Last month, the Consumer Financial Protection Bureau (CFPB) issued a long-anticipated proposed rule (published in the Federal Register on October 8, 2021) requiring regulated financial institutions to collect and report small business lending data to the Bureau. The rulemaking amends Regulation B, the CFPB's Equal Credit Opportunity Act (ECOA) regulations, to implement section 1071 of the Dodd-Frank Act.
This is the first in a series of posts, as we continue to work with clients to respond to the proposed rule.
While the CFPB's jurisdiction generally covers financial services that impact consumers (it's in the name!), the proposed rule focuses on small businesses. The finances of small businesses—and in particular sole proprietors—are often intermingled with the owners' personal finances, and the Dodd-Frank Act directed the CFPB to gather data on potential ECOA issues that exist at this intersection.
The Bureau's process leading up to the proposed rule started in 2017 with a published request for information on the small business lending market and a series of field hearings on section 1071. While the CFPB continued its work on the proposal, the COVID-19 pandemic and disaster relief programs in response highlighted the fair lending risks in the small business lending market. In introducing the proposed rulemaking, the CFPB's Acting Director said:
[The Paycheck Protection Program] was plagued with problems—the smallest businesses had trouble accessing the funds, and, at least initially, reports were widespread that Black and Hispanic entrepreneurs had trouble accessing funds as well. For example, testing conducted by the National Community Reinvestment Coalition showed that Black women entrepreneurs, in particular, were seldom, if ever, encouraged by lenders to apply for PPP loans, even though they were as well-qualified as others who were encouraged to apply.
One of the key debates coming out of the CFPB's field hearings was how to define a "small business." The CFPB proposes to reference the Small Business Act definition of "small business concern," but with a size standard of $5 million or less in gross annual revenue, which will require approval of the Small Business Administration to use an alternative standard.
Covered financial institutions are required to collect, report, and maintain data associated with "covered applications" submitted by small businesses pertaining to "covered credit transactions." The proposal defines covered applications consistently with Regulation B, but excludes applications for reevaluations, extensions, renewals (unless additional credit is sought), inquiries, and prequalification requests.
The definition of covered credit transactions in the proposal is largely consistent with Regulation B and similar to the 12 CFR 1002.3(a) definition of business credit. Covered transaction excludes: trade credit, public utilities credit, securities credit, and incidental credit, as well as factoring, leases, consumer-designated credit used for business purposes, and credit secured by certain investment properties.
The data that financial institutions must pass along to the CFPB includes data known to the financial institution itself, data provided by applicants, and data provided by third parties connected to the transaction. Data points include a variety of financial and organizational information related to the transaction itself, as well as to the small business entity (e.g., gross revenue, number of employees, age of business, etc.).
Under the proposal, financial institutions would be required to collect demographic information pertaining to a small business's principal owners (e.g., minority-owned business status, women-owned business status). The proposed rulemaking contains a number of conditions on how the information is collected, including that applicants are not required to provide such information and that financial institutions must ensure collected demographic information remains siloed and private.
The CFPB and consumer protection advocates argue that the proposal is not simply the mandatory implementation of legislation passed over a decade ago, but would create a useful tool for enhancing financial access for minority entrepreneurs. The proposal embodies an expansive view of fair lending that is representative of the Biden Administration's priorities.
The Bureau has tried to downplay any potential increase in regulatory burden for financial institutions from the proposal. In his introductory remarks, the Acting Director drew parallels to the Home Mortgage Disclosure Act (HMDA), which has already required the reporting of credit application information to regulators for over 40 years.
Financial institutions, meanwhile, have been less sanguine about the prospect of more regulatory reporting requirements. Recently, the Independent Community Bankers of America (ICBA) expressed complaints about the chilling effect the proposal would have on bank pricing. Furthermore, as with HMDA data, there is industry concern that oversimplified analysis of publicly available data under the proposal could be misused as the basis for unfounded fair lending complaints.
As proposed, the rule will add to the compliance responsibilities of lenders large and small, though the extent of that burden remains unclear. We will be tracking what is expected to be a significant number of public comments from interest groups and industry participants.