The Consumer Financial Protection Bureau's ("CFPB" or "Bureau") May 10, 2017 field hearing and issuance of a Request for Information ("RFI") regarding the small business lending market, particularly credit issues facing small businesses owned by women and minorities, have stirred worries about new regulatory burdens on this sector. Yet this action is but a first step in the implementation of the data collection requirements of Section 1071 of the Dodd-Frank Act, and a final rule will be long in coming. A far more immediate threat looms in the CFPB and the States' increasing focus on small business loans, especially fair lending enforcement, independent of the Section 1071 rulemaking.
Section 1071 Rulemaking
The CFPB this week kicked-off its long-delayed implementation of Section 1071, which amended the Equal Credit Opportunity Act ("ECOA") to require financial institutions to compile and submit annually to the CFPB data regarding applications for credit submitted by minority-owned, woman-owned, and small businesses. Section 1071 identifies the specific data to be collected, including: the amount and type of credit applied for; the action taken on the application; the location and gross revenue of the business; and the race, ethnicity, and gender of the principal owner. Besides imposing burdensome collection requirements, this data compilation would substantially increase lenders' exposure as it provides ammunition which could be used and misused by regulators and private litigants alike.
As the CFPB emphasized at the Los Angeles field hearing, it is merely at the beginning stages of developing the data collection rule. The 60-day comment period for the RFI may be extended, and many months will pass before the CFPB is likely to announce a proposed rule. Accordingly, the potential is high that no final rule will be adopted before a director appointed by the Trump administration is in place. Nevertheless, given the specificity of the data collection requirements of Section 1071, industry may have to go to Congress to obtain meaningful relief.
Meanwhile, the CFPB's RFI is seeking information about:
- what data to consider for assessing whether an entity is a small business;
- the non-bank entities, including marketplace lenders, involved in small business lending;
- the role of third parties in small business lending;
- the financial products offered to small businesses; and
- information considered by financial services companies in deciding whether to extend credit to a small business.
As reflected in these RFI questions and in remarks by the CFPB and State representatives at the Los Angeles field hearing, they already are scrutinizing the definition of small business loans and seeking to regulate certain of these loans in a manner similar to consumer loans.
CFPB and States Focus on Small Business Loans
As Director Cordray stated at the field hearing, the CFPB believes that the line between consumer finance and small-business finance is blurry. In particular, both the CFPB and California officials who attended the field hearing emphasized the fact that many minority- and women-owned small businesses have few employees, and therefore that the line distinguishing personal from commercial loans is often vague. Accordingly, if they believe the evidence warrants such an action, the CFPB and the States may try to pierce the corporate veil and treat loans to some small businesses as consumer loans to the individuals behind them.
Tellingly, California Attorney General Xavier Becerra, Department of Business Oversight Commissioner Jan Owen and Los Angeles City Attorney Michael Feuer all spoke at the field hearing, and each emphasized a commitment to incorporate small business lending into the consumer protection activities of their respective offices. In her comments, Commissioner Owen highlighted the role marketplace lenders play in small business lending and her office's intention to regulate the marketplace lending space. All three officials emphasized the role of enforcement and regulatory agencies in ensuring that small businesses are able to get credit on fair terms.
Finally, although the CFPB's jurisdiction largely is limited to consumer financial products and services, the ECOA gives it fair lending authority over small business loans, and the Bureau has made this issue a top priority in its current agenda. Its ECOA supervisory exams already include small business lending programs, and fair lending enforcement actions will follow. In sum, while the information collection activities announced by the CFPB this week are part of a longterm process, financial institutions should be mindful of the risk of CFPB and State enforcement activities in the small business lending space in the interim and for the foreseeable future.
The attorneys of Stroock's Financial Services/Class Action Group are well-positioned to answer any questions you may have about the Consumer Financial Protection Bureau and other federal and state authorities' examination of small business lending, as well as related issues.
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