At Long Last, CFPB Issues Section 1071 Regulations

Eleven years ago, when Dodd-Frank was enacted, the equipment finance industry knew that the impacts of Section 1071, once implemented, would be dramatic. On Sept. 1, the Consumer Financial Protection Bureau (CFPB) finally issued the draft rule, and it’s a 900-page Oscar winner. 

First, the good news: True leases and trade credit are proposed to be exempt from collection under the rule and financial institutions will not have to provide their data to any member of the public who requests it but can simply refer the public to the CFPB website. On the other side of the coin, the CFPB went well beyond the statutory requirements in many ways. 

The CFPB is proposing to require financial institutions to disclose pricing in addition to the statutorily required credit decision data point (approved, denied, incomplete, etc.). The required pricing information would include, as applicable, interest rate, total origination charges, broker fees, initial annual charges, additional cost for merchant cash advances or other sales-based financing, and prepayment penalties. (Interesting question for what that means for the rules about not talking about pricing at ELFA events!)

ELFA encourages all member companies to review the rule and submit your comments to the CFPB. 

The CFPB is proposing that financial institutions will have to go well beyond whether or not the business is minority-owned and will be required to collect information about the specific minority group(s) that the principal owner identifies as. For example, the draft collection form lists Asian as a primary option, but then lists “Asian Indian, Chinese, Filipino, Japanese, Korean, Vietnamese, and Other Asian (Print Race, for example, Cambodian, Hmong, Laotian, Pakistani, Thai, and so on).” But the most striking addition to this requirement is that, if a financial institution has met with one of the applicant’s principal owners, the CFPB is proposing to require financial institutions to guess as to their ethnicity. A direct quote from the draft form reads, “Federal law requires us [the financial institution] to report at least one principal owner’s ethnicity and race based on visual observation and/or surname.”

While it is a positive development that financial institutions will likely not be required to report on covered transactions with customers that are not classified as small businesses (defined as businesses with annual revenues under $5 million), it appears that the rule requires reporting on all covered transactions for everyone else regardless of whether the customer provided any information requested under Section 1071. Put another way, there appears to be no way for your customers to not have their covered transactions reported to the CFPB.

Lastly, ELFA had hoped that the rule would adopt a fundamentally different reporting structure, but the CFPB did not take that approach. Additionally, since it was fairly clear in recent months that the CFPB wasn’t intending to adopt our recommended approach, we had hoped that the CFPB would allow the demographic information and other information that can only come from the customer to be collected after the application was submitted and after the credit decision was made. The CFPB seems to have closed the door on that idea, but, at present, ELFA intends to keep advocating for that approach.

So, what’s next? The rule is open to comment for 90 days after it is published in the Federal Register, so comments will be due in early-to-mid-December. ELFA encourages all member companies to review the rule and submit your comments to the CFPB. ELFA will also be commenting, but it is critical that the CFPB hear from as many market participants as possible. This may be the last opportunity to have your voice formally heard, so don’t miss the opportunity!