Section 1071 Moves to the Regulatory Agenda

Since Dodd-Frank was enacted more than nine years ago, Section 1071 has loomed over the commercial finance industry like a dark cloud threatening to produce rain. In the initial years after passage of the measure—which would require the Consumer Financial Protection Bureau to collect and report certain small business lending data—the fledgling CFPB was concentrating on getting its feet on the ground and working on their highest-priority regulatory projects. After that initial stage, the CFPB stated that they would work on Home Mortgage Disclosure Act regulations, and then use that experience to inform their work on Section 1071. In 2017 a burst of activity led to the issuance of a Request for Information, which gave little insight into the regulatory approach that the CFPB would take. When Richard Cordray left the CFPB in 2017, Section 1071 was one of the few items left undone, and really not even started, during his tenure.

Throughout all of this, one thing remained true: a major part of the reason Section 1071 has never been put into force is because it has the potential to be extremely disruptive to commercial finance and it is an extremely difficult regulatory project from all perspectives. Most commercial lenders will want a limited rule (or for the rule to magically go away) but consumer groups want every piece of information imaginable to be collected. The collection of the information is going to be very challenging from a technological perspective with huge privacy and security issues at play. The details of the regulations are perhaps the thorniest of all—the outcomes of decisions on what information will be collected and from whom could lead to dramatically different impacts on the commercial finance marketplace. In short, if it were easy, it would have been done already.

There are huge questions remaining to be resolved

It is with this history behind us that the CFPB, now led by an appointee of President Trump, Kathy Kraninger, has placed Section 1071 on its Regulatory Agenda, with some sort of action, albeit initial action, expected in January of 2020. Earlier this year, ELFA representatives met with senior officials at the CFPB who indicated that they intend to issue regulations. The timeframe for something more concrete is assumed to be Inauguration Day 2021. This date is not random for obvious reasons, and it is a safe assumption that this CFPB believes that they will issue better rules than a future CFPB, and extending it beyond that date puts political wildcards in play.

What this regulation will look like is very much up in the air. There are huge questions remaining to be resolved. While industry has heavily focused on the definition of small business, that is one of the easier issues to resolve. The issues of how the information will be collected, what types of companies might be exempted from collection (e.g., publicly traded companies) and whether certain transaction types will be exempted are but the beginning of the list of difficult unresolved issues.

What is known is that, a year-and-a-half from now, it is likely that the broad contours of how Section 1071 will be in force will be clear. While the regulation may not be final by January of 2021, and the compliance deadlines may provide some relief, in the scope of Section 1071 history, this is right around the corner.

ELFA will remain engaged with the CFPB throughout this process to ensure that the CFPB is cognizant of the impacts different regulatory approaches would have on our industry. In the meantime, however, ELFA companies should be examining their origination processes to see how they would incorporate collecting this information. Stay tuned for future updates on this topic in this space, the ELFA Washington Report e-newsletter and other ELFA communication channels.