CFGMS Admin February 20, 2024 Categories: Compliance Regulation, Small Business Funding

Section 1071 of the Dodd-Frank Act requires financial institutions to collect and report demographic data on small business credit applicants—especially those that are women-owned or minority-owned. The goal is to promote fair lending, improve transparency, and support community development. However, compliance has been delayed due to legal challenges and operational hurdles.

What Is Dodd-Frank 1071?

Passed in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act introduced a series of regulatory reforms following the financial crisis. Section 1071 of the Act amended the Equal Credit Opportunity Act (ECOA) to mandate that financial institutions:

– Collect data on applications for credit from small businesses
– Focus on capturing information related to women-owned and minority-owned businesses
– Submit this data to the Consumer Financial Protection Bureau (CFPB)

This initiative is designed to uncover gaps in credit access and inform policy decisions aimed at fostering economic equity.

What are the Delays and Legal Challenges?

Though rooted in equity, implementation of the rule has proven complex. Covered financial institutions have raised concerns over feasibility, data sensitivity, and resource constraints.

Adding to this complexity, ongoing litigation has placed a temporary stay on compliance deadlines. In particular, a lawsuit from the State of Texas questioning the constitutionality of the CFPB has paused enforcement efforts. These delays underscore the challenges of rolling out such a wide-reaching data collection mandate.

What is the CFPB Final Rule Overview?

On March 30, 2023, the CFPB issued a final rule amending Regulation B to outline how financial institutions must comply with Section 1071.

Key highlights of the rule include:

– Mandatory collection of small business credit application data
– Specific emphasis on demographic information (race, ethnicity, gender)
– Recordkeeping requirements and privacy guidelines
– Filing Instructions Guide and other tools to assist with implementation

These requirements are meant to create consistency and enhance data usability for regulators and policymakers.

Proposed Rulemaking and Public Feedback

Before issuing the final rule, the CFPB released a notice of proposed rulemaking on September 1, 2021, along with summaries, data point charts, and a methodology document. The response was significant—over 2,100 public comments were submitted.

While many stakeholders supported the intent of the rule, concerns were raised about:

1. The operational burden on small funders

2. Privacy risks tied to demographic data collection

3. The challenge of capturing data for all applicants, not just approved loans

What is the Industry Pushback and Constitutional Questions?

Trade groups, including the Equipment Leasing and Finance Association (ELFA), have advocated for delays in enforcement, citing practical limitations for lenders—especially non-bank funders.

Meanwhile, the CFPB itself faces legal scrutiny. A constitutional challenge brought by the State of Texas has reached the U.S. Supreme Court, adding uncertainty around the rule’s future.

The Road Ahead: Balancing Fairness with Feasibility

Dodd-Frank 1071 represents a significant step toward transparency in small business lending. But its path to execution highlights the friction between regulatory ambition and operational capacity. Financial institutions must prepare to:

– Adapt internal systems for data capture and reporting
– Address privacy and compliance risk
– Monitor ongoing litigation that could influence final outcomes

As legal developments unfold, the conversation around Dodd-Frank 1071 remains a critical one for funders, regulators, and small business advocates alike.