SECTION 1071 FINAL RULE WHAT YOU NEED TO KNOW By Victoria E. Stephen Tier Annual originations in 2022 & 2023 Data collection start date Data reporting start date Tier 1 2,500 or more covered credit transactions Oct. 1, 2024 June 1, 2025 Tier 2 500-2,499 covered credit transactions April 1, 2025 June 1, 2026 Tier 3 100-499 covered credit transactions Jan. 1, 2026 June 1, 2027 Whether you were counting down the minutes until its release or hoping it would be put off as long as possible, it’s finally here — the Section 1071 Final Rule. The Final Rule caps a more than 10-year wait from the enactment of the original statute that prescribed these requirements in the 2010 Dodd-Frank Act, and it was released a mere day before the CFPB’s publication deadline. Surprisingly, perhaps, there were several changes from the Proposed Rule to the Final Rule that should provide some much-needed relief to community banks. However, the majority of the rules were finalized as proposed, so for those institutions who fall within the rules’ scope, it will still be quite the mountain to climb until compliance day. What Changed from Proposed to Final? Many were happy to see that the final rule contained some key changes from the proposal issued in September 2021. According to the CFPB, the changes reflect the consideration of more than 2,100 public comments on the Proposed Rule, as well as extensive public input predating the proposal. Threshold Increase Undoubtedly, the biggest and most welcome change from the proposal is the threshold increase. Whereas the Proposed Rule called for institutions to be covered when making as few as 25 covered loans per year, the Final Rule increases this all the way to 100 per year. To be clear, this still covers a large majority of bank small business lending, and those under the threshold should note that the CFPB made clear that “Lenders originating less than 100 loans per year will still be required to adhere to fair lending laws.” Of course, we always knew that banks are subject to fair lending laws regardless of the number of loans originated, but the question will be how the CFPB and/or other regulators may interpret this assertion in this new Section 1071 world. Phased Implementation Probably the second most welcome change is the phased implementation, which means that even for those institutions that are covered, some do not have to collect and report until 2026 and 2027, respectively. Specifically, the Final Rule includes compliance date “tiers” for when a covered financial institution must begin collecting and reporting data: Note that even if your institution originated fewer than 100 covered originations in 2022 or 2023, if you originate at least 100 covered originations in 2024 and 2025, you still must collect and otherwise comply with the rule starting on Jan. 1, 2026. Additionally, the bank must have a method to determine how many covered credit transactions it originated in order to determine its appropriate compliance tier. If the bank happens to not have readily available information needed to make this determination, the Final Rule says that it can use “any reasonable method to estimate its covered originations” for 2022 and 2023 and provides several examples of this. Visual Observation Requirement A third important change from the Proposed Rule is that the bank will no longer be required (or allowed) to collect a business owners’ demographic information by way of visual observation or surname. This made many breathe a huge sigh of relief as the idea of trying to collect ethnicity and race through these means raised a variety of concerns during the time of the Proposed Rule. So, under the Final Rule, this information will only be able to be collected directly from the applicant(s) and not through any other means. What Data Points Does This Cover? It is interesting that the original 2010 Dodd-Frank statute that enacted the 1071 rule required 13 data points, which have now ballooned in the Final Rule to be reportable through 19 The CommunityBanker
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