{"id":699,"date":"2023-06-28T06:08:00","date_gmt":"2023-06-28T11:08:00","guid":{"rendered":"https:\/\/www.credacc.com\/insights\/?p=699"},"modified":"2024-05-22T03:47:51","modified_gmt":"2024-05-22T08:47:51","slug":"section-1071","status":"publish","type":"post","link":"https:\/\/www.credacc.com\/insights\/blogs\/section-1071\/","title":{"rendered":"1071: Purpose & Implications"},"content":{"rendered":"\n\n
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The\u00a0Dodd-Frank<\/a>\u00a0Wall Street Reform and Consumer Protection Act, passed by Congress in 2010, established the Consumer Financial Protection Bureau (CFPB). Section 1071 governs small business lending data collection.<\/p>\r\n\r\n\r\n\r\n

The Equal Credit Opportunity Act (EOCA) was amended under Section 1071, requiring financial institutions to collect data on credit applications from minority- and women-owned businesses. On September 1st, 2021, CFPB issued its Notice of Proposed Rule Making (NPRM) to implement Section 1071. Similar to how the Home Mortgage Disclosure Act (HMDA) requires financial institutions to provide mortgage data, Section 1071 will require covered FIs to provide data for minority- and women-owned businesses. The purpose of the rule is to support and create equal opportunities for minority- and women-owned small businesses while enforcing fair lending laws. Financial institutions of all sizes and types, including fintechs and small business lenders, will be impacted by Section 1071. The following sections will explain how the Bureau\u2019s key elements of the proposed rule will affect the covered financial institutions and credit transactions.\u00a0<\/p>\r\n\r\n\r\n\r\n

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Section 1071 \u2013 what SMB lenders need to know<\/strong><\/p>\r\n\r\n\r\n\r\n

Per\u00a0CFPB\u2019s<\/a>\u00a0current proposed rule, any financial institution that originated 25 or more covered transactions for small businesses in the past two calendar years will be required to collect loan application data. The CPFB issued<\/a> this long-awaited, final rule implementing Section 1071 of the Dodd-Frank Act on March 30th<\/sup>, 2023.<\/p>\r\n\r\n\r\n\r\n

Section 1071 will make it easier for agencies to enforce fair lending laws for small businesses while enabling seamless access to information for the public about community development needs. CPFB states, \u201cthe proposal also addresses its approach to privacy interests and the publication of Section 1071 data; shielding certain demographic data from underwriters and other persons; recordkeeping requirements; enforcement provisions; and the proposed rule\u2019s effective and compliance dates.\u201d<\/p>\r\n\r\n\r\n\r\n

Section 1071 aims to increase transparency to identify opportunities and shortcomings for small businesses and create equal credit opportunities. For small business lenders, this means that the CFPB will further enforce more stringent examination and supervisory reviews. Once this rule is final, small business lenders will have eighteen months to comply. Thus, it is critical for financial institutions to proactively prepare for data collection practices to become Section 1071 compliant. With the substantial shift that lenders will experience throughout their loan lifecycles, nothing less than a complete transformation effort is required to prepare for Section 1071.<\/p>\r\n\r\n\r\n\r\n

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NPRM \u2013 Terms and Definitions<\/strong><\/p>\r\n\r\n\r\n\r\n

The NPRM has provided\u00a0new definitions<\/a>, a sample data collection form, and instructions for lenders on collecting and reporting data points. This collected data will be made public annually on CFPB\u2019s website.<\/p>\r\n\r\n\r\n\r\n

1.\u00a0Covered Financial Institutions<\/em><\/strong>:\u00a0The Bureau proposes that a covered financial institution would be one that originated at least 25 covered credit transactions for small businesses in each of the two preceding calendar years. Covered financial institutions include:<\/p>\r\n\r\n\r\n

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2.\u00a0Covered Credit Transactions<\/em><\/strong>:\u00a0The Bureau proposes defining a \u201ccovered credit transaction\u201d as one that meets the definition of business credit under existing Regulation B, with certain exceptions. Loans, lines of credit, credit cards, and merchant cash advances, including such credit transactions for agricultural purposes and those covered by the Home Mortgage Disclosure Act of 1975 (HMDA), would all be covered credit transactions within the scope of this proposed rule.<\/p>\r\n\r\n\r\n\r\n

3.\u00a0Covered Applications:<\/em><\/strong>\u00a0The Bureau is proposing to define a \u201ccovered application\u201d\u2014which would trigger data collection and reporting requirements \u2014 as an oral or written request for a covered credit transaction that is made in accordance with procedures used by a financial institution for the type of credit requested.<\/p>\r\n\r\n\r\n\r\n

4.\u00a0Small Businesses<\/em><\/strong>:\u00a0The Bureau is proposing to define a \u201csmall business,\u201d about whose applications for credit data must be collected and reported, by reference to the definitions of \u201cbusiness concern\u201d and \u201csmall business concern\u201d as set out in the Small Business Act and Small Business Administration (SBA) regulations. However, instead of using the SBA\u2019s size standards for defining a small business concern, the Bureau\u2019s proposed definition would examine whether the business had $5 million or less in gross annual revenue for its preceding fiscal year.<\/p>\r\n\r\n\r\n\r\n

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Data Collection Requirements for Financial Institutions<\/strong><\/p>\r\n\r\n\r\n\r\n

Section 1071 requires financial institutions to collect and report on thirteen data points. Furthermore, it provides CFPB the authority to require any additional data, if necessary, to fulfill the statutory purposes of the rule. The\u00a0thirteen mandatory data points<\/a> include:<\/p>\r\n\r\n\r\n\r\n

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Discretionary Data Points<\/em><\/strong><\/p>\r\n\r\n\r\n\r\n

In addition to the above-mentioned mandatory data points, Section 1071 requires FIs to collect and report \u201cany additional data that the Bureau determines would aid in fulfilling the purposes of [section 1071].\u201d The Bureau refers to these as \u201cdiscretionary data points.\u201d<\/p>\r\n\r\n\r\n\r\n