The CFPB is now in the process of writing regulations to implement Dodd-Frank Section 1071 and has released an 80-page Outline of Proposals Under Consideration and Alternatives Considered (Outline). For a brief overview, the CFPB has also released a six-page High Level Summary of the Outline.
As you may recall Section 1071 of Dodd-Frank amended the Equal Credit Opportunity Act (ECOA) and requires the collection specific 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. Since the passage of Dodd-Frank in 2010, no regulations have been written to implement the requirements of Section 1071, although the CFPB is currently working to remedy this situation, although the implementing regulations may end up being somewhat different than Section 1071 as found in Dodd-Frank.
In the Outline, the CFPB divides the data points of Section 1071 into mandatory data points, and discretionary data points. Section 1071 does not specify when in the credit approval process that this data must be collected, and likewise the CFPB is also considering not specifying a particular time period in which data must be collected.
The Outline indicates that the scope of the eventual Section 1071 final rule may require financial institutions to collect and report data for all applications for credit by small businesses. Because collecting and reporting on all small businesses would encompass most women-owned and minority-owned businesses, financial institutions may not be required to collect and report Section 1071 data for any businesses that are not small businesses.
Further, the Outline discusses including a number of proposed definitions for the Section 1071 final rule, some of which are included in Section 1071 of Dodd-Frank and some of which are found in existing regulations. For example, the CFPB has proposed a broad definition of “financial institution” that includes virtually every entity that engages in any financial activity but also proposes potential size-based and/or activity-based exemptions for those institutions
The definitions of “small business,” “women-owned business” and “minority-owned business” are likely to mirror the definitions already provided in Section 1071, but the term “minority individual” may be clarified to mirror the aggregate categories used under HMDA.
In the Outline, the CFPB is proposing that covered products be those that meet the ECOA definition of credit and are not excluded under the Section 1071 final rule. The CFPB is proposing to include loans, lines of credit and business credit cards as covered products and excluding consumer credit used for business purposes, leases, factoring, trade credit and merchant cash advances.
Section 1071 does not provide a definition for the term “application,” but the CFPB is proposing to define “application” similarly to how it is defined in ECOA, and providing that the following would be excluded from the definition of application: 1) inquiries/prequalifications; 2) reevaluation, extension, and renewal requests, and 3) solicitations and firm offers of credit.
The CFPB is proposing either a balancing test or establishing a privacy threshold pursuant to the Section 1071 requirement that data collected be made publicly available annually. In accordance with Section 1071, the CFPB may retain discretion to modify the data made available to the public, if such a modification is necessary for privacy reasons.
We do not expect to see a final rule published in 2020, and as proposed in the Outline, whenever the Section 1071 final rule is published, financial institutions will have approximately two calendar years to comply. There will likely be increased activity by the CFPB related to this topic in the coming months, but it should still be quite a while until we see any actual requirements related to Section 1071.