Last month, the Consumer Financial Protection Bureau (CFPB) released a long-awaited rule proposal (published in the Federal Register on October 8, 2021) requiring regulated financial institutions to collect and report data on small business loans to the Bureau. The regulation amends Regulation B, the CFPB Equal Credit Opportunity Regulation (ECOA), 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 CFPB’s jurisdiction typically covers financial services that impact consumers (that’s in the name!), The proposed rule focuses on small businesses. The finances of small businesses – and particularly sole proprietorships – are often entangled with the personal finances of owners, and the Dodd-Frank Act ordered the CFPB to collect data on potential ECOA issues that exist at this intersection.
The Bureau’s process leading to the proposed rule began 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 have highlighted fair lending risks in the small business lending market. In presentation of the proposed regulations, the acting director of CFPB said:
[The Paycheck Protection Program] was plagued by problems – smaller businesses struggled to access funds and, at least initially, there were widespread reports that black and Hispanic entrepreneurs also struggled to access funds. For example, tests conducted by the National Community Reinvestment Coalition showed that black women entrepreneurs, in particular, were rarely, if ever, encouraged by lenders to apply for PPP loans, even though they were as skilled as others who were encouraged to apply. .
One of the main debates emerging from the CFPB field hearings was how to define a “small business”. The CFPB proposes to reference the Small Business Act definition of “small business”, but with a size standard of $ 5 million or less in gross annual revenue, which will require Small Business Administration approval to use. another standard.
Covered financial institutions are required to collect, report and retain data associated with “covered claims” submitted by small businesses regarding “covered credit transactions”. The proposal defines which requests are covered in accordance with Regulation B, but excludes requests for reassessment, extension, renewal (unless additional credit is requested), inquiries and requests for prequalification.
The definition of covered credit transactions in the proposal is broadly in line with Regulation B and similar to 12 CFR 1002.3 (a) definition of business credit. Covered transactions exclude: trade credit, utility credit, securities credit and ancillary credit, as well as factoring, leases, consumer credit used for business purposes and credit guaranteed by certain buildings shift.
The data that financial institutions must transmit to the CFPB include data known to the financial institution itself, data provided by applicants and data provided by third parties related to the transaction. Data points include a variety of financial and organizational information related to the transaction itself, as well as the entity of the small business (e.g. gross income, number of employees, age of company, etc.).
Under the proposal, financial institutions would be required to collect demographic information on the primary owners of a small business (eg, minority-owned business status, women-owned business status). The proposed regulations contain a number of conditions on how information is collected, including that applicants are not required to provide this information and that financial institutions must ensure that demographic information collected remains siled and private.
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 to improve financial access for consumers. minority entrepreneurs. The proposal embodies a broad vision of fair lending that is representative of the priorities of the Biden administration.
The Bureau attempted to minimize any potential increase in regulatory burden for financial institutions resulting from the proposal. In his opening remarks, the acting director drew parallels with the Home Mortgage Disclosure Act (HMDA), which has already required disclosure of credit application information to regulators for more than 40 years.
Financial institutions, meanwhile, have been less optimistic about the prospect of more regulatory reporting requirements. Recently, the Independent Community Bankers of America (ICBA) complaints expressed on the deterrent effect that the proposal would have on bank pricing. In addition, as with the HMDA data, the industry is concerned that an over-simplified analysis of publicly available data under the proposal could be misused as the basis for unfounded loan complaints. fair.
As proposed, the rule will add to the compliance responsibilities of lenders large and small, although the extent of this burden remains uncertain. We will be following what should be a significant number of public comments from interest groups and industry participants.