Financial Institutions Face an Impending Requirement - guidance on Strategies for Early Preparation

The Consumer Financial Protection Bureau (CFPB) has proposed a new rule under Section 1071 of the Dodd-Frank Act, aiming to enhance transparency in small business lending and ensure equal credit opportunities for small, minority, and women-owned businesses. The proposed rule, often referred to as the Home Mortgage Disclosure Act (HMDA) for small business lending, is set to be finalized in mid-2022.

The proposed regulation affects financial institutions of all types and sizes, including traditional depository institutions, non-bank lenders, and fintechs. If the expected timeline holds true, financial institutions may begin testing data collection practices by 2023, with a compliance effective date set for January 2024.

To position their organizations for success, financial institutions should take proactive steps such as providing program management support, conducting comprehensive training, drafting procedures and process flows, and analyzing gaps in technology/systems, applications, data collection, and data management practices against Section 1071 requirements.

Our website offers support for financial institutions in all aspects of Section 1071 implementation and compliance, including fair lending regression analyses, data quality reviews, and data control reviews.

The CFPB has detailed the upfront and ongoing costs of implementing and complying with Section 1071, including activities like planning, preparing systems, transcribing data, and performing audits. It's crucial for financial institutions to begin preparing for Section 1071 now, as the CFPB is expected to quickly focus on enforcing the rule in effect.

Financial institutions may face key difficulties when implementing Section 1071, such as understanding nuanced differences between HMDA and Section 1071 requirements, managing data from third-party loan originators, and implementing consistency in data collection and data storage processes.

State regulators, like New York, are enacting similar requirements, such as revising the Community Reinvestment Act to require data collection by banks on loan applications from minority- and women-owned businesses. This move aligns with the goals of Section 1071, which include promoting transparency in small business lending and ensuring equal credit opportunities.

The CFPB published the proposed rule in the Federal Register on October 8, 2021, with the period for public comment closing on January 6, 2022. Financial institutions may anticipate that the CFPB will use Section 1071 reporting to prioritize institutions for fair lending supervisory and examination reviews.

In conclusion, the upcoming Section 1071 regulation is set to impact various lending products and services beyond mortgage products. Financial institutions should take the necessary steps to prepare for this new era in small business lending transparency to ensure compliance and position their organizations for success.