The Consumer Financial Protection Bureau has proposed a rule it says would “shine new light on small businesses’ access to credit.” The proposed rule accomplishes this goal by requiring lenders to “disclose information about their lending to small businesses.”
Titled “Small Business Lending Data Collection under the Equal Credit Opportunity Act,” the proposed rule is intended to encompass not only traditional small business lenders, but also fintech lenders and merchant cash advance lenders (MCAs) that cater to small businesses.
At 918 pages, the CFPB not only provides the proposed rule, but also substantial background material to aid in interpreting the proposal.
Covered Lenders and Excluded Transactions
“Covered financial institutions” are “any partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative organization, or other entity that engages in any financial activity” and “that originated at least 25 covered credit transactions for small businesses in each of the two preceding calendar years.” It is a broad group of entities and, as the Bureau puts it, “the rule would apply to a variety of entities that engage in small business lending.” This would include both depository and non-depository lenders such as motor vehicle and equipment lenders, online lenders, platform lenders, commercial finance companies, as well as governmental and nonprofit lenders.
The proposed rule excludes leases, factoring and “consumer-designated” credit, being credit that is offered or extended primarily for personal, family or household use. It also excludes credit secured by “1-4 individual dwelling units that the applicant (or one or more of the applicant’s principal owners) does not, or will not, occupy.” Finally, the proposed rule would exclude trade credit, and provides as an example “a supplier that finances the sale of equipment, supplies, or inventory.”
Data Collection and Reporting
The proposed rule would impose data collection and reporting requirements for “covered applications from small businesses for covered credit transactions.” As proposed, covered financial institutions would be required to:
- collect and report whether an applicant is a minority-owned business or women-owned business.
- when it requests an applicant provide minority-owned or women-owned business status, inform the applicant that the financial institution cannot discriminate on the basis of the applicant’s minority- or women-owned business status, or on whether the applicant provides this information.
- inform an applicant that the applicant is not required to respond to the financial institution’s questions regarding the applicant’s minority-owned business status and women-owned business status.
In addition, the proposed rule
- prohibits covered financial institutions from requiring applicants to provide minority- or women-owned status information.
- includes a sample data collection form.
- permits the reporting of minority- and women-owned status from previously collected data if the financial institution is permitted to do so under proposed § 1002.107(c)(2) and its commentary.
- permits a financial institution to “collect and report a principal owner’s ethnicity and race based on visual observation and/or surname in certain circumstances.” However, the same exception is not permitted for collection of women-owned status. Financial institutions are required to “collect at least one principal owner’s race and ethnicity (but not sex) on the basis of visual observation and/or surname when the applicant does not provide ethnicity, race or sex information for at least one principal owner.”
The proposed rule imposes further extensive requirements for the means and manner by which information is collected and reported.
Unique Definition of “Small Business”
The proposed rule defines a small business using the definitions for “business concern” and “small business concern” in the federal Small Business Act and regulations promulgated by the Small Business Administration regulations. However, under the proposed rule, notwithstanding a business’s size (i.e., number of employees) a business is a small business “if and only if its gross annual revenue, as defined in [the proposed rule], for its preceding fiscal year is $5 million or less.” This is substantially less than the annual gross revenue for a small business classification by the SBA.
Comments on the proposed rule will be accepted by the Bureau on or before 90 days from the publication of the proposed rule in the federal register.