While small businesses are known to drive the nation’s economic engine, women- and minority-owned businesses have long been left behind on the road to prosperity. One reason has been their inability to secure loans and capital.
The Dodd-Frank Act of 2010 included Section 1071, which mandated the collection and dissemination of data on loan applications to small businesses, including those owned by women and minorities. The data is aimed at enforcement of fair lending laws and to assess whether the needs of businesses targeted by the law are being addressed.
“This is a very far-reaching regulation with significant implementation challenges, and it also involves the collection of very sensitive data about the status of the businesses.”
The Consumer Financial Protection Bureau (CFPB) didn’t issue rules regarding this process until March 2023. As the bureau gears up to begin enforcement, business-purpose lenders need to prepare for the extensive task of collecting data on their end. Timothy R. Burniston of Wolters Kluwer recently spoke with Scotsman Guide about the new rules and some of their possible implications for commercial real estate.
What is Section 1071 of the Dodd-Frank Act about?
When Congress passed the Dodd-Frank Act in 2010, it amended the Equal Credit Opportunity Act to require financial institutions to compile, maintain and submit to the CFPB certain data regarding applications for credit for small businesses, including those that are owned by women and minorities. The data would be published annually by the CFPB. The statutory purpose of the CFPB’s new rule implementing Section 1071 of the Dodd-Frank Act is to facilitate fair lending enforcement and to enable the identification of business and community development needs, and opportunities for women-owned, minority-owned and other small businesses.
Why is this receiving so much scrutiny right now?
The key thing to remember here is that this is a fair lending regulation, not just an exercise in data collection. The data is going to be used by regulators, examiners, advocacy groups, the media and plaintiff’s attorneys to look at patterns associated with access to credit and matters that may be indicative of potential redlining, underwriting issues and pricing issues. The bank regulators will also likely use that data in connection with reviews of applications for certain expansion requests such as mergers and acquisitions. And the same data will also be used by the bank regulators in connection with Community Reinvestment Act exams.
How will this rule impact commercial real estate?
It would impact the industry in a lot of significant ways. First off, this would require an institution that’s covered by the regulations to have procedures in place that are reasonably designed for the application process. These procedures would ensure consistency in the collection and reporting of a number of data elements, and the institutions will need to have controls and train the staff monitoring the programs.
This is a very far-reaching regulation with significant implementation challenges, and it also involves the collection of very sensitive data about the status of the businesses, whether they are owned by women, minorities and people who identify as LGBTQ+. This will involve identifying the race, sex and ethnicity of the principal owners of a business, along with a number of other data elements. So, there will be many internal challenges in collecting the information and challenges after the collection process to analyze the information.
What is the timeline for implementation?
The CFPB put in place a tiered implementation schedule based on the number of small-business loan originations. If a company does more than 2,500 originations in 2022 and in 2023, it will have to start collecting the information by Oct. 1, 2024, and will have to provide it to the CFPB by June 1, 2025.
If a company does between 500 and 2,500 originations in both 2022 and 2023, then collection will begin in April 2025 and be reported by June 1, 2026. For companies doing fewer than 500 originations annually but more than 100 in 2024 and 2025, collection will begin in January 2026, with the first submission due in June 2027. For those organizations with the largest number of originations, they have roughly 17 months before they have to start collecting. ●