ON MARCH 30, the Consumer Financial Protection Bureau (CFPB) released its final rule implementing Section 1071 of Dodd-Frank. The 888-page rule and the 123 pages of accompanying directions are complex and will require institutions to review them thoroughly in order to be compliant. Both documents and other supporting materials can be found on the CFPB website (https://www.consumerfinance.gov/1071-rule/).
The rule will require financial institutions to collect information about credit applicants and report it to the CFPB on an annual basis along with extensive financial information associated with the application’s disposition, including extensive pricing information. Under the CFPB’s definitions most equipment finance companies are covered as financial institutions. The information required to be requested/collected includes at least 26 data fields, and arguably many more, with multiple possible responses to each. As was proposed in the rule issued in the fall of 2021, information relating to the application and its disposition appears to be required to be reported regardless of whether the customer provides demographic information.
Notably the final rule maintains the exemptions for leases as defined by UCC 2A, an issue ELFA advocated to keep in the rule. Additional items that we advocated for that were decided in ELFA’s favor were the ability to rely upon applicant-provided data, a longer implementation timeline, no requirement for covered entities to provide 1071 information upon request from members of the public, and a removal of the provisions requiring the surmising of ethnicities. Additionally, factoring and trade credit also remain exempted. Interestingly, the rule specifically rules out voluntary collection of information on transactions that are not covered. This creates an interesting scenario for leases that may be close calls on characterization as a lease under 2A or loans.
The timeframe for implementation is staggered based on the institution’s volume of annual originations. Institutions processing more than 2,500 covered originations on an annual basis will be required to begin collecting 1071 information in October 2024. Institutions with over 500 covered originations will be required to collect beginning in April 2025 and those with more than 100 covered originations will be required to collect beginning in January 2026. Institutions with fewer than 100 originations appear to not be covered institutions under the rule.
As with any complex regulation, there may be developments to come and nuances that come to light upon further review. One area that is particularly ripe for thorough review is how vendor finance and broker finance will operate under the rule. The rule does require that the applicant-provided information be requested prior to decisioning the application. It further seems to allow the collection of the information by a broker or a vendor. The rule does not lay out any specific process that could be utilized here. ELFA’s initial read is that ELFA members, presuming they’ve received an application for a covered transaction, will be required to either have their vendors or brokers request the information at the application stage, or go back out to the customer before decisioning to request this information.
Another area to emphasize: The CFPB went to great lengths in their announcement to emphasize that they will focus enforcement on areas where they believe that institutions may be discouraging reporting of demographic information. This is an area for ELFA member companies to focus on. One can see how the scenario of a sales team member telling a customer that they don’t need to fill out a form because it will slow the transaction is discouraging the provision of demographic information. However, a less obvious example is using a hyperlink to a form or third-party information collector when the rest of the application requires a click-through, a scenario specifically highlighted by the CFPB as problematic.
ELFA will be active in both the legislative and regulatory arenas on this matter in the coming weeks. We will also begin a multi-stage process to help ELFA members get ready for the rule before their applicable compliance deadline arrives. For more information, contact Andy Fishburn, ELFA’s Vice President for Federal Government Relations, at [email protected].
The rule will require financial institutions to collect information about credit applicants and report it to the CFPB on an annual basis along with extensive financial information associated with the application’s disposition, including extensive pricing information. Under the CFPB’s definitions most equipment finance companies are covered as financial institutions. The information required to be requested/collected includes at least 26 data fields, and arguably many more, with multiple possible responses to each. As was proposed in the rule issued in the fall of 2021, information relating to the application and its disposition appears to be required to be reported regardless of whether the customer provides demographic information.
Notably the final rule maintains the exemptions for leases as defined by UCC 2A, an issue ELFA advocated to keep in the rule. Additional items that we advocated for that were decided in ELFA’s favor were the ability to rely upon applicant-provided data, a longer implementation timeline, no requirement for covered entities to provide 1071 information upon request from members of the public, and a removal of the provisions requiring the surmising of ethnicities. Additionally, factoring and trade credit also remain exempted. Interestingly, the rule specifically rules out voluntary collection of information on transactions that are not covered. This creates an interesting scenario for leases that may be close calls on characterization as a lease under 2A or loans.
The timeframe for implementation is staggered based on the institution’s volume of annual originations. Institutions processing more than 2,500 covered originations on an annual basis will be required to begin collecting 1071 information in October 2024. Institutions with over 500 covered originations will be required to collect beginning in April 2025 and those with more than 100 covered originations will be required to collect beginning in January 2026. Institutions with fewer than 100 originations appear to not be covered institutions under the rule.
As with any complex regulation, there may be developments to come and nuances that come to light upon further review. One area that is particularly ripe for thorough review is how vendor finance and broker finance will operate under the rule. The rule does require that the applicant-provided information be requested prior to decisioning the application. It further seems to allow the collection of the information by a broker or a vendor. The rule does not lay out any specific process that could be utilized here. ELFA’s initial read is that ELFA members, presuming they’ve received an application for a covered transaction, will be required to either have their vendors or brokers request the information at the application stage, or go back out to the customer before decisioning to request this information.
Another area to emphasize: The CFPB went to great lengths in their announcement to emphasize that they will focus enforcement on areas where they believe that institutions may be discouraging reporting of demographic information. This is an area for ELFA member companies to focus on. One can see how the scenario of a sales team member telling a customer that they don’t need to fill out a form because it will slow the transaction is discouraging the provision of demographic information. However, a less obvious example is using a hyperlink to a form or third-party information collector when the rest of the application requires a click-through, a scenario specifically highlighted by the CFPB as problematic.
ELFA will be active in both the legislative and regulatory arenas on this matter in the coming weeks. We will also begin a multi-stage process to help ELFA members get ready for the rule before their applicable compliance deadline arrives. For more information, contact Andy Fishburn, ELFA’s Vice President for Federal Government Relations, at [email protected].
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EL&F magazine article
SECTION 1071
Federal Insight
Column
2023