COMMENT CALL: The CFPB has proposed a set of new Reg. B provisions that would require credit unions and other creditors nationwide to collect and report data on small businesses’ loan applications. (The CFPB provides a summary to help navigate the lengthy proposal.) The goal is to help the CFPB enforce fair lending laws.
The rules implement a section of the Dodd-Frank Act, which amended the Equal Credit Opportunity Act to require financial institutions to collect and report data on credit applications by women-owned, minority-owned, and small businesses.
Summary
The following points sum up the proposal’s key provisions:
“Covered financial institutions.” The rules would apply to financial institutions, including credit unions, that have originated at least 25 “covered credit transactions” to “small businesses” within the preceding two calendar years. The proposal includes no exemption for small asset-sized lenders.
“Covered credit transactions.” Under the proposal, a “covered credit transaction” is defined broadly to mean any extension of business credit, including loans, lines of credit and credit cards. However, there are exceptions, and the following would not be included: (1) trade credit, (2) public utilities credit, (3) securities credit, and (4) incidental credit. In addition, factoring, leases, consumer-designated credit used for business purposes, and credit secured by certain investment properties would not be covered.
“Small businesses.” The proposal borrows from the Small Business Administration’s definition of “small business concern,” which means any business that is independently owned and operated and that is not dominant in its field. The definition only covers businesses with $5 million or less in gross annual revenue for their preceding fiscal year.
Data points. The proposal would require lenders to collect 13 pieces of information that the CFPB calls “mandatory data points”:
- Whether the applicant is minority-owned;
- Whether the applicant is women-owned;
- Unique identifier for each application;
- Application date;
- Loan type (i.e., product type, guarantees, and term);
- Loan purpose;
- Amount applied for;
- Amount approved or extended;
- The action on the application (i.e., originated, approved but not accepted, denied, withdrawn, or incomplete);
- Action date;
- Census tract;
- Gross annual revenue; and
- Race, sex, and ethnicity of the principal owners.
Applicants would not be required to provide race, sex or ethnicity information if they choose not to, but lenders would have to report the information based on their own observations if there is a face-to-face meeting either in person or electronically.
The proposal also addresses the collection of several so-called “discretionary data points”:
- Time in business;
- NAICS code;
- Number of employees;
- Application method (e.g., in-person, phone, mail, online);
- Application recipient (e.g., direct or through a third party);
- Reasons for denial (providing nine specific reasons and a text box for any other reason);
- Number of principal owners (i.e., 0-4); and
- Pricing information, including:
- Interest rate,
- Total origination charges,
- Broker fees,
- Initial annual charges,
- Additional cost for “merchant cash advances” or other sales-based financing, and
- Prepayment penalties.
The proposal offers several appendices, including a sample data collection form and instructions for financial institutions on how to collect and report data. The CFPB has also published a chart of the proposed data points.
Reporting. Annual reporting would generally be due on June 1 of each calendar year. Covered financial institutions would have to retain evidence of compliance for at least three years. The CFPB would publish the data it receives on its website (after withholding some details for privacy purposes).
Firewalls. The proposal would require covered financial institution to put “firewalls” in place – prohibiting employees or officers who are involved in a particular credit decision from accessing data about whether that applicant is minority- or women-owned or the applicant’s ethnicity, race, or sex.
Compliance date. Compliance with the final rule would be required approximately 18 months after it is published, so it seems likely that compliance may not be necessary until 2023, depending on when the rule is finalized.
Make your voice heard
The League believes that the reporting requirements of these new rules would be overly burdensome, especially for small lenders. We plan to submit a comment letter opposing the rule, or at least advocating for broader exemptions.
Your input is essential. The more we know about how this rule may impact your lending operations, the more effective our comment letter can be. Please share your thoughts so that our comment letter accurately reflects the views of our Wisconsin credit unions. Contact Paul Guttormsson by Dec. 30, so that we include your opinions in our letter, which is due Jan. 6, 2022.