Since Section 1071 of the Dodd-Frank act was finalized by the CFPB on March 30, 2023, it has been surrounded by controversy. The rule, requiring small business lenders to collect race, gender, and other demographic data from small business loan applicants, was more than a decade in the making but with various legal actions complicating the picture, let’s take a look at where Section 1071 stands now.
Controversy in Congress
Earlier this month, the Senate failed to override the president’s December veto of a Republican-led resolution to revoke the small-business data collection rule under the Congressional Review Act.
However, the rule is still on hold pending the outcome of a Supreme Court case challenging the constitutionality of the CFPB’s funding. The U.S. Supreme Court heard oral arguments in October of 2023 and is not expected to render a decision until as late as June 2024.
Legal Actions
In the last week of December, a trade group called Revenue Based Finance Coalition (RBFC), whose members include non-banks that provide sales-based financing to businesses, filed a lawsuit against the CFPB in a Florida federal district court challenging the 1071 Rule. The argument made by RBFC is that because sales-based financing does not constitute “credit” within the meaning of the Equal Credit Opportunity Act and Regulation B, the CFPB did not have the authority to regulate sales-based financing as “credit” under the 1071 Rule.
Last summer, suits challenging the rule were filed in both Texas and Kentucky district courts. These suits focus on claims by the plaintiffs that the 1071 rule is invalid because the CFPB’s funding structure is unconstitutional, based on the ruling of the U.S. Court of Appeals for the Fifth Circuit that held the CFPB’s funding is unconstitutional in Community Financial Services Association of America Ltd. v. CFPB.
What Now?
It’s hard to know what steps to take when there hasn’t yet been a resolution to the various legal actions surrounding Section 1071. However, it is important to understand that there is support for this rule to move forward and there doesn’t appear to be much chance that it will simply go away.
Section 1071 is supported by nearly 100 civil rights and consumer groups, including the Consumer Federation of America, Center for Responsible Lending, Farm Aid, National Urban League, NAACP, the U.S. Hispanic Chamber of Commerce and the Union of Concerned Scientists. Last year, CFPB Director Rohit Chopra framed the rule as necessary to give regulators data about small-business lending which was lacking when the pandemic hit, and the government created the Paycheck Protection Program.
However, financial institutions and fintechs have expressed concern that Section 1071’s requirements are too burdensome and would restrict credit to small businesses while raising costs. In addition, FI’s have claimed implementation of the rule, which takes effect in October of 2024, is a complex effort involving multiple data collection platforms and changes to existing technology.
Although the Texas injunction requires the CFPB to adjust compliance dates, no updates have been provided for what that actually means. As of now the 1071 rule’s compliance deadlines begin in October for lenders that originated 2,500 small-business loans in 2022 and 2033. Lenders that originated between 500 and 2,500 in the previous two years have until April 1, 2025, to comply, while the smallest lenders with fewer than 500 loans start reporting on January 1, 2026.
October of 2024 is on the horizon and will be here before we know it. Considering the support the rule continues to garner in civil rights groups, consumer advocacy groups and in Washington, it seems prudent to prepare a plan for implementation at your FI. If you haven’t already gotten started, this on-demand session may prove useful.