This week, the CFPB filed an emergency notice in the Fifth Circuit Court of Appeals, indicating that it no longer opposes a pause in compliance with its Section 1071 small business data-collection rule (previously discussed here, here, and here). This marks a significant departure from its previous stance as it navigates ongoing legal challenges from lenders.

The notification was submitted just before a scheduled hearing in the case challenging the rule’s validity, and states “Counsel for the CFPB has been instructed not to make any appearances in litigation except to seek a pause in proceedings.” This shift raises questions about the rule’s near-term enforceability, particularly for financial institutions that have been preparing for its implementation. 

The Section 1071 rule, established under the Dodd-Frank Act, is designed to enhance transparency in small business lending. It mandates that financial institutions:

• Collect and retain data on small business credit applications. Businesses must track and document applications for credit from small businesses to ensure fair lending practices and monitor access to credit for minority- and women-owned businesses.
• Gather applicants’ demographic details. Lenders are required to ask applicants for self-reported demographic information including race, ethnicity, and gender. This will be used to assess lending trends and potential disparities.
• Report lending decisions to regulatory bodies for oversight. Collected data must be submitted to the CFPB and other relevant regulatory agencies to facilitate enforcement actions and policy assessments related to fair lending laws.
• Establish compliance protocols to ensure adherence with reporting requirements. Institutions must implement internal systems to collect, store, and submit required data while ensuring privacy protections for applicants.

Putting It Into Practice: The CFPB finalized the rule as a result of a lawsuit brought by the California Reinvestment Coalition and other plaintiffs who sought to compel the agency to implement Section 1071 of the Dodd-Frank Act, which had been enacted in 2010 but not enforced for years. The lawsuit led to a settlement agreement in 2020, under which the CFPB committed to a timeline for proposing and finalizing the rule. So while it may not be possible to rescind the law, a pause may lead to the Bureau carving back some of the data collection requirements. We will continue monitor the Section 1071 compliance landscape for further developments.

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