Ready or not, it’s here! On March 30th, the Consumer Financial Protection Bureau (CFPB) issued its final rule to amend Regulation B to implement changes made to the Equal Credit Opportunity Act (ECOA) via section 1071 of the Dodd-Frank Act. Lending institutions will be required to aggregate and submit select data points on small business credit applications to the CFPB on an ongoing basis. Applying section 1071 to small business lending is intended to promote greater transparency and, potentially, greater access to credit for many businesses.
Lenders involved in the workstream to comply with section 1071 on equity products nearly a decade ago are likely all too familiar with the significant effort and cost that full compliance with the rule will require. As a result, many financial institutions have feverishly begun scoping the task at hand — from data collection and accuracy to systems reconfiguration to submission to the bureau. The logistics and impacts of implementing the rule, including the potential outcomes that it will present, are significant and potentially daunting. Will your organization be ready?
Scope, Data Required And Timing Of Section 1071
To help financial institutions better understand and comply with 1071 for small business, the CFPB has published several helpful reference materials.1 They present four key areas that need consideration, and if the criteria for all four quadrants are met, 1071 will apply. (See Figure 1.)
Figure 1: Section 1071 Criteria
If it’s determined that 1071 applies, financial institutions will be required to collect and report data on covered applications in three categories: financial institution, credit and demographics. (See Figure 2.)
Figure 2: Section 1071 Required Data
Third, the number of covered transactions that a financial institution originates over a specified number of years will determine the required timeframe for compliance. (See Figure 3.)
Figure 3: Section 1071 Timetable
Source: Executive Summary of the Small Business Lending Rule
Are You Ready?
Because the specifications and requirements for compliance listed above are at a high level, financial institutions should acquaint themselves with the many details and nuances of section 1071. They should also focus on outcomes. What will 1071 implementation mean for their small business lending practice? Do they have a good handle on originations in areas with large minority populations? Does a high proportion of lending come from women-owned businesses? Whatever the demographic density by geographic region, is the institution practicing fair and equitable lending in these areas?
For example, among the top 50 small business lenders in the country,2 the largest branch presence as it relates to a high concentration of Black residents is in the southeast, notably Georgia, Alabama, Mississippi and Louisiana. The largest branch presence as it relates to a high concentration of Hispanic residents is in California, Texas and Florida. While the high concentration of brick and mortars in these areas is a positive indicator, it doesn’t necessarily mean that fair lending is taking place among the qualifying population. So, be proactive! Curinos advises lenders to look into and undergo a data-driven analysis of their portfolio now, before they’re up against their deadline for compliance.
2Estimated based on Q4 2022 FDIC data, top 50 bank portfolio balances with loan amounts <= $1MM