The CFPB issued a notice of proposed regulations (NPRM) to implement section 1071 of the Dodd-Frank Act. Section 1071 amended the ECOA to require financial institutions to collect and report certain data related to credit applications made by businesses and small businesses owned by women or minorities. Comments on the NPRM will be due no later than 90 days after the date of its publication in the Federal Register.
We’ll review the 918-page CFPB press release and share our thoughts in future blog posts. The full text of the NPRM was accompanied by a summary prepared by the Bureau. Based on the summary, the main aspects of NPRM are as follows:
- Covered financial institutions. The definition of “financial institution” in section 1071 (h) covers any entity that carries on financial activity and includes both depository and non-depository institutions such as online lenders, platform lenders, lenders involved in equipment and vehicle financing and commercial financing. companies. In September 2020, the CFPB published an overview of the proposals he was considering in anticipation of the convening of a panel of experts under the Small Business Regulatory Enforcement Fairness Act (SBREFA Outline). In the SBREFA Outline, the CFPB indicated that it was considering different standards to exempt financial institutions from the data collection and reporting requirements of Section 1071, consisting of a size-based exemption for deposit-taking institutions, a activity-based exemption for all financial institutions, and combined size and activity-based exemptions. In the NPRM, the CFPB proposes an activity-based exemption for all financial institutions that would exempt financial institutions that conduct less than 25 âcovered credit transactionsâ to âsmall businessesâ in each of the two calendar years. previous ones.
- Definition of “small business”. Section 1071 (h) defines a “small business” applicant as having the same meaning as “small business” in the Small Business Act. In the SBREFA outline, the Bureau indicated that it was considering defining a “small business” by overlapping the general definition of “small business” in the SBA, but adopting a simplified size standard for the purposes of its rule of law. article 1071 which used one of the three alternative approaches. One of those alternatives was a standard size of the previous year’s gross annual income of less than $ 1 million or $ 5 million. In the NPRM, the Bureau proposes to define a “small business” as a business that generated gross annual revenues of $ 5 million or less in its previous fiscal year. (Consistent with the outline of SBREFA, the Bureau is not proposing to require financial institutions to collect and report data on applications from women-owned or minority-owned businesses that are not a âsmall businessâ.)
- Definition “application”. Section 1071 does not define the term “application”. In the draft SBREFA, the Bureau indicated that it was considering defining a “request” in a manner that was largely consistent with Regulation B (which defines a “request” as “an oral or written request for ‘credit extension which is made in accordance with the procedures used by a creditor for the type of credit requested “) but would exclude certain circumstances such as inquiries and screening even though they would be considered a” request “under rule B In the NPRM, the Bureau proposes to adopt Regulation B Definition of ârequestâ but excludes (1) requests for reassessment, requests for extension or requests for renewal on an existing business account, unless the request only requests additional credit; and (2) inquiries and prequalification.
- Coverage of credit transactions. Section 1071 requires financial institutions to collect and report information regarding applications for âcreditâ to businesses. In the SBREFA outline, the Bureau indicated that it was considering a proposal that a transaction covered under Section 1071 would be a transaction that would meet the ECOA definition of âcreditâ and not be excluded. under the rule of Article 1071 of the Bureau. Transactions excluded included trade credit, factoring and cash advances to merchants. In the NPRM, the Bureau proposes to define a “covered credit transaction” as one that meets the definition of business credit under Regulation B. In addition to loans, lines of credit and credit cards, a “Covered transaction” would include cash advances from traders. The products that would not be covered by credit operations even if they meet the definition of regulation B are trade credit and public service credit, securities credit and ancillary credit as defined in regulation B.
- Data points. The NPRM includes the data points that a financial institution would be required to collect and report. In accordance with Section 1071 (e), a financial institution must collect and report “the race, sex and ethnicity of the principal owners of the business”. In the draft SBREFA, the Bureau indicated that it did not consider proposing the use of visual observation or surnames by institutions to determine the race, sex and ethnicity of principals. owners of a business and would instead suggest that this information be based solely on a primary self-declaration by the owner. In the NPRM, the Bureau suggests that if an applicant does not provide any information about the ethnicity, rate, or gender of at least one primary owner, the financial institution should collect at least race and ethnicity ( but not gender) of at least one principal owner by visual observation and / or last name if the financial institution meets the principal owners in person (including meetings via electronic media with a video component enabled.)
- Implementation. In the draft SBREFA, the Bureau indicated that it planned to allow financial institutions approximately two calendar years for implementation after the Bureau issued a final rule under Section 1071. In the NPRM, the Bureau proposes that a final rule enter into force 90 days after its publication in the Federal Register but compliance would not be required until approximately 18 months after publication.