CFPB 1071 Rule: Checklist for Compliance Success

June 13, 2023

Senior advisor Paula S. King

Paula S. King, senior advisor at Abrigo Advisory Services, a GoWest Solutions partner, is part of a team of subject matter experts who assist financial institutions nationwide in the interpretation and application of regulatory requirements. She has extensive experience in ensuring compliance with regulatory and audit requirements, as well as creating policies, procedures, and processes.

She recently shared her checklist for compliance success:

Read the rule and familiarize your staff with rule requirements

The Consumer Financial Protection Bureau is proposing to apply the rule to covered financial institutions. A covered financial institution is a financial institution or other entity that originated at least 25 credit transactions that would be covered credit transactions to small businesses in each of the two preceding calendar years.

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. Covered credit transactions include loans, lines of credit, credit cards, and merchant cash advances. If able, produce a report of small business loans that fit the revenue size above.

Create written policies and procedures 

Policies should include the following components:

• Background and governance
• Roles and responsibilities
• Description of the 1071 rule’s impact on the loan portfolio
• General process of gathering, tracking, monitoring, and reporting pertinent information to comply
• Process internal controls
• Reporting and conclusions on compliance
• Educational expectations for current and new staff
• Collection and recording of data
• Monitoring and interpreting the data
• Staff training

Determine a plan to gather data points and set up an identification/data collection system

Data points can be divided into three categories:

1. System basic data points such as member/borrower loan number, type, purpose, and pricing details. For denied applications, the denial reason.
2. Data points specifically related to the credit, such as business description, gross annual revenue, census tract, NAICS code, and owner and worker counts.
3. Demographic data points, such as minority (and women) business status, owner ethnicity, race, and sex.

There are specific rules related to the method of data collection. For example, suppose an applicant does not provide ethnicity, race, or sex information for at least one principal owner. The proposed rule states that the credit union must collect at least one principal owner’s race and ethnicity but not sex via visual observation and/or surname if the credit union meets in person, or by video, with any principal owners.

The applicant must provide the minority-owned business status and/or women-owned business status. The credit union would not be permitted or required to report these data points based on visual observation, surname, or any other basis if the applicant chooses not to provide the information.

Begin tracking data on a rule-compliant system

The final rule should include a sample tracking sheet. These data points should be captured during the loan application/booking process. Check with your core provider to determine if they have or are considering automating the process as data is entered directly into their system. If your credit union doesn’t automate this function, Excel can be a useful for maintaining the required data points.

Set up an audit system to periodically check small business loans by cross-referencing to tracking document

One of the primary reasons for the rule is to ensure that financial institutions are addressing the credit needs of minority small businesses and that institutions are pricing and determining other loan terms in a manner that does not discriminate. The development of analytical reports and periodic monitoring of small business lending is essential for compliance and to identify areas of concern, mitigation, and reporting. Consider a quarterly compliance scorecard approach to identify loan pricing exceptions and set baseline performance indicators.

Consider assistance from third-party resources

A third-party provider can make compliance easier by:

• Alleviating any staff bandwidth issues
• Avoiding interruptions in daily job requirements
• Assisting with best practices to gather information
• Assisting with the creation/adaptation of current collection and/or loan pricing systems to ensure compliance with the rule

Contact your GoWest Solutions Team to find out how Abrigo can assist you with learning how to apply regulatory requirements.

Posted in Public Awareness, Top Headlines.