Section 1071 of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act has awaited implementation since 2010. Twelve years later, it is on its final lap to actualization. On October 1, 2021, the Consumer Financial Protection Bureau (CFPB) issued a Notice of Proposed Rule Making (NPRM). The period for public comment ended in January 2022.
When we first explored implementation of Section 1071 (The CFPB Small Business Lending Data Collection NPRM) in September 2021, we discussed the rule, its impact and what financial institutions should expect. With the rule projected to come out in just months, it’s time to think about what you and your financial institution can do to be ready for it. Section 1071’s size and complexity will require massive preparation and review of data points already collected. Understanding its nuances, putting it on your radar now and discussing it with your compliance team or partner is the first step in enabling your financial institution to be ready when the time comes.
Now that the comment period has ended, it’s important to be aware of what pundits like ABA, ICBA and NAFCU are concerned about. We’ll take a look at a few of their reactions to the NPRM and how that may affect the final ruling.
Cost Effect on Local Banks & Credit Unions
A main issue is cost. In a joint response, NAFCU and CUNA expressed concern that the complexity and cost will “weigh disproportionately on credit unions in ways that ultimately lead to fewer and less favorable outcomes for all small business borrowers.”1 The ABA and 51 state bankers associations feel Section 1071 will “be felt most acutely by community banks – that will negatively affect their small business customers.”2 The ICBA concurred and added that if the threshold for covered financial institutions remains as is, it will, “almost certainly raise the cost of credit …, as thousands of small lenders would be forced to shoulder the significant compliance costs associated with a major new data collection requirement.”3 Until the rule is final, it is uncertain what the final cost will be.
Small Business Definition
How Section 1071 defines a small business also raised numerous red flags. The proposed rule defines a small business as one with a gross annual revenue of $5 million. While most are onboard with setting a clear threshold, they feel the threshold is too high for smaller financial institutions and suggest a lower threshold of $1 million. The ICBA feels that a lower threshold will “streamline compliance, cover the vast majority of businesses, and correspond to the public’s general understanding of a small business.”3 In addition, the ABA, NAFCU and CUNA feel that the proposed threshold will cover businesses that are not, in reality, small businesses. The ABA added that it would, “exclude 270,000 businesses deemed small under SBA size standards … and cover 77,000 businesses that are not small under those standards.”2
Covered Financial Institutions
Perhaps one of the most pressing questions is what is considered a covered financial institution. Section 1071 defines a covered institution as one that has conducted 25 covered credit transactions over the last two years. The proposed threshold is considered too low by CUNA, ABA, NAFC, ICBA and others. NAFCU and CUNA’s joint letter echoed a universal concern: “The proposed 25 covered credit transactions threshold is far too low and would unjustifiably impact many smaller participants in the commercial lending market,”1 and called for a higher threshold of 100 covered credit transactions. The ABA also suggested that the proposal “lacks a compelling rationale for a 25-loan trigger”2 however, they do not endorse the 100-loan trigger.
On another note, the CFPB will broaden the scope of fair lending to cover more than traditional financial institutions. With the rise of alternative lending sources, Section 1071 will expand fair lending enforcements to include Fintech, insurance companies, capital equity firms and online lending institutions. They hope to not only level the playing field, but also to ensure that all relevant lenders are compliant with fair lending laws and regulations. These institutions should take note of the broader scope and begin preparing now.
These are just a few of the concerns covered during the comment period. Whether the CFPB will incorporate them or not is yet to be seen. And once the ruling is final, this doesn’t mean your financial institution will have to drop everything to comply with Section 1071’s data gathering demands. If all runs according to plan, financial institutions may begin collecting the necessary data in January 2023. Since final rule compliance is slated for January 2024, if you start examining your process now, you will have the time to test and iron out any bugs. Keep in mind that Section 1071 is a complicated and lengthy regulation, and dates may or may not exceed the expected timeline.
Taking a preliminary look now at what your financial institution will need to do to ensure compliance on data collection will help smooth the road to implementation in the future. Having a compliance partner like Marquis on your side will help alleviate the stress and confusion that are associated with implementing new rules and regulations.
1 Joint NAFCU and 0CUNA 0Section 1071 Comment Letter, January 6, 2022 https://www.nafcu.org/system/files/files/Joint%20NAFCU%20and%20CUNA%20Section%201071%20Comment%20Letter.pdf
2 Joint ABA and State Bankers Association 1071 Letter to CFPB, January 6, 2022 https://www.aba.com/advocacy/policy-analysis/1071-joint-comment-letter
3 ICBA Comments On 1071 Small Business Lending Data Collection, January 6, 2022 https://www.icba.org/docs/default-source/icba/advocacy-documents/letters-to-regulators/comments-on-1071-small-business-lending-data-collection