CRA Modernization and Section 1071: a Perfect Storm

Posted on May 11, 2023

by Elizabeth Rozsa, Senior Consultant, Capco Academy Blackboard

Most of you remember the superstorm Sandy-otherwise known as the “perfect storm” of 2012. Why is it called the perfect storm? Because it combined the force of a hurricane’s rain and wind with the catastrophic flooding of a nor’easter. This one-two-punch combination is what financial institutions are facing with the imminent implementation of CRA modernization and Section 1071, both of which will require enhancements to procedures and training to meet the challenge. Of course, these separate storms will have varying degrees of impact on financial institutions (small banks under the CRA will not need to revamp their entire CRA programs), but the combination will hit all subject institutions with tremendous force. Let’s examine each of them in turn and then talk about the combination.


Ramifications of the CRA Modernization Proposal

The CRA modernization proposal would require those institutions designated as intermediate and large banks not only to continue to collect and report certain information but proposes additional collection and reporting responsibilities. The current Intermediate Small and Large Bank tests evaluate a bank’s lending in all assessment areas based on its loan portfolio. In most evaluations, this includes both HMDA and Small Business lending across all assessment areas, providing a level of certainty for the institution. The proposed Retail Lending Test would evaluate loan products by assessment area, so institutions would need to monitor their lending in each assessment area and prepare accordingly. In addition, the proposed evaluation categories could include many loans that have not come under the CRA microscope in the past.

The modernization proposal will require institutions to perform ongoing detailed examinations of all their products by assessment area to prepare for the next CRA Public Evaluation. This is in addition to the additional collection and reporting of community development activity required for large and some intermediate banks. Under current standards, large banks must collect and report data on community development loans only; the proposed standards would require these institutions to collect and report data on all community development activity. All these new collection and reporting requirements will necessitate changes and updates to procedures, tracking mechanisms, and training.


How Does Section 1071 Data Collection Fit into the Picture?

According to the Final Rule issued March 30, 2023, institutions originating more than 100 small business loans (as defined by the regulation) annually will soon be required to collect and report reams of information on certain commercial applications. There are exclusions to these 100 small business loans counted towards the threshold:

  • Trade credit
  • HMDA reportable transactions
  • Insurance premium financing
  • Public utilities credit
  • Securities credit
  • Incidental credit

Platforms and origination software systems may not capture the data elements, including but not limited to:

  • Credit purpose
  • Guarantees
  • Application Date
  • Denial reasons
  • Number of principal owners
  • Origination charges
  • Number of workers
  • Time in business

Financial institutions will be required to update their data collection processes and implement new reporting processes.

In addition, loan officers will need to collect demographic data under the new Rule.  Although this collection process is similar in some aspects to that currently mandated for HMDA reportable loans to natural persons, the scope is much wider as Section 1071 requires the institution to attempt to collect demographic information from at least one principal owner of the business. Maintaining compliance with this new requirement will necessitate updated procedures and training.


Compliance Implications

So why do these new and/or updated requirements constitute a perfect storm?

  1. The implementation dates of these two rules may occur within months of each other so instead of preparing for one regulation with increased requirements and updating procedures and training, there are two.
  2. According to the CRA modernization proposal, when Section 1071 data becomes available, it will replace the current small business/small farm data used for a CRA Public Evaluation.

In conclusion, even though as of this writing a final rule has not yet been issued for CRA modernization, every financial institution needs to evaluate its responsibilities under both the final Section 1071 rule and the CRA modernization proposal to determine the enhancements and adjustments necessary to stay compliant.

How Capco Can Help

Not sure where to start? Capco has many offerings that can assist the financial institution with its compliance program. Capco Academy is ready to assist your institution to meet these challenges with our custom training solutions tailored to the specialized needs of your institution at every level of responsibility. Regulatory Advisory Services can assist the financial institution in understanding the requirements for collecting data and reporting.

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