I’ve written articles critical of the Section 1071 Rule and the CFPB’s implementation of the new rule. For example, the scheduled “applicable dates” for data recording and reporting make no sense at all. As currently scheduled the applicable dates which mandate capture of 1071 data are July 18, 2025, for Tier 1 lenders, January 16, 2026, for Tier 2 lenders and October 18, 2026, for Tier 3 lenders. This means that none of the data collected during 2025 and 2026 will be useful for CRA purposes because it will represent the activity of only a few lenders for only a part of each year. Another adverse nonsensical consequence of this is that bank lenders will be simultaneously collecting and reporting “small business” loans under 2 different rules with 2 different definitions of what is a small business loan. This adds to the confusion about what is a small business loan. But there is another point of confusion that makes the data collected under 1071 problematic. What I am referring to is the exclusion of loans that are “renewed”.

Under the current CRA rule small business loans that are refinanced or renewed are mandated to be collected and reported if you are a CRA reporter (subject to a once-per-year limit), and all small business loans that are refinanced or renewed are counted as originated small business loans. However, under the Section 1071 rule as embodied in § 1002.103(b), all renewed lending activity is excluded as “covered applications”.  But lines of credit issued to businesses, mostly for working capital purposes, are a widespread practice in lending and are typically “renewed” annually. In fact, an April 18, 2024, article in Forbes Advisor, Small Business Loan Statistics and Trends 2024, indicated that about one quarter (24.2%) of small business loans are for working capital purposes such as cashflow for everyday expenses and inventory purchases. This means that reported Section 1071 data will not include a very common form of business financing and consequently will significantly understate lending to small businesses.

But one of the main reasons for Section 1071 was to provide an overview of credit decision making and lending to the small businesses community and potential discrimination. The omission of loan renewals means there will be a big gap in the true volume of business credit decisions and the reported volume under 1071. I suspect the legislators who authorized Dodd-Frank would not be happy about the disqualification of much commercial credit activity which means those lending decisions will not be subject to scrutiny under Section 1071. Discrimination, whether it occurs during the loan origination process or during its subsequent renewal, is still discrimination.

An irony of the Bureau’s approach to renewal lending is that a transaction that is a renewal for one bank and therefore not a covered transaction for that bank, would be a covered application for another bank that processes the same application from the same borrower for the same amount of money. Bank 1 could deny an application for a renewal of a line of credit and not report the transaction. But if the very same borrower approaches another lender the transaction would be reportable. So, Bank 1 would not report a denial for a renewed line of credit, but Bank 2 would report that same application, and the outcome; origination or denial, etc., if the borrower approached Bank 2 for the very same loan. So, the identical application for a line of credit is covered or not covered depending on whether it is a renewal or not. And the answer to that depends on who the creditor is.

A final point is that secured revolving lines of credit (secured by inventory and receivables) known as “Accounts Receivable” financing, typically is done with demand notes to avoid the disruption of the priority of the lender’s security interest. Prudent lending dictates this to protect the lender’s interest in the assets. This means that many secured lines of credit will not be collected and reported under Section 1071 because the renewals of those credit facilities will not meet the qualifications of a covered loan under the Rule.

Once again, this will result in the omission of a significant volume of small business credit under Section 1071. And, since the 1071 data eventually will replace the small business lending currently reported under CRA, the understatement of small business lending contradicts an important purpose of the CRA, to present a picture of the credit market for small businesses.

I have had the pleasant experience of speaking with many CFPB attorneys who have responded to my many questions about the new Rule. The Bureau’s proactive approach to informing the public about the new Rule is impressive. The Bureau should reconsider its decision to exclude renewed loans as covered applications.