Long-Awaited Section 1071 Final Rule Released on March 30th

On Thursday, March 30th, the Consumer Financial Protection Bureau (CFPB) finalized its long-awaited Section 1071 rule, aimed at transforming small business lending reporting. Section 1071 was a key provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, and the financial services industry has been anxiously awaiting the finalized rule for years. 

Since the CFPB released the proposed Section 1071 in September 2021, depository and non-depository institutions have steeled themselves in preparation for the comprehensive design and implementation effort that lay on the horizon. Often referred to as the Home Mortgage Disclosure Act — or the HMDA-for-Small-Business-Lending, the final Section 1071 rule has confirmed suspicions that increasing transparency into small-business lending will come with significant time, resourcing, and effort from financial institutions to be in compliance with the mandatory regulation. While the CFPB has issued the ruling and has enforcement authority, there are numerous other constituents, including the Federal Trade Commission, federal prudential banking regulators, state attorneys general, and state regulators, that are eager to leverage and analyze the data that will be published by the CFPB for their own monitoring and potential enforcement. Through initial analysis of the finalized ruling, Guidehouse and the industry are already noting differences between the proposed and finalized Section 1071 requirements, as well as updated compliance timelines. 

Section 1071 Summary

According to the CFPB, the finalized Section 1071 is meant to “increase transparency in small business lending, promote economic development, and combat unlawful discrimination.”¹ At the ruling’s core, Section 1071 mandates that “covered” financial institutions collect and report data regarding small-business lending applications. Reminiscent of HMDA, this data will include geographic, demographic, lending decision, and credit pricing information. Below is a summary of key Section 1071 terminology. 

A covered financial institution that must adhere to Section 1071 — A partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative organization, or other entity that engages in any financial activity, and that originated at least 100 covered originations (such as loans, credit cards, and lines of credit) in each of the two preceding calendar years.

A small business — Defined as a business that is independently owned and operated, organized for profit, is not dominant in its field of operation, and had $5 million or less in gross annual revenue in its preceding fiscal year. (Non-profits and government entities are not small businesses under Section 1071).

A covered credit transaction — An extension of credit under Regulation B, including loans, lines of credit, credit cards, merchant cash advances, and credit products used for agricultural purposes. (However, there are certain transactions that are excluded from Section 1071, such as HMDA-reportable transactions, leases, insurance premium financing, trade credit, public utilities credit, securities credit, and incidental credit.) 

A covered origination — A covered credit transaction that the financial institution originated to a small business — this includes refinancings, but does not include extensions, renewals, and other amendments of existing transactions, even if they increase credit lines or credit amounts of existing transactions.

A covered application — An oral or written request for a covered credit transaction that is made in accordance with procedures used by the financial institution for the type of credit requested.

In summary, covered financial institutions will be required to collect and report data on covered applications for covered credit transactions from small businesses. Generally, implementation timelines will be based on the number of covered originations a covered financial institution performs, which is outlined below. 

Section 1071 requires covered financial institutions to report more than 20 data points. In the table below, we compared the data points outlined in the proposal alongside final rule requirements. As noted, the final rule introduced LGBTQI+, but otherwise has consolidated certain proposed information.

Section 1071 requires financial institutions to report this information to the CFPB by June 1 of the year following the calendar year the data was collected (i.e., June 1, 2025, for data collected in 2024). The CFPB has provided a Filing Instructions Guide, which contains additional information regarding the submission of data. Financial institutions should be aware that the CFPB will make this data available to the public on an annual basis. (Note, the CFPB may choose at its discretion to summarize or not release certain data). 

In addition to data-reporting requirements, covered financial institutions will also have to adhere to (i) notice/disclosure requirements to applicants, including informing applicants that the financial institution is not permitted to discriminate on the basis of the applicant’s demographic information request response; (ii) requirements to maintain procedures for collecting applicant-provided information in a timely and accurate manner; and (iii) record-keeping requirements such as keeping an applicant’s demographic information responses separate from the rest of an application’s information and limiting certain persons’ access to certain data (i.e., firewall) in order to ensure that the demographic information is not taken into consideration during the underwriting process.

Section 1071 also requires that financial institutions have procedures in place to ensure that applicants are not discouraged from providing the requested data. While the CFPB is keen to have the data collected, applicants should not feel pressured to provide the requested information. The rule states that the lender will not be penalized for not furnishing information that was withheld or not responded to by the borrower. With that being said, as part of their analysis, we would anticipate that the CFPB will take note of trends where data is routinely missing. Additionally, while there are more than 20 fields requested, the CFPB does allow for some of the fields to be freeform text, such as Credit Purpose and Sex/Gender. However, financial institutions are expected to provide the standard text if the freeform text is similar in nature to the standard language.

Key Changes Between Proposed and Finalized Section 1071

Based on consideration of more than 2,000 public comments and extensive public input, the finalized Section 1071 contains several differences from the proposed ruling issued in September 2021. The material below summarizes certain key updated requirements:

• Larger lenders that cover the majority of the market will be expected to implement Section 1071 sooner than smaller lenders
  • Lenders that originate at least 2,500 small business loans annually must collect data starting October 1, 2024
  • Lenders that originate at least 500 loans annually must collect data starting April 1, 2025
  • Lenders that originate at least 100 loans annually must collect data starting January 1, 2026
• The CFPB may offer small lenders that have demonstrated high levels of success in serving local communities additional implementation time; this is based on frameworks such as the Community Reinvestment Act and other statutory laws
• The definition of a covered financial institution is now based on a covered origination volume threshold, whereas previous industry discussion considered other definitions, such as whether covered financial institutions be determined by asset size thresholds or origination thresholds depending on type of financial institution
• Loan officers will no longer be expected to make their own determinations of an applicant’s demographic information, including race or ethnicity
• Loans reportable under HMDA will not need to be reported under Section 1071

Implementation Timeline

How Guidehouse Can Help

The impacts of Section 1071 are going to be felt across the financial services industry as the regulation impacts organizations of all types and sizes. For organizations that already provide HMDA data for loans secured by a dwelling, they might be one step ahead; however, Guidehouse foresees the efforts that will need to be undertaken to implement and comply will be vast. Guidehouse foresees numerous complexities, given the multiple products and services covered, existing application and origination systems, processes, procedures, and variations in data collection that may vary based on product or service, as well as ongoing program execution and maintenance. Financial institutions should start now examining the impacts of Section 1071 to their organization to ensure compliance. Guidehouse can help alleviate these constraints by supporting financial institutions through all aspects of Section 1071 implementation and compliance, including:

• Providing program management support
• Establishing strong and accountable governance structures
• Analyzing gaps in technology/systems, applications, data collection, and data management practices against Section 1071 requirements
• Prioritizing and managing updates to technology/systems, applications, data collection, and data management practices
• Drafting process flows and procedures, incorporating steps to provide decision audit trails
• Conducting comprehensive training for applicable employees
• Performing data quality reviews on collected data
• Conducting data control reviews
• Performing fair lending regression analyses on currently collected data