BACKGROUND
The CFPB continues to use data reporting as a means to expand its reach into private lending. This most recently occurred through the CFPB’s expansion of the reporting requirements under the Equal Credit Opportunity Act.
On March 30, 2023, the CFPB issued a Rule requiring Private Lenders who are covered by the Rule to collect and report information submitted by “Small Business” loan applicants, including:
- Whether the Small Business is women-owned, minority-owned, or LGBTQI+ -owned, and
- The ethnicity, race, and sex of the principal owners of the Small Business.
The rule is intended to enforce fair lending laws and support Small Businesses owned by women, minorities or LGBTQI+ individuals.
The good news for most Private Lenders is that the Rule does not apply to most business purpose mortgage loans secured by residential real estate, including multi-family residential real estate.
Although the Rule applies to most business credit, this Article focuses on how the Rule affects Private Lenders making business purpose mortgage loans.
WHICH PRIVATE LENDERS ARE COVERED BY THE RULE?
The Rule applies to a Private Lender only if it originated- in each of the two preceding calendar years – at least 100 loans for Small Businesses that that are considered to be “Covered Credit Transactions”. With minor exceptions, if a lender does not originate at least 100 business purpose loans covered by the Rule – – commercial real estate-secured loans, personal property- secured loans, and unsecured loans – – Private Lenders do not need to comply with this new Rule.
WHAT IS A “SMALL BUSINESS?”
A “Small Business” means a for-profit business entity that had gross annual revenue” of $5 Million or less during its prior fiscal year.
WHAT IS A “COVERED CREDIT TRANSACTION?”
A “Covered Credit Transaction” is generally an extension of business credit.
However, a “Covered Credit Transaction” does NOT include a business purpose mortgage loan that is reportable under HMDA. This means that the Rule does NOT cover a loan that is:
- Secured by a dwelling (including a multi-family dwelling), and
- Used to purchase, improve, or refinance the dwelling.
This exemption will exclude most dwelling-secured loans, including loans secured by a 1-to-4 or multi-family dwelling.
Business purpose mortgage loans that ARE reportable under the Rule (because they are NOT reportable under HMDA) include loans that are:
- NOT secured by a dwelling (for example, loans that are secured by an office building, retail store, strip mall, hotel, warehouse, or factory).
- Secured by unimproved land.
- Secured by an applicant’s primary residence.
- Temporary financings (loans designed to be replaced by permanent financing at a later time, such as a fix and flip loan that will be paid off from the proceeds of a permanent loan).
- Loans secured by residential investment property as collateral for inventory financing or working capital (these loans do not involve the purchase, improvement, or refinancing of a dwelling).
- Business purpose mortgage loans secured by a dwelling located on real property used primarily for agricultural purposes.
The Rule includes other exemptions.
WHAT IS A MINORITY-OWNED, WOMEN-OWNED, OR LGBTQI+ -OWNED BUSINESS?
A Private Lender must determine if a Small Business is a “Minority-Owned Business,” “Women-Owned Business,” or “LGBTQI+ – Owned Business.”
A Minority-Owned Business is a business for which:
- More than 50% of its direct or indirect ownership OR control is held by one or more Minority Individuals, AND
- More than 50% of its net profits or losses accrue to one or more Minority Individuals.
A Woman-Owned Business is a business for which:
- More than 50% of its direct or indirect ownership OR control is held by one or more women, AND
- More than 50% of its net profits or losses accrue to one or more women.
An LGBTQI+-Owned Business is a business for which:
- More than 50% of its direct or indirect ownership OR control is held by one or more LGBTQI+ individuals, AND
- More than 50% of its net profits or losses accrue to one or more LGBTQI+ individuals.
WHAT ARE THE DATA POINTS THAT SOME PRIVATE LENDERS WILL BE REQUIRED TO COLLECT AND REPORT?
There are up to 81 possible data fields reportable under the Rule, including a Small Business’ number of workers, time in business, number of principal owners, minority-owned business status, women-owned business status, LGBTQI+ -owned business status, and the ethnicity, race, and sex of the principal owners.
WHO ARE THE PRINCIPAL OWNERS OF A SMALL BUSINESS?
A “Principal Owner” is an individual who directly owns 25 percent or more of the equity interests of a Small Business.
Therefore, a Small Business will not have more than 4 Principal Owners.
A Small Business will not have any Principal Owners at all if no individual directly owns 25% or more of the equity interests of the Small Business.
FIREWALL IS REQUIRED TO LIMIT ACCESS TO SENSITIVE INFORMATION
A Private Lender covered by the Rule would have to limit certain employees’ access to certain application data. The CFPB refers to this as a “firewall.” An employee of a Private Lender or its affiliate that is involved in underwriting or making a determination about a Small Business’ covered loan application would be prohibited from accessing the Small Business’ responses to questions (a) whether the Applicant is a Minority-Owned Business, Women-Owned Business, or LGBTQI+ -Owned Business, and (b) information about the ethnicity, race, and sex of the Applicant’s Principal Owners, if that employee.
This prohibition does not apply to an employee if a covered Private Lender (a) determines that the employee should have access to one or more of the Applicants responses to these questions in order to perform that employee’s job duties, and (b) provides a special notice to the Applicant.
HOW SHOULD DATA BE COLLECTED AND REPORTED?
A covered Private Lender would be required to collect data on a calendar-year basis by using a “Small Business Lending Application Register” and report the data to the CFPB by June 1 of the following year.
WILL THE CFPB PUBLISH THE DATA?
Yes. The CFPB will make the data submitted by Private Lenders available to the public each year (subject to certain modifications or deletions that the CFPB determines is necessary to protect privacy interests).
WHEN WILL COVERED PRIVATE LENDERS HAVE TO COMPLY WITH THE RULE?
Not all covered Private Lenders are required to begin complying with the final rule at the same time. This is because the Rule includes compliance date tiers that have different initial compliance dates depending on the number of covered loan originations that a Private Lender originated in 2022 and 2023. The earliest date when a Private Lender could be required to begin collecting data and complying with the Rule is October 1, 2024.
HOW CAN WE HELP YOU?
Geraci can help you determine if the Rule applies to you. If it does, we can help you design a compliance program for your company. We have created a detailed Compliance User Guide for this purpose. Please call us if you are interested in discussing the Guide.
Please remember that we can help you with all your other compliance needs. We look forward to hearing from you.
