Of course. This is a complex area of tax law. Here is a detailed explanation of the penalties associated with Section 1071 of the Internal Revenue Code, including the critical context of its current status.

Executive Summary

Section 1071 itself does not contain specific penalties. Instead, the penalties for failing to comply with its requirements come from general IRS enforcement provisions related to information reporting (e.g., Form 1099 series). The most significant penalties are for:

• Failure to File the correct information return.


• Failure to Furnish a payee statement to the borrower.

The potential penalties are substantial and can escalate quickly based on how long the failure persists and whether it was intentional.

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What is Section 1071?

First, it's crucial to understand what Section 1071 requires. Enacted as part of the Dodd-Frank Act in 2010, it mandates that financial institutions collect and report data on credit applications made by small businesses, including those owned by women and minorities.

The data to be reported includes:

• Demographic information of the principal owners (ethnicity, race, and sex).


• The type and purpose of the loan.


• The amount and action taken on the application (approved, denied, etc.).

The goal is to help identify potential discrimination in small business lending, similar to how the Home Mortgage Disclosure Act (HMDA) works for residential mortgages.

The Current Status: A Legal Limbo

This is the most important point for anyone researching this topic today: The implementation of Section 1071 has been subject to extensive litigation and delays.

• The Rule: In March 2023, the CFPB issued its final rule to implement Section 1071.


• The Lawsuit: A Texas bank association sued, arguing the CFPB's funding structure was unconstitutional.


• The Supreme Court Ruling: In May 2024, the Supreme Court upheld the CFPB's funding mechanism, allowing the rule to move forward.


• The Injunction: However, prior to that ruling, a federal court in Texas had issued a nationwide injunction, pausing the implementation of the rule.


• Current Situation: Following the Supreme Court's decision, the CFPB is expected to resume implementation, but the specific timeline and compliance dates are being reconsidered and are not yet final.

Bottom Line: As of mid-2024, the enforcement of Section 1071 is on hold, but financial institutions should be preparing for it to become active in the near future.

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The Penalties for Non-Compliance (Once Enforced)

When Section 1071 is in effect, the penalties for failing to report will be severe. They are calculated under the general information return penalty rules of Internal Revenue Code Section 6721 (Failure to File) and Section 6722 (Failure to Furnish to Payee).

The penalties are per violation, meaning for each loan application for which data is not properly reported.

1. Penalty for Failure to File Correct Information Returns (IRC § 6721)

This penalty applies if you fail to file the required data with the IRS (or the designated agency, likely the CFPB) by the deadline, or if you file incorrect or incomplete information.

Timeliness / Circumstance	Penalty (Per Return)
General Failure (Filed late but within 30 days of due date)	$60 (Max $221,500 per year)
Filed more than 30 days late but by August 1	$120 (Max $664,500 per year)
Filed after August 1, or not at all	$310 (Max $3,783,000 per year)
Intentional Disregard	$630 (or 10% of the aggregate amount of items required to be reported, if greater) No annual maximum.

2. Penalty for Failure to Furnish Payee Statements (IRC § 6722)

This penalty applies if you fail to provide a written statement to the small business borrower (the "payee") informing them of the reported data.

Timeliness / Circumstance	Penalty (Per Statement)
General Failure (Furnished late but within 30 days of due date)	$60 (Max $221,500 per year)
Furnished more than 30 days late but by August 1	$120 (Max $664,500 per year)
Furnished after August 1, or not at all	$310 (Max $3,783,000 per year)
Intentional Disregard	$630 No annual maximum.

Example of Potential Penalty Exposure

Imagine a medium-sized bank that processes 5,000 small business loan applications in a year. If it completely fails to report any of them:

• Failure to File Penalty: 5,000 returns x $310 = $1,550,000


• Failure to Furnish Penalty: 5,000 statements x $310 = $1,550,000


• Total Potential Penalty: $3,100,000

This does not even include the heightened penalties for intentional disregard, which would be far more severe.

Other Consequences Beyond IRS Penalties

• CFPB Enforcement: The CFPB can bring its own enforcement actions for violations of Section 1071, which can result in significant civil money penalties and public consent orders.


• Reputational Damage: Failure to comply could lead to negative publicity and a loss of trust among small business customers and the public.


• Fair Lending Scrutiny: The data collected under Section 1071 will be used by regulators to examine institutions for potential fair lending violations under laws like the Equal Credit Opportunity Act (ECOA). Non-compliance with 1071 would trigger immediate and deep scrutiny, potentially leading to separate, massive penalties for discriminatory lending practices.

Key Takeaways

• Section 1071 is Not Currently in Force, but its implementation is imminent following the Supreme Court's decision.


• The Penalties are Drawn from General Tax Code Provisions (Sections 6721 and 6722) for failure to file information returns.


• Penalties are Per Violation and can escalate into the millions of dollars for institutions with significant small business lending volume.


• Intentional Disregard carries the harshest penalties with no annual cap.


• The CFPB will be the Primary Enforcer, and its actions could compound the financial and reputational harm.

Financial institutions should use this current pause to prepare their systems, data collection processes, and staff training to ensure a smooth and compliant transition once the final implementation schedule is announced by the CFPB.

Disclaimer: This information is for educational purposes only and does not constitute legal or tax advice. You should consult with a qualified professional for advice specific to your situation.