This week, the Consumer Financial Protection Bureau (CFPB) took a significant step by filing an emergency notice with the Fifth Circuit Court of Appeals.
This marks a notable shift in their previous approach regarding the compliance enforcement of the Section 1071 small business data collection rule.
The timing is particularly relevant given the ongoing legal challenges primarily brought forth by lending organizations against this rule.
CFPB’s Legal Strategy Shift
The notice comes ahead of a critical hearing that questions the rule’s validity.
It reveals that the CFPB’s legal team has been instructed to limit their involvement in the ongoing litigation, focusing solely on petitioning for a delay in the proceedings.
This strategic pivot raises urgent questions about the rule’s immediate enforcement, especially for financial institutions that have been diligently preparing for its rollout.
Objectives of Section 1071
Enacted as part of the Dodd-Frank Act, Section 1071 aims to bolster transparency in lending practices aimed at small businesses.
To achieve this objective, financial institutions face several essential responsibilities:
- Credit Application Data Collection: Lenders are required to gather and retain data from small business credit applications.
This helps ensure fair lending practices and allows for monitoring of credit access for minority and women-owned businesses.
- Demographic Information Acquisition: Financial institutions must ask applicants to voluntarily disclose demographic details such as race, ethnicity, and gender.
This information plays a crucial role in understanding lending trends and potentially uncovering disparities.
- Obligation to Report: Lenders need to send the gathered data to the CFPB and other regulatory agencies.
This reporting is vital for enforcing fair lending statutes and assessing the effectiveness of existing policies.
- Building Compliance Mechanisms: It’s essential for financial institutions to develop internal systems that facilitate proper data collection, storage, and reporting, all while protecting the privacy of applicants.
Context and Future Outlook
The Section 1071 rule came about due to a lawsuit organized by the California Reinvestment Coalition and other advocacy groups.
Their aim was to compel the CFPB to act on a provision of the Dodd-Frank Act that had remained dormant since Congress passed the legislation in 2010.
The legal battle culminated in a settlement reached in 2020, which outlined a timeline for the proposal and finalization of the rule.
While the underlying law continues to be active, this latest pause presents an opportunity for the CFPB to reevaluate its data collection requirements laid out by the rule.
As the situation around Section 1071 compliance continues to evolve, we will monitor any updates or additional insights from the Bureau.
Source: Natlawreview