In the last edition of this column, we covered ELFA’s comments to the CFPB regarding their proposals to implement Section 1071 of Dodd-Frank. As a reminder, Section 1071, once implemented, will require most financial institutions to collect certain demographic information
from their customers for most small business commercial finance transactions. While effective dates that trend toward 2025 may seem way down the road, once the magnitude of the task of complying with this rule is grasped, it is clear that planning
must begin soon.
What steps can equipment finance industry leaders take today to start preparing for the rule coming into effect? There are four general areas of focus that make sense to look at today, even though the rule is not in its final form, so that you can
be ready for when the rule becomes effective.
The first is a thorough top-to-bottom review of your process to determine which aspects of Section 1071 implementation you need to focus on. If you are frequently meeting with customers face to face, you are going to need a process for ethnicity surmising
in place. If you are in an application only setting, this requirement may only pop up occasionally, but you’ll still need a process to make sure that your team knows how to handle it. If you often offer customers the options of both true
leases and loans, you need to recognize that while the true lease may end up being exempted, the application itself is likely covered because loan terms were offered.
Once the magnitude of the task of complying with this rule is grasped, it is clear that planning must begin soon.
The second is training. As the previous paragraph illustrates, your front-line sales staff is going to need a lot of training on how to comply with this rule, but training in this arena is likely to approximate anti-money laundering training where
some training is going to be required for almost everyone. Getting this into your budgets and planning processes today is important.
The third is your working arrangements with vendors and brokers that you work with on a regular basis. These partners are your front-line sales team in many cases, and they are going to be key to your compliance because they are going to be accepting
The last area is your origination software systems. By definition, your origination software doesn’t collect your customer’s race today. (If it does, you will be interested in our Legal Buyer’s Guide.) Thus, changes are going to
be necessary. Some think that this information will be best collected as part of your origination system and will be as “simple” as adding the additional fields. Others think that the collection of 1071 information is best done as
a third-party process that allows the information to easily be firewalled off from your underwriting process. The best solution depends on your business model, and your organization’s tolerance for handling software upgrades in-house. Wherever
on this spectrum you end up, the time to start these conversations is now.
Finally, a few words for those that think that this may still go away. The House of Representatives voted to expand Section 1071 last year to include inquiring about sexual orientation of principal owners. The final vote included 33 Republicans. The Senate
has never shown any desire to wade into Section 1071. While there almost certainly will be challenges for the government in implementing this rule, the CFPB has a lot of regulatory inertia right now in their process, and the general political will
to pare back this rule is on the wane rather than the wax. Even if the political environment in Washington changes after the 2022 elections, the likelihood of Section 1071 going away entirely is very low.