Section 1071: Hold for Commentary or Lost During a Trump Administration?
Loyola University Chicago School of Law, JD 2020
As a part of the large and cumbersome Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), Section 1071 was enacted to amend the Equal Credit Opportunity Act (15 U.S.C. 1691 et. seq.) to impose data collecting requirements on financial institutions. Pursuant to Section 1071 (the “Rule”), financial institutions are required to compile, maintain, and submit to the Consumer Financial Protection Bureau (“CFPB”) certain information concerning credit applications by women-owned, minority-owned, and small businesses. The Rule was not slated to go into effect until the CFPB issues necessary implementing regulations. Unfortunately, nearly 8.5 years later, there is still no guidance. Consumers and financial institutions alike are at a sort of standstill, unclear on the contours of its reporting requirements. In November of 2019, the CFPB published a letter to financial institutions promising to develop rules “expeditiously;” the CFPB later hosted an information-gathering symposium on the Rule, yet there is still no clear guidance.
The November Letter and Symposium
The November letter was published in response to multiple inquiries to the CFPB regarding the timing of financial institutions’ obligations under the Rule. In it the CFPB indicated that the Rule was intended to bolster fair lending oversight and broader understanding of the credit needs of small businesses. The CFPB organized the symposium in order to gather information from interested parties, including nonprofit organizations, small business associations, and financial institutions.
At the symposium, Director Kraninger, head of the CFPB, opened her remarks calling small businesses “critical engines for economic growth” and that credit was integral to smoothing out cash flows and enable entrepreneurial investments. The small business financing market is a roughly $1.4 trillion industry. Panelists expressed four primary concerns related to Section 1071 information collecting:
- Ability to rely on self-reported data: speakers asked the CFPB to clarify that lenders will be able to rely purely on application information customarily collected in loan transactions with businesses, rather than implanting a separate verification process
- Duplicate information collection regimes: panelists raised concerns over applicants who refused to provide demographic information required, but have previously provided that information in connection with a consumer financial product
- Increased Compliance Costs: many banks are most concerned about the costs inherent to this new program, particularly in the absence of clear rules
- Data privacy: panelists urged the CFPB to keep loan-level data disclosed private
The National Community Reinvestment Coalition (“NCRC”), an association of 600 community-based nonprofit organizations dedicated to increasing access to credit and capital for underserved communities commented on the Rule’s implementation. Panelists from the NCRC argued that recent testing had shown that banks sometimes provided friendlier service to and sought less documentation from white testers seeking business loans compared to black and Hispanic testers.
The NCRC’s statement explains through various surveys collected that Section 1071 data is vital to promoting fair lending and increasing access to responsible lending for women-owned and minority-owned businesses. The organization has suggested the implementation of a robust database to meet the needs of Section 1071 and minimizing burdens that would be felt by smaller financial institutions seeking to keep up with the compliance demands of the Rule.
Lawsuit Erupts in Response to the CFPB’s Failure to Release Rules
One lawsuit was filed on May 14, 2019 in the Northern District of California by the California Reinvestment Coalition (“CRC”), a nonprofit organization based in California founded to aid low-income communities and communities of color in accessing credit, financial services, and investments. The complaint alleged that the CFPB’s failure to implement the Rule harms CRC and small businesses and communities it serves by inhibiting CRC’s “ability to advocate, educate, and issue reports about access to credit; to advise economic development organizations working with women-owned, minority-owned, and small communities and communities of color.” The CRC’s press release on the lawsuit explains that it is the Trump administration’s responsibility for defying the Dodd-Frank Act by unlawfully failing to collect and disclose data required under Dodd-Frank.
Between 2017-2018, women started an average of 1,821 new businesses per day in the United States, and the number of businesses owned by people of color grew by 79% between 2007-2018. Despite these numbers, the CFPB has acknowledged that the data is inadequate to fully understand and remedy the extent to which discriminatory lending creates credit deserts for small businesses and minority-owned businesses. The Rule was designed to collect data to understand precisely how these groups have been discriminated against in lending practices of larger financial institutions, and to incentive these institutions to diversify their lending practices.
The CFPB Under President Trump
Under President Trump’s direction, the CFPB has failed to make several steps necessary to protect consumers, small businesses, and student borrowers. One author characterized the Trump administration’s approach to transforming Washington as “one in which strategic neglect and bureaucratic self-sabotage create versions of agencies that seem to run contrary to their basic premises.” The CFPB developed out of a concern that the American economy was defined by inequality and consumer debt, without anyone advocating on the other end for consumers. Financial products that consumers purchase are defined by arduous terms and conditions, mandatory arbitration, reverse amortization, interest-rate calculations that can charge costly fees erratically, mysterious credit scores, and cross-default clauses. Under the direction of President Trump, this liberal leaning consumer protection agency has drastically scaled back, leaving rules like 1071 without guidelines for implantation and compliance.