.
Which FIs will be required to collect and report information? Should anyone be exempt?
The CFPB is proposing that banks, savings associations, credit unions, online lenders/platform lenders, community development financial institutions (both DIs and non-DIs), lenders involved in equipment and vehicle financing (captive financing companies and independent financing companies), commercial finance companies, governmental lending entities, and non-profit, non-DI lenders be required reporters.
Consideration is being given to exempting some financial institutions on either or both a size-based and/or activity-based threshold.
What info should be collected and how will they collect and report it?
On an annual basis, discretionary data points under consideration include pricing, time in business, North American Industry Classification System (NAICS) code, and number of employees.
What small business products should count as “credit” for Section 1071 purposes?
Covered products under the proposal include term loans, lines of credit, and business credit cards. Consumer-designated credit, leases, factoring, trade credit, and merchant cash advances would not be covered.
What data should be made public?
The CFPB is considering a “balancing test” to weigh the risks and benefits of publicly releasing the data. If adopted, data would be modified or deleted if publicly disclosing the data would create privacy risks that outweigh the benefits of releasing the data.
What Does the CFPB 1071 Proposal Mean for My FI?
This first look at how the CFPB is thinking to implement section 1071 of Dodd-Frank can help your FI make strategic decisions when it comes to small business data collection and analysis. As you consider new systems, products, or services, knowing that a new data collection requirement is coming can help you build system requirements now instead of retroactively trying to accommodate them.
It also gives you a proactive head start on analyzing your small business data to avoid potential violations down the road. We all know that the CFPB will not be collecting this data just for fun. They will be analyzing it for Fair Lending compliance trends to ensure fair access to credit. Additionally, as with HMDA, publicly releasing the data means attention from special interest groups!
Many FIs are in different stages of data analytics for small businesses already due to PPP lending. If you have not started analyzing your small business data, how do you know if your FI is consistently applying practices or if it is treating a market segment differently?
Commercial lending rarely has uniform rates and fees, underwriting requirements, or guidelines like mortgage and consumer loans do. That leaves a lot of room for interpretation, and inconsistently applied practices can lead to disparities and potential violations. You want to be sure your commercial lending practices are not discriminatory, that borrowers are not being treated differently, and that your FI and its lenders are following the Equal Credit Opportunity Act (ECOA) and Fair Credit Reporting Act (FCRA).
This heads up gives you time to make sure your commercial lenders are mindful of applicable Fair Lending regulations including Reg B, the Fair Credit Reporting Act, the Community Reinvestment Act, and Service Members Relief Act (SCRA). By ensuring commercial lending adheres to regulation in effect now, it can prevent problems down the road.
Like all proposals, the CFPB’s plans for implementing Section 1071 of Dodd-Frank are not yet written in stone. Public comments are welcome until December 14. In the meantime, the CFPB is meeting a Small Business Advocacy Review panel in October to consider the potential impact of the rule on small businesses. If you have strong feelings on the topic, make them known to the CFPB.
CRA: OCC vs. Fed
Last week we broke down the key aspects of the Federal Reserve’s Community Reinvestment Act (CRA) proposal. CRA modernization has been a major regulatory priority and has drawn a lot of attention over the past year as the different agencies have diverged in their approaches.
As promised, here are a few key differences between the OCC’s CRA rule and the Fed’s proposed plan.
As expected, the Fed proposal includes two tests:
- A retail test. This would assess a bank's record of providing retail loans and retail banking services in its assessment areas. Lending would be measured in numbers of loans made instead of the overall dollar amount.
- A community development test. Larger bank’s record of community development lending, qualified investments, and services would be evaluated.
These tests are meant to make the most use of existing data to minimize burden. The Fed might also create national assessment areas for online banks with no brick-and-mortar branches.
This differs from the OCC rule which evaluates CRA performance with quantitative measures that assess the volume and value of activity. OCC performance standards for distribution and impact analysis include:
- The distribution of retail lending activities relative to LMI (Low to Moderate Income) populations and LMI census tracts in a bank’s assessment areas.
- The impact of all CRA activity, measured in dollars.
- Quantitative credit for branches in, or that serve, LMI census tracts or other identified areas of need.
- Consideration of the qualitative aspects of CRA activities by including an assessment of a bank’s performance context.
The OCC plan requires collecting new data points. Assessment areas would be determined by branch location.
The plans also share some similarities:
- Smaller banks could choose whether to adopt a new CRA regime or continue with the old one.
- Both include a list of activities eligible for CRA credit.
- Both designate areas outside of market boundaries where banks could get credit for CRA activities.
- Both agencies hope their approach will open the door to interagency collaboration. "By releasing a thoughtful and balanced ANPR (Advanced Notice of Proposed Rulemaking) and providing a long period for comment, the Federal Reserve is hoping to build a foundation for the banking agencies to come together on a consistent approach to CRA that has the broad support of the intended beneficiaries as well as banks of different sizes and business models," said Federal Reserve Board Chair Jerome H. Powell.
Whether your bank is regulated by the Federal Reserve or OCC, make sure your bank is staying on top of CRA compliance.