Section 1071 Rule Proposed Amendments—A Deeper Dive

As previously reported, the CFPB is proposing major changes to its 2023 final rule that would require financial institutions to report information contained in loan applications submitted by small businesses, including women-owned and minority-owned small businesses. The rule is better known as the "Section 1071 rule" after the section of the Dodd-Frank Act that required the CFPB to adopt it. Comments must be received by December 15, 2025.

The proposed amendments would reduce the number of financial institutions subject to the rule, the transactions that are covered by the rule, and the data points that must be collected and reported under the rule. Reflecting its overall approach to the proposed revisions, the CFPB states in the preamble to the proposal that it "preliminarily believes that [the] reaction to the 2023 final rule, practically speaking, was in part based on its expansive approach, appearing to seek broad coverage of lenders, products, and information collected. The CFPB does not believe that alignment with the statutory purposes of section 1071 requires the use of its discretionary authority to collect data with such a breadth of scope." (Footnote omitted.)

Covered Financial Institutions. The 2023 final rule established three tiers of covered financial institutions based on the volume of covered transactions that they engaged in during each of the preceding two calendar years, with three different compliance dates. Based on lawsuits challenging the rule, which we have reported on previously, including here, here, and here, the CFPB has extended the original compliance dates twice. Based on the most recent extension, the compliance dates under the 2023 final rule are as follows:

Under the 2023 final rule as adopted originally, financial institutions are in Tier 1 if they originated at least 2,500 covered transactions in both 2022 and 2023, financial institutions are in Tier 2 if they originated at least 500 covered transactions in both 2022 and 2023 and were not in Tier 1, and financial institutions are in Tier 3 if they originated at least 100 covered transactions in both 2024 and 2025 and were not in Tiers 1 or 2.

The CFPB now proposes to change the three-tier approach to a single-tier approach, with financial institutions being subject to the rule if they originate 1,000 covered credit transactions for each of the two preceding calendar years, starting with originations in 2026 and 2027. The new compliance date would be January 1, 2028. The new first filing deadline would be June 1, 2029. In the preamble to the proposal, the CFPB notes that it also considered thresholds of 200, 500 and 2,000 originations in each of the two preceding calendar years.

The 2023 final rule did not exclude any type of financial institution from the rule. The CFPB now proposes to exclude Farm Credit System (FCS) lenders from the rule. In the preamble to the proposal the CFPB explains it "believes that an exemption for FCS lenders would advance the statutory purposes of section 1071. FCS lenders have a unique mission-driven structure, and they operate in a specific regulatory environment."

Covered Transactions. The 2023 final rule broadly defined a covered transaction as "an extension of business credit that is not an excluded transaction" and incorporated the definition of "business credit" from Regulation B section 1002.2(g). That section defines "business credit" as extensions of credit primarily for business or commercial (including agricultural) purposes, but excluding extensions of credit of the types described in [Regulation B sections] 1002.3(a)-(d)." Those sections set forth partial exemptions for public utilities credit, securities credit, and incidental credit, and a broad exemption for credit extensions to governments and government entities.

The 2023 final rule sets forth six types of excluded credit transactions:

• Trade credit, which the rule defines as "[a] financing arrangement wherein a business acquires goods or services from another business without making immediate payment in full to the business providing the goods or services."'
• Transactions that must be reported under the Home Mortgage Disclosure Act.
• Insurance premium financing, which the rule defines as "[a] financing arrangement wherein a business agrees to pay to a financial institution, in installments, the principal amount advanced by the financial institution to an insurer or insurance producer in payment of premium on the business's insurance contract or contracts, plus charges, and, as security for repayment, the business assigns to the financial institution certain rights, obligations, and/or considerations (such as the unearned premiums, accrued dividends, or loss payments) in its insurance contract or contracts. Insurance premium financing does not include the financing of insurance policy premiums obtained in connection with the financing of goods and services.
• Public utilities credit as defined in Regulation B section 1002.3(a)(1).
• Securities credit as defined in Regulation B section 1002.3(b)(1).
• Incidental credit as defined in Regulation B section 1002.3(c)(1), but without regard to whether the credit is consumer credit under the Regulation.

The final rule also excluded from being a covered transaction factoring, leases and purchases of existing credit transactions.

The CFPB proposes to add three additional exclusions for:

• A merchant cash advance (MCA), which the proposal defines as "[a]n agreement under which a small business receives a lumpsum payment in exchange for the right to receive a percentage of the small business's future sales or income up to a ceiling amount." (While the proposed regulatory text refers only to MCAs, in the preamble the CFPB refers to MCAs and other sales-based financing transactions, and the CFPB proposes to remove the references to such transactions from the 2023 final rule.)
• Agricultural lending, which the proposal defines as "[a] transaction to fund the production of crops, fruits, vegetables, and livestock, or to fund the purchase or refinance of capital assets such as farmland, machinery and equipment, breeder livestock, and farm real estate improvements."
• A transaction in an amount of $1,000 or less. (This dollar amount will be subject to adjustment every five years starting in January 2035, using the January 2030 Consumer Price Index for All Urban Consumers (CPI-U) as the base for adjustments.)

Addressing MCAs in the preamble to the proposal, the CFPB notes that it intentionally decided not to exclude such advances from the 2023 final rule and has now reconsidered that decision. The CFPB states it "believes that at the onset of the data collection under section 1071 the focus should be on core lenders and products before the CFPB considers expanding the scope of the rule" and that "MCAs are structured differently from traditional lending products." The CFPB also states it "believes it erred in prematurely determining that collection of data on MCA transactions would serve section 1071's statutory purposes by concluding that all MCAs constitute credit." However, the CFPB adds that it "will continue to monitor developments in the markets for MCAs and other sales-based financing to determine whether over time a subset might be appropriately included in the definition of "covered credit transaction" for purposes of data collection."

Addressing agricultural lending in the preamble to the proposal, the CFPB states that "agricultural lending differs markedly from other types of commercial lending. Agricultural loans are often secured by biological-based assets such as crops or livestock, which are subject to variables and risk from weather and disease. These characteristics create unique underwriting challenges that make such loans difficult to compare to those in other industries. The 2023 rule did not adequately consider these distinctions and the quality of data stemming from such transactions." The CFPB also observes that "agricultural lending is already subject to an existing Federal data collection framework, [through the Farm Credit Administration (FCA),] one that is tailored to this particular sector."

Addressing small dollar transactions in the preamble to the proposal, the CFPB noted that it had rejected requests by stakeholders to include an exemption in the 2023 final rule with, parties suggesting amounts ranging from $25,000 to $10 million, and that at the time "[t]he CFPB explained that it was not adopting an exemption because of the significant volume of small business lending involving credit amounts below the threshold levels proposed by commenters." The CFPB added that it "now believes that an exclusion for the smallest loans—well under the thresholds suggested by commenters in the 2023 final rule—is necessary or appropriate to carry out the purposes of section 1071."

Small Business. Under the 2023 final rule a business is considered a small business if its gross annual revenues in the preceding fiscal year were $5 million or less, subject to periodic adjustment for inflation. The CFPB proposes to lower the amount to $1 million or less. The amount would be subject to adjustment every five years starting in January 2035, using the January 2030 CPI-U as the base for adjustments, with the result rounded to the nearest multiple of $100,000. The 2023 final rule provides for adjustments starting in January 2025, and the rounding of the result to the nearest $500,000.

Addressing the proposed reduction in small business revenue amount, the CFPB refers to Executive Order 14192, Unleashing Prosperity Through Deregulation, which seeks to reduce burdens imposed by federal regulations. The CFPB states that "[a]s part of the CFPB's review of the 2023 final rule under this order, the CFPB identified that a $1 million threshold would help reduce regulatory burden on financial institutions because it would better align with other existing financial regulatory requirements and standard financial industry practices related to small businesses." However, the CFPB invites comments on whether revenue thresholds of $500,000, $2 million, $3 million, or some other amount would be appropriate.

Data Points. Dodd-Frank specifies the following data points for inclusion in the 1071 rule:

1. Whether the business is women-owned or minority-owned.
2. The application number and the date on which the application was received.
3. The type and purpose of the loan or other credit being applied for.
4. The amount of the credit or credit limit applied for, and the amount of the credit transaction or the credit limit approved for such applicant.
5. The type of action taken with respect to such application, and the date of such action.
6. The census tract in which the principal place of business is located.
7. The gross annual revenue of the business in the last fiscal year preceding the date of the application.
8. The race, sex, and ethnicity of the principal owners of the business.

Dodd-Frank permits the CFPB to add data points that it determines would aid in fulfilling the purposes of section 1071. The CFPB added many data points, including:

1. Whether the business is LGBTQI+-owned.
2. The application method.
3. Whether the application was received directly by the financial institution or its affiliate, or was received through a third party.
4. For applications that are denied, the denial reasons.
5. The following pricing information: the type of interest rate; the term of any initial rate period; for a fixed rate loan, the interest rate; for a variable rate loan, the margin, index value, initial rate period expressed in months (if applicable), and index name.
6. The total origination charges.
7. The total broker fees.
8. The total amount of all non-interest charges that are scheduled to be imposed over the first annual period.
9. For a merchant cash advance or other sales-based financing transaction, the difference between the amount advanced and the amount to be repaid.
10. Whether the financial institution could have provided for a prepayment penalty, regardless of whether the transaction includes a prepayment penalty.
11. Whether the transaction has a prepayment penalty.
12. The number of non-owners working for the small business.
13. The type(s) of guarantees for the credit.
14. The term to maturity.
15. The address used to determine the census tract of the principal place of business.
16. The type of small business, using a three-digit North American Industry Classification System (NAICS) code.
17. The time that the small business has been in business.
18. The number of principal owners, which would be limited to four given that a person must directly own 25% or more of the business to be a principal owner.

While the CFPB could have proposed the removal all of the additional data points from the 1071 rule, it took a more limited approach, proposing the removal of the first 12 data points.

The CFPB proposes modifying the data field for the sex of the principal owners by replacing the free form text field with Male and Female check boxes. The CFPB advises in the preamble that it "now believes, based on feedback from stakeholders of all kinds, that a free-form text field would likely result in poor data quality, given the variety of possible responses to the sex question even for a single type of answer."

While the CFPB does not propose to change the approach under the 2023 final rule of requiring the collection of both aggregate and disaggregated race and ethnicity information on the principal owners, it observes that section 1071 does not expressly provide for the collection of disaggregated data. The CFPB then adds that "[g]iven its concern about commencing a long-term data collection regime by asking for potentially complex and costly data points, the Bureau seeks comment on whether it should revise the rule's data collection requirements to require collection only of aggregate ethnicity and race categories."

Addressing in the preamble the approach taken by the CFPB in the 2023 final rule with regard to the addition of data points, the CFPB states that:

The CFPB then refers to Executive Order 14192, which is addressed above, and Executive Order 14219, Ensuring Lawful Governance and Implementing the President's ''Department of Government Efficiency'' Deregulatory Initiative, which provides that it is the policy of the Trump Administration "to focus the executive branch's limited enforcement resources on regulations squarely authorized by constitutional Federal statutes, and to commence the deconstruction of the overbearing and burdensome administrative state. Ending Federal overreach and restoring the constitutional separation of powers is a priority of [the] Administration."

The CFPB states that it believes removing certain of the discretionary data points would meet the goals of the Executive Orders. The CFPB then adds that:

Discouragement Provisions. The 2023 final rule includes provisions prohibiting a covered financial institution from discouraging applicants from responding to requests for information. In particular, the final rule provides that "[a] low response rate for applicant-provided data may indicate discouragement or other failure by a covered financial institution to maintain procedures to collect applicant-provided data that are reasonably designed to obtain a response." The provisions sparked ire from stakeholders, as it appeared that the CFPB assumed financial institutions would impede the goals of the rule by deliberately discouraging small businesses from providing information. Also, experience with the Home Mortgage Disclosure Act reveals that many individuals opt not to provide demographic data, which made it appear that the low response rate provision was designed to allow the CFPB to unjustly accuse many institutions of the prohibited discouragement. The CFPB proposes to remove the discouragement provisions, as it believes the provisions "are redundant and add unnecessary regulatory complexity."

Lawsuits. Presumably, activity in the three lawsuits challenging the 2023 final rule will pause during the rulemaking process. The effect on the lawsuit seeking to force the CFPB to implement the rule is less clear. In that lawsuit, the CFPB must file its motion to dismiss and opposition to the plaintiffs' revised motion for summary judgment on or before November 21, 2025. The plaintiffs then must file their opposition to the CFPB's motion to dismiss and any reply in support of their revised motion for summary judgment on or before December 18, 2025. After that, the CFPB must file any reply in support of the motion to dismiss on or before January 16, 2026. Whether the CFPB will have funding at the time to do so remains to be seen.

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