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.

There are lessons for all financial institutions from the Wells Fargo Case

sept27blogA Three Part Series- Part One- Understanding the Power of UDAAP

The recent news about a huge fine levied against Wells Fargo financial institution presents a cautionary tale for all financial institutions regardless their size. The law and regulation that were used to construct the enforcement actions against the financial institution and the subsequent fees and fines come from the Unfair, Deceptive, Abusive Acts or Practices Act (“UDAAP”). UDAAP is an extremely powerful regulation and it is important to remember that with these types of violations the considerations are different from other areas. A product or a practice can be technically in compliance with the spirits of a regulation, but still have UDAAP implications.

A brief description of UDAAP

At the end of the Great Depression, there was a public outcry for changes in regulations that dealt with all manner of financial institutions. During the financial crash consumers found many of the promises that had been made by business were not kept. Insurance companies did not pay as promised, department stores that had promised refunds for returns reneged, financial institutions closed overnight and business in general were able to avoid payments to consumers that they promised. Neither state governments nor individuals had many options when they found they had been misled or defrauded. A consumer who was defrauded often found fine print in the contract immunized the seller or creditor. Consumers could fall back only on claims such as common law fraud, which requires rigorous and often insurmountable proof of numerous elements, including the seller’s state of mind. Even if a consumer could mount a claim, and even if the consumer won, few states had any provisions for reimbursing the consumer for attorney fees. As a result, even a consumer who won a case against a fraudulent seller or creditor was rarely made whole. Without the possibility of reimbursement from the seller, consumers could not even find an attorney in many cases. [1]

Among the changes requested were laws that prevented practices that were deceptive or fraudulent. Eventually it fell to the Federal Trade Commission, FTC, to write regulations for consumer protection on a federal level. Unfair and Deceptive Act statutes were passed in recognition of these deficiencies. States worked from several different model laws, all of which adopted at least some features of the Federal Trade Commission Act by prohibiting at least some categories of unfair or deceptive practices. But all go beyond the FTC Act by giving a state agency the authority to enforce these prohibitions, and all but one also provides remedies consumers who have been cheated can invoke. In addition to the FTC regulations, state laws and court decisions help to shape the definition of unfair or deceptive business practices.

The Predecessor

The original UDAP (with one “A”) Unfair, Deceptive Acts or Practices is derived from Regulation AA, also known as the Credit Practices Rule. The regulation was divided into two subparts;

Subpart A outlines the process for submitting consumer complaints to the Board of Governors of the Federal Reserve System’s Division of Consumer and Community Affairs
Subpart B puts forth the credit practice rules pertaining to the lending activities of financial institutions. It defines certain unfair or deceptive acts or practices that are unlawful in connection with extensions of credit to consumers
Certain provisions in their consumer credit contracts, including confessions of judgment, waivers of exemptions, assignments of wages and security interests in household goods unfair or deceptive practices involving co-signers
Pyramiding late charges, in which a delinquency charge is assessed on a full payment even though the only delinquency stems from a late fee that was assessed on an earlier installment

Through the last half of the 20th century, UDAP regulation was largely the purview of the Federal Trade Commission. Financial institution regulatory agencies generally issued guidance for financial institutions to follow and some the practices that we mention above were specifically prohibited. However, the truth of the matter was that UDAP enforcement was not exactly a matter of grave concern in the financial institution industry.


The financial meltdown of 2009 lead to many changes in regulations including the passage of the Dodd-Frank Act. Among the changes brought about by Dodd-Frank, was the supercharging of UDAP. The regulation became the Unfair Deceptive Abusive Actions, Practices, or UDAAP.

UDAAP with two ‘A’s goes beyond extensions of credit and introduces an enterprise-wide focus on all the products and services offered by your institution. The CFPB has been given the authority to bring enforcement actions under UDAPP. Considered at a high level, UDAAP is more of a concept than an individual set of regulations. The idea is that dealings with the public must be fair and that financial institutions should in fact look after the best interests of its customers.

Another key difference is that UDAAP coverage makes it unlawful for any provider of consumer financial products or services to engage in unfair, deceptive or abusive act or practices; therefore, this regulation may be applicable far beyond financial institutions.

Under the new UDAAP regime, financial institutions can be liable for the actions of the third party processors that they hire. This is one of the many reasons why vendor management has become such an important area.

Even though there a great number of laws that deal with required disclosures on financial products such as loans and certificates of deposit, these laws generally do not deal with the fairness of the terms or the possibility that a consumer may unwittingly agree to additional fees and terms that go well beyond the agreed to interest rate. UDAAP is designed to address this problem.

The Basics

What is “unfair’?

The practice causes or is likely to cause substantial injury.
The injury cannot reasonably be avoided.
The injury is not outweighed by any benefits.
Briefly, what this means is if a customer has to pay fees or costs because of some act by the financial institution that is deemed unfair, then a substantial injury has occurred. The description of the regulation does say the injury does not necessarily have to be monetary, it can be emotional. However, there are no current examples of this second form of substantial injury. This is the section of the regulation that is most often applied to overdraft programs. Even in the cases where financial institutions allow overdrafts only after getting a customer’s permission and providing monthly statements that show the amounts of overdraft fees that have been paid, a substantial injury can be found.

What is “deceptive” ?

The practice misleads or is likely to mislead.
A “reasonable” consumer would be misled.
The presentation, omission or practice is material.
According to the CFPB, to determine whether an act or practice has actually misled or is likely to mislead a Consumer, the totality of the circumstances is considered. Deceptive acts or practices can take the form of a representation or omission. The Bureau also looks at implied representations, including any implications that statements about the consumer’s debt can be supported. Ensuring claims are supported before they are made will minimize the risk of omitting material information and/or making false statements that could mislead consumers.

Any programs that have the possibility of late fees or additional fees as the result of balances, usage charges or any fees that are in addition to the initial fees all have the possibility being misleading. We have found this section is most often cited when the language used in disclosures does not match the language in advertisements or on the website. For example, in one case, a financial institution called a fee a “maintenance fee” in its advertisements, but called the fee a “monthly” fee in the disclosures it gave customers at the time they opened the accounts. This was cited as a deceptive disclosure.

What is “abusive” ?

The practice materially interferes with the consumers ability to understand a term or condition of a product or service.
The practice takes unreasonable advantage of a consumer’s lack of understanding of the risk, costs and conditions of a products or service.
The CFPB description of this portion of the regulation notes a consumer can have a reasonable reliance on a financial institution to act in his or her best interests. This means for products or services which are offered that have the ability to add fees or costs, there is an affirmative duty to make sure the customer knows what it is they are getting into. It is also critical to pay particular attention to the second part of rule which defines abusive; a practice that takes advantage of a customer’s lack of understanding of fees and costs of a product. This part of the rule requires Financial institutions to be vigilant not only about disclosures they give to customers, but also about the level of fees being charged to the customer. An add-on interest charge may make economic sense. It may also be designed with a legitimate business purpose in mind. The fee can be applied to all customers that have a specific type of account and therefore, not a violation of fair lending or equal credit opportunities laws. However, these types of fees can adversely impact customers of limited means. As a result, these sorts of additional charges on an account can represent a UDAAP concern.

Part Two-The role management must play in preventing UDAAP violations

Your Partner in Balancing Compliance