Community Reinvestment Act & Section 1071: Adapting to change in 2024

This year brought two important regulatory developments: small business lending data collection requirements under Section 1071 and Community Reinvestment Act (CRA) reform. While these regulatory updates were announced in 2023, the steps required to comply will keep financial institutions busy in 2024 and beyond.

As you continue your institution’s 2024 compliance action planning, we share key considerations and suggested next steps for staying current with CRA and Sec. 1071 developments.

Small business data collection and Sec. 1071 implementation

In October 2023, the U.S. District Court for the Southern District of Texas issued a nationwide injunction prohibiting the Consumer Financial Protection Bureau from implementing and enforcing its small business lending data collection rule. This means financial institutions aren’t required to comply with the rule until further notice.

So, what happens next? Financial institutions, regulators, and other interested parties will be required to wait until the U.S. Supreme Court reviews the legal arguments surrounding the injunction and makes a ruling. While the case was brought before the Court in October 2023, justices are expected to issue a ruling in June 2024.

Navigating this uncertainty is frustrating for many compliance professionals, but steps should still be taken in the first six months of 2024 to continue to prepare for 1071 implementation. Prudent planning actions include:

• Collecting the loan information necessary to understand when your institution will be required to start reporting data.
• Ensuring all required parties remain informed about 1071 implementation requirements and additional regulatory developments surrounding the rule. Such parties include but aren’t limited to the board of directors, risk management personnel, IT personnel, and key small business lending personnel. 
• Drafting a 1071 implementation plan. Once your compliance team drafts a plan, it should be reviewed by the key stakeholders required for its implementation. While focusing on commercial loan officers or other stakeholders in the lending function is a natural place to start, don’t underestimate the amount of support you’ll need from your IT function.
• Developing a 1071 reporting field summary, indicating where each reporting field can be located within the institution. Data location for each reporting field will vary by institution and will depend in part on how automated (or not) lending processes are. This document will also help identify information that isn’t being captured in current processes.
• Determining how data will be obtained going forward. Once you determine what data points are captured in your current lending processes, you’ll need to plan for ongoing data collection. Make sure to include line of business and IT personnel in these efforts to ensure plans are reasonable and actionable. This planning can help drive the strategy you’ll need to implement to ensure everyone involved in small business data collection receives sufficient training prior to your institution’s required collection date.

While it could be tempting to put 1071 implementation plans on hold until a verdict is received in June, moving forward with your planning in the meantime helps ensure your institution will be ready to comply once the regulatory dust settles later in 2024.

Steps should still be taken in the first six months of 2024 to continue to prepare for 1071 implementation.

CRA reform

In October 2023, regulators released the final rule designed to modernize the CRA. The final rule takes effect on April 1, 2024, with staggered compliance dates of Jan. 1, 2026, and Jan. 1, 2027. The updates to the CRA rules are complex and far-reaching, impacting everything from the number and type of performance tests institutions will be subject to in future CRA exams to asset size thresholds for the rule.

Much like your institution’s small business data collection efforts, the key to complying with the reformed CRA regulation is to understand the timeline for compliance and make a comprehensive implementation plan.

The key to complying with the reformed CRA regulation is to understand the timeline for compliance and make a comprehensive implementation plan.

Key considerations should include:

• Whether your institution will be considered small, intermediate, or large under the revised asset-size thresholds in the revised rule. It’s possible for some institutions to change categories between April 1, 2024, and Jan. 1, 2026, so it will be important to understand your institution’s growth trajectory.
• Once you understand the asset size category your institution will fall into, you’ll want to have the regulatory exam guides available to understand what required tests your institution will be subject to in future regulatory exams and what tests would be optional for compliance.
• Once you understand the tests that will apply, you’ll need to understand what geographies your institution will be evaluated on. This is especially important to identify early, since there could be geographies you’re not evaluating for CRA compliance today that you will need to evaluate in the future to understand your institution’s CRA performance.
• Once you understand the new tests and geographies, you’ll use the processes you’re likely familiar with today to move forward: Evaluate how your institution is currently performing and use that self-assessment to formulate future action plans for improved CRA compliance.

Whether working through Sec. 1071 small business data collection or understanding the revised CRA regulation, plan ahead; the changes are complex. Make sure you engage experts you trust to provide the support and expertise you need to successfully comply.

Whether working through Sec. 1071 small business data collection or understanding the revised CRA regulation, plan ahead; the changes are complex.