CFPB Finalizes Rule On Small Business Lending

The Consumer Financial Protection Bureau (CFPB) has finalized a rule required by Congress to increase transparency in small business lending, promote economic development, and combat unlawful discrimination. 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, 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.

“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. “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 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.

The pandemic-era Paycheck Protection Program, for example, would have benefited from the kind of small business lending data that will be captured by this rule. Such data could have led to better targeted, more effective lending during the COVID-19 public health emergency.

The rule finalized 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 — a growing sector accounting for roughly $550 billion in financing to small businesses — will be required to collect and report data, as will banks, savings associations, and credit unions. Online lending by nonbanks is a rapidly evolving market that particularly impacts minority entrepreneurs.

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. However, the CFPB did not issue rules to implement this requirement. The California Reinvestment Coalition sued the CFPB in 2019, leading to a court order requiring the CFPB to finalize the rule by March 31, 2023.

The CFPB has undertaken significant planning to 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:

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.

While the rule announced requires data collection and reporting for those that make at least 100 loans annually, the rule will still cover the vast majority of bank small business lending, based on the CFPB’s analysis. Lenders originating less than 100 loans per year will still be required to adhere to fair lending laws.

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.

Reduce duplicative reporting requirements: Loans reportable under the Home Mortgage Disclosure Act 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.

Allow for the use of new digital tools developed by industry and technology partners: The rule finalized today 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. For example, the CFPB plans to provide Application Programming Interfaces in an open-source environment to spur the development of accurate and efficient data reporting tools.

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.

To emphasize financial institutions’ obligations to collect this important data, the CFPB is also issuing a policy statement noting that it intends to focus its supervisory and enforcement activities in connection with the new rule on ensuring that lenders do not discourage small business loan applicants from providing responsive data, including responses to the requests to provide demographic information about their ownership.