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Section 1071 – Challenges for Smaller Equipment Finance Lenders in Today’s Digital World

Date: May 03, 2024 @ 07:00 AM
Filed Under: Regulatory

Financial disclosure regulations remain problematic for many equipment finance lenders, and while lawyers remain steadfast in their efforts to secure possible exemptions from Section 1071 of the Dodd Frank Act, lenders must be prepared to adhere to these new guidelines.

Smaller equipment finance lessors are paying particular close attention, and with May serving as National Small Business Month, many leaders are looking to identify strategies to maximize their equipment finance operations and small business financials while remaining in compliance.

What are the challenges facing lenders?

Section 1071 would require equipment financiers of varying sizes to report more information to the federal government about their borrowers, including demographic information and other consumer data. Lenders argue that Section 1071 is too burdensome as it requires covered financial institutions to create and maintain systems for reporting 81 different customer data points to prove they don’t discriminate, putting them at a potential disadvantage when closing deals.

Smaller lenders face unique challenges in staying compliant while remaining competitive. Section 1071 of the Dodd-Frank Act was enacted to promote fair lending practices and transparency in small business lending. The rationale behind the 1071 provision is to identify and address potential disparities in access to credit for underserved communities.

Key requirements for smaller lenders

Section 1071 applies to lenders engaged in providing financial products or services to small businesses. This includes loans, lines of credit, or any other financial accommodation. Smaller lenders need to collect specific data points related to the applicant and the loan. This includes information on the race, ethnicity, and gender of the principal owners of the small business. Once the loan is originated, lenders must report this data to the Consumer Financial Protection Bureau (CFPB). The purpose is to enable the CFPB to monitor and assess lending patterns and potential disparities.

Implementing Section 1071 poses certain challenges for smaller lenders. Collecting and reporting additional data requires investment in systems and resources, which can be disproportionately burdensome for smaller institutions. It can be tricky to safeguard sensitive borrower information while complying with reporting requirements necessitates robust data privacy measures. There are also operational complexities in adapting existing processes to comply with Section 1071, which may disrupt workflow and necessitate staff training.

These challenges are very real, especially when so many of today’s lenders are concerned about compliance. In fact, in a recent survey, 40 percent of lenders said they are concerned about remaining in compliance with regulatory changes.

Opportunities for smaller equipment finance lenders

Despite these challenges, smaller lenders can take proactive steps to comply effectively with Section 1071, such as the investment in technology. Lenders can explore cost-effective technological solutions that streamline data collection and reporting processes. They can also enhance data governance, where they implement rigorous data governance protocols to ensure accuracy, security, and privacy of borrower information.

What’s more, lenders can collaborate with industry peers and engage with industry associations to share best practices and insights on compliance strategies. Lastly, they can monitor regulatory updates and guidance issued by the CFPB to adapt compliance programs accordingly.

Section 1071 of the Dodd-Frank Act represents a significant regulatory development for smaller lenders in the small business lending space. While compliance may present challenges, it also offers an opportunity to demonstrate commitment to fair lending practices and foster greater transparency in financial services.

By investing in technology that emphasizes digital adoption, enhancing data governance, and collaborating with industry peers, smaller lenders can navigate the complexities of Section 1071 effectively. Ultimately, proactive compliance with this regulation not only ensures legal adherence but also promotes trust and inclusivity within the lending ecosystem. As the regulatory landscape continues to evolve, staying informed and adaptable will be key for smaller equipment finance lenders to thrive in an increasingly complex financial environment.

Tim Yalich
Head of Motor Vehicle Strategy | Wolters Kluwer
Tim Yalich is Head of Motor Vehicle Strategy for Wolters Kluwer, a global provider of professional information, software solutions and services for the automotive and auto lending industries.
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