On March 30, 2023, the Consumer Financial Protection Bureau (CFPB) issued a final rule, amending Regulation B, implementing changes to the Equal Credit Opportunity Act (ECOA) made by section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The rule change extends the collection and reporting of demographic information not only to the application of credit by individual consumers but also to business credit applicants, including small businesses, in what are defined as “covered originations.” This change in regulation will likely impact all SBA 7(a) lenders as “covered originations” include extensions of credit to “small business” identified, in turn, as a “small business concern” as defined by the SBA. The new rule goes into effect 90 days after date of publication in the Federal Register, and compliance with the new requirements will depend on the number of extensions of business credit applications received by the particular lender during 2022 and 2023.
The purpose behind the rule is to promote fair business credit lending practices. For SBA lenders it is important to note Compliance with the new CFPB rule require the collection and reporting of information which may be different, or in addition to, other SBA compliance requirements (i.e., forms such as the 1919 and 1920) already in place. SBA lenders may need to implement changes to their internal processes and controls to assure compliance with both. It is incumbent on SBA lenders to be on the lookout for further information on enforcement for lack of compliance of the revised CFPB rule.
Under the CFPB rule change, financial institutions will be required to report demographic information on small business credit applicants such as:
- The applicant’s minority-owned business status, women-owned business status,
- LGBTQI+-owned business status, and
- The applicant’s principal owners’ ethnicity, race, and sex.
Financial institutions can only solicit this information from the business applicant and are not permitted to create data from any other source. Additionally, to address any privacy concerns, business applicants will have the option of not providing the information. Furthermore, financial institutions must inform the applicant that it will not discriminate based on answers and must inform such applicant that it is not required to answer any question regarding demographic information. Finally, financial institutions can’t discourage applicants from responding and must maintain procedures to collect such data at a time and in a manner that is reasonably designed to obtain a response.
In connection with the collection of demographic data collected directly from an applicant, these procedures must, at a minimum, have provisions to ensure that:
- The initial request for applicant-provided data occurs prior to notifying an applicant of the final action taken on an application,
- The request for applicant-provided data is prominently displayed and presented
- Applicants are not discouraged from responding to such requests, and
- Applicants can easily respond to such requests.
Financial institutions must also maintain procedures to identify and respond to signs of potential discouragement in responses.
In general, these changes are intended to enable identification of the needs and opportunities of women-owned, minority-owned, and small businesses needed to enforce fair lending laws. For more information regarding the new reporting requirements, contact the attorneys at Starfield & Smith, PC at 215-542-7070.