CFPB Issues Proposed Small Business Lending Rule – Finance and Banking

United States: CFPB Issues Proposed Small Business Lending Rule 03 September 2021 Mayer Brown To print this article, all you need is to be registered or login on Mondaq.com. Today the Bureau finally released its long-awaited proposed rulemaking on small business lending data […]


United States:

CFPB Issues Proposed Small Business Lending Rule


To print this article, all you need is to be registered or login on Mondaq.com.

Today the Bureau finally released its long-awaited proposed
rulemaking on small business lending data collection. Section 1071
of the Dodd-Frank Act mandated that the CFPB collect data about
small business lending to facilitate enforcement of fair lending
laws.

After ten years of fits and starts on this topic, the Bureau
ultimately was pressured by a lawsuit filed against it to make
forward progress on a proposal. As we previously reported, a court
settlement last year mandated a timeline for the CFPB to take
certain steps to initiate a Section 1071 small business lending
data collection rulemaking. Among other steps, the settlement
required the CFPB to convene a Small Business Advocacy Review panel
(“Panel”) by October 15, 2020. The Panel met and provided
feedback on the CFPB’s proposals under consideration and
released its report in December.

The 918-page proposed rule issued today is the culmination of
years of research and CFPB engagement with stakeholders. Below is a
brief rundown of how the proposed rule lines up against the
Panel’s recommendations, which we previously covered in our
January Fair Lending Newsletter:

  • General. The Panel recommended that the Bureau
    issue implementation and guidance materials, including sample
    disclosure language. The proposed rule addresses this by offering
    several appendices, including a sample data collection form and
    instructions for financial institutions on how to collect and
    report data.

  • Scope. The Dodd-Frank Act’s amendment to
    ECOA requires a financial institution to inquire whether a business
    applicant is a women-owned, minority-owned, or small business.
    Notwithstanding the plain language of the statute, however, the
    Bureau is not proposing to require that financial institutions
    collect and report data regarding applications for women-owned and
    minority-owned businesses that are not small. Its
    rationale is that most existing businesses are small businesses,
    making it likely that nearly all women-owned and minority-owned
    businesses would already be captured just by covering small
    businesses. This limitation on scope is something the Panel had
    recommended that the Bureau continue to explore, but the Bureau
    decided that limiting the scope to small businesses (as opposed to
    expanding it to large women-owned and minority owned
    businesses) is consistent with the purposes of the statute.

  • Lenders covered. Under the statutory
    definition of “financial institution,” the rule’s
    data-collection and reporting requirements could apply to a variety
    of entities that engage in small-business lending. The Bureau
    decided to define a covered financial institution as one that
    originated at least 25 credit transactions to small businesses in
    each of the two preceding calendar years. This exemption based
    solely on volume of activity may come as a disappointment to
    institutions that were hoping to be exempted on other grounds, such
    as asset size.

  • Definition of small business. Section 1071
    defines “small business” by reference to the Small
    Business Administration regulations, but the Bureau had been
    contemplating a variety of potential ways to simplify the
    definition for purposes of this rulemaking. As recommended by the
    Panel, the Bureau is consulting with the SBA Administrator and is
    seeking approval from SBA to simplify the definition of small
    business to look to whether the business had $5 million or less in
    gross annual revenue for its preceding fiscal year.

  • Definitions of women-owned business, minority-owned
    business, and minority individual
    . The Panel recommended
    that the Bureau seek public comment on potential interpretations of
    these terms to ensure that small-business applicants are able to
    understand questions based on these definitions. It also
    recommended permitting applicants to select multiple race and
    ethnicity categories. The proposed rule contains a data collection
    form for financial institutions to use, which explains to an
    applicant the reasons for collecting the information and includes a
    non-discrimination notice. Financial institutions would be required
    to ask an applicant to provide demographic information about the
    applicant’s principal owners or ownership status, but
    applicants could choose not to answer. If an applicant does not
    provide any ethnicity, race, or sex information for at least one
    principal owner, the Bureau is proposing that the institution must
    collect at least one principal owner’s race and ethnicity (but
    not sex) via visual observation and/or surname if the institution
    meets in person or by video with any principal owners.

  • Product coverage. The Bureau is proposing that
    covered credit products would include term loans, lines of credit
    and business credit cards. As recommended by the Panel, covered
    products also would include merchant cash advances, which the Panel
    believed would further the statutory purposes of section 1071
    because they represent an important means of accessing credit for
    small businesses. Covered credit transactions would not
    include consumer-designated credit, leases, factoring, trade
    credit, or public utilities, securities, or incidental credit.

  • Definition of application. Consistent with its
    earlier outline of proposals, the Bureau is proposing to clarify
    circumstances that would not be reportable under section 1071, even
    if they might be considered an “application” for
    Regulation B purposes, including inquiries/prequalifications,
    reevaluation, extension, and renewal requests, and solicitations
    and firm offers of credit. Consistent with the Panel’s
    recommendation, the Bureau is seeking comment on whether to include
    line increase requests as a “covered application” and
    information on how financial institutions currently process
    requests for a line of credit increase. At least one Panel
    participant had suggested that treating line increases as
    reportable applications would require some lenders to make
    significant changes to how they do business. The Bureau is also
    proposing to require the collection of data on incomplete or
    withdrawn applications, which stakeholders said would highlight
    potential issues of discouragement, level of assistance
    disparities, or other discriminatory treatment.

  • Statutory data points. A covered financial
    institution would be required to collect and report certain data
    points mandated by statute. The proposed rule describes these data
    points and notes that for the collection of data that is
    self-reported by the applicant, the financial institution is
    generally not required to verify the information.

  • Discretionary data points. Although a large
    majority of industry stakeholders argued against the collection of
    any additional data points–which the Bureau refers to as
    “discretionary” because they are within the Bureau’s
    discretion to adopt–the Bureau’s proposed rule would
    require the collection of additional data points relating to
    pricing, time in business, NAICS1 code, and number of workers.
    Panelists had been divided about pricing data in particular, with
    some panelists suggesting that there would be essentially no point
    to collecting any data if the Bureau does not also require pricing
    data to put it into perspective, and others arguing that making
    pricing data public could result in misinterpretations and
    unjustified fair lending concerns. Ultimately, the Bureau said it
    believes that each of these discretionary data points would serve
    the purposes of 1071 and improve the utility of the data for
    stakeholders. The Bureau also decided that a handful of additional
    data points would be important to add to this list, including
    application method, application recipient, denial reasons, and
    number of principal owners.

  • Timing of data collection. Rather than
    specifying a particular time period for the collection of section
    1071 data, the Bureau is proposing to require a covered financial
    institution to maintain procedures to collect applicant-provided
    data at a time and in a manner that is reasonably designed to
    obtain a response.

  • Underwriter firewall. The Bureau was
    considering requiring a firewall so that an underwriter does not
    know of an applicant’s status as a women- or minority-owned
    business, or of the race, sex, or ethnicity of the principal
    owners. Given that many smaller institutions might not find a
    “firewall” feasible, the Bureau’s proposed rule would
    allow financial institutions to provide a notice to applicants
    instead of restricting access to demographic information if it is
    not feasible to maintain a firewall.

  • Applicant’s right to refuse to provide demographic
    information
    . As suggested by the Panel, the Bureau
    developed sample language financial institutions can use to give
    context as to why applicants are being asked to provide demographic
    information. Applicants may refuse to provide the information.

  • Compiling, maintaining, and reporting 1071
    data
    . As expected, the Bureau is proposing that data
    collection and reporting be done on a calendar-year basis, with a
    three-year retention requirement and a prohibition on including
    personally identifiable information other than that specifically
    required.

  • Privacy considerations. To address privacy
    concerns, the Bureau is proposing to use a balancing test that
    weighs the risks and benefits of public disclosure of section 1071
    data. The Bureau has discretion under ECOA section 704B(e)(4) to
    modify or delete fields from the public application-level 1071 data
    where the release of the unmodified data would create risks to
    privacy interests. The Bureau’s proposed 1071 balancing test
    would consider the privacy interests of not just applicants, but
    also related natural persons who might not be applicants (such as
    principal owners of a business, where a legal entity is the
    applicant), as well as the privacy interests of financial
    institutions reporting 1071 data.

  • Implementation period. Annual reporting would
    generally be due on June 1 of each calendar year; however,
    compliance with the final rule would not be required until
    approximately 18 months after the final rule is published. The
    Bureau explained that it expects to specify a date certain for
    compliance in the final rule. Depending on when a final rule is
    issued, that could mean the initial collection of data is on a
    partial-year basis.

These are just some of the key takeaways of the lengthy proposed
rulemaking. Small business lenders should carefully review the
proposal and consider whether to submit comments. The comment
period is 90 days from the date the notice is published in the
Federal Register.

Footnote

1 NAICS
refers to the 6-digit North American Industry Classification
System.

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