As part of the 2010 Dodd-Frank Act, Congress enacted Section 1071, which amended the Equal Credit Opportunity Act to mandate certain reporting requirements for lenders making business loans. The act aims to “facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.” Specifically, Section 1071 requires that lenders identify women-owned, minority-owned, and small businesses and collect data related to — among other things — the race, sex, and ethnicity of the business owners, the purpose of the loan, the action taken with regards to the loan, the business’s gross annual revenue, and “any additional data that the [CFPB] determines would aid in fulfilling the purposes of this section.” This catch-all language suggests that the CFPB has substantial leeway in determining the volume and breadth of data points required under Section 1071, and if implementation is anything like the CFPB’s implementation of HMDA — a similar reporting statute related to secured residential loans — collection and reporting could prove to be onerous indeed.
Moreover, based on certain comments by stakeholders at a November 2019 CFPB Symposium on implementation of Section 1071, the universe of lenders and loans subject to 1071 reporting requirements may be quite broad. As such, all types of institutions — including banks, credit unions, and merchant cash advance companies — should pay close attention to how the CFPB goes about implementing this section of Dodd-Frank.
The Implementation History of Section 1071
In April 2011, the CFPB promised to act “expeditiously” in issuing rules implementing Section 1071. Despite this pledge, the CFPB has been deliberate in its efforts to implement the rule. In May 2017, the CFPB issued a Request for Information (RFI) regarding the small business lending landscape in order to “augment the Bureau’s expertise in this space.” Although the RFI suggested that the CFPB would move quickly to implement Section 1071, its Fall 2018 agenda reclassified Section 1071 implementation as a long-term action item, citing the CFPB’s apparent need to focus on HMDA implementation instead. However, in mid-2019, the CFPB issued its spring regulatory agenda in which it endeavored to “recommence work . . . to implement [S]ection 1071 . . . .” This delay resulted in a May 2019 lawsuit, filed in the United States District Court for the Northern District of California against CFPB Director Kathleen Kraninger, in which a public interest group argues that the CFPB has violated the Administrative Procedures Act and Dodd-Frank by failing to implement Section 1071.
November 2019 Symposium
In November 2019, the CFPB held a symposium on the implementation of Section 1071. Reassuringly, Director Kraninger promised that the CFPB would engage in Section 1071 rulemaking with “care and consideration in order that the rule not impede the ability of small businesses — including minority and women owned small businesses — to access the credit they need.” The director’s comments suggest that the agency will approach implementation of Section 1071 with a light touch.
However, several panelists issued words of caution regarding the possible challenges and burdens associated with implementation. For instance, Brad Blower, vice president of Consumer Practices at American Express, urged the CFPB to clarify that Section 1071 applied only to small business lending, in part, by applying the relatively clear and consistent definition of “small business” contained in the Small Business Act. Diego Zuluaga, a policy analyst at the Cato Institute’s Center for Monetary and Financial Alternatives, warned that “data collection requirements can pose a substantial compliance burden on lenders, causing underwriting costs to rise and discouraging some lenders from serving certain markets.” Other stakeholders asked the CFPB to expand the reach of Section 1071. For instance, Richard Nieman, head of Public Policy at LendingClub, opined that merchant cash advance and factoring companies should also be subject to 1071’s requirements. Other panelists expressed concern about the potential for increased cost, decreased efficiency, possible duplicative collection and reporting requirements, as well as the privacy risk of additional data collection. In a nutshell, representatives for lenders and other potentially affected industries expressed concern about the typical dangers of over-regulation: increased cost, decreased efficiency, the potential to reduce the availability of credit, and regulatory uncertainty.
Section 1071 is Coming
At the November symposium, the CFPB noted that it may take several years to fully implement Section 1071. However, the CFPB’s Fall 2019 regulatory agenda lists its pre-rule activity date as beginning in November 2019, suggesting that rulemaking may begin sooner rather than later. Of course, it is impossible to predict when the CFPB will initiate a formal rulemaking process related to Section 1071. However, given the potentially broad scope of the rule, as well as the risk of increased compliance burdens, it is critical that all stakeholders monitor the CFPB and understand the potential issues surrounding Section 1071. There will — as part of the rulemaking process — be a public comment period. Banks, credit unions, and all other lenders, as well as merchant cash advance and factoring companies, should be prepared to protect their interests by either submitting a comment or urging their respective trade organizations to submit a comment on their behalf. We will also continue to monitor the CFPB for any new developments.