The Consumer Financial Protection Bureau (CFPB) has finalized a rule [1] required by Congress to increase transparency in small business lending, promote economic development, and combat unlawful discrimination. Through the rule [1], lenders will collect and report information about the small business credit applications they receive, including geographic and demographic data, lending decisions, and the price of credit. The rule will work in concert with the Community Reinvestment Act (CRA) [2], which requires certain financial institutions to meet the needs of the communities they serve. The increased transparency will benefit small businesses, family farms, financial institutions, and the broader economy.
The CFPB’s rule will:
- Provide a comprehensive view of small business lending: The rule covers lenders making over 100 covered small business loans per year, which accounts for more than 95 percent of small business loans by banks and credit unions. Like with mortgages, lenders will submit data points required by Congress, as well as additional data points that are typically already included in lender files.
- Cover diverse forms of credit by all types of lenders: The rule covers closed-end loans, lines of credit, business credit cards, online credit products, and merchant cash advances by banks, credit unions, and other lenders. Non-depository financial institutions will be required to collect and report data, as will banks, savings associations, and credit unions.
- Use straightforward definitions and streamlined forms: To make it easy for lenders to know on which applications to collect data, the rule defines a small business as one with gross revenue under $5 million in its last fiscal year. The rule also includes a streamlined sample form for lenders to use, if they so choose, to collect demographic data from small business credit applicants.
In 2010, Congress enacted requirements that would result in lenders making data available to the public about their small business lending activity in Section 1071 of the Consumer Financial Protection Act [3]. However, the CFPB did not issue rules to implement this requirement. The California Reinvestment Coalition sued the CFPB in 2019 [4], leading to a court order requiring the CFPB to finalize the rule by March 31, 2023.
“Many local businesses were shuttered during the COVID-19 pandemic after they struggled to obtain credit under the Paycheck Protection Program,” said CFPB Director Rohit Chopra [5]. “This small business loan census will give the public key data on this market to ensure that banks and nonbanks are serving small businesses fairly.”
The CFPB will simplify implementation and prepare for the submission of data from thousands of lenders. While many of these lenders already report mortgage data, the CFPB recognizes that small business lending has a number of key differences. After considering a wide range of feedback and thousands of public comments, the CFPB is finalizing the rule and planning for implementation in ways that will:
- Reduce duplicative reporting requirements: Loans reportable under the Home Mortgage Disclosure Act (HMDA) [6] will not need to be reported under the small business lending rule. The rule is also designed to work in concert with rules under the Community Reinvestment Act’s reporting requirements. Under the regulators’ Community Reinvestment Act proposal, data submitted under the CFPB’s rule would satisfy the relevant Community Reinvestment Act requirements.
- Phase in implementation for the largest lenders first: The CFPB found that there were key differences in how large financial institutions would implement the rule, compared to relationship-based local lenders. The final rule requires the largest lenders, which account for most of the small business lending market, to collect and report data earlier than smaller lenders. Specifically, lenders that originate at least 2,500 small business loans annually must collect data starting October 1, 2024. Lenders that originate at least 500 loans annually must collect data starting April 1, 2025. Lenders that originate at least 100 loans annually must collect data starting January 1, 2026.
- Streamline and improve demographic and financial data collection: Small businesses will be able to self-identify as women-, minority-, or LGBTQI+-owned. Lenders will be able to rely on the financial and other information provided by the small business. Loan officers will not be required to make their own determinations of an applicant’s race, ethnicity, or any other demographic information.
- Allow for the use of new digital tools developed by industry and technology partners: The rule allows financial institutions to work with third parties, including industry consortia, to develop services and technologies that will aid in collecting and reporting data. While individual lenders are ultimately responsible for ensuring fair and accurate collection and reporting, the rule permits them to work with third parties, including industry consortia and other partners, to collect and report data in ways that are tailored to their business model.
- Give extra time to lenders with strong records of service to meet the needs of the communities they serve: The CFPB intends to issue a supplementary proposal that would, if finalized, provide additional implementation time for small lenders that have demonstrated high levels of success in serving their local communities, as measured by their performance under relevant frameworks like the Community Reinvestment Act and similar state laws.
“While we are pleased that loans reportable under the Home Mortgage Disclosure Act will not need to be reported under the Bureau’s final rule, it is disappointing that this exclusion is not applied to all investment property lending,” said Mortgage Bankers Association (MBA) President and CEO Bob Broeksmit, CMB [7]. “MBA agrees with federal regulatory agencies’ long-held view that lending to finance income-producing properties is not small business lending. The longer implementation timelines and higher loan reporting thresholds are appreciated, but we are concerned that the final rule imposes burdensome and costly data collection and reporting requirements on some commercial real estate lenders. Commercial real estate markets are already facing headwinds from financial market volatility, economic uncertainty, and higher interest rates. Preparing for new compliance obligations only adds to these challenges and will likely raise costs for borrowers.”
According to the CFPB, the nation’s 33 million small businesses employ nearly half of all private sector workers in the U.S., and account for the majority of new job creation. Operators of small and local businesses finance their enterprises through a variety of sources, including loans from banks, credit unions, and nonbank finance companies. Many of these businesses have a relationship with a local financial institution to help grow their business. However, there is currently limited data on small business entrepreneurs’ access to credit, and no comprehensive information available about small business lending. For decades, the government has assembled data pursuant to Congressional mandates on residential mortgages. Now, for the first time, data on small business lending will give investors and lenders more insights to identify new opportunities that support economic growth, help policymakers measure the effectiveness of any government programs, and provide a data-driven approach to detect potential discrimination.
“Entrepreneurs are the economic engine of our nation and today’s final rule is the culmination of more than a decade of advocacy to provide better data on the extent of discrimination encountered by small business owners seeking access to credit,” read a joint statement from Congresswoman Maxine Waters [8] of the House Financial Services Committee, and Congresswoman Nydia Velázquez [9] of the House Small Business Committee. “This critical rule will shine a light on disparities in lending to small business owners and help Congress understand how to ensure that banks and other lenders are meeting the credit needs of all of our nation’s small businesses—especially those that are women-owned and minority-owned. This transparency will promote competition and help lenders, especially community financial institutions, identify new opportunities to serve the needs of small businesses.”