The CFPB today released a long-awaited final rule implementing Section 1071 of the Dodd-Frank Act, which requires the collection and reporting of credit application data for small businesses, including women-owned and minority-owned small businesses. The final rule—which covers closed-end loans, lines of credit, business credit cards, online credit products and merchant cash advances—applies to banks, credit unions and nonbank lenders.
Under the final rule, a covered financial institution is defined as a financial institution that originated at least 100 “covered credit transactions” (rather than 25, as proposed) for small businesses in each of the two preceding calendar years. In addition, a “small business” is defined as one with gross revenue under $5 million in the last fiscal year. Small businesses will be able to self-identify as women-, minority-, or LGBTQI+-owned, and lenders will be able to rely on the financial and other information provided by the small business, the CFPB said. Importantly, loan officers will not be required to make their own determinations of an applicant’s race, ethnicity or any other demographic information—a change to the proposal sought by the American Bankers Association.
The mandatory compliance date is tiered depending on a lender’s volume. Covered lenders originating at least 2,500 small business loans in both 2022 and 2023 must begin collecting data beginning Oct. 1, 2024, while lenders that originate at least 500 loans but fewer than 2,500 loans in both 2022 and 2023 must begin data collection by April 1, 2025. Lenders that originate at least 100 loans but fewer than 500 loans in both 2022 and 2023 must begin collecting data by Jan. 1, 2026. The bureau said that it intends to create a public database with the data collected “that will essentially serve as a census of small business lending in America,” according to CFPB Director Rohit Chopra. The database will include geographic and demographic data, as well as information on lending decisions and loan pricing.
The bureau noted that the final rule will work in tandem with a forthcoming Community Reinvestment Act final rule from the Federal Reserve, FDIC and OCC, and that under this new rule, banks would not have to separately provide small business data to their regulators. Additionally, business-purpose loans that are reportable under the Home Mortgage Disclosure Act will be exempt from 1071 reporting requirements. The CFPB is also planning to issue a supplemental proposal “to give some more time for financial institutions who already get high marks for meeting the credit needs of their communities,” Chopra added.
Along with the final rule, the CFPB issued a policy statement noting that it intends to focus its oversight on ensuring that lenders do not discourage small business loan applicants from providing responsive data, including demographic information about their ownership.
While emphasizing the banking industry’s commitment to fair lending, ABA President and CEO Rob Nichols expressed disappointment over the final rule, calling it “unnecessarily far-reaching,” and noting that it “will harm the relationship banking model Director Chopra often praises—the model that community banks have relied on to meet the unique needs of small businesses in their communities.”
“Given the cost of implementing these significant new reporting requirements and their impact on lending, some community banks may be forced to limit their small business loan programs. Nonbanks—many not supervised for compliance by the bureau—may absorb some of the small business lending done today by banks, but they will not be able to offer their customers the benefits of a banking relationship and the technical assistance banks provide to their small business customers,” Nichols noted. “We also worry that the data produced will put small businesses’ privacy at risk and could provide an incomplete and potentially misleading picture of small business lending to underserved groups. These outcomes are not what Congress intended when it passed the Dodd-Frank Act back in 2010.”
House Financial Services Committee Chairman Patrick McHenry (R-N.C.) signaled that he will “explore all options—including the Congressional Review Act” to ensure the rule does not take effect.