The CFPB has issued a notice of proposed rulemaking (NPRM) to implement Section 1071 of the Dodd-Frank Act. Section 1071 amended the ECOA to require financial institutions to collect and report certain data in connection with credit applications made by women- or minority-owned businesses and small businesses. Comments on the NPRM will be due no later than 90 days after the date it is published in the Federal Register.
We will be reviewing the CFPB’s 918-page release and share our thoughts in subsequent blog posts. The full text of the NPRM was accompanied by a summary prepared by the Bureau. Based on the summary, key aspects of the NPRM include the following:
- Financial Institutions Covered. The definition of “financial institution” in Section 1071(h) covers any entity that engages in financial activity and includes both depository institutions and non-depository institutions such as online lenders, platform lenders, lenders involved in equipment and vehicle financing, and commercial finance companies. In September 2020, the CFPB released an outline of the proposals it was considering in anticipation of convening a panel pursuant to the Small Business Regulatory Enforcement Fairness Act (SBREFA Outline). In the SBREFA Outline, the CFPB indicated that it was considering different standards for exempting financial institutions from Section 1071 data collection and reporting requirements, consisting of a size-based exemption for depository institutions, an activity-based exemption for all financial institutions, and combined size- and activity-based exemptions. In the NPRM, the CFPB is proposing an activity-based exemption for all financial institutions that would exempt financial institutions that originate less than 25 “covered credit transactions” to “small businesses” in each of the two preceding calendar years.
- “Small Business” Definition. Section 1071(h) defines a “small business” applicant as having the same meaning as a “small business concern” in the Small Business Act. In the SBREFA Outline, the Bureau indicated that it was considering defining a “small business” by cross-referencing the SBA’s general “small business concern” definition but adopting a simplified size standard for purposes of its Section 1071 rule that used one of three alternative approaches. One of such alternatives was a size standard of gross annual revenue in the prior year of less than $1 million or $5 million. In the NPRM, the Bureau is proposing to define a “small business” as one that had $5 million or less in gross annual revenue for its preceding fiscal year. (Consistent with the SBREFA Outline, 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 a “small business.”)
- “Application” Definition. Section 1071 does not define the term “application.” In the SBREFA Outline, the Bureau indicated that it was considering defining an “application” in a way that was largely consistent with Regulation B (which defines an “application” as “an oral or written request for an extension of credit that is made in accordance with procedures used by a creditor for the type of credit requested”) but would exclude certain circumstances such as inquiries and prequalifications even if they would be considered an “application” under Regulation B. In the NPRM, the Bureau is proposing to adopt the Regulation B definition of an “application” but exclude (1) reevaluation requests, extension requests, or renewal requests on an existing business account, unless the request seeks additional credit, and (2) inquiries and prequalification requests.
- Credit Transaction Coverage. Section 1071 requires financial institutions to collect and report information regarding applications for business “credit.” In the SBREFA Outline, the Bureau indicated that it was considering a proposal under which a covered transaction under Section 1071 would be one that meets the ECOA definition of “credit” and was not excluded under the Bureau’s Section 1071 rule. Among the excluded transactions were trade credit, factoring, and merchant cash advances. In the NPRM, the Bureau is proposing to define a “covered credit transaction” as one that meets the definition of business credit under Regulation B. In addition to loans, lines of credit, and credit cards, “covered transaction” would include merchant cash advances. The products that would not be covered credit transactions even if they meet the Regulation B definition are trade credit and public utilities credit, securities credit, and incidental credit as defined in Regulation B.
- Data Points. The NPRM includes the data points that a financial institution would be required to collect and report. Pursuant to Section 1071(e), a financial institution must collect and report “the race, sex, and ethnicity of the principal owners of the business.” In the SBREFA outline, the Bureau indicated that it was not considering proposing the use of visual observation or surnames by institutions to determine the race, sex, and ethnicity of a business’s principal owners and instead would propose that such information be based solely on a principal owner’s self-reporting. In the NPRM, the Bureau is proposing that if an applicant does not provide any ethnicity, rate, or sex information for at least one principal owner, the financial institution must collect at least one principal owner’s race and ethnicity (but not sex) via visual observation and/or surname if the financial institution meets in person with any principal owners (including meetings via electronic media with an enabled video component.)
- Implementation. In the SBREFA Outline, the Bureau indicated that it was considering allowing financial institutions approximately two calendar years for implementation following the Bureau’s issuance of a final Section 1071 rule. In the NPRM, the Bureau is proposing that a final rule would become effective 90 days after publication in the Federal Register but compliance would not be required until approximately 18 months after publication.