As I wrote recently, the Supreme Court will have an opportunity to kill off the Consumer Financial Protection Bureau (CFPB) next term when it considers the Fifth Circuit’s decision striking down the CFPB’s funding mechanism as a violation of the appropriations clause of the Constitution. The CFPB’s final rule on Section 1071 of Dodd-Frank Act, which takes effect in late June, will likely enlarge the chorus of financial institutions hoping the Supreme Court does just that.
As a response to the financial crisis of 2008, Dodd-Frank was signed into law in July 2010. Section 1071 amended the Equal Credit Opportunity Act (ECOA) to “facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.” Thirteen years later, the Small Business Lending Rule is here.
Once you get past the misnomer of the Consumer Financial Protection Bureau regulating commercial transactions, and you study the minutia of the rule’s requirements, it is evident how onerous this will be on lenders, particularly smaller community banks and credit unions. The financial services industry is lobbying hard for public pressure to halt implementation of the rule. Some members of Congress are promising to do anything possible to prevent its implementation. With an effective date late next month, that may be wishful thinking.
Collecting and reporting the required information will be a massive undertaking. Generally speaking, loans, lines of credit, merchant cash advances, and credit cards to businesses with gross annual revenue of $5 million or less in the preceding fiscal year will constitute covered credit transactions. The $5 million threshold is subject to adjustment by the CFPB every five years. Whether the lender qualifies as a “covered financial institution” depends on the number of “covered credit transactions” it has originated in the previous two calendar years. Institutions with more covered transactions must begin reporting sooner than those with fewer such transactions.
The initial reporting dates are staggered, depending on how many originations a lender has in the preceding two calendar years. The first reporting date is October 1, 2024 if the lender originated at least 2,500 covered transactions in both 2022 and 2023. The next date is April 1, 2025 if the lender originated at least 500 covered transactions in both of those years, did not originate 2,500 or more in both 2022 and 2023, and originated at least 100 in 2024. Finally, a lender must engage in this data collection and reporting on January 1, 2026 if it originated at least 100 covered originations in both 2024 and 2025 but did not originate at least 500 in both 2022 and 2023.
While the number of originations is key to whether an institution is covered, once a lender falls into that category, it must report all applications for what would have been covered transactions. The heart of Section 1071’s inquiry is the status of the applicant as a minority-owned business, women-owned business, and/or LGBTQI+-owned business, in addition to the applicant’s principal owners’ race, sex, and ethnicity—all voluntarily reported. However, the CFPB has enumerated multiple additional data points it wants on each application, including a unique identifier, application date, application method, application recipient, action taken by the institution, and the date of such action. Depending on whether the application was accepted or denied, there are even more data points required.
Additional reportable data points include credit type, credit purpose, amount of request, a census tract based on the applicant’s address, gross annual revenue for the applicant’s preceding fiscal year, the applicant’s three-digit NAICS (North American Industry Classification System) code, the number of employees of the applicant, and the number of principal owners of the applicant. The rule has strict requirements as to how the data is collected, how it is maintained, and when a lender must share it with an applicant. The institutions may not discriminate based on any response an applicant provides or whether the applicant provides it at all.
Although this rule was not the one at issue in the Fifth Circuit, the CFPB’s funding mechanism is still derived from the Federal Reserve and not as an annual appropriation by Congress. Perhaps the Supreme Court will curtail or even eliminate the CFPB’s rule-making authority by the end of its next term, before the initial October 1, 2024 reporting deadline under this final rule.
Meanwhile, to assess whether your institution, your applicants, or your transactions are covered by this rule, contact the attorneys at Dalton & Tomich today. We counsel financial institutions and small businesses in issues of lending, transactions, and regulatory compliance.