I’m sure you are well aware of the beast the Consumer Financial Protection Bureau (CFPB) issued on March 30, 2023 related to Section 1071, the finalized Small Business Lending rule.
Almost every day there is a call to action from the banking industry to challenge the CFPB to provide relief for community banks. The House Financial Services Committee recently advanced legislation to block the 1071 rule, and S.J. Res. 32 is pending in the Senate. The Texas Bankers Association, the ABA, and Rio Bank filed a lawsuit against the CFPB in late July requesting relief for every entity subject to the rule.
Since the court limited relief to members of just those previously mentioned associations, all of the State Banking Associations have signed a letter requesting relief to all FDIC-insured banks nationwide.
4 Steps You Can Take Now:
- Contact your state legislator.
Along with the following items and learning about Section 1071, contact your member of Congress, urging them to address problems with the rule before it takes effect.
In case you aren’t up to speed, Section 1071 amended Regulation B to require a variety of entities, including banks and credit unions, to collect and report data regarding certain small business credit applications and annually report the data to the CFPB. This data will then be included in a public database that covers small business lending practices.
The purpose of Section 1071 is to facilitate enforcement of fair lending laws and enable the identification of business and community development needs and opportunities for women-owned, minority-owned, and small businesses.
- Determine if you are a covered institution.
Your bank or credit union should be in the process of determining if you are a covered institution, which is if you have originated at least 100 covered originations* to small businesses** in each of the two preceding calendar years. For now, that includes originations in 2022 and determining how many are originated in 2023. At this stage, amendments, renewals, and extensions of existing transactions are not covered originations.
Effective dates and compliance date tiers to know:
- Tier 1 – Originated at least 2,500 covered originations in both 2022 and 2023—Comply October 1, 2024
- Tier 2 – Originated at least 500 covered originations, but not 2,500 or more, in both 2022 and 2023 – Comply April 1, 2025
- Tier 3 – Originated at least 100 covered originations, but not 500 or more, in both 2022 and 2023 – Comply January 1, 2026
- Familiarize yourself with the required data points.
If you are familiar with HMDA reporting, this will seem very familiar to you. There are several data points that you will obtain from the application, the note, and the bank’s underwriting information, but there are additional data points that you will need to ask the applicant for. Some of these include:
- Number of people working for the applicant,
- Applicant’s time in business,
- Number of applicant’s principal owners,
- Applicant’s minority-owned business status, women-owned business status, and LGBTQI+-owned status, and
- Principal owners’ ethnicity, race, and sex.
- Plan for implementation.
As you are planning for implementation, how will the bank obtain this information consistently among all locations, and all lenders? Related to selected data points, there are requirements to limit certain demographic data from underwriters and other persons (i.e., the firewall). Make sure to get your IT personnel involved.
Have you thought about educating your business customers on this new rule? There have been several resources released to assist you with education. As you begin to analyze data and decipher these new Reg B requirements, many people throughout the organization will need to be involved. Be sure to get all the departments on board early in the process.
For questions and additional guidance, please reach out to the Pinion Financial Institutions Team or visit the CFPB website for a detailed quick reference, here.
*Covered credit transaction – loans, line of credit, credit card, merchant cash advance, credit products used for agricultural purposes. Excludes: HMDA reportable transactions, and various other types of credit
**Small Business – defined as $5 million or less in gross annual revenue for its preceding fiscal year (relying on applicant’s representation regarding gross annual revenue).
