What Transactions Are Covered? Covered Credit Transactions Very generally, a covered credit transaction is an extension of business credit under Regulation B, but with certain exclusions, some specifically for purposes of Section 1071, such as: • Trade credit; • HMDA-reportable transactions; • Insurance premium financing; • Public utilities credit; • Securities credit; • Certain incidental credit; • Factoring; • Leases; • Consumer-designated credit used for business or agricultural purposes; • Purchases of a credit transaction; • Purchases of an interest in a pool of credit transactions; and • Purchases of a partial interest in a credit transaction (such as a loan participation agreement). Despite the length of this list of exclusions, the definition is still extremely broad and covers a wide variety of transactions, including closed-end loans, open-end lines of credit, credit cards, merchant cash advances and various credit products used for agricultural purposes. Covered Originations A very important thing to note in this area is that “covered originations” for purposes of determining institutional coverage and compliance dates is narrower than the above. A common question we have been getting on the hotline is whether extensions and renewals should be counted. For this purpose, extensions, renewals, and certain other loan amendments are not considered covered originations even if they increase the credit line or credit amount of the existing transaction. What Else Should I Be Thinking About? Firewall A very unique aspect of this rule is the so-called “firewall” provision, which bears mentioning here. In general, employees and officers should be prohibited from accessing the following responses if that employee or officer is involved in making any determination about the application: • The applicant’s minority-owned, women-owned, and LGBTQI+-owned business statuses; and • Its principal owners’ ethnicity, race, and sex. There are limited exceptions to this firewall requirement, including a notice allowance, and the Final Rule also prohibits the bank from disclosing this demographic information to other parties, again, with limited exceptions. Safe Harbors Interestingly, the Final Rule has a safe harbor for certain incorrect census tracts, NAICS codes, and application dates. It also has a safe harbor regarding incorrect determinations of small business status, covered credit transactions, and covered applications. For example, if the bank initially determines that an applicant is a small business, but then later concludes the applicant is not a small business, the bank would not be in violation if, at the time the bank collected the demographic data, it had a “reasonable basis for believing that the application was from a small business.” Action Plan Now that the Final Rule has arrived, there are a variety of questions and action steps our members should be considering, such as: • Is my bank covered under the new Final Rule? If so, what is the bank’s mandatory compliance date? • How will this affect the bank’s Compliance Management System (CMS)? What policies, procedures, and other governance documents or materials may need to be amended? • Is everyone well-informed of the changes and their effects, including the Board, senior management, business lines, and other stakeholders? • What type of training is planned and for whom? • What do the bank’s business lending processes look like currently and what change management will be required to implement these changes correctly and in a timely manner? 20 Nebraska Banker
RkJQdWJsaXNoZXIy MTg3NDExNQ==