Congress Got 1071 Right

Mike Calhoun has over thirty years of experience working to increase sustainable and affordable housing. Mike has worked collaboratively with the nation’s lenders and others in the mortgage finance system to expand responsible mortgage products for working families. He has served as the President of the Center for Responsible Lending (CRL) for the past fifteen years, and CRL helped secure safe mortgage requirements so that there is not a repeat of the 2008 housing crash and recession.  Prior to that, for a decade he led home lending programs and compliance at Self-Help, one the nation’s largest community development lenders. Mike serves on numerous boards and financial institution advisory groups, including as a member of the Board of the Leadership Conference on Civil and Human Rights and previously serving as a member and Chair of the Federal Reserve Board Consumer Advisory Committee.

In her Open Banker piece “We Need Regulation that Matches Economic Policy,” Leigh Lytle, the President and CEO of the Equipment Leasing and Finance Association, calls for the repeal of Section 1071 of the Dodd-Frank Act – the provision that directed the CFPB to develop a data collection and reporting regime for small business lending – on the ground that the statute is “seriously impeding borrowers from accessing the credit they need to grow” and is thereby “stifling the American economy.” This claim is startling if for no other reason than that Section 1071 has not yet taken effect. The financial institutions that do the largest volume of small business lending – roughly five percent of banks – are not required to collect any date until July 2025. The smallest covered financial institutions, roughly 75% of all covered lenders, have until October, 2026.¹ It would seem more plausible to believe that lenders are currently racing to do as much lending as they can before the rule takes effect than to believe lenders are shutting down their lending long before the rule imposes any obligations on them.

But even if the call for repeal were intended as a prediction of the future effects the rule will have rather than a statement of its current impact, it still would be wide of the mark. The truth is that Section 1071 serves compelling national interests whose benefits far outweigh its modest costs.

Section 1071 Furthers Vital Economic and Social Policy Objectives

Let’s start with the common ground among proponents and opponents of the statute.  Small businesses are a vitally important engine of job creation and economic growth. Entrepreneurship is also a vital source of household wealth creation, especially for those from historically-disadvantaged communities who lack the benefit of intergenerational wealth. And small businesses need access to capital, including – perhaps especially – debt capital, to thrive. Agreed.

There is one other proposition that is incontrovertible when it comes to  small business lending: there is a dearth of reliable data regarding the small business lending market both with respect to the demand for credit and with respect to the supply. As the CFPB observed, “Data on small business lending are fragmented, incomplete, and not standardized,” so that “it is not possible with current data to confidently answer basic questions regarding the state of small business lending” let alone to “conduct meaningful comparisons across products and over time.” And, “This limitation is especially the case with regard to the ethnicity, race, and sex of small business owners” and with respect to “applications as opposed to originations.”

Despite these data limitations, there are troubling indications that discrimination is endemic in small business lending. For example, surveys conducted by a consortium of Federal Reserve Banks consistently have found wide disparities in the approval rates on applications by minority-owned businesses as compared to white-owned businesses; in the most recent survey, firms owned by people of color were half as likely as white-owned firms to report having received all of the traditional financing they sought² and for start-up firms that had reached the point of having employees, the disparities were even greater.³ In research involving testers, Blacks and Latinos inquiring about small business loans were required to produce more documentation about their business than white testers, received less information about fees, and were less likely to be invited to schedule an appointment to apply for a loan.⁴ And an academic paper using data from the Kaufman Firm Survey found vast differences in the ability of Black-owned firms to access  capital, differences that could not be explained by a range of variables including business characteristics and credit scores.⁵

That small business lending is infected by racial discrimination should hardly be surprising. After all, small business lending is one of the last bastions of judgmental underwriting. Although the risk of algorithmic bias in the growing use of machine learning models is real, there is, perhaps, no more biased machine than the human mind. Indeed, it would be quite shocking if the underwriters who evaluate applications for small business loans somehow were able to set aside all the biases, both conscious and unconscious, that permeate our society and consistently render truly “objective,” non-discriminatory judgments. 

Enter Section 1071

It was against this background that Congress enacted Section 1071. That section has two stated purposes: first, “to facilitate the enforcement of fair lending laws,” and second, to “enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.” The data to be collected under Section 1071 is vitally important to advance both of those objectives.

From a fair lending perspective, the application-level data that lenders will be required to submit under Section 1071 means that, instead of flying blind, those tasked with enforcing anti-discrimination laws will be able to focus their inquiries on those firms whose data raises the largest concerns of potential violations. Although the data collected under Section 1071 will rarely, if ever, answer the question of whether an individual firm is violating the law – such determinations generally require a detailed analysis of a specific lender’s underwriting practices and policies – 1071 data will, as the Bureau stated, “lead to a more efficient use of government resources in enforcing fair lending laws through more efficient prioritization of fair lending examinations and investigations.” Indeed, this is precisely the way that data collected under the Home Mortgage Disclosure Act has been utilized for decades.

At the same time, the loan-level data that will be submitted under the rule – which will include an indicator of the census tract and the (three digit) industrial classification of the borrower – will enable private and public sector entities to identify where the market, for whatever reason, may not be providing sufficient credit to meet small business credit needs. Identifying those gaps can, as the Bureau observed, “fuel community development, in partnership with creditors and governmental entities through the development of targeted lending programs, loan funds, small business incubators, and other community-driven initiatives to support small businesses.” Similarly, creditors can use 1071 data to “identify potentially profitable opportunities to extend credit” such as “areas of high credit demand into which they could consider expanding.” 

Although it may not be possible to quantify these benefits – and is especially difficult to do so before the data has been collected and put to use – the potential value of collecting these data simply cannot be gainsaid. 

Balancing the Costs

Opponents of Section 1071 have suggested that compliance with the rule will be so costly that it will drive smaller lenders out of the market. These concerns are not tethered to reality.

To begin with, it is important to note that in issuing the rule to implement Section 1071, the CFPB chose to exempt lenders making 100 or fewer loans.

With respect to those institutions that will have reporting obligations under the rule, the Bureau engaged in a detailed estimate of the costs they would be expected to incur. Drawing on its experience under HMDA as well as its research and stakeholder outreach relating specifically to small business lending, the Bureau estimated separately for each of 15 tasks required to comply with the rule the senior, mid-level and junior hours that would be required and calculated the associated costs, including non-salary expenses. The Bureau made such estimates separately for institutions of varying sizes and complexity in light of the fact that smaller institutions tend to be less technologically sophisticated and thus to engage in more staff-intensive – and more costly – processes.

Based on all of this analysis, the Bureau estimated that for the smallest set of institutions covered by the rule – those receiving up to 300 applications per year – the cost per loan origination for the typical lender would be between 9 and 12 basis points of the net income generated by such loans and that for mid-size institutions – those receiving up to 2,000 applications – the costs would be between 24 and 30 basis points. It is difficult to believe that costs of this magnitude (or even 2x or 3x higher) would cause lenders to flee the market or would materially affect the cost of credit.⁷

Fears that the mandated collection of data will negatively impact borrowers’ privacy are similarly misguided.  Section 1071 affords the Bureau ample discretion to “delete or modify data…made available to the public” to “advance a privacy interest.” Just as the Bureau deletes sensitive data elements such as credit scores from HMDA public data, it can delete certain data fields from any public 1071 database. Additionally, the Bureau may elect to delete or modify other data fields from the public 1071 data to minimize the risk that individual records can be “reidentified” and attributed to specific individuals or firms. Indeed, in the 1071 rule the Bureau announced that it would not make any data public until it had collected at least one full year of data so that it could “carry out the necessary analysis of prepublication modifications and deletions” and “engage with stakeholders on the issue of data publication before it resolves on a particular approach to protecting privacy interests through modifications and deletions.”

Privacy fears have been repeatedly invoked by opponents of HMDA data collection in their effort to block the collection of data regarding mortgage applications. In the mortgage context, there is at least a plausible basis to fear reidentification of HMDA records given that there are public databases covering substantially all mortgages to which HMDA records could be matched by one so motivated to do so. But there is no evidence over its long history that HMDA has led to any invasion of  applicants’ privacy. Thus, the fears of 1071 data undermining borrower privacy are quite far-fetched.

Good Economic Policy

We can all agree that “we need regulation that matches economic policy.” Section 1071 does just that. It provides the transparency into small business lending that will help small businesses, and especially minority and woman owned small businesses, to obtain the credit they need to thrive and does so at a quite modest cost. Congress should ignore calls to repeal Section 1071 and  the CFPB should allow the rule to take effect as scheduled.

The opinions shared in this article are the author’s own and do not reflect the views of any organization they are affiliated with.

^[1] As originally promulgated by the CFPB, the rule had earlier compliance dates, 88 Fed. Reg. 35150, 35494-35496 (May 31, 2023) but a district court issued a preliminary injunction and the compliance dates subsequently were extended to make up for the period that the injunction was in effect. See 89 Fed. Reg. 55024 (July 3, 2024).  

^[2] 2022 Report on Firms Owned by People of Color 

^[3] 2023 Report on Startup Firms Owned by People of Color 

^[4] National Community Reinvestment Coalition, Disinvestment, Discouragement, and Inequity in Small Business Lending 

^[5]  Fairlie, Robb, Robinson, Black and White: Access to Capital Among Minority-Owned Startups (2020).

^[6]  The Bureau was unable to estimate the share of non-depository institutions covered by the exemption but did estimate that 620 non-depositories would be covered by the rule.

^[7] The Bureau also estimated the smallest covered financial institutions typically would incur $59,400 in one-time costs to prepare for compliance and that typical mid-size institutions would incur a one-time cost of $44,600. Amortized over, e.g., five years, these costs would add a trivial amount to each originated loan.

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