The Consumer Financial Protection Bureau (CFPB) recently issued its final rule to implement Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rule amends the Equal Credit Opportunity Act (ECOA), introducing substantial data collection and reporting requirements for small business lenders and finance companies. In this blog post, we delve deeper into the final rule, its changes from the proposed rule, the phased approach to compliance, and key takeaways for small business lenders.
Key Components of the Final Rule
The final rule requires lenders to collect and report specific data points about small business credit applications they receive. This information includes demographic data (such as race, ethnicity, and gender of principal owners), lending decisions, and the price of credit. The rule covers lenders that originate more than 100 small business loans or finance products per year. Notably, the final rule continues to exclude factoring companies (but includes merchant cash advance companies).
Section 1071 of Dodd-Frank aims to “help communities, governments, and the financial industry find investment opportunities while promoting fair lending to all entrepreneurs.” The practical impact of the rule, however, will be to increase the data regarding small business applications and financing originations available to regulators, private plaintiffs, the media, and the general public. As such, the rule will increase fair lending risk in the small business finance space.
Notable Changes from the Proposed Rule
The final rule contains several important changes from last year’s proposed rule, including
- Increased reporting threshold: The final rule raises the threshold for covered financial institutions from originating 25 covered transactions in each of the two preceding calendar years to originating 100 covered transactions. However, “[l]enders originating less than 100 loans per year will still be required to adhere to fair lending laws.”
- Exclusion of HMDA reportable transactions: Mortgage loans that must be reported under the Home Mortgage Disclosure Act (HMDA) are now excluded from the reporting requirements of Section 1071.
- Community Reinvestment Act compatibility: The 2022 Community Reinvestment Act (CRA) NPRM proposed to eliminate the current CRA small business and small farm data collection and reporting requirements and replaced them with the CFPB’s Dodd-Frank 1071 reporting requirements. Data collected under Section 1071 will be used to measure bank performance in a CRA assessment, and to establish benchmarks against which bank CRA performance will be measured.
- Elimination of visual observation requirement: The CFPB removed the proposed requirement for lenders to determine principal owners’ race and ethnicity based on visual observation and last name for in-person applications.
- Phased approach to compliance: The CFPB has established a phased approach to compliance for small business lenders, with different “compliance date tiers” depending on the number of covered originations a financial institution made in 2022 and 2023:
- Lenders that originated at least 2,500 covered originations in both 2022 and 2023 must begin collecting data and complying with the final rule on October 1, 2024.
- Lenders that originated at least 500 covered originations in both 2022 and 2023, but not 2,500 or more, and originated at least 100 covered originations in 2024, must begin collecting data and complying with the final rule on April 1, 2025.
- Lenders that originated at least 100 covered originations in both 2024 and 2025 must begin collecting data and complying with the final rule on January 1, 2026.
6. Possibility for extra time: According to the proposed rule, the CFPB “intends” to issue a proposal that will give additional implementation time to small lenders who have demonstrated “high levels of success in servicing their local communities, as measured by their relevant performance under frameworks like the [CRA] and similar state laws.”
Enforcement and Supervisory Practices
The CFPB intends to use its enforcement and supervisory authority to focus on covered lenders’ compliance with the final rule’s prohibition against discouraging applicants from submitting responsive information. The CFPB will pay particular attention to covered lenders’ response rates for data requested from applicants.
Lenders and commercial finance companies should begin thinking about their Section 1071 compliance obligations today. Data collection and reporting under the new rule will almost certainly require substantial operational changes for covered financial institutions. This is especially true for institutions that have never had to comply with similar regulatory regimes, such as the Home Mortgage Disclosure Act. Getting an early start will help ease the process and prevent a lot of needless difficulty and expense.