Section 1071 of the Dodd-Frank Act amended the Equal Credit Opportunity Act (ECOA) to require financial institutions to compile, maintain, and submit to the Consumer Financial Protection Bureau (CFPB or Bureau) certain data on applications for credit for women-owned, minority-owned, and small businesses. The Bureau took the next step to implement this mandate on September 15, 2020 by releasing its Outline of Proposals under Consideration and Alternatives Considered (Outline) regarding small business lending data collection and reporting. Coinciding with the issuance of the Outline, the Bureau also released a high-level summary.
The outline describes proposals that the CFPB is considering to implement Section 1071, the regulatory process, and an economic analysis of the potential impacts of the proposals on directly affected small entities. The Bureau’s proposals under Section 1071 have been long-awaited. The key elements of the proposals under consideration are as follows:
- Scope of the rulemaking: The Bureau is considering proposing that the data collection and reporting requirements of its eventual Section 1071 rule would apply to any application to a financial institution for credit by a small business, and that financial institutions would not be required to collect and report data for women- and minority-owned businesses that are not “small.”
- Covered lenders – definition of “financial institution”: Under the proposed definition of “financial institution” that the Bureau is considering, the rule’s data collection and reporting requirements may apply to a variety of entities that engage in small business lending, including depository institutions, online lenders/platform lenders, community development financial institutions, lenders involved in equipment and vehicle financing (captive financing companies and independent financing companies), commercial finance companies, governmental lending entities, and nonprofit, non-depository institution lenders. Certain financial institutions may be exempt based on either or both a size-based and/or activity-based threshold.
- Covered applicants—definitions of “small business,” “women-owned business,” “minority-owned business,” and “minority individual”: The Bureau is considering adopting a simplified small business size standard for purposes of its Section 1071 rule, and will seek Small Business Administration (SBA) approval if it ultimately decides to take this approach. The Bureau also is considering clarifying the terms “women-owned business” and “minority-owned business.”
- Covered products—definition of “credit”: Specifically, the Bureau is considering proposing that covered products under Section 1071 include term loans, lines of credit, and business credit cards, and that consumer-designated credit, leases, factoring, trade credit, and merchant cash advances be exempt.
- Definition of “application”: The Bureau is considering defining an “application” largely consistent with the Regulation B (ECOA’s implementing regulation) definition of that term. The Bureau also is considering clarifying circumstances that would not be reportable under Section 1071, even if certain of these circumstances are considered an “application” under Regulation B, including (1) inquiries/prequalifications; (2) reevaluation, extension, and renewal requests, except requests for additional credit amounts; and (3) solicitations and firm offers of credit.
- Data points and timing of data collection: Along with the mandatory data points required under Section 1071, the Bureau is considering requiring the reporting of the additional discretionary data points. The Bureau is considering not specifying a particular time period during the application process when financial institutions must collect Section 1071 data from applicants.
- Shielding data from underwriters and other persons: The Bureau is considering proposing that financial institutions need only limit the access of a loan underwriter or other person to an applicant’s responses to inquiries regarding women-owned and minority-owned business status under Section 1071, as well as the race, sex, and ethnicity of principal owners. The Bureau is further considering proposing that an applicant’s response regarding small business status need not be firewalled off pursuant to Section 1071.
- Applicants’ right to refuse to provide certain information: The Bureau is considering proposing that the right of an applicant under Section 1071 to refuse to provide certain information applies to the financial institution’s specific inquiries regarding women-owned and minority-owned business status, as well as the race, sex, and ethnicity of principal owners, but not to the financial institution’s specific inquiry regarding small business status.
- Compiling, maintaining, and reporting Section 1071 data to the Bureau: The Bureau is considering proposing that Section 1071 data collection be done on a calendar-year basis, and submitted to the Bureau by a specified time after the end of each calendar year. Further, the Bureau is considering proposing that the record retention period be three years.
- Privacy considerations involving Bureau publication of Section 1071 data: The Bureau is examining the privacy implications of financial institutions’ collection, reporting, and disclosure of information pursuant to Section 1071 and the Bureau’s public release of the data. Further, the Bureau is considering applying a balancing test to weigh the privacy considerations of public disclosure.
- Implementation period: The Bureau is considering proposing that financial institutions have approximately two calendar years for implementation following the issuance of a final rule.
It remains too early to tell whether a Section 1071 rule would have significant impacts on and implications for the small business credit market. The Bureau expects that the tasks required for data collection, checking for accuracy, and reporting under the eventual Section 1071 rule would be similar to those under the Home Mortgage Disclosure Act (HMDA), but there are significant differences between the home mortgage and small business lending markets. For example, generally small business lending is less automated, and has a wider variety of products, smaller volumes and smaller credit amounts. These differences will likely affect the calibration of the Bureau’s rulemaking.
In terms of next steps, the Bureau will convene a Small Business Advocacy Review panel in October, which will be tasked with preparing a report that examines the impact of the potential rule on small businesses. That report, along with feedback received from small businesses, will be considered by the Bureau in advance of the issuance of a proposed rule. Stay tuned for additional updates.