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CFPB finalizes Section 1071 rule on small business lending data
On March 30, the CFPB released its final rule implementing Section 1071 of the Dodd-Frank Act. Consistent with Section 1071, the final rule will require financial institutions to collect and provide to the Bureau data on lending to small businesses, defined as an entity with gross revenue under $5 million in its last fiscal year, which the Bureau will ultimately publish. (See also an executive summary here.)
As explained in a corresponding fact sheet, the final rule is intended to foster transparency and accountability by requiring financial institutions—both traditional banks and credit unions, as well as non-banks—to collect and disclose data about small business loan recipients’ race, ethnicity, and gender, as well as geographic information, lending decisions, and credit pricing. The credit application information will be compiled in a comprehensive, publicly available database to help policymakers, borrowers, and lenders better address economic development needs and adapt to future challenges. The final rule also contains a sample data collection form that lenders can, but are not required to, use to collect applicants’ demographic data, and while small businesses are given the option not to provide this information, lenders must not discourage applicants from supplying this data (as explained in more detail in an accompanying policy statement). The Bureau also released a report detailing user testing research used to learn about lenders’ likely experience in filling out the sample data collection form, as well as a report describing the agency’s methodology for estimating how many lenders will be required to report under the final rule and for producing cost estimates associated with implementing the final rule.
The final rule contains important changes from the proposed rule issued in September 2021 (covered by a Special Alert here). Explaining that these changes are designed to make the final rule more effective and easier to follow, the Bureau stated that larger lenders will be required to collect and report data earlier than small lenders. The reporting requirements begin once a lender originates at least 100 covered small business loans in each of the two prior calendar years—a threshold that “accounts for more than 95 percent of small-business loans by banks and credit unions,” the Bureau said in its press release, noting that it was raised from the originally proposed 25-loans-per-year threshold.
While the final rule is effective 90 days after publication in the Federal Register, lenders will follow a tiered compliance date structure:
- Lenders that originate at least 2,500 covered small business loans in both 2022 and 2023, must begin collecting data on October 1, 2024.
- Lenders that originate at least 500 covered small business loans in both 2022 and 2023, must begin collecting data on April 1, 2025.
- Lenders that originate at least 100 covered small business loans in both 2022 and 2023 must begin collecting data on January 1, 2026.
- Lenders that did not originate at least 100 covered small business loans in both 2022 and 2023, but subsequently originated at least 100 transactions in two consecutive calendar years may begin collecting data no earlier than January 1, 2026.
- Lenders that originate between 100 and 500 small business loans in both 2024 and 2025, must begin collecting data on January 1, 2026.
Other changes from the proposal include allowing applicants to self-identify demographic information, including race and ethnicity, rather than requiring loan officers to make the determination. The final rule also now includes an exclusion for mortgage loans that must be reported under HMDA, and suggests that under the federal regulators’ forthcoming Community Reinvestment Act (CRA) reporting requirements, data submitted under the Bureau’s final rule will satisfy relevant CRA requirements. Additionally, financial institutions and other third parties will be allowed to develop services and technologies to assist lenders with collecting and reporting data. The Bureau noted that it is working on a supplementary proposal that would, if finalized, give more compliance time for small lenders that are already successful in meeting the needs of the local communities they serve.
CFPB Director Rohit Chopra commented that the final rule’s impact “will be in the comprehensive data that it produces, which can be used by lenders, borrowers, and the broader public to achieve better credit outcomes for small businesses and communities across the country.”
California: TILA does not preempt state laws on commercial financial disclosure
On January 20, California Attorney General Rob Bonta sent a comment letter to CFPB Director Rohit Chopra in response to a preliminary determination issued by the Bureau in December, which concluded that commercial financial disclosure laws in four states (New York, California, Utah, and Virginia) are not preempted by TILA. As previously covered by InfoBytes, the Bureau issued a Notice of Intent to Make Preemption Determination under the Truth in Lending Act seeking comments pursuant to Appendix A of Regulation Z on whether it should finalize its preliminary determination. The Bureau noted that a number of states have recently enacted laws requiring improved disclosures of information contained in commercial financing transactions, including loans to small businesses, to mitigate predatory small business lending and improve transparency. In making its preliminary determination, the Bureau concluded that the state and federal laws do not appear “contradictory” for preemption purposes, explaining, among other things, that the statutes govern different transactions (commercial finance rather than consumer credit).
Under the California Commercial Financing Disclosures Law (CFDL), companies are required to disclose various financing terms, including the “total dollar cost of the financing” and the “total cost of the financing expressed as an annualized rate.” Bonta explained that the CFDL only applies to commercial financing arrangements (and not to consumer credit transactions) and “was enacted in 2018 to help small businesses navigate a complicated commercial financing market by mandating uniform disclosures of certain credit terms in a manner similar to TILA’s requirements, but for commercial transactions that are unregulated by TILA.” He pointed out that disclosures required under the CFDL do not conflict with those required by TILA, and emphasized that there is no material difference between the disclosures required by the two statutes, even if TILA were to apply to commercial financing. According to Bonta, should TILA preempt the CFDL’s disclosure requirements, there would be no required disclosures at all for commercial credit in the state, which would make it challenging for small businesses to make informed choices about commercial financing arrangements.
While Bonta agreed with the Bureau’s determination that TILA does not preempt the CFDL, he urged the Bureau to “articulate a narrower standard that emphasizes that preemption should be limited to situations where it is impossible to comply with both TILA and the state law or where the state law stands as an obstacle to the full purposes [of] TILA, which is to provide consumers with full and meaningful disclosure of credit terms in consumer credit transactions.” He added that the Bureau “should also reemphasize certain principles from prior [Federal Reserve Board] decisions, including that state laws are preempted only to the extent of actual conflict and that state laws requiring additional disclosures—or disclosures in transactions not addressed by TILA—are not preempted.”
CFPB releases regulatory agenda
Recently, the Office of Information and Regulatory Affairs released the CFPB’s fall 2022 regulatory agenda. Key rulemaking initiatives that the agency expects to initiate or continue include:
- Overdraft and NSF fees. The Bureau is considering whether to engage in pre-rulemaking activity in November to amend Regulation Z with respect to special rules for determining whether overdraft fees are considered finance charges. According to the Bureau, the rules, which were created when Regulation Z was adopted in 1969, have remained largely unchanged despite the fact that the nature of overdraft services has significantly changed over the years. The Bureau is also considering whether to engage in pre-rulemaking activity in November regarding non-sufficient fund (NSF) fees. The Bureau commented that while NSF fees have been a significant source of fee revenue for depository institutions, recently some institutions have voluntarily stopped charging such fees.
- FCRA rulemaking. The Bureau is considering whether to engage in pre-rulemaking activity in November to amend Regulation V, which implements the FCRA. As previously covered by InfoBytes, on January 3, the Bureau issued its annual report covering information gathered by the Bureau regarding certain consumer complaints on the three largest nationwide consumer reporting agencies (CRAs). CFPB Director Rohit Chopra noted that the Bureau “will be exploring new rules to ensure that [the CRAs] are following the law, rather than cutting corners to fuel their profit model.”
- Section 1033 rulemaking. Section 1033 of Dodd-Frank provides that covered entities, such as banks, must make available to consumers, upon request, transaction data and other information concerning consumer financial products or services that the consumer obtains from the covered entity. Over the past several years, the Bureau has engaged in a series of rulemaking steps to prescribe standards for this requirement, including the release of a 71-page outline of proposals and alternatives in advance of convening a panel under the Small Business Regulatory Enforcement Fairness Act (SBREFA). The outline presents items under consideration that “would specify rules requiring certain covered persons that are data providers to make consumer financial information available to a consumer directly and to those third parties the consumer authorizes to access such information on the consumer’s behalf, such as a data aggregator or data recipient (authorized third parties).” (Covered by InfoBytes here.) The Bureau anticipates issuing a SBREFA report in February.
- Amendments to FIRREA concerning automated valuation models. The Bureau is participating in interagency rulemaking with the Fed, OCC, FDIC, NCUA, and FHFA to develop regulations to implement the amendments made by Dodd-Frank to FIRREA concerning appraisal automated valuation models (AVMs). The FIRREA amendments require implementing regulations for quality control standards for AVMs. The Bureau released a SBREFA outline and report in February and May 2022 respectively (covered by InfoBytes here), and estimates that the agencies will issue a notice of proposed rulemaking (NPRM) in March.
- Property Assessed Clean Energy (PACE) financing. The Bureau issued an advance notice of proposed rulemaking (ANPRM) in March 2019 to extend TILA’s ability-to-repay requirements to PACE transactions. (Covered by InfoBytes here.) The Bureau is working to develop a proposed rule to implement Economic Growth, Regulatory Relief, and Consumer Protection Act Section 307 in April.
- Nonbank registration. The Bureau issued an NPRM in December to enhance market monitoring and risk-based supervision efforts by including all final public written orders and judgments (including any consent and stipulated orders and judgments) obtained or issued by any federal, state, or local government agency for violation of certain consumer protection laws related to unfair, deceptive, or abusive acts or practices in a database of enforcement actions taken against certain nonbank covered entities. (Covered by InfoBytes here.) In a separate agenda item, the Bureau states that the NPRM would also require supervised nonbanks to register with the Bureau and provide information about their use of certain terms and conditions in standard-form contracts. The Bureau proposes “to collect information on standard terms used in contracts that are not subject to negotiating or that are not prominently advertised in marketing.”
- Credit card penalty fees. The Bureau issued an ANPRM last June to solicit information from credit card issuers, consumer groups, and the public regarding credit card late fees and late payments, and card issuers’ revenue and expenses. (Covered by InfoBytes here.) Under the CARD Act rules inherited by the Bureau from the Fed, credit card late fees must be “reasonable and proportional” to the costs incurred by the issuer as a result of a late payment. Calling the current credit card late fees “excessive,” the Bureau stated it intends to review the “immunity provision” to understand how banks that rely on this safe harbor set their fees and to examine whether banks are escaping enforcement scrutiny “if they set fees at a particular level, even if the fees were not necessary to deter a late payment and generated excess profits.” The Bureau is considering comments received on the ANPRM as it develops an NPRM that may be released this month.
- Small business rulemaking. Section 1071 of Dodd-Frank amended ECOA to require financial institutions to report information concerning credit applications made by women-owned, minority-owned, and small businesses, and directed the Bureau to promulgate rules for this reporting. An NPRM was issued in August 2021 (covered by InfoBytes here). The Bureau anticipates issuing a final rule later this month.
New Jersey reaches $27.3 million settlement with merchant cash advance operation
On January 3, the New Jersey attorney general announced a $27.4 million settlement with a private equity firm, its parent company, and six other associated companies (collectively, “respondents”) to resolve allegations related to violations of the New Jersey Consumer Fraud Act (CFA). According to the press release, the respondents targeted small businesses to enter into lending arrangements disguised as merchant cash advances (MCA) on future receivables. The AG claimed these loans effectively charged interest rates far exceeding the state’s usury caps. According to the attorney general’s press release, the respondents also allegedly engaged in deceptive servicing and collection practices against small businesses.
Under the terms of the consent order, the respondents are permanently enjoined from engaging in any acts or practices that violate the CFA and any applicable Advertising Regulations. The respondents have also agreed to forgive all outstanding balances for customers who entered MCAs (approximately $21.75 million) and pay $5.625 million to cover restitution, attorneys’ fees, costs of investigation and litigation and costs of administering restitution, and penalties not to exceed $250,000. The press release stated that the respondents will also (i) dismiss any pending debt collection actions against customers who had their balances forgiven as a result of the settlement; (ii) provide current customers with the ability to request modifications to their payment terms based on actual receivables; (iii) “[i]mprove internal business practices, be transparent in any terms of future MCA agreements regarding fees and reconciliation rights, and give notice to customers before taking legal action to collect on purported unpaid balances”; and (iv) ensure that all respondents, principals, and any future business entities that may result from a change in structure comply with the terms of the consent order.
Agencies release 2021 CRA data
On December 15, members of the FFIEC with Community Reinvestment Act responsibilities (Federal Reserve Board, FDIC, and the OCC) released 2021 Community Reinvestment Act data on small business, small farm, and community development lending. (See also fact sheet here.) The 685 reporting banks reported that they originated or purchased 9.4 million small-business loans totaling $371 billion, with the total number of loans originated by reporting banks increasing by approximately 12.6 percent from 2020. The dollar amount of these small business loans decreased by 21 percent, the report found. Additionally, roughly 47.1 percent of the reported small business loan originations and 59.3 percent of reported farm loans were made to firms with less than $1 million in revenue. With respect to community development lending activity, the agencies reported that based on data compiled from 618 banks, lending activity decreased by 10.1 percent from the amount reported in 2020.
CFPB releases spring 2022 semi-annual report
On December 6, the CFPB issued its semi-annual report to Congress covering the Bureau’s work for the period beginning October 1, 2021 and ending March 31, 2022. The report, which is required by Dodd-Frank, addresses several issues, including complaints received from consumers about consumer financial products or services throughout the reporting period. The report highlighted that the Bureau, among other things, has: (i) conducted an assessment of significant actions taken by state attorneys general and state regulators related to federal consumer financial law; (ii) initiated 21 fair lending supervisory activities to determine compliance with federal laws, including ECOA, HMDA, and UDAAP prohibitions, and engaged in interagency fair lending coordination with other federal agencies and states; (iii) “encouraged lenders to enhance oversight and identification of fair lending risk and to implement policies, procedures, and controls designed to effectively manage HMDA activities, including regarding integrity of data collection”; and (iv) launched a new Diversity, Equity, Inclusion, and Accessibility Strategic Plan to increase workforce and contracting diversity.
In regard to supervision and enforcement, the report highlighted the Bureau’s public supervisory and enforcement actions and other significant initiatives during the reporting period. Additionally, the report noted rule-related work, including advisory opinions, advance notice of proposed rulemakings, requests for information, and proposed and final rules. These include rules and orders related to the LIBOR transition, fair credit reporting, Covid-19 mortgage and debt collection protections for consumers, small business lending data collection, and automated valuation model rulemaking.
SBA seeks to end SBLC moratorium
On November 7, SBA published a proposed rule in the Federal Register seeking to lift the moratorium on licensing new small business lending companies (SBLCs) and adding a new type of entity called a “Mission-Based SBLC.” The moratorium was imposed in 1982, after the agency lacked adequate resources to effectively service and supervise additional SBLCs participating in SBA’s 7(a) loan program beyond the 14 it was authorized to approve. According to SBA, while the majority of 7(a) lenders are federally-regulated depository institutions, “SBLCs are regulated, supervised, and examined solely by SBA” and “are subject to specific regulations regarding formation, capitalization, and enforcement actions.” SBA explained that there are capital market gaps in certain markets that “continue to struggle to obtain financing on non-predatory terms.” The proposed rule seeks to lift the licensing moratorium and further create the Mission-Based SBLC to help bridge the financing gap. Mission-Based SBLCs will be nonprofit entities that will help SBA meet the needs of underserved communities and increase opportunities for access to capital in precisely targeted capital market gaps. Comments on the proposed rule are due January 6, 2023.
CFPB “on track” to issue Section 1071 rulemaking by March 31
On August 22, the CFPB filed its tenth status report in the U.S. District Court for the Northern District of California, as required under a stipulated settlement reached in February 2020 with a group of plaintiffs, including the California Reinvestment Coalition, related to the collection of small business lending data. The settlement (covered by InfoBytes here) resolved a 2019 lawsuit that sought an order compelling the Bureau to issue a final rule implementing Section 1071 of the Dodd-Frank Act, which requires the Bureau to collect and disclose data on lending to women and minority-owned small businesses. The current status report states that the Bureau is on track to issue the Section 1071 final rule by March 31, 2023—a deadline established by court order in July (covered by InfoBytes here).
Find continuing Section 1071 coverage here.
CFPB announces meetings for small business lending data reporting
On August 8, the CFPB announced that it is hosting two events to discuss the technical implementation required to prepare for the Bureau’s Small Business Lending Data Collection Rulemaking, which is a requirement under Section 1071 of the Dodd-Frank Act. According to the Bureau, the meetings will be geared toward in-house bank technologists or providers that provide compliance software to banks. Among other things, the meetings will: (i) share how the Bureau builds regulatory compliance technology systems; (ii) discuss possible approaches to authentication and application programming interfaces; and (iii) review technical data submission standards, edits and validations. The Bureau stated that the meetings “will not discuss or seek input on the merits or potential outcome of any ongoing rulemakings or take questions pertaining to the substance of such rulemakings.” According to the CFPB’s spring rulemaking agenda that was released earlier this summer, a final rule is expected in March 2023 (covered by InfoBytes here).
Biden signs bills providing 10-year SOL on PPP and EIDL fraud
On August 5, President Biden signed the Paycheck Protection Program and Bank Fraud Enforcement Harmonization Act (see H.R. 7352) and the COVID-19 Economic Injury Disaster Loan Fraud Statute of Limitations Act (see H.R. 7334). H.R. 7352 provides a 10-year statute of limitations for fraud by borrowers under the SBA’s Paycheck Protection Program, while H.R. 7334 establishes a 10-year statute of limitations for fraud by borrowers under the SBA’s Covid-19 Economic Injury Disaster Loan programs.