Compliance Journal February 2023
Special Focus In Anticipation of a Final Section 1071 Rule, Banks Should Determine What a “Covered Application” Is? What does the bank consider to be an application for business-purpose credit? Is it a verbal request? Or does a request need be documented on a particular type of application? Can a request be made via email or via some other electronic method? With the finalization of the Bureau of Consumer Financial Protection’s (CFPB’s) small business loan data collection rule (a/k/a Section 1071) forthcoming in the near future, what a bank considers an application for business-purpose or commercial credit will be an important distinction as the request will become a trigger for the need to ask and collect additional information regarding the applicant. As the industry awaits the release of a final Section 1071 rule, each bank should determine what it considers an application for business-purpose credit to help conceptualize how to collect additional data when working with women- or minority-owned businesses and small businesses. To help with those initial steps, this article outlines what is considered a “covered application” for a “covered credit transaction” under the Section 1071 proposed rule. While it is unknown how CFPB will finalize the rule, by identifying what applications may be covered, banks can begin to identify how the flow of data collection may be accomplished. This preparatory step should assist with implementation of a final rule. Based upon its published semi-annual regulatory agenda, it is expected that CFPB will release a final Section 1071 rule by end of March. Background Section 1071 of the Dodd Frank Act amended the Equal Credit Opportunity Act (ECOA) to require that financial institutions collect and report to CFPB data regarding applications for business credit by women- or minority-owned businesses and small businesses. In addition, Section 1071 requires that financial institutions restrict access to underwriters and other persons to certain 1071 data as CFPB fears underwriters will be influenced by such data— resulting in higher or more costly loan terms for the applicant. Section 1071 also imposes recordkeeping requirements and the publication of data after modification or deletion of certain data to protect applicants’ privacy interests. Who is a Covered Financial Institution As proposed, a “covered financial institution” means a financial institution that originated at least 25 covered credit transactions for small businesses in each of the two preceding calendar years. For example, in 2026, the two preceding calendar years are 2024 and 2025. Accordingly, in 2026, Bank A does not meet the loan-volume threshold if did not originate at least 25 covered credit transactions for small businesses both during 2024 and during 2025. The calculation is based on total covered credit transactions originated for small businesses, rather than covered applications received. For example, if in both 2024 and 2025, Bank B received 30 covered applications from small businesses and originated 20 covered credit transactions for small businesses, then for 2026, Bank B is not a covered financial institution. As further explained below, a covered credit transaction is generally a request for business credit.