CFPB Finalizes 1071 Rule

On March 29th, 2023, the Consumer Financial Protection Bureau (CFPB) released the final rule for Section 1071 of the Dodd-Frank Act, which requires banks to collect data on small business loan applications. Although Section 1071 originally contained fewer than four pages of statutory text, the final rule spans 888 pages.

Under the new rule, banks will need to collect data on all oral and written small business loan applications for businesses with $5 million or less in gross annual revenue for the preceding fiscal year. This data includes action dates, methods and actions taken, as well as reasons for denials, credit types, purposes, amounts, census tracts, gross revenues, NCAIS codes, the number of employees, applicants' time in business and the number of principal owners.

In addition, banks must collect data on the applicant's minority-owned, women-owned and LGBTQI+-owned business status, as well as the applicant's principal owners' ethnicity, race and sex. Loan officers are required to ask the applicant for this demographic information, but customers are not required to provide it, and the lender cannot require the borrower to respond. If the applicant declines to provide the information, the bank must report the failure or refusal to provide it. Banks are not allowed to report these data points based on visual observation or any other basis.

The compliance dates for the new rule vary based on the number of loan originations:

• Banks with 2,500+ loan originations in both 2022 and 2023 must begin collecting data on October 1, 2024.
• Banks with 500 to 2,500 originations in 2022 and 2023 must begin collecting data on April 1, 2025.
• Banks with at least 100 originations in 2024 and 2025 must begin collecting data on January 1, 2026.

The release of the final rule has sparked debate about the impact of increased data collection on small business lending. Proponents of the rule argue that it will increase transparency and help address discrimination in lending practices, while opponents argue that it will add unnecessary regulatory burden and harm small businesses. The true impact of the final rule remains to be seen, but it is clear that it will significantly change the landscape of small business lending.