CFPB’s Final Rule to Implement Section 1071 of the Dodd-Frank Act: How it Could Change Small Business Lending and Reporting
Enforcement of the Final Rule to implement Section 1071 of the Dodd-Frank Act by the Consumer Financial Protection Bureau (“CFPB”) is dependent on the outcome of a case currently pending before the United States Supreme Court (“SCOTUS”). If SCOTUS reverses the decision of the lower court, the Final Rule could be enforced which would require the collection of voluminous data from small businesses who apply for loans from covered financial institutions. Following is a summary breakdown of the Final Rule and what its implementation could potentially mean.
What Is the Final Rule?
To implement changes to the Equal Credit Opportunity Act (“ECOA”) as authorized by section 1071 of the Dodd-Frank Act, the CFPB issued its Final Rule on March 30, 2023 which has been codified at 12 CFR Part 1002, et seq. Among other requirements, the Final Rule requires covered financial institutions to collect and report data derived from credit applications made by small businesses, including those that are owned by women or minorities.
Who does this affect?
Generally, all financial institutions that originate at least 100 covered credit transactions for small businesses in each of the two preceding calendar years are impacted by this rule. Covered transactions are an extension of business credit which generally include loans, lines of credit, credit cards, and merchant cash advances. Covered transactions do not include HMDA-reportable transactions, trade credit, insurance premium financing, public utilities credit, securities credit, or incidental credit.
Subject to some limitations, a small business is defined under the Final Rule as a business with gross annual revenue of $5 million or less for the preceding fiscal year. It is the responsibility of those covered by the statute to enact policies and procedures to ensure compliance with the rule.
What will this affect?
Data Collection and Reporting
The financial institutions covered under the Final Rule are required to compile and maintain data from small business loan applications. Specifically, there are 81 data points that these institutions must collect and submit to the CFPB, and a list of these data points can be found here. These institutions may rely on information from the applicant and are not required to verify the data provided by the applicant. However, if the data is verified, the financial institution must report the verified data. Also, covered institutions may reuse certain previously collected data if it was collected within the previous 36 months.
Time and Manner of Collection and Reporting
Covered institutions will be required to maintain procedures to collect data at a time and in a manner that are reasonably designed to obtain a response. These institutions will also be required to monitor for low response rates of applicant-provided information. The data must be reported to the CFPB on a small business lending application register on or before June 1st following the calendar year when the data was collected.
Employees who are involved in a credit determination cannot have access to an applicant’s responses regarding whether the applicant is a minority-owned business, a women-owned business, or an LGBTQI+-owned business and regarding the ethnicity, race, and sex of the applicant’s principal owners. This limitation will not apply if the financial institution determines it is not feasible to limit such access, and the financial institution provides notice to the applicant.
Publication of Data and Other Disclosures
The CFPB will make the data reported by the financial institutions available to the public annually. However, the CFPB reserves the right to make modifications or deletions to the data to advance a privacy interest. Financial institutions cannot disclose certain collected data to third parties unless the disclosure is necessary to comply with the Final Rule or other applicable law.
A covered financial institution must maintain evidence of their compliance with the Final Rule, which includes copies of their small business lending application register, for at least three years after it is required to be submitted to the CFPB.
What are the penalties?
Violations of the Final Rule are subject to administrative sanctions and civil liability. Bona fide errors are not a violation of this section. As defined by the rule, a bona fide error is an error that was unintentional and occurred despite the maintenance of procedures reasonably adapted to avoid such an error.
What is the status of the implementation?
Though there were staggered compliance dates based on the loan volume of the financial institutions covered by the rule, currently, there is a nationwide injunction that prohibits the CFPB from implementing or enforcing these rules; this injunction was imposed by the United States District Court for the Southern District of Texas in Texas Bankers Ass’n v. CFPB, 7:23-cv-00144 (S.D. Tex. Apr. 26, 2023). Whether the injunction is lifted depends on the outcome of a case pending in the United States Supreme Court, Cmty. Fin. Sers. Ass’n of Am., Ltd. V. CFPB, 51 F.4th 616 (5th Cir. 2022), cert. granted, 143 S. Ct. 978, 215 L. Ed. 2d 104 (2023) (“Community Services”).
The Supreme Court should issue a decision in that case before the end of its term in June 2024. Per the injunction entered in Texas Bankers, all covered financial institutions will be given an extension of time to comply with the requirements of the Rule “to compensate for the period stayed” in the event SCOTUS rules in favor of the CFPB in Community Services. However, the length of this extension is unclear.
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