Today the Consumer Financial Protection Bureau (CFPB) finalized the Section 1071, Business Data Collection rule required by Congress to increase transparency in small business lending, promote economic development, and combat unlawful discrimination. The rules require Lenders to collect and report information about the small business credit applications they receive, including geographic and demographic data, lending decisions, and the price of credit.
The CFPB stated “the rule will work in concert with the Community Reinvestment Act, the increased transparency will benefit small businesses, family farms, financial institutions, and the broader economy.”
Our team at Compliance Resource is jumping headfirst into reading and understanding the new rules. As we navigate these changes, we will keep everyone abreast of the requirements and the impact it will have to your financial institution and the industry. So, keep your eyes peeled for more information!
In short, the CFPB indicated that after considering a wide range of feedback and thousands of public comments, the CFPB finalized the rule and plan for implementation in ways that will:
- Phase in implementation for the largest lenders first: The CFPB found that there were key differences in how large financial institutions would implement the rule, compared to relationship-based local lenders. The final rule requires the largest lenders, which account for most of the small business lending market, to collect and report data earlier than smaller lenders. Specifically –
- Lenders that originate at least 2,500 small business loans annually must collect data starting October 1, 2024.
- Lenders that originate at least 500 loans annually must collect data starting April 1, 2025.
- Lenders that originate at least 100 loans annually must collect data starting January 1, 2026.
The rule announced today requires data collection and reporting for those that make at least 100 loans annually. This is a change from the 25 loans that were in the proposal.
- Cover diverse forms of credit by all types of lenders: The rule covers closed-end loans, lines of credit, business credit cards, online credit products, and merchant cash advances by banks, credit unions, and other lenders. Non-depository financial institutions — a growing sector accounting for roughly $550 billion in financing to small businesses — will be required to collect and report data, as will banks, savings associations, and credit unions.
- Use straightforward definitions and streamlined forms: To make it easy for lenders to know on which applications to collect data, the rule defines a small business as one with gross revenue under $5 million in its last fiscal year. The rule also includes a streamlined sample form for lenders to use, if they so choose, to collect demographic data from small business credit applicants.
- Streamline and improve demographic and financial data collection: small businesses will be able to self-identify as women-, minority-, or LGBTQI+-owned. Lenders will be able to rely on the financial and other information provided by the small business. Loan officers will not be required to make their own determinations of an applicant’s race, ethnicity, or any other demographic information.
- Reduce duplicative reporting requirements: Loans reportable under the Home Mortgage Disclosure Act will not need to be reported under the small business lending rule. The rule is also designed to work in concert with rules under the Community Reinvestment Act’s reporting requirements. Under the regulators’ Community Reinvestment Act proposal, data submitted under the CFPB’s rule would satisfy the relevant Community Reinvestment Act requirements.
- Allow for the use of new digital tools developed by industry and technology partners: The rule finalized today allows financial institutions to work with third parties, including industry consortia, to develop services and technologies that will aid in collecting and reporting data. While individual lenders are ultimately responsible for ensuring fair and accurate collection and reporting, the rule permits them to work with third parties, including industry consortia and other partners, to collect and report data in ways that are tailored to their business model. For example, the CFPB plans to provide Application Programming Interfaces in an open-source environment to spur the development of accurate and efficient data reporting tools.
- Give extra time to lenders with strong records of service to meet the needs of the communities they serve: The CFPB intends to issue a supplementary proposal that would, if finalized, provide additional implementation time for small lenders that have demonstrated high levels of success in serving their local communities, as measured by their performance under relevant frameworks like the Community Reinvestment Act and similar state laws.
These are just a few of the more pertinent highlights from the final rule. We’ll continue to dive into the new regulation and make sure you’re as prepared as possible. Stay tuned!