Navigating Section 1071
of the Dodd-Frank Act

The Consumer Financial Protection Bureau is an integral agency in the United States' financial sector. Its vision is to create a consumer finance marketplace that benefits American consumers, responsible providers, and the economy as a whole. The CFPB's primary responsibility is to enforce federal consumer financial laws and ensure fair, transparent, and competitive markets for consumer financial products.

Additionally, the CFPB provides invaluable educational materials and handles consumer complaints. Its role in resolving customer issues is crucial to relationship banking and maintaining consumer trust. The CFPB also plays an important role in providing consumer education, creating clear rules for financial institutions, and taking action against marketplace malpractices.

Under Section 1071 of the Dodd-Frank Act, a covered financial institution is defined as an entity that originated at least 100 covered originations for small businesses loans in each of the two preceding calendar years.  This provision aims to promote transparency and fair lending practices within the financial industry.

It's important to note that certain "covered credit transactions" are excluded from the scope of this ruling. For instance, HMDA reportable transactions, which are subject to separate reporting requirements, are not considered covered originations under Section 1071. Additionally, insurance premium financing and securities credit are also exempted from the requirements of this section.

By providing clarity on the definition of covered financial institutions and specifying the exclusions, the Section 1071 Small Business Lending Rule seeks to enhance the accuracy and comprehensiveness of data collection related to small business lending, ultimately promoting better access to credit for entrepreneurs and small business owners.

HOW MANY SMALL BUSINESS LOANS DO YOU DO IN A YEAR?

The CFPB made their final ruling on the Small Business Lending Rule to have a positive impact on small business lending without being a burden on financial institutions. Reporting compliance timelines are based on the number of covered lending transactions in the last two years.

Keep reading to learn when your financial institution will need to be prepared.

The compliance timeline has been adjusted from when it was first released, but still holds significant importance for most financial institutions. According to the regulations, the first year of data should be collected starting July 18, 2025 and reported to the CFPB by June 1, 2026, if the institution has at least 2500 covered originations in both 2023 and 2024. However, for institutions with at least 100 covered originations in two consecutive years, the timeline extends to January 1, 2026 to collect data and to June 1, 2027 for reporting. It is crucial for financial institutions to adhere to these reporting deadlines to ensure compliance and transparency in their operations. By providing accurate and timely data, institutions can contribute to the overall integrity and effectiveness of the regulatory framework.

View the image to the right taken from the CPFB Compliance Date Infosheet to see the reporting compliance timeline for your financial institution.

The firewall rule, established to protect the privacy and security of applicants' demographic data, prohibits employees or officers of covered financial institutions from accessing such information if they are involved in making determinations about the corresponding applications. This rule, although crucial in safeguarding sensitive data, presents considerable challenges for smaller institutions with limited staff in their credit processes. As a result, these institutions must implement clear and effective procedures to ensure compliance with the rule while maintaining operational efficiency.

Under the Small Business Lending Rule (Section 1071), financial institutions are required to establish and maintain robust procedures for the identification and handling of potential discouragement and low response rates. These procedures are designed to ensure that applicants have the necessary means and ease to promptly respond to requests for applicant-provided data. As a result, institutions will need to carefully consider and evaluate their existing data collection processes, documentation practices, administrative requirements, firewall procedures, and change management protocols to fully comply with the final ruling within the specified deadline. By doing so, financial institutions can effectively meet the regulatory requirements and uphold the integrity of their data management practices.