Seeking Clarity on Section 1071

ON NOV. 6, 2019, the Consumer Financial Protection Bureau (CFPB) held a symposium on the small-business lending marketplace and the future of Section 1071. Section 1071 of the Dodd-Frank Act will, once in force, require certain demographic information to be collected about credit applicants and provided to the CFPB. As mentioned in the last edition of this magazine, the CFPB is moving deliberately on Section 1071, and while the speed of their action has significantly accelerated in recent weeks, progress on Section 1071 is still glacially slow. Some key takeaways from the symposium include the following.

Open Issues Abound

Somewhat shockingly, nine years after the passage of Dodd-Frank, it seems like every issue is still an open issue. During the symposium the panelists were asked to discuss issues that are elemental to any final rules. For example, during their opening remarks the CFPB officials referred to Section 1071 as requiring the collection of certain information about credit applications by woman-owned, minority-owned or small businesses. However, from the discussion, it is clear that there is no clarity on whether the rules will require collection from only businesses that fall into those categories, or if information will be required from every applicant, including publicly traded companies.

Headline Issues Are Getting the Attention

During consideration of Section 1071 and in the years afterwards, the definition of small business has been a key issue. Everyone involved with this process has agreed that a clear definition is key. Inherent in that belief is that the Small Business Administration (SBA) definition is unworkable. The SBA defines small business based on NAICS codes so that, in order to be a small business, an apiculture (beekeeping) small business must have less than $1 million in gross revenues, while a food product machinery manufacturer must have 500 or fewer employees. While this is important, the issue here is really bureaucratic, and has provided a smokescreen for thornier issues like the fact that determining ownership of a small business can be quite complex when there are multiple owners, or the owner is not completing the application.

Community Investment Groups Have a Big Appetite

The National Community Reinvestment Coalition was one of the groups represented at the symposium. Their appetite for data collection under this rule is not small. They earnestly believe that commercial financiers collect this information already, and it is not a big deal to require it to be submitted to the government. First this is not true; businesses are currently prohibited from collecting racial or almost any gender information about their customers and, second, it ignores the fact that significant portions of the commercial finance marketplace currently have no federal functional regulator, so any regulatory regime is all new.

Winners and Losers (Exemptions and Inclusions)

It is clear that many of the symposium participants have determined that there may be a parochial benefit to partnering with the CFPB in this regulatory effort and pushing for more regulation in some areas and less in others. For example, one panelist specifically indicated that annual percentage rates (APR) should be collected as well as information about merchant cash advances. The logic is that if APR is collected, many of the lenders charging triple-digit APRs might exit, leaving the market smaller and possibly more reputationally sound. Another indicated that certain types of activity, including leases, were obvious candidates for collection, while others might not be. It was also suggested that third-party provision of some information, such as revenues, might be desirable, reducing the amount of information required to be collected by the financier.

It will be left to the CFPB to determine which portions of the financial services industry to exempt, and which data elements to include, and those decisions will have significant impacts on the commercial finance marketplace. One can hope that the CFPB will start making some of the big decisions publicly, so that the market can rationally prepare for this regulatory regime.

For those interested, the entire symposium is available on the CFPB’s website at http://bit.ly/2WTrwT5.