The Dodd-Frank Act was originally passed into law in 2010. It established the Consumer Financial Protection Bureau (CFPB) as well as a number of rules and requirements related to the practice of lending within the banking industry. While the early focus of the CFPB was on consumer protection, it is important to note that businesses with revenues of $1 million or less are considered the same as individuals in the eyes of the CFPB.
Despite a delay of over a decade, Section 1071 of the Act has become a focus and will soon be implemented as a part of Regulation B which governs the Equal Credit Opportunity Act (ECOA) and Fair Credit Reporting Act (FCRA) among other things.
According to the CFPB, the goals of Section 1071 include enabling greater transparency in small business lending and identifying opportunities and weaknesses for ensuring equal credit opportunities for small, minority, and women-owned businesses. Banks and credit unions will need to comply with this section, so it is important to begin the planning process ahead of time.
As the CFPB becomes closer to a final rule on 1071, many business lenders are worried about their ability to manage the new data collection requirements. In fact, in a recent report from Cornerstone Advisors, nearly 40 percent of participating senior bank and credit union executives stated that regulatory burden will be one of their top concerns in 2023.
With growing uncertainty around 1071, we spoke with one of our in-house banking experts and current head of financial products at Numerated Michael Desimone to learn more about what lenders can expect leading up to the final ruling this month. Here’s what he had to say.
What Section 1071 Will Mean for Lenders
Timeline
We expect the final rule to go into effect in March 2023 with an 18 month adoption period for financial institutions to comply with the new requirements. This leaves little time for lenders to evaluate, select and implement a 1071 solution.
Requirements and Expectations from the CFPB
Section 1071 will require any institution that processes more than 25 loans per year to collect data points on the individual(s) associated with business loan applications. This could not only add more than 20 additional data points that lenders will now have to collect, but also greatly expand the number of lenders who need to submit data. For many institutions, this will be the first time having to report any data at all.
Expected Costs
According to an outline of the 1071 proposal, the CFPB estimates the new requirements will cost lenders an estimated $99 per application. This estimate is based on the assumption that the lender is a middle complexity institution that processes an average of 300 applications per year.
How to Drive Cost-Savings in Collecting 1071 Data
For many lenders, the thought of adding an additional $99 fee to every loan application they receive can be alarming. The good news is that choosing the right technology partner can significantly lower the cost per application.
Today, Numerated’s standard applications already collect 15 of the required data points for 1071. Once the rule is finalized, we will quickly implement changes to add the additional data points and ensure 1071 compliance at a fraction of the cost estimated by the CFPB. Lenders already leveraging Numerated can easily comply with 1071 with a few additional questions to their Numerated application.
Additionally, the CFPB prohibits five of the new data points in 1071 from being used as determining factors used to make credit decisions. To ensure Lenders do not accidentally create bias in their lending decisions, Numerated will ensure the 5 data points that create the risk of making a lending decision on a prohibited basis are not visible to the individual making the credit decision. These values will be masked in the application and made available for reporting purposes only.
Stay Ahead of 1071 Compliance with Numerated
Numerated is ready to help your institution navigate the process and meet the requirements of section 1071. After the rule is finalized, the 18 months to follow will put pressure on business lenders to quickly adapt and maintain 1071 compliance, or risk hefty penalties from the CFPB. Give your institution peace of mind and adopt 1071 application requirements early with Numerated’s digital applications.
To keep lenders informed on the latest developments on 1071, our in-house banking experts will host a webinar on Tuesday, May 9 at 3 PM ET. Learn more and save your seat, here.
