The CFPB Small Business Lending Data Collection NPRM

What you need to know about the new rule of Section 1071 of the Dodd-Frank Act.

Section 1071 of the Dodd-Frank Act was intended to facilitate fair lending laws by identifying business and community development lending needs and barriers for small, women-owned and minority businesses. Section 1071 amended the Equal Credit Opportunity Act (ECOA), requiring financial institutions to:

  1. Inquire if the business is a small, women- or minority-owned business.
  2. Collect, maintain and annually report lending data.
  3. Restrict data access to relevant personnel.
  4. Make the data available for public disclosure.

It’s been more than ten years since the Dodd-Frank Wall Street Reform and Consumer Protection Act  (Dodd Frank Act) became public law. However, this is the first time Section 1071 is being fully addressed. Early this September, the Consumer Financial Protection Board published a 900+ page proposal. They also published a webpage with resources relevant to the rulemaking.

The intention is to gather data on whether the borrower is a small, women- or minority-owned business. The rule presents 23 data points, some of which you may already be collecting. If the borrower declines to self-identify, the lender should take visual or last name clues to supply the necessary data. The CFPB will also offer a Filing Instructions Guide to help simplify and streamline the data submission process.

Only covered financial institutions will be required to comply with section 1071’s data collection and reporting requirements. All other financial institutions can submit the data voluntarily in certain circumstances. But what constitutes a covered financial institution? According to the rule, a covered financial institution must have conducted at least 25 small business loans during each of the previous two years. Although a financial institution may be exempt from reporting by this definition, it may not be exempt from Home Mortgage Disclosure Act (HMDA) reporting. It’s important to know where your institution stands and not to assume that if you are exempt from one, then you are exempt from both.

A small business will be defined as a business with a gross annual revenue of less than $5 million for its preceding fiscal year. Although based on the Community Reinvestment Act (CRA), the rule relies on the definition set by the Small Business Administration (SBA).

A 90-day comment period begins once published in the Federal Register. If you have something to say, this is your opportunity to be heard. Mandatory compliance begins 18 months after the Federal Register publishes the final rule. There will be no immediate effect or need for action. However, it doesn’t hurt to start planning for this new rule now.

As Marquis Software Solutions continues to monitor the situation, we’ll learn more about the ruling. And once it is ratified, we’ll take a deep dive into what this means for financial institutions of all sizes and keep you up-to-date on what we find. By staying on top of the situation, we hope to make implementing this new rule a painless and stress-free process.

CFPB COVID-19 Policy Rescissions and What That Means to You

When COVID-19 first made its appearance, it affected every part of our lives, including our financial health and well-being. The pandemic also caused a monumental pivot on how we conducted business. The financial industry’s shift to digital and drain on resources could become a compliance nightmare as more and more people and businesses sought relief through loans and other considerations.

To alleviate the strain and ensure that funding would continue to reach those who needed it, the Consumer Financial Protection Bureau (CFPB) released seven Statements of Policy that affected how banks handle their compliance responsibilities. For example, one revision temporarily created a hold on citing or enforcing any action against a financial institution that did not keep up with reporting their Home Mortgage Disclosure Act (HMDA) data quarterly. Another stated that the CFPB “…does not intend to cite a violation in an examination or bring an enforcement action against a creditor that takes longer than required by the regulation to resolve a billing error.”

These temporary measures allowed financial institutions to tend to their customers’ needs without placing an undue burden upon their employees. Banks and credit unions would still need to acquire the same data and follow the same regulations; they just had more time and increased flexibility.

Now that the country is opening up, the CFPB has determined it is time to get back to business as usual. On April 1, 2021, the Bureau rescinded these temporary Statements of Policy. However, business as usual will not be the same as experienced over the last four years. Under the new administration, the CFPB will be looking for non-compliance issues more “actively and aggressively” than the previous administration.

What does this mean for you and your financial institution? It means that when it comes to reporting time, your data must be clean and up-to-date. From your Compliance Management System (CMS) to considerations taken on approving and declining loans, you still have to present the necessary data to support your actions. You have to identify issues occurring over the past year and a half and create a plan that addresses correcting them. You have to be able to tell your story accurately and with confidence.

As banks, credit unions and mortgage companies return to their physical facilities, the drain on resources continues. While the CDC’s eviction moratorium was slated to end on July 31, 2021, President Biden announced on July 29 that federal agencies should use their authority to extend their respective eviction moratoria. Therefore, the Federal Housing Finance Agency and the Federal Housing Administration extended their eviction moratoria through September 30 for foreclosed borrowers and other occupants. Meanwhile, more than $46 billion in emergency rental assistance has already been allocated by Congress and awaits distribution.

The influx of mortgage forbearance cases was supposed to begin in October of 2021. Financial institutions are still reallocating and training their employees as they continue to adapt to the changing landscape.

Even if your compliance team is still intact, the constantly changing regulations and Statement of Policy rescissions can put more pressure on already stressed team members. Partnering with compliance experts can help see you through the first hurdle – returning to pre-pandemic protocols and procedures.

Marquis Software Solutions offers a suite of compliance solutions to help you through your compliance issues. With CenTrax NEXT, you’ll have all you need for Fair Lending, HMDA and CRA. This Marquis flagship compliance software comes with customizable dashboards, intuitive reporting tools, advanced mapping technology, security management and demographics analysis to ensure accurate submissions and exams.

To pull everything together, Marquis compliance experts offer an array of services from HMDA/CRA file review, risk assessments, Compliance Management System reviews and self-assessments. We’ve stayed on top of how special considerations brought on by the pandemic affect compliance and what that means to your financial institution. We’ll give you all the support you need to tell your story and face regulators with confidence.

To learn more about Marquis’ comprehensive compliance solutions, contact us at [email protected].

NOTE: COVID-19 and the Delta variant continue to impact the ability of home-owners and renters to meet their obligations. Marquis will continue to monitor the situation and how that impacts your compliance efforts.

What Works? An Analysis of Campaign Results and Best Practices – Part 4 Featuring Marquis’ CMO, Dr. Tony Rizzo

 

Video Transcription 

What Works? An Analysis of Campaign Results and Best Practices.

Part 4: The Power of Triggers

Dr. Tony Rizzo, CMO, Marquis

One of the questions I get asked frequently is, “What works?” So, taking that question to heart, we executed a very extensive analysis of campaign performance throughout campaigns that we managed and produced over 2019.

Marketing automation. This is the holy grail of marketing, in my opinion. But I would add to it to even have it to be more effective. Our marketing automation takes a look at a set of predefined business rules, analyzes those business rules and acts on them every single day.

There are four categories that we look at. One I classify as market automation or triggers. It could be a credit trigger, where I’m analyzing a data set for credit activity to find those members applying for loans not with you on a daily basis. I’m going to make some type of preemptive offer.

It could be what we call good manners marketing. These are things like “Thank you” and “Happy Anniversary.”

It could be a new account trigger. “You opened a credit card yesterday. Thank you. We think you might like an auto loan.”

It could be transactional. “Yesterday, we noticed that you had an overdraft hit. Would you like overdraft protection?”

But as I went back before, and I said, you know, is it worth it? Because there’s a lot going on here, right? There’s a whole lot that goes into marketing automation. It is absolutely not “Set it, forget it and walk away.” So, we undertook another study and looked at 50,000 people. We sent them the exact same letter. One group was based on timing – when they purchased something we thought the timing was right to make a home equity offer – versus 25,000 people that we just picked a date and mailed 25,000 letters out. No time factor at all. However, both the trigger group and the non-trigger group were already predisposed based on filter criteria. So as close as we could, either group was as qualified as the other. All we did was isolate for time.

Again, same exact letter. Nothing was different. Even the envelope was the same. And here’s what we learned. For the group that received the timed letter, there was a higher response rate. Not only was there a higher response rate, but a statistically significant relationship was found between the time an offer was sent and the take rate/response rate on the offer. So, there is something to marketing automation. We’ve proved it scientifically. We’ve also proved it anecdotally through all the different campaigns that we’re doing.

Look at the different benchmarking responses across the universe. You can see, highlighted in red, combining direct mail with email had an impact on balances.

This idea of machine learning, which is really what marketing automation is, it is not set it and forget it. If you have not done this yet, and you’re looking to get into it for next year, do it slow, do it methodically – one trigger at a time. Do the trigger. Launch the trigger. Track the trigger. Go on to the next one. If you don’t follow that sage advice, you will get bogged down in too many details and your progress, your forward momentum, will stop.

Some samples.

This is marketing automation for credit. Remember, these are people that applied for credit outside of your institution.

The best product you can do this for is auto. Do an auto credit trigger 30 days after the person applied for a loan somewhere else. Why? Because if I go to the auto loan dealer, and I’m credit worthy, I’m going to get the auto loan. Might not be the best auto loan, but I’m going to get one. So, for you to try to preempt that with a letter or email sooner, it isn’t going to be very effective. What is going to be effective is, “Hey you probably have an auto loan, we’d like to lower your payment and save you some money.” That’s a better offer.

The worst product to use credit triggers for are credit cards. Why? Because people generally get a credit card for a specific reason. Could be rewards involved. Could be affinity involved. Could be because I went to Best Buy and I got some money off the TV. It was for a specific intent and purpose, by and large. To make another offer for another credit card, right after the fact, is not the best use of money.

Good manners. These are typically Thank You, Happy Birthday and Happy Anniversary. If we’re doing this approach, we’d like to stay light on offers, heavy on the “Thank you.” We’re trying to get to that point. For new accounts, same thing: “Thank you for opening the account. We appreciate your business. It’s customers like you that keep our business viable. By the way, people just like you have purchased …” or, “By the way, you purchased our checking account. You want to make sure you sign up for our access services, our mobile app.”

Transactional. Now with transactions, we’re recognizing a behavior, some type of interaction like overdraft. And we’re making an offer for, in this example, overdraft protection. Or it could be Net Promoter Score. Now here’s the thing: when you’re doing this type of work with transactional data, you have to make sure about the integrity of your data. It’s important. In other words, if you’re not 100% confident that the overdraft data points that we’re going to use are accurate, don’t use it, it will get you in more trouble with loss of confidence, complaint phone calls, those types of unpleasant member experiences. If you’re going to use transactional, make sure that you have an understanding of transactional. Don’t delegate it, because as the person in charge, you have to understand the nuances of data.

No trigger is 100% bulletproof, not one. Give me any trigger, I can poke holes in it. You’re working off probability. You’re working off, “I’m 98% confident in what I’m doing is accurate.” You’re never going to be 100%, it just isn’t realistic. You have to know, in particular, with this transactional data, what you’ve got on your hands.

What do we know? We know from this study that when we use a combination of channels, I double my balances. When I use personalization, in particular time personalization, in particular this idea of daily marketing with triggers, I’m increasing my performance by 4x over a campaign approach. Frequency and consistency – we’ve learned those are your buddies, those are your pals. That’s the way to do direct marketing. It’s not one big campaign that looks beautiful when I put it out there. It’s something I do all the time, that constant machine that’s always working for me.

What we’ve also learned, if I’m looking at direct mail, non-window, live stamp, much higher response rates than indicia-based mail. Much higher response rates than indicia-based mail that’s sent standard class. Now there’s a time to send standard class. So, you’ve got a way when you will and when you won’t spend that extra money. But we know that the non-window live stamp is a high performing package. We know that simple coded email, singular column works the best, as opposed to all the tricks and gimmicks that go on.

We’ve also learned, and I’ve learned the hard way, marketing automation isn’t automatic. Bad name. We have to monitor it. We have to look at the results. We have to make sure that our criteria are valid. We, as marketers, have to be engaged in that. Don’t delegate that. Understand it.

What Works? An Analysis of Campaign Results and Best Practices – Part 3 Featuring Marquis’ CMO, Dr. Tony Rizzo

 

Video Transcription 

What Works? An Analysis of Campaign Results and Best Practices.

Part 3: Campaign Analysis 

Dr. Tony Rizzo, CMO, Marquis

One of the questions I get asked frequently is, “What works?” So, taking that question to heart, we executed a very extensive analysis of campaign performance throughout campaigns that we managed and produced over 2019. Now, on to some granular detail in terms of campaign analysis.

The first thing we’re going to talk about is Invitation to Apply. An Invitation to Apply is a quasi-data element. But it’s like a credit score, basically averages 10 households, say with a 780 score. We don’t use it to make pre-qualified offers. We use it as a filtering tool in comparison, or in contrast to the credit score, and I’ll talk to credit scores in just a second. You can see the results of these campaigns. I am going to draw your attention to the direct mail and email category, where you see that substantially higher balances were generated with the combination of the two channels.

Why do we care? Well, here’s something interesting, and I’ll bet this would hold true for your institution. We do a significant amount of analysis of loan potential and loan portfolios. And here’s what we found on average. That for every one loan you own, there are 46 loans elsewhere within your customer base. For every dollar you own, there are $66 in the membership base that you don’t own, that are financed somewhere else. That does include the mortgage.

But you can see, just by this slide alone, you could 2X your loan portfolio by focusing on your existing members, your existing customers. Super important. A lot of times we go looking for the acquisition, and that’s important. But we don’t go and do outreach to our existing customers. And I meant with a lot of method to it. We’re doing ourselves a disservice because there’s a lot of potential that we’re leaving on the table.

You can see a sample Invitation to Apply. Professional tip: first of all, best month to do these campaigns is in June, worst month is February. If you’re going to do this, keep your offer, and this is kind of global, simple and easy to understand. Not a lot going on in the letter. Not a lot going on in the email. On the postcard, keep it simple.

Next campaign we’re going to talk about is something called the Value Statement. The Value Statement is a content heavy execution. Remember, content was one of the sources we talked about in terms of data and variable production. The Value Statement speaks to what the individual consumer has with you compared to local competition. The idea is to show for a credit union, for example, the value of being a credit union member versus a customer. So, it’s a very heavy analytical project. And you can see again, our DM plus EM category, you’re still generating more balances, right? Your response rates on this are higher than a singular channel.

Here’s a sample of what this particular campaign looks like. It basically shows every account that the consumer would have, and what the annual savings are or earnings would be based on a competitive dive. It’s a statement of value. Why it is important to remain a customer or remain a member here.

Onboarding: if you don’t do Onboarding, this is the only thing you should do next year. Get your Onboarding campaign going, super important. Now, on average, when somebody becomes a new customer, they receive 10 exposures. Could be five emails and five letters, but an average of 10 exposures are coming through. We classify Onboarding campaigns three different ways: standard Onboarding to retail households, to commercial customers or indirect customers – people that got an auto loan on Saturday through the dealer, now we’re going to onboard them. So, we classify those things three different ways.

Why is Onboarding important? From a number standpoint, the average annual churn rate for financial institutions is 11%. Of those, 20% of your customers will leave you that joined within the first year, they don’t even stay 13 months. Of those, half leave in the first 90 days. Now, there’s a lot of mitigating circumstances that go into that. But don’t let one of the circumstances be you didn’t communicate with the new member. Because if you do that, you can control that. Other things you can’t control. This you can control. If you’re not doing Onboarding, you’re leaving money on the table.

Now, our typical Onboarding campaigns are very advanced. They are a spider web of communication that run through various products, various relationships, and various channels. That approach has proven to be very good, very profitable, very high performance. You can see some of the numbers. If you look, the direct mail and email is out-pulling in terms of the average balance generated. Some by a lot. Some by a little. There is something to this multiple channel approach. Our highest performing onboarding campaigns have 16 versions. Don’t know why it’s 16, but our highest performing segment has 16 versions.

The only pro tip I can provide with Onboarding is doing it. If you’re not doing it, you must do it. For Business Onboarding, biggest pro tip I can provide, if I’m speaking to a business account, is to be informational, to use a little bit longer form of a letter, not so offer intensive. If I’m doing something from an indirect perspective, I would add on additional products. That could be for an auto loan, mechanical breakdown, it could be GAP or it could be like the retention segment we talked about earlier. I could just add on an offer that says if you have another auto loan in your household, refinance it here.

I would do that for the Onboarding. What I wouldn’t do … I wouldn’t sell checking accounts. I wouldn’t sell deposits. You can. It just isn’t going to work. But sell me more on an indirect basis, something that’s closer to me, that I understand.

All right, Product. Next one for the campaign analysis is Cross Sell. That is using our predictive model set where you bought a credit card. Now we think you want a mortgage. So, we’re using that. When I do a Cross Sell campaign with two channels, it is driving higher balances. Again, something to this multiple channel approach.

The chart here represents the likelihood someone will leave you in the first 12 months if you don’t onboard, if you don’t cross sell appropriately. I am 50% likely to leave with only one product versus 5% if I have four more. Now, that’s kind of common sensical, right. But now you have some numbers to back up that claim when you’re in the meeting, and they’re talking about the importance of repetition in marketing. The importance of continuing to outreach. Keeping that like a machine and always running, there is a definite financial impact, a benefit of doing that.

We execute cross sell campaigns in lot of different ways. You’re looking at one that has several different suggestions. This particular client wanted to focus on term and balance versus another that wanted to keep it simple, branded and direct with very little copy in there. Either one has proven to be pretty successful. I can certainly say more in a letter than I can on a postcard. So, if I’m going to product cross sell with a postcard, keep it very simple and very branded.

Pre-Approvals. For Pre-Approvals, we use our FICO data. I’m using credit scores to make some type of a pre-qualified offer. This is my only example where multiple channels didn’t have higher balances, by the way. I don’t know why, just reporting the numbers to you. You decide.

If I’m doing a sample, or if I’m doing Pre-Approval, the best month is April. The worst month is October. The best product are credit cards. The worst product are mortgages. Here’s the thing with credit data: less than 60% of your customer base, your membership base, has opted into having their credit score looked at from a marketing perspective. So, what that basically says is you’re leaving opportunity on the table if you’re only doing pre-approvals. The other thing I’m not as juiced about with this credit data is it a risk. It is a liability. All you have to do is Google credit score lawsuits, misuse of credit score, to see that data is risky to use. It’s not to say I wouldn’t use it, but eyes wide open when we’re getting into credit data. All credit data is purchased for a very specific and narrow purpose and cannot be reused. So, if you are doing a portfolio review, and you’re pulling those scores and using them for another purpose, that’s a huge NO. So be very careful when you use this data.

Let’s take a look at Reboarding. Reboarding is when I have a group of people that have detached. They might be a single service household, and I need to get them reengaged. You can see here that although not demonstratively higher on multiple channels, when I use two channels, direct mail and email, I do get a higher average bounce generated. If I’m doing a Reboarding campaign, you isolate for single service. I would also isolate for tenure and those geographically close to you. We don’t reboard everyone. Again, we use predisposition of response to narrow our funnel. The biggest thing with Reboarding is it has to be something that’s frequent. Just like we saw earlier in the campaign versus matrix, the comparison of those two, this is a great example of that. I have to do something frequently in order to rebuild trust, to rebuild familiarity and to open that filter to make a good offer.