Today, the CFPB has issued the small business lending final rule to implement changes to the Equal Credit Opportunity Act made by Section 1071 of the Dodd-Frank Act to require financial institutions to compile data regarding certain business credit applications and report that data to the CFPB (we previously discussed Section 1071 rulemaking in prior blog posts here and here). According to the CFPB, Section 1071’s purposes are “facilitating enforcement of fair lending laws and enabling the identification of business and community development needs and opportunities for women-owned, minority-owned, and small businesses.” While the final rule includes almost 900 pages of rulemaking, highlights include the following:
- Covered Financial Institutions. Coverage includes, but is not limited to, depository institutions, online lenders, platform lenders, CDFIs, equipment and vehicle finance lenders, commercial finance companies, and MCA providers.
- Phases in implementation. The final rule requires the largest lenders, which cover the bulk of the market, to collect and report data earlier than smaller lenders, starting Oct. 1, 2024.
- Demographic data collection. Loan officers will not be required to make their own determinations of an applicant’s race or ethnicity — or any other demographic information.
- Model form. The final rule contains a short, plain-language form that lenders can, but are not required to, use to collect demographic data. As that form reflects, small businesses may choose not to provide demographic data. Lenders must not discourage applicants from providing data.
- Supervisory and Enforcement. The CFPB intends to focus its supervisory and enforcement activities in connection with the new rule on ensuring that lenders do not discourage applicants from submitting information, as explained in a policy statement accompanying the final rule.
Generally, covered financial institutions must report data to the CFPB by June 1 of the year following the calendar year in which the financial institution collected the data (e.g., data collected for 2024 must be reported by June 1, 2025).
Additional materials published by the CFPB include the following:
Putting It Into Practice: As industry participants will undoubtedly spend the next several weeks reviewing the final rule, top off mind should be some level of overhaul to existing underwriting and record-keeping processes, as well data segregation, data storage, and other IT systems and processes, including the potential need to secure additional resources and personnel to implement the new procedural framework. A top concern for many covered financial institutions and commentators is that the data gathered and publicly reported under this rule will be misconstrued and used against financial institutions in a way not intended by the law. Whether this use will include fair lending enforcement under theories of disparate impact, or the expansion of CFPB enforcement powers to commercial credit, remains to be seen.