Section 1071 of the Dodd-Frank Act- A New Look at Fair Lending – Part One- Towards a LAR for Commercial Loans, July 25, 2017

July 24blog

As the dust settled from the financial meltdown of 2008 there were a large number of new significant regulations to consider. The qualified mortgage rules, mortgage servicing rules and appraisal valuations all garnered a great deal of attention and focus. Of course, due to the impact of these rules, this attention was well deserved. However, as the dust settled from getting compliance programs in place, it is time to give attention to future regulatory requirements.

One of the most significant of the future regulations is section 1071 of the Dodd Frank Act. This section amends the Equal Credit Opportunity Act (AKA as Reg. B) to require banks to gather information about applicants for commercial loans. The information that will be gathered is very similar to information that is currently required by the Home Mortgage Disclosure Act (HMDA). Many believe that the future of this regulation is in doubt due to the general hostility of the current presidential administration to the Dodd Frank Act. Regardless of whether this regulation becomes fully implemented, the information that it requires is well worth considering.


For the time being, this section of the Dodd Frank Act has been put on hold until the implementing regulations have been written. There are many who believe the future of the CFPB is in doubt, but merely hoping things change is not a successful strategy. Earlier in 2017, the CFPB started taking comments on the regulation with an eye toward developing a final rule early next year. It is likely the regulation will be implemented in some form early in 2018.

What is the type of information that is required? So far, the list of information required is as follows:

‘‘(1) IN GENERAL. —Each financial institution shall compile and maintain, in accordance with regulations of the Bureau, a record of the information provided by any loan applicant pursuant to a request under subsection (b).

‘‘(2) ITEMIZATION.—Information compiled and maintained under paragraph (1) shall be itemized in order to clearly and conspicuously disclose— ‘‘(A) the number of the application and the date on which the application was received; ‘‘(B) the type and purpose of the loan or other credit being applied for; ‘‘(C) the amount of the credit or credit limit applied for, and the amount of the credit transaction or the credit limit approved for such applicant; ‘‘(D) the type of action taken with respect to such application, and the date of such action; ‘‘(E) the census tract in which is located the principal place of business of the women-owned, minority-owned, or small business loan applicant; ‘‘(F) the gross annual revenue of the business in the last fiscal year of the women-owned, minority-owned, or small business loan applicant preceding the date of the application; ‘‘(G) the race, sex, and ethnicity of the principal owners of the business; and ‘‘(H) any additional data that the Bureau determines would aid in fulfilling the purposes of this section.

‘‘(3) NO PERSONALLY IDENTIFIABLE INFORMATION.—In compiling and maintaining any record of information under this section, a financial institution may not include in such record the name, specific address (other than the census tract required under paragraph (1)(E)), telephone number, electronic mail address, or any other personally identifiable information concerning any individual who is, or is connected with, the women owned, minority-owned, or small business loan applicant.

When the regulation is enacted, what will be required? Why are the regulators doing this to us? In reverse order, the reason given for this change to the ECOA is as follows:

“The purpose of this section is to facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority owned, and small businesses” [1]

Put another way, the purpose of the collection of this information will be to allow banks, economists and regulators to more completely and accurately determine the types of loans that are being requested by minority and women owned business. Presumably, the collected data will be used to provide regulators with tools to craft legislation to help expand fair lending laws and rules to the commercial lending area. The merits of whether these regulations should be expanded to the commercial lending will be discussed in part two of this blog.

There are some unique features to the requirements of this law. For example, the lending staff member who is doing the underwriting is NOT ALLOWED to ask the questions required by the law;

Where feasible, no loan underwriter or other officer or employee of a financial institution, or any affiliate of a financial institution, involved in making any determination concerning an application for credit shall have access to any information provided by the applicant pursuant to a request under subsection (b) in connection with such application.[2]

The idea here is this information must not be part of any credit decision, and the bank is under an obligation to present evidence that this information has been segregated from the credit decision. Therefore, even in cases where there are too few staff members to totally segregate the collection of the information from the loan staff, a protective wall still must be created.

If a financial institution determines that a loan underwriter or other officer or employee of a financial institution, or any affiliate of a financial institution, involved in making any determination concerning an application for credit should have access to any information provided by the applicant pursuant to a request under subsection (b), the financial institution shall provide notice to the applicant of the access of the underwriter to such information, along with notice that the financial institution may not discriminate on the basis of such information[3]

The time is coming when this information must be collected and the Bank must make sure that once it is collected, that the information has no impact on the credit decision.

Implications for the Future

What does this regulation mean for the future? It is of course, difficult to predict the future with any real accuracy. However, it is clear that the trend for regulations is that the scope and influence of fair lending and equal credit opportunity laws will increase in influence over the next decade. It will be increasingly important for banks to determine with detail the credit needs of the communities they serve. Moreover, there will be increased emphasis on banks’ ability to show how the credit products being offered meet the credit needs of that same community.

Why not start now?

The obvious question to ask is with all of the regulations that are coming into effect at this point and the resulting requirements, why start dealing with a regulation that has not come into existence? Why not cross that bridge when we come to it? In fact, there is a chance that this law may never get an implementing regulation.

Delay will result in higher costs and increase the risk of noncompliance. Whether or not Section 1071 is implemented within the next year or the next few years, information about the borrowers you serve and the products that you offer to serve them should be part of your strategic plan, fair lending plan and CRA plan. This information will be a critical component of showing your regulators that you are a vital part of the local economy and community. Moreover, this information should be a critical part of your institutions’ drive to reach out to the new customers who are currently among the large number of unbanked and underbanked. This pool of potential customers is one of the keys to successful banking in the future. In fact, whether or not the regulation is ever implemented, developing information on women and minority owned businesses will be a key strategic advantage for the financial institutions that realize the vast potential that these business owners present.

In Part two of this blog, we will make the case for collection of information on loans to women and minority owned.

Why IS There a Truth in Savings Act?


As anyone in compliance can attest to, there are myriad consumer compliance regulations.  For bankers, these regulations are regarded as anything from a nuisance, to the very bane of the existence of banks.  However, in point of fact, there are no bank consumer regulations that were not earned by the misbehavior of financial institutions in the past.  Like it or not these regulations exist to prevent bad behavior and/or to encourage certain practices.   We believe that one of the keys to strengthening a compliance program is to get your staff to understand why regulations exist and what it is the regulations are designed to accomplish.  To further this cause, we have determined that we will from time to time through the year; address these questions about various banking regulations.  We call this series “Why IS there….”

Like all of its consumer brethren, the Truth in Savings Act (“TISA”) was enacted to address significant problems that consumers were experiencing with financial institutions. Moreover, the history of the regulation is a familiar one.  First, there were practices that left consumers confused and misinformed about the value, cost and benefits of deposits accounts.   Next, there was an outcry about the practices which resulted in congressional hearings.   Eventually regulation was passed that was designed to set standards in this area and TISA was born!

TISA has a history that is a bit more interesting than some of the significant consumer regulations.   The law was first passed in 1991, but the implementing regulations took close to two years to design and implement.    Once the rules were implemented, there was a still a great deal of confusion in the immediate years that followed, and amendments to the Act were added that delayed its implementation.  Since its implementation there have been some “fine-tuning” amendments such as adding the ability to make disclosures electronically, but the basic thrust of the regulation has remained.  The most significant change to the regulation occurred in 2006 which guidance was published that covered the manner in which information is disclosed to customers about overdraft fees.

Why was there a need for TISA?

In the early 1990’s the financial services industry had just gone through a tremendous upheaval as several important industries have either failed or gone through significant contraction.  The Savings and Loan industry had all but come to an end.  As the economy contracted the competition for the deposits of consumers became fierce.  Deposits are of course, the life blood of financial institutions.  Deposits generally supply the liquidity of financial institutions and are the funding source for loans.

Fierce competition for deposits meant that financial institutions began to do all they could to stand out to potential deposit clients.  Many institutions engaged in aggressive advertising of rates that they would pay on deposits and unfortunately, in many cases, the advertising did not tell the full story at all.  Consumers soon found out even though they thought they were getting a certain rate of return on their deposits, there in fact many “catches” to the interest rate    

Four Really Bad Practices

TISA was aimed at three particularly misleading practices in particular;

  • Interest Timing
  • Investible Balance
  • Low Balance
  • “Free” Checking

Interest Timing:  Was the practice of offering a rate on a deposit without clearly informing the customer that if the deposit was not made by a certain time, the rate would not apply for the month.  For example, I offer you a rate of 10% on your $1,000 deposit.   However, I neglect to mention to you that if the deposit is not made by the 10th of the month the rate for the whole month will be 2%.  In extreme cases, the borrower who missed the deposit deadline would never earn the higher rate advertised.

Investible Balance:  This is the practice of paying interest only on the portion of the deposit that that financial institution deemed “investable” after having to set aside required reserves.  In some cases, using this practice banks would actually pay interest only on 80 percent of the balance of your deposit.  As in the above example, your deposit is $1,000.  The financial institution would argue that $200 of that deposit must be set aside for capital purposes and can’t be used to make money, therefore, only the remaining $800 would receive interest.

Low Balance:  A third practice that regulators (and consumers) found vexing was the “low Balance” method of calculating interest.  Using this method, the amount of interest that was calculated was based upon the lowest balance of the account during the month.  If your account maintained its $1,000 balance for 29 of the 30 days of the month and then you made a withdrawal of $900 on the 29th day, interest would be calculated on the remaining $100 balance.

“Free” Accounts:  Many accounts that were advertised as free, would also come with strings attached based upon the collected balance in the account.  A series of charges would be applied anytime that the balance of the account went below an amount set by the financial institution.  Many of these free accounts ended up being more expensive than other accounts.

These practices and several other lessor tactics employed by financial institutions in advertising made it nearly impossible for consumers to shop to find the best deal for their deposits.

One Additional Concern- Overdrafts

After the first version of the ACT was passed, a further concern came to light, fees charged on overdrafts.  In many cases, financial institutions were allowing for the payment of items that overdraw accounts “as a courtesy”.  However, the term “courtesy” came with significant fees.  In some cases, the financial institution engaged in practices that would pay the largest check first and then charge fees for each subsequent overdraft.  For example, suppose five checks are presented to an account that had a balance of $1,000.  The checks total $1,300.   One check is for $1,200 and the other checks are for $100, $75, $50 and $25.  Financial institutions were paying the first check and then charging an overdraft fee for each of the other checks.   Under the rules of TISA, only the $1,200 check would come with an overdraft fee, because the other checks would be paid first.

The Main Point of TISA

The significant changes that TISA brought about include the creation of the Annual Percentage Yield or APY.  The requirement here is that the way an institution quotes an interest rate has to be uniform.  Financial institutions had to base their disclosures on this calculation and must calculate interest as disclosed.  In this manner a customer can compare one institution to the next and make an informed decision about where they will put their money.


Although the regulations do not contain significant penalties for noncompliance, in recent years, examiners have tied the Unfair Deceptive Abusive Acts or Practices (“UDAAP”) regulations to TISA.   In cases, when disclosures did not meet the standards established by TISA, violations of UDAAP have been cited.  For example, when an account is advertised as “free” or low cost, when fees are actually charged that don’t match, a UDAAP claim can be filed.    In addition, when terms of an account are mentioned in advertising or on the website of a financial institution aren’t mentioned, there can be UDAAP claims.

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