The finalization of the CFPB 1071 rule of the Dodd-Frank Act on March 30, 2023, marked a pivotal shift in the financial industry, particularly in the realm of small business lending. This rule, aimed at bolstering the enforcement of fair lending laws and identifying opportunities for businesses owned by women, minorities, and small enterprises, has far-reaching implications across the spectrum of financial institutions.
Understanding CFPB 1071
CFPB 1071 amends the Equal Credit Opportunity Act (ECOA) to mandate data collection and reporting concerning business credit applications to the CFPB. The regulation's primary objective is to promote fair lending practices and to provide crucial data for understanding the community and business development needs.
A “covered financial institution,” under CFPB 1071, is defined broadly to include any entity engaged in financial activities, which originated at least 100 covered transactions in the preceding two calendar years. This encompasses depository institutions, online lenders, commercial finance companies, and various other lending entities.
Covered transactions include loans, lines of credit, credit cards, merchant cash advances, and other credit products. Notably, certain transactions like trade credit, insurance premium financing, and incidental credit are excluded from this coverage.
Small Business Definition
Adopting the SBA’s definition in part, a “small business” under this rule is one with $5 million or less in gross annual revenue for the preceding fiscal year. Financial institutions are permitted to rely on an applicant’s representation for this determination.
Data Collection and Reporting
Covered institutions are required to collect and report various data points including, but not limited to, information about the applicant, the requested credit, and the action taken on the application. This also involves collecting demographic data on the minority-owned, women-owned, and LGBTQI+-owned status of businesses, which must be handled with particular care to ensure compliance and protect applicant privacy.
Different Requirements under CFPB 1071 for Various Lenders
CFPB 1071 doesn’t adopt a one-size-fits-all approach. The regulation recognizes the diversity in the lending landscape and tailors its requirements accordingly:
1. Varied Thresholds for Data Collection Based on Lending Volume:
- The rule introduces tiered compliance dates based on the number of small business loans originated by an institution.
- Lenders with at least 2,500 small business loan originations annually must begin data collection starting October 1, 2024.
- Those with a minimum of 500 loans annually are required to start on April 1, 2025.
- Institutions originating at least 100 loans annually must comply beginning January 1, 2026.
- This tiered approach indicates that larger lenders, who cover a more significant portion of the market, are subject to earlier compliance, acknowledging the differences in operational capacities between large and smaller institutions.
2. Inclusion of Non-Bank and Alternative Lenders:
- The rule extends beyond traditional banking institutions to include non-banks and alternative lenders, such as online lenders, platform lenders, and others.
- This broad coverage ensures that a significant portion of the small business financing market, which is increasingly serviced by non-traditional lenders, is included under the rule’s purview.
3. Simplified Demographic Data Collection:
- The rule simplifies the process of demographic data collection across different lenders. Loan officers are not required to make determinations about an applicant’s demographic information, which is left to self-identification by the small businesses.
- This uniform approach reduces the complexity of compliance and minimizes the burden on lenders, ensuring consistency in data collection.
4. Streamlining with Other Reporting Frameworks:
- The rule is designed to work in conjunction with other reporting requirements like those under the Home Mortgage Disclosure Act and the Community Reinvestment Act.
- For instance, loans reportable under these acts will not require additional reporting under the small business lending rule, reducing duplicative efforts for financial institutions already complying with these frameworks.
5. Industry-Driven Solutions and Flexibility:
- The rule allows for the development of industry-driven solutions to assist lenders with data collection and reporting, showing flexibility in implementation and acknowledging the diverse technological capabilities across different types of lenders.
- Navigating the Current and Future Banking Landscape: Why Lending Platforms are Essential Now More Than Ever
- Navigating CFPB 1071: A Succinct Guide for Financial Institutions
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- Futureproofing Your Community Bank
- Embracing the Future: Why Banks Shouldn’t Fear Automation
Best Practices for Compliance
To effectively navigate CFPB 1071, lenders should consider the following best practices:
- Invest in Robust Data Systems: Implement systems capable of handling increased data collection and analysis.
- Prioritize Training and Development: Regular training sessions for staff on CFPB 1071 requirements are essential.
- Collaborate with Industry Peers: Sharing knowledge and best practices can help in tackling common challenges.
- Engage with Legal and Compliance Experts: Ongoing consultation with experts can provide insights into evolving regulatory expectations.
Lenders should view CFPB 1071 not just as a regulatory requirement but as an opportunity to refine their practices, contribute to market transparency, and foster an environment of fairer and more equitable access to credit. By embracing the challenges and opportunities it presents, lenders can play a pivotal role in shaping an inclusive and robust financial ecosystem.
Note: On October 18, 2023, Congress voted 53-44 to pass S.J. RES. 32, which states that CFPB 1071 “shall have no force or effect.” However, President Biden is expected to veto it, keeping CFPB 1071 in effect.