In March 2023, the Consumer Financial Protection Bureau (CFPB) released its latest rule implementing Section 1071 of the Dodd-Frank Act, marking a significant development in small business lending regulation.
This rule requires financial institutions to collect and provide data on lending to small businesses, aiming to enhance transparency, accountability, and fair lending practices. Here’s a detailed breakdown of the CFPB 1071 rule and how small banks can navigate through it effectively.
Overview of the CFPB 1071 Rule
The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated the CFPB to adopt regulations governing the collection of small business lending data.
Section 1071 of the Dodd-Frank Act amended the Equal Credit Opportunity Act (ECOA), directing financial institutions to compile, maintain, and submit specific data on credit applications and lending decisions for women-owned, minority-owned, and small businesses, with the goal of fostering transparency, accountability, and fair lending practices.
Threshold for Reporting
The reporting requirements under the final rule vary based on the volume of covered small business loans originated by lenders. Larger lenders are required to collect and report data earlier, with thresholds set to ensure comprehensive coverage.
Compliance Dates
The CFPB has provided a tiered compliance date structure for lenders based on their origination volumes:
- Lenders that originated at least 2,500 covered small business loans in 2022 and 2023 must begin collecting data on October 1, 2024.
- Lenders that originate at least 500 loans annually must begin collecting data starting April 1, 2025.
- Lenders that originate at least 100 loans annually must begin collecting data starting January 1, 2026.
- All financial institutions must report information to the CFPB by June 1 of the year following the calendar year the data was collected.
Self-Identification
Applicants have the option to self-identify demographic information, such as race and ethnicity, rather than relying solely on loan officers’ determinations. This empowers borrowers to provide accurate data and ensures compliance without undue burden on lending institutions.
Exclusions and Regulatory Alignment
Certain exclusions, such as mortgage loans covered under the Home Mortgage Disclosure Act (HMDA), are included in the final rule. Moreover, the rule aligns with forthcoming Community Reinvestment Act (CRA) reporting requirements, streamlining compliance efforts for financial institutions.
Who Does the CFPB 1071 Rule Affect?
The CFPB 1071 rule primarily affects covered financial institutions engaged in small business lending including banks, credit unions, and non-bank lenders.
How Does CFPB 1071 Affect Small Banks and What are the Possible Solutions?
While the tiered structure gives smaller banks a longer timeline to adapt to the new data collection and reporting requirements, they may still face a compliance burden due to limited resources. Small banks should focus on the following to ensure requirements are met by the mandatory deadlines:
- Education and Training: Small banks should invest in educating their staff about the intricacies of the CFPB 1071 rule. Training programs can help employees understand the new requirements and ensure accurate data collection.
- Technology Integration: Implementing technology solutions that streamline data collection and reporting processes can ease the compliance burden for small banks.
- Collaboration and Knowledge Sharing: Small banks can benefit from collaborating with industry peers to share insights and best practices for compliance. Networking and knowledge-sharing forums can provide valuable guidance on navigating the challenges posed by the rule.
- Compliance Planning: Given the tiered compliance dates, small banks should initiate early planning for compliance with the CFPB 1071 rule. If banks establish internal protocols and systems well in advance, they can adequately mitigate last-minute challenges.
