VIDEO: 1071 Voluntary Collecting & Reporting
In this Compliance Clip (video), Adam answers the question on whether a non-covered financial institution can voluntarily collect information on covered applications from a small business pursuant to the 1071 Final Rule. Adam explains the answer by discussing the different situations that the CFPB has provided through the Small Business Lending Rule Small Entity Compliance Guide.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about voluntary collection and reporting under the 1071 Rule or subpart B of Regulation B. The question we've received a couple of times is something like this: Can a non-covered financial institution voluntarily collect information on covered applications from a small business pursuant to the 1071 Final Rule? This question comes into play whether you are a non-covered financial institution or you’re not currently covered but you think you’re gonna be covered because your implementation date is down the road. There’s a couple of different reasons why you might not be covered right now and when to collect this information going forward.
The best answer we have is going to come from the Small Business Lending Rule Small Entity Compliance Guide Section 2.6. We've got a Small Entity Compliance Guide that talks about these rules. In this Small Entity Compliance Guide, they've set a number of things and what they've done is they provided us with some scenarios.
Let's first look at what they've said. They've said, “While it is permissible for a financial institution to request most of the data specified in the final rule regardless of whether it is a covered financial institution,” meaning it's subject to the collection and reporting rules of Section 1071 and subpart B of Regulation B, “the final rule recognizes that a non-covered financial institution might violate provisions of ECOA and Regulation B if it collects the demographic information without a legal requirement to do so. Thus, the final rule includes a provision that permits non-covered financial institutions to voluntarily collect this demographic information for covered applications from small businesses.”
Now there are some specific rules on how you have to comply with this. So what they've done is they've provided us with a number of situations and these situations outline different possibilities of why you might be collecting these information under the small business data collection and reporting rule even though you’re not required to do so.
Situation 1 says the financial institution was required to report data pursuant to the final rule for any of the preceding five calendar years but is not currently a covered financial institution. So this would work down the road if we're in the year 2035, but today, at the time this video is being recorded, we’re seeing the implementation tiers are not yet here. So if you're planning to be subject to one of those implementation tiers, then this situation won't help us at this point.
Now, Situation 2 might because Situation 2 says this, “A financial institution originated 100 or more covered originations in one year and wants to begin collecting data in the second year of the two-year threshold period.” Remember that you have to meet certain thresholds for two consecutive years, so if you met it in the first year and you know you're going to meet it in the second year, you could use that second year as a ramp up period to start collecting the data and you have a safe harbor to do that under the final rule of Regulation B. So that is a situation that's going to apply to most of you who are wanting to ramp up your collection and reporting before you're actually required to do so.
Now, for situations 1 and 2, they say that the financial institution may only collect demographic information for covered applications.It has to be subject to the rule. You can't collect it for everybody. It has to be covered applications for small businesses, and it must comply with the applicable requirements of the 1071 final rule, the firewall, and the final rule’s and Reg B's record retention requirements as though it were a covered financial institution.
So basically you're going to operate just like you're a covered financial institution. You can only collect information that's allowed to be collected under the rule. In this situation, the financial institution is collecting these applications and is permitted, but not required, to report. So that one year period in between having your first year and then the one year ramp up period, you are permitted to collect but not report. Same for five years after you were required to report or you're allowed to collect, but you don't have to report. So that is something that's permitted under the rules.
Now, Situations 3 and 4 are a little bit different. Situation 3 says situations 1 and 2 do not apply but nonetheless the financial institution wishes to collect demographic information from small businesses that submit covered applications. In this situation, you must report. So you're allowed to voluntarily collect and report. So that’s something that is permitted. If you want to report, you can but the only way you're allowed to collect information, if you're not subject to situations 1 and 2, is you have to report.
Situation 4 is a little bit different. It basically says the financial institution is collecting demographic information from a small business submitting a covered application, whether for required collections or voluntary collections described through situations 1 through 3, and wishes to collect such information from co-applicants as well. So you also want to collect for co-applicants even if the co-applicants are not small businesses. In this situation, the financial institution must comply with relevant requirements of the final rule with respect to co-applicants.
So if you want to collect for co-applicants, you have to comply with the rules for co-applicants which we're not going to get into today because that situation probably doesn't apply to most of you.
Hopefully that answers any questions you have about voluntary reporting because those are the situations that are outlined to us from the CFPB.
That is it for this Compliance Clip.