Last week — roughly 8 1/2 years after the CFPB published a letter to financial institutions promising to develop rules “expeditiously” — the CFPB held an information-gathering symposium on Section 1071 of the Dodd-Frank Act. Section 1071 amended the Equal Credit Opportunity Act to require that financial institutions collect and report information concerning credit applications made by women- or minority-owned businesses and by small businesses.
As we previously noted, once Section 1071 is implemented, institutions will be required to collect information regarding the race, sex, and ethnicity of the principal owners of small businesses and women- and minority-owned businesses. Collection of this information is designed to “facilitate enforcement of fair lending laws,” among other things. Applicants can refuse to provide required information, but the financial institution must retain the required demographic information that it collects and submit it to the CFPB. Section 1071 mandates that, where feasible, a financial institution’s underwriters, officers, employees, or affiliates involved in making credit determinations should not have access to this demographic information, and applicants must receive notice if those individuals do receive access to demographic information.
While the CFPB is responsible for drafting rules to implement Section 1071, it had not previously taken significant steps to meet that obligation other than reporting on some preliminary research it conducted in 2017. The CFPB had moved the Section 1071 rulemaking to “long-term” status. However, in its Spring 2019 rulemaking agenda, the CFPB indicated that it expected to resume pre-rulemaking activities related to Section 1071.
There has been significant industry pressure to address Section 1071, and interest groups have filed a lawsuit arguing that the CFPB’s failure to implement regulations violates the Administrative Procedures Act. In a complaint filed earlier this year, plaintiffs asked the court to order the CFPB to propose and finalize a Section 1071 rule within six months. Two days after the symposium, on November 8th, the Bureau argued that the court should not grant the plaintiff’s wish for a writ of mandamus to compel agency action because, among other reasons, there is no statutory deadline, rushing to issue a poorly-designed rule could harm small businesses, and any delay was caused by CFPB’s leadership transitions and resource constraints.
The CFPB also stated that it has a plan to complete the rulemaking promptly. Specifically, the CFPB said it intends to release a SBREFA outline by November 2020. (The CFPB is required to conduct a small business consultation process pursuant to the Small Business Regulatory Enforcement Fairness Act of 1996 before issuing a proposed rule.) A SBREFA panel will then issue a report within two months after the panel is officially convened. Once the SBREFA process concludes, the CFPB says it will move “expeditiously” to issue a proposed rule. It estimates that could take approximately 3-12 months. Finally, the CFPB generally assumes that it takes at least 9 months after the close of the comment period before a final rule will be ready for release. Based on those estimates, it seems likely the CFPB could not issue a final rule before late 2022, and the effective date could be significantly later.
Symposium speakers had a variety of perspectives on Section 1071.
- The business-lending market is complex. Director Kraninger noted the vast array of loan products and providers operating in the roughly $1.4 trillion small business financing market. Some participants somewhat echoed her comments. Multiple panelists stated the need for rules that clearly apply only to small business loans (rather than large commercial loans).
- Lenders have concerns about information collection practices. Panelists expressed four primary concerns related to Section 1071 information collection:
o Ability to rely on self-reported data. Speakers asked the CFPB to clarify that lenders will be able to rely on application information provided by businesses seeking loans, rather than be required to independently verify information submitted.
o Duplicate information collection regimes. Panelists raised concerns about what financial institutions should do if an applicant for a commercial loan refuses to provide the demographic information required by Section 1071 but has otherwise provided that information to the financial institution in connection with a consumer financial product.
o Data privacy. Panelists expressed concerns about rules that would report sensitive business information or application numbers to the CFPB, as that information could be used to reverse-engineer the identity of a particular applicant or business owner. They also urged the CFPB not to publicly disclose loan-level data.
o Increased compliance costs. Many industry participants expressed concern that complying with Section 1071, particularly in the absence of clear rules, would drive up compliance and data security costs for business lenders.
- Testing may show that small business and consumer lending are subject to similar discrimination-related concerns. Panelists from some organizations argued that recent testing has shown that banks sometimes provided friendlier service to and sought less documentation from white testers seeking business loans as compared to black and Hispanic testers.
- There was considerable disagreement over whether Section 1071’s requirements will impose a burden on lenders. As mentioned above, many of the panelists, particularly those from think tanks, thought that Section 1071 would impose burdensome collection requirements. Others argued to the contrary that financial institutions already regularly collect and report comparable information.
Mayer Brown continues to track developments related to Section 1071 and fair lending laws and regulations. The panelists’ prepared remarks and a video replay of the symposium can be accessed here.