NEWS: Yesterday, The League submitted a comment letter to the CFPB, expressing our support for a proposal to revise the Bureau’s small business lending data collection rule.
As explained in The League’s ii Release No. B083, the rule requires financial institutions that do a certain amount of lending to small businesses to collect and report to federal authorities data about those loans.
The data includes basic information about the business and the loan, similar to the HMDA reporting requirement but for small business lenders. It also requires covered lenders to ask if the business applying is minority-owned, women-owned, or LGBTQ+-owned, as well as the applicant’s principal owners’ ethnicity, race, and sex. The rule is intended to help authorities enforce fair lending laws.
Last spring, the CFPB extended the rule’s compliance dates until 2027-28 and announced that it planned to revise the rule, as explained in this Compliance Courier.
The proposed changes
The CFPB is proposing several significant changes to the rule, which implements Section 1071 of the Dodd-Frank Act:
- Small business definition. The proposal would lower the threshold at which a borrower is considered a “small business” – from gross annual revenue of $5 million or less to $1 million or less, with future inflation adjustments in $100,000 increments every five years starting in 2035. In its proposal, the CFPB wrote that that it “believes that the focus of the rule, at least initially, should be truly small businesses.”
- Covered financial institutions. The CFPB wrote that the rule should “focus on larger core lenders.” So, the proposal would raise the threshold at which financial institutions (including credit unions) would be subject to the rule, from 100 to 1,000 covered small business credit transactions originated for each of two consecutive years.
- Covered credit transactions. The CFPB wrote that it believes “that the initial iterations of data collection under the rule should focus on the core, widely used lending products most likely to be foundational to small businesses’ formation and operation.” For that reason, merchant cash advances, agricultural lending, and small dollar loans under $1,000 (to be adjusted for inflation) would not be subject to the rule.
- Data points. The proposal would reduce the number of data points that covered lenders would have to collect about their small business loans. It would require only the fields specified under Section 1071 of the Dodd-Frank Act, plus a small set of discretionary items needed to make those statutory fields useful (e.g., NAICS code, time in business, number of principal owners). The proposal would remove several other discretionary data points, including application method, application recipient, denial reasons, pricing components (including interest rate and fees), and the business’ number of workers.
- Demographic information. The proposal would change the collection of demographic information. Significantly, it would remove LGBTQI+‑owned business status and require collection of principal owners’ sex using a static male/female choice, replacing free‑form text asking the applicant to state their “sex/gender.”
Our comments
The League told the CFPB that Wisconsin credit unions strongly support the Bureau’s plan to streamline this rule to “start with more modest requirements, focusing on core lending products, lenders, and data.”
In particular, we expressed support for raising the threshold at which financial institutions (including credit unions) would be subject to the rule. Currently, the rule applies to credit unions that have originated at least 100 loans to small businesses in each of the two preceding calendar years. The CFPB wrote that it wants to raise that number to 1,000, because it believes that the rule should “focus on larger core lenders.”
“If adopted, this increase would be a welcome relief for small institutions with limited business lending services across the country,” we wrote. We quoted comments we received from one Wisconsin credit union, with assets of about $320 million:
This change is incredibly important for small credit unions like [ours], where we originate under 200 small business loans annually.
We focus on originating small loans that our neighboring banks often overlook due to their small size. Larger banks in our area have mentioned that they prefer to focus on larger loans, and as a result, we frequently receive referrals for smaller loans from them. Many of these loans are for women and minority business owners, whom we are happy to serve as part of our credit union mission.
Requiring compliance from institutions with significantly fewer transactions would impose disproportionate operational and financial burdens on smaller lenders, diverting valuable resources away from serving our members and communities. The reporting requirements would be overly burdensome and would necessitate compliance resources similar to those required for HMDA reporting. For our $320M credit union, we lack the economies of scale that larger institutions have, so we would need to reallocate resources to handle the compliance obligations, which would detract from the other important initiatives we have to serve our community.
Credit unions play a crucial role in supporting local businesses and we do a great job of serving the underserved in our communities. Imposing the data collection and reporting requirements on credit unions originating fewer than 1,000 covered business transactions annually would hinder our ability to effectively serve our members and support the growth of small businesses in our communities.
The League will alert credit unions when the CFPB takes final action on this proposal.