The Section 1071 final rule is a mandate implemented by the Consumer Financial Protection Bureau (CFPB) as part of the Dodd-Frank Act. This rule requires financial institutions to collect and report data on lending to small businesses, particularly focusing on the fair access to credit for all small businesses.
Who does the Section 1071 final rule apply to? The Section 1071 final rule applies to all covered financial institutions, including banks, credit unions, and other lending entities. The rule specifically targets institutions that engage in small business lending.
Under the Section 1071 final rule, financial institutions are required to collect three types of data: application-level data, such as the amount applied for and the type and purpose of the financing; individual demographic data for women-owned, minority-owned, and small businesses; and data about the institution's action on the loan application, such as the action taken, the date of action, and the principal amount.
The purpose of the Section 1071 final rule is to facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities for women-owned, minority-owned, and small businesses.
The Section 1071 final rule impacts financial institutions by requiring them to change their data collection and reporting practices. Institutions will need to update their systems and procedures to comply with these new requirements. This may include training staff, updating software systems, and regularly monitoring and auditing their compliance.
Mitch Woods: Well, welcome back to Baker Hills podcast Lending made easy. Today's episode's gonna be an informative one as we dive into the waters of the significant financial regulation that's been making waves - the Dodd-Frank Acts section 1071. For those who, may be living under a rock, the Dodd-Frank Act is a crucial piece of legislation that was just put into place after the financial crisis of 2008, with the aim of enhancing the financial stability and consumer protection.So fast forward to today and the Consumer Financial Protection Bureau has finally released the final ruling on 1071 back in March, and created a lot of buzz. So you might be asking how will the CFPB's final ruling impact the lending landscape? So to help us navigate through this complex topic, we have a couple of special guests today - a true lending lighthouse, Mike Horrocks, and our compliance compass, Julia Bedell. So welcome, to the show, Mike and Julia.
Mike Horrocks: Hey, thanks Mitch for having us on the podcast today. And, love the, maritime references there. So let's, let's get into a safe harbor here if we shall, right. With,section 1071
Mitch Woods: Absolutely.
Mike Horrocks: So actually, one thing, it's interesting you did mention that this came out of the 2008 crisis is literally section 1071 of the Dodd-Frank Bill that went through. And I think it's really important to maybe move away from section 1071. So you may hear me today, refer to it as a small business lending rule because that's really what it's all geared towards, right? And as we describe, again, for those people that have been under a rock, as you mentioned, right, the 1071 or the small business lending rule is really designed initially to help make sure that banks and credit unions are lending to markets that frankly have been underserved in the community. Making sure that when it comes to women and minority owned businesses, that we are truly making sure that we're giving fair opportunity for those small businesses and for them to, get the funding that they need and be able to be successful, right? And be on the same playing field that other businesses have. So that's really what the beginning of it came from, right? and so I see that as a great opportunity for banks and credit unions. Now it's gonna come at a price, right? There is additional monitoring and things that, that come from that but that's how I view it at that 10,000 foot level. I don't know. Julia, what are you seeing? Because you're on the road with a lot of clients, what's the general take for the market around 1071?
Julia Bedell: I agree with you, Mike. It's been discussed for a long time. We've all been waiting for this ruling to come down, and I think for the financial institutions. Their concern over any new regulations always is going to be how they're gonna implement it. Making sure that they are from a regulatory, doing the things that they need to do, and, if they have any, special circumstances in their institution, how they're gonna handle that. So I think that's always the concern of the financial institutions when a new regulation comes down.
Mike Horrocks: I would absolutely agree with you. I mean, here at Baker Hill, one of the things we wanted to make sure from a product perspective, and since I, my, my responsibilities is over the product, we wanted to make sure that we have a clear interpretation of it. So, we've had focus groups over the past couple months.
Over a dozen institutions have been represented in those focus groups, and it's really interesting to see how, I would say different, but at the same time, they're congealing around key points of the regulation. But that's the fun point about any reg, right, is it comes up to interpretation and how you wanna use it.
So it will be, it'll be fun to see how the landscape adapts to this. And I say that with a little bit of an asterisk because of the Texas courts and what they did here just recently with the injunction, right? For the Texas Banker Association and the ABA banks. So, that's all waiting on the larger case right around the constitutionality of the CFPB. I'm kinda leaning toward the fact that the, it's gonna continue to get its funding, the CFPB will, and so these rules will continue in place, but that's where I think it's, back to, the key point, the regulation and the interpretation of it is really gonna be interesting to see what happens in the industry.
Julia Bedell: And that's been interesting to watch listening to all of our clients and the different aspects and interpretations or different parts of it that are slightly different from one institution to another. Which I think is one of the key things that institutions look at is the interpretation of it and how they're implementing it.
But it's been great to have a collective thought of different folks that we've talked to and what their interpretation is and how this should be implemented, to keep everybody within regulation.
Mike Horrocks: Back in the spring when Baker Hill had our Prosper event, we were fortunate enough to have, two individuals from the CFPB. We had Alan and Nate that both address, Alan from the policy side and Nate from the technology and the procedural side, when we had them there. I hosted one session and Julia, you hosted another session with 'em. What was the big takeaway that you recall for those that are listening, that came out of the session that you hosted, Julia?
Julia Bedell: I think the biggest, question, that seemed to be fairly consistent was for the banks, how they were gonna handle the information that they needed to collect by not having credit people inside the institution, seeing that people who are making the decision on the loan, seeing access to that information, that seemed to be something that was a big discussion, talking point, in our session.
Mike Horrocks: Yeah, and I would say in mine it was really interesting. I've always looked at the. This reg in the CFPB is, this is one of those thou shalt do it just because, right? You're checking the box, you're following the rule. I would say the big takeaway that I got from this is I really started to appreciate a little bit more, I think what the CFPB is trying to do.
And that is have an understanding of what's happening in the small business arena. Right? There's a lot of studies that led up to this rule and at the end of the day, I think that's what the CFPB is wanting to do with all this data as well, is continue to go ahead and see, what's happening for small businesses? Are they getting the funding that they need? Are they, getting access to the capital and the growth that they need for their small businesses?
Julia Bedell: I agree with you, Mike. And then when you circle back to what you said earlier, and that is, it's really about going back to the small business owners and making sure that are the minority groups and the women and all, are they getting access to the funds that we need. We know that they're growing and so I think that is a very key point to this in, in, in what they're trying to do.
Mike Horrocks: Yeah. Hey Julie, I got a question for you. 'cause we did something at Zions Bank when I was a banker there where we actually had dedicated resources for women and minority business owners right? We had, obviously they could go to any branch, but we had a couple branches that were in areas like in downtown Salt Lake and others that were uniquely identified with that and folks with either different language skills and things like that would be assigned there. Are you seeing that more predominantly in institutions or what ways are you seeing beyond collecting the data that banks are helping with this kind of outreach?
Julia Bedell: And I have seen that, even in my past life in banking, we had seen that in the institution I worked in. They actually end up trying to partner up with specific, organizations inside there, depending on their community. I also think the communities that have a lot of diversity, you guys know I came from South Florida, so therefore it was something that we were very aware of just due to the diversity of what we had going on down there in business.
But I do think that financial Institutions do look for organizations to try to tap into getting more of those folks that they want, in minorities and things like that, because sometimes these folks just don't walk right into the banks. The banks have to go out and do some things to find those type of minority owners or owners that are in specific groups that maybe they haven't accessed before.
Mike Horrocks: Yeah, no, that I, so I think it's beyond, like, say it's beyond just collecting the data, right? It's also, what kind of processes can I put into my organization to support that and help that. So what do you see as the biggest challenge for an institution when it comes to the small business lending rule?
Julia Bedell: I think really, because right now that small business rule is based off, volume and there's different types of volumes for different institutions and different timeframes right? I think sometimes that can be a little confusing or makes some folks anxious, right? 'cause they wanna make sure what group are they really following and do they know, right?
Especially when you have, some of the institutions that have smaller, maybe smaller amounts of credits that they do every year. So I think that might be one of the things for the folks that aren't doing a lot, what is it that they need to do? And then as they hit those different marks of certain amounts of loans,what will they have to do to grow that business? So I think those are some things that they'll think about.
Mike Horrocks: Yeah, no, I would agree with you. I think, unfortunately, I do think the rule has a little bit of a benefit more for what I'd call like, a regional bank or a larger, even community bank. But I think it's also fortunate, that because they did put those tiers they have the tier one through three and you know those tier three, those smaller institutions, I think it's January 1st, 2026 is the day they have to start looking at.
So I think a lot of kinks will be worked out of the system and there'll be a lot of good, best practices that will be great articles like an American Banker and, trade shows, et cetera. and from here at Baker Hill too, right. We're gonna be sharing our findings, out there as well.
That's cool. And just maybe wrap things up a little bit, like what would you say are some of the underlying opportunities that a bank we'll have from this? 'cause again, I think a lot of banks are just looking at it as, oh, I gotta, collect more data. Right. I got one more reg I gotta do. I got, what's the silver lining to this regulation.
Julia Bedell: Well, small business is always a fun. Oh, I've always enjoyed the whole small business lending and I think the opportunity is for the financial institutions to have some diversity in their portfolio and really engage with some incredible businesses, right? Because there's so many different businesses and ideas that folks have, and some of them can just really be and watch those businesses grow.
I mean, to be a banker and see a, a company that's only been around for a few years and watched them grow and also have access to different diversity in different companies, that was always really fun. So I think there is an opportunity if the bank, if the financial institutions would look at that opportunity of the new type of clients that they could obtain and grow, and not only just their loans, but deposits in the whole entire banking relationship.
Mike Horrocks: Yeah, no, that's exactly where I was going. And I was even thinking at it from a, just even a risk perspective, right? It's, I'm now introducing a different entire, well, not introducing, but I'm, I. I'm ensuring that I'm getting to markets that maybe were underserved, right? And now I can get access to that and diversify it from a credit perspective as well, right?
'Cause you don't know the different impacts of different communities and you know how the economy will respond to that, right? Because I guess, again, with the economy, everyone's like, okay, what's around the corner? Right? Because everyone keeps thinking that recession's gonna be here sometime soon. But we've been saying soon, for the, what, the past couple years. I think it's great that it's happening. Again, there's definitely, back to Mitch's maritime references, right? It's gonna have some choppy waters. That as we go through that,we're gonna take on a little water here and there as we collect this data. And I think for some of the institutions they're going to, be looking for that kind of guidance in the direction. And I think that's the one I guess other key thing I would say for a lot of folks that are maybe listening to this is be aware of where you're getting your data on 1071.
There's a lot of people that are out there trying to just make a dollar or so on this, right? There's a lot of different webcasts that are out there. There's a lot of different thought leaders, but I'd say, make sure that you're actually working with folks that are working directly with the CFPB and are, following the reg, right, and also that are working with other institutions because that kind of group think from like-minded institutions I think is really important, especially as we're all coming into this together. And I would also say, go to the CFPB. I'm so impressed with what they have. In terms of resources, there's a lot of great resources just out there on their own.
They're really wanting to help institutions make the most of this 'cause again, my big takeaway from the session I had, I think they're really doing this not to penalize banks, but they're underlying key driver here is what can we do to help promote small business 'cause it's just small business is just so important in the local economies. And so, yeah, that's where I'm looking at it.
Mitch Woods: We say that a lot, right? Small businesses are important and community banks and credit unions are critical in getting 'em the resources that they need as well. So Mike, Julia, thank you both for giving us a good 10,000 foot view, maybe even coming down a little bit further to a 1,071 foot view, if you will, of the CFPB's new regulation and giving us maybe a new perspective on the final ruling as well.
I like that it is a new regulation that could be a little bit difficult, but there's some benefits on the back end of it as well. So appreciate both of your insights there. anyone out there that's listening, if you have questions, just know that we are here to help. We have resources available for you.
Visit our website, visit the CFPB's website and reach out if you do have questions around the small business lending rule. And thanks everybody out there for listening to today's episode of Lending Made Easy.