Regulatory expert offers initial reaction to new 1071 rule

One day before the March 31, court-ordered deadline, the Consumer Financial Protection Bureau (CFPB) released the finalized rule for section 1071 of the Dodd-Frank Act, which established reporting requirements for lending to small businesses.

In an exclusive interview with Dodd Frank Update, Tim Burniston, senior advisor for regulatory strategy, Wolters Kluwer Compliance Solutions, offered his initial reactions to the new 1071 rule, including what changes were made from the draft rule released in September 2021, what clarifications have been given, and what issues are still left unanswered.

Following the draft proposal in 2021, the rule underwent a period of input from an array of interested parties, including a panel review convened under the Small Business Regulatory Enforcement Fairness Act (SBREFA) which requires the bureau solicit input from small business entities which might be affected by the new rule. The bureau also accepted extensive public comment as part of the rulemaking procedure.

“The CFPB does appear to have very carefully considered the public comments,” Burniston noted. “They received over 2,100 comments as noted in their final rule. There are those who might not necessarily agree with the outcome on certain issues, but the reasoning is there for people to see and to understand.”

One notable change from the 2021 proposed rule, Burniston pointed out, which was likely inspired by the public comments, was an increase in the reporting threshold from 25 covered originations to 100 covered originations. Under the final version of the rule, lenders that do not originate at least 100 covered loans annually are not subject to reporting the lending data.

The bureau in its announcement did note that “lenders originating less than 100 loans per year will still be required to adhere to fair lending laws.”

The bureau also adopted an incremental implementation schedule as many commenters requested.

“I think parts of the industry will find [the additional time] very welcome,” Burniston said. “The larger reporters – those with a number of transactions greater than 2,500 annually – have 18 months to prepare for data collection beginning Oct. 1, 2024.”

Another big change from the 2021 proposal, Burniston noted, was the removal of a requirement for lenders to report race, ethnicity, and sex/gender data on a sight and surname basis if not voluntarily provided by the applicant.  In the final rule, borrowers are still requested to voluntarily proffer their demographic information, but loan officers and lenders are able to leave the information blank if none is provided.

“Although the proposed sight and surname approach was not imposed as part of the final rule, the CFPB did put other controls in place to make sure lenders are not discouraging applicants from providing that information,” Burniston explained.

One tool the CFPB is planning to utilize to prevent lenders from discouraging applicants from providing demographic information is response rate monitoring. The bureau stated it will monitor the rate at which applicants opt out of volunteering their demographic data for significant irregularities which may indicate “steering, improper interference, or other potential discouragement or obstruction” by lenders or specific loan officers. The rule further states prompt remedial actions will be taken by the bureau if such behavior is identified.

Burniston also discussed the decision to define a small business as one with $5 million or less in revenues in its preceding fiscal year. A substantial number of comments called on the bureau to lower the threshold amount, but ultimately this was one of the points on which the CFPB held to its original proposal.

“The $5 million threshold does seem to be high, especially for smaller organizations,” Burniston said. “I don’t know what effect it will have other than to increase their costs. Obviously, if you had a much lower threshold, you would have fewer transactions to report on and that would naturally cost less.  On the other hand, there are public benefits of using the $5 million threshold in order to get a more complete picture of small business lending across the country.”

The CFPB in the final rule maintained it believed the $5 million threshold struck the right balance in terms of “broadly covering the small business credit market” to fulfill 1071’s purpose, while meeting the Small Business Administration’s criteria for alternative size standards.

The bureau also indicated it anticipates this size standard will be adjusted to meet inflation, though not more than every five years.