The Section 1071 Rule – Simplified

Author:

Rachel Mondragon, Director of Financial Institution Compliance

Background:

For more than a decade, studies have shown a consistent decrease in the number of small business loans year after year. While there may be more than one correlation to this statistic, there has never been a greater need for access to the data. Consistent with the CFPB’s goal of enforcing consumer protection laws, comes the need to identify patterns or practices of possible discrimination. In this case, that discrimination could be centered on small businesses, predominantly those owned by minorities and women.

Who is impacted:

• Covered financial institution – An institution that originates 25 or more covered credit transactions to small businesses in the two previous calendar years.
• Covered credit transactions – Meets the definition of business credit under Regulation B, and may include, small business loans, lines of credit, credit cards, and merchant cash advances (including credit for agricultural purposes and those covered by HMDA), with certain exclusions.¹

Covered Institutions Must:

• Ask small-business applicants if they identify as a minority-owned or woman-owned business
• Collect a data report, which appears very similar to a HMDA LAR with multiple credit-decision data points, including census tract information
• Submit the data annually to the Bureau

Prepare for These Changes:

• Do not put off change implementation efforts. Loan data will flow from your core software through to data submission, leaving ample room for error. This trial-and-error framework is a naturally occurring event and should not be rushed.
• Train, train, train. Commercial lenders are not the most accepting group when it comes to new compliance rules. After developing the new application form, create the necessary checklists and begin the training process for lenders and loan processing personnel.
• Formalize your process. Develop the necessary policies and procedures, which can also be used for training purposes.

Other Considerations:

• Similar to HMDA and CRA, it’s best to have your data verified by experienced professionals prior to submission.
• Subsequent fair lending audits, monitoring, and risk assessments should be expanded to include 1071 data.

¹Exclusions include trade credit, public utilities, securities credit, or incidental credit.

About the Author:

Rachel Mondragon serves as Director of Financial Institution Compliance, a division of JRBT Bank Consulting where she brings notable experience working with banks, credit unions, fintech providers, mortgage companies as well as other institutions. Throughout her career, Rachel has assisted various clients with remediation efforts and compliance with federal and state enforcement actions. Rachel is recognized for executing detailed assessments while taking a hands-on approach to compliance services. Her experience includes a comprehensive knowledge of consumer protection regulations and other related laws, with an emphasis in BSA/AML, lending compliance and fair lending.

Rachel can be reached directly at Rachel_Mondragon@jrbt.com or 254.297.4206