Federal regulators have targeted unfair lending practices for more than a decade, with the fallout from the 2008 financial crisis prompting the introduction of numerous new rules designed to protect consumers from predatory lenders. Now, these regulators are shifting their focus from consumer-facing loans to small business loans—specifically, those issued to businesses with under $5 million in revenue. Section 1071 of the Dodd-Frank Act requires lenders to document information about their lending practices to underrepresented groups, including women-owned businesses and minority-owned businesses.

This data must be reported to the Consumer Financial Protection Bureau (CFPB) for analysis. The final 1071 rule was revealed in 2023 and will be rolled out on a tiered basis. While enforcement has not begun yet, that date is approaching: for large banks, the first filing deadline with the CFPB will be on June 1, 2026, meaning they must begin collecting data and demonstrating compliance with the rule’s provisions by July 18, 2025. Small and mid-sized banks and financial institutions have a bit more time.

They need to start collecting data by January 16, 2026, with a filing deadline of June 1, 2027. While 2027 may seem far off, implementing the data collection and compliance practices required by Section 1071 can be time-consuming, especially if starting from scratch. It’s critical for financial institutions to have an implementation plan in place well before the rule officially goes into effect. What the New Section 1071 Rules Mean for Banks Since the Home Mortgage Disclosure Act (HMDA) already requires financial institutions to document and report their mortgage lending activity, the concept of collecting data on lending practices should not be new to most financial institutions. The goal of both regulations is to identify and prevent discriminatory or predatory lending practices.

HMDA focuses on individual borrowers, while Section 1071 seeks to ensure that women, minorities, and small businesses are not being discriminated against when seeking commercial loans. Ultimately, both aim to ensure that banks are not unfairly penalizing would-be homeowners or entrepreneurs based on demographics or other factors. This poses an interesting conundrum for financial institutions. While the goal of ensuring fair lending practices is an admirable one, there are a wide range of variables that go into lending decisions—and strategy and fairness don’t always perfectly align.

A bank that sees an opportunity for growth in one industry may offer more favorable rates to businesses seeking loans in that sector. At the same time, the bank might provide intentionally elevated rates to parts of its portfolio that it views as less advantageous. This is standard practice—banks will be more aggressive in certain areas depending on how they want to build their portfolios. Under the new Section 1071 rules, banks will need to be mindful of how they approach certain industries.

A bank offering unfavorable rates to borrowers in an industry where minority-owned or women-owned businesses could create the impression of discrimination—whether it’s true or not. This is something lenders will need to factor into their decision-making process moving forward, or they risk attracting negative attention from regulators. Fortunately, the looming implementation of the new Section 1071 rules means most banks should already be collecting test data to ensure their processes are working correctly—giving them plenty of time to make adjustments to their lending practices before the rule officially enters enforcement. Complying with Section 1071 For financial institutions, complying with Section 1071 starts with ensuring that the necessary data collection processes are in place and determining what the corresponding workflows will look like.

For instance, in order to maintain objectivity, there needs to be a firewall between the underwriters and those collecting the actual data. Banks will need to ensure that their loan application procedures include the correct fields, and that the data is being collected, stored, and reported on in an acceptable manner. Given the number of regulations that modern banks need to comply with, many have already turned to automated compliance solutions that can help them gauge how well they align with certain frameworks and identify any potential gaps. This will be important as the rules inch closer to enforcement.

For now, businesses have been told that there will be a year-long grace period during which the data they collect and submit to the CFPB will not be used against them for any enforcement action. This gives them time to identify any concerning patterns in the data and work to correct them before they attract the attention of the regulators tasked with levying fines. The intention is to avoid penalizing good-faith efforts to comply with the new reporting requirements, with the CFPB promising to work with financial institutions to identify and correct any compliance weaknesses.

In theory, that’s good. However, in practice? Things are rarely so cut and dry. While it’s true that financial institutions will not be penalized for data submission errors or compliance challenges, those that submit imperfect data (or worse, data that indicates unfair lending practices) will almost certainly find themselves under the microscope when enforcement begins in earnest. That should provide strong motivation for banks to prioritize Section 1071 compliance well in advance of the enforcement period.

Again, financial institutions should already be collecting test data (and those in later tiers should at least have a plan to do so)—and they should be analyzing that data to ensure it is free from mistakes, irregularities, or negative indicators. By ensuring that their data collection capabilities meet the requirements of Section 1071 and remediating any potential irregularities in their lending practices before the law enters enforcement, financial institutions can avoid drawing unwanted scrutiny from regulators. Planning Ahead Is Critical While the goal of the law is to ensure fair lending practices and put small businesses on an even playing field, the new Section 1071 rules may force banks to reevaluate the way they approach lending. Banks that want to avoid running afoul of the new law will need to evaluate their own lending practices well in advance of the enforcement date, ensuring that they have the mechanisms in place to collect the right data and that the data is free from violations.

As regulators continue to zero in on the financial industry, having the tools in place to successfully navigate the compliance landscape has never been more important. 0 SHARES 0 VIEWS Share on FacebookShare on TwitterShare on LinkedIn

By matt kunkel
Jan 10, 2025 00:00
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