In July of 2022, the CFPB had agreed to a March 31, 2023, deadline for issuing a final rule implementing the small business data requirements of Section 1071 of the Dodd-Frank Act. Section 1071 amended the ECOA, to require financial institutions to collect and report certain data in connection with credit applications made by small businesses, including women- or minority-owned small businesses. The CFPB issued a NPRM in September 2021 and the comment period ended on January 6, 2022.
The looming March 31st deadline is a result of a lawsuit filed against the CFPB in a California federal district court to force the CFPB to move forward on Section 1071 rulemaking, which is over a decade in the making.
What is the purpose of 1071?
Section 1071 of Dodd-Frank amended the Equal Credit Opportunity Act (ECOA, Reg. B) to require financial institutions to collect and submit specific data to the CFPB. Congress enacted section 1071 for the purpose of:
- Facilitating enforcement of fair lending laws.
- Enabling communities, governmental entities, and creditors to identify business and community development needs and opportunities for women-owned, minority-owned, and small businesses.
Proposed Mandatory Dates:
- The effective date for the final rule will be 90 days after its publication in the Federal Register, which would be approximately June 20, 2023.
- The compliance date for implementing the rule is expected be 18 months after the date of publication of the final rule in the Federal Register or October 1, 2024. However, industry speculation is that a partial year could be considered.
Which financial institutions are covered by the proposed regulation?
A financial institution that originates at least 25 covered credit transactions in each of the two preceding calendar years is covered by the proposed regulation.
Something to keep in mind: If more than one financial institution participated in the origination of a credit transaction, only the financial institution that makes the final credit decision will count the transaction toward the origination threshold.
What data will be required to be collected under the proposed regulation?
There are 21 main categories required to be collected under the proposed regulation.
Covered financial institutions would be required to compile and maintain the following data from small business loan applications:
- Unique identifier
- Application date
- Application method
- Application recipient
- Credit type
- Credit purpose
- Amount applied for
- Amount approved or originated
- Action taken
- Action taken date
- Denial reasons
- Pricing information
- Census tract
- Gross annual revenue
- NAICS code
- Number of workers
- Time in business
- Minority-owned business status
- Women-owned business status
- Ethnicity, race, and sex of principal owners
- Number of principal owners
What should my financial institution be doing now?
- Get to Know your Current Commercial Lending Process
It is important to understand your institution’s lending process from start to finish so you can more easily identify data collection points, risks, and single points of failure. Consider conducting a gap analysis to determine how your current processes will need to be modified.
- Create an Outline for Compliance
Even if the proposed rules differ slightly from the final ruling, the proposal is still a good guide for what to expect, so begin to make a plan now for how your institution will comply with section 1017. The results of a gap analysis would be instrumental in outlining your plan for compliance.
- Raise Board and Management Awareness
An unprepared financial institution is not going to be successful in implementing such an immense requirement. Make sure your Board of Directors and senior leadership teams are aware of the basic proposed requirements, the impact on your institution, and your plan to address that impact. Being proactive and ensuring they understand the scope of this regulatory change is going to help your organization navigate the challenge of section 1071 more effectively.
We’ll be announcing lots of new 1071 training and resources in the coming weeks, but in the meantime, here are a few popular 1071 preparation tools we’ve developed to help you get started:
- How to Conduct a Section 1071 Gap Analysis and Create a Plan for Compliance
- Section 1071 Whitepaper
- 5 Critical Section 1071 Steps Needed Now
- 1071 Board and Senior Management Update Template