The Four “Don’ts” of Section 1071 and How They Will Help Your Bank
At a press conference on August 12, 1986, United States President Ronald Reagan said, “The nine most terrifying words in the English language are ‘I’m from the government and I’m here to help.’” It may have started as a “joke” based on Reagan’s long-held suspicions about the effectiveness and morality of the role of government in people’s lives.
But fast-forward to Section 1071 and there are a lot of nervous bankers who are revitalizing this opinion. They’re bringing up concerns about the Consumer Financial Protection Bureau (CFPB) and the upcoming compliance with this regulation. Most of the bankers I’ve talked to are genuinely concerned about the enforcement of the data gathering on small businesses that is a part of Section 1071 but after reading through the final rule and multiple conversations with the CFPB, I believe, to quote another U.S. president, that “The only thing we have to fear is fear itself”.
At the most recent Baker Hill Prosper conference, we heard from Alan Ellison, the CFPB Small Business Lending Program Manager, and Nate Weber, the CFPB Program Manager of the Office of Innovation. As they spoke to our clients, I took note of four don’ts that will impact your institution positively if you adhere to them. I am not from the government, but I am here to help, so here we go.
Don’t call it Section 1071.
This is much more than the 1,071st section of the Dodd-Frank bill — it is about making small business lending better in America. Small business is vital to the U.S. economy. Before coming up with something innovative that propelled them into growth, all big businesses once started out small. Not only are small businesses driving the U.S. economy, but they also keep the American dream alive. According to the U.S. Small Business Association (SBA), small businesses of 500 employees or fewer make up 99.9% of all U.S. businesses and 99.7% of firms with paid employees. But there is still so much that policymakers do not know about this critical economic driver. That is where Section 1071 — or, as I am going to call it from here on out, the Small Business Lending Rule — comes into play. This is all about knowing how we can better understand the needs and react to small businesses, so let’s stop calling it by a clinical name and actually call it by the name that captures its true purpose.
Don’t comply if you don’t have to.
Now before you start saying, “Great, Mike, you're going to end up getting me thrown into jail for not complying with the Small Business Lending Rule,” hear me out. If you are not doing the amount of loan volume to small businesses that makes you a “covered” institution, do not stress out about the Small Business Lending Rule. The CFPB has gone out of their way to make it so that smaller institutions that lend to small businesses, but do not have the volume to be considered a tier 3 institution (which means that they're doing less than 100 small business loans a year), do not have to comply with this ruling. They can simply keep helping those small businesses in their market without having the pressure of collecting this data. In my opinion, that truly is a gift from the government, and they are truly here to help those small businesses in those markets.
Don’t jump the gun and collect data too early.
In my conversations with bankers, I hear so many that are looking for resolution today for the Small Business Lending Rule. The rest are looking at the 18-month window that was the headline date in the news. But with the CFPB tiering, many of you reading this blog may not have to collect data until April 2025 or even until January 2026 in some cases. Allow those larger institutions to take over and lead the way in terms of complying with the rule and learn from their challenges, opportunities, and failures. One thing you will NEVER hear at any watercooler, tradeshow, or board room is that there is a first mover advantage for being the earliest adopter of compliance to regulations. Wait it out all you can and learn.
Don’t try to comply with the Small Business Lending Rule on your own.
There is a lot to take in when you look at the Small Business Lending Rule, and it can be overwhelming. In life, when I try to take on some overwhelming projects or goals, I make sure to have a partner in the mix so that I can bounce off ideas, look for support, or just have someone to vent to at times. So why would anyone want to take on the Small Business Lending Rule by themselves?
At Baker Hill we are working alongside the CFPB, banks and credit unions within our User Community, and other leaders in the fintech ecosystem to ensure that when the time comes to collect and report, you can have confidence in your submission. Again, we are here to help — and we are not from the government.
I hope that you learn from these don’ts so that when it comes to the Small Business Lending Rule, you are ready and able to help those small businesses that are driving the economy.
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We Had a Chance to Sit Down With the CFPB and the Only Topic on Bankers’ Minds is Section 1071
Posted on Friday, May 12, 2023 at 8:00 AM
by Mike Horrocks
With more than 25 years of experience in the financial services industry, Mike Horrocks possesses a unique and extensive blend of financial expertise, technology skills, process redesign abilities and solution management experience. Horrocks’ background enables him to create go-to-market strategies for new solutions, help clients convert strategies into revenue generating initiatives and forecast market direction.
As the Vice-President of Product Management at Baker Hill, Horrocks’ responsibilities include the identification and development of new market opportunities in the business of lending, risk management, and analytics for financial institutions. Mike holds a MBA both in International Finance and Venture Technology Management from Indiana University and a B.S in International Finance from Brigham Young University.
Before joining Baker Hill, he held executive positions within several other organizations, including Experian, Profit Technologies, SAIC, Broadway and Seymour (FIS), Zions First National Bank and Zions Data Corporation.
Horrocks is a member of many associations including the Risk Management Association and Bankers Without Borders. In his free time, he enjoys traveling internationally with his wife and five children.