CFPB Issues Proposed Rule on Small Business Lending; Requiring Increased Data and Collection and Reporting Requirements
On September 1, the Consumer Financial Protection Bureau (“CFPB”) issued a Notice of Proposed Rulemaking to amend Regulation B in order to implement certain changes to the Equal Credit Opportunity Act (“ECOA”).
The proposed rule, which was mandated by Congress as part of Section 1071 of the Dodd-Frank Act, would require lenders to collect and disclose data about their lending to small businesses, including women-owned and minority-owned businesses, with an end goal of bolstering the enforcement of fair lending laws. To that end, the data required to be collected would include information on the race, ethnicity, and sex of the principal owners of an applicant for credit (although the applicant may decline to answer these questions at their discretion). Once collected, lenders would be required to report this data to the CFPB for the purpose of creating a database of small business credit applications.
Notably, the proposed rule would broadly apply to any lender that makes more than 25 covered transactions per financial year, with covered transactions including, among other things, lines of credit, loans, credit cards, and merchant case advances. This means the proposed rule would broadly apply to, and increase compliance costs for, both large and smaller community banks and credit unions.
In addition to increasing compliance costs on providers, it should be noted that the proposed rule is part of a growing trend – likely to accelerate once President Biden’s choice for Director of the CFPB is finalized – of heightened on scrutiny small business lending. On both the federal and state level, regulators are increasing scrutiny on small business lending, including by reviewing how their unfair, deceptive, or abusive acts and practices laws may be used in the context of small business lending.
The CFPB is seeking comments on all aspects of the Proposed Rule. Comments are due within 90 days of the proposed rule’s publication in the Federal Register.
A copy of the proposed rule can be found here.