Story Series: Section 1071

Dodd-Frank 1071: Regulatory Uncertainty in Small Business Financing

Jeffrey S. Paige is the Chief Legal Officer of CFG Merchant Solutions. Visit: https://cfgmerchantsolutions.com

A Changing Regulatory Landscape for Commercial Finance in New York & Beyond

When President Trump returned to office on January 20, 2025, he signed several executive orders with significant implications, particularly for New York’s commercial finance sector and the revenue-based financing industry. One such order was a regulatory freeze that could impact rules issued by the Consumer Financial Protection Bureau (CFPB), specifically those concerning small business financing data collection under Dodd-Frank Section 1071. The rationale behind this freeze is that the CFPB, an agency not directly controlled by Congress, exceeded its intended regulatory scope.

Trump’s order not only halts the issuance of new rules but also mandates the withdrawal of any rules previously sent to the Office of the Federal Register. More critically, it directs agency heads to “consider postponing” any rules that have been published but have not yet taken effect, creating a 60-day review period for reassessment of their legal and policy implications.

“Should actions be identified that were undertaken before noon on January 20, 2025, that frustrate the purpose underlying this memorandum, I may modify or extend this memorandum to require that department and agency heads consider taking steps to address those actions,” the order concludes. This places Section 1071 in limbo, leaving financial institutions uncertain about compliance obligations moving forward.

However, New York funders may still need to prepare. Under 12 U.S.C. § 5552 of the Dodd-Frank Act, individual states (including their respective financial regulators and attorneys general) have the authority to enforce federal consumer financial law, specifically, the Consumer Financial Protection Act and 18 enumerated consumer laws such as TILA, EFTA, FDCPA, GLBA, and regulations issued by the CFPB. Simply put, New York has the ability to enforce these laws and regulations, including Section 1071, by bringing suit in federal or state courts or other appropriate proceedings against any “covered person or service provider” as defined and not excluded by the Dodd-Frank Act’s terms. It is therefore prudent for non-exempt lenders and funders to take a proactive approach.

What Is Dodd-Frank 1071?

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010, sought to address vulnerabilities in the financial system exposed during the 2008 financial crisis. On March 30, 2023, Section 1071 amended the Equal Credit Opportunity Act (ECOA), empowering the CFPB to collect and report key data from financial institutions on small business financing. The compliance deadline varies based on the size of the institution, with the earliest deadline set for July 18, 2025, affecting Tier 1 providers, defined as high-volume financial institutions.

The goal of Section 1071 is to identify and address disparities in small business financing by analyzing key metrics such as:

• Demographics of business owners (race, gender, ethnicity).
• Financing terms, rates, and credit outcomes.
• Geographic data, including trends in underserved regions.

By requiring funders to disclose this information, the regulation seeks to foster accountability and ensure that small businesses—especially those owned by minorities and women—have equitable access to credit and capital.

CFPB & Section 1071 Timeline

2010: Dodd-Frank Act Enacted

• Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act is established.

2011: CFPB Established

• The Consumer Financial Protection Bureau (CFPB) is created as an independent agency overseeing consumer financial protection laws, including small business lending regulations under Section 1071.

2017: CFPB Faces Legal Challenges

• Industry groups challenge the CFPB’s authority and structure, arguing that it lacks proper congressional oversight.
• Under the Trump administration, regulatory focus shifts toward deregulation, and CFPB rulemaking efforts on Section 1071 slowed down.

2020: U.S. Supreme Court Decision – Seila Law v. CFPB

• The Supreme Court rules that the president can remove the CFPB director at will, weakening its independence but allowing it to continue functioning.

2021: Biden Administration Revives Section 1071 Rulemaking

• The CFPB under Director Rohit Chopra prioritizes implementing Section 1071, aiming to enhance transparency in small business lending.

2022-2023: CFPB Proposes & Finalizes Section 1071 Rule

• The proposed rule is released in 2022, requiring lenders to collect and report loan application data, including business owner demographics.
• In March 2023, the final rule is issued, with compliance deadlines set for 2024 and 2025 based on lender size.

2023-2024: Legal Pushback & Court Challenges

• Industry groups file lawsuits, arguing that Section 1071 creates excessive regulatory burdens and violates constitutional limits on CFPB authority
• In October 2023, a Texas court stays the rule for certain plaintiffs, pausing enforcement for some lenders.
• In 2024, additional lawsuits escalate concerns over the rule’s implementation.

January 20, 2025: Trump Returns to Office & Freezes Regulations

• On his first day back in office, President Trump issues an executive order freezing pending regulations, including Section 1071.
• The order:
  • Blocks new CFPB rulemaking,
  • Withdraws rules not yet finalized,
  • Delays implementation of already published rules for a 60-day review period.
• President Trump’s justification: The CFPB is an unelected agency that overstepped its authority, and its rules should be reassessed.

2025: Uncertainty & State-Level Action

• The CFPB’s authority remains in question, leaving financial institutions uncertain about compliance requirements.
• New York may independently implement similar reporting requirements, as it has done with previous commercial financing regulations.
• Many New York funders continue preparing for potential state-level enforcement despite the federal freeze.

How Alternative Financing Providers Can Adapt

Funders in the alternative financing space should remain agile and prepare for multiple scenarios. Even if Section 1071 is rolled back, transparency and fair funding practices remain critical for fostering trust and maintaining credibility in the market.

Steps funders can take include:

• Investing in technology to automate compliance processes, ensuring readiness for future regulations.
• Engaging with industry stakeholders to advocate for practical regulatory approaches that balance fairness and business efficiency.
• Maintaining transparency in financing practices to build stronger relationships with merchants and partners.

Looking Ahead

As the financial industry navigates the potential rollback of Dodd-Frank 1071 (Republican Congressman Roger Williams of Texas has introduced H.R. 976 seeking to do just that), alternative financing companies should focus on long-term strategies that prioritize both compliance and innovation. This is especially true in New York, where the legislature is currently considering a bill called the Fair Business Practices Act, modeled after Title X of Dodd-Frank, that would among other things expand the New York Attorney General’s enforcement powers and enhance penalties in this industry sector for UDAP violations. This further signals that New York as well as other states is seeking to fill any void left by the weakening of the CFPB. Whether the regulation remains in effect or is dismantled, financial institutions should stay proactive in adapting to changes while ensuring fair access to capital for small businesses.

CFPB Rule Would Likely Impact Sale of Business Loan Applicant Data

A proposed rule by the CFPB aims to “Stop Data Brokers from Selling Sensitive Personal Data to Scammers, Stalkers, and Spies” by limiting “the sale of personal identifiers like Social Security Numbers and phone numbers collected by certain companies and make sure that people’s financial data such as income is only shared for legitimate purposes, like facilitating a mortgage approval, and not sold to scammers targeting those in financial distress.” Presented as a consumer-facing protection that would make parties selling data subject to the Fair Credit Reporting Act while prohibiting the sale of such data to third parties for “marketing” the full 206-page proposal suggests that it would apply equally when individual information is used in the course of applying for business loans.

“The CFPB expects that the proposal may have a limited impact on the cost of credit for small entities. One small entity representative stated during the SBREFA process that the proposed rule may affect the cost and ease of accessing credit for small entities. In particular, the written instructions provision may slow down the application process for small business loans because creditors lending to small businesses check the personal credit of the small business owner and may need to rely on the small business owner’s written authorization to do so. In theory, the proposed rule could increase the cost of credit for small businesses if the compliance costs discussed above are passed on to small businesses in the form of higher on loans from lenders.””

“Data brokers sell lists of financially vulnerable individuals to predatory lenders for targeted marketing campaigns,” the CFPB wrote in a summary of the propsal. “This practice is compounded by the widespread sale of personal identifiers collected by consumer reporting agencies, also known as ‘credit header’ data—including names, addresses, and Social Security numbers—which has created a thriving market for sensitive personal information that puts Americans’ privacy and financial security at risk.”

Anyone can officially comment on this proposal until March 3, 2025.
Announcement
Proposed Rule