The “Do’s” of Preparing for Dodd-Frank 1071

In banking, keeping up with compliance is a full-time job and Section 1071 is the latest example of that. At the end of March 2023, the Consumer Financial Protection Bureau (CFPB) issued its long-awaited final rule to implement Section 1071 of the Dodd-Frank Act. Section 1071 amended the Equal Credit Opportunity Act to require financial institutions to collect and report certain data in connection with credit applications made by small businesses, including women- or minority-owned small businesses.

However, this regulation is much more than a call for data collection. The purpose of the rule is to enforce fair lending laws and to assess whether the needs of women-owned, minority-owned and other small businesses targeted by the law are being addressed.

Regulators, examiners, advocacy groups, the media and plaintiff’s attorneys will examine the reported data to see if there are patterns that may be indicative of potential redlining, underwriting issues and pricing issues for credit products.

Although the final rule will not take effect until August 29, 2023, it contains a tiered compliance schedule, with an earliest compliance date of October 1, 2024 for financial institutions that originate the most covered credit transactions and later compliance dates for institutions with lower covered transaction volumes.

Wherever your financial institution falls on the compliance date spectrum, preparation will be key and this blog will outline the “do’s” of prepping for the new rule.

DO learn from the larger institutions that must comply first.

Since the biggest financial institutions must comply with Section 171 first, smaller financial institutions can learn lessons from how their larger counterparts successfully comply – and fail to comply – with the new rule.

The CFPB established tiered implementation schedule based on the number of small-business loan originations. If an institution does more than 2,500 originations in 2022 and in 2023, it will have to start collecting the required information by Oct. 1, 2024, and will have to provide it to the CFPB by Jun. 1, 2025.

If a financial institution does between 500 and 2,500 originations in 2022 and 2023, then collection will begin in April 2025 and must be reported by Jun. 1, 2026. For financial institutions completing fewer than 500 originations annually but more than 100 in 2024 and 2025, collection will not start until January of 2026, with the first submission due to regulators in June of 2027.

Given the tiered compliance schedule, smaller institutions have an opportunity to watch and learn from larger banks and lending institutions. Community banks should take note of what works well and potential challenges other banks face when it comes to gathering and processing the necessary data points, and reporting on them to regulators.

DO consider how a technology partner can support compliance.

This far-reaching regulation can pose significant implementation challenges, and also involves the collection of very sensitive data about the status of the businesses, whether they are owned by women, minorities, or individuals who identify as LGBTQ+. This will involve identifying the race, sex and ethnicity of the principal owners of a business, along with several other data elements.

Given all large number of data requirements, digitizing workflows will be necessary for financial institutions to comply with the new regulation without adding extra resources or headcount.

For financial institutions that haven’t considered digitizing their lending workflows, now is the time to do so. The right technologies can help streamline data collection, credit analysis and reporting, mitigating the risk of non-compliance. Partnering with a technology provider with deep expertise in financial services and the complexities of ever-changing compliance requirements can present a strategic advantage for community banks.

DO focus on the future.

Many bankers anticipate new opportunities and benefits as a result of the rule, including greater diversity in loan portfolios, which can lead to more tailored products for historically underserved communities and help banks improve risk mitigation over time. Additionally, the data collection and reporting requirements can help banks fine-tune and optimize their lending workflows, creating greater consistency in processes and pricing.

For banks and their customers to reap those benefits, the right technology will be key.

To learn how Baker Hill can support compliance with the small business lending rule, check out our comprehensive resource guide.

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