ABA Regulatory Compliance Inbox: Does Section 1071 of the Dodd-Frank Act define when banks must collect demographic information?

The bank’s first request for information may not be made simultaneous with or after notifying the applicant of action taken.

By Leslie Callaway, CRCM, CAFP and Rhonda Castaneda, CRCM

Q/ My bank will be subject to the small business lending data collection requirements (Section 1071 of the Dodd-Frank Act) under the Equal Credit Opportunity Act (Regulation B). Does the 1071 rule define when banks must collect the demographic information of sex, ethnicity, and race and the applicant’s minority, women and LGBTQI+ ownership status?

A/ The rule generally does not dictate when data must be collected except when data are collected directly from the applicant. If data are collected directly from the applicant, the rule states that the bank’s first request for information may not be made simultaneous with or after notifying the applicant of action taken. (Comment 107(c)(2)-2.i.) In addition, the rule includes guardrails for data collection that banks must incorporate into their policies and procedures. Section 1002.107(c)(1) states that covered financial institutions shall “maintain procedures to collect such data at a time and in a manner that are reasonably designed to obtain a response.”

Section 1002.107(c)(2) and the related commentary states that procedures “reasonably designed to obtain a response” may include initially requesting the data prior to notifying an applicant of final action taken but not simultaneously with final action; prominently displaying or presenting the data request which could include requiring an applicant to provide a response to the data request prior to proceeding with a covered application; and making multiple requests for the data if the applicant does not respond to an initial request. Comment 2 to 1002.107(c)(2) states: “Generally, the earlier in the application process the financial institution seeks to collect  … data, the more likely the timing of collection is reasonably designed to obtain a response.” (Answer provided August 2023.)

Q/ Under the Home Mortgage Disclosure Act (Regulation C), included in the information that must be reported, is the ZIP code of the property securing the loan. The bank’s loan origination system used to prepare the data submission generally contains only a five-digit ZIP code while other documents (such as note or deed of trust) contain a nine-digit ZIP code.

When reporting mortgage loan data, does it matter if the bank reports only the five-digit ZIP code? Or must it report nine digits if it has that information?

A/ Banks may report either. Per Comment 2.iv to §4(a)(9)(i): “A financial institution complies by reporting the five- or nine-digit ZIP code in which the property is located.”. However, it may be prudent to report all loans in the same manner (such as all with five or all with nine) as well as documenting the reason for doing so (such as for privacy or security reasons). (Answer provided February 2023)

Q/ My bank has a question regarding joint intent to apply for credit and guarantors. Under §1007.7(d) of Regulation B (Equal Credit Opportunity Act), creditors may not require the signature of an applicant’s spouse or other person, other than a joint applicant, on any credit instrument if the applicant qualifies for the loan without a guarantor. Comment 3 to that section requires creditors to have evidence of an applicant’s intent to be a joint applicant at the time of application.

Section §1002.2(e) defines applicant as “any person who requests or who has received an extension of credit from a creditor and includes any person who is or many become contractually liable regarding an extension of credit.” It further provides, “For purposes of §1007.7(d), the term includes guarantors, sureties, endorsers, and similar parties.”

If a guarantor is offered at the time of application and not required by the bank as a condition of granting credit, must the guarantor show evidence of joint intent?

A/ No. Guarantors are only applicants for purposes of the prohibition against obtaining the signature of the guarantor’s spouse as guarantor. Otherwise, they are not “applicants” or co-applicants, because they are not requesting or receiving credit, the key elements of the definition of applicant. Thus, guarantors would not provide evidence of an intent to apply jointly.

Q/ My bank has a customer who plans to form an LLC in January 2024, and then open a business account in the name of the LLC. There are three LLC members: One is an adult and the other two are his minor children. One child is 17 and has a driver’s license, but the other is 13 and does not have any identification. The two minors own at least 25 percent of the LLC and the parent owns less than 25 percent.

The LLC will be formed after the new beneficial ownership requirements go into effect Jan. 1, 2024, and require the reporting bank customer to report new, additional information to the Financial Crimes Enforcement Network. How does the bank handle beneficial ownership reporting for the new LLC?

A/ There is a lot of uncertainty right now about upcoming beneficial ownership reporting requirements. For banks, the most important thing to remember is that until the current Customer Due Diligence rule is changed, banks must continue to follow their existing CDD procedures.

This is true even if reporting company bank customers are required to report different information to FinCEN than their bank collects for CDD purposes. The legislation that established the new beneficial ownership reporting requirements also requires FinCEN to revise the existing CDD rule, so additional changes for banks will likely be coming. However, until those changes are made, banks must continue to comply with the existing CDD rule.

In this example, it is likely that if the new LLC is formed on or after Jan. 1, 2024, for purposes of reporting beneficial ownership information to FinCEN, the new beneficial ownership reporting rule establishes different reporting requirements for minor children, at least until they reach the age of majority. (See 31 C.F.R. § 1010.380(b)(2)(ii); (d)(3)(i); (a)(2)(iv)). Beneficial ownership reporting requirements to FinCEN will apply to banks’ customers who meet the new regulatory definition, not to banks. FinCEN should be able to answer questions bank customers will have about their new reporting obligations to FinCEN.

However, if that new LLC then seeks to open a new business account with your bank, the bank should continue to follow the same CDD procedures that it currently uses (until FinCEN changes the CDD rule).

Answers are provided by ABA Regulatory Policy and Compliance team members Leslie T. Callaway, CRCM, CAFP, senior director, compliance outreach and development; and Rhonda Castaneda, CRCM, senior compliance analyst. Answers do not provide, nor are they substitutes for, professional legal advice.