(Editor's Note: A member of SFNet’s Advocacy Committee, Brett Garver of Moritt Hock & Hamroff LLP, has provided this alert pertaining to CFPB Section 1071, which could prove to be unduly burdensome to the vast majority of small and mid-sized finance companies that provide credit to small businesses. If you have any questions or comments, please contact Michele Ocejo at mocejo@sfnet.com.)

In the wake of the credit crisis ten years ago, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was enacted in an attempt to provide greater stability to the financial systems and  impose greater accountability on its participants.  While many market participants, especially larger banks and other heavily regulated institutions have become familiar with the many restrictions and regulations imposed under the Dodd-Frank Act, one provision in particular has been largely dormant since its passage and has the potential to affect virtually anyone  providing  financing of any kind regardless of size or type of financing.  Section 1071 of the Dodd-Frank Act (Section 1071 or 1071) amended the Equal Credit Opportunity Act (ECOA) to require financial institutions to compile, maintain, and submit to the Consumer Financial Protection Bureau (CFPB) certain data on applications for credit for women-owned, minority-owned, and small businesses.  The stated purpose of 1071 was to support enforcement of fair lending laws and to help communities and governmental entities expand opportunities for women-owned, minority-owned, and small businesses.  Until recently, 1071 had received limited attention and no rules had been adopted for its implementation or enforcement.  In February 2020, the CFPB settled a lawsuit which sought to compel it to undertake the rulemaking required by 1071.  Accordingly, the CFPB has actively begun the rulemaking process and is seeking comments from the public.

It is imperative that market participants share their opinions with the CFPB, since as drafted, 1071 could have a sweeping and burdensome impact on almost every business  engaged in  extending  of credit.  Beyond the mere burden of collecting the data, there are extensive areas of concern which include data privacy and penalties for non-compliance among others.  Also of major concern is the fact that the information collected must be made publicly available.  There is no clear guidance yet on what portion of the data will be public and whether it will be aggregated or the names of the borrower and lenders will be available.

Under Section 1071, Financial Institutions are required to compile, maintain, and submit data on the type and purpose of any application for “credit”, the census tract for the applicant’s principal place of business, and the race, sex, and ethnicity of the principal owners of the business, along with a number of other data points.

In order to understand the potential burden, it is important to consider three key definitions:

“Financial Institution” is defined broadly under Section 1071(h)(1) as “any partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative organization, or other entity that engages in any financial activity.”  Read broadly this would appear to encompass every entity engaged in the extension of credit without regard to the nature or size of the credit provider.  In many cases, the information collection and reporting could prove unduly burdensome and expensive to the vast majority of small and mid-sized finance companies that provide credit to small businesses.

“Small Business” is similarly defined broadly by relating back to the definition of a “Small Business Concern” under the Small Business Act (the “SBA”).  The basic definition used by the SBA is exceedingly broad and is then adapted on a program-by-program basis, however, it is likely that following some of the SBA standards, nearly well over 90% of all businesses would be covered including effectively all women-owned and minority-owned businesses.

The term “credit” is not specifically defined in Section 1071.  However, ECOA defines “credit” as “the right granted by a creditor to a debtor to defer payment of debt or to incur debts and defer its payment or to purchase property or services and defer payment therefor.”  Once again, the broadest possible definition, sweeping up every form of financing.  Given the nature of the information and the underlying goal of encouraging financing for women-owned and minority-owned businesses and small business, it would seemingly be better that the reporting focus on general commercial and industrial credit provided to small business and not focus on larger loans and specialized financing such as asset-based loans, leases and factoring agreements.

The CFPB is not unsympathetic to the exceptionally broad reach 1071 could have and, accordingly, is seeking feedback from market participants as to how it should define each of these terms for purposes of adopting the rules and regulations required by 1071, as well as an extensive series of issues associated with the data collection called for by 1071.  In fact, the Outline of Proposals under Consideration and Alternatives Considered, published by the Small Business Advisory Panel, seems to provide guidance that the CFPB is looking for and considering broad exemptions by class of borrower, financial product, and credit provider.  Given that the rulemaking itself is underway by virtue of litigation, it can be assumed that the CFPB will want to be able to point to extensive data supporting the exemptions it elects to grant.

The CFPB has posted a survey seeking public feedback on the scope of the pending rules under 1071.  According to the CFPB website, the survey “is part of an overall effort in the consideration of costs and benefits in the implementation of Section 1071 of the Dodd-Frank Act.  Section 1071 amends the Equal Credit Opportunity Act to require financial institutions to compile, maintain, and report information concerning credit applications made by women-owned, minority-owned, and small businesses.  This survey will be the primary opportunity for financial institutions to provide the Bureau information on potential one-time costs to financial institutions which will help inform the Bureau’s policy decisions.”

The survey, which closes October 1, 2020, can be found at: 

https://www.consumerfinance.gov/data-research/small-business-compliance-cost-survey/

Industry participants should take the time to respond to the survey and do so as soon as possible.

The Secured Finance Network will be preparing a formal comment letter on 1071 to be submitted to the CFPB.