December 2, 2022

Volume XII, Number 336

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Dodd Frank 1071 Update: Members of Congress Address Significant Concerns

On February 16, 2022, legislators Blaine Luetkemeyer, French Hill, and Roger Williams submitted a letter to Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra raising concerns regarding the Bureau’s Dodd-Frank Act Section 1071 rulemaking.

As we have discussed, the CFPB issued its Section 1071 Notice of Proposed Rulemaking (NPRM) on September 1, 2021. The comment period for this new rule closed on January 6, 2022. During this period, the CFPB received over 2,000 comments. This letter comes as a follow-up to the comments received and focuses on four issues we pointed out in a previous webinar on the NPRM: (1) the impact on small financial institutions, (2) the implementation timeframe, (3) rules that contradict the statute, and (4) the process the CFPB intends to implement when determining what information it will disclose to the public.

Burden on Small Financial Institutions

The letter first highlights the significant burdens the proposed rules would have on small financial institutions. This comes as no surprise because even Director Chopra commented on the regulatory burden the proposed rule will have on small banks.

The proposed thresholds require financial institutions to report data if the institution originates at least 25 covered credit transactions for small businesses in each of the last two years. A “small business” would be defined as having $5 million or less in gross annual revenue for the preceding year. A “covered credit transaction” would include loans, lines of credit, credit cards, and merchant cash advances.

The letter asserts that the proposed thresholds for reporting “are far too stringent,” which “would drastically impact the ability of small institutions to make loans to small businesses and decrease access to credit for minority-owned, women-owned, and small businesses.”

Implementation Period

As currently drafted, the proposed rule gives financial institutions 18 months after the final rule is issued to implement the rule. The letter points out the significant impact the new rule will have on nearly all financial institutions and requests more time for implementation. According to the letter, 18 months is not enough time to train staff and “develop the appropriate systems to carry out this complex rulemaking which will cover multiple credit products.”

Contradictory Reporting Requirements

One issue raised regarding contradictory language in the rule as opposed to the statute should be of particular concern to all impacted by the new rule: While the statute permits borrowers to refuse to provide information on race, gender, or ethnicity, the CFPB is proposing that “[i]f an applicant does not provide any ethnicity, race, or sex information for any principal owners . . . the financial institution must collect at least one principal owner’s race and ethnicity (but not sex) via visual observation or surname, . . . if the financial institution meets with any principal owners in person or via electronic media with an enabled video component.”

Aside from the contradiction between the statutory language and proposed rule violating the applicant’s right to not submit information, the letter highlights that such a process would rely “on racial stereotypes and generalizations and would render all 1071 information tainted and inaccurate.” The letter notes that loan officers should be focused on borrower creditworthiness, not on becoming experts in determining the race or ethnicity of individuals. This guessing game also would violate the proposal of creating a “firewall” to separate race, ethnicity, and gender information from “financial institution personnel involved in making any determination related to the application.”

CFPB Disclosure of Information

Finally, the letter highlights concerns regarding the CFPB’s proposed process for determining the information that will be disclosed to the public. Rather than telling financial institutions what information will be made public before the financial institution reports the information to the CFPB, the CFPB proposes to collect data for one year and then determine what information it will share.

Additionally, the CFPB plans to announce modifications and deletions to the data being shared via a policy statement. This process raises concerns because the issuance of a “policy statement” does not allow consumers or financial institutions to comment on what information becomes public and essentially the CFPB is “choosing to conduct major rulemaking through guidance.”

Takeaways

It is encouraging to see that the concerns we previously noted have been recognized by lawmakers, and we hope to see the CFPB take these and other concerns under serious consideration as they work towards a final rule. The implementation of Section 1071 will be difficult and time-consuming, especially for lenders who are not covered by financial institutions under the Home Mortgage Disclosure Act (HMDA) and do not have existing policies and procedures designed to comply with similar reporting requirements. In the meantime, all financial institutions that offer small business products should remain informed about the development of Section 1071’s implementing regulations.

© 2022 Bradley Arant Boult Cummings LLPNational Law Review, Volume XII, Number 80
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About this Author

Shelby D. Lomax Finance Attorney Bradley Arant Boult Cummings Nashville
Associate

Shelby Lomax is an associate in Bradley’s Banking and Financial Services Practice Group, focusing on litigation and regulatory compliance issues. She has experience advising clients on regulatory risks relating to small business lending, alternative finance, and merchant cash advance transactions.

When assisting clients involved in regulatory and compliance matters, Shelby draws on her extensive experience as a banker. Prior to becoming an attorney, Shelby had a successful career as a banker, working both with consumer and commercial clients....

615-252-3591
Christopher Friedman Nashville Lawyer Bradley Arant Boult Cummings Law Firm
Associate

Chris Friedman is a regulatory compliance attorney and litigator who focuses on helping consumer finance companies and small business lenders, as well as banks, fintech companies, and other participants in the financial services industry, address the challenges of operating in a highly regulated sector. Chris focuses on both small business lenders and alternative business finance products and has helped non-bank small business lenders, banks who make small business loans, commercial credit counselors, lead generators, and others in the industry. He helps clients launch new products,...

615-252-3504
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