The Consumer Financial Protection Bureau (“CFPB”) is finally prepared to begin writing regulations implementing Section 1071 of the Dodd-Frank Act, which could usher in a new regulatory chapter for small business lenders and result in significant new reporting requirements, fair lending examinations and possible enforcement actions.
To read a more in-depth summary of these proposed changes, click here.
BACKGROUND
Section 1071 of the Dodd-Frank Act amends the Equal Credit Opportunity Act by requiring “financial institutions” to collect, maintain, and report to the CFPB certain data from loan applications submitted by women-owned, minority-owned, and small businesses, including the gender, race, and ethnicity of the owners of these businesses. These requirements will provide the CFPB the tools necessary to conduct examinations focused on potential gender and race-based lending discrimination against these businesses.
OUTLINE OF PROPOSALS
On September 15, 2020, the CFPB released its long-awaited outline of proposals that it is considering in preparation of drafting regulations to implement Section 1071 (the “Outline”). The Outline provides guidance on the CFPB’s current thoughts on how it will shape these new regulations.
Lenders Covered by the Outline
The Outline would apply to all kinds of “financial institutions” making loans for a business or commercial purpose to a small business, including a small business that is women-owned or minority-owned.
The CFPB is considering exempting:
- Depository institutions with assets of one of the following thresholds: (a) $100 million, or (b) $200 million
- Certain financial institutions (and not just depository institutions) based on their small business lending activity. Options for exemption thresholds include:
- Originations of at least 25 loans or $2.5 million
- Originations of at least 50 loans or $5 million
- Originations of at least 100 loans or $10 million
- Financial institutions based on a combination of asset size and lending activity
Borrowers Covered by the Outline
Covered borrowers mean “Small Businesses,” including Women-Owned Small Businesses and Minority-Owner Small businesses. Under the Outline, Women-Owned and Minority-Owned Businesses that are not Small Businesses would not be covered by the CFPB’s new rules implementing Section 1071.
Small Business
The CFPB proposes to define a “Small Business” by using the definition of a “small business concern” in the Small Business Act and employing simplified size limits based on gross annual revenues, number of employees, or both.
Women-Owned Small Business
A Women-Owned Small Business is one where more than 50% of the ownership or control is held by one or more women and more than 50% of the net profit or loss accrues to one or more women.
Minority-Owned Small Business
A Minority-Owned Small Business is one where more than 50% of the ownership or control is held by one or more minority individuals and more than 50% of the net profit or loss accrues to one or more minority individuals.
Business Purpose Loans That Would be Covered by the Outline
The Outline would cover term loans, lines of credit, and business credit cards that are NOT:
- Designated by the lender as a consumer purpose loan
- Leases
- Trade credit
- Factoring
- Merchant cash advances
Proposed Data Points That Lenders Would be Required to Collect and Report
Date points would include:
- Whether the applicant is a women-owned, minority-owned, and/or a small business
- Application/loan number
- Application date
- Loan/credit type
- Loan/credit purpose
- Credit amount/limit applied for
- Credit amount/limit approved
- Type of action taken
- Action taken date
- Census tract (principal place of business)
- Gross annual revenue
- Race, sex, and ethnicity of the applicant’s principal owners
- Pricing
- Time in business
- North American Industry Classification System (NAICS) code, and number of employees
Effective Date of the New Rules
The CFPB is proposing that lenders have approximately 2 years for implementation after the CFPB issues its final Section 1071 rule.
Other Requirements in the Outline
The Outline also contains provisions relating to privacy, record retention, data collection, data submission, and publication of data to the public.
REPORT OF SMALL BUSINESS REVIEW PANEL
On October 15, 2020, the CFPB held a Small Business Review Panel to consult with small entities that will likely be regulated under the new rules. On December 15, 2020, the CFPB published the following feedback that it received from small entity representatives and recommendations made by the Panel:
Possible Expansion of Coverage to Women-Owned and Minority-Owned Businesses That Are Not Small Businesses
The CFPB proposed in the Outline to impose data collection and reporting requirements only in connection with a Women-Owned or Minority-Owned Business that is also a Small Business. Under this proposal, a lender would not collect or report data for a Women-Owned Business or Minority Owned Business that is not a Small Business.
The Panel recommended that the CFPB continue to explore whether the data collection and reporting requirements should apply to applications for Women-Owned and Minority-Owned Businesses that are not small.
Lenders Covered
As discussed above in the summary of the Outline, the CFPB is exploring exemptions for certain lenders based on certain size and activity standards. The Panel recommended that the CFPB continue to explore these exemption standards.
Small Businesses Covered
The Panel recommended that the CFPB:
- Adopt a “Small Business” definition that is simple for Small Business applicants to understand and easy for lenders to implement,
- Consult with the SBA officials before issuing proposed rules to determine whether any of the three alternatives for a small business size standard being considered by the CFPB or another alternative should be included in the proposed rules, and
- Continue to explore how information that small lenders collect from Small Business applicants (gross annual revenue, number of employees, and NAICS code) might assist in selecting an alternative for a “small business” standard.
Loans Covered
As discussed above, the CFPB is considering proposing that covered loans include term loans, lines of credit, and business credit cards, and that covered loans would exclude consumer credit used for business purposes, leases, trade credit, factoring and merchant cash advances (MCAs).
The Panel recommended that the CFPB:
- Continue to assess the costs and benefits of covering MCAs, factoring, and certain other credit products,
- Include in the CFPB’s proposed rules whether the CFPB intends to cover agricultural and real-estate secured loans in the rule, and
- Continue to explore the potential costs to lenders in connection with reporting consumer credit used for business purposes (products designated by a lender as consumer purpose products) and ask for comments in the proposed rule on how best to define this type of credit if the CFPB determines that this exclusion is appropriate.
Implementation
The Panel recommended that:
- The CFPB ask for comments in its upcoming proposed rule about the sufficiency of a two-year implementation period,
- The CFPB ask for comments in its upcoming proposed rule about which requirements in a final rule might require more or less time to implement, and
- The CFPB comment in its upcoming proposed rule on ways to facilitate implementation for small lenders, particularly those that have no experience with any federal data reporting requirements.
POSSIBLE IMPACT OF THE NEW ADMINISTRATION ON THE RULEMAKING PROCESS
The incoming CFPB Director will oversee the proposed and final rules implementing Section 1071. Because of this change, the proposed and final rules may be less “lender-friendly” than the proposals set forth in the Outline.
Further, the National Community Reinvestment Coalition issued a press release citing concerns with some of the CFPB’s approaches in the Outline.
WHERE DO PRIVATE LENDERS GO FROM HERE?
Private Lenders who are not currently reporting HMDA data may still be covered by the new Section 1071 data reporting requirements, in which case they will need to develop new operations and procedures to collect, maintain, and record these data points.
Private Lenders who are currently reporting HMDA data and who will also be covered by the new Section 1071 data reporting requirements will need to enhance their current operations and procedures to collect, maintain, and record these additional data points.
All Private Lenders who will be covered by the new Section 1071 data reporting requirements should be aware that the CFPB and state regulators can use the data results to conduct fair lending exams and analyze their lending approval and pricing practices from a fair lending perspective. Private Lenders may wish to conduct self-testing prior to the effective date of the final rules.
