Before Section 1071 small business data collection begins, small business lenders need to draft procedures for collecting the data. Recognizing that different lenders do things differently, the Consumer Financial Protection Bureau (CFPB) gives small business lenders the flexibility to collect applicant-provided data in a time and manner “reasonably designed” to get a response.
This phrase, “reasonably designed,” is mentioned often in the Section 1071 final rule. What does it mean when it comes to data collection? The CFPB highlights some minimal provisions.
The only timing requirement in the rule is to collect an applicant’s demographic information before notifying them of action taken on a covered transaction. It’s worth noting that the earlier in the application process you ask for the data, better chance you have of collecting that data.
The request for data must be displayed prominently and not discourage an applicant from providing a response.
Lenders must make it easy for an applicant to respond. For example, if a lender has an online loan application, forcing the applicant to mail in a form about demographic information instead of entering it online is not easy. It will be important for lenders to test their systems to make sure it’s easy to respond.
Related: 1071 Update: Q&A with a Reg Expert
The CFPB plans to create educational materials for small business owners to explain why lenders are collecting demographic information. It will also be important for lenders to train staff and create talking points so they can answer applicant questions about data collection.
This is especially important if your organization has never collected this type of data before. Lenders can feel uncomfortable asking about sensitive topics and applicants might question why such data is needed.
Loan officers and other staff need to be able to explain why they need to ask for the information, how it will be used, and why it’s applicable to this loan. The more upfront information and tools you give loan officers, the better equipped they’ll be to collect information in a way that complies with your reasonably designed procedures.
It will also make it easier on the backend when reporting. There will be fewer pieces of information to track down or update. You don’t want loan officers to form bad habits that will inhibit data collection and reporting.
Some 1071 software modules come with pre-loaded customizable content (model policies and procedures) and a library of training materials for lenders and compliance officers.
What if loan officers can’t collect 1071 data?
The final 1071 rule provides guidance on what to do when a small business lender can’t collect the requested data even when they follow procedures.
Lenders should not rely on visual observation or their own judgement to ascertain the data. They can only rely on statements provided by the applicant – whether verbally or in writing. Only verified data from the applicant can be recorded for those data points.
This data could have been collected anytime within the last 36 months as long as the lender has no reason to believe the data is inaccurate. The only exception is gross annual revenue. Gross annual revenue must come from the same calendar year as the application.
The CFPB does not expect a lender to make multiple attempts to collect the data. As long as they are following their reasonably designed procedures for collecting information, they have met the CFPB’s requirements.
Related: 1071 Update - September 2023
1071 data collection firewall
The CFPB included a firewall provision in the 1071 final rule prohibiting officers and employees of a lender or its affiliates from accessing 1071 information about the business status or demographic data. If a lender is involved in making a decision on an application, they should not have access to the data.
However, there’s an exception if limiting access to the information isn’t possible and a notice is provided to the applicant.
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