Small Business Lending Rule – Section 1071 of the Dodd-Frank Act
The Small Business Lending Rule, outlined in Section 1071 of the Dodd-Frank Act, is set to bring significant changes to how financial institutions handle credit applications for women-owned, minority-owned, and small businesses. This rule mandates that financial institutions report specific data points for such credit applications, aiming to promote fair lending practices and provide better insight into the lending landscape for these businesses.
Who Does It Apply To?
The rule applies to any financial institution that has had at least 100 "covered originations" in each of the two preceding calendar years. Covered originations refer to credit applications from women-owned, minority-owned, and small businesses.
Compliance Dates
The compliance dates are staggered based on the volume of covered originations:
- Tier 1: Institutions that originated 2500 or more covered originations in 2022 and 2023 must comply by October 1, 2024.
- Tier 2: Institutions with 500 or more covered originations in 2022 and 2023 must comply by April 1, 2025.
- Tier 3: Institutions with 100 or more covered originations in 2022 and 2023 must comply by January 1, 2026.
Preparation for Compliance
Financial institutions need to take several steps to prepare for compliance with Section 1071:
- Provide training on the requirements to applicable staff and hire any additional resources needed.
- Develop policies and procedures for data collection and reporting.
- Consider integrating compliance software to streamline reporting processes.
- Implement an internal review process to ensure the accuracy of reporting.
- Consider conducting an annual audit prior to submission by a third party.
Community Reinvestment Act (CRA) Changes
Effective April 1, 2024 (pending legal rulings), the Community Reinvestment Act (CRA) changes aim to create a more consistent process for evaluating banks. Additional changes are slated for January 1, 2026, and January 1, 2027, further refining the evaluation criteria.
Preparing for CRA Changes
To prepare for these changes, financial institutions should:
- Provide training on the changes to applicable staff and hire any additional resources necessary.
- Determine which asset size category the institution falls into: Large Banks, Intermediate Banks, Small Banks, or Limited Purpose.
- Clarify community development activities and update delineation requirements for assessment areas.
- Develop policies and procedures to ensure compliance with new performance standards, which vary depending on the size of the institution.
- Consider conducting an annual audit to ensure compliance with the requirements by a third party.
By understanding and preparing for these regulatory changes, financial institutions can ensure they are compliant and continue to serve their communities effectively.
If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
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