On September 15, 2020, after considerable delay and pursuant to a court settlement, the Consumer Financial Protection Bureau (CFPB) released its Outline of Proposals Under Consideration and Alternatives Considered for small business lending data collection rulemaking. When the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was passed, Section 1071 amended the Equal Credit Opportunity Act (ECOA) to require such small business data collection. Dodd-Frank requires the CFPB to comply with The Small Business Regulatory Enforcement Fairness Act (SBREFA) of 1996, which provided new avenues for small businesses to participate in the federal regulatory arena and created Small Business Advocacy Review panels (SBAR panels, also known as SBREFA panels).
Section 1071 states that “in the case of any application to a financial institution for credit for women-owned, minority-owned, or small business, the financial institution shall – (1) inquire whether the business is a women-owned, minority-owned, or small business, without regard to whether such application is received in person, by mail, by telephone, by electronic mail or other form of electronic transmission, or by any other means, and whether or not such application is in response to a solicitation by the financial institution…” The purpose of Section 1071 was to facilitate the enforcement of fair lending laws. The CFPB is beginning the process of writing regulations to implement Section 1071.
The CFPB’s Outline describes the various proposals that are being considered to implement Section 1071, the relevant law, the regulatory process, and an economic analysis of the potential impacts on small entities that will be directly impacted.
A few proposals in the Outline to highlight:
- Section 1071(b) can be read to “include data collection for all small businesses as well as women-owned and minority-owned businesses that are not small.” The CFPB is considering limiting this Section to small businesses only and not requiring financial institutions to collect and report data for women- and minority-owned businesses that are not small;
- Adopting a general definition of “financial institution”;
- Clarifying the terms “women-owned business” and “minority-owned business”;
- Clarifying the covered credit products for which data must be collected and reported;
- Defining the term “application”;
- Detailing the mandatory data points that must be collected, and discretionary data points that may be collected;
- Allowing financial institutions to determine when during the application process the data must be collected;
- Limiting access to loan underwriting to an applicant’s responses to inquiries regarding women- and minority-owned business status;
- Allowing applicants to refuse to provide certain information;
- Timing of data collection;
- Privacy concerns; and
- Implementing a period for financial institutions to comply.
In May 2019, several community groups and small business owners in California filed an action in federal court against the CFPB to force it to issue regulations under Section 1071. In December 2019, the parties entered into a settlement agreement which required the CFPB to issue an outline of the proposals it had under consideration to implement Section 1071 by September 15, 2020. The proposal issued by the CFPB met that deadline. There are other deadlines in the settlement including requiring a SBREFA panel to meet within 30 days after this proposal, the issuance of a proposed rule, and when a final rule will be promulgated. It appears that it will be at least a year until the final rule is promulgated with an effective date sometime thereafter.
To meet the SBREFA deadline, the CFPB is scheduled to convene a Small Business Advocacy Review panel in October 2020 to prepare a report that examines the impact of this Outline and proposals under consideration in advance of issuing a notice of proposed rulemaking. The Panel’s report will be used by the CFPB in its rulemaking to implement Section 1071.
Industry representatives have raised a concern that a broadly tailored rule under Section 1071 could negatively impact the availability of credit for small businesses based upon the record-keeping and reporting responsibilities that may be required of small business lenders. Director Kraninger expressed the concern that the rule may impose “unnecessary and undue costs on lenders” which would need to be borne by minority and woman-owned small businesses. We would expect any proposed rule will attempt to minimize these concerns.