Wait, Is Section 1071 On The Verge Of Being Cancelled?

After the CFPB spent 13 years trying to figure out how to implement a wide-reaching poorly-worded law, the ensuing 888-page handbook full of rules for small business lenders to follow so the government can measure disparities in commercial loan underwriting processes, may have all been for naught. Congress wants the rules gone.

The rules in question were mandated by Section 1071 of the Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) at a time when the bill’s drafters assumed that all business financing products were loans and all loans came from banks. The consequence has been endless rounds of debates, RFIs, hearings, committees, consultations, explainer guides, and lawsuits. Most recently there was a court-ordered injunction put in place to delay implementation of these rules.

Today, however, the House followed the Senate in voting to strike down the relevant rules. Though it was close in both chambers of Congress, Democrats did join Republicans in reaching this outcome. Nevertheless, reports say that Biden is expected to veto their resolution.

Notably, the passed legislation disapproves the rules submitted by the CFPB, not the underlying section of the law that mandates they draft a set of rules. This is important because it’s not Section 1071 that they’ve voted to undo, but rather the final rules that the CFPB has issued as part of its obligation to Section 1071.

According to House republicans, “By overturning the final 1071 rule, Congress will force the CFPB to reengage small businesses and their lenders to create a rule that is better tailored to their concerns and less likely to reduce the availability of credit.”

This effectively means that Section 1071 itself is safe (unless a court rules it or the CFPB unconstitutional). If the President does not veto it the legislation would force the CFPB to go back to the drawing board on rules it took 13 years to come up with in the first place.

Was Section 1071 of Dodd-Frank a Massive Mistake?

Did Congress make a huge mistake by thinking small business loans were easily commoditized?

Pursuant to Section 1071 of Dodd-Frank, the CFPB is planning to collect data from companies engaged in small business finance in order to potentially screen for discrimination against women and minorities. Before deciding how exactly they’re going to do that, they’ve asked the public for comment, and the public… isn’t showing the law much love. Below are some excerpts of the nearly 300 responses already submitted.

We can tell all the stories we want, and hold all the hearings imaginable, and there is still no way to disguise the fact that implementing a HMDA-like reporting requirement will add cost, complexity, and rigidity to our amazingly customized lending

– Alan Gay

A loan priced properly for the risk may be acceptable for one institution and not acceptable to another. For example a client requests funds to open their second doughnut shop in town. One bank declines the loan because they do not specialize in food service business per lending policy and the banks appetite for risk. Another bank would consider the loan, however after reviewing the current competition decides that the market is saturated and the loan is too risky based on the three competitors within five miles. The third bank is willing to loan the money based on the cash flow of the owner and her husband, but will not take into account the expected cash flow from the business, and will require the collateral to include the primary residence of the client. The fourth bank is an SBA lender and proposes the client use the SBA program to mitigate the risk for the bank. The fifth bank declines the loan due to cash flows. They will not consider the revenues from the new location, because it is considered a start-up business. As I understand it the CFPB will collect the data from all five banks to determine “Fair Lending” similar to the consumer lending program. I find this problematic on many levels: I believe in the scenario presented all the lenders were fair. The data is redundant and will not show the result of credit search on the commercial loan request or accurate results.

– Doug Mitchell

Creating additional documentation and regulation only makes those in Congress and the CFPB feel better without truly adding benefit to our community and it’s businesses.

– Joseph Williams

COLLECTING AND AGGREGATING THIS INFORMATION WOULD BE A BURDEN THAT WOULD REQUIRE ADDITIONAL STAFF AND NOT CHANGE OUR HISTORY AND BUSINESS MANDATE OF SERVING OUR SMALL TOWN BUSINESSES.

– Dee Baertsch

As a community banker in rural Ohio I strongly urge the repeal of Section 1071 of the Dodd-Frank Act. The addition of another report will be counterproductive to lending to small businesses.

– Chuck Dixon

Commercial lending is a completely different animal from consumer lending, and has so many different aspects to consider. While a consumer loan is typically viewed from and ability and intent to pay by reviewing a consumer credit score and debt to income calculation, a commercial loan is viewed from not only current earnings but also projected earnings, the economic conditions surrounding the specific business/industry, competitiveness in the market, and the speed of obsolescence of the business’ products and services. It is so much more than pulling a credit report and getting the last two pay stubs.

– Brian Smith

The Race and Sex questions should be eliminated from all loans.

– David Ludwig

Our bank in particular will be unduly burdened by small business lending data collection.

– Casey D. Lewis, CRCM, First Bank & Trust

This new requirement will place a large burden on our small bank and staff as more time will be spent on data collection and reporting rather than giving the value added service to our actual customers. It also may increase the cost of credit to our borrowers in order to offset the increased compliance cost to comply.

– Anita Drentlaw

These regulation proposed by the CFPB will only act to hamper and restrict our ability to continue meet the credit need of our communities and will not provide any meaningful benefit to anyone.

– Jim Goetz

Adding new requirements to collect and report data related to these loans much like HMDA diverts time of our limited staff away from serving our customer needs and expends resources that do not help our community.

– James Milroy

The last thing I need is to spend even more of my time collecting data similar to the HMDA data we collect on other loans. It is a timely, costly and inefficient use of our resources which could be better utilized for spending more time with potential and current customers and lowering their interest rates. Very few businesses are the same which would lead to misrepresentation and baseless fair lending complaints.

– Daniel Mueller

By making our jobs harder, you are making it harder for small businesses to thrive.

– Joy Blum

I have seen first hand the negative effects of the HMDA collection and reporting to our bank. The increased work for our small bank has driven up our costs and is making it harder for us to compete. In addition to the negative impact on our bank mortgage customers pay a cost and as more and more community banks decide they can no longer provide these services the community will be left with fewer options.

– Jeff Southcott

Stop all the paper work to get a commercial loan. Enough is Enough!

– Jeff Spitzack

We are a small $65 Million dollar bank with limited personnel now being asked to police another segment of our customer base. We do not have the resources to carry out more regulatory burden.

– Girard J. Hoel, Chairman, The Miners National Bank of Eveleth

Commercial lending cannot be “commoditized” in the way that consumer lending can, nor can it be subject to simplified, rigid analysis which may generate baseless fair lending complaints.

– Steve Worrell

We are so heavily burdened with keeping up with all the changing regulations and requirements, it would be very burdensome for not only our bank, but many other community banks. There has to be a way to ensure the end results that you are looking to achieve without making it so hard on Community Banks. We feel that we have to really analyze if it is cost prohibitive to actually make the loan – and how does that help the small businesses?

– Margi Fleming

We would never decline a profit making loan because of the race or sex of the applicant. You would be appalled to know how little attention borrowers pay to the dozens of pages of disclosures required by regulation. Over disclosure is no disclosure.

– Douglas Krogh

Community banks simply do not have numbers on our side, either in manpower or funding, to seamlessly and efficiently absorb the vast and sweeping regulatory changes.

– Cheryl Hiller, 1st National Bank of Scotia

The new data collection will add additional staff at our institution. This salary will be passed on in the form of origination fees or increased rates to our small business customers. This is not fair to them, but with the increased regulatory demands by the CFPB on small business lending if this is adopted will increase their borrowing cost.

– Russell Laffitte

The burden of data collection and reporting would in effect end up costing our customers more to get a loan.

– Shannon Fuller

This tracking will be onerous on a small bank that stays competitive by maintaining a small staff like ours

– Jim Legare

Section 1071 will have a chilling effect on lenders’ ability to price for risk. This, in addition to the expense of data collection and reporting, may impact community banks’ ability to provide affordable commercial lending products and curb access to small business credit, an engine of local economic growth and job creation.

– Freeman Park

Please make every effort to prevent the added burden to small business lending and community bank processes by repealing Section 1071 of the Dodd Frank Act.

– Julie Goll

You can read and track all the responses HERE.