CFPB finalizes information reporting rules for small business lenders

Ron Sachs/Bloomberg

The Consumer Financial Protection Bureau has introduced long-awaited legislation requiring banks and other lenders to report data on small business loans in an effort to fight discrimination.

In the year A rule passed by Congress in 2010 would require lenders to begin collecting data on how many applicants are approved or denied small business loans by 2024. The data includes the cost of credit as well as geographic and demographic details about borrowers.

After dragging its feet for more than a decade, the CFPB was finally forced to initiate the rule Accused In the year 2019 by the California Reinvestment Coalition, a consumer advocacy group. According to the court order, the CFPB had until March 31 to finalize the rule. The rule is one of the last remaining mandates of the Dodd-Frank Act.

“The collection of data is very, very powerful,” CFPB Director Rohit Chopra said Thursday, “especially when you can identify… “Just by asking for the data, it changes the mindset of lenders.”

Chopra called the rule “a small business lending census that ensures banks and banks serve small businesses fairly.” The bureau said the regulation provides “to identify discrimination based on information.”

There is currently limited data on small business loans, especially during the COVID-19 pandemic and the rush to make loans through the Paycheck Protection Program. The data covers a variety of credit products, including term loans, lines of credit, business credit cards, online credit products and merchant cash.

Community advocacy groups plan to reveal which banks are doing a poor job lending to black and Hispanic-owned small businesses when the data is finally released.

“It’s overdue and we think a lot of good things are coming,” said Paulina Gonzalez-Brito, CEO of the California Reinvestment Coalition. “The result is to increase credit and allow more scrutiny of banks and to whom they lend, and fairer credit enforcement and changes in the way. [lenders] Business.”

The CFPB’s final rule includes major changes from the 2021 proposal. The rule applies to banks and lenders that originate at least 100 loans per year, up from 25 loans per year in the proposal. The CFPB has simplified the definition of small business for companies with annual gross revenues of less than $5 million with the goal of simplifying compliance.

Lenders that originate fewer than 100 small business loans per year are still required to comply with fair lending laws, the bureau said. The rule currently covers about $550 billion in bank loans to small businesses, the bureau said.

The data collection is similar to the home loan disclosures that lenders have reported for the past 50 years.

The regulation, known as Section 1071 of the Dodd-Frank Act, was created to give policymakers insight into the lending decisions of the nation’s 33 million small businesses, particularly those owned by women and minorities. CFBB said the legislation could work in conjunction with the revised Community Reinvestment Act, which federal regulators plan to overhaul the accounting for mobile and online banking activities.

The long awaited Reforms of the nearly 50-year-old CRA are underway by the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, and they rely on the CFPB’s small business data collection, a senior CFPB official said.

In another change, the CFPB will allow a two-year phase-in starting in 2024, with larger lenders collecting the data before smaller ones. Lenders that originate at least 2,500 small business loans annually will begin collecting the data on October 1, 2024. Lenders that originate at least 500 loans per year will begin on April 1, 2025, and those that originate at least 100 loans per year will begin on Jan. 1, 2026, CFBB said.

According to Lindsey Johnson, president and CEO of the Consumer Bankers Association, banks will need more time to comply with this massive rule.

“We are concerned that the deadline for implementation of this massive task is insufficient,” she said in a press release.“

The CFPB dropped a requirement from the 2021 proposal that would have required loan officers to identify an applicant’s race or ethnicity after a major controversy with the industry. Instead, CFBB says small businesses can “identify themselves” as “women-, minority- or LGBTQI+-owned.”

“Loan officers are not required to make their own determinations about an applicant’s race, ethnicity or other demographic information,” the bureau said in a press release.

According to the law, small business applicants have the right not to provide the information. But the bureau plans to use its regulatory and enforcement powers to discourage lenders from giving up applicants, a senior CFPB official said.

“Privacy is increasingly on people’s minds,” said Mary Ann Miller, vice president of customer experience at Prove Identity, a New York-based provider of digital-identity solutions. “Part of the heavy lifting is when the small business applicant refuses to comply.”

The CFPB is still studying how to address privacy concerns. In another change the bureau proposed, it abandoned the so-called “balancing test” intended to weigh the harms and benefits of public disclosure. Instead, the Bureau will continue to seek public comment on privacy issues.

“We’re really still in this design phase,” says Chopra. “There’s no data yet, so once we get it we’ll look at privacy [and] Think about how we can publish summary information, credit rating information, and everything in between.

He continued: “How much demographic data do we collect, what do we do and what do we learn? [mortgage data] How to ensure that individuals are not re-identified in the process?

Consumer advocates have expressed concern that the CFPB could be sued by banking trade groups to prevent the rule from taking effect. In response, CFBB said it is committed to working with small business lenders and third parties, has set up a helpline to answer lenders’ compliance questions, and plans to release additional educational materials.

Patrick McHenry, chairman of the House Financial Services Committee, responded by calling the rule a “danger” that would limit lending and put pressure on small lenders. Even if such efforts fail, they have threatened to repeal the law.

“To hold the CFPB accountable for the harmful legislation, the House Financial Services Committee will explore all options — including the Congressional Review Act — to ensure it is not implemented,” McHenry said in a statement. “By imposing overly burdensome reporting requirements on small lenders, Director Chopra threatens the privacy and security of small business owners’ personal and financial information.”

– Polo Rocha contributed to this article.