Section 1071 at a crossroads: Preparation beats waiting for regulatory clarity

Despite ongoing delays and legal challenges to regulations implementing Section 1071 of the Dodd-Frank Act, financial institutions that begin preparing now for small business lending data requirements will be better positioned for compliance when — not if — these regulations take effect. The underlying demand for transparency in commercial lending isn't disappearing, and institutions need to recognize that building the necessary infrastructure today creates competitive advantages tomorrow, regardless of how the final regulatory framework takes shape..The continuing regulatory journeyFinancial institutions find themselves navigating another regulatory detour as Section 1071 continues its uncertain journey through the compliance ecosystem. Originally designed to shine a light on small business lending practices and improve credit access for women- and minority-owned businesses, this Equal Credit Opportunity Act (ECOA) expansion has become a case study in regulatory evolution.The Consumer Financial Protection Bureau issued its final rule in March 2023, establishing a tiered compliance framework based on origination volumes. Institutions processing at least 2,500 small business loans in each of the previous two years were slated to begin data collection by October 2024, with smaller-volume lenders following in subsequent years. It’s now 2025, and those deadlines have evaporated amid legal challenges and regulatory reconsiderations. The CFPB delayed compliance again in June, while multiple lawsuits worked their way through the courts and Congress deliberated whether to nullify the new ECOA provision entirely..The temptation to waitThis regulatory uncertainty creates a tempting narrative: Perhaps Section 1071 will disappear, saving lenders from the burden of collecting and reporting 81 distinct data elements on every small business loan application. Some institutions, particularly moderate-volume lenders processing 500 or more but less than 2,500 loans annually (based on original Tier 2 standards), have embraced this wait-and-see approach, postponing meaningful preparation while hoping for regulatory relief.But this perspective misses a crucial point. The underlying demand for transparency in commercial lending isn't going away. Community groups, regulators and policymakers remain committed to understanding how credit flows to small businesses, particularly those owned by underrepresented populations. Whether through Section 1071 or another future iteration, the expectation for comprehensive lending data will persist.Preparation creates competitive advantageForward-thinking institutions recognize that preparation today creates competitive advantages tomorrow. The complexity of these requirements, from collecting sensitive demographic information to implementing firewall procedures that limit internal access to that data, demands significant lead time. Technology systems need updating to capture credit inquiries alongside formal applications. Staff require training on new collection procedures. Compliance programs must include commercial and agricultural transactions in addition to consumer lending.Unlike HMDA reporting, which many banks have mastered over decades, Section 1071 introduces entirely new data collection requirements for commercial lending. Loan officers accustomed to focusing solely on business financials should be prepared to navigate conversations about ownership demographics. Systems designed to track approved loans must be adaptable to retrofitting to capture withdrawn applications and verbal credit inquiries. Record retention policies require updating to accommodate multi-year data storage with appropriate security safeguards.The technology and partnership challengeThe technology implications go deeper than simple system updates. Institutions will need to forge new partnerships with vendors, integrate disparate data systems and ensure accuracy across multiple collection points. These aren't changes that happen overnight. Experience shows that establishing effective third-party relationships and implementing complex compliance systems typically requires 12 to 18 months, assuming there are no delays.The cultural shift Section 1071 demands is perhaps even more challenging than the technical requirements. Ensuring fair treatment across all credit applicants requires more than new procedures. It demands organizational commitment from the boardroom to branches. Institutions must examine whether their lending practices truly provide equal access and opportunity, using data to identify and address potential disparities.Building a culture of fair lendingThis cultural dimension becomes particularly important when considering the emphasis on preventing discouragement — the subtle ways lenders might dissuade certain applicants from pursuing credit. Low response rates to certain questions, for instance, might signal that loan officers aren't properly explaining why this information matters. Such nuances require thoughtful training and ongoing monitoring.Some institutions are already laying groundwork for compliance, regardless of regulatory uncertainty. They're assessing current loan origination systems, identifying necessary upgrades and budgeting for implementation costs. They're reviewing fair lending programs to ensure coverage of commercial transactions. They're building cross-functional teams with the expertise to manage a multi-year implementation process.Strategic benefits beyond complianceInstitutions that develop robust data collection and analysis capabilities position themselves to better understand their markets, identify underserved segments and make more informed lending decisions. In an increasingly data-driven financial services landscape, these capabilities represent strategic assets rather than regulatory burdens.While the specific requirements may evolve, the need for comprehensive small business lending data will endure. Institutions that begin addressing process documentation, system capabilities, staff training and vendor relationships will find themselves ready to adapt regardless of how the regulatory framework ultimately takes shape.Section 1071 may be at a crossroads, but the destination remains clear: greater transparency and accountability in small business lending. The institutions that recognize this reality and prepare accordingly will find themselves not just compliant but competitively positioned when the regulatory fog finally lifts.About the AuthorsJason Keller is director of product management and Tatyana Wentler is specialized consulting manager with Wolters Kluwer Financial & Corporate Compliance.