By: Edward R. Milhorn, Compliance Consulting Director
Back on September 15, 2020, in connection with the requirements set forth in Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Section 1071), the Consumer Financial Protection Bureau (CFPB) released both an “Outline of Proposals under Consideration and Alternatives Considered” (Outline) for the small business data collection rulemaking and a high-level summary of its proposals to implement Section 1071. Section 1071 amends the Equal Credit Opportunity Act to require financial institutions to “compile, maintain, and submit to the [CFPB] certain data on applications for credit for women-owned, minority-owned, and small businesses.” According to the Outline, “Congress enacted section 1071 for the purpose of facilitating enforcement of fair lending laws and enabling communities, governmental entities, and creditors to identify business and community development needs and opportunities for women-owned, minority-owned, and small businesses.” With that in mind, the Outline includes a description of the relevant law, the regulatory process, the CFPB’s rule proposals and an economic analysis of the potential impacts on small entities.
The CFPB is proposing to apply the data collection and reporting requirements to all entities that meet the statutory definition of “financial institution,” which under Section 1071 includes “any partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative organization, or other entity that engages in any financial activity.” Given that the CFPB is casting such a wide net, it is likely that your institution would be impacted by these requirements. This proposed definition would mean that the data collection and reporting requirements would apply to several types of entities that engage in small business lending, including depository institutions, online lenders/platform lenders, community development financial institutions, lenders involved in equipment and vehicle financing, commercial finance companies, governmental lending entities, and non-profit, non-depository lenders.
Within the Outline, the CFPB is considering applying some exemptions based on either the lender’s size and/or level of small business activity. The reason for this is due to concerns that smaller financial institutions that conduct lower small business lending volumes may reduce or cease small business lending activity due to the costs of implementing and complying with the rule once it is implemented. This type of result would be a direct contradiction to the purpose of Section 1071, which is to promote community development by increasing access to credit. In terms of the scope of products to be covered by the rule, the CFPB states that it is proposing that the term “covered products” include term loans, lines of credit and business credit cards; however, the rule would specifically exclude consumer-designated credit, leases, factoring, trade credit and merchant cash advances.
Among other provisions, the CFPB notes that it is considering limiting the scope of the rule’s requirement to all small businesses, rather than including both small businesses and women- and minority-owned businesses, since the CFPB believes its definition would “cover nearly all women-owned and minority-owned businesses.” The CFPB is also considering the right of an applicant to refuse to provide certain information as well as an effective date of two years after the issuance of a final rule. Most importantly, the rule would require financial institutions to compile, maintain and report the following data:
- Whether the applicant is a women-owned, minority-owned, and/or small business
- The application/loan number
- The application date
- The loan/credit type
- The loan/credit purpose
- The credit amount/limit applied for
- The credit amount/limit approved
- The type of action taken
- The action taken date
- The census tract of the applicant’s principal place of business
- The applicant’s gross annual revenue
- The race, sex, and ethnicity of the applicant’s principal owners
In addition to the data above, Section 1071 gives the Bureau the authority to require financial institutions to collect and report “any additional data that the Bureau determines would aid in fulfilling the purposes of [Section 1071].” Among the additional discretionary data points that the CFPB is considering, is information related to the pricing of both originated credit and credit that is approved but not accepted, the applicant’s time in business, the applicant’s North American Industry Classification System (NAICS) code and the applicant’s number of employees.
Similar to the data collection and reporting requirements under the Home Mortgage Disclosure Act (HMDA) for mortgage loans, the CFPB’s rule may require a great deal of effort on the part of financial institutions to ensure accurate reporting and compliance with the rule. Depending on your institution’s size and complexity, the costs associated with complying with this rule could potentially pose a significant concern as well. Fortunately, the CFPB has opened up its rule to public comment and is seeking feedback on the direction of the rule. Feedback and comments on the scope of the rule can be sent to 2020-SBREFA-1071@cfpb.gov until December 14, 2020. Given the potential impacts, we urge you to review the rule and provide comments as you deem necessary.
For those wanting to learn more about the CFPB’s Proposal for Small Business Lending Data Collection and Reporting, you can find the Outline here. Additionally, you can find the CFPB’s High-Level Summary of the Outline here.