CFPB Moving Forward with Section 1071 Rulemaking: 5 Things Your FI Needs to Know to Prepare
Since the passage of the Dodd-Frank Act over 11 years ago, compliance officers have been wondering about Section 1071, which amended the Equal Credit Opportunity Act (ECOA) to require financial institutions to compile, maintain, and submit certain data on applications for credit for women-owned, minority-owned, and small businesses.
Envisioning HMDA for small business lending, compliance officers wanted to know the Who and What (data points), the How (collection efforts), and the When (implementation). As the years have passed without any rulemaking, the When has seemed further and further away. But, as of September 1, we finally have a solid idea about When. That’s the day the Consumer Financial Protection Bureau (CFPB) issued its proposal—all 918 pages of it!
How did we get here?
The Dodd-Frank Wall Street Reform and Consumer Protection Act directed the CFPB to adopt regulations governing the collection of small business lending data. The purpose of Section 1071 is to:
- Facilitate enforcement of fair lending laws; and
- Enable communities, governmental entities, and creditors to identify business and community development needs and opportunities for women-owned, minority-owned, and small businesses.
The enactment of Section 1071 has been a long time coming. While many parts of Dodd-Frank saw prompt rollouts, Section 1071 didn’t start gaining traction until May of 2017 when the CFPB held a hearing on small business lending in Los Angeles.
Since then, enactment has slowly picked up speed.
May 2017 – CFPB issued a Request for Information Regarding the Small Business Lending Market and released a report on Key dimensions of the small business lending landscape.
May 2019 – Plaintiffs filed a suit against the CFPB in a California federal district court for alleged wrongful delay in adopting regulations to implement Section 1071 of the Dodd-Frank Act.
November 2019 – CFPB held a symposium focused on Section 1071 of the Dodd-Frank Act.
January 2020 – CFPB released a report on small business lending and the Great Recession.
Feb 2020 – California federal district court established a timetable for the Bureau to engage in the Section 1071 rulemaking and required the Bureau to provide status reports to the plaintiffs and the court every 90 days until a Section 1071 final rule is issued.
July 2020 – CFPB released a voluntary survey to measure the one-time costs of compliance with an eventual small business lending data collection rule.
Sept. 2020 (Deadline #1) – CFPB released an Outline of Proposals Under Consideration and Alternatives Considered for the small business lending data collection rulemaking, along with a High-Level Summary of Outline of Proposals Under Consideration for SBREFA and a Discussion Guide for Small Entity Representatives.
Oct. 20202 (Deadline #2) – CFPB convened a Small Business Review Panel for its section 1071 rulemaking. The panel collected advice and recommendations from representatives of small entities that are likely to be subject to the regulation that the CFPB is considering proposing.
Dec. 2020 (Final deadline) – CFPB released the Final Report of the Small Business Review Panel on the CFPB’s Proposals Under Consideration for the Small Business Lending Data Collection Rulemaking.
Sept. 1, 2021 – Advanced Notice of Proposed rulemaking released. The Notice of Proposed Rulemaking (NPRM) has a comment period of 90 days following publication in the Federal Register.
Section 1071: What does it mean?
Nothing is certain at this point. First, we have to make it through the NPRM. As with any new regulation the financial services community has 90 days to weigh in after the NPRM is published in the Federal Register.
One thing we do know: Small business lenders need to start preparing for the next phase of data collection and analysis. Basically, it is time to “awaken the sleeping giant” and tackle the elephant in the room. Data collection!
What should we do? Or start thinking about?
The biggest challenge compliance officers face collecting the required data points. Quickly glancing through the chart of proposed data points, they bear a striking resemblance to HMDA data collection.
That raises several data collection issues:
1. Commercial loans don’t use applications. The most challenging question and one I’m sure all of us have grappled with is “We do not use an application in our commercial loan area.”
That common lending element has been a challenge in compliance for years, especially, when trying to establish “application” date for timing purposes in Reg B.
Action item: If your FI is still working from the adage that an application is not used in commercial lending, then it is probably time to revisit that process in an effort to collect key data points such as application date, applicant(s), amount, gross annual revenue, or time in business (just to name a few).
2. Application date. How many times during testing, monitoring, or loan review has your FI struggled with application data? In most commercial departments there are probably multiple answers based on who you ask.
Action item: To help with consistency, establish a definition for application date, document it in policy and train your staff. This will allow you to start test the process to make sure you have a consistently applied date and help create proactive changes as needed.
3. No system of record. A lot of commercial departments do not use a loan operating system (LOS) to create workflows, underwrite loans, or transfer information to a core system of record. Other lending offerings (I.e., consumer, Retail mortgage) have prebuilt workflows to help capture and maintain data fields that can be used for analysis later.
Action item: Has your FI started thinking how it will capture and then maintain the roughly 30 fields being proposed under the new rule? If the answer is yes, GREAT. If not, it might be time to start thinking about getting data from loan files into a usable format to facilitate future analysis.
4. We do not use rate sheets. The lack of a rate sheet in most commercial lending departments limits the ability to make pricing decisions based of the 5 “Cs” of credit (e.g., capacity, capital, collateral, conditions, and character) and can cause challenges in fair lending programs. With the collection of these data points, fair lending standards will now directly influencing commercial lending.
Action item: Subjectivity, now more than ever, requires guide rails in the form of policies and exception management. The first place to start is establishing rate sheets and exception management policies. This will provide understanding when explaining what story the data is telling.
5. Training. Training is the foundation of any good compliance program. Getting our commercial lenders on board with a new way of looking at lending is now a must. We need them to really understand and embrace Reg. B. The saying “I’m a commercial lender, regulations do not apply to me” should be even less of an effective push back on compliance training.
Action item: Start training now! Focus on application date, the importance of getting an app, exceptions, fee waivers, and complaints. Each of these are key indicators of a potential issue, of different treatment. Understanding the role, a lender plays in the process may help to eliminate potential disparities in the data.
Rulemaking for Section 1071 is just the beginning. FIs need to build a system to collect and report data. The ultimate goal is to monitor your performance in lending for fairness, treat businesses equally, make sure your communities’ lending needs are being met and aligned with your Community Reinvestment Act (CRA) program.
Topics: Lending Compliance