Revisiting the CFPB’s Final Rule to Implement Section 1071 of The Dodd-Frank Act: How It Could Change Small Business Lending and Reporting – Part II

Due to an injunction imposed by the United States District Court for the Southern District of Texas, nationwide enforcement of the Final Rule to implement Section 1071 of the Dodd-Frank Act was dependent on the outcome of a case pending before the United States Supreme Court (“SCOTUS”).  On May 16, SCOTUS made its decision which had the effect of lifting the injunction.  Following this ruling, the Consumer Financial Protection Bureau (CFPB) released an Interim Final Rule on July 3, 2024, which became effective on August 2, 2024.

What’s the Final Rule Again?

On March 30, 2023, the CFPB issued a final rule governing the collection and reporting requirements for small businesses for covered financial institutions (the “Final Rule” also known as the “Small Business Rule”).  As more fully discussed here, to comply with the Final Rule, covered institutions must compile, collect, and maintain voluminous data from small business applications; maintain procedures reasonably designed to collect the data and obtain a response; report the data to the CFPB yearly; subject to certain exceptions, limit employee access to applicant responses; and maintain evidence of compliance with the Final Rule for at least three years after it is required to be submitted to the CFPB.

So Is the Injunction Preventing Implementation of the Final Rule Still in Place?

No.  Enforcement of the Final Rule was initially delayed due to a preliminary injunction issued in Texas Bankers Ass’n v. CFPB, 7:23-cv-00144 (S.D. Tex. Apr. 26, 2023) pending the outcome of another case before SCOTUS, Cmty. Fin. Sers. Ass’n of Am., Ltd. v. CFPB, 51 F.4th 616 (5^th Cir. 2022) (“CFSA v. CFPB”), cert. granted, 143 S. Ct. 978 (2023).  However, on May 16^th, SCOTUS ruled in favor of the CFPB in CFSA v. CFPB and upheld its funding structure.  This ruling lifted the stay and has cleared the path for implementation of the Final Rule.  In response, the CFPB released its Interim Final Rule that became effective on August 2, 2024.  The following is a summary breakdown of the amended rule.

Enforcement Dates

The Interim Final Rule extends the compliance dates originally set forth in the Final Rule in 2023 by 290 days to compensate for the period that the rule was stayed (July 23, 2023 to May 16, 2024).  As explained here, a financial institution is generally covered under the rule if it originates 100 covered credit transactions for small businesses in each of the two preceding calendar years.  Covered transactions are an extension of business credit which generally include loans, lines of credit, credit cards, and merchant cash advances.  However, not all covered financial institutions must begin complying with the rule at the same time:

How to Determine Compliance Tier            

The volume thresholds for the compliance tiers referenced in the chart above have been set by the CFPB and depend upon the number of covered originations that a financial institution originated in particular calendar years.   Highest volume lenders are those covered financial institutions that have at least 2,500 covered originations for each of those years, moderate volume lenders are those covered financial institutions that have at least 500 covered originations for each of those years, and the smallest volume lenders are those that have at least 100 covered originations in each of those years.

As opposed to the Final Rule, the Interim Final Rule states that financial institutions may determine their compliance tier based upon either their covered originations for calendar years 2022 and 2023 or their covered originations for calendar years 2023 and 2024.  This change will allow a financial institution to pick the most advantageous two years, which can push off their compliance date to a later date.  For example, if a financial institution had a high number of loan originations in 2022 and 2023 that would classify it as a moderate volume lender, but they had a slower 2024 that would classify it as the smallest volume lender, it could elect to determine its compliance tier based on its 2023 and 2024 covered originations and push out its mandatory compliance date.  In this scenario, the financial institution’s new compliance date would be October 18, 2026 rather than January 16, 2026.

12-month grace period

A 12-month grace period was adopted under the Final Rule in 2023 during which the CFPB would not intend to assess penalties for errors in data reporting, and would intend to conduct examinations only to discover compliance weaknesses as long as the financial institutions engaged in good faith compliance efforts.  To reflect the new compliance dates referenced in the Interim Final Rule, the CFPB has revised these dates as follows:

Unless material, errors discovered during the grace period will not require data resubmission.  Additionally, the CFPB has stated it does not intend to assess penalties for unintentional and good faith errors during this time.  However, if the errors are not the result of good faith compliance efforts, they could subject that financial institution to punishments, including the assessment of penalties.

Contact the Law Group of Northwest Arkansas PLLC for Banking and Finance Representation. We understand what it takes to navigate the complexities of banking and regulatory law and have the experience it takes to resolve issues favorably.

Whether you need assistance with perfecting your security interests; garnishment responses; workout agreements; state, federal, or bankruptcy litigation; collection of judgements; or drafting procedures to comply with the Final Rule, The Law Group of Northwest Arkansas PLLC can help.

If you have any questions, please feel free to contact the co-author of this article, Teaven Stamatis, at teaven.stamatis@lawgroupnwa.com or by phone at 479-316-2584.