CFPB Rule 1071 and Its Impact on Small Business Banking

Transcription:

Abhishek Bhasin (00:10):

Okay, great, great. I don't know how many of you were here in this room in the session before on diverse on businesses, but that was an amazing session and I hope this will be even better than that all through the day. You've been having great conversations. I hope, a lot of insightful conversations. So this session is about CFPB, rule 1071, and its impact on small business banking, and we have actually a regulator on this panel as well. So I think this will be really, really interesting.

Renee Huffaker (00:44):

Pressure's on Alan. Pressure's on.

Abhishek Bhasin (00:48):

So yeah, so let the fun begin. So my name is Abhishek Bhasin. In short, I'm the Head of Product at Uplink, and I can tell you that we've been talking to a lot of lenders specifically about this 1071 compliance. They've all been worried, okay, how do we make it happen? This is coming down the pipe. Then at the same time, when I tell them about uplink, a quick plug that, okay, we've helped lenders underwrite a lot of loans over the last so many years, 1.4 trillion. But when I tell them this thing about meeting this compliance is natively built in through regulatory approved criteria, financial inclusion criteria like BISG testing, then some of them they'll be like, wow, this is like, they get amazed. So I'm just saying that this is an important topic and a lot of discussion needs to be had on this. So I'll introduce this amazing panel. The first one, Alan, which obviously you know Alan Ellison, Senior Small Business Lending Program Manager at CFPB, Consumer Financial Protection Bureau on Alan's left as Renee Huffaker, Chief Compliance Officer at Arvest Bank. Then Anurag Agarwal who is the President at RiskExec by surety. And last but not least, Chris Napier, who's the Partner at Mitchell Sandler and the moderator for the session. Chris, thank you.

Chris Napier (02:06):

Fantastic. Good afternoon everyone, and welcome to our recession on CFPB section 1071. I know everyone wants to end their day on a data collection rule, but as you mentioned, it is an important topic, particularly now as we're getting towards the finish line on the implementation here. And it does have a lot of ramifications for what you're going to do with that data and what you can do with that data. And I'm sure a lot of you have heard recent news about some interesting developments in terms of what's been going on on the legal side of that. Some of you may be wondering what that really means and does that affect what you're doing? I think if you were expecting to come here and have us tell you that the recent litigation about it means pens down and you can all forget about the rule, if that were the case, this would be five minutes long.

(02:59):

So that's definitely not the message. But just to go over recent events really quickly to start off this discussion, you're probably aware the district court in the Southern District of Texas has granted a preliminary injunction against the CFPB staying the implementation of the rule. It applies nationwide and the order also includes a requirement that once the stay is lifted, the bureau compensate by extending the deadlines out to compensate for the time that the rule has been stayed. So in terms of what that really means for everybody, I think I'll start kicking it over to the panel here and then a I'll start with you.

Alan Ellison (03:48):

Sure.

Chris Napier (03:49):

Yeah. Has the stay affected the way that the bureau is looking at implementation or lender's compliance with the rule?

Alan Ellison (03:58):

Okay, first a disclaimer, you can't have a regulator without a disclaimer. So this presentation is being made by a consumer Financial Protection Bureau representative on behalf of the CFPB. It does not constitute legal interpretation, guidance, or advice of the CFPB. Any opinions or views stated by the presenter are the presenter's own and they not present the CFPB's view. Okay, now let me answer your question. First of all, we are proceeding at the bureau with all the infrastructure development to be able to take in data. In addition to that, we actively are involved in working with financial institutions to answer their questions, which we would urge you. If you have any questions on the rule, things are unclear, reach us. And in addition to that, what I have heard for many lenders is that we're relieved we have a little bit more time, which is going to provide opportunities for us to make sure our systems are in order and for us to train our bankers. So to some degree, it's some additional time for you, and this lawsuit ties into the constitutionality of the bureau based on its funding, not pertaining to the rule itself.

Chris Napier (05:31):

Great. And Renee, from a practitioner's standpoint, is this affecting what you're doing at your institution and what do you plan to do with the extra time?

Renee Huffaker (05:40):

So we have not taken our foot off the gas in any way in terms of preparation or readiness, any additional time that we get, we are using as part of our really end to end business process review over business lending more generally. And we're also using that in particular to listen to our customers, to do some customer focus groups, to give them a little preview of what to expect in this new rule and then to gauge reaction from that. We are expecting customers to just all of a sudden one day flip a switch and trust us with a significant amount of very sensitive information and very sensitive data. And so understanding how we can make that a better experience for them in the implementation process is one of the things that we're using this little bit of extra time to focus on.

Chris Napier (06:44):

Great honor. From your vantage point of broader view across the industry, do you have any additional thoughts on it?

Anurag Agarwal (06:52):

I mean, as a vendor to the financial services community, the only thing I can offer here is this is a difficult rule. This is an area that many lenders have not been that diligent about. So get some help probably from coding from movies. You're not alone, you have vendors, whether vendors like uplink, vendors like us, vendors like others, there are people out there who've been doing this for a number of years. There are experts out there. This is not a scary thought. You've been doing hummed up probably hopefully for a number of years. This okay, Anne. Sorry. Okay, okay, okay. I said you've been doing it not properly. I didn't say you're doing it properly.

Renee Huffaker (07:47):

There you go.

Anurag Agarwal (07:48):

You've been doing hamda. Let's begin 1071 properly to start with and just get some help out there. Find people who are out there that can help you, law firms that can help you. The bureau, I give a plug to Alan, the bureau is always willing to help the people look at them as antagonistic. In my experience with Alan and Nat, they're not. So get some help out there. Understand what needs to be done, get some formal procedures. Look at this as extension as a gift, use this time wisely, but Dodd-Frank is not going away and I'm not a politician, but unless Congress changes its mind. Alan Dodd-Frank is here to stay. God Frank is section 1071 is here to stay.

Renee Huffaker (08:39):

But I think you made a really good point there. And the reality is our business bankers and our business lenders, they're not accustomed to working in a highly regulated way. Our business lenders have had a tremendous amount of autonomy, a tremendous amount of discretion in how they can approve loans or underwrite loans or when to require certain covenants or not require those covenants. And that largely goes away in a post 1071 world. And so from a cultural perspective in your organization, making sure that you're getting the right help that you need to address some of the organizational change management and the cultural issues that this type of fundamental change in our lending practices is going to create.

Chris Napier (09:32):

No, I think that's actually a good segue sort of into the next topic, which is from a, not to put you on the spot, Renee, but where is your institution at in the implementation and is a lot of your time now being focused more on training in those sorts of needs?

Renee Huffaker (09:50):

So we have never thought of this as just a data collection rule. It's a fair lending rule and they get to fair day, meaning the bureau gets to fair lending through the use of this data that they collect. And so our primary focus has been on what business practices do we need to stop, start or change in order that our data shows and clearly demonstrates that we don't discriminate against our customers. And so the way that we've approached this is we've broken down the work into 11 different work streams and those work streams, some are probably exactly what you would expect. We have an application management work stream and an underwriting work stream and a pricing and products work stream. But then we have other work streams as well like customer experience that I mentioned earlier or advertising and marketing or people roles and structures.

(10:48):

How are people's incentive plans going to have to change in this new world? We have a communications work stream, lots of different things for us. Our organization, we're about 28 billion and this is very impactful to us based on our initial assessments, it's going to impact about 85% of all of the business lending we do in our organization, even like our largest commercial loans will fall under this rule. And so we're having to think of this very, very broadly across the organization. And using these work streams have allowed us to kind of tackle all of these different issues, whether it's related to organizational structure or whether it's related truly to the data collection itself and do that in a very cohesive way.

Chris Napier (11:45):

And Alan, this is actually for you honor, I had mentioned before obviously get help if you are not far enough along in the process and that there's tools available out there if you need it. What kind of tools and assistance is the bureau offering?

Alan Ellison (12:02):

Okay, thank you. And I want to just follow up on your comment is that the Equal Credit Opportunity Act pertains to small business lending and it pertains to small farm lending as it does to consumer lending. If this rule didn't exist, it's still incumbent that discrimination not occur in the lending process. And we know that there were challenges in individual, especially like an organization like yours where you have a number of branches and it's helpful to having diligence and having a compliance management system to support this. Now on our end we have on consumer finance.gov, which is the bureau's website. We have put up there a number of tools to assist you in addition to the rule and executive summary and data point charts and all sorts of things. We have the enforcement policy statement there. We have the filing instructions guide, we have q and As based on questions that we've gotten at the bureau. Many of your questions might be satisfied at that point. And in addition to, we have a commitment to turn around any question to the bureau within two weeks and on our website we provide instructions on how to ask us whether it's a technical question or a regulatory question and we urge you we're here to help you. And I was on the other side at a major bank implementing bureau rules and we've learned a lot from that to provide the tools that you need and we're here for you.

Anurag Agarwal (13:48):

The one thing Chris, I wanted to add there is we heard in the initial days who's going to do this in the institution. And I'm not peak for Renee here by any means, but if anybody here is under the misconception that the hamda CRA teams in the bank, which are already far overloaded in meeting the needs of hamda, and not to point a finger at the bureau or anybody, but hamda data is becoming controversial. So you're going to need new resources. Don't expect your hamda CRA team to help you at all in doing this 1071 data collection submission. So we are behind on hiring resources, we are behind on getting training. We are behind on getting the systems in place to take 78 different loan types in 1071, consolidate them. So we are already behind in a lot of ways, and I'm speaking for the banks, so there's a lot of work to be done. Let's not wait around, get the buy-in of your C-suite, impose the financial burden that the banks are going to face. Let's not be, we are aware of that, but let's go start this project now if you haven't, you're actually probably way behind already if you aren't very far along

Renee Huffaker (15:11):

Well and it can't be something that people are just doing off the side of their desk, right? I mean it's got to be a prioritized project in your organization with appropriate project leadership because it's just too material of a body of work with too serious of implications around it to mess it up.

Chris Napier (15:30):

So then this day actually might actually be an opportunity to take stock of where you are and maybe adjust your plans and reassert the focus on getting this across the finish line it sounds like.

(15:43):

So actually sticking with the topic of not letting your foot off the gas and compliance, I think a lot of people are wondering once the compliance states actually roll around and I actually now have to be responsible for all these efforts of implementation. I think they're wondering how regulators are going to approach this from an early examination standpoint. So Alan, I'm wondering, I know that the bureau is offering a grace period premised on good faith efforts at compliance and I was wondering if you could provide some more light on what that grace period means and what you mean by that.

Alan Ellison (16:28):

Sure. Let me start off by saying what are the statutory purpose of the rule? And these were delineated by Congress and this rule was mandated by Congress. One is the fair lending purpose, but second equally as important is the community and business development purpose of the rule. We wish we would've had this data when we were designing the payroll protection program. We would've had a more effective program early on. The thing to note here is that this data will be utilized for a number of purposes. The new CRA rule utilizes the same definitions of 1071 for small business loans as well as small farm loans. So we have consistency with this data for future CRA exams. If you're a bank. In addition to that, if you can look at, and I would urge you to read the enforcement policy statement of the bureau saying, what is it that we're going to be looking for early on and we are going to be looking for one good faith efforts to implement this rule.

(17:45):

And the question is, what does that mean? That means integration in your compliance management systems at your financial institution in terms of policy procedures, validating the data's correct in implementation. We're also going to be looking to see that you have effective programs for training your bankers to be able to deal with the data collection form and the demographic data is contained in a form and we've provided a sample of what that form could look like for capturing data, whether it's in person on a paper form or digitally as well. And that bankers understand that the customer can refuse to provide the information that should be captured from the customer if the information is provided that should be reflected in the form being compiled correctly and that the data itself from your systems are reported to the bureau on time. There's a June 1st date for the data collected in the prior year to be submitted to the bureau and in addition that the data is correctly submitted. So that's what we're going to be looking for. And we do have a grace period we recognize with something's new there can be errors, but what we're looking for is a good faith effort to do this well.

Chris Napier (19:22):

And for Renee and Anurag, I mean from a practical perspective.

Anurag Agarwal (19:24):

Let me give you an example of what Alan is alluding to but not talking about it. So if it turns out when you analyze your data in the collection of the GMI information, which is required in 1071 that you had 2% data collection in majority minority census tract and 80% in non-majority minority, that's going to be a problem. There are markers in this data that are essentially to be used of fair lending, whether you use the BISG, which is the only tool at this point approved by the bureau to use, there is not going to be a peer data set available for a while. So what does that mean for fair lending means you are your own worst enemy. You're going to be judged against yourself. So then let's look at our own internal data, our own marker showing that we are doing either a poor job of data collection or hiding the data by not providing the data in protected geographies. This has been a problem in hamda data growing recently with the telephone internet channels. We see the rise of code six, which is information not provided. If that happens in 1071, then we as vendors are going to track it and let people know. But I would presume the bureau is going to gravely interested in that kind of analysis.

Alan Ellison (20:50):

And I should add that the data is certainly we will be protecting in the data release information on the individual customers. There's no private PI being captured, but there'll be the opportunity for you to be able to see how are you doing on the data capture versus a peer institution.

Renee Huffaker (21:12):

So I'll just even cut more to the chase on this. Organizationally, you are shortsighted if you are relying on this good faith protection for the first year. You need to be doing everything in your power to have good clean data on the first year that you report it. And so you need to be thinking about organizationally where you have soft spots. You do need to read this enforcement description that Alan referred to because it gives you a very good sense of how they will be drilling into the data. They're going to be slicing it by product, they're going to be slicing it by geography, they're going to be slicing it down to the individual lender level. And so it is incumbent upon you as an organization to really understand where soft sparks are in your data before the bureau does. And that way you can at least make some initial efforts to start remediating those soft spots and shoring them up and the bureau doesn't have to tell you to do it.

Alan Ellison (22:26):

Yeah. If I could add one thing to that is this is the opportunity. You have this pause right now. This is an opportunity if there are issues in your organization with disparate treatments, whether it's by geography or by office or phone versus mail or whatever, this is the opportunity to clean it up.

Chris Napier (22:50):

Yeah, and that's a good point too, right, because I think a lot of lenders will end up being surprised by the risks that they see once that is available and you don't want to get caught flat foot with that. So are there things that you would suggest that lenders can do now even without necessarily having a complete picture of the data?

Anurag Agarwal (23:14):

Well, I mean Renee and Allen make very good points about the best data that you can get less established practices to get that as early on. But from an analytics point of view, things aren't going to change. This is going to be the same kind of fair lending, underwriting, pricing, redlining, the same traditional analysis that has been done. So the concepts are there if you feel that your data doesn't have enough GMI and you need to use the BISG to proxy it, so be it. We know it has problems with it, but it's the best thing out there. It's the only approved methodology by the bureau. So let's do that. Let's perform this analysis, look at your redlining across geographies and then take stock of other stuff that has gone before marketing complaints, as Alan mentioned. Have a complete CMS. If all else fails, call Chris Napier as the resident expert, the law expert on 1071.

Chris Napier (24:16):

And I think it's important to point out too for everyone that even without the data, there is nothing preventing you from planning out and gaming out some of the strategies, the business strategies that you will actually implement in the event that you find risk.

Renee Huffaker (24:33):

That's such a great point, Chris, not only for 1071, but for modernized CRA as well, we are going to see a marrying of business strategy and compliance in a way that none of us have ever contemplated before in our careers. And so understanding the intersection of all of that and how it informs your delivery channels, how you market inside and outside of your footprint, all of the different things now become a part of the conversation.

Chris Napier (25:09):

Yeah, I think that's a perfect way to sort of end this discussion, which is of sure, it's of interest particularly to the business folks. This data is not just about compliance and about measuring my fair lending risk. Are there other opportunities you see this data giving institutions now that they'll have this visibility?

Anurag Agarwal (25:29):

Well, not only that, I mean even with HAMDA data and all, why does everybody look at this as a compliance issue? Why isn't this a marketing opportunity? Why isn't this an opportunity for relearn your gaps and gain market share as opposed to looking at this always as a bad thing?

Renee Huffaker (25:47):

Yeah, I was stunned this session was not in the marketing and selling track of the conference because really you guys, we have a treasure trove of data that will be available to us from this rule. And while there are very specific ways we can and cannot use the data as outlined in the regulation itself. And so make sure your compliance people are advising you on how you can and can't use the data, right? There are ways that you will be able to thread the needle with this and use this as a real opportunity to maximize competitiveness distinction in the market, all of those kinds of things. Right.

Alan Ellison (26:29):

Okay. Can I add one thing before we that I would urge folks, NCRC, which is an advocacy organization, has done a number of studies where they worked with academics at BYU, Utah State and Florida State where they've done match pair testing at individual bank branches where they have a white tester and a black tester or a female white tester and a female black tester and looked at treatment and in their shops they design it. So the credit profiles of the black tester are slightly stronger and they found a significant instances at a branch level. And this is shopping the same banker of discouragement of the minority or women shopper for small business credit. And I think this is the opportunity if to look at your organizations and say, gee, is there problems there? Do I need to train better? Do I need to test my branches myself to make sure that there is not disparate treatment occurring? And this is really the right thing if we're going to have our minority communities and our inner city communities and rural communities grow and prosper is to be able to have fair and equitable access to credit. And we need your help.

Renee Huffaker (28:00):

As a plug for my friend Chris, don't mystery shop except under the advice and supervision of counsel.

Alan Ellison (28:07):

Exactly right. Yep.

Anurag Agarwal (28:09):

Yes.

Renee Huffaker (28:09):

Be careful. Yeah,

Chris Napier (28:11):

No, those are all great points. And Alan, I'm glad you mentioned NCRC too, just the concept of consumer advocacy groups and other groups out there. This data is going to be developed to everybody. So it is not only an unprecedented opportunity, I think for businesses to one, you can see what your competitors are doing, you can see who is successful where and better understand I think what strategies are successful and which I think has been the black box for the most part on the commercial side of things. But at the same time, you'll also have a lot more people watching you, right? There's going to be consumer advocacy groups who've traditionally focused on mortgage lending. Now they're going to look at small business because they have the tools to do it. So it's going to be a big push both in terms of competition, changing business practices, a lot of opportunities, but also risks that need to be accounted for. So I think that is all we had for this panel.

Anurag Agarwal (29:11):

In the woods of good old Ross. We can either talk about it or we can do it. So I mean, let's just go about and do it and hopefully the bureau looks kindly on everybody that makes a good faith estimate to do it.

Alan Ellison (29:23):

We always do. And it Is this a time now for an open bar?

Chris Napier (29:29):

Yeah, we definitely want to end about a minute early because yes, it looks like they're rolling out the buffet open bar. There's line dancing. I understand.

Renee Huffaker (29:38):

Yeah. Alan said open bar and eight heads went like this.

Alan Ellison (29:40):

Right, exactly. Woke everybody up.

Chris Napier (29:42):

Alright, well thank you everyone for attending.