Section 1071 Finally Arrives

On March 30, one day before the deadline to publish the final rule, the Consumer Financial Protection Bureau (CFPB) issued the long-delayed Section 1071 final rule. As you may recall, Section 1071 of Dodd-Frank amended the Equal Credit Opportunity Act (ECOA) and requires the collection specific application data points for the purpose of facilitating the enforcement of fair lending laws and enabling banks to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses. The final rule covers both closed-end loans and open-end lines of credit, with limited exceptions.

Under the final rule small businesses will be able to self-identify as minority-owned or women-owned and will also be able to identify if the business is “LGBTQIA+”-owned. The final rule makes it clear that banks will be able to rely on the information provided by the business, or appropriate third-party sources for certain data points, when compiling Section 1071 required data.

Under the final rule data collection is triggered by the submission of a “covered application” by a small business. An application for Regulation B purposes is defined as an oral or written request for an extension of credit that is made in accordance with procedures used by a financial institution for the type of credit requested.

For Section 1071 purposes, certain “applications” are not covered applications, even if they are considered applications under the existing Regulation B definition of application.  Specifically, covered applications for purposes of this rule do not include 1) reevaluation, extension, or renewal requests on existing business credit accounts, unless the request seeks additional credit amounts; 2) inquiries and prequalification requests; or 3) certain solicitations, firm offers of credit, and other evaluations that the institution initiates.

Rather than relying on the SBA determination of what a small business is, under the Section 1071 final rule, a “small business” is defined having gross annual revenue under $5 million in the preceding fiscal year. The final rule also anticipates updates to this size standard to account for inflation, not more than every five years.

One notable change between the proposed rule and the final rule, the threshold for “covered credit transactions” has been set at 100, rather than 25 (as was the case under the proposed rule) in each of the two preceding calendar years. Another noteworthy change from the proposed rule is that lenders will not be required to use their own determinations to collect race and ethnicity via visual observation or surname if an in-person applicant does not provide it directly; instead, the final rule requires that these data be reported based only on information provided by the applicant.

The final rule has several mandatory compliance dates, depending on the number of covered credit transactions originated by the institution. For those that originate at least 100 covered credit transactions but fewer than 500 in the two preceding years (2022 and 2023) data collection must begin starting January 1, 2026. Those originating least 500 covered credit transactions but fewer than 2,500 loans in both 2022 and 2023, data collection must begin starting April 1, 2025. Those originating 2,500 or more covered credit transactions in both 2022 and 2023, data collection must begin starting October 1, 2024.

At 888 single-spaced pages, there’s a lot to this rule, so you may have questions. Feel free to reach out to us on the hotline and we’ll help you navigate getting ready for your mandatory compliance date 18-32 months from now.