We Had a Chance to Sit Down With the CFPB and the Only Topic on Bankers’ Minds is Section 1071

Baker Hill along with all Financial Institutions in the country have all eyes focused on the final rule of section 1071 of the Dodd-Frank Act that was announced on March 30, 2023. During Baker Hill’s annual Prosper Conference in Scottsdale, AZ  April 23- 25^th we invited representatives from the Consumer Financial Protection Bureau (CFPB) at our conference to discuss this new ruling from Congress with our clients. 

The 65 Financial Intuitions that joined us at Prosper this year had many questions for the CFPB, and with no surprise, most were focused on the final ruling. Here are some of the most discussed topics of Section 1071 from our time with the CFPB:

Definition of Covered Financial Intuitions

Covered financial intuition is defined as a financial institution that originated at least 100 covered originations for small businesses in each of the two preceding calendar years. It is important to note that that there are “covered credit transactions” that are excluded from the ruling. A few that were mentioned were HMDA reportable transactions, insurance premium financing, and securities credit.

Compliance Timeline

The compliance timeline is of the highest importance to all financial institutions with June 1, 2025, being the deadline for the first year of data to be reported to the CFPB if they have at least 2500 covered originations in both 2022 and 2023. The compliance timeline spans with the first reporting being June 1, 2025, and the last set of institutions to report that have at least 100 covered originations June 1, 2027.

Firewall Ruling

The firewall ruling had many questions and significant time was spent on this conversation.Why? The firewall rule states that an employee of a covered financial intuition shall not have access to the demographic data of the applicants’ principal owners, if that employee or officer is involved in making any determinations concerning that applicant’s covered application. For the smaller intuitions that have fewer employees in their credit processes this created many questions, but the intuition will have the opportunity to provide the required 1002.108; this notice must be provided to each applicant whose information will be accessed or, alternatively the financial institution could prove the notice to all applicants whose information could be accessed. The Bureau is proposing simple language that a financial institution could use in providing this notice.

Data Collection Requirements

This refers to a covered financial intuition shall have procedures that are “reasonably designed to obtain a response.” Basically, the financial intuitions need to ensure that applicants can easily respond to the request for applicant-provided data. Financial intuitions must maintain procedures to identify and respond to potential discouragement and low response rates.

After listening to the representatives from the CFPB and the questions that bankers were asking it was clear that all financial intuitions will have to start thinking about their data collection process, documentation, administrative needs, firewall procedures and change management in order to comply with the final ruling by the deadline. 

Section 1071 of the Dodd-Frank act is an important ruling for all financial intuitions and software companies that support financial intuitions in their lending process. Although I have highlighted a few of the important pieces discussed during our Prosper conference this is only a small portion since the Section 1071 is an 885-page document that will need financial intuitions along with their council and compliance departments to understand and to begin working on the processes and procedures for their bank or credit union.  Baker Hill has already begun to work on Section 1071 and what changes we will have to make in order to help our current and future clients.

For additional information and the entire final ruling along with tools please visit the CFPB website dedicated to the 1071 rule:

https://www.consumerfinance.gov/1071-rule/

Learn how Baker Hill is helping financial institutions prepare for the 1071 Small Business Lending Rule:

https://www.bakerhill.com/1071-small-business-lending-rule-solution

You might also like:

The Four “Don’ts” of Section 1071 and How They Will Help Your Bank

Navigating Section 1071 of the Dodd-Frank Act: A Comprehensive Guide to the Small Business Lending Rule for Financial Institutions

Author Bio

As a Senior Business Process Architect, Julia works with clients to devleop best practices and strategy to get the most out of Baker Hill's products and services.