(As published by BankBeat)
The future of the Consumer Financial Protection Bureau’s controversial Section 1071 small business data collection rule remains uncertain, with only a year remaining until the nation’s largest bank lenders need to start reporting data.
Smaller lenders, which will have more time to comply with Section 1071, are already preparing for the rule. Take south-central Nebraska’s Bruning State Bank, where a half-dozen commercial lenders and loan administrators have already attended several Section 1071 compliance webinars. The $545 million bank plans to purchase Section 1071 software from NContracts, the same company it used to comply with the most recent updates to the Home Mortgage Disclosure Act.
“I’m not going to say we’re 100 percent on top of it, but we’re working at it,” said Chief Operating Officer Jerry Catlett.
Though he approves of the main goal of ending lending disparities to women- and minority-owned businesses, Catlett also believes the rule has morphed into a more encompassing package with burdensome and unnecessary requirements. He cited a mandate that an employee other than the loan originator collect Section 1071 data.
He expects complying with Section 1071 will tack a few hours of work onto each loan application. “Some of this just doesn’t make sense,” Catlett said. “There are just too many steps. And I hope that it doesn’t cut back on credit to small businesses, but that’s what it seems to do, or it is going to add costs.”
Section 1071 will require lenders to collect and report information on the race, sex and ethnicity of the principal owners of the small business applicant as well as the company’s gross annual revenue. Under the rule, the CFPB will require lenders that originate at least 2,500 loans to small businesses — businesses with $5 million or less in gross annual revenue — in each of the last two years to collect data starting on Oct. 1, 2024. Lenders that originate at least 500 such loans will need to begin collecting information on April 1, 2025, and those that originate at least 100 annually must collect data beginning on Jan. 1, 2026.
Legal speed bumps
Classified as a Tier II bank, Bruning State Bank will need to start collecting data on April 1, 2025, with reporting due June 1, 2026. Catlett’s concerns are similar to the broader industry’s view of Section 1071: That the CFPB has overstepped its authority and is propagating a rule that will force banks to cut back on small business lending. At least one lawsuit has already been filed challenging Section 1071. In the spring, Texas-based Rio Bank, the American Bankers Association and Texas Bankers Association sued the CFPB to prevent it from implementing the rule. The groups requested that Section 1071 be delayed until the Supreme Court rules on the constitutionality of the agency’s funding structure, a decision expected next year.
In late July, U.S. District Court Judge Randy Crane granted the motion for a preliminary injunction. However, the injunction only applied to TBA and ABA member banks, which the Independent Community Bankers of America later argued should be extended to smaller banks. Crane authorized the ICBA to join the lawsuit in mid-August. The CFPB later filed a motion requesting the court deny ICBA’s request for a preliminary injunction, contending that the plaintiffs had not “provided specific evidence of compliance costs” that they are immediately required to incur.
On Sept. 14, the U.S. District Court for the Eastern District of Kentucky issued a nationwide injunction preventing the CFPB from implementing Section 1071 until the Supreme Court rules on the legality of the bureau’s funding structure. The case was filed Aug. 11 by seven Kentucky state-chartered banks, one national bank headquartered in the state and the Kentucky Bankers Association.
“I don’t ever think an industry suing your regulator is a good idea, but it’s part of what we have to do now, because of the slant that regulators are taking against banks,” Catlett said. “We’re not the bad guys, but it sometimes looks like it’s intended to make us look like that.”
CFPB Director Rohit Chopra still sees Section 1071 as necessary to help the agency update the Community Reinvestment Act and ease current discrepancies in small business lending access across demographic groups.
“The copious evidence before the Bureau when it issued the Rule, and that the Bureau described at length in the preamble to the Rule, supports the Bureau’s view that the Rule as well as the statutory requirements it implements will produce significant benefits for small businesses, the communities they serve and lenders,” the CFPB stated in the court motion.
Congressional pushback against Section 1071 is also ongoing but less likely to be successful. In late July, the House Financial Services Committee approved a resolution of disapproval against Section 1071. Similar legislation has been introduced in the Senate by John Kennedy (R-La.). The bills face steep odds at being signed into law, as they still need to pass both chambers before being approved by President Joe Biden.
“[Section 1071 is] going to have to be settled by the Supreme Court,” said Mike Horrocks, vice president of product management at Carmel, Ind.-based software-as-a-service firm Baker Hill.
Wolters Kluwer Senior Advisor of Regulatory Strategy Tim Burniston said the Supreme Court could deem the CFPB’s funding structure unconstitutional while splitting the ruling from Section 1071 and other agency actions, or instead find that they are connected. Still, bankers are not being distracted by speculating over the future of the rule, he added, as they are aware that regulators have not committed to pushing back the implementation dates.
“It would be far too disruptive to stop and then try to start again,” Burniston said of what bankers have told him. “Of course, they are looking carefully at what is going on, and we don’t know exactly what the future will hold, but so far we’ve seen that our customers are moving in that same direction.”
