The Effects of Dodd-Frank Section 1071 on Community Banks

Jim Taylor | Chairman | Arkansas Bankers Association

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010, brought significant changes to the financial industry. One particular section, Section 1071, was introduced to promote fair lending practices by requiring financial institutions to collect and report data on small business lending. While the intent behind this provision was to enhance transparency and address potential disparities, it has had notable effects on community banks. Let’s explore the potential impacts of Dodd-Frank Section 1071 on community banks and the challenges they face in complying with the new requirements.

Community banks, often characterized by their smaller size and local focus, have traditionally played a vital role in supporting local economies and providing credit to small businesses. However, complying with the reporting requirements of Section 1071 has imposed an additional regulatory burden on these institutions. The collection, maintenance, and reporting of small business lending data necessitate significant investments in technology, staff training, and compliance measures. This places a strain on the limited resources of community banks, diverting their attention and resources away from their primary mission of serving their local communities.

Community banks are known for their personalized and relationship-based approach to lending. However, the introduction of Section 1071 has increased compliance costs for these institutions. Community banks often lack the same economies of scale as larger financial institutions, making it harder for them to absorb the costs associated with new compliance measures. These costs include hiring specialized staff, investing in data management systems, and conducting internal audits to ensure accurate and timely reporting. As a result, community banks may face challenges in maintaining their competitive edge and providing affordable credit options to small businesses.

The reporting requirements under Section 1071 demand detailed information on small business lending, including loan amounts, interest rates, and borrower characteristics. While this data collection aims to identify potential disparities and ensure fair lending practices, community banks encounter challenges in gathering and organizing the required data. Unlike larger banks with established reporting infrastructures, community banks may rely on manual processes or less sophisticated systems, making it time-consuming and resource-intensive to comply with the new regulations. This may hinder the ability of community banks to adapt swiftly to the reporting requirements and redirect their focus away from fulfilling their customers request in a timely manner.

Community banks face a unique set of challenges compared to larger financial institutions. With limited resources, these banks may struggle to keep up with the ever-increasing regulatory landscape. Compliance with Section 1071 may result in community banks dedicating a significant portion of their resources to meet reporting obligations, leaving them with fewer resources to invest in innovative products, technology advancements, personalized customer service, and the communities they serve. This could put them at a competitive disadvantage against larger banks that have greater financial capacity to absorb regulatory costs and invest in customer-centric initiatives.

Dodd-Frank Section 1071 was enacted with the aim of promoting fair lending practices and enhancing transparency in small business lending. However, its implementation has had significant implications for community banks. These institutions, already operating on limited resources, face increased regulatory burden, compliance costs, and data collection challenges. Moreover, the diversion of resources towards compliance measures may hinder their ability to compete effectively with larger banks and continue serving their local communities in a personalized and efficient manner.

As community banks we must not let the overburdensome reporting requirements of section 1071 take our focus away from providing essential and timely financial solutions to our small business customers. These entrepreneurs power the local economies of every town in Arkansas, both large and small. I assure you that your association continues to battle for relief from Section 1071’s overwhelming effects on small business lending.

For example, we encourage French Hill to reintroduce the Small Lender Act which will reduce the definition of a small business from $5 Million in gross revenues down to $1 Million in gross revenues along with extending the implementation from 18 months to 3 years. The Texas Bankers Association along with the American Bankers Association have sued the CFPB seeking to invalidate the final rule on the premise that it will drive small lenders from the market due to their inability to comply with the final rule’s “burdensome and overreaching reporting requirements”. The result of this lawsuit is a temporary injunction for the implementation of 1071 for members of American Bankers Association and Texas Bankers Association. This decision is being appealed and we anticipate the US Supreme Court to rule later in 2024. If the verdict is overturned the CFPB will set a new timeline for those member banks, in the meantime, if you are not a member of AmBA or TBA, the original implementation timeline is still applicable.

As policymakers and lawmakers evaluate the impact of Section 1071, it is crucial to consider the unique circumstances of community banks and explore potential avenues to alleviate their compliance burden without compromising the goals of fair lending. Striking a balance between regulatory oversight and supporting the essential role community banks play in local economies will be crucial for fostering a vibrant and inclusive financial ecosystem.

In full disclosure a portion of this article is the product of ChatGPT. If you read the article in the last Arkansas Banker, you know that Artificial Intelligence will be playing a larger role in our lives.