United States: CFPB Issues Proposed US Small Business Data Collection Rule

Over 10 years after announcing it would "expeditiously" implement provisions of the Dodd-Frank Act concerning data collection on small business lending, the Consumer Financial Protection Bureau ("CFPB" or the "Bureau") is finally taking action. On September 1, 2021, the CFPB issued a notice of proposed rulemaking on small business data collection. In this Legal Update, we summarize the CFPB's proposed rulemaking and describe the consequences for small business lenders and other finance providers. (We previously published a high-level overview on the proposed rule on our Consumer Financial Services Review blog.) We do not rehash each of the more than 900 pages of the Bureau's proposal but instead summarize some of the most significant developments that small business lenders and finance providers should review when considering whether to provide comments to the Bureau regarding the proposed rule.

Background of the Proposed Rule

The origin of the proposed rule traces back to 2010 and the passage of the Dodd-Frank Act. Section 1071 of the Dodd-Frank Act amended the Equal Credit Opportunity Act ("ECOA") to require creditors to collect, and report to the CFPB, certain information designed to effectuate federal fair lending laws with respect to women-owned, minority-owned and small businesses.¹ It was not clear at the time whether the Section 1071 data collection obligations were self-executing or whether the CFPB was required to promulgate implementing regulations prior to the data collection requirements becoming effective. On April 11, 2011, the CFPB's general counsel issued what was to be the Bureau's first piece of industry guidance, indicating that obligations under Section 1071 would not go into effect until the Bureau issued implementing regulations, which he indicated it would do "expeditiously."² Despite this promise, however, the small business data collection rulemaking appeared only sporadically on the Bureau's regulatory agenda throughout the ensuing decade, each time without a proposed rule ever materializing.³

The CFPB's delay in beginning the rulemaking process to implement Section 1071 did not go unnoticed by consumer advocacy groups. In 2019, two community groups and two individuals filed suit to compel the agency to carry out the required rulemaking. This suit culminated in a February 2020 settlement, under which the CFPB committed to publicly releasing an outline of proposed options to implement a Section 1071 rule by September 15, 2020.⁴ The settlement also required the CFPB to convene a Small Business Advocacy Review panel ("Panel") to make recommendations for an eventual Section 1071 rulemaking. The Panel consisted of representatives from the CFPB, the Small Business Administration ("SBA"), and the Office of Management and Budget. This Panel consulted with representatives of small entities likely to be affected directly by a Section 1071 regulation, who provided feedback on the CFPB's proposals under consideration for Section 1071 and the potential economic impacts of compliance. The Panel released its report on December 15, 2020. As part of the ongoing settlement discussions, the CFPB and the consumer advocacy groups agreed in July 2021 to a stipulation requiring the CFPB to publish its proposed Section 1071 rule by September 30, 2021.⁵

The Proposed Rule

The proposed rule would amend and supplement the existing Regulation B, which implements ECOA, by adding a new subpart that imposes a basic requirement on certain lenders and finance providers to collect data about applications for business financing that the creditor receives from a small business applicant. Specifically, the proposed rule would require creditors that originated at least 25 "covered credit transactions" for small businesses in each of the two preceding calendar years to collect data about the application.⁶

The proposed rule is not the first data collection requirement applicable to commercial finance creditors. The Home Mortgage Disclosure Act requires entities originating commercial-purpose loans that are secured by residential dwellings (such as "fix and flip" loans, or loans to purchase investment properties) to collect and report certain information about the application.⁷ Regulation B also requires creditors that receive applications for the purchase or refinance of an owner-occupied principal residence to collect the ethnicity and race, sex, marital status, and age of the applicant.⁸ The Bureau's proposed rule, however, "would create the first comprehensive database of small business credit applications in the United States."⁹

The proposed rule cites to Congress's two stated principles for Section 1071 as support for the data collection requirements. In enacting Section 1071, Congress articulated the twin purposes of "facilitat[ing] enforcement of fair lending laws" and "enabl[ing] communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses."¹⁰ According to the Bureau, the data collection requirements are necessary to facilitate efficiency in fair lending examinations, such as by allowing regulators to use pricing and other data to prioritize fair lending examinations, and by "help[ing] the public and regulators to identify potentially discriminatory lending patterns that could constitute violations of fair lending laws."¹¹ With respect to the second purpose, the Bureau notes that it believes the proposed rule "would provide more data to the public-including communities, governmental entities, and creditors-for analyzing whether financial institutions are serving the credit needs of their small business customers," and provide the public with a greater understanding of access to and sources of credit in a community or an industry, which, in the Bureau's view, "would not only assist in identifying potentially discriminatory practices, but would also contribute to a better understanding of the experiences that members within certain communities may share in the small business financing market."¹²

Below, we summarize (1) the entities to whom the rule applies, (2) the types of financial products covered by the proposed rule, and (3) the information that the proposed rule requires covered persons to collect.

Who Is Required to Collect Information?

The proposed rule would subject a "covered financial institution" that originated at least 25 "covered credit transactions" to small businesses in each of the two preceding calendar years to the information collection requirements.¹³ A "financial institution" is defined very broadly as any partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative organization, or other entity that engages in any financial activity.¹⁴ As a result, a diverse variety of lenders, including banks, credit unions, fintechs, and equipment finance companies, among others, would be subject to the rule. If more than one financial institution was involved in the origination of a covered credit transaction, then only the financial institution that made the credit decision approving the application would be required to collect data and report the origination.¹⁵ If the application did not result in the origination of a covered credit transaction, then any covered financial institution that made a credit decision must report the application.¹⁶ This is an important clarification, as brokers and independent sales organizations ("ISOs") often participate in the process of gathering information and submitting applications for business credit on behalf of their clients. This is similar to how the data reporting requirements under HMDA and Regulation C are implemented.

The proposed rule defines a "small business" by reference to the SBA regulations, which prescribe annual revenue thresholds for a variety of industries and businesses.¹⁷ The proposed rule narrows the universe of "small business" by providing that, notwithstanding the SBA size standards, a business would only be a "small business" for purposes of the proposed rule if its gross annual revenue for its preceding fiscal year was $5 million or less.¹⁸ A financial institution is not required to independently verify a business's gross annual revenue (but if it does verify the gross annual revenue reported by the applicant, then it must report the verified information).¹⁹

Although Section 1071 requires a financial institution to inquire whether a business credit applicant is a minority-owned, women-owned, or a small business, the proposed rule does not extend the data collection obligation to applications from businesses that are not small.²⁰ Although the Bureau acknowledged the ambiguity in Section 1071, it decided that interpreting Section 1071 to not require financial institutions to collect data on applications from non-small businesses is consistent with the purpose of the statute.²¹ Among other reasons, the Bureau noted that almost all women-owned and minority-owned businesses are small businesses, so limiting coverage of the rule to small businesses "would necessarily include nearly all women-owned and minority-owned businesses."²²

What Credit Products Are Covered?

As noted above, a small business finance provider would become subject to the proposed rule's data collection requirement only if it originates at least 25 "covered credit transactions" in each of the two preceding calendar years.²³ The proposed rule defines a "covered credit transaction" to mean any extension of business credit-as that term is defined in Regulation B-that is not "trade credit" (a financing arrangement wherein a business acquires goods or services from another business without immediate payment), public utilities credit, securities credit, or certain "incidental credit" that is not extended under a credit card agreement, does not bear a finance charge, and is not payable in more than four installments.²⁴ The proposed rule would also exclude transactions such as leases or "factoring" transactions that courts or regulators have previously determined are not subject to ECOA, as well as credit transactions that are secured by 1-to-4 unit residential properties so long as the applicant, or one or more of the applicant's principal owners, will not occupy the property (although HMDA applies to business credit extended to purchase, refinance, or improve non-owner occupied residential property).²⁵

Footnotes

1 Pub. L. 111-203, tit. X, section 1071, 124 Stat. 1376, 2056 (2010), codified at ECOA section 704B, 15 U.S.C. § 1691c-2.

2 See Letter from Leonard Kennedy, General Counsel, CFPB, to Chief Executive Officers of Financial Institutions under Section 1071 of the Dodd-Frank Act (Apr. 11, 2011), available at https://files.consumerfinance.gov/f/2011/04/GC-letter-re1071.pdf.

3 The Section 1071 rulemaking first appeared on the CFPB's Fall 2015 regulatory agenda, and was subsequently carried over to the Spring 2016 and Spring 2017 rulemaking agenda. In Fall 2018, the Bureau noted in its rulemaking agenda that it reclassified the Section 1071 rulemaking from pre-rule status to "longer-term action" status.

4 Stipulated Settlement Agreement and Order, Calif. Reinvestment Coalition et al. v. Kraninger, Case No. 4:19-cv-02572-JSW (N.D. Cal. Feb. 26, 2020).

5 Stipulation and Order, Calif. Reinvestment Coalition et al. v. Uejio, Case No. 4:19-cv-02572-JSW (N.D. Cal. Jul. 16, 2021).

6 Proposed 12 C.F.R. § 1002.107(a).

7See 12 C.F.R. § 1003.3(c)(10).

8See id. § 1002.13(a).

9 Proposed Rule at 4.

10 15 U.S.C. § 1691c-2(a).

11 Proposed Rule at 59.

12 Id. at 61.

13 Proposed 12 C.F.R. § 1002.105(b).

14 Id. § 1002.105(a).

15 Id. § 1002.105(b).

16 Id. § 1002.109(3).

17 Id. § 1002.106(b).

18 Id.

19 Id.

20 See 15 U.S.C. § 1691c-2(b)(1)

21 See Proposed Rule at 100.

22 Id. at 102.

23 Proposed 12 C.F.R. § 1002.105(b).

24 Id. § 1002.104.

25 Proposed Comment 104(b) to 12 C.F.R. § 1002.

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