As recently discussed on our podcast here, section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) amended the Equal Credit Opportunity Act (ECOA) to require lenders to collect information about small business credit applications they receive, including geographic and demographic data concerning the principal owners, lending decisions, and the price of credit. The Consumer Financial Protection Bureau (CFPB or Bureau) issued its proposed rule in 2021, and after considering the over 2,500 comments it received, on March 30, 2023, the CFPB issued the massive, highly technical, and complicated Final Rule. The Final Rule and its accompanying discussion and analysis, as well as the Official Commentary totals 888 pages exclusive of the 123-page Filing Instruction Guide and numerous other documents released by the Bureau. In this fourth in a multi-post blog series (first post available here, second here, third here), we will take a closer look at the anti-discouragement provisions in the Final Rule.

What are the anti-discouragement provisions?

One of the aspects of the proposed rule that changed dramatically when the Final Rule was issued was a series of new provisions and sections of the Official Commentary prohibiting small business lenders from discouraging applicants from providing the data required to be collected by the Final Rule. There was no comparable provision in the proposed rule.

Specifically, §§ 1002.107(c)(3) and (4) of the Final Rule require a covered financial institution to maintain procedures designed to identify and respond to indicia of potential discouragement of applicants from providing responsive demographic information, including low response rates. According to the CFPB, a low response rate for applicant-provided data may indicate that the financial institution has engaged in discouragement or has failed to maintain procedures that are “reasonably designed to obtain a response.”

When do the anti-discouragement provisions take effect and how does the CFPB plan to enforce them?

Unlike the data collection grace period from enforcement, there is no grace period for the discouragement provisions. This means that if the Bureau in a supervisory exam detects that there was discouragement of an applicant from providing the requested data even from the effective date, the Bureau has signaled an intention to take supervisory or enforcement action in policy guidance issued concurrently with the Final Rule.

The policy guidance states that the CFPB intends to pay particular attention to covered lenders’ response rates for data requested from applicants in the Bureau’s use of its supervisory and enforcement authorities. The CFPB intends to consider how a lender’s response rates compare to financial institutions of similar size, type, geographic reach, or other relevant factors because low response rates may indicate discouragement or “other failure” by that lender to maintain proper data collection procedures. Similarly, the CFPB intends to consider irregularities in particular responses (such as high rates of an applicant response “I do not wish to provide this information) because that may indicate steering, improper interference, or other potential discouragement or obstruction of applicants’ preferred responses.

How do covered financial institutions monitor for discouragement?

There are essentially six sets of procedures that covered financial institutions will need to develop to monitor for discouragement, all of which are spelled out specifically in the Official Commentary to the Final Rule:

• Monitoring for low response rates, i.e., the percentage of covered applications for which the institution has obtained some type of response to its request for applicant provided data.
  • This includes responses of “I don’t wish to provide this information.”
  • Once 1071 data becomes publicly available, the CFPB expects creditors to compare their response rates against their peer lenders.
• Monitoring for irregularities in responses that might indicate steering, improper interference, or some other potential discouragement.
  • For example, if an institution finds that it has relatively high rate of “I don’t wish to provide this information” responses, it could mean that its procedures are not reasonably designed to elicit a response.
  • Again, a peer analysis is required here, once the data is available to perform it.
• Monitoring for response rates by product, division, location, loan officer, etc. to ensure there is no discouragement in any part of the institution’s lending practices.
• Providing adequate training to employees, particularly loan officers, to ensure that no discouragement is taking place with regard to applicant-provided data.
• Investigating any indicia of potential discouragement that might become evident from the monitoring, testing, and auditing process.
• Taking remedial action in response to any discouragement or other improper conduct.

We view these discouragement provisions as the ones most likely to cause significant supervisory or enforcement activity against 1071 reporting lenders once data collection is required. For this reason, covered financial institutions should pay particular attention to the requirements set forth in the Final Rule and Official Commentary, and design their monitoring procedures as set forth by the Bureau.