Navigating CFPB 1071

and Implications for SMB Lending

What’s the latest status on 1071?

The final rules were issued by the CFPB last year, with scheduled implementation dates. However, a Texas court issued an injunction due to concerns about the constitutionality of the CFPB’s funding mechanism. This injunction was later expanded nationwide by another federal district court. The Supreme Court is expected to rule on the constitutionality of the CFPB’s funding before the end of June. There is optimism that the CFPB’s funding will be upheld,  and the stay on 1071 enforcement will be lifted.

What specific requirements does 1071 of the Dodd Frank Act impose on financial institutions regarding small business lending data? 

Section 1071 of the Dodd-Frank Act imposes requirements on financial institutions regarding small business lending data. Covered institutions must report transactions involving small businesses with gross revenues of $5 million or less, including various types of financing, with few exemptions. Data falls into three categories: institution-generated, applicant-provided or third party-sourced, and demographic information.

Specific disclosures and rules are provided, including a model form for demographic data collection. Applicants must be allowed to respond freely to certain questions, and institutions must maintain procedures to ensure ease of response. Data must be reported annually to the CFPB, which will make it publicly available with privacy considerations. Additionally, there are restrictions on access to certain data to prevent conflicts of interest or discrimination.

How does a bank actually know that they are compliant?

Banks must ensure the accuracy of demographic information, establish processes to capture necessary data for small businesses, and submit reports to the CFPB annually. There’s a growing trend towards digitalization and streamlining in the industry, and CFPB’s 1071 rule has accelerated this transformation. Our platform not only aids in compliance but also enhances the client experience, effectively tackling multiple challenges at once.

Further insights delve into specific aspects of the rule, such as allowances for errors and traditional data validation practices used by banks. The importance of proactive preparation for implementing the rule is highlighted, stressing the advantages of early readiness. Additionally, the significance of collecting demographic data for promoting fair lending practices, without resorting to outdated methods, is emphasized.

How do you foresee CFPB 1071 affecting lending?

Many express concerns that adhering to this regulation might negatively impact small business lending, but the overall outlook isn’t entirely bleak. Although compliance entails costs and challenges, it’s a universal requirement affecting all banks. Smaller institutions may feel the strain more acutely, yet they have more time to adapt. Furthermore, it’s the sheer volume of transactions, rather than the bank’s size, that poses the greatest risk.

A significant slowdown in small business lending isn’t expected. While smaller banks may reduce transactions or exit the market, larger institutions can absorb the expenses. The anticipated changes primarily involve heightened regulatory enforcement and increased scrutiny of pricing fairness. In essence, these adjustments will enhance transparency and subject small business lending to more public scrutiny.