2024 CLFP Recertification
Educational Content: Section 1071 of the Dodd-Frank Act
Section 1071 of the Dodd-Frank Act
- If the financial institution has 2,500 or more covered transactions, data collection begins on 10/1/24, and the initial filing date is set for 6/1/25.
- For financial institutions with 500-2,499 covered transactions, data collection starts on 4/1/25, and the initial filing date is 6/1/26.
- And for financial institutions with 100-499 covered transactions, data collection begins on 1/1/26, and the initial filing date is scheduled for 6/1/27.
Background of 1071
Section 1071 of the Equal Credit Opportunity Act (ECOA) requires financial institutions to gather and report data on business credit applications to the Consumer Financial Protection Bureau (CFPB). The purpose of this requirement is to support fair lending enforcement and identify needs for women-owned, minority-owned, and small businesses. The CFPB can request additional data points if deemed necessary. The final rule, issued by the CFPB, mandates covered institutions to collect and report data on small business applications and enables the creation of a comprehensive public database on small business lending practices.
Financial institutions, including all those involved in commercial finance activities like equipment leasing and finance companies, have a responsibility to determine if their customers qualify as small businesses.
Potential compliance issues
Incomplete Reporting: All covered transactions must be reported accurately. Failing to do so may raise concerns and give the impression that applicants have been discouraged from providing demographic information. The CFPB has emphasized this as an examination priority.
Procedural Formalities: Having well-defined and documented application procedures is crucial for compliance. Lack of formal processes can create vulnerabilities that may be identified during audits or examinations.
Transparent Pricing Decisions: It’s important to clearly document the reasons behind pricing decisions.
Underwriting and Exception Rates: High rates of underwriting and pricing exceptions can be red flags for compliance issues.
Fair Lending Testing and Monitoring: Establishing robust mechanisms for fair lending testing and monitoring is crucial to identify and rectify any potential compliance gaps.
Additionally, the CFPB has set up a resource center where institutions can seek guidance and submit questions. However, it’s important to note that queries may not be anonymous, so users should be aware of the likelihood of their identity being disclosed.
Data collection for covered transactions involves approximately 81 data fields, which must be formatted according to CFPB specifications. Establishing robust procedures for data collection is recommended to ensure compliance and withstand scrutiny. Financial institutions are not required to verify applicant information, but if verification is done, it must be reported to the CFPB. Certain previously collected applicant data may be reused within a year, while demographic data may be collected every 36 months.
Demographic information collected by loan officers must be separated from underwriters, except in cases where it’s deemed infeasible, with appropriate customer notice. Implementing these changes requires resource allocation for software collaboration, role redefinition, workflow adjustments, and organizational adaptability. Larger institutions with geographically dispersed loan officers and underwriters may face challenges in maintaining this separation. Software solutions can help segregate demographic information while ensuring underwriting requirements are met. Adapting to these process changes enables effective data management and compliance with the final rules.