When was the last time you thought you had a good handle on “the situation” only to discover things might not be what they seem?
I once convinced my wife to help me drag a 48-foot dock, floating on three tractor tubes, across a 2,000-acre lake with a 16-foot aluminum boat powered by a 15-horsepower outboard in early November headwinds.
What could possibly go wrong?
Saying we were underpowered doesn’t accurately describe our predicament. Thankfully, we can laugh about it now.
More recently, I wondered if I really understood the challenges our industry faces with Dodd-Frank Section 1071 compliance -- and if companies most impacted feel prepared for the deadline. (Keep in mind that I’ve been engaged with this issue since 2013 via ELFA’s Capitol Connections conference where we advocated against 1071.) Beyond all the dialogue floating around on the topic, we wanted to know, “Are you prepared?”
This was the genesis for Tamarack conducting a survey focused on 1071. We asked three simple questions, and I was surprised by the responses and the implications.
1. Which Tier (number of covered transactions) does your organization fall under?
Initially, I was surprised that almost 70% of respondents fell under the first tier, meaning they only have until July 18, 2025, to implement the solution(s) to be compliant with the CFPB.
| Tier | Covered Transaction /Calendar Year |
Respondents |
|---|---|---|
| 1 | => 2,500 | 68% |
| 2 | => 500 | 23% |
| 3 | => 100 | 5% |
| N/A | 5% |
However, I suspect Tier 1 financial institutions had a higher propensity to participate given the urgency of that deadline, whereas Tier 3 companies still have two years to become compliant.
2. Do you believe your organization is on track to be compliant by the date you selected above?
Turning to our industry’s preparedness, less than half of respondents believe they are on track to comply!
| Do you believe your organization is on track? | Respondents |
|---|---|
| We have completed or will execute our plan to be compliant by the date required. | 45% |
| We have a plan & allocated resources but are unsure if we will be compliant when required. | 23% |
| We are relying on our vendor(s) to deliver functionality to support compliance. | 27% |
| I’m not familiar with my organization’s strategy for compliance. | 0% |
| N/A | 5% |
The other side of this coin is that 50% are unsure or are relying on their software vendors to provide a timely solution.
Tom Prendergast from Xerox Financial Services echoes this concern: “We definitely fall into the 1st tier of data collection -- but I’m not sure if our systems will be ready.”
3. About what aspects of compliance are you most concerned?
Most revealing were the results to the third and final question:
| About what aspects of compliance are you most concerned? | % Expressing Concern |
|---|---|
| Training sales staff and/or our Third-Party Originators on how to be compliant | 64% |
| Requesting the demographic data from our customers | 64% |
| Modifying our origination system to capture the demographic data | 59% |
| Firewalling the demographic data from our adjudication process | 50% |
| Reporting application data to the CFPB | 23% |
| None of the above | 0% |
This illustrates the uncertainty and overall burden this legislation has on all aspects of the origination process. Here’s how industry professionals articulated their worries:
Eric Gross, chief operating officer at Dext Capital, said, “I’m very concerned about the technical and timing aspects of collecting the [demographic] data.”
Michael Green, chairman at Dakota Financial, said, “I’m concerned about the time associated with modifying our origination platform to adhere to this regulation – collecting, storing and firewalling the demographic data from the credit adjudication process. It is one thing to create custom fields but developing the security levels that assure compliance is a significant risk.”
With only 45% of respondents confident they are or will be ready, it is clear our industry is far from prepared for 1071. And for those who have been working in this industry for a while, we understand why: There are so many variables.
Compliance involves much more than asking three questions. What about how customers will react to being asked about their ethnicity, gender and race?
Eric Gross indicated he is most concerned about this risk: “No one seems to mention the potential liability we are undertaking and the risk of litigation. We are not being protected against someone bringing action against us for denying credit based upon the information they provided to us.”
Dragging a ½-ton metal dock across the lake may not seem like a great idea, but the risk is limited to my boat and dock. With the implementation of Section 1071, there is no precedent in litigation, which means experience and our judicial system will have to provide sufficient flotation and rope systems.
Regardless of the date of your specific 1071 compliance deadline, we at Tamarack have the tools and experience to help you navigate these uncharted waters! Contact me at dnelson@tamarack.ai if you would like discuss.
Written by
Daniel Nelson
Founder & CEO, Board Member
Founder and CEO of Tamarack Technology, Daniel Nelson is well-versed in the challenges and opportunities facing lessors and lenders. A recognized industry expert, Nelson has spent his entire career working exclusively within the equipment finance and commercial lending industry.