The CFPB took another significant step towards issuing regulations to implement Section 1071 of the Dodd-Frank Act by releasing the final report of the small business review panel (Panel) on the proposals the Bureau is considering for developing such regulations (Report).
Section 1071 amended the ECOA to require financial institutions to collect and report certain data in connection with credit applications made by women- or minority-owned businesses and small businesses. Such data includes the race, sex, and ethnicity of the principal owners of the business. The Small Business Regulatory Enforcement Fairness Act (SBREFA) and the Dodd-Frank Act require the CFPB to convene a Panel when developing rules that may have a significant economic impact on a substantial number of small businesses. It also requires the Panel to consult with representatives of small business entities (SBRs) that are likely to be subject to the rules under consideration. The Panel is comprised of representatives of the CFPB, SBA, and OMB.
In accordance with the rulemaking timetable established by the Stipulated Settlement Agreement in the lawsuit filed against the Bureau alleging wrongful delay in adopting regulations to implement Section 1071, the Bureau released an outline of the proposals under consideration in September 2021 and convened the Panel in October 2021. The Settlement Agreement provides for the parties to meet and confer regarding a deadline for the Bureau's issuance of a Notice of Proposed Rulemaking (Section 1071 NPRM) following the completion of the Report. If the parties cannot agree on a deadline, the plaintiffs, at any time that is more than 30 days after completion of the Report, can notify the Bureau that they want to ask the court to set a deadline for issuance of a Section 1071 NPRM. The CFPB agreed not to oppose the setting of a deadline and the plaintiffs agreed not to propose a deadline that is less than 6 months after completion of the Report.
It is unclear how a change in CFPB leadership in a Biden Administration will impact the establishment of a timetable for issuing a Section 1071 NPRM. The plaintiffs can be expected to take a more cooperative approach with new CFPB leadership, given that a Section 1071 NPRM issued under new CFPB leadership will likely be more closely aligned with the views of consumer advocates than one issued under Director Kraninger. Accordingly, we would not expect the plaintiffs to try to establish a deadline for issuing a Section 1071 NPRM before new CFPB leadership is installed. Instead, we would expect the plaintiffs to wait to establish a timetable with new leadership for whom Section 1071 rulemaking will likely be a priority.
The Report includes a list of the 20 individuals who served as SERs, with the names and locations of their businesses and the types of businesses. Two of the businesses are identified as online lenders. The Report summarizes the SERs' feedback and includes their complete written feedback and the materials they were provided as appendices. It also sets forth the Panel's findings and recommendations which include the following:
- Scope. Section 1071(b) imposes requirements regarding "any application to a financial institution for credit for [a] women-owned, minority-owned, or small business." The Bureau indicated that it is considering proposing that the data collection and reporting requirements of its Section 1071 rule apply to any application for credit for a "small business" as defined by the rule, including for a women-owned or minority-owned business that meets the "small business" definition. Under this approach, a financial institution (FI) would not be required to collect and report Section 1071 data for women-owned or minority-owned businesses that are not a "small business." The Panel recommends that the Bureau continue to explore whether Section 1071's collection and reporting requirements should extend to applications for women-owned and minority-owned businesses that are not small and seek comment in the Section 1071 NPRM on the compliance costs to small FIs regarding applications for such businesses that are not small.
- Financial Institutions Covered. The definition of "financial institution" in Section 1071(h) covers any entity that engages in financial activity and includes both depository and non-depository institutions. The Bureau indicated that it is considering size-based and activity-based standards for exempting FIs from Section 1071 data collection and reporting requirements. The Panel recommends that the Bureau continue to explore whether either or both types of exemption standards might be appropriate, taking into consideration whether the fixed costs of coming into compliance with a Section 1071 rule might cause certain FIs to cease lending to small businesses.
- "Small Business" Definition. Section 1071(h) defines a "small business" applicant as having the same meaning as a "small business concern" in the Small Business Act. The Bureau indicated that it considering proposing to define "small business" by cross-referencing the SBA's general "small business concern" definition but adopting a simplified size standard for purposes of its Section 1071 rule that uses one of three alternative approaches that look to (a) gross annual revenues in the prior year regardless of industry, (2) a maximum number of employees or gross annual revenues depending on the type of industry that a business is in, or (3) a size standard (for which the Bureau would need SBA approval) using gross annual revenues or number of employees that looks to the SBA's industry-specific size standards which are expressed in terms of a business's average annual receipts or average number of employees and that would result in eight different size standards and 13 industry categories. The Panel recommends that the Bureau seek to adopt a "small business" definition that is easy for small business applicants to understand and straightforward for FIs to implement. It also recommends that the Bureau (1) consult with certain SBA officials before issuing a Section 1071 NPRM to determine whether any of the three alternatives for a small business size standard being considered by the Bureau or another alternative that would be easy for small businesses to understand and for FIs to implement should be included in the Section 1071 NPRM, and (2) continue to explore how information that small FIs may or may not currently collect from small business applicants (specifically gross annual revenue, number of employees, and North American Industry Classification System code) might inform the selection of an alternative for a "small business" standard.
- Product Coverage. Section 1071 requires FIs to collect and report information regarding applications for "credit." The Bureau indicated that it is considering proposing that a covered product under Section 1071 is one that meets the ECOA definition of "credit" and is not excluded under the Bureau's rule. It is considering proposing that covered products include term loans, lines of credit, and business credit cards and that consumer credit used for business purposes, leases, trade credit, factoring and merchant cash advances (MCAs) would not be covered. The Panel recommends that the Bureau continue to explore the extent to which covering MCAs or other products such as factoring would further the statutory purposes of Section 1071, along with the benefits and costs of covering such products. It also recommends that the Bureau address in the Section 1071 NPRM whether it intends to cover agricultural and real-estate secured loans in a Section 1071 rule. With regard to consumer credit used for business purposes (i.e., products designated by the creditor as consumer purpose products), the Panel recommends that the Bureau continue to explore the potential costs to FIs associated with reporting such credit and seek comment in the Section 1071 NPRM on how best to define such credit if the Bureau determines that this exclusion is appropriate.
- Implementation. The Bureau indicated that it is considering proposing that FIs have approximately two calendar years for implementation following the Bureau's issuance of a final Section 1071 rule. The Panel recommends that the CFPB seek comment in the Section 1071 NPRM on the sufficiency of a two-year implementation period and, in particular, what aspects of a final rule might require more or less time to implement. It also recommends that the Bureau comment in the Section 1071 NPRM on ways to facilitate implementation for small FIs, particularly those that have no experience with any federal data reporting requirements.
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