- A new federal rule seeks to reduce discriminatory practices in small business loan applications.
- If your financial institution issues business loans, determine whether you must comply with the rule and meet data collection and reporting requirements.
- There are legal challenges and resistance to the rule (including a current legal stay in Texas), but with unknown outcomes, start preparing for potential compliance deadlines now.
Need help meeting the new small business lending rule?
Financial institutions should start investigating if they need to comply with the new federal rule seeking to reduce discriminatory practices in small business loan applications.
Small business lending rule background
The Consumer Financial Protection Bureau (CFPB) issued the rule in March 2023 under the much-anticipated Section 1071 of the Dodd-Frank Act of 2011 for the collection and reporting of small business loan application information. The rule is intended to serve as a tool for regulators and the public to identify discriminatory practices in business-purpose loans on a prohibited basis as prescribed under the Equal Credit Opportunity Act (ECOA).
As with the Home Mortgage Disclosure Act (HMDA) and the Community Reinvestment Act (CRA), certain covered institutions and transactions will be subject to the uniform collection and reporting of specific data points involved in loan application decisions and loan pricing. Some distinctions with respect to existing HMDA and CRA data collection and reporting rules exist and some of these provisions will replace existing data collection and reporting rules under the CRA.
If your institution originates business-purpose credit, determine whether you must comply with the rule and meet data collection and reporting requirements. Under the rule, institutions must develop reasonable procedures for compliance with data collection and reporting requirements (something not currently required under HMDA or the CRA).
There are legal challenges and resistance to the rule (including a current legal stay in Texas), but with unknown outcomes, your financial institutions should start preparing for potential compliance deadlines. While it’s possible the legal challenges may change some aspects, it’s unlikely the rule will be fully abolished.
Learn the covered institutions and transactions
Institutions subject to the new rule include those with 100 or more covered transactions in the two preceding calendar years. It appears these transactions are defined as business-purpose loans to small businesses with annual gross revenues of $5 million or less.
The rule defines financial institution as any partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative organization, or other entity engaging in any financial activity. This includes:
- Savings associations
- Credit unions
- Online lenders
- Platform lenders
- Community development financial institutions (CDFIs)
- Farm credit system lenders
- Equipment and vehicle financing companies
- Governmental or governmental subdivisions or agencies
- Nonprofit lenders
These include an oral or written request for a covered credit transaction made in accordance with procedures used by a financial institution for the type of credit requested. A covered transaction is also one that meets the definition of business credit under existing regulation B, with certain exceptions, and is not excluded under Section 1002.104(b).
Regulation B exempts public utilities, securities, and incidental credits from coverage. The 1071 rule adds transactions covered under Regulation C (HMDA), insurance premium financing, and trade credit to excluded transactions, too. The definition of business concern under the Small Business Administration is applicable throughout the 1071 rule.
A small business loan under the CRA is $1 million or less for business purposes and $500,000 or less of a small farm loan for agricultural-purpose loans. However, under the new rule, a small business loan is defined as a loan to a business with gross annual revenues of $5 million or less. Under this definition, we need to think of covered transactions as loans to small businesses and not as small business loans.
While no final CRA reform rule has been issued, it’s highly anticipated it could prescribe alignment with Section 1071 and there will be one loan application register (LAR) for compliance with both Regulations B and BB.
Key distinctions from existing CRA regulations
Here are some other differences from existing CRA regulations:
- Renewals, along with extensions and reevaluations, are excluded from the rule. Existing CRA rules, however, require the reporting of renewals.
- Loan purchases are exempted from 1071 coverage. Existing CRA rules require the reporting of loan participations.
- When more than one financial institution makes a decision to approve a single covered credit transaction, only the last covered financial institution with authority to set the material terms of the covered transaction is required to report the application. Existing CRA rules do not cover the topic in extent. Official commentary is limited to participations and purchases so your current procedures on the topic will likely need to be updated.
- Institutional coverage under the CRA is based on the bank’s asset size while under the 1071 rule, coverage is based on number of transactions.
For some covered institutions, it will be burdensome to identify covered transactions in 2022 and 2023 as part of their coverage and effective dates of compliance. Many institutions do not currently maintain a consistent or centralized process for documenting the gross annual revenues of business credit borrowers.
However, the special transition rules provide some flexibility and can serve as a starting point for guidance. Consider examples of processes for identifying and documenting the gross annual revenues of borrowers from loans in 2022 and 2023 and to determine coverage and effective compliance dates.
Your institution may voluntarily start collection 12 months before your effective compliance date. If your organization voluntarily chooses to do so, several provisions from the rule would not be applicable during that period.
Data collection effective dates
Effective dates are divided in three tiers by the volume of loans to small businesses:
Tier 1 — At least 2,500 originations in both 2022 and 2023. Data collection starts October 1, 2024. First deadline for data reporting and submission to the CFPB is June 1, 2025.
Tier 2 — At least 500 but fewer than 2,500 originations in both 2022 and 2023. Data collection starts April 1, 2025. First deadline for data reporting and submission to the CFPB is June 1, 2026.
Tier 3 — At least 100 but fewer than 500 originations in both 2022 and 2023. First deadline for data reporting and submission to the CFPB is June 1, 2027.
How we can help
There is a lot to figure out with the new rule, including determining if your financial institution must comply and the effective date of compliance CLA’s fair banking and compliance consultants are ready to help your institution navigate the new rule and pursue an effective compliance program. Contact us for assistance.