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Well, the CFPB did it.
They released their final rule that implements section 1071 of the Dodd-Frank Act. As we’ve said before, the CFPB had told us they would release it by the end of the 1st quarter, and they did just that.
And guess what? There is some really good news for a number of you - some of you won't be subject to this rule.
Now, this rule is brand new to all of us which means that our team doesn’t really have many answers yet - but we do have some. So, here is what we want to do with this article:
Give you a quick overview of what we know and answer questions we would have at this time;
Explain the resources we plan to offer in the future;
Give you a way to sign up to get notified of every 1071 resource we create. (Quick link: www.compliancecohort.com/1071-wait-list)
So without further ado, here we go.
As expected, this rule is huge. Its 888 pages in a PDF to be exact. While this is obviously going to take some time to work through, here are a few of the key pieces we know at this point:
Regulation B. As expected, the CFPB is creating a Subpart B to Regulation B to store this new rule. In short, the existing Regulation B as we know it will now become Subpart A, and the new 1071 rule will become Subpart B of regulation B. Subpart B will have 14 different sections and will be a beast, just like Regulation C is for HMDA.
Who Must Comply-Transactional Coverage. The great news here is that this rule is going to exempt lenders who make less than 100 covered small business loans per year. While the proposal had proposed a lower threshold of 25 covered loans, the final rule covers lenders making over 100 covered small business loans per year. The CFPB states that this will account for more than 95 percent of small business loans by banks and credit unions. So, if you are a smaller institution that doesn't do too many commercial/small business loans, this rule may not apply to you.
Who Must Comply - Institutional Coverage. The final rule defines a "covered financial institution" as including banks and credit unions, but also other lenders like online lenders, platform lenders, farm credit system lenders, commercial finance companies, nonprofit lenders, and others.
Required Compliance Dates. In their release, the CFPB explained that they found key differences in how large financial institutions would implement the rule, compared to relationship-based local lenders. Therefore, the larger institutions have an earlier/sooner compliance date than smaller lenders. Specifically, the required implementation dates to begin collecting data are as follows:
Large Lenders (2,500+ loans): October 1, 2024;
Medium Lenders (500 - 2499 loans): April 1, 2025; and
Small Lenders (100 - 499 loans): January 1, 2026.
Data to Be Collected. The final rule requires covered financial institutions to collect and report certain data, including:
Data points the financial institution generates (like application date, action date, ect);
Data points about the applicant (like credit type, number of people working the applicant, and gross annual revenue of the business); and
Demographic information (like whether the business is minority-owned, women-owned, or LGBTQI+-owned).
Reporting Deadlines. The biggest concern here that most HMDA reporters have is whether the deadline to report 1071 data will be at the same time as the HMDA deadline, which is March 1 of each year for most small and mid-sized reporters. In the final rule, the CFPB is requiring that 1071 data be reported by June 1 of each year. For example, data collected for 2024 must be reported by June 1, 2025. This is great news for HMDA reports who will also be working on 1071 data as now "HMDA Hell" gets expanded from 2 months to 5 months (yes - that is sarcasm!).
The Firewall Rule. A big discussion around 1071 has been the mandatory provision Congress placed in the Dodd-Frank Act - a requirement to limit certain data to certain employees - i.e. a firewall. The final rule does prohibit employee who are "involved in making any determination concerning the applicant's covered application" from being able to access an applicant's demographic responses. That said, the rule does provide an exception that should help smaller lenders, which is basically a disclosure that can be provided to (up to all) applicants..
Filing Instruction Guide. As we expected, the CFPB has created a "Filing Instruction Guide" (FIG) that is very similar to the FIG used by HMDA reporters. The interesting thing with this guide is that the layout is web-based (HTML) rather than a PDF as this is a true CFPB-owned guide, while the HMDA FIG is owned by the FFIEC. Upon first review, it seems that this web-based format will be helpful as it appears it will be easier to jump from section to section of the document. If you are a HMDA reporter who uses the FIG as your guide, this is going to be a great resource for you.
Streamlined Data Collection Form. In the final rule, the CFPB has added a new Appendix E to Regulation B, that includes a sample data collection form. This form is two pages long and appears pretty straightforward. The biggest challenge with collecting this information, of course, will be to get your commercial lenders - who often previously haven't had to comply with detailed rules and regulations like this - to collect this form from their applicants. In addition to the Demographic Information that we already collect with HMDA data (and Reg B), the sample form includes two additional collections:
Business Ownership Status. What is your business ownership status:
Minority-owned business
Women-owned business
LGBTQI+-owned business
None of these apply
I do not wish to provide this information
Number of Principal Owners. How many principal owners does your business have? (Check one)
0
1
2
3
4
As you can see, it appears that the 1071 final rule really was designed with a "HMDA backbone" as they CFPB previously told us it would. This means that if you have HMDA reporting knowledge, you are going to be in pretty good shape to implement this rule.
Going forward, we plan to offer a number of resources to assist with implementing this new 1071 rule. At this point, we plan to provide the following assistance:
Email Updates. We will be sending occasional email updates to our basic (free) members to keep them informed of the 1071 information as we feel we should share it. Obviously, this is email #2.
Class - Introduction to the 1071 Final Rule. By mid April, we plan to release a new class: Introduction to the 1071 Final Rule. This program will provide an overview of the new rule by helping attendees understand who must comply with the new rule, when reporting must begin, what data must be reported (general overview), and what steps need to be taken to start implementing the new rule.
1071 School. Over the next few months, we will be working to create a comprehensive 1071 school that will help institutions subject to the new rule learn the ins and outs of what they need to do in their shops to ensure compliance.
In offering these resources, we will likely be creating some guides and cheat-sheets, though it is a bit early to know exactly what we plan to create.
If you would like to learn more about the 1071 resources we create, you can join our 1071 wait list. When you do this, we will make sure you are aware of the 1071 resources we create, whether free of for sale in our store. To join our 1071 wait list, complete a very short form by clicking the below button.
In conclusion, we hope that this email was helpful for you to understand the basics of the final rule that was released by the CFPB yesterday. This rule is obviously brand new, so we will be doing our best to work through this and provide you with as many resources as possible. That said, if you have an idea for a resource you would like to see, let us know (by going to our contact us page) and we will add it to our list of things to consider.
