BY PAULA KING, ABRIGO ONE TWO THREE Executive Summary Commonly known as the CFPB 1071 Rule, upcoming requirements to be finalized in 2023 by the Consumer Financial Protection Bureau (CFPB) will represent the most significant effort of data collection and reporting for financial institutions in nearly 50 years. The checklist provides lenders with seven steps to prepare for compliance with this new rule. Introduction Section 1071 of the Dodd-Frank Act amended Regulation B — Equal Credit Opportunity Act (ECOA). On Sept. 1, 2021, the CFPB issued a proposed rule to require financial institutions and others to compile, maintain, and submit to the CFPB certain data points on applications for credit for small businesses, including those owned by women and minorities. While officially titled “Small Business Lending Data Collection Under the Equal Credit Opportunity Act (Regulation B),” the proposed rule is often known as the CFPB’s 1071 Rule. The primary purposes of reporting this information are to: • Provide tracking of small business credits to enforce fair lending laws • Enable creditors to identify and support the business needs of women and other minority-owned small businesses within the community CFPB 1071 Deadline Ahead The final rule is expected by March 31, 2023, with compliance required 18 months after the publication of the final rule. While 18 months may seem like a long lead time, don’t let that timeframe lull you into inaction. This is a major effort of small business data collection and reporting not experienced since the Home Mortgage Disclosure Act (HMDA) requirements of 1975. As community financial institutions have become more commercially focused, the data collection requirements of the 1071 rule may surpass those of HMDA. The following seven steps are a checklist for successful compliance with the final 1071 Rule: 1. Read the Rule and Familiarize Your Staff With Rule Requirements This may seem obvious, but spend the time needed to focus on the regulatory requirements of this particular guidance. This is especially important when complying with a regulation concerning the collection of applicant/borrower attributes – where it’s essential to know what you can and cannot ask. The Bureau is proposing to apply the rule to covered financial institutions. A covered financial institution is a financial institution or other entity, including fintechs, that originated at least 25 credit transactions that would be covered credit transactions to small businesses in each of the two preceding calendar years. After you’ve assessed whether you are covered under the 1071 data collection rule, the next step is to analyze your small business loan portfolio. 2. Analyze Your Small Business Loan Portfolio in Advance of the Compliance Date to Determine Impact The CFPB’s proposed definition of a small business is one that had $5 million or less in gross annual revenue for its preceding fiscal year. The bureau is seeking SBA approval for this alternate small business size standard pursuant to the Small Business Act. Next, covered credit transactions include loans, lines of credit, credit cards, and merchant cash advances (including such credit transactions for agricultural purposes and those that are also covered by the Home Mortgage Disclosure Act of 1975). If able, produce a report of small business loans that fit the revenue size above. In addition, if you have the minority information available, you can sort the data by that additional criteria. Either way, this exercise should provide insight into the impact that the 1071 rule will have on your institution. 3. Create Written Policies and Procedures Policies should include the following components, while procedures should represent more detailed instructions describing how to perform tasks associated with the rule: • Background and governance • Roles and responsibilities • Description of the 1071 rule’s impact on the loan portfolio (from the analysis above) CFPB 1071 RULE: Checklist for Compliance Success 10 In Touch
RkJQdWJsaXNoZXIy ODQxMjUw