Banking & Finance  November 1, 2021

Banks may soon face new regulation

Banks, credit unions and other financial institutions could face two changes to federal reporting requirements, depending on what happens in Washington, D.C., over the next several months.

Amendments to the Dodd-Frank Act Section 1071 regulating small-business lending would require more detail in what banks report about loan transactions with small businesses.

A proposed tax law change before Congress would add a reporting requirement on consumer or business bank accounts as small as $10,000.

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The new proposed rules are meant to assure that small businesses have equitable access to credit and to aid the Internal Revenue Service in tax collections.

Both provisions — in one case proposed administrative amendments now in a public comment period and the other a proposal that would have to pass Congress — are receiving industry criticism and objections from people concerned about privacy.

Section 1071

The Consumer Financial Protection Bureau, a federal agency that oversees consumer lending, published a notice of rulemaking in the Federal Register on Oct. 8, setting up a 90-day comment period on a rule to implement data collection on small-business lending, which was required in Section 1071 of the Dodd-Frank Act. 

As outlined by the Consumer Financial Protection Bureau, the rule is meant to collect information that could spotlight uneven access to credit and to provide insights into “community development needs and opportunities for women-owned, minority-owned and small businesses.”

Information that would have to be collected under the rule includes information about the credit applicant, including demographic and financial information, what the credit would be used for, and what the financial institution decided. If the application was denied, a reason would need to be stated.

Information would be collected annually and submitted each June 1. 

The rule would also restrict who could have access to the information collected, the CFPB outlined. With some exceptions, the person collecting the information from applicants couldn’t be the same person who would make the decision to provide credit.

A spokesman for Sen. John Hickenlooper, D-Colo., told Bizwest in an email that the senator supports efforts to improve transparency and promote equity in access to small-business capital. 

CFPB acting director Dave Uejio, in laying out the proposed rule, said, “… small business ownership is the primary means by which families and communities build wealth. Yet too often, small business development is starved for want of access to responsible, fairly priced credit.”

Regulators pointed to the Paycheck Protection Program, which provided assistance to businesses during the pandemic. Early applications of the PPP program found that some large banks “failed to prioritize small businesses in underserved markets, including minority and women-owned businesses,” the House Select Subcommittee on the Coronavirus Crisis reported in late 2020.

While comments from banks and consumers on the proposed rule change are just now being submitted, the Consumer Bankers Association did write that the rule will have significant impact on financial institutions in terms of time and perhaps needs to change systems to record, track and submit the information. The CBA asked for “a phased approach to implementation and a thoughtfully tailored set of data points requiring collection.”

Bank account reporting

Getting far more attention from bankers and consumers is a proposed federal law, which could be a part of the budget-reconciliation bill making its way through Congress, that would require financial institutions to report to the Internal Revenue Service information on private bank accounts of consumers and businesses. 

The proposal would not require reporting on every transaction flowing into or out of bank accounts but would require institutions to report on total amounts of inflow or outflow that total more than $10,000. As originally proposed, that threshold would have been $600.

The effort is an attempt to get a handle on the reported $166 billion per year tax gap — essentially the difference between taxes owed and taxes paid.

The alternative means to collect that money could be stepped-up IRS audits, which proponents of the new reporting requirement say would be more expensive.

The American Bankers Association has called it “bad tax policy,” according to information on the Colorado Bankers Association website. The ABA has urged rejection of the measure.

Mike Brown, president of Alpine Bank and this year’s chairman of the Colorado Bankers Association, said the banking industry association is wary of the legislation. 

“Whether $600 or $10,000, the issues that I have as a banker in the communities I serve is that there are a few reasons that we object to this. First is privacy. We serve customers and allow them to transact money through their accounts. We take privacy of our customers seriously. If a customer is doing something illegal, there are rules in place to catch fraud,” he said.

Brown also said the legislation, if it were to pass, could affect whom banks can reach with their services. 

“One of the things the industry is pursuing is how to bank the underserved. How to reach people who have not traditionally used banks,” he said. Regulators have encouraged banks to find ways to meet the needs of these new customers. “Doing something like this could scare those potential customers away,” he said.

Also, “you are adding another reporting requirement to banks and credit unions that is going to require us to revamp our systems or update our systems. So in addition to interest earned on accounts or loans, now we’d have to report additional information. This creates additional expense for us as well as customers,” Brown said.

Hickenlooper also expressed concern about the privacy issues. A spokesman said, “He is concerned about the proposed bank reporting provision, including privacy issues and the burden it could place on small banks and their customers.”

As for Brown, “I don’t see how this would be more effective [than audits]. We already report information to the Internal Revenue Service. How the IRS can draw a line between account information to whether a customer is accurately reporting income, I don’t see the equation on that. How do you take transaction information like that, either detailed or summary form, that we can determine you’re paying what you owe (in taxes)?”

Banks, credit unions and other financial institutions could face two changes to federal reporting requirements, depending on what happens in Washington, D.C., over the next several months.

Amendments to the Dodd-Frank Act Section 1071 regulating small-business lending would require more detail in what banks report about loan transactions with small businesses.

A proposed tax law change before Congress would add a reporting requirement on consumer or business bank accounts as small as $10,000.

The new proposed rules are meant to assure that small businesses have equitable access to credit and to aid the Internal Revenue Service in tax collections.

Both provisions — in one…

Ken Amundson
Ken Amundson is managing editor of BizWest. He has lived in Loveland and reported on issues in the region since 1987. Prior to Colorado, he reported and edited for news organizations in Minnesota and Iowa. He's a parent of two and grandparent of four, all of whom make their homes on the Front Range. A news junkie at heart, he also enjoys competitive sports, especially the Rapids.
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