The Consumer Financial Protection Bureau (CFPB) recently issued its long-awaited final rule to implement Section 1071 of the Dodd-Frank Act. Section 1071 amended the Equal Credit Opportunity Act to require financial institutions to collect and report certain data concerning credit applications made by small businesses, including women- or minority-owned small businesses. Here’s what financial institutions need to know about the CFPB Section 1071 Final Rule.
Compliance Date Tiers
The final rule will be effective 90 days after it is published in the Federal Register. However, compliance with the rule will not be required as of that date. The rule contains “compliance date tiers” that differ depending on the number of covered originations a financial institution originated in 2022 and 2023. These tiers are as follows:
According to the rule, a financial institution must begin collecting data and otherwise complying with the final rule on October 1, 2024 if it originated at least 2,500 covered originations in both 2022 and 2023.
A financial institution must begin collecting data and otherwise complying with the final rule on April 1, 2025 if it:
- Originated at least 500 covered originations in both 2022 and 2023;
- Did not originate 2,500 or more covered originations in both 2022 and 2023; and
- Originated at least 100 covered originations in 2024.
A financial institution must begin collecting data and otherwise comply with the final rule on January 1, 2026, if it originated at least 100 covered originations in both 2024 and 2025.
Transitional Provision
The final rule also contains a transitional provision that a financial institution can use to determine the number of covered originations it originated in 2022 and/or 2023 if it did not collect sufficient information to determine if some or all borrowers were small businesses pursuant to the final rule or if such information is not readily accessible.
Significant Changes from the Proposed Rule
As an initial observation, there are two significant changes from the proposed rule.
- Reporting Threshold: The reporting threshold has increased from the origination of 25 covered transactions in each of the two preceding calendar years to the origination of 100 covered transactions in each of the two preceding calendar years. This means that financial institutions with fewer than 100 covered transactions in each of the two preceding calendar years will not be required to comply with the final rule.
- Exclusion for Mortgage Loans: The final rule also excludes mortgage loans that must be reported under the Home Mortgage Disclosure Act. Financial institutions will not be required to report mortgage loans under both Section 1071 and the Home Mortgage Disclosure Act.
These changes will significantly impact financial institutions and their compliance programs. While financial institutions now have more time to prepare for compliance with the final rule, they must still act quickly to ensure that they are prepared to collect and report the required data.
How to comply with the final rule
To effectively comply with the final rule, financial institutions should consider implementing the following best practices:
- Develop a comprehensive plan: Financial institutions should develop a comprehensive plan for complying with the final rule. This plan should include timelines for compliance, the necessary resources and personnel identification, and a clear understanding of the data that must be collected and reported.
- Conduct a data inventory: Financial institutions should conduct a data inventory to identify the types of data they currently collect and store and any data that must be collected to comply with the final rule. This will help financial institutions understand what data they need to collect and how it can be stored and reported.
- Implement a data management system: Financial institutions should implement a data management system to ensure that the required data is collected and reported accurately and efficiently. This system should be capable of integrating with existing systems to facilitate data collection and reporting.
- Provide training and education: Financial institutions should train employees on the final rule’s requirements and the proper data collection and reporting. This will help ensure that all employees know their responsibilities and that the necessary data is collected and reported accurately.
Conclusion
At RADD LLC, we understand the importance of complying with the CFPB’s Section 1071 final rule. That’s why we offer services to help financial institutions stay up-to-date with regulatory changes and updates, including updates to comply with the final rule. Our experienced team can help financial institutions develop and implement comprehensive compliance programs to meet regulatory requirements and mitigate risks.
If you need assistance with complying with the CFPB’s Section 1071 final rule, schedule a FREE strategy call with RADD LLC today and learn how we can help.