Okay, let's break down Section 1071 compliance. This is a significant regulation for financial institutions that engage in small business lending. Here's a comprehensive guide to help you navigate it:

What is Section 1071?

Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires financial institutions to collect and report data on their small business lending activities. The goal is to promote fair lending and identify potential discrimination in lending practices.

Who is Covered?

• Financial Institutions: This includes banks, credit unions, savings associations, community development financial institutions (CDFIs), and nonbank financial institutions that originate small business loans.


• Small Businesses: For the purpose of 1071, a "small business" is defined as one with $5 million or less in gross annual revenue for its preceding fiscal year. This is a critical threshold to determine whether the loan is reportable.

• Data Collection: The core of Section 1071 is the collection of specific data points for each covered loan application. This is the most time-consuming and complex part of compliance.


• Mandatory Data Points:


• Applicant Demographics:


• Minority-owned, Women-owned, Veteran-owned status (and whether the applicant declined to provide)


• Principal owners' ethnicity and race (using disaggregated categories - see official CFPB guidance)


• Principal owners' sex


• Credit Information:


• Credit score (or scores if multiple were used)


• Credit scoring model(s) used


• Application Information:


• Application date


• Application method (e.g., online, in-person)


• Amount applied for


• Type of credit applied for (e.g., line of credit, term loan)


• Loan purpose categories (as defined by the CFPB)


• Loan Decision Information:


• Action taken (e.g., approved, denied, withdrawn)


• Date of action taken


• Reason(s) for denial (if applicable)


• Loan amount approved (if applicable)


• Pricing information (e.g., interest rate, fees)


• Loan term


• Geographic Information:


• Census tract of the applicant's principal place of business


• Other Information:


• Number of full-time equivalent employees


• Gross annual revenue of the applicant


• NAICS code of the applicant's business


• Whether the credit is primarily for agricultural purposes.


• Privacy Considerations: Institutions must have procedures to protect the privacy of applicants, especially regarding demographic data. This typically involves using a firewall between the loan officer and the demographic information collected. This ensures that loan decisions are not based on prohibited characteristics. The CFPB has specific guidance on firewall implementation.


• Data Reporting: The collected data must be submitted to the CFPB annually, in a prescribed format (likely through an online portal).


• Data Security and Accuracy: Financial institutions are responsible for ensuring the security and accuracy of the data they collect and report. This involves implementing robust data governance policies and procedures.


• Record Retention: Maintain records of all data collected and reported for at least three years.


• Policies and Procedures: Implement comprehensive written policies and procedures to ensure compliance with all aspects of Section 1071.


• Training: Provide thorough training to all relevant staff members (loan officers, compliance personnel, IT staff) on Section 1071 requirements.

• Gap Analysis:


• Assess your current data collection practices. What data do you currently collect related to small business loans?


• Identify the gaps between your current practices and the Section 1071 requirements. This is crucial for determining what needs to be changed.


• System and Process Design:


• Determine how you will collect the required data. Will you modify your existing loan origination system (LOS)? Will you use a separate data collection tool? Consider vendor solutions designed for 1071 compliance.


• Design your internal processes for data collection, validation, and reporting. Document these processes clearly.


• Establish procedures for safeguarding applicant privacy, including firewalls, data encryption, and access controls.


• Technology Implementation:


• Implement the necessary technology to support data collection and reporting. This might involve upgrading your LOS, implementing a new software solution, or developing custom tools.


• Ensure your systems can generate the required data in the CFPB's specified format.


• Policy and Procedure Development:


• Develop written policies and procedures covering all aspects of Section 1071 compliance. These should address data collection, privacy, security, accuracy, reporting, and record retention.


• Training:


• Develop and deliver comprehensive training to all relevant staff members. Training should cover the requirements of Section 1071, the institution's policies and procedures, and the use of the data collection systems.


• Testing and Validation:


• Thoroughly test your systems and processes to ensure they are working correctly. Validate the accuracy of the data being collected and reported.


• Conduct periodic audits to identify and correct any deficiencies.


• Ongoing Monitoring:


• Continuously monitor your compliance program to ensure it remains effective.


• Stay up-to-date on any changes to the Section 1071 regulations or guidance.

• Data Collection Complexity: Gathering all the required data points can be challenging, especially for institutions that haven't previously collected this information.


• Privacy Concerns: Protecting applicant privacy, particularly regarding demographic data, requires careful planning and implementation.


• System Integration: Integrating new data collection requirements into existing loan origination systems can be complex and costly.


• Training Staff: Ensuring that all relevant staff members are properly trained on Section 1071 requirements can be a significant undertaking.


• Data Accuracy: Maintaining the accuracy of the data being collected is critical for compliance.


• Understanding the Nuances of the Rule: The CFPB's rule is lengthy and complex, with many specific requirements and exceptions.

• CFPB (Consumer Financial Protection Bureau): The primary source for information on Section 1071. The CFPB website has the official rule, guidance, FAQs, and other resources. Start here. Look for the official "Small Business Lending Rule Resources."


• Small Business Administration (SBA): The SBA provides resources for small businesses, which can be helpful in understanding the impact of Section 1071.


• Industry Associations: Banking and credit union trade associations often provide compliance resources and training for their members.


• Legal Counsel: Consult with legal counsel experienced in financial regulatory compliance to ensure your institution is meeting all of its obligations.


• Compliance Consultants: Consider engaging a compliance consultant to assist with implementing your Section 1071 compliance program.


• Vendor Solutions: Many vendors offer software and services to help financial institutions comply with Section 1071. Research and compare different vendor solutions to find one that meets your needs.

• Integration with your existing LOS: A seamless integration will streamline data collection and reduce manual effort.


• Data security and privacy features: Ensure the vendor has robust security measures in place to protect applicant data.


• Reporting capabilities: The vendor should be able to generate the required reports in the CFPB's specified format.


• Cost: Compare the costs of different vendor solutions, including implementation fees, ongoing maintenance fees, and per-loan charges.


• Vendor reputation and experience: Choose a vendor with a proven track record of helping financial institutions comply with regulatory requirements.


• Scalability: The solution should be able to scale to meet your institution's growing needs.


• Training and support: The vendor should provide adequate training and support to help you use the system effectively.

• Implementation Timeline: Developing and implementing a Section 1071 compliance program will take time. Start planning early to ensure you are ready when the reporting requirements take effect.


• Stay Updated: The CFPB has continued to extend the date to begin collecting data. As of October 2024, the effective date for mandatory data collection depends on the financial institution's loan volume, with a tiered approach. Check the most recent CFPB announcements for the latest deadlines applicable to your institution.