New CFPB Rules On Small Business Lending Equal Credit Opportunity
On March 30, 2023, the Consumer Financial Protection Bureau (CFPB) issued its final rule to implement Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1071 amends the Equal Credit Opportunity Act (ECOA) by requiring the collection and reporting, as to business loans, similar to information that is collected for consumer loans. While Section 1071 aims to “help communities, governments and the financial industry to find investment opportunities while promoting fair lending to all entrepreneurs,” in practical effort, it will increase access to demographic data by the public, regulators and private plaintiffs with attendant litigation risk.
Data Points Collected
Section 1071 requires lenders to collect and report several data points about small business credit applications such as race, ethnicity, and gender of principal owners, lending decisions, and the price of credit. In addition, it will require the lender to compile and report key loan data points such as interest rate, term, purpose, early payment penalties, census tract, applicant gross revenue, applicant time in business, loan size, broker fees, lender origination fees, number of owners, minority owned and the like. Moreover, each lender will have to report the action taken on each application such as approval, declined or withdrawn. A copy of the model race and ethnicity collection form can be found here. Unlike consumer lenders, business lenders will not have to report data based upon visual observations of the borrower’s race or ethnicity.
Lenders Covered
- Lenders that originated at least 2,500 covered originations in both 2022 and 2023 must begin collecting data and complying with the final rule on October 1, 2024.
- Lenders that originated at least 500 covered originations in both 2022 and 2023, but not 2,500 or more, and originated at least 100 covered originations in 2024, must begin collecting data and complying with the final rule on April 1, 2025.
- Lenders that originated at least 100 covered originations in both 2024 and 2025 must begin collecting data and complying with the final rule on January 1, 2026.
Borrowers Covered
The law applies to loans made to “small businesses,” meaning businesses with $5M or less in gross revenues in the preceding calendar year. It also applies to businesses that are engaged in agriculture with gross revenues under $5M.
Lenders and Loans Exempt
- Loans reported under the HMDA are not reportable under Section 1071
- Factoring is exempt
- Leases are exempt
- Securities credit (margin) is exempt
- Consumer-designated credit meaning consumer credit used by a consumer for business purposes is exempt (e.g., consumer loan that the borrower ends up using for a business purpose)
- Trade credit is exempt
Note that Section 1071 does not apply to mortgage brokers (non-lenders), but they are permitted to collect the required data for reporting “covered lenders.” Thus, Section 1071 is most likely to impact private money mortgage pools and debt funds rather than the mortgage brokers who fund loans with capital from private money investors.
Enforcement
The CFPB has the right to bring actions for injunctive relief and financial penalties as do state agencies. In addition, there is the possibility of private enforcement actions.
Reporting
The CFPB has yet to develop a method to report data.
Take Away
If you are a mortgage lender making business purpose loans and you meet one of the volume thresholds above, you will be subject to the law both as to data collection, reporting and public access to your demographic information.
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