The future of the Consumer Financial Protection Bureau’s controversial Section 1071 small business data collection rule remains uncertain, with only a year remaining until the nation’s largest bank lenders need to start reporting data.
Smaller lenders, which will have more time to comply with Section 1071, are already preparing for the rule. Take south-central Nebraska’s Bruning State Bank, where a half-dozen commercial lenders and loan administrators have already attended several Section 1071 compliance webinars. The $545 million bank plans to purchase Section 1071 software from NContracts, the same company it used to comply with the most recent updates to the Home Mortgage Disclosure Act.
“I’m not going to say we’re 100 percent on top of it, but we’re working at it,” said Chief Operating Officer Jerry Catlett.
Though he approves of the main goal of ending lending disparities to women- and minority-owned businesses, Catlett also believes the rule has morphed into a more encompassing package with burdensome and unnecessary requirements. He cited a mandate that an employee other than the loan originator collect Section 1071 data.
He expects complying with Section 1071 will tack a few hours of work onto each loan application. “Some of this just doesn’t make sense,” Catlett said. “There are just too many steps. And I hope that it doesn’t cut back on credit to small businesses, but that’s what it seems to do, or it is going to add costs.”
Section 1071 will require lenders to collect and report information on the race, sex and ethnicity of the principal owners of the small business applicant as well as the company’s gross annual revenue. Under the rule, the CFPB will require lenders that originate at least 2,500 loans to small businesses — businesses with $5 million or less in gross annual revenue — in each of the last two years to collect data starting on Oct. 1, 2024. Lenders that originate at least 500 such loans will need to begin collecting information on April 1, 2025, and those that originate at least 100 annually must collect data beginning on Jan. 1, 2026.
Legal speed bumps
Classified as a Tier II bank, Bruning State Bank will need to start collecting data on April 1, 2025, with reporting due June 1, 2026. Catlett’s concerns are similar to the broader industry’s view of Section 1071: That the CFPB has overstepped its authority and is propagating a rule that will force banks to cut back on small business lending. At least one lawsuit has already been filed challenging Section 1071. In the spring, Texas-based Rio Bank, the American Bankers Association and Texas Bankers Association sued the CFPB to prevent it from implementing the rule. The groups requested that Section 1071 be delayed until the Supreme Court rules on the constitutionality of the agency’s funding structure, a decision expected next year.
In late July, U.S. District Court Judge Randy Crane granted the motion for a preliminary injunction. However, the injunction only applied to TBA and ABA member banks, which the Independent Community Bankers of America later argued should be extended to smaller banks. Crane authorized the ICBA to join the lawsuit in mid-August. The CFPB later filed a motion requesting the court deny ICBA’s request for a preliminary injunction, contending that the plaintiffs had not “provided specific evidence of compliance costs” that they are immediately required to incur.
On Sept. 14, the U.S. District Court for the Eastern District of Kentucky issued a nationwide injunction preventing the CFPB from implementing Section 1071 until the Supreme Court rules on the legality of the bureau’s funding structure. The case was filed Aug. 11 by seven Kentucky state-chartered banks, one national bank headquartered in the state and the Kentucky Bankers Association.
“I don’t ever think an industry suing your regulator is a good idea, but it’s part of what we have to do now, because of the slant that regulators are taking against banks,” Catlett said. “We’re not the bad guys, but it sometimes looks like it’s intended to make us look like that.”
CFPB Director Rohit Chopra still sees Section 1071 as necessary to help the agency update the Community Reinvestment Act and ease current discrepancies in small business lending access across demographic groups. “The copious evidence before the Bureau when it issued the Rule, and that the Bureau described at length in the preamble to the Rule, supports the Bureau’s view that the Rule as well as the statutory requirements it implements will produce significant benefits for small businesses, the communities they serve and lenders,” the CFPB stated in the court motion.
Congressional pushback against Section 1071 is also ongoing but less likely to be successful. In late July, the House Financial Services Committee approved a resolution of disapproval against Section 1071. Similar legislation has been introduced in the Senate by John Kennedy (R-La.). The bills face steep odds at being signed into law, as they still need to pass both chambers before being approved by President Joe Biden.
“[Section 1071 is] going to have to be settled by the Supreme Court,” said Mike Horrocks, vice president of product management at Carmel, Ind.-based software-as-a-service firm Baker Hill.
Wolters Kluwer Senior Advisor of Regulatory Strategy Tim Burniston said the Supreme Court could deem the CFPB’s funding structure unconstitutional while splitting the ruling from Section 1071 and other agency actions, or instead find that they are connected. Still, bankers are not being distracted by speculating over the future of the rule, he added, as they are aware that regulators have not committed to pushing back the implementation dates.
“It would be far too disruptive to stop and then try to start again,” Burniston said of what bankers have told him. “Of course they are looking carefully at what is going on, and we don’t know exactly what the future will hold, but so far we’ve seen that our customers are moving in that same direction.”
Bracing for implementation
To comply with Section 1071, banks will need to list the number of principal owners — those with at least 25 percent ownership — the applicant has, noted Brad Stumpe, practice leader of financial compliance at St. Louis-based advisory firm Anders. The status of a firm as a minority-, women- or LGBTQI+ owned business depends on if an owner with a majority stake in the firm is a member of one of those populations.
Categories included under Section 1071 are oral or written requests for an extension of non-consumer credit; the amount of any increases in credit approved from a reevaluation, extension or renewal; non-HMDA-reportable commercial purpose transactions; and agricultural loans.
Categories not included are credit reevaluations, extensions or renewals which did not increase the amount of credit, such as modifying an extension rate or extending a maturity; inquiries and pre-approval requests; and participation loans when the bank was not the originating institution. Other unincluded categories are HMDA-reportable transactions; and trade credit, insurance premium financing, public utilities credit, securities and incidental credit.
Banks that don’t make enough small business loans to qualify for Section 1071 requirements should still track how many they approve, both as a way to prove to regulators that they don’t qualify and to track if they eventually do cross that threshold, Stumpe noted. He said banks should consider the data points they already track along with how and where such information is gathered and stored. He also advised banks to consider who should be on implementation teams, potentially compliance officers, chief credit officers and lending officers among others.
Banks should prepare for Section 1071 by being deliberate, Burniston said, training impacted team members, establishing project teams, setting up responsibility structures and reaching out to third-party providers. To Burniston, banks should include Section 1071 in risk assessment planning while being aware that the data will be used to identify discriminatory lending practices. The effectiveness of Section 1071 won’t be established for several years after implementation, Burniston added.
“The key thing to remember here is this is not just an exercise at collecting information and sending it to the government,” he noted. “The underlying purpose here is this is a fair lending regulation, and as a fair lending regulation, the data is going to be used by regulators, examiners, advocacy organizations, the media, plaintiff’s attorneys.”
‘It’s taken quite a long time to get there’
Burniston expects Section 1071 will bring both positives and negatives to the banking industry. Though the rule will enable banks to target potential growth areas and allow policymakers to view a comprehensive network of small business lending data for the first time, compliance work will inevitably be expensive and get passed down to the customers Section 1071 is supposed to protect.
“This is an expensive proposition for those who are subject to it,” Burniston said. “On the other hand, it is a requirement that was put in through Dodd-Frank in 2010. It’s taken quite a long time to get there. I don’t think that anybody is surprised by the fact that there is a rule finally, but maybe surprised by how extensive it actually came out.”
Horrocks views Section 1071 positively, seeing it as a way to stimulate small business lending and serve traditionally underserved communities, not punish the industry. The timing of the rollout is also beneficial, he said, as small businesses in recent years have increasingly opted for the ease of application that nonbanks provide rather than the lower interest rates provided by banks.
Horrocks views them as being collected for a good cause. “Some questions are more intrusive than they need to be, but at the same time, they are asked in the spirit of inclusivity,” he said. “That’s the balance that people have to think about: It’s intrusion, but for the inclusivity component of it.
“It’s going to shed some light on how we service, as an industry, these businesses … all small businesses, but a specific focus on minority- and women-owned small businesses,” he added. “It will also be good for the economy, too.”
Horrocks cautioned banks to avoid the fear tactics he sees as being promulgated by detractors of Section 1071. “There’s a lot of people that are trying to make money off of this, so go where the facts are,” he added.
The long and winding road to Section 1071’s implementation
- July 21, 2010: The Dodd-Frank Wall Street Reform and Consumer Protection Act is signed into law; its Section 1071 instructs the Consumer Financial Protection Bureau to create regulations governing the collection of small business lending data.
- September 1, 2021: The CFPB requests comment on its proposed Section 1071 rule.
- February 27, 2023: The U.S. Supreme Court agrees to hear Community Financial Services Association of America., Ltd. v. CFPB, which challenges the constitutionality of the CFPB based on its funding structure.
- March 30, 2023: The CFPB releases its final Section 1071 rule.
- April 26, 2023: The Texas Bankers Association and Rio Bank, McAllen, Texas, file a lawsuit against the CFPB, challenging Section 1071.
- May 18, 2023: The American Bankers Association joins the TBA lawsuit.
- July 31, 2023: A U.S. district court orders the CFPB not to implement or enforce Section 1071 against plaintiffs in Texas Bankers Ass’n, et al. v. CFPB, et al.
- Aug. 11, 2023: A group of Kentucky banks and the Kentucky Bankers Association file a lawsuit seeking to block Section 1071 until the Supreme Court rules on Community Financial.
- August 16, 2023: The Independent Community Bankers of America is allowed to join the ABA/TBA case against the CFPB.
- Sept. 14, 2023: A U.S. district court issues a nationwide injunction blocking Section 1071 until the Supreme Court rules on the legality of its funding structure.
- June 2024: A ruling in Community Financial Services Association of America., Ltd. v. CFPB is expected from the U.S. Supreme Court.
- Oct. 1, 2024: Tier I banks would be required to begin collecting Section 1071 data.
- April 1, 2025: Tier II banks would be required to begin collecting Section 1071 data.
- Jan. 1, 2026: Tier III banks would be required to begin collecting Section 1071 data.