Section 1071 – Small Business Lending Rule

The US Consumer Financial Protection Bureau (CFPB) published its final rule implementing Section 1071 of the Dodd-Frank Act on March 30, 2023. The rule aims to enforce fair lending laws with respect to women-owned, minority-owned, and small businesses by requiring lenders to collect and report data about their small business lending activities.rnrnThe final rule presents extensive requirements, and its implementation is expected to pose operational challenges. Institutions experienced with Home Mortgage Disclosure Act (HMDA) reporting requirements may be better prepared to comply, but the process will likely be complicated and time-consuming for all covered institutions.rnrnOn July 31, 2023, the U.S. District Court issued a preliminary injunction in favor of two trade groups and a private bank that had initiated a legal action against the CFPB, seeking to delay the implementation of Dodd- Frank 1071. Additionally, the Texas Bankers Association and the American Bankers Association jointly communicated with the CFPB on August 2, 2023, requesting the adoption of a relief measure for exempting all banks from compliance with the Dodd-Frank 1071 rule.rnrnThis legal challenge and industry pushback resulted in extending the original deadlines. Originally, lenders were required to begin collecting data between October 1, 2024, and January 1, 2026. However, the CFPB issued an interim final rule in June 2024 to extend these deadlines. See the updated compliance dates below:rnu003culu003ern tu003cliu003eTier 1 institutions (highest volume lenders): New compliance date – July 18, 2025u003c/liu003ern tu003cliu003eTier 2 institutions (moderate volume lenders): New compliance date – January 16, 2026u003c/liu003ern tu003cliu003eTier 3 institutions (smallest volume lenders): New compliance date – October 18, 2026u003c/liu003ernu003c/ulu003ernNotwithstanding the continued development of Dodd-Frank 1071, Newgen’s Commercial and Small Business Loan Origination Solutions, built on a low code foundation, provides banks and financial institutions with the capability to efficiently implement the solution and facilitate ongoing adjustments in a matter of days. During the Paycheck Protection Program, Newgen successfully executed the loan origination and forgiveness solutions and deployed them for newer banks in a mere two days, swiftly accommodating changes as necessitated. We invite you to collaborate with Newgen to engage in an ongoing learning process and achieve the next level of digital transformation for a fully compliant small business lending platform.

u0022Covered financial institutions” must collect and report data. These institutions include a wide range of entities engaged in financial activities, with a minimum requirement of 100 covered originations in each of the two preceding calendar years. Loan brokers and correspondents may collect data on behalf of a covered financial institution.rnrnEntities eligible as “small businesses” must have $5 million or less in gross annual revenue for the preceding fiscal year. Not-for-profit organizations and governmental entities are not considered small businesses under this rule.

The CFPB extended the original implementation timeline due to a legal challenge. The new deadlines are tiered based on the number of covered loans an institution originates. You can find the latest deadlines on the CFPB’s website [link to CFPB Section 1071 page on CFPB website.rnu003culu003ern tu003cliu003eTier 1 institutions (highest volume lenders): Compliance date – July 18, 2025u003c/liu003ern tu003cliu003eTier 2 institutions (moderate volume lenders): Compliance date – January 16, 2026u003c/liu003ern tu003cliu003eTier 3 institutions (smallest volume lenders): Compliance date – October 18, 2026.u003c/liu003ernu003c/ulu003e

The rule also implements a u0022firewallu0022 to limit access to certain demographic data, prohibiting employees and officers of the financial institution involved in making determinations concerning the applicant’s eligibility from accessing this information, unless certain conditions are met.

Covered financial institutions must collect and report data about the transaction, the small business, and the principal owners of the business. Data points include application date, method, recipient, action taken, credit type, credit purpose, and more. Financial institutions must also maintain procedures to collect applicant-provided data in a manner designed to obtain a response.

The CFPB intends to focus its supervisory and enforcement efforts on preventing discouragement of applicants from providing responsive data. It will monitor response rates, compare rates among institutions, and investigate irregularities that may indicate discouragement.rnrnIn conclusion, the final rule implementing Section 1071 of the Dodd-Frank Act introduces comprehensive requirements for collecting and reporting data on small business lending activities, aiming to enforce fair lending laws. Covered financial institutions need to prepare for compliance, navigate the complex rule, and be aware of potential enforcement efforts by the CFPB.