CFPB Issues Final 1071 Rule on Small Business Data Collection
Written by: Rob Ellis
On March 30th, the CFPB issued a final rule under section 1071 of the Dodd-Frank Act. A little history behind this rule, section 1071 of the Dodd-Frank Act amended the Equal Credit Opportunity Act (ECOA) and required financial institutions to collect data on small business loans. The final rule published on March 30th enacts this requirement. The CFPB has also published an executive summary and factsheet that may be helpful, as the final rule is 888 pages long.
Who is Covered Under This Rule?
Under the rule, a covered institution is one that “originated at least 100 covered credit transactions for small businesses in each of the two preceding calendar years”.
What Qualifies as a Small Business?
The final rule defines a small business as a business with gross annual revenue of $5 million or less in the preceding calendar year. This is the same definition as in the Small Business Act.
What are Covered Credit Transactions?
The rule defines a covered credit transaction as “an extension of business credit that is not an excluded transaction.” The rule excludes the following transactions:
Leases
Consumer-designated credit used for business or agricultural purposes
Purchases of a credit transaction
Purchases of an interest in a pool of credit transactions
Purchases of a partial interest in a credit transaction
Trade Credit
Home Mortgage Disclosure Act (HMDA) reportable transactions
Insurance premium financing
Public utilities credit
Securities credit
Incidental credit
Factoring
What are the Requirements for Covered Institutions?
Under the rule, a covered institution is required to collect and report data on covered applications.
What is a Covered Application?
The rule defines a covered application as “an oral or written request for a covered credit transaction that is made in accordance with procedures used by a financial institution for the type of credit requested.” Furthermore, the rule excludes the following from the definition of a covered application:
Reevaluation, extension, or renewal requests for existing businesses credit accounts
However, requests for additional credit on existing accounts is a covered application
Inquiries and pre-qualification requests
Solicitations
Firm offers of credit
Other evaluations that the institution initiates
What Data is Required to be Collected and Reported?
The final rule requires a covered institution to collect the following 20 different data points:
Institutions are permitted to rely on information from the applicant when compiling the above data. Furthermore, the rule provides a more detailed explanation regarding the above data points that covered institutions may want to review.
Institutions are required to report the above data on June 1st of the calendar year following the collection of the data. Institutions can find the CFPB’s filing instructions for the data here.
Effective Date
The final rule will be effective 90 days after it is published in the Federal Register. However, a covered institution's required compliance date depends on certain information, such as the number of covered originations in 2022, 2023, 2024, and 2025. Fortunately, the CFPB has helpfully provided an explanation regarding a covered institution’s requirements to follow the rule:
This info sheet from the CFPB further discusses a institution’s required compliance date that may be helpful.
Institutions should note that the above is only an overview of the new rule, and the final rule, its commentary, and the preamble contain more detailed information that should be reviewed to ensure compliance with the rule.
Overall, the new Small Business data collection rule expands the scope of data that covered institutions are required to collect and report, with a focus on providing greater transparency into lending practices for small businesses and communities that have historically been underserved. While compliance with the new rule may require significant effort, it can also provide an opportunity for covered institutions to improve their data collection and reporting processes, better understand their lending practices, and ultimately, better serve their customers and communities.
SCA is here to help you navigate the details and complexities of monitoring and action plans. Please contact our Director, Bill Dolan, at: Wdolan@scapartnering.com. Visit www.scapartnering.com to get started and avoid becoming the next headline.
