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The Dodd-Frank Wall Street Reform and Consumer Protection Act is one of the most comprehensive pieces of legislation ever written, amending nearly every financial regulatory statute in the United States. Although every bank and credit union executive knows that change is coming, very few are talking about it – and that’s a concern. Section 1071 requirements are the first signs of a culture shift in commercial lending. It is the beginning of material transactional and portfolio compliance in a nearly unregulated arena.
Just over a year ago, we saw a dramatic change in the type of transparency required for mortgages. Now, lenders have to collect data, show approval and denial rates, and prove non-discrimination by documenting the type of people to whom they’re lending – or not.
Section 1071 of Dodd-Frank is the initial step toward bringing that level of transparency to commercial lending.
This section amends the Equal Credit Opportunity Act, requiring institutions to collect data about commercial loan applicants; specifically, identifying whether the loan applicant is a small business, female-owned business or minority-owned business. While the exact data to be collected for applicants that fall into one of these categories has not been finalized, it is anticipated that Government Monitoring Information on principal owners will be required. This is a significant change in the type of application data collected for most commercial loan applications today. On top of the data collection requirements, if the loan officer making the final decision has access to this application data, an additional disclosure must be provided to the applicant.
Although, at this writing, the actual effective date has been deferred until implementing regulations are prepared, section 1071 will not be going away. While software partners, like D+H, will provide tools for data collection, bank and credit union management must also take steps to prepare.
These key questions can help you get the discussion started:
The days of the business loan that started on the golf course and ended with a financial statement review and a gut feel will no longer work in this monitored, regulated world. Compliance means moving from an informal commercial lending process to a more formalized, standardized process.
The good news is, you can make these new requirements and this more formalized structure work to your benefit.
For example, if you’re already required to document specific data, as required by Dodd-Frank, why not document all parts of the commercial loan? By adding a few more elements to the data requirements, institutions can gain real insight into their environments, their market and lending practices in each branch.
By managing commercial loan origination through one system, instead of individual Excel spreadsheets, institutions gain the ability to view the entire loan portfolio as a whole. You can gather segmentation data to more clearly identify opportunities, see the concentration of industries you serve and or use this insight to set pricing. There are benefits to be derived from the change.
If this isn’t enough reason to start talking about Dodd-Frank, section 1071, here is one more: the current data collection requirement is just the tip of the iceberg. It is just the beginning of a new era of transparency in commercial lending, with more requirements, a greater degree of monitoring and more changes to come.
D+H will help you stay on top of new regulations by building compliance into our solutions, supporting these new data collection needs. We also have multiple resources available to help you understand the impact of Dodd-Frank, from webinars, websites and a 1-800 number to a link from the LaserPro® section of our Customer Services Network.
Although the initial July 21 deadline has been extended, don’t wait to start talking about how these new regulations impact your institution. Get the conversation going today – start making plans – and think creatively about how to use the data collection requirement to your institution’s benefit.
Mitch Lucas is vice president of product management and legal compliance at D+H. He leads the compliance legal and product management departments, which are responsible for several dynamic (computerized) and static form and origination systems for commercial, consumer and real estate lending, and deposit account opening. Mitch joined D+H in October 2004 after 11 years as general counsel for a northwest financial institution. Prior to his role as general counsel, he was the managing shareholder of a firm representing 30 financial institutions in Washington State. Mitch received his Juris Doctorate from Lewis & Clark Law School, and Bachelor of Science degree from Oregon State University. He is a member of the Washington State Bar Association, the American Bar Association (ABA) and the ABA Banking and Consumer Financial Services Committees.
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