On September 1, 2021, the Consumer Financial Protection Bureau (CFPB and/or Bureau) issued a notice of proposed rulemaking (NPRM) requesting public comment on its proposed rule to implement Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The publication of the NPRM in the Federal Register on October 8, 2021, commences the 90-day comment period – and comments on the proposed rule must be received on or before January 6, 2022. Because the adoption of the proposed rule on collecting and reporting data on the gender, race and sex of the applicant may affect pricing, access to capital, and privacy rights, lenders may wish to familiarize themselves with the NPRM in order to comment on the wisdom of the Government’s proposal.
While the CFPB’s jurisdiction is generally limited to financial services that impact consumers, Section 1071 of the Dodd-Frank Act (section 1071) amended the Equal Credit Opportunity Act (ECOA) to require financial institutions to compile, maintain, and submit to the Bureau certain data on applications for credit for women-owned, minority-owned, and small businesses. Congress enacted section 1071 to (1) facilitate enforcement of fair lending laws and (2) identify business and community development needs and opportunities for women-owned, minority-owned, and small businesses. With the release of the NPRM, The CFPB is implementing its authority under section 1071.
According to the CFPB’s Acting Director, this new rule stems from the fact that “[the Paycheck Protection Program] was plagued with problems—the smallest businesses had trouble accessing the funds, and, at least initially, reports were widespread that Black and Hispanic entrepreneurs had trouble accessing funds as well.” While small business owners with existing banking relationships were often provided quicker access to PPP loans since the lender “knew” their customers better than others, was there a different model which lenders should have adopted in April 2020? Congress rolled out a program with few rules and asked lenders to assume enormous risks in order to help America’s small businesses survive. That mission was accomplished due to the heroic efforts of SBA professionals and lenders. While fair lending practices with respect to the underserved is a shared goal, the issue for lenders is whether the proposed rule will achieve this objective.
The Proposed Rule
To accomplish this goal, the proposed rule seeks to impose requirements on a “covered financial institution” to collect and report certain data regarding “covered applications” from “small businesses” for “covered credit transactions.” Here is a brief outline of how the NPRM defines each of these terms:
- Covered financial institution- a financial institution that originated at least 25 covered credit transactions to small businesses in each of the two preceding separate calendar years, including, but not limited to depository institutions (i.e., banks, savings associations, and credit unions), online lenders, platform lenders, community development financial institutions (both depository and non-depository institutions), lenders involved in equipment and vehicle financing, commercial finance companies, governmental lending entities, and nonprofit non-depository lenders.
- Covered applications- an oral or written request for a covered credit transaction that is made in accordance with procedures used by a covered financial institution for the type of credit requested (matches current definition in Regulation B).
- Small businesses-the alternative size standard of $5 million or less in gross annual revenue currently outlined in the Small Business Act.
- Covered credit transactions- a transaction that meets the business credit definition of Regulation B.
Collection and Reporting
Under the NPRM, covered financial institutions would be required to collect and report more than 20 data points regarding covered applications from small businesses for covered credit transactions, including ethnicity and gender of a small business’s principal owners, gross annual revenue of the applicant, and reasons for credit approval or denial.
The proposed rule would require covered financial institutions to collect data on a 12 month-calendar-basis and report the data to the CFPB by June 1 of the following year. A covered financial institution would also be required to provide certain information about itself as part of its annual submission. Covered financial institutions must retain evidence of compliance with this regulation for at least three years.
The data that covered financial institutions must pass along to the CFPB includes data known to the financial institution itself, data provided by applicants, and data provided by third parties connected to the transaction. Data points include a variety of financial and organizational information related to the transaction itself, as well as to the small business entity (e.g., gross revenue, number of employees, age of business, etc.).
The CFPB argues that the proposed rule would create a useful tool for enhancing financial access for minority entrepreneurs. Further, the CFPB believes that the NPRM imposes minimal burden for financial institutions. Perhaps.
However, many lenders, while committed to fair lending practices, may be concerned that the addition of the proposed regulatory reporting requirements could negatively impact access to capital for just those small businesses which the NPRM is designed to assist. The pricing of loans may rise, compliance may be difficult and enforcement subjective, and the NPRM may create privacy concerns that arise out of the collection and storage of information including the race, gender and sex of loan applicants.
Lenders are encouraged to review the rule and consider providing comments to the CFPB prior to the January 6, 2022 deadline.
For more information, or to get in touch with one of our attorneys, please contact us at 215.542.7070 or firstname.lastname@example.org.
 The entire Rule can be reviewed at https://files.consumerfinance.gov/f/documents/cfpb_section-1071_nprm_2021-09.pdf
 Proposed data points are outlined in full at https://files.consumerfinance.gov/f/documents/cfpb_section-1071-nprm_data-points-chart_2021-09.pdf