Opinions are mixed on the Consumer Financial Protection Bureau’s finalized rule that requires small businesses such as equipment dealers to collect information from customers, as financial institutions prepare for new small business lending reporting requirements.
The CFPB issued a final rule to implement Section 1071 of the Dodd-Frank Act on March 30, solidifying a contentious and potentially costly change in the way businesses record finance transactions with customers.
Congress enacted Section 1071 to “facilitate the enforcement of fair lending laws and enable communities, governmental entities and creditors to identify business and community development needs and opportunities for women-owned, minority-owned and small businesses,” according to the CFPB.
Financial institutions that originate between 100 and 500 small-business loans will not have to begin reporting under Section 1071 until Jan. 1, 2026, according to the CFPB. Institutions with less than 100 originations will not have to report data to the CFPB.
When the rule was proposed Sept. 21, 2021, trade groups such as the American Financial Services Association (AFSA) and Equipment Leasing and Finance Association (ELFA) publicly voiced concerns with the proposal.
The bureau addressed some of those concerns in the final rule, Celia Winslow, senior vice president of AFSA, told Equipment Finance News.
The CFPB “limited it to only small business data, so consumer-designated loans will not be included, even if [the recipient] were having to end up completing that loan for a small business,” Winslow said. “There is a simple, bright-line approach to defining a small business. … We are glad that the CFPB is limiting this to only small businesses, not any minority- or women-owned business of any size, as we think that that’s the right approach.”
U.S. Rep. Maxine Waters (D-Calif.), who drafted the provision 13 years ago and is the top Democrat on the House Financial Services Committee, released a statement Wednesday commending the CFPB’s rule.
“This new data collection rule will help promote competition in the marketplace, making loans much more affordable for those wanting to start a new business,” Waters said in the statement. “In addition, this will help create more small businesses, building on my prior efforts, as well as the unprecedented number of small businesses created — more than 10.5 million — in the last two years under the Biden Administration.”
Concerns over implementation, information
Still, concerns remain. Specifically, implementation of the rule and collection of certain data points are areas of concern, Winslow said.
“There are some other parts that AFSA has expressed some concern about that will continue to the final rule: short implementation period from the larger institutions, the inclusion of some additional data points, not limiting the data points to what were in Dodd-Frank. And there’s also a limited range of views,” Winslow said.
“Dodd-Frank says clearly that small-business applicants can choose whether or not to provide this information, but the way the CFPB have interpreted that, the bureau says that they may only choose whether or not to give the race, sex, ethnicity information, all the other loan information does have to continue,” she added.
Under the final rulemaking, financial institutions are not required or permitted to report these data points based on visual observation, surname or any other basis. That approach differs from the Home Mortgage Disclosure Act (HMDA), according to the CFPB.
Compliance, privacy concerns
For financial institutions that do not have experience dealing with HMDA or are smaller community banks, the new rule creates compliance and privacy issues, Rebeca Romero Rainey, president and chief executive of the Independent Community Bankers of America (ICBA), said in a March 30 statement.
“Not only will these data reporting requirements place a significant compliance burden on small community banks, but this final rule does not address the significant concerns ICBA has raised about the privacy of applicants, particularly in smaller communities,” Rainey said. “The CFPB’s rule will make it possible for loan applicants to be identified, especially in rural areas — potentially driving small-business owners away from community banks and local communities while having a chilling effect on small-business lending.”
AFSA’s Winslow believes that some small institutions may leave the small-business lending space to avoid compliance concerns. “I think that there are a number of small institutions that will make a decision that they’re not going to be small-business lenders because compliance is so challenging, even with the help that the CFPB is providing,” Winslow said.
The bureau is also providing more resources on its blog and easier ways to access information through an online guide in addition to extending the compliance window for smaller financial institutions, according to the CFPB.