Subprime auto lenders across the U.S. must prepare for the forthcoming compliance requirements tied to Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Section 1071”). Enacted as part of the financial reform package following the 2008 financial crisis, Section 1071 aims to promote transparency and fairness in lending practices by requiring financial institutions to collect and report data on small business loan applications.
Though Section 1071 requirements focus broadly on small business lending, it directly impacts various lending industries, including business-purpose automobile and subprime finance. As the compliance deadlines approach, subprime lenders must act to understand their risk associated with Section 1071, develop policies and procedures to effectuate compliance, and consider technologies and partnerships with subject matter experts to avoid costly penalties and enhanced reputational risk.
What Is Section 1071?
Section 1071 was introduced to amend the Equal Credit Opportunity Act (“ECOA”). It requires financial institutions to collect and report data on applications for credit from small businesses, including those owned by minorities, women, and other groups often seen as underrepresented in financial markets. The goal is to ensure fair lending practices and to increase transparency within the lending community and help regulators assess whether credit markets are operating equitably.
In March 2023, the Consumer Financial Protection Bureau (CFPB) issued a final rule to implement Section 1071, laying out specific data collection and reporting requirements for financial institutions that originate credit for small businesses. However, ongoing litigation caused delays in Section 1071 compliance timelines, and an extension of the initial deadlines. Compliance will now be phased in between 2025 and 2027, depending on the volume of credit transactions put forward in the final rule.1
What Auto Lenders Need to Know
While Section 1071 focuses exclusively on small business lending, it applies to a wide range of financial institutions, including lenders involved in vehicle financing (both captive and independent finance companies), such as commercial finance companies that specialize in business or agricultural vehicle purchases. Notably, motor vehicle dealers (which often act as intermediaries between the vehicle lender and the small business) are not covered by the final rule.
Automobile lenders are considered “covered financial institutions” under the rule if they originate 100 or more “covered credit transactions” to small businesses in each of the two preceding calendar years. A “small business” is defined as a business with gross annual revenue of $5 million or less, and a “covered credit transaction” refers to most forms of business-purpose credit, including loans, lines of credit, and credit cards, but excludes leases and consumer-designated credit. The key here is the primary purpose of the credit transaction. Is vehicle financing extended primarily for business, commercial or agricultural purpose? If “yes,” the transaction is covered, even if it is offered together with consumer-purpose credit, which is a frequent scenario in business- or agricultural-purpose vehicle finance.
There are a number of additional exclusions from coverage that subprime lenders should note. For example, credit transactions secured by residential property, such as a manufactured home, could qualify for an exemption, while a transaction that finances a non-dwelling (such as a recreational vehicle) could be Section 1071-reportable.
Trade credit is also not covered by the final rule. (An example would be a financing arrangement that allows one business to acquire goods, such as vehicle inventory, from another business without simultaneously paying off the transaction.) In response to the industry questions about the impact of Section 1071 on floor plan financing, the CFPB clarified that the trade credit exclusion applies where a distributor is financing its own inventory. In contrast, the transaction is covered where a financial institution provides the financing and receives the payment in full.
Key Compliance Dates
The CFPB has introduced a tiered compliance timeline based on the volume of originated covered transactions. Initially:
• Tier 1 lenders (the highest-volume lenders) must begin collecting data by July 18, 2025, with the first data reporting deadline set for June 1, 2026.
• Tier 2 lenders (moderate-volume lenders) have until January 16, 2026, to begin data collection, with a reporting deadline of June 1, 2027.
• Tier 3 lenders (the smallest-volume lenders) must be prepared to comply with data collection requirements by October 18, 2026, with data submissions due by June 1, 2027.
Subprime lenders must assess their lending volumes over the past two years to determine their compliance tier and begin preparations to meet these deadlines. Institutions may optionally use data from calendar years 2022 and 2023, or 2023 and 2024, in making this assessment. Lenders will then need to perform this institutional coverage determination on an annual basis.
Data Collection and Reporting Requirements
Section 1071 mandates that covered auto lenders collect and report specific data on credit applications from small businesses. This data is crucial for regulators to evaluate trends in small business lending and to assess whether lenders are meeting their fair lending obligations.
Lenders must gather and report data across three primary categories:
• Application-Related Data: This includes data, such as a unique identifier for each application, the method and date of application submission, the amount of credit applied for, and the action taken (e.g., approved, denied, withdrawn).
• Credit Pricing and Terms: Lenders must collect and report transaction characteristics, for example, the amount of credit approved or originated, interest rate details, origination fees, and any additional charges such as broker fees and information on prepayment penalties. These data points will help regulators understand how credit terms vary across different business demographics.
• Small Business and Principal Ownership Data: Information about the small business applicant must include, among others, the gross annual revenue, the number of employees, the time in business, and the ownership status of the business (minority-owned, women-owned, and/or LGBTQI+-owned). Additionally, demographic data on the principal owners, including race, ethnicity, and sex/gender, must be collected and protected through “firewalls” to ensure that underwriting decisions are not influenced by demographic information.
These significant data collection and reporting requirements pose a particular challenge to subprime lenders that receive applications from third parties (typically, vehicle dealers). Staff training, clear procedures and transparent communication between the lender and a third party will help ensure accurate and timely data collection.
Action Items for Automobile Lenders To Comply With Section 1071
Subprime lenders should evaluate their lending volumes over the past two years to determine whether they meet the threshold of 100 covered credit originations. If the lender falls into one of the compliance tiers initially, they need to begin preparing to meet their data collection and reporting obligations in time for the corresponding compliance dates. The institution’s policies and procedures should describe the ongoing, annual institutional coverage process.
Documented procedures should also address lending scenarios where more than one institution is involved in the automobile financing transaction (e.g., indirect lending). For example, which of the institutions should count the origination for purposes of institutional coverage? The last financial institution with authority to set the material terms of the credit transaction must count the origination for institutional coverage purposes (even if the lender does not, in fact, set the material terms). Also, only the last financial institution with authority to set the material terms is the reporting institution. The CFPB provided an important clarification for purposes of reporting application data that is especially relevant in context of indirect lending. Specifically, if the institution with last authority to set the material terms of the covered credit transaction is not a covered financial institution itself (e.g., it is an exempt motor vehicle dealer), the application is not reportable under Section 1071.
Lenders must also ensure that their current application processes align with Section 1071’s definitions of “covered credit transaction” and “small business” (which includes qualifying small farms). Policies may need to be revised to incorporate new procedures for collecting demographic data, protecting sensitive information, and reporting the required data points.
Subprime lenders should also create a comprehensive compliance plan that outlines the steps required to meet the deadlines for their respective compliance tiers. This includes identifying the systems that will be used to collect, store, and report data, as well as determining how data will be validated and submitted to the CFPB.
Since Section 1071 introduces many data-related requirements and processes, lenders (especially those that are not accustomed to data collection and reporting) must ensure that their staff are adequately trained to understand and comply with these requirements. Additionally, lenders may need to upgrade their loan origination systems to capture the required data, design a “firewall” for protected demographic information, and automate reporting procedures.
Given the ongoing litigation and potential for further regulatory changes, automobile lenders should monitor announcements from the CFPB and other relevant regulatory authorities. Staying up-to-date with developments will ensure that lenders are not caught off guard by any adjustments to the rule or further extensions of the compliance timelines.
Most importantly, as Section 1071 is a revision to the ECOA, subprime lenders are encouraged to analyze their anticipated covered transactions from a fair lending perspective at least annually. Once data for the Tier 1 reporters is filed in 2026, regulators will begin evaluating lenders’ pricing and underwriting practices as well as risks associated with marketing and other factors in the interagency fair lending examination procedures.2 Lenders that fall in any of the compliance tiers should consider using software to validate that their underwriting and pricing practices are fair to all credit applicants. Institutions that service their own portfolios may also want to consider how regulators may view their debt collection practices and whether all staff are appropriately trained to ensure equitable treatment amongst minority and female customers as well as anyone who identifies with an LGBTQI+ category.
Presuming a lender’s policies are compliant with applicable fair lending laws and regulations, all covered institutions will specifically want to ensure that credit applicants are not treated differently on one of the prohibited bases. Subprime lenders are reminded that the regulators do not have to prove that any disparate treatment was motivated by prejudice or a conscious intent to discriminate to pursue action. Variations in levels of assistance provided to protected ethnic or racial groups versus white applicants, for example, or inconsistencies in lender discretion that harm certain parties, should be considered in all cases.
If examples of potentially disparate treatment or overt discrimination are noted, lenders are advised to take immediate action. Legal counsel, as well as external consultants, should be contracted to ensure that the institution promptly takes steps to address the illegal action, and that policies and procedures are revised to prevent future recurrence.
Challenges and Opportunities
Even though Section 1071 presents significant compliance challenges for automobile lenders, it also offers opportunities to enhance lending practices and improve relationships with customers. By collecting detailed data on credit applications, lenders can gain advanced insights into their lending patterns and identify opportunities to better serve underrepresented groups.
Moreover, by demonstrating compliance with fair lending regulations, subprime lenders can enhance their reputation and position themselves as leaders in responsible lending practices. This can lead to greater trust from small business borrowers, that can, in turn, lead to new potential business opportunities.
The CFPB’s Section 1071 rulemaking marks a significant shift in the regulation of automobile lending, and those lenders that meet the covered financial institution threshold must begin preparing now to comply with the rule. By partnering with trusted Section 1071 compliance experts and taking proactive steps to update policies, train staff, and upgrade systems, lenders can not only meet their regulatory obligations but also strengthen their lending practices and foster greater trust with the communities they serve.
1The CFPB’s regulations (including Section 1071 rulemaking), generally, do not apply to motor vehicle dealers (that is, businesses that are predominantly engaged in the sale and servicing, and/or leasing and servicing, of motor vehicles).
2 See Office of the Comptroller of the Currency (fdic.gov)
Jason Keller, MPPA is a Director within Wolters Kluwer’s Product Management function. He is responsible for developing and delivering fair and responsible banking, financial crimes, and Community Reinvestment Act (CRA)-related products and advisory services at Wolters Kluwer. [email protected]
Tatyana Wentler, JD, CRCM, is a Specialized Consulting Manager with the Regulatory Analysis team of Wolters Kluwer’s Compliance Center of Excellence, where she serves as the lead attorney on matters of consumer finance. [email protected]
