Commercial lenders: Are you ready to start providing data on small business lending to the CFPB?

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Over the past year and a half, the CFPB has been quietly taking steps toward implementing regulations around collecting data from commercial lenders regarding commercial loans. Those efforts culminated on September 1, 2021, in a new rule proposed by the CFPB to start collecting application-level data regarding loans made to small businesses. Are commercial lenders ready?

What is Section 1071?

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which was passed more than a decade ago, contains Section 1071 (codified as 15 USC § 1691c-2 within the Equal Credit Opportunity Act (ECOA)). Section 1071 requires the CFPB to prescribe rules and guidance to “enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.”

It may surprise some lenders that the CFPB – the federal consumer financial protection agency – is in a position to regulate commercial entities, but it is. The Equal Credit Opportunity Act (ECOA) is a federal law that has been around since the mid-1970s. It was enacted to ensure equal access to credit and to safeguard that financial institutions were not discriminating based on protected characteristics (for example, age, sex, or race). Most of the ECOA focuses on access to consumer credit, though there are several provisions that address commercial credit as well.

For many years after the passage of Dodd-Frank, the CFPB did not promulgate rules and regulations under Section 1071 – despite a clear mandate from Congress to do so. In 2019, the California Reinvestment Coalition took the unusual step of suing the CFPB in order to have a court enforce the Section 1071 mandate. The California Reinvestment Coalition and the CFPB reached a settlement in February 2020 in which the CFPB pledged to issue proposed rules.

In short, Section 1071 introduces a new regulatory burden on financial institutions, including exclusively commercial lenders: Section 1071 will require all financial institutions to collect and maintain data on how many borrowers apply for credit that are women-owned, minority-owned, or small businesses, and will require those financial institutions to report the data to the CFPB once a year.

If the CFPB’s proposed rule is finalized, the CFPB will add a new Subpart B to Regulation B to implement Section 1071’s mandate.

What is the CFPB going to collect from commercial lenders?

The CFPB is proposing to collect the following data from lenders:

  • The amount and type of small business credit applied for and extended;
  • Decisions made on certain small business credit applications;
  • Demographic information about small business credit applicants; and
  • Key elements of the price of the credit offered, such as information regarding interest rate, total origination charges, broker fees, initial annual charges, additional cost for merchant cash advances or other sales-based financing, and prepayment penalties.

Where are we in the rulemaking process?

The CFPB issued its notice of proposed rulemaking (NPR) on September 1, 2021.
It is encouraging all stakeholders to review the NPR and provide comments to the CFPB in the 90-day window that will open as soon as the NPR is published in the Federal Register. In all likelihood, that means stakeholders – including commercial lenders of all sizes – will have through mid-December 2021 to provide comments to the CFPB. The CFPB will have to review the commentary before deciding whether to finalize the rule as proposed. The effective date of the rule, if it is finalized, will come after that. So mandatory compliance with the new Section 1071 rule is at least a year in the future.

What is the CFPB’s “Tell Your Story” portal?

In a twist on the traditional rulemaking process, the CFPB is soliciting both commentary from industry stakeholders as well as direct feedback from small business owners. Also on September 1, the CFPB launched its new small business landing page which includes a “Tell Your Story” portal – a place for small business owners to upload a narrative regarding their lending experiences. Although the portal is not explicitly a place for lodging complaints, like the CFPB’s already-existing consumer complaint portal, the Tell Your Story form includes a field for identifying the lender at issue in the business owner’s narrative.

Our Financial Services and Cybersecurity teams will continue to keep you posted on new developments.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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