On August 31, 2021, the Consumer Financial Protection Bureau (CFPB) published a 918-page notice of proposed rulemaking (NPRM) to implement Section 1071 of the Dodd-Frank Act. That section amends the Equal Credit Opportunity Act (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, which will be in early December.
- Compliance with a final rule will be mandatory 18 months after publication, which likely extend into 2024.
Key aspects of the proposal include, but are not limited to:
- Who is covered – The rule applies to financial institutions, however a proposed activity-based exemption would exempt financial institutions that originate less than 25 “covered credit transactions” to “small businesses” in each of the two preceding calendar years.
- What is a “Small Business” – The CFPB is proposing to define a “small business” as one that had $5 million or less in gross annual revenue for its preceding fiscal year.
- What is an “Application” – The NPRM proposes to adopt the Regulation B definition of an “application” but exclude:
- Reevaluation requests, extension requests, or renewal requests on an existing business account, unless the request seeks additional credit; and
- Inquiries and prequalification requests.
- What is a “covered credit transaction” – The CFPB is proposing to define a “covered credit transaction” as one that meets the definition of business credit under Regulation B. The term:
- Includes loans, lines of credit, credit cards, and merchant cash advances.
- Does not include trade credit, public utilities credit, securities credit, and incidental credit as defined in Regulation B.
- What information is collected and reported – The NPRM includes the race, sex, and ethnicity of the principal owners of the business. 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 or in meetings via electronic media with video capabilities.)
Stay tuned. This debate will rage for the next several years.