Texas Hold 'Em or Fold 'Em: Section 1071 CFPB Small Business Lending Rule

Yesterday, July 31, the U.S. District Court for the Southern District of Texas issued a limited preliminary injunction on the Small Business Lending Rule (Section 1071) for banks that are part of the Texas Bankers Association (TBA) and/or the American Bankers Association (ABA). This is something I knew was going to happen. Right now, it does seem likely that for these TBA and ABA plaintiffs, the implementation date of the final rule surrounding Section 1071 will be postponed while we await the Supreme Court’s decision in CFSA v. CFPB. This case will determine the constitutionality of the funding of the CFPB. In my role as the head of product direction here at Baker Hill, I have already received a lot of questions around “what is next for Baker Hill” regarding this news and the injunction. To quote “The Gambler,” “You got to know when to hold ‘em, know when to fold ‘em, know when to walk away, and know when to run.” In other words, we are going to keep working on this functionality because we believe that the cards on the table will all be in favor of Section 1071 coming to be.

The Basis of the Injunction

On April 26, the Texas Bankers Association and Rio Bank based out of McAllen, Texas filed a complaint in the U.S. District Court for the Southern District of Texas challenging the Consumer Financial Protection Bureau’s (CFPB or Bureau) final rule under Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The plaintiffs relied heavily on the Fifth Circuit’s decision in Community Financial Services Association (CFSA) v. CFPB, finding the CFPB’s funding structure unconstitutional and, therefore, rules promulgated by the Bureau invalid. The plaintiffs also argued portions of Section 1071 violate various requirements of the Administrative Procedure Act (APA).

Now I am not going into constitutional law here (although I love the Federalist Papers and the Constitution), but these were the big drivers in the injunction. The very existence of the CFBP will determine whether 1071 lives or dies. I am going to put my chips on consumers being the driver here, so this will be the key driver in keeping the CFPB and 1071 alive.

Counting Cards and Reading Poker Faces

This is not the first time a regulation has been challenged. If we learn from the past, I would like to introduce you to two old friends of mine — Red Flag Rules and CECL.

Red Flag Rules were born out of the 2003 Fair and Accurate Credit Transactions Act (FACTA), and most everyone agreed that it would help the industry address Identify likely business-specific identity theft red flags, act to prevent and mitigate harm when red flags were identified, and in general help make lending safer. At that time, Baker Hill worked to get this out well before the enforcement date. But as life in banking regulations would have it, there was one delay and then another delay and even one more delay. Finally, in 2010, the rule kicked in, and we were helping banks officially monitor those risks. But actually, we were doing it years before, because we saw the business benefit of minimizing fraud or other red flags. Although the delays happened in the industry, Baker Hill continued to progress and the financial institutions that used us minimized risk.

CECL was no different. Implementation delays after delays, but the banks and credit unions that pushed forward had a better view of risk and reserves and are stronger for that.

With 1071, while we will be sensitive to what we can ask and address, I believe that those who embrace it will have the ability to expand markets and coverage and help their local communities.

FinTech is Here to Help

Other claims in the court case are that section 1071 was a burden to many of the plaintiffs. That’s where firms like Baker Hill are here to help. Over the past months, we have talked with banks and credit unions across the country and have discovered what some of their pain points are when it comes to section 1071 and what we can do to specifically address that. This is going to result in a user experience — both for the borrower and for the banker — that will be positive and make the burden much less than it would be without a fintech partner.

Baker Hill is also taking the approach that by increasing our odds for success by bringing in additional partners that address the regulatory landscape, we increase our chances for you as our client to win at Section 1071. By talking to other technology providers that will support 1071 reporting, we are able to ensure a very robust solution for this regulation. Connecting with technology, compliance, and frontline application-taking bankers, we are minimizing the burden from this regulation and making sure that when the CFPB requires the data, you have a winning hand.

We will be watching the litigation to see whether the mandatory compliance dates of the rule are stayed while the case is pending, presumably to await the Supreme Court’s decision in CFSA. In the meantime, we are delivering the best solution in the industry, because to quote Kenny Rogers and “The Gambler” one last time, “There’ll be time enough for countin’, when the dealing’s done!”

Author Bio

With more than 25 years of experience in the financial services industry, Mike Horrocks possesses a unique and extensive blend of financial expertise, technology skills, process redesign abilities and solution management experience. Horrocks’ background enables him to create go-to-market strategies for new solutions, help clients convert strategies into revenue generating initiatives and forecast market direction.

As the Vice-President of Product Management at Baker Hill, Horrocks’ responsibilities include the identification and development of new market opportunities in the business of lending, risk management, and analytics for financial institutions. Mike holds a MBA both in International Finance and Venture Technology Management from Indiana University and a B.S in International Finance from Brigham Young University.

Before joining Baker Hill, he held executive positions within several other organizations, including Experian, Profit Technologies, SAIC, Broadway and Seymour (FIS), Zions First National Bank and Zions Data Corporation.

Horrocks is a member of many associations including the Risk Management Association and Bankers Without Borders. In his free time, he enjoys traveling internationally with his wife and five children.