On the surface of it, section 1071 of the Dodd-Frank Act is about the data you collect and report on, but at its core, it’s about fair lending practices. The Act itself, though, was created to address issues that contributed to the 2008 financial crisis. It represented the most far reaching Wall Street reform in history. It was built to create a safer, more stable, and equitable financial system, but new regulations come with growing pains. For financial institutions (and, to be clear, equipment finance companies count, according to the CFPB), it means collecting and reporting on demographic information related to the businesses they work with, as well as the ones they don’t.
It amends the Equal Credit Opportunity Act (ECOA) to mandate the collection and reporting of data on credit applications made by women-owned, minority-owned, and small businesses to ensure fair lending practices, prevent discrimination, and expand access to credit for traditionally underserved communities.
What Section 1071 of Dodd-Frank Means For Your Business
Simply put, you now need to ask small businesses to disclose whether they are minority owned, woman-owned, and LGBTQTI+ owned when accepting applications for credit for businesses under $5m in revenue, then report the data points annually to the CFPB. In all, there are 23 categories of data you now need to report on, alongside 81 actual data points. You likely already collect most of these data points, but Section 1071 adds the requirement to collect and report of data related to demographics of ownership you likely do not currently require.
The good news here is that these data collection and reporting requirements roll out in stages depending on volume of business, and that you can rely on disclosure without the need to verify.
So if you have 2,500 or more small business covered transactions originated, you’ll need to begin data collection October 1, 2024, and begin filing June 1, 2025, but if you have something between 100-and 499, then you don’t need to begin collecting data until 2026, and reporting to the CFPB until 2027.
The specific requirements break down as follows:
- Data Collection: Section 1071 requires financial institutions to collect and maintain specific information related to applications for credit made by small businesses, including the race, sex, and ethnicity of the business owners. This data collection aims to provide regulators with better insight into lending practices and potential disparities.
- Financial Institutions must:
- Compile and maintain the data points in the rule regarding covered applications from small businesses
- Maintain procedures to collect applicant-provided data at a time and in a manner reasonably designed to obtain a response
- Financial Institutions must:
- Reporting: The law requires these institutions to report the collected data to the Consumer Financial Protection Bureau (CFPB) on an annual basis. The CFPB then compiles and analyzes this information to identify trends and potential disparities in small business lending.
- Public Disclosure: In the interest of transparency, Section 1071 mandates the public disclosure of a summarized version of the reported data. This allows stakeholders, including advocacy groups, researchers, and the general public, to monitor lending practices and hold financial institutions accountable for any discriminatory actions.
The CFPB also, in the interest of making the filing experience as seamless as possible, has a guide available here.
For most equipment finance companies, Section 1071 shouldn’t be a scary thing, because, assuming you’re using the right tools, most all of your compliance requirements should be easily managed.
If you’d like to read more on Section 1071 of Dodd-Frank the ELFA has collected a number of useful resources, here.