Is Section 1071 the New HMDA?
by: Greggory B. Oberg, Esq.
HMDA Implementation Was So Fun, Let’s Do it Twice.
Fresh off the first lap of “real” HMDA examination following the implementation of 2018 rules flowing from Dodd-Frank, the CFPB—reluctantly this time—has expressed a timeline for implementation of what some are calling “Small Biz HMDA” reporting requirements under Dodd-Frank, which direct the CFPB to implement regulatory amendment to Reg B.
The mandate, referred to as Section 1071, is codified in 15 U.S.C. § 1691c-2, directs the CFPB to “prescribe such rules and issue such guidance as may be necessary to carry out, enforce, and compile data pursuant to this section.”
What is Section 1071?
Briefly…because Rich Jackmauh will make fun of me if I include the 16 page chart I made…Section 1071 of Dodd-Frank provides broad strokes direction to the Bureau to create a HMDA-like reporting scheme to collect demographic data on small business loans made to non-male, non-white owned businesses. Very much under the same theories put forth for HMDA, you can’t improve what you don’t measure.
Section 1071 rightfully does absolutely nothing until the Bureau prescribes the methods of collection. I sometimes conceptualize data in my head with water running through pipes. Suppose Congress is a homeowner who wants to get water to their rural mountain cabin. Congress is a relative layperson when it comes to complex topics like moving things from point A to point B, but they can generally tell you what they want, when, and the related info. But they cannot perform the entire task—and must contract someone to put in the plumbing or whatever they’re in need of. That person—the CFPB—must install the pipes through which the water will flow. Or, in this metaphor, the manner in which the data requested will be delivered for consumption. We can't get the data till the pipes are built.
When Dodd-Frank passed, this was one of the MANY reform mandates handed down; naturally some prioritization had to occur. Reforms with broader applicability, like HMDA took the front seat. However, Section 1071 is about to have its day in the sun, and in relatively quick order—at least when you consider it’s a government action.
Why is it a priority now?
Because sometimes the regulators take a beating too. Back in May of 2019, a coalition of California mortgage industry groups seeking to advance the credit opportunities for minorities and women sued the CFPB.
…[T]he lawsuit filed by the California Reinvestment Coalition, the National Association for Latino Community Asset Builders, and two individual small business owners seeking a declaration that the CFPB’s failure to issue regulations implementing Section 1071 violates the Administrative Procedure Act and an order directing the CFPB to issue such regulations within six months.
Alan S. Kaplinski, Ballard Spahr, LLP, Nov. 14, 2019
On February 26, 2020, a settlement was reached in the case, and the CFPB effectively will be forced by the court to promulgate a Final Rule implementing Section 1071 on certain timelines.
When is this happening?
Short Answer: good question. The settlement provides certain timelines, although many of them have exceptions and can be litigated at a later date.
Here’s what we do know,
According to the agreement, the CFPB will:
By September 2020, outline its proposals for collecting the required data and publicly release those proposals for consideration of their effect on small businesses;
By October 2020, establish a Small Business Advocacy Review panel to provide input on its proposal. CFPB will take panelist suggestions from the small business plaintiff groups;
Negotiate deadlines with the plaintiffs for each stage of the rulemaking process to facilitate the data collection, including the deadline to issue the final data collection rule, and accept court-ordered deadlines if the parties cannot agree; and
Submit status reports every 90 days detailing the CFPB’s progress toward implementing this data collection rule.
Dodd-Frank Update, March 6, 2020
I was less than satisfied with that answer, so down the rabbit hole I went.
Methodology: Skip to Chart if You Don't Care
So, here's what I did. I took the settlement, used clean fractions of 30-day months and worked forward from obligatory dates.
Spoiler alert: the first step which is a condition precedent to the passage of the Final Rule under the settlement terms is also the first step for which no definite deadline exists. In fact, it's the only timeline that does NOT have a step-by-step procedure reasonably designed to allow the court to mandate an action with fairly certain timelines.
Moving down the line into steps 4 and 5, the timelines become less certain based on a few factors. First, the delays and uncertainty in previous steps is compounded as you move down the line.
Second, litigation is not known to move at a pace easily predicted. OR at least it's not something I've researched in any detail on similar cases--if they exist. I assumed at least a month to get a trial/decision after pleadings, but that could be significantly low. For example, the SCOTUS hearing on Seila Law was last week, and the opinion is due in June. I know that's a less-than-ideal comparison.
Third, although the defendants stipulated they will not recommend "no deadline", I assumed it was possible CFPB might say "your honor, we've got the Rule right here," and thus a zero day period is possible…and also made the math cleaner.
Finally, when the onus is on the CFPB to act, and the Court sets a "can't sue by" date, I assume litigation starts day one after expiration. Conversely, I assume the CFPB will wait as long as the court will let them under current political conditions.
Comparison to HMDA Roll Out
Dodd-Frank passed in July 2010. The NPRM was roughly 4 years later, in August 2014, and the Final Rule in October 2015—five years later. Add another three to get to 1/1/18—the excess is to recapture rounding errors. If we assume February 2020 settlement as the starting point, you might not see implementation until 2028 following a late 2025 final rule. That’s probably not realistic given the uniqueness of the court oversight in this instance, so but it’s worth defining an outer bound.
My Best Guess
HMDA Final Rule Passed October 15, 2015 and became effective on January 1, 2018, which is ~2.25 years. Obviously, they'd want to trigger on 1/1/something.
2023 feels insanely fast; would require everything to go on schedule with no disagreements between plaintiff and defendant. Even if that happened, that's less than a year to develop what I suspect will be a relatively complicated compliance management system addition.
Under the assumption that the lift isn't quite as heavy as HMDA, a 23-month implementation may be reasonable, which got me to 1/1/24. I don't think things will go smoothly, and even if they do, I think it's entirely possible this CFPB may side with industry commentators screaming about LOS challenges, etc. So, I added a year, and we're at 1/1/2025.
I’ll admit this is a new one for me, so I’m also just learning the scope and complexity of the forthcoming rules. Maybe I’m just the last to know…or just so far out ahead that it’s not on radars for most of you. What have you been hearing/thinking/planning for with 1071?
And if anybody wants that 16-page chart—and wants to prove to Rich there’s a demand for such—email me.