Small Business Lending Data Collection Under the Equal Credit Opportunity Act (Regulation B)

CourtConsumer Financial Protection Bureau
Citation86 FR 56356
Published date08 October 2021
SectionProposed rules
Record Number2021-19274
Federal Register, Volume 86 Issue 193 (Friday, October 8, 2021)
[Federal Register Volume 86, Number 193 (Friday, October 8, 2021)]
                [Proposed Rules]
                [Pages 56356-56606]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2021-19274]
                [[Page 56355]]
                Vol. 86
                Friday,
                No. 193
                October 8, 2021
                Part II Bureau of Consumer Financial Protection-----------------------------------------------------------------------12 CFR Part 1002 Small Business Lending Data Collection Under the Equal Credit
                Opportunity Act (Regulation B); Proposed Rule
                Federal Register / Vol. 86 , No. 193 / Friday, October 8, 2021 /
                Proposed Rules
                [[Page 56356]]
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                BUREAU OF CONSUMER FINANCIAL PROTECTION
                12 CFR Part 1002
                [Docket No. CFPB-2021-0015]
                RIN 3170-AA09
                Small Business Lending Data Collection Under the Equal Credit
                Opportunity Act (Regulation B)
                AGENCY: Bureau of Consumer Financial Protection.
                ACTION: Proposed rule; request for public comment.
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                SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is
                publishing for public comment a proposed rule amending Regulation B to
                implement changes to the Equal Credit Opportunity Act (ECOA) made by
                section 1071 of the Dodd-Frank Wall Street Reform and Consumer
                Protection Act (Dodd-Frank Act). Consistent with section 1071, the
                Bureau is proposing to require covered financial institutions to
                collect and report to the Bureau data on applications for credit for
                small businesses, including those that are owned by women or
                minorities. The Bureau's proposal also addresses its approach to
                privacy interests and the publication of section 1071 data; shielding
                certain demographic data from underwriters and other persons;
                recordkeeping requirements; enforcement provisions; and the proposed
                rule's effective and compliance dates.
                DATES: Comments must be received on or before January 6, 2022.
                ADDRESSES: You may submit comments, identified by Docket No. CFPB-2021-
                0015 or RIN 3170-AA09, by any of the following methods:
                 Federal eRulemaking Portal: https://www.regulations.gov.
                Follow the instructions for submitting comments.
                 Email: [email protected]. Include Docket No. CFPB-
                2021-0015 or RIN 3170-AA09 in the subject line of the message.
                 Mail/Hand Delivery/Courier: Comment Intake--Section 1071
                Small Business Lending Data Collection, Bureau of Consumer Financial
                Protection, 1700 G Street NW, Washington, DC 20552.
                 Instructions: The Bureau encourages the early submission of
                comments. All submissions should include the agency name and docket
                number or Regulatory Information Number (RIN) for this rulemaking.
                Because paper mail in the Washington, DC area and at the Bureau is
                subject to delay, and in light of difficulties associated with mail and
                hand deliveries during the COVID-19 pandemic, commenters are encouraged
                to submit comments electronically. In general, all comments received
                will be posted without change to https://www.regulations.gov. In
                addition, once the Bureau's headquarters reopens, comments will be
                available for public inspection and copying at 1700 G Street NW,
                Washington, DC 20552, on official business days between the hours of 10
                a.m. and 5 p.m. Eastern Time. At that time, you can make an appointment
                to inspect the documents by telephoning 202-435-7275.
                 All comments, including attachments and other supporting materials,
                will become part of the public record and subject to public disclosure.
                Proprietary information or sensitive personal information, such as
                account numbers or Social Security numbers, or names of other
                individuals, should not be included. Comments will not be edited to
                remove any identifying or contact information.
                FOR FURTHER INFORMATION CONTACT: Camille Gray, Paralegal Specialist;
                Tola Adenuga, Regulatory Implementation and Guidance Specialist;
                Tarrian Ellis, Honors Attorney; Jaydee DiGiovanni, Counsel; Kristine M.
                Andreassen, Pavitra Bacon, Benjamin Cady, Joseph Devlin, Amy Durant,
                Gregory Evans, David Jacobs, Kathryn Lazarev, Lawrence Lee, Kristen
                Phinnessee, or Michael Scherzer, Senior Counsels, Office of
                Regulations, at 202-435-7700 or https://reginquiries.consumerfinance.gov/. If you require this document in an
                alternative electronic format, please contact
                [email protected].
                SUPPLEMENTARY INFORMATION:
                I. Summary of the Proposed Rule
                 In 2010, Congress passed the Dodd-Frank Act. Section 1071 of that
                Act amended ECOA\1\ to require that financial institutions collect and
                report to the Bureau certain data regarding applications for credit for
                women-owned, minority-owned, and small businesses.\2\ Section 1071's
                statutory purposes are to (1) facilitate enforcement of fair lending
                laws, and (2) enable communities, governmental entities, and creditors
                to identify business and community development needs and opportunities
                of women-owned, minority-owned, and small businesses.
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                 \1\ 15 U.S.C. 1691 et seq.
                 \2\ Public Law 111-203, tit. X, section 1071, 124 Stat. 1376,
                2056 (2010), codified at ECOA section 704B, 15 U.S.C. 1691c-2.
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                 Section 1071 specifies a number of data points that financial
                institutions are required to collect and report, and also provides
                authority for the Bureau to require any additional data that the Bureau
                determines would aid in fulfilling section 1071's statutory purposes.
                Section 1071 also contains a number of other requirements, including
                those that address restricting the access of underwriters and other
                persons to certain 1071 data; recordkeeping; publication of 1071 data;
                and modifications or deletions of data prior to publication in order to
                advance a privacy interest.
                 Section 1071 directs the Bureau to prescribe such rules and issue
                such guidance as may be necessary to carry out, enforce, and compile
                data pursuant to section 1071, and permits the Bureau to adopt
                exceptions to any requirement or to exempt financial institutions from
                the requirements of section 1071 as the Bureau deems necessary or
                appropriate to carry out the purposes of section 1071. The Bureau is
                proposing to add a new subpart B to Regulation B to implement the
                requirements of section 1071.\3\ Key aspects of the Bureau's proposal
                are summarized below.
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                 \3\ The Bureau interpreted section 1071 to mean that obligations
                for financial institutions to collect, maintain, and submit data
                ``do not arise until the Bureau issues implementing regulations and
                those regulations take effect.'' See Letter from Leonard Kennedy,
                General Counsel, CFPB, to Chief Executive Officers of Financial
                Institutions under Section 1071 of the Dodd-Frank Act (Apr. 11,
                2011), https://files.consumerfinance.gov/f/2011/04/GC-letter-re-1071.pdf.
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                 If finalized, the Bureau's proposed rule would create the first
                comprehensive database of small business credit applications in the
                United States. This would include critical information about women-
                owned and minority-owned small businesses to help regulators and the
                public identify and address fair lending concerns. The database would
                also enable a range of stakeholders to better identify business and
                community development needs and opportunities for small businesses,
                including women-owned and minority-owned small businesses. Just as the
                Bureau works in other ways to help foster fairness and opportunity in
                consumer financial services markets for all consumers, the proposed
                1071 rule is structured to realize these same goals for the small
                business market--for all small businesses within the scope of the rule,
                including those that are owned by women and minorities. Research
                indicates that minority-owned small businesses face particular
                obstacles, as do those that are women-owned, but the current lack of
                comprehensive, quantitative data has made it difficult to understand
                the extent of these obstacles and address them with responsive
                [[Page 56357]]
                policy. By shining a light on lending practices in this area, the
                Bureau believes that the 1071 data would not only foster a culture of
                compliance but bring particular attention to the underserved parts of
                the small business market that have traditionally faced the greatest
                obstacles to success. In this way, the proposed rule is intended to
                help small businesses drive inclusive and equitable growth.
                 Scope. The Bureau is proposing to require financial institutions to
                collect and report 1071 data regarding applications for credit for
                small businesses, including those that are owned by women and
                minorities. The Bureau is not proposing to require that financial
                institutions collect and report data regarding applications for women-
                owned and minority-owned businesses that are not small. Because most
                existing businesses are small businesses, covering small businesses
                necessarily means nearly all women-owned and minority-owned businesses
                will also be covered. The Bureau believes that this scope is consistent
                with the statute and will allow the rule to carry out section 1071's
                purposes without requiring collection of data that would be of limited
                utility.
                 Covered financial institutions. Consistent with language from
                section 1071, the Bureau is proposing to define a ``financial
                institution'' to include any partnership, company, corporation,
                association (incorporated or unincorporated), trust, estate,
                cooperative organization, or other entity that engages in any financial
                activity. Under the proposed definition, the Bureau's 1071 rule would
                apply to a variety of entities that engage in small business lending,
                including depository institutions (i.e., banks, savings associations,
                and credit unions),\4\ online lenders, platform lenders, community
                development financial institutions (both depository and nondepository
                institutions), lenders involved in equipment and vehicle financing
                (captive financing companies and independent financing companies),
                commercial finance companies, governmental lending entities, and
                nonprofit nondepository lenders.\5\
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                 \4\ For purposes of this notice of proposed rulemaking, the
                Bureau is using the term depository institution to mean any bank or
                savings association defined by the Federal Deposit Insurance Act, 12
                U.S.C. 1813(c)(1), or credit union defined pursuant to the Federal
                Credit Union Act, 12 U.S.C. 1751 et seq., as implemented by 12 CFR
                700.2. The Bureau notes that the Dodd-Frank Act defines a depository
                institution to mean any bank or savings association defined by the
                Federal Deposit Insurance Act, 12 U.S.C. 1811 et seq.; there, that
                term does not encompass credit unions. 12 U.S.C. 5301(18)(A),
                1813(c)(1). To facilitate analysis and discussion, the Bureau is
                referring to banks and savings associations together with credit
                unions as depository institutions throughout this notice, unless
                otherwise specified.
                 \5\ The Bureau's rules, including this proposed rule to
                implement section 1071, generally do not apply to motor vehicle
                dealers, as defined in section 1029(f)(2) of the Dodd-Frank Act,
                that are predominantly engaged in the sale and servicing of motor
                vehicles, the leasing and servicing of motor vehicles, or both. 12
                U.S.C. 5519.
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                 The Bureau's proposal uses the term ``covered financial
                institution'' to refer to those financial institutions that would be
                required to comply with section 1071's data collection and reporting
                requirements. The Bureau is proposing that a covered financial
                institution would be a financial institution that originated at least
                25 covered credit transactions for small businesses in each of the two
                preceding calendar years. The Bureau is not proposing an asset-based
                exemption threshold for depository institutions, or any other general
                exemptions for particular categories of financial institutions.
                 The Bureau is also proposing to permit creditors that are not
                covered financial institutions to voluntarily collect and report data
                under section 1071 in certain circumstances.
                 Covered credit transactions. The Bureau is proposing to require
                that covered financial institutions collect and report data regarding
                covered applications from small businesses for covered credit
                transactions. The Bureau is proposing to define a ``covered credit
                transaction'' as one that meets the definition of business credit under
                existing Regulation B, with certain exceptions. Loans, lines of credit,
                credit cards, and merchant cash advances (including such credit
                transactions for agricultural purposes and those that are also covered
                by the Home Mortgage Disclosure Act of 1975 (HMDA) \6\) would all be
                covered credit transactions within the scope of this proposed rule. The
                Bureau is proposing to exclude trade credit, public utilities credit,
                securities credit, and incidental credit. Factoring, leases, consumer-
                designated credit used for business purposes, and credit secured by
                certain investment properties would also not be covered credit
                transactions.
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                 \6\ 12 U.S.C. 2801 et seq.
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                 Covered applications. The Bureau is proposing to define a ``covered
                application''--which would trigger data collection and reporting and
                related requirements--as an oral or written request for a covered
                credit transaction that is made in accordance with procedures used by a
                financial institution for the type of credit requested. This proposed
                definition of covered application is largely consistent with the
                existing Regulation B definition of that term. However, the Bureau is
                also proposing that certain circumstances would not be covered
                applications, even if they are considered applications under existing
                Regulation B. Specifically, the Bureau is proposing that a covered
                application does not include (1) reevaluation, extension, or renewal
                requests on an existing business credit account, unless the request
                seeks additional credit amounts; or (2) inquiries and prequalification
                requests.
                 Small business definition. The Bureau is proposing to define a
                ``small business,'' about whose applications for credit data must be
                collected and reported, by reference to the definitions of ``business
                concern'' and ``small business concern'' as set out in the Small
                Business Act \7\ and Small Business Administration (SBA) regulations.
                However, in lieu of using the SBA's size standards for defining a small
                business concern, the Bureau's proposed definition would look to
                whether the business had $5 million or less in gross annual revenue for
                its preceding fiscal year. The Bureau is seeking SBA approval for its
                alternate small business size standard pursuant to the Small Business
                Act.\8\
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                 \7\ 15 U.S.C. 631 et seq.
                 \8\ See 15 U.S.C. 632(a)(2)(C).
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                 Data to be collected and reported. The Bureau's proposal addresses
                the data points that must be collected and reported by covered
                financial institutions for covered applications from small businesses.
                Many of the proposed data points are specifically enumerated in section
                1071; for the others, the Bureau is proposing to use the authority
                granted by section 1071 to require financial institutions to collect
                and report any additional data that the Bureau determines would aid in
                fulfilling the purposes of section 1071. Certain of these data points
                are or could be collected from the applicant (or otherwise determined
                based on information provided or authorized by the applicant); other
                data points are based on information solely within the financial
                institution's control. The Bureau is proposing that covered financial
                institutions maintain procedures to collect applicant-provided data at
                a time and in a manner that is reasonably designed to obtain a
                response. The Bureau's proposal also addresses what financial
                institutions should do if, despite having such procedures in place,
                they are unable to obtain certain data from an applicant. A financial
                institution would be permitted to rely on statements made by an
                [[Page 56358]]
                applicant (whether in writing or orally) or information provided by an
                applicant when collecting and reporting 1071 data, although for most
                data points if the financial institution verifies the information
                provided it must report the verified information. The Bureau's proposal
                would also permit financial institutions to reuse certain previously
                collected data in certain circumstances.
                 As noted above, the Bureau's proposal includes certain data points
                that are, or could be, provided by the applicant. Some data points
                specifically relate to the credit being applied for: The credit type
                (which includes information on the credit product, types of guarantees,
                and loan term); The credit purpose; and the amount applied for. There
                are also data points that relate to the applicant's business: A census
                tract based on an address or location provided by the applicant; gross
                annual revenue for the applicant's preceding full fiscal year; the 6-
                digit North American Industry Classification System (NAICS) code
                appropriate for the applicant; the number of workers that the applicant
                has (i.e., non-owners working for the applicant); the applicant's time
                in business; and the number of principal owners of the applicant.
                 There are also data points that would be provided by the applicant
                addressing the demographics of the applicant's ownership: Whether the
                applicant is a minority-owned business; whether the applicant is a
                women-owned business; and the ethnicity, race, and sex of the
                applicant's principal owners. The Bureau refers to these data points
                collectively as an applicant's ``protected demographic information.''
                The Bureau is proposing that principal owners' ethnicity and race be
                collected from applicants using aggregate categories as well as
                disaggregated subcategories. The Bureau is proposing to permit
                principal owners to self-describe their sex (instead of or in addition
                to choosing male and/or female), and is seeking comment on whether and,
                if so, how its collection of principal owners' sex should incorporate
                sexual orientation and gender identity in light of the recent Supreme
                Court decision in Bostock v. Clayton County \9\ and the Bureau's
                subsequent ECOA interpretive rule.\10\ If an applicant does not provide
                any ethnicity, race, or sex information for any principal owners, the
                Bureau is proposing that the financial institution must collect at
                least one principal owner's race and ethnicity (but not sex) via visual
                observation or surname, but only if the financial institution meets
                with any principal owners in person or via electronic media with an
                enabled video component. The Bureau is proposing detailed instructions
                to assist financial institutions in collecting and reporting
                applicants' protected demographic information pursuant to section 1071.
                The Bureau is also proposing a sample data collection form, which would
                include a required notice to applicants that the financial institution
                cannot discriminate on the basis of an applicant's minority- or women-
                owned business status or any principal owner's ethnicity, race, or sex.
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                 \9\ 140 S. Ct. 1731 (2020).
                 \10\ 86 FR 14363 (Mar. 16, 2021).
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                 In addition, the Bureau's proposal includes data points that would
                be generated or supplied solely by the financial institution. These
                data points include, for all applications: A unique identifier for each
                application for or extension of credit; the application date; the
                application method (i.e., the means by which the applicant submitted
                its application); the application recipient (that is, whether the
                financial institution or its affiliate received the application
                directly, or whether it was received by the financial institution via a
                third party); the action taken by the financial institution on the
                application; and the action taken date. For denied applications, there
                is also a data point for denial reasons. For applications that are
                originated or approved but not accepted, there is a data point for the
                amount originated or approved, and a data point for pricing information
                (which would include, as applicable, interest rate, total origination
                charges, broker fees, initial annual charges, additional cost for
                merchant cash advances or other sales-based financing, and prepayment
                penalties).
                 Firewall. The Bureau's proposal includes a section to implement the
                requirement in section 1071 that certain data collected be shielded
                from underwriters and certain other persons; the Bureau refers to this
                as the ``firewall.'' An employee or officer of a financial institution
                or a financial institution's affiliate that is involved in making any
                determination concerning the application would be prohibited from
                accessing an applicant's responses to inquiries that the financial
                institution makes pursuant to section 1071 regarding whether the
                applicant is a minority-owned or women-owned business, and the
                ethnicity, race, and sex of the applicant's principal owners.
                 This prohibition would not apply to an employee or officer,
                however, if the financial institution determines that it is not
                feasible to limit that employee's or officer's access to an applicant's
                responses to the financial institution's inquiries regarding the
                applicant's protected demographic information, and the financial
                institution provides a notice to the applicant regarding that access.
                It would not be feasible to limit access if the financial institution
                determines that an employee or officer involved in making any
                determination concerning a covered application should have access to
                one or more applicants' responses to inquiries regarding protected
                demographic information. The notice must be provided to each applicant
                whose information will be accessed or, alternatively, the financial
                institution could provide the notice to all applicants whose
                information could be accessed. The Bureau is proposing sample language
                that a financial institution could use in providing this notice.
                 Reporting data to the Bureau; publication of data by the Bureau;
                and privacy considerations. The Bureau is proposing to require that
                1071 data be collected on a calendar year basis and reported to the
                Bureau on or before June 1 of the following year. Financial
                institutions reporting data to the Bureau would be required to provide
                certain identifying information about themselves as part of their
                submission. The Bureau is proposing to provide technical instructions
                for the submission of 1071 data in a Filing Instructions Guide and
                related materials.
                 The Bureau is proposing to make available to the public, on an
                annual basis and on the Bureau's website, the data submitted to it by
                financial institutions, subject to modifications or deletions made by
                the Bureau, at its discretion, to protect privacy interests. To
                determine whether and how the Bureau might use its discretion to modify
                or delete data prior to publication, the Bureau is proposing a
                ``balancing test'' that would assess the risks and benefits of public
                disclosure. After the Bureau receives at least one full year of 1071
                data following the compliance date of the final rule, the Bureau plans
                to issue a policy statement in which it would set forth its intended
                modifications and deletions. The Bureau is also proposing that the
                Bureau's publication of the data would satisfy financial institutions'
                statutory obligation to make data available to the public upon request.
                 Recordkeeping, enforcement, severability, and effective and
                compliance dates. The Bureau's proposal addresses issues related to
                recordkeeping and to severability of the rule. It also addresses
                enforcement of violations of the rule, along with provisions regarding
                bona fide errors
                [[Page 56359]]
                under the rule as well as several safe harbors.
                 Finally, the Bureau is proposing that its final rule to implement
                section 1071 would become effective 90 days after publication in the
                Federal Register, though compliance with the rule would not be required
                until approximately 18 months after publication in the Federal
                Register. The Bureau is also proposing several related transitional
                provisions that would permit covered financial institutions to begin
                collecting applicants' protected demographic information prior to the
                compliance date and would permit financial institutions to use a
                different time period to determine whether they will be covered by the
                rule as of the compliance date.
                II. Background
                 As discussed above, in 2010, Congress enacted the Dodd-Frank Act.
                Section 1071 of the Dodd-Frank Act, which amended ECOA, requires
                financial institutions to collect and report to the Bureau data
                regarding applications for credit for women-owned, minority-owned, and
                small businesses. Section 1071 was adopted for the dual purposes of
                facilitating fair lending enforcement and enabling communities,
                governmental entities, and creditors to identify business and community
                development needs and opportunities of such businesses. Section 1071
                complements other Federal efforts to ensure fair lending and to promote
                community development for small businesses, including through ECOA, the
                Community Reinvestment Act of 1977 (CRA),\11\ and the Community
                Development Financial Institutions (CDFI) Fund.\12\
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                 \11\ 12 U.S.C. 2901 et seq.
                 \12\ The Riegle Community Development Banking and Financial
                Institutions Act of 1994, 12 U.S.C. 4701 et seq., authorized the
                Community Development Financial Institution Fund (CDFI Fund). The
                CDFI Fund is discussed in more detail in part II.F.2.ii below.
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                 The collection and subsequent publication of more robust and
                granular data regarding credit applications for small businesses,
                including those that are women- and minority-owned, will provide much-
                needed transparency to the small business lending market. The current
                COVID-19 pandemic has shown that transparency is essential,
                particularly at a time of crisis, when small businesses, especially
                those owned by women and minorities, may be in urgent need of credit in
                order to recover from economic shocks.
                 Furthermore, in the years and decades to come, the collection and
                publication of these data will be helpful in identifying potential fair
                lending violations and in facilitating the enforcement of anti-
                discrimination laws. It will also help governments, community groups,
                financial institutions, and other stakeholders to identify
                opportunities and gaps in the market, thereby enhancing business and
                community development and boosting broad-based economic activity and
                growth.
                Overview
                 Small businesses are a cornerstone of the U.S. economy. There were
                over 30 million small businesses in the U.S. in 2017, employing almost
                half of all private sector employees.\13\ Small businesses,
                particularly start-ups, also generated 65 percent of new jobs since
                2000.\14\ Small businesses were hit hard by two major shocks in the
                last two decades. First, the Great Recession, which began in 2007,
                disproportionately affected small businesses.\15\ Between 2007 and
                2009, employment at businesses with under 50 employees fell by 10.4
                percent, compared with 7.5 percent at larger firms,\16\ while between
                2008 and 2011 lending to small firms fell by 18 percent, compared with
                9 percent at larger firms.\17\ Small businesses suffered again because
                of the COVID-19 pandemic. Around 40 percent of small businesses were
                temporarily closed in late March and early April 2020, due primarily to
                demand shocks and employee health concerns.\18\ Across the first year
                of the pandemic, ``excess'' business establishment exits from the
                market, in comparison to exits over the same period from prior years,
                numbered up to 200,000.\19\ As of mid-2021, loan approvals (other than
                for government emergency programs) still remained low, and some 845,000
                non-farm private sector jobs had not yet been recovered.\20\
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                 \13\ Off. of Advocacy, Small Bus. Admin., 2020 Small Business
                Profile (May 2020), https://cdn.advocacy.sba.gov/content/uploads/2020/06/04144214/2020-Small-Business-Economic-Profile-States-Territories.pdf (estimating 31.7 million small businesses in the
                United States).
                 \14\ Off. of Advocacy, Small Bus. Admin., Frequently Asked
                Questions About Small Business, at 1 (Oct. 2020), https://cdn.advocacy.sba.gov/wp-content/uploads/2020/11/05122043/Small-Business-FAQ-2020.pdf (SBA OA 2020 FAQs) (small businesses accounted
                for 65.1 percent of new jobs since 2000). See generally
                Congressional Research Serv., Small Business Administration and Job
                Creation (updated June 23, 2021), https://fas.org/sgp/crs/misc/R41523.pdf (discussing small business job creation); Jon Haltiwanger
                et al., Who Creates Jobs? Small Versus Large Versus Young, 95 Rev.
                Econ. Stat. 347, 347-48 (May 2013), https://direct.mit.edu/rest/article/95/2/347/58100/Who-Creates-Jobs-Small-versus-Large-versus-Young (finding that young firms, which are generally small,
                contribute disproportionately to both gross and net job creation).
                 \15\ Jason Dietrich et al., Bureau of Consumer Fin. Prot., Data
                Point: Small Business Lending and the Great Recession, at 9 (Jan.
                23, 2020), https://files.consumerfinance.gov/f/documents/cfpb_data-point_small-business-lending-great-recession.pdf (finding that small
                business lending fell sharply during the Great Recession and
                recovered slowly, still not reaching pre-Recession levels by 2017).
                 \16\ Ay[scedil]eg[uuml]l [Scedil]ahin et al., Fed. Reserve Bank
                of N.Y., Current Issues in Economics & Finance, Why Small Businesses
                Were Hit Harder by the Recent Recession, at 1 (Vol. 17, No. 4,
                2011), https://www.newyorkfed.org////_issues/ci17-4.pdf.
                 \17\ Rebel A. Cole, Off. of Advocacy, Small Bus. Admin, How Did
                the Financial Crisis Affect Small Business Lending in the United
                States?, at 2 (Nov. 2012), https://www.microbiz.org/content/ploads//04/SmallBizLending-and-FiscalCrisis.pdf.
                 \18\ Alexander W. Bartik et al., The Impact of COVID-19 on Small
                Business Outcomes and Expectations, 117 Proc. Nat'l Acad. Sci.
                17656, 17656 (July 2020), https://www.pnas.org/content/pnas/117/30/17656.full.pdf.
                 \19\ Leland D. Crane et al., Bd. of Governors of the Fed.
                Reserve Sys., Finance and Economics Discussion Series, 2020-089,
                Business Exit During the COVID-19 Pandemic: Non-Traditional Measures
                in Historical Context, at 4 (2020), https://www.federalreserve.gov/econres/feds/files/2020089r1pap.pdf (estimating excess establishment
                exits and analyzing other estimates of small business exits during
                the pandemic). The paper defines ``exit'' as permanent shutdown and
                calculates ``excess'' exits by comparing the number of exits during
                the 12-month period from March 2020 to February 2021 with previous
                years. Id. at 2-4.
                 \20\ ADP Research Inst., ADP National Employment Report (May
                2021), https://adpemploymentreport.com////May-2021.aspx (non-farm
                private sector jobs as of June 2021 as compared to Feb. 2020);
                Biz2Credit, Biz2Credit Small Business Lending Index Finds April 2021
                Non-PPP Loan Approval Rates Move Little for All Types of Lenders
                (Apr. 2021), https://www.biz2credit.com/business-lending-index/april-2021 (approvals as of May 2021).
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                 During the last two decades, the small business lending landscape
                has also transformed. Traditional providers--namely banks--
                consolidated, leading to branch closures. The number of banks in the
                U.S. has declined from over 18,000 in 1986 to under 5,200 today and the
                number of branches declined by 14 percent from 2009 to 2020.\21\
                Meanwhile, new providers and products, such as fintechs and merchant
                cash advances (MCAs), have become increasingly prevalent in the small
                business lending market. Financing by MCA providers is estimated to
                have increased from $8.6 billion in volume during 2014 to $15.3 billion
                in 2017.\22\ From 2017 to 2019, the volume may
                [[Page 56360]]
                have increased further to $19 billion.\23\ Meanwhile, financing by
                fintechs \24\ is estimated to have increased from $1.4 billion \25\ in
                outstanding balances in 2013 to approximately $25 billion \26\ in 2019.
                ---------------------------------------------------------------------------
                 \21\ Congressional Research Serv., Small Business Credit Markets
                and Selected Policy Issues, at 6 (Aug. 20, 2019), https://fas.org/sgp//misc/R45878.pdf (decline since 1986); Bruce C. Mitchell et al.,
                Nat'l Cmty. Reinvestment Coal., Relationships Matter: Small Business
                and Bank Branch Locations, https://ncrc.org/relationships-matter-small-business-and-bank-branch-locations/ (last visited Aug. 24,
                2021) (branch closures).
                 \22\ PYMNTS, How Long Can MCAs Avoid the `Loan' Label? (Jan. 20,
                2016), https://www.pymnts.com/in-depth/2016/how-long-can-mcas-avoid-the-loan-label/.
                 \23\ Paul Sweeney, Gold Rush: Merchant Cash Advances are Still
                Hot, deBanked (Aug. 18, 2019), https://debanked.com/2019/08/gold-rush-merchant-cash-advances-are-still-hot/. Although the article
                does not specify one way or the other, estimates by the underlying
                source, Bryant Park Capital, appear to reference origination volumes
                rather than outstanding balances. See Nimayi Dixit, S&P Global
                Market Intelligence, Payment Fintechs Leave Their Mark On Small
                Business Lending (Aug. 28, 2018), https://www.spglobal.com/marketintelligence/en/news-insights/research/payment-fintechs-leave-their-mark-on-small-business-lending. Depending on credit multiplier
                effects, the value of annual origination volumes could be smaller or
                greater than outstanding balances. Without information on
                outstanding balances and for the purposes of calculating a market
                size for small business financing in 2019, the Bureau assumes in
                this paper a 1:1 ratio between annual origination volumes and
                outstanding balances for MCA products. See part II.D below for
                discussion of credit multiplier effects and for market size
                calculations for MCA and other small business financing products in
                2019.
                 \24\ Fintechs are defined as ``technology companies providing
                alternatives to traditional banking services, most often exclusively
                in an online environment,'' and may overlap in part with other
                categories of financial institution, such as commercial finance
                companies and/or providers of specialized products, including
                factoring and MCAs. Brett Barkley & Mark Schweitzer, The Rise of
                Fintech Lending to Small Businesses: Businesses' Perspectives on
                Borrowing, 17 Int'l J. Cent. Banking 35, 35-36 (Mar. 2021), https://www.ijcb.org/journal/ijcb21q1a2.pdf.
                 \25\ Id. (citing Katie Darden et al., S&P Global Market
                Intelligence, 2018 US Fintech Market Report, at 5, https://www.spglobal.com/marketintelligence/en/documents/2018-us-fintech-market-report.pdf (2018 US Fintech Market Report)). This figure
                annualizes $121 million in estimated 2013 quarterly originations to
                $484 million in annual originations and scales up to estimated
                outstanding balances using the ratio between the FFIEC Call Report
                and the CRA data discussed in part II.D below.
                 \26\ 2018 US Fintech Market Report at 6. This figure scales up
                $9.3 billion in estimated 2019 credit originations for small to
                medium sized enterprise (SME) borrowers to outstanding balances
                using the ratio methodology discussed in part II.D below.
                ---------------------------------------------------------------------------
                 Both recent economic shocks and changes in patterns of small
                business financing have had fair lending and community development
                implications. In terms of the effect of economic shocks, data suggest
                that women-owned and minority-owned small businesses were impacted
                disproportionately by the economic crises of the last two decades.\27\
                Data further suggest that women-owned and minority-owned small
                businesses, compared to other small businesses, had fewer cash reserves
                and faced steeper hurdles in accessing credit that would have allowed
                them to better weather these crises.\28\
                ---------------------------------------------------------------------------
                 \27\ See part II.E below.
                 \28\ Id.
                ---------------------------------------------------------------------------
                 Regarding trends in the small business financing landscape, the
                shift away from traditional providers of small business credit toward
                newer types of providers gives rise to both potential harm and
                opportunity. In terms of potential harms, bank closures may have made
                it more difficult for small businesses, particularly women-owned and
                minority-owned small businesses, to access credit and remain open--
                particularly in low- and moderate-income areas and rural communities.
                Newer providers, often offering newer products, have less experience
                complying with both Federal and State lending laws and regulations.
                Additionally, they may use algorithms and artificial intelligence (AI),
                which may create or heighten ``risks of unlawful discrimination,
                unfair, deceptive, or abusive acts or practices . . . or privacy
                concerns.'' \29\ In addition, opaque product terms and high interest
                rates could trap business owners in cycles of debt.
                ---------------------------------------------------------------------------
                 \29\ 86 FR 16837, 16839 (Mar. 31, 2021).
                ---------------------------------------------------------------------------
                 In terms of opportunity, innovative products and lending models,
                including the use of AI, may yield benefits of more accurate, lower-
                cost, and faster underwriting, as well as expanded credit access for
                small businesses that may not have obtained credit under traditional
                credit underwriting approaches.\30\ Specifically, newer providers and
                approaches may permit those with low or nonexistent personal or
                business credit scores--including women and minorities who own or seek
                to start small businesses but on average have relatively lower personal
                credit scores than male and white business owners \31\--to more easily
                access credit.\32\ Non-traditional credit providers may help offset
                decreases in lending associated with the closure of bank branches. For
                instance, fintechs may help provide financing to small businesses in
                rural communities that lack bank branches.
                ---------------------------------------------------------------------------
                 \30\ Id. See also Patrice Ficklin et al., Bureau of Consumer
                Fin. Prot., Innovation Spotlight: Providing Adverse Action Notices
                When Using AI/ML Models (July 7, 2020), https://www.consumerfinance.gov/about-us/blog/innovation-spotlight-providing-adverse-action-notices-when-using-ai-ml-models/
                (discussing potential benefits and risks from financial institutions
                using AI in credit underwriting and other areas).
                 \31\ Geng Li, Bd. of Governors of the Fed. Reserve Sys., FEDS
                Notes: Gender-Related Differences in Credit Use and Credit Scores
                (June 22, 2018), https://www.federalreserve.gov/econres/notes/feds-notes/gender-related-differences-in-credit-use-and-credit-scores-20180622.htm (finding that single women on average have lower credit
                scores than single men); Alicia Robb, Off. of Advocacy, Small Bus.
                Admin., Minority-Owned Employer Businesses and their Credit Market
                Experiences in 2017, at 4 (July 22, 2020), https://cdn.advocacy.sba.gov/wp-content/uploads/2020/07/22172533/Minority-Owned-Employer-Businesses-and-their-Credit-Market-Experiences-in-2017.pdf (finding that Black and Hispanic small business borrowers
                are disproportionately denied credit or discouraged from applying
                for credit on the basis of their credit score).
                 \32\ See Jessica Battisto et al., Who Benefited from PPP Loans
                by Fintech Lenders?, Liberty Street Economics (May 27, 2021),
                https://libertystreeteconomics.newyorkfed.org/2021/05/who-received-ppp-loans-by-fintech-lenders.html (showing that fintech lenders were
                an important source of credit for Black owners during the COVID-19
                pandemic).
                ---------------------------------------------------------------------------
                 The precise impacts of these broader trends are not well understood
                at present because there are no comprehensive, comparable, and
                application-level data across the fragmented and complex small business
                lending market. Some small business lending data exist, provided mostly
                by Federal regulators, but available data are incomplete in certain
                ways. Some do not include lending by certain categories of
                institutions, such as smaller depository institutions. And none include
                lending by nondepository institutions, which comprises almost half of
                all small business financing.\33\
                ---------------------------------------------------------------------------
                 \33\ The Bureau estimates that nondepository private business
                financing totaled approximately $550 billion out of around $1.2
                trillion in total private outstanding balances in 2019 (47 percent).
                This $550 billion figure includes estimated financing by fintechs
                (around $25 billion), commercial finance companies (around $160
                billion), nondepository CDFIs (around $1.5 billion), MCA providers
                (around $19 billion), factors (around $100 billion), equipment
                leasing providers (around $160 billion), nondepository mortgage
                lenders originating loans for 5+ unit residential developments
                (around $30 billion), and non-financial trade creditors (around $50
                billion). There may additionally be lending by equipment and vehicle
                dealers originating loans in their own name that is not captured
                here. Public lenders include the Small Business Association (SBA),
                the Federal Housing Association (FHA), Fannie Mac and Freddie Mac,
                and the Farm Credit System (FCS), with public lending totaling
                around $210 billion in traditional lending programs plus $1 trillion
                in emergency COVID-19 SBA lending programs. See part II.D below for
                methodology and sources regarding market size estimates for each
                lending category.
                ---------------------------------------------------------------------------
                 The datasets that do exist both over- and underestimate small
                business lending in certain respects by including small dollar loans to
                non-small businesses and by excluding larger loans to small
                businesses.\34\ Further, these datasets all concern originated loans;
                they do not include information on applications that do not result in
                originated loans. Nor do they generally include borrower demographics.
                Other public, private, and nonprofit datasets offer only partial
                snapshots of particular areas of the market. Finally, much of the
                publicly available data are aggregated, which does not permit more
                granular, loan- or application-level analysis that
                [[Page 56361]]
                would facilitate fair lending or business and community development
                analysis by stakeholders other than those that collected the data. See
                part II.B below for a detailed discussion on existing data on small
                business financing.
                ---------------------------------------------------------------------------
                 \34\ See part II.B below.
                ---------------------------------------------------------------------------
                 The remainder of this part II focuses on several broad topics that
                explain, in more detail, the need for the small business lending data
                that the proposed rule to implement section 1071 would provide: (A) The
                role of small businesses in the U.S. economy; (B) existing data on
                small business financing; (C) the landscape of small business
                financing; (D) estimating the size of the small business financing
                market despite limited data; (E) the particular challenges faced by
                women-owned and minority-owned small businesses; and (F) the purposes
                and impact of section 1071.
                A. Small Businesses in the United States
                 Small businesses are an important, dynamic, and widely diverse part
                of the U.S. economy. They are critical to employment, innovation, and
                economic growth and stability, both overall and specifically for
                minority and women entrepreneurs.
                 The Small Business Act, as implemented by the SBA, defines a small
                business using size standards that generally hinge on the average
                number of employees or average annual receipts of the business concern
                and are customized industry by industry across 1,057 6-digit North
                American Industry Classification System (NAICS) codes.\35\ Size
                standards based on average number of employees are used in all
                industries in the manufacturing and wholesale trade sectors, as well as
                in certain industries across a variety of other sectors as well.
                Employee-based size standards range from 100 (used almost entirely in
                certain industries within the wholesale trade sector) to 1,000 (used in
                industries across a variety of sectors including, for example,
                petroleum refineries, automobile manufacturing, and greeting card
                publishers).\36\ Size standards based on average annual receipts are
                used in nearly all other industries, and range from $1 million (used in
                most industries in the crop production and animal production and
                aquaculture subsectors) to $41.5 million (used in industries across a
                variety of sectors including, for example, passenger car leasing,
                television broadcasting, and general medical and surgical
                hospitals).\37\
                ---------------------------------------------------------------------------
                 \35\ See Small Bus. Admin., Table of Small Business Size
                Standards Matched to North American Industry Classification System
                Codes (effective Aug. 19, 2019), https://www.sba.gov/sites/default/files/2019-08/SBA%20%20%20Size%20Standards_Effective%20Aug%2019%2C%202019_Rev.pdf.
                 \36\ See id.
                 \37\ A small number of industries use a size standard based on a
                metric other than average annual receipts or average number of
                employees. For example, the commercial banking industry (NAICS
                522110) is subject to an asset-based size standard. See id.
                ---------------------------------------------------------------------------
                 Simpler definitions of what constitutes a small business are used
                in certain contexts. For example, in certain annual research releases
                the SBA's Office of Advocacy defines a small business as one that has
                fewer than 500 employees.\38\ According to the Office of Advocacy, and
                based on this definition of a small business, there are 31.7 million
                such businesses in the U.S. that represent 99.9 percent of all U.S.
                firms and employ over 60 million Americans.\39\ Six million of these
                small businesses have paid employees, while 25.7 million are non-
                employer businesses (i.e., the owner(s) are the only people involved in
                the business).\40\ From 2000 to 2019, small businesses, particularly
                young businesses and start-ups, created 10.5 million net new jobs in
                the U.S., while large businesses created 5.6 million.\41\
                ---------------------------------------------------------------------------
                 \38\ See SBA OA 2020 FAQs at 1.
                 \39\ See id.
                 \40\ See id.
                 \41\ See id.; see also Haltiwanger et al., 95 Rev. Econ. Stat.
                at 347-48 (finding that young firms, which are generally small,
                contribute disproportionately to both gross and net job creation).
                ---------------------------------------------------------------------------
                 Nearly one third of all businesses are minority-owned and more than
                one third are women-owned, though minorities and women own a smaller
                share of employer firms. As of 2018, minorities owned over one million
                employer firms in the U.S. (amounting to 18.3 percent of all employer
                firms) \42\ and, as of 2017, approximately 8.2 million non-employer
                firms.\43\ Likewise, as of 2018, women owned about 1.1 million employer
                firms (19.9 percent of all employer firms) \44\ and, as of 2017,
                approximately 10.6 million non-employer firms.\45\
                ---------------------------------------------------------------------------
                 \42\ See Press Release, U.S. Census Bureau, Annual Business
                Survey Release Provides Data on Minority-Owned, Veteran-Owned and
                Women-Owned Businesses (Jan. 28, 2021), https://www.census.gov/newsroom/press-releases//business-survey.html.
                 \43\ Minority Bus. Dev. Agency, U.S. Dep't of Com., The Number
                of Minority Nonemployer Firms Grew by Nearly 17% between 2014 and
                2017 (Dec. 18, 2020), https://www.mbda.gov/news/press-releases/2020/12/the-number-of-minority-nonemployer (stating that the nearly 8.2
                million minority non-employer firms in the U.S. generated $279.3
                billion in revenues in 2017, and grew in number at four times the
                rate of non-minority non-employer firms between 2014 and 2017). See
                also SBA OA 2020 FAQs at 3 (showing over 7.6 million minority-owned
                non-employer firms as of 2016).
                 \44\ See Press Release, U.S. Census Bureau, Annual Business
                Survey Release Provides Data on Minority-Owned, Veteran-Owned and
                Women-Owned Businesses (Jan. 28, 2021), https://www.census.gov/newsroom/press-releases//business-survey.html.
                 \45\ See Press Release, Nat'l Women's Bus. Council, NWBC Shares
                2017 Nonemployer Statistics by Demographics Estimates for Women-
                Owned Businesses (Dec. 17, 2020), https://www.nwbc.gov/2020/12/17/nwbc-shares-2017-nonemployer-statistics-by-demographics-estimates-for-women-owned-businesses/ (also stating that these 10.6 million
                non-employer firms generate $286.1 billion in revenue, and that
                nearly half of all women-owned non-employer firms generate less than
                $10,000 in annual receipts, while only 0.05 percent generate $1
                million or more in revenue).
                ---------------------------------------------------------------------------
                 Businesses are legally structured in several ways. In 2017, 87
                percent of non-employer businesses were sole proprietorships, which
                means that the business is not distinguishable from the owner for tax
                and legal purposes; the owner receives profits directly but is also
                legally responsible for the business's obligations.\46\ Seven percent
                of non-employer businesses were partnerships, which can be structured
                to limit the personal liability of some or all owners; limited partners
                may exchange control for limited liability, while general partners that
                run the business may remain personally liable.\47\ Six percent of non-
                employer businesses were structured as corporations--4.6 percent are S-
                corporations and 1.5 percent are C-corporations--which are independent
                legal entities owned by shareholders who are not personally liable for
                the corporation's obligations.\48\ In 2017, most small employer
                businesses were corporations, with 50.5 percent choosing to be S-
                corporations and 16.8 percent preferring C-corporation status, although
                sole proprietorship and partnership structures remained relatively
                popular at 12.9 percent and 11.8 percent respectively. By contrast,
                74.2 percent of large employer businesses chose to be C-corporations,
                with 9.3 percent preferring a partnership structure and 8.1 percent S-
                corporation status.\49\
                ---------------------------------------------------------------------------
                 \46\ See SBA OA 2020 FAQs at 3.
                 \47\ Id. at 4.
                 \48\ Id.
                 \49\ Id.
                ---------------------------------------------------------------------------
                 Small businesses are particularly important in specific sectors of
                the economy. In 2016, in the services sector, small businesses supplied
                45 percent of 19.7 million healthcare and social services jobs, over 60
                percent of 13.7 million accommodation and food services jobs, and over
                80 percent of 6.3 million construction jobs.\50\ In the same year, in
                manufacturing, small businesses made up 44 percent out of 11.6 million
                [[Page 56362]]
                jobs.\51\ Finally, in 2016, small family farms totaled 96 percent out
                of 2.2 million farms,\52\ and small businesses provided over 80 percent
                of agriculture, forestry, and fishing and hunting jobs out of
                161,000.\53\ As such, the financial health of small businesses is
                essential to the U.S. economy, especially to the supply of critical and
                basic goods and services--from producing food to serving it at
                restaurants, and from home building to healthcare.
                ---------------------------------------------------------------------------
                 \50\ See Off. of Advocacy, Small Bus. Admin., 2019 Small
                Business Profile (Apr. 2019), https://cdn.advocacy.sba.gov/wp-content/uploads/2019/04/23142719/2019-Small-Business-Profiles-US.pdf
                (2019 Small Business Profile).
                 \51\ Id. at 3.
                 \52\ Nat'l Inst. of Food & Agric., U.S. Dep't of Agric., Family
                Farms, https://nifa.usda.gov/family-farms (last visited July 26,
                2021) (classifying family farms as any farm organized as a sole
                proprietorship, partnership, or family corporation. Family farms
                exclude farms organized as non-family corporations or cooperatives,
                as well as farms with hired managers.).
                 \53\ 2019 Small Business Profile at 3.
                ---------------------------------------------------------------------------
                 Small businesses have been especially hard-hit by the COVID-19
                pandemic. At a low point in the pandemic in April 2020, 20 percent of
                self-employed workers had temporarily exited the labor market.\54\
                Industries in which small businesses played a large role have been
                particularly impacted. For example, comparing April 2020 with April
                2019, employment declined by almost 50 percent in the leisure and
                hospitality industries (also declining by 50 percent among food
                services and drinking establishments within the leisure and hospitality
                industry), in which small businesses employ 60 percent of workers.\55\
                ---------------------------------------------------------------------------
                 \54\ Daniel Wilmoth, Off. of Advocacy, Small Bus. Admin., The
                Effects of the COVID-19 Pandemic on Small Businesses (Issue Brief
                No. 16) (Mar. 2021), https://cdn.advocacy.sba.gov/wp-content/uploads/2021/03/02112318/COVID-19-Impact-On-Small-Business.pdf.
                 \55\ Id. By August 2021, many of these jobs had since returned
                as mandatory closure orders ended and the economy began to recover.
                ---------------------------------------------------------------------------
                B. Existing Data on Small Business Lending
                 While small businesses are a critical part of the U.S. economy and
                require financial support, it is still true, as it was in 2017 when the
                Bureau published its White Paper on small business lending, that it is
                not possible with current data to confidently answer basic questions
                regarding the state of small business lending. This limitation is
                especially the case with regard to the race, sex, and ethnicity of
                small business owners, applications as opposed to originations, and for
                small business financing products that are not currently reported in
                Call Report data.\56\
                ---------------------------------------------------------------------------
                 \56\ Bureau of Consumer Fin. Prot., Key dimensions of the small
                business lending landscape, at 39-40 (May 2017), https://files.consumerfinance.gov/f/documents/201705_cfpb_Key-Dimensions-Small-Business-Lending-Landscape.pdf (White Paper).
                ---------------------------------------------------------------------------
                 Data on small business lending are fragmented, incomplete, and not
                standardized, making it difficult to conduct meaningful comparisons
                across products and over time. This hinders attempts by policymakers
                and other stakeholders to understand the size, shape, and dynamics of
                the small business lending marketplace, including the interaction of
                supply and demand, as well as potentially problematic lending
                practices, gaps in the market, or trends in funding that may be holding
                back some communities.\57\ For example, absent better data, it is hard
                to determine if relatively lower levels of bank loans to small
                businesses in the decade before the pandemic began were reflective of a
                net relative decline in lending to small businesses as compared to
                large businesses or rather a shift within small business lending from
                banks to alternative lenders.\58\ To the extent there may have been a
                relative decline, it is difficult to assess if that decline affected
                certain types of small businesses more than others, including women-
                owned and minority-owned small businesses.\59\
                ---------------------------------------------------------------------------
                 \57\ While Call Report and CRA data provide some indication of
                the level of supply of small business credit, the lack of data on
                small business credit applications makes demand for credit by small
                businesses more difficult to assess, including with respect to local
                markets or protected classes.
                 \58\ Rebel A. Cole, Off. of Advocacy, Small Bus. Admin., How Did
                Bank Lending to Small Business in the United States Fare After the
                Financial Crisis?, at 26 (Jan. 2018), https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf (showing a decline in bank loans to small
                businesses from 2008 to 2015 from $710 billion to $600 billion). The
                level of bank lending to small businesses has recovered somewhat
                since a trough in 2012-13 that represented the lowest amount of
                lending since 2005. Fed. Deposit Ins. Corp., https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx (last visited July 22, 2021).
                 \59\ White Paper at 40.
                ---------------------------------------------------------------------------
                 The primary sources of information on lending by depository
                institutions are the Federal Financial Institutions Examination Council
                (FFIEC) and National Credit Union Administration (NCUA) Consolidated
                Reports of Condition and Income (Call Reports), as well as reporting
                under the CRA. Under the FFIEC and CRA reporting regimes, small loans
                to businesses of any size are used in whole or in part as a proxy for
                loans to small businesses. The FFIEC Call Report captures banks'
                outstanding number and amount of small loans to businesses (that is,
                loans originated under $1 million to businesses of any size; small
                loans to farms are those originated under $500,000).\60\ The CRA
                requires banks and savings associations with assets over a specified
                threshold to report loans in original amounts of $1 million or less to
                businesses; reporters are asked to indicate whether the borrower's
                gross annual revenue is $1 million or less, if they have that
                information.\61\ The NCUA Call Report captures data on all loans over
                $50,000 to members for commercial purposes, regardless of any indicator
                about the business's size.\62\ There are no similar sources of
                information about lending to small businesses by nondepository
                institutions. The SBA also releases data concerning its loan programs,
                but these typically do not include demographic information, and this
                covers only a small portion of the overall small business financing
                market.
                ---------------------------------------------------------------------------
                 \60\ See Fed. Fin. Insts. Examination Council, Reporting Forms
                31, 41, and 51 (last modified Mar. 16, 2021), https://www.ffiec.gov/ffiec_report_forms.htm (FFIEC Call Report).
                 \61\ See Fed. Fin. Insts. Examination Council, A Guide to CRA
                Data Collection and Reporting, at 11, 13 (2015), https://www.ffiec.gov/cra/pdf/2015_CRA_Guide.pdf (2015 FFIEC CRA Guide).
                Small business loans are defined for CRA purposes as loans whose
                original amounts are $1 million or less and that were reported on
                the institution's Call Report or Thrift Financial Report as either
                ``Loans secured by nonfarm or nonresidential real estate'' or
                ``Commercial and industrial loans.'' Small farm loans are defined
                for CRA purposes as loans whose original amounts are $500,000 or
                less and were reported as either ``Loans to finance agricultural
                production and other loans to farmers'' or ``Loans secured by
                farmland.'' Id. at 11. Beginning in 2023, national banks supervised
                by the OCC with assets greater than $2.5 billion will be required to
                report loans of $1.6 million or less and indicate whether the
                borrower's gross annual review is $1.6 million or less. See 85 FR
                34734 (June 5, 2020).
                 \62\ See Nat'l Credit Union Admin., Call Report Form 5300 (June
                2020), https://www.ncua.gov/files/publications/regulations/form-5300-june-2020.pdf.
                ---------------------------------------------------------------------------
                 These public data sources provide some of the most extensive
                information currently available on small business lending. However,
                they suffer from four material limitations, namely that the data
                capture only parts of the market, are published at a high level of
                aggregation, do not permit detailed analysis across the markets, and
                lack standardization across different agencies.
                 First, these datasets exclude entire categories of lenders. For
                example, banks under $1.322 billion in assets do not have to report
                under the CRA.\63\ The FFIEC and NCUA Call Reports and CRA data do not
                include lending by nondepository financial institutions, which the
                Bureau estimates to represent 40 percent of the small business
                financing market and is rapidly growing.\64\
                ---------------------------------------------------------------------------
                 \63\ Fed. Fin. Insts. Examination Council, Community
                Reinvestment Act 2021 Reporting Criteria, https://www.ffiec.gov/cra/reporter21.htm (last visited Aug. 5, 2021).
                 \64\ Nondepository lending is estimated to total approximately
                $550 billion out of $1.4 trillion in total lending, excluding $1
                trillion in COVID-19 emergency program lending. See part II.D below
                (providing a detailed breakdown and methodology of estimates across
                lending products).
                ---------------------------------------------------------------------------
                [[Page 56363]]
                 Second, Federal agencies publish summary data at a high level in a
                manner that does not facilitate independent analysis by other agencies
                or stakeholders. The FFIEC and NCUA Call Reports and the CRA data are
                all available at a higher level of aggregation than loan-level,
                limiting fair lending and detailed geographic analyses since race, sex,
                and ethnicity as well as business location data are rarely disclosed.
                 Third, the detailed data collected by these Federal sources have
                significant limitations as well, preventing any analysis into certain
                issues or types of borrowers, even by the regulators possessing these
                data. Neither Call Report nor CRA data include applications, which
                limits insights into any potential discrimination or discouragement in
                application processes as well as into the interaction between credit
                supply and demand. The Call Report and CRA data separately identify
                loans of under $1 million in value, and CRA data also identify loans to
                businesses with annual revenues of $1 million or less.\65\ However, the
                Call Report definition of small business loans as those with a loan
                size of $1 million or less at origination is both overinclusive, as it
                counts small loans to businesses of all sizes, and underinclusive, as
                it excludes loans over $1 million made to small businesses. Credit
                unions report any loans under $50,000 as consumer loans and not as
                commercial loans,\66\ potentially excluding from measurement an
                important source of funding for many small businesses, particularly the
                smallest and often most underserved.
                ---------------------------------------------------------------------------
                 \65\ Fed. Fin. Insts. Examination Council, Schedule RC-C, Part
                II Loans to Small Businesses and Farms, at 1, https://www.fdic.gov/regulations/resources/call/crinst-031-041/2017/2017-03-rc-c2.pdf
                (detailing the Call Report loan size threshold of $1 million at
                origination for loans to small businesses); 2015 FFIEC CRA Guide at
                11 (detailing the CRA size thresholds of $1 million both for loan
                amount at origination and for revenue of small business borrowers).
                 \66\ Nat'l Credit Union Admin., Call Report Form 5300
                Instructions, at 26 (effective Mar. 31, 2021), https://www.ncua.gov/files/publications/regulations/call-report-instructions-march-2021.pdf.
                ---------------------------------------------------------------------------
                 Finally, the Federal sources of small business lending data are not
                standardized across agencies and cannot be easily compared. For
                example, the FFIEC Call Report collects small loans to businesses as a
                proxy for small business lending, whereas the NCUA Call Report collects
                loans to members for commercial purposes above $50,000 but with no
                upper limit. The loan-level data for the Paycheck Protection Program
                (PPP) offer an unprecedented level of insight into small business
                lending, but this dataset is a one-off snapshot into the market for a
                specific lending program at an acute moment of crisis and is also
                limited in utility by relatively low response levels to demographic
                questions concerning borrowers.\67\
                ---------------------------------------------------------------------------
                 \67\ Zachary Warmbrodt, Tracking the Money: Bid to Make Business
                Rescue More Inclusive Undercut by Lack of Data, Politico (Mar. 2,
                2021), https://www.politico.com/news/2021/03/02/businesses-inclusive-coronavirus-relief-money-data-472539 (reporting that 75
                percent of PPP recipients did not report their ethnicity and 58
                percent did not reveal their gender).
                ---------------------------------------------------------------------------
                 The Federal government also conducts and releases a variety of
                statistics, surveys, and research reports on small business lending
                through the member banks for the Federal Reserve System, the FDIC, CDFI
                Fund, and the U.S. Census Bureau. These data sources offer insights
                into broad trends and specific small business lending issues but are
                less useful for detailed fair lending analyses or identification of
                specific areas, industries, or demographic groups being underserved.
                Periodic changes in survey methodology and questions can also limit
                comparability and the ability to track developments over time.
                 There are also a variety of non-governmental data sources, issued
                by both private and nonprofit entities, that cover small businesses
                and/or the small business financing market. These include datasets and
                surveys published by commercial data and analytics firms, credit
                reporting agencies, trade associations, community groups, and academic
                institutions. Certain of these data sources are publicly available and
                track specific topics, such as small business optimism,\68\ small
                business employment,\69\ rates of small business credit application
                approvals,\70\ small business lending and delinquency levels,\71\ and
                rates of small business closure.\72\ Other databases have more
                granularity and provide detailed information on individual businesses,
                including revenue, credit utilization, industry, and location.\73\
                ---------------------------------------------------------------------------
                 \68\ Nat'l Fed'n of Indep. Bus., Small Business Optimism Index
                (June 2021), https://www.nfib.com/surveys/small-business-economic-trends/.
                 \69\ ADP, Employment Reports, https://adpemploymentreport.com/
                (last visited July 22, 2021).
                 \70\ Biz2Credit, Biz2Credit Small Business Lending Index,
                https://www.biz2credit.com/small-business-lending-index (last
                visited July 27, 2021).
                 \71\ PayNet, Small Business Lending Index, https://sbinsights.paynetonline.com/lending-activity/ (last visited July 27,
                2021).
                 \72\ Opportunity Insights Economic Tracker, https://tracktherecovery.org/ (last visited July 27, 2021). The Opportunity
                Insights Economic Tracker and similar data sources may materially
                overestimate the number of business closures by not controlling for
                attrition in the small business client base of data providers. See
                Leland D. Crane et al., Bd. of Governors of the Fed. Reserve Sys.,
                Finance and Economics Discussion Series, 2020-089, Business Exit
                During the COVID-19 Pandemic: Non-Traditional Measures in Historical
                Context, at 21-22 (2020), https://www.federalreserve.gov/econrest/feds/files2020089r1pap.pdf.
                 \73\ See, e.g., Dun & Bradstreet, https://www.dnb.com/ (data
                provider and credit reporter); Data Axle, https://www.data-axle.com/
                (data provider); Equifax, https://www.equifax.com/business/business-credit-reports/ (credit reporter); Experian, https://www.experian.com/small-business/business-credit-reports (credit
                reporter).
                ---------------------------------------------------------------------------
                 While these non-public sources of data on small businesses may
                provide a useful supplement to existing Federal sources of small
                business lending data, these private and nonprofit sources often do not
                have lending information, may rely in places on unverified research
                based on public internet sources, and/or narrowly limit use cases for
                parties accessing data. Further, commercial datasets are generally not
                free to public users and can be costly, raising equity issues for
                stakeholders who cannot afford access.
                C. The Landscape of Small Business Finance
                 Notwithstanding the lack of data on the market, it is clear that
                financing plays an important role in enabling small businesses to grow
                and contribute to the economy. When it is available, financing not only
                provides resources for small businesses to smooth cash flows for
                current operations, but also affords business owners the opportunity to
                invest in business growth. An analysis by the National Small Business
                Association, which examined data from 1993 through 2016, found a
                correlation between small business owners' ability to access credit and
                their ability to hire.\74\ This same study found that, while not the
                sole cause, the inability to secure financing may have led 16 percent
                of small businesses to reduce their number of employees and
                approximately 10 percent of small businesses to reduce employee
                benefits. Lack of access to financing also contributed to a further 10
                percent of small businesses being unable to increase store inventory in
                order to meet existing demand.\75\
                ---------------------------------------------------------------------------
                 \74\ Nat'l Small Bus. Ass'n, 2016 Year-End Economic Report (July
                2017), https://www.nsba.biz/wp-content/uploads/2017/02/Year-End-Economic-Report-2016.pdf.
                 \75\ Id.
                ---------------------------------------------------------------------------
                 To support their growth or to make it through harder times, small
                businesses look to a variety of funding sources. Especially when
                starting out, entrepreneurs often rely on their own
                [[Page 56364]]
                savings and help from family and friends. If a business generates a
                profit, its owners may decide to reinvest retained earnings to fund
                further growth. However, for many aspiring business owners--and their
                personal networks--savings and retained earnings may not be sufficient
                to fund a new venture or grow it, leading owners to seek other sources
                of funding. This is particularly true for minority- and women-led
                households, which on average have less wealth than their white- and
                men-led counterparts.\76\
                ---------------------------------------------------------------------------
                 \76\ Emily Moss et al., The Black-White Wealth Gap Left Black
                Households More Vulnerable, Brookings Inst. (Dec. 8, 2020), https://www.brookings.edu/blog/up-front/2020/12/08/the-black-white-wealth-gap-left-black-households-more-vulnerable/ (detailing wealth gaps in
                2019 by race and sex that show white male households with more
                wealth than white female or Black male or female households at all
                age brackets). See also Erin Ruel & Robert Hauser, Explaining the
                Gender Wealth Gap, 50 Demography 1155, 1165 (Dec. 2012), https://read.dukeupress.edu/demography/article/50/4/1155/169553/Explaining-the-Gender-Wealth-Gap (finding a gender wealth gap of over $100,000
                in a longitudinal study over 50 years of a single age cohort in
                Wisconsin); Neil Bhutta et al., Bd. of Governors of the Fed. Reserve
                Sys., Disparities in Wealth by Race and Ethnicity in the 2019 Survey
                of Consumer Finances (Sept. 28, 2020), https://www.federalreserve.gov/econres/notes/feds-notes/disparities-in-wealth-by-race-and-ethnicity-in-the-2019-survey-of-consumer-finances-20200928.htm (finding median white family wealth in 2019 of
                $188,200 compared with $24,100 for Black families and $36,100 for
                Hispanic families).
                ---------------------------------------------------------------------------
                 One such source of funding comes from others besides family and
                friends, whether high net worth individuals or ``angel investors,''
                venture capital funds, or, in a more recent development usually
                facilitated by online platforms, via crowdsourcing from retail
                investors. Often, these early investments take the form of equity
                funding, which business owners are not obligated to repay to investors.
                However, equity funding requires giving up some ownership and control
                to investors, which certain entrepreneurs may not wish to do. For small
                businesses, equity funding also tends to be somewhat more expensive
                than debt financing in the longer run. This is for a number of reasons,
                including that loan interest payments, unlike capital gains, are tax-
                deductible.\77\ Finally, equity investments from others besides family
                and friends are available to only a minority of small businesses.
                ---------------------------------------------------------------------------
                 \77\ Jim Woodruff, The Advantages and Disadvantages of Debt and
                Equity Financing, CHRON (updated Mar. 4, 2019), https://smallbusiness.chron.com/advantages-disadvantages-debt-equity-financing-55504.html.
                ---------------------------------------------------------------------------
                 Many small businesses instead seek debt financing from a wide range
                of providers. These providers include depository institutions, such as
                banks, savings associations, and credit unions,\78\ as well as fintechs
                and commercial finance companies, specialized providers of specific
                financing products, and a range of government and government-sponsored
                enterprises, among others.
                ---------------------------------------------------------------------------
                 \78\ For purposes of this notice of proposed rulemaking, the
                Bureau is using the term depository institution to mean any bank or
                savings association defined by section 3(c)(1) of the Federal
                Deposit Insurance Act, 12 U.S.C. 1813(c)(1), or credit union defined
                pursuant to the Federal Credit Union Act, as implemented by 12 CFR
                700.2. The Bureau notes that the Dodd-Frank Act defines a depository
                institution to mean any bank or savings association defined by the
                Federal Deposit Insurance Act; there, that term does not encompass
                credit unions. 12 U.S.C. 5301(18)(A), 1813(c)(1). The Bureau is
                referring to banks and savings associations together with credit
                unions as depository institutions throughout this notice, unless
                otherwise specified, to facilitate analysis and discussion.
                ---------------------------------------------------------------------------
                 In the past, small businesses principally sought credit from banks;
                however, as banks have merged and consolidated, particularly in the
                wake of the Great Recession, they have provided less financing to small
                businesses.\79\ As noted earlier, the number of banks has declined
                significantly since a post-Great Depression peak in 1986 of over 18,000
                institutions to around 5,200 institutions today,\80\ while 13,500
                branches closed from 2009 to mid-2020, representing a 14 percent
                decrease.\81\ Although nearly half of counties either gained bank
                branches or retained the same number between 2012 and 2017, the
                majority lost branches over this period.\82\ Out of 44 counties that
                were deeply affected by branch closures, defined as having 10 or fewer
                branches in 2012 and seeing five or more of those close by 2017, 39
                were rural counties.\83\ Of rural counties, just over 40 percent lost
                bank branches in that period; the rural counties that experienced
                substantial declines in bank branches tend to be lower-income and with
                a higher proportion of African-American residents relative to other
                rural counties,\84\ raising concerns about equal access to credit.
                ---------------------------------------------------------------------------
                 \79\ Rebel A. Cole, Off. of Advocacy, Small Bus. Admin., How Did
                Bank Lending to Small Business in the United States Fare After the
                Financial Crisis?, at 26 (Jan. 2018), https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf (showing a decline in bank loans to small
                businesses from 2008 to 2015 from $710 billion to $600 billion). The
                level of bank lending to small businesses has recovered somewhat
                since a trough in 2012-13 that represented the lowest amount of
                lending since 2005. Fed. Deposit Ins. Corp., https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx (last visited July 22, 2021).
                 \80\ Congressional Research Serv., Small Business Credit Markets
                and Selected Policy Issues, at 6 (Aug. 20, 2019), https://fas.org/sgp/crs/misc/R45878.pdf.
                 \81\ Bruce C. Mitchell et al., Nat'l Cmty. Reinvestment Coal.,
                Relationships Matter: Small Business and Bank Branch Locations, at 6
                (2020), https://ncrc.org/relationships-matter-small-business-and-bank-branch-locations/ (stating that in 2009 there were 95,596 brick
                and mortar full-service branches or retail locations but, as of June
                30, 2020, that number had fallen to 82,086).
                 \82\ Bd. of Governors of the Fed. Reserve Sys., Perspectives
                from Main Street: Bank Branch Access in Rural Communities, at 1, 3-
                4, 19 (Nov. 2019), https://www.federalreserve.gov/publications/files/bank-branch-access-in-rural-communities.pdf.
                 \83\ Id.
                 \84\ Id.
                ---------------------------------------------------------------------------
                 As banks and branches have merged and/or closed, the share of
                banking assets has also become increasingly concentrated in the largest
                institutions, with banks of over $10 billion in assets representing 84
                percent of all industry assets in 2018,\85\ totaling $15.1 out of $17.9
                trillion.\86\ Nevertheless, banks of under $10 billion in assets
                continue to hold approximately half of all small business loans (using
                the FFIEC Call Report definition of loans of under $1 million),
                highlighting the importance of smaller banks to the small business
                lending market.\87\ Since smaller bank credit approvals have
                traditionally been close to 50 percent, while large banks approve only
                25-30 percent of applications, bank consolidation may have implications
                for small business credit access.\88\ Since institutions under $1.322
                billion in assets are not required to report on lending under the
                CRA,\89\ it is difficult to precisely assess the
                [[Page 56365]]
                impact of bank consolidation and shuttered branches on small business
                lending and access to credit in local areas.\90\ By contrast, credit
                unions increased their small business lending from $30 billion in 2008
                to at least $55 billion in 2019.\91\ Like banks, credit unions
                typically receive high satisfaction scores among small business
                borrowers, reflecting more high-contact, relationship-based lending
                models.\92\
                ---------------------------------------------------------------------------
                 \85\ Congressional Research Serv., Small Business Credit Markets
                and Selected Policy Issues, at 6 (Aug. 20, 2019), https://fas.org/sgp/crs/misc/R45878.pdf.
                 \86\ Fed. Deposit Ins. Corp., Bank Data and Statistics, https://www.fdic.gov/bank/statistical/ (last visited Aug. 22, 2021).
                 \87\ Speech by Board Governor Lael Brainard: Community Banks,
                Small Business Credit, and Online Lending (Sept. 30, 2015), https://www.federalreserve.gov/newsevents/speech/brainard20150930a.htm.
                Banks with under $10 billion in assets are often referred to as
                ``community banks.'' Congressional Research Serv., Over the Line:
                Asset Thresholds in Bank Regulation, at 2-3 (May 3, 2021), https://fas.org/sgp/crs/misc/R46779.pdf (noting that the Board of Governors
                of the Federal Reserve System (Board) and the Office of the
                Comptroller of the Currency (OCC) define community banks as having
                under $10 billion in assets, although there may be other criteria,
                with the FDIC considering also geographic footprint and a relative
                emphasis on making loans and taking deposits as opposed to engaging
                in securities and derivatives trading). Community banks are also
                more likely to engage in relationship-based lending. See id. at 3.
                 \88\ Biz2Credit, Biz2Credit Small Business Lending Index,
                https://www.biz2credit.com/small-business-lending-index (last
                visited July 22, 2021). These historical approval rates are
                reflected in pre-pandemic Small Business Lending Index releases by
                Biz2Credit. See, e.g., Biz2Credit, Small Business Loan Approval
                Rates at Big Banks Remain at Record High in February 2020:
                Biz2Credit Small Business Lending Index, https://www.biz2credit.com/small-business-lending-index/february-2020 (last visited July 29,
                2021) (showing large bank approvals of 28.3 percent in February 2020
                and of 27.2 percent in February 2019 and smaller bank approvals of
                50.3 percent in February 2020 and of 48.6 percent in February 2019).
                 \89\ See part II.B above.
                 \90\ Bruce C. Mitchell et al., Nat'l Cmty. Reinvestment Coal.,
                Relationships Matter: Small Business and Bank Branch Locations,
                https://ncrc.org/relationships-matter-small-business-and-bank-branch-locations/ (last visited July 27, 2021).
                 \91\ Rebel A. Cole, Off. of Advocacy, Small Bus. Admin., How Did
                Bank Lending to Small Business in the United States Fare After the
                Financial Crisis?, at 26 (Jan. 2018), https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf.
                 \92\ Fed. Reserve Banks, Small Business Credit Survey, 2021
                Report On Employer Firms (2021), https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2021/2021-sbcs-employer-firms-report.
                ---------------------------------------------------------------------------
                 Certain banks and credit unions choose to be mission-based lenders,
                as CDFIs or Minority Depository Institutions (MDIs).\93\ Mission-based
                lenders focus on providing credit to traditionally underserved and low-
                income communities and individuals to promote community development and
                expand economic opportunity, making them a relatively smaller by dollar
                value but essential part of the small business lending market. There
                were over 1,200 CDFIs (around half of which are depository
                institutions) as of May 2021 and over 140 MDIs as of March 2021.\94\
                ---------------------------------------------------------------------------
                 \93\ According to the FDIC, FDIC-insured MDIs and CDFI banks are
                banks, savings banks, and savings associations (collectively, banks)
                that serve minority, low- or moderate-income (LMI), and rural
                communities at higher rates than mainstream banks. MDIs serve
                minority communities including African American, Asian American,
                Hispanic American, and Native American. CDFI banks are certified
                through the U.S. Department of the Treasury by demonstrating they
                serve LMI communities. See, e.g., Fed. Deposit Ins. Corp. Minority
                Depository Institutions Program website, https://www.fdic.gov/regulations/resources/minority/mission-driven/index.html (last
                visited July 11, 2021).
                 \94\ Cmty. Dev. Fin. Inst., CDFI Certification, https://www.cdfifund.gov/programs-training/certification/cdfi (last visited
                July 21, 2021); Fed. Deposit Ins. Corp., Minority Depository
                Institutions Program (last updated June 9, 2021), https://www.fdic.gov/regulations/resources/minority/mdi.html.
                ---------------------------------------------------------------------------
                 During a period in which that depository institutions have been
                providing relatively less funding to small businesses,\95\ small
                businesses have increasingly relied on other nondepository institutions
                for financing. Since nondepositories typically do not report their
                small business financing activities to regulators, however, there are
                no authoritative sources for either the number of such entities or the
                dollar value of financing they provide to small businesses.\96\
                However, what data are available make clear that fintech firms are
                rapidly increasing their share of the small business financing
                market.\97\
                ---------------------------------------------------------------------------
                 \95\ See Rebel A. Cole, Off. of Advocacy, Small Bus. Admin., How
                Did Bank Lending to Small Business in the United States Fare After
                the Financial Crisis?, at 26 (Jan. 2018), https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf (showing a decline in
                bank loans to small businesses from 2008-15 from $710 billion to
                $600 billion). The level of bank lending to small businesses has
                recovered somewhat since a trough in 2012-13 that represented the
                lowest amount of lending since 2005. See also Fed. Deposit Ins.
                Corp., https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx (last visited July 21,
                2021) (tabulating outstanding balances for credit extended to small-
                and non-small business lending by banks and thrifts over time).
                 \96\ See part II.B above.
                 \97\ See part II.D below.
                ---------------------------------------------------------------------------
                 Whether depository or nondepository, each provider of small
                business financing assesses a variety of different criteria to
                determine whether and on what terms to grant an extension of credit or
                other financing product, including business and financial performance,
                the credit history of the business and its owner(s), the time in
                business, and the industry, among other factors. Protections such as
                guarantees, collateral, and insurance can mitigate perceived risks,
                potentially enabling a lender to offer better terms or facilitating an
                extension of credit that would otherwise not meet lending limit or
                underwriting criteria. Often, government agencies, including the SBA,
                FHA, and USDA, guarantee or insure loans themselves to encourage
                lenders to provide credit to borrowers that may not otherwise be able
                to obtain credit, either on affordable terms and conditions or at
                all.\98\ Different lenders also employ diverse methods for assessing
                risk, with smaller banks generally relying more on traditional
                underwriting methods and typically managing multi-product
                relationships. Fintechs increasingly use algorithms, automation, and
                even AI and machine learning to assess risk and make underwriting
                decisions, with originations typically being less relationship-based in
                nature.
                ---------------------------------------------------------------------------
                 \98\ Congressional Research Serv., Small Business Administration
                7(a) Loan Guaranty Program (updated June 21, 2021), https://fas.org/sgp/crs/misc/R41146.pdf (discussing the SBA's flagship 7(a) loan
                guarantee program); U.S. Dep't of Hous. & Urban Dev., Descriptions
                Of Multifamily Programs, https://www.hud.gov/program_offices/housing/mfh/progdesc (last visited July 27, 2021) (listing FHA
                mortgage insurance programs for 5+ unit residential developments);
                Farm Serv. Agency, U.S. Dep't of Agric., Guaranteed Loan Program
                Fact Sheet (Mar. 2020), https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/guaranteed_loan_program-factsheet.pdf
                (discussing the USDA's Farm Service Agency guaranteed loan program).
                ---------------------------------------------------------------------------
                 As well as diversity in underwriting methodology and criteria,
                there are also considerable differences across small business financing
                products and providers with respect to pricing methods and repayment
                structures. As a result, it can be challenging to compare the
                competitiveness of product pricing and terms. The Bureau understands
                that term loans, lines of credit, and credit cards typically disclose
                annualized interest rates; leases often take into account depreciation;
                factoring products discount an invoice's value and add a fee; and MCAs
                apply a multiple to the value of the up-front payment.\99\ Moreover,
                providers may add additional fees that are not standardized within
                industries, much less across them. The Bureau believes that this
                complexity may confuse business owners and render them unable to secure
                more favorable rates due to opacity in offers presented--which in some
                cases may even be deliberate \100\--and a corresponding inability to
                effectively compare across different financing options.\101\ This may
                impair applicants' ability to make informed choices.
                ---------------------------------------------------------------------------
                 \99\ See part II.D below for definitions of the different
                product categories.
                 \100\ Press Release, Fed. Trade Comm'n, Cash Advance Firm to Pay
                $9.8M to Settle FTC Complaint It Overcharged Small Businesses (Apr.
                22, 2021), https://www.ftc.gov/news-events/press-releases/2021/04/cash-advance-firm-pay-98m-settle-ftc-complaint-it-overcharged
                (settling a lawsuit between the Federal Trade Commission (FTC) and
                an MCA provider for $9.8 million where the complaint alleged that
                the provider ``deceived'' and ``misle[d]'' business borrowers about
                the amount and terms of financing); Bd. of Governors of the Fed.
                Reserve Sys., Record of Meeting: Community Advisory Council and the
                Board of Governors, at 7 (Oct. 5, 2018), https://www.federalreserve.gov/aboutthefed/files/cac-20181005.pdf (noting a
                growing trend of small business owners facing difficulty with
                expensive loan products such as MCAs where the pricing and structure
                of the loans is often deliberately obscured).
                 \101\ Fed. Trade Comm'n, `Strictly Business' Forum, Staff
                Perspective, at 5 (Feb. 2020), https://www.ftc.gov/system/files/documents/reports/staff-perspective-paper-ftcs-strictly-business-forum/strictly_business_forum_staff_perspective.pdf (discussing the
                difficulty in comparing across financing products with widely
                differing methods for calculating and describing key features).
                ---------------------------------------------------------------------------
                D. Estimating the Size and Scope of the Small Business Financing Market
                 In light of the lack of data and the heterogeneity of products and
                providers within the small business financing market, it can be
                difficult to get a clear sense of the size and scope of the market. In
                this section, the Bureau describes its estimates of the total
                outstanding balances of credit in the market, the number of
                institutions that are active in the small business
                [[Page 56366]]
                financing market, and how the Bureau arrived at these estimates. Where
                possible, the Bureau tries to estimate the state of the small business
                financing market at the end of 2019 in order to estimate the state of
                the market during a year unaffected by the COVID-19 pandemic.
                 One challenge is that some of the data report the dollar value of
                originations and some report outstanding balances. For the purposes of
                this exercise and for most, but not all, products, the Bureau assumes
                that for every $1 originated in the market in a given year, there is
                approximately a corresponding $3 of outstanding balances. This
                assumption is based on the ratio of the 2019 FFIEC Call Report data,
                which totaled $721 billion in outstanding balances on bank loans to
                small businesses and small farms, and the 2019 CRA data, which recorded
                $264 billion in bank loan originations to small businesses and small
                farms.\102\ This assumption is limited by the extent to which other
                small business financing products differ from loans and lines of
                credit, which make up the majority of financing products captured by
                the FFIEC Call Report data and the CRA data.\103\
                ---------------------------------------------------------------------------
                 \102\ FFIEC Call Report data records outstanding balances on
                loans with origination amounts less than $1 million across
                Commercial & Industrial, Nonfarm Nonresidential, Agricultural, and
                Secured by Farmland lending categories. See FDIC Quarterly Banking
                Profile Time Series, https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx (last
                visited August 29, 2021).
                 \103\ FFIEC Call Report data and CRA data on small business
                credit products also include business credit card products, but
                loans and lines of credit made up $713 billion out of $775 billion
                in outstanding balances on bank, savings association, and credit
                union loans to small businesses in 2019. One important caveat to
                this assumption is that products with materially shorter average
                term lengths, for example credit cards, factoring products, and
                MCAs, may have an inverse ratio of originations to outstanding
                balances. For example, top issuers of general purpose credit cards
                recorded purchase volumes of two to seven times their outstanding
                balances in 2020. Nilson Report, Issue 1192, at 6 (Feb. 2021),
                https://nilsonreport.com/publication_newsletter_archive_issue.php?issue=1192. If business-
                purpose credit cards, factoring products, and MCAs behaved similarly
                with respect to the ratio of originations to outstanding balances,
                then for every $1 originated in the market in a given year, there
                could be a corresponding $0.14-0.50 in outstanding balances for such
                products ($1 divided by two to seven).
                ---------------------------------------------------------------------------
                 As detailed in this section, the Bureau estimates that the market
                for small business financing products totaled $1.4 trillion in
                outstanding balances in 2019. The Bureau estimates that small business
                financing by depository institutions makes up just over half of small
                business financing by private institutions. In 2020 and 2021, COVID-19
                emergency lending programs added a further $1 trillion to this value,
                bringing the overall size of the small business financing market up to
                $2.4 trillion. Below, the Bureau estimates the market share for
                different small business financing products.
                 Since the available data regarding depository institutions' small
                loans to businesses address term loans, lines of credit, and credit
                cards together, the respective share of different products in the
                overall small business financing market is difficult to assess. As
                detailed in this section, the Bureau estimates that together, private
                term loans and lines of credit constitute the largest small business
                credit product by value, totaling approximately $770 billion in
                outstanding balances in 2019, although PPP and EIDL Program loans have
                since added $1 trillion to this figure.
                 Lending by banks, saving associations, and credit unions comprises
                the largest part of this total amount for private term loans and lines
                of credit. Using FFIEC Call Report data for December 2019, the Bureau
                estimates that banks and savings associations account for a total of
                about $721 billion in outstanding credit to small businesses and small
                farms as of December 2019.\104\ Using NCUA Call Report data for
                December 2019, the Bureau estimates that credit unions account for a
                total of about $55 billion in outstanding credit to members for
                commercial purposes.\105\ From this value, the Bureau subtracts $62
                billion in credit card lending to arrive at $713 billion in outstanding
                balances for term loans and lines of credit. From this value, the
                Bureau further subtracts $134 billion in SBA guaranteed loans to arrive
                at $580 billion in outstanding balances for private term loans and
                lines of credit extended by depository institutions (i.e., banks,
                savings associations, and credit unions) as of December 2019.
                ---------------------------------------------------------------------------
                 \104\ Calculated from FFIEC Call Report data accessed on June 8,
                2021. The Bureau notes that, as discussed in part II.B above, these
                estimates rely on small loans to businesses as a proxy for loans to
                small businesses. As such, the Bureau acknowledges that the true
                outstanding value of credit extended to small businesses by such
                institutions may be different than what is presented here. For
                example, the small loans to businesses proxy would overestimate the
                value of outstanding credit if a significant number of small loans
                to businesses and farms are to businesses or farms that are actually
                large. Alternatively, the proxy would underestimate the value of
                outstanding credit to small businesses if a significant number of
                businesses and farms that are small under the proposed rule take out
                loans that are larger than $1 million or $500,000, for businesses
                and farms, respectively.
                 \105\ Nat'l Credit Union Admin., 2019 Call Report Quarterly
                Data, https://www.ncua.gov/analysis/credit-union-corporate-call-report-data/quarterly-data (last visited Aug. 24, 2021) (2019 NCUA
                Call Report). The Bureau notes that, as discussed in part II.B
                above, credit unions only report credit transactions made to members
                for commercial purposes with values over $50,000. The Bureau uses
                this value as a proxy for small business credit. The Bureau
                acknowledges that the true value of small business credit extended
                by credit unions may be different than what is presented here. For
                example, this proxy may overestimate the value of outstanding small
                business credit because some members are taking out loans for large
                businesses. Alternatively, this proxy may underestimate the value of
                outstanding small business credit if credit unions originate a
                substantial number of small business loans with origination values
                of under $50,000. For this analysis, the Bureau includes all types
                of commercial loans to members except construction and development
                loans and multifamily residential property. This includes loans
                secured by farmland; loans secured by owner-occupied, non-farm, non-
                residential property; loans secured by non-owner occupied, non-farm,
                non-residential property; loans to finance agricultural production
                and other loans to farmers; commercial and industrial loans;
                unsecured commercial loans; and unsecured revolving lines of credit
                for commercial purposes. The Bureau does include multifamily in part
                VII below.
                ---------------------------------------------------------------------------
                 The remaining $190 billion in outstanding balances for private term
                loans and lines of credit was extended by various nondepository
                institutions, namely commercial finance companies, fintechs, and
                nondepository CDFIs.\106\
                ---------------------------------------------------------------------------
                 \106\ There may additionally be lending by equipment and vehicle
                dealers originating loans in their own name that is not captured
                here.
                ---------------------------------------------------------------------------
                 Commercial finance companies specialize in financing equipment and
                vehicle purchases. The Bureau estimates that the value of outstanding
                balances on credit extended by commercial finance companies totaled
                approximately $160 billion. Using data from the Federal Reserve Board's
                Finance Company Business Receivables data on owned assets as of
                December 2019, the Bureau estimates commercial finance companies
                outstanding credit for commercial purposes as the value of retail motor
                vehicle loans plus equipment loans and other business receivables,
                which totaled about $215 billion.\107\ The Bureau further assumes that
                about 75 percent of this value, or $162 billion, can be attributed to
                loans to small businesses.\108\
                ---------------------------------------------------------------------------
                 \107\ Bd. of Governors of the Fed. Reserve Sys., Finance
                Companies--G.20 (updated July 15, 2021), https://www.federalreserve.gov/releases/g20/hist/fc_hist_b_levels.html. The
                Bureau does not include leases, since they are already counted
                within the product category of equipment and vehicle leasing, or
                wholesale loans, which it assumes are typically made to non-small
                businesses.
                 \108\ This methodology is consistent with the approach taken by
                Gopal and Schnabl (2020).
                ---------------------------------------------------------------------------
                 Typical fintech providers are characterized primarily by providing
                banking services exclusively in an online environment.\109\ The Bureau
                estimates that total outstanding loan balances for fintech providers
                reached around $25 billion in 2019. In a 2018 report, S&P Global
                projected that online
                [[Page 56367]]
                platform lenders would originate about $9.3 billion in credit to small
                and medium enterprises in 2019.\110\ Using this estimate, the Bureau
                scales up the value of originations to $25 billion in estimated
                outstanding balances, under the assumptions discussed above.\111\ At
                the beginning of the COVID-19 pandemic and financial crisis, fintechs
                originated around $22 billion in PPP loans to small businesses from
                March to August 2020 \112\ and likely continued to originate billions
                more during the third wave of PPP loans in 2021, which represents an
                almost 90 percent increase or more in outstanding balances since
                2019.\113\ This follows already rapid growth from $1.4 billion in
                estimated outstanding balances in 2013.\114\
                ---------------------------------------------------------------------------
                 \109\ Barkley & Schweitzer, 17 Int'l J. Cent. Banking at 35-36.
                 \110\ 2018 US Fintech Market Report at 6.
                 \111\ The Bureau notes that this figure may underestimate the
                total value of fintech lending because it focuses on platform
                lenders and may overestimate the value of lending to small
                businesses because it also includes credit to medium businesses.
                Additionally, the Bureau notes that fintechs often offer products
                besides loans and lines of credit, and that there is no clear
                demarcation between fintech, commercial finance company, and MCA
                provider, limiting the precision of market size estimates. Finally,
                fintechs often sell loans once originated to other entities,
                securitize their originations, or purchase loans that banks have
                originated, which may further present challenges to the precision of
                market size estimates for this market segment.
                 \112\ Jessica Battisto et al., Who Benefited from PPP Loans by
                Fintech Lenders?, Liberty Street Economics (May 27, 2021), https://libertystreeteconomics.newyorkfed.org/2021/05/who-received-ppp-loans-by-fintech-lenders.html; Small Bus. Admin., Paycheck
                Protection Program (PPP) Report (approvals through 12 p.m. EST Apr.
                16, 2020), https://www.sba.gov/sites/default/files/2020-06/PPP%20Deck%20copy-508.pdf; Small Bus. Admin., Paycheck Protection
                Program (PPP) Report (approvals through Aug. 8, 2020), https://www.sba.gov/sites/default/files/2020-08/PPP_Report%20-%202020-08-10-508.pdf.
                 \113\ Per the program's intent, many PPP loans have been
                forgiven since the program began, which may mean that outstanding
                balances on PPP loans extended by fintech providers have since
                declined.
                 \114\ Barkley & Schweitzer, 17 Int'l J. Cent. Banking at 35-36
                (citing 2018 US Fintech Market Report at 5). This figure annualizes
                $121 million in estimated 2013 quarterly originations to $484
                million in annual originations and scales up to estimated
                outstanding balances using the ratio between the FFIEC Call Report
                and the CRA data discussed above.
                ---------------------------------------------------------------------------
                 The Bureau estimates the value of outstanding balances on credit
                extended by nondepository CDFIs to small business borrowers to be
                around $1.5 billion. Using reporting by the CDFI Fund for 2019, the
                Bureau scales down the outstanding balances for loan funds of $13.8
                billion and for venture capital funds of $0.3 billion by the proportion
                of all CDFI lending attributable to business borrowers, which totaled
                $15.4 billion out of $141.2 billion.\115\
                ---------------------------------------------------------------------------
                 \115\ CDFI Fund, CDFI Annual Certification and Data Collection
                Report (ACR): A Snapshot for Fiscal Year 2019, at 17, 22 (Oct.
                2020), https://www.cdfifund.gov/sites/cdfi/files/2021-01/ACR-Public-Report-Final-10292020-508Compliant.pdf. To the extent that CDFI loan
                funds and venture capital funds extend credit to business customers
                at different rates than CDFI banks and credit unions, this
                calculation may over- or underestimate the value of lending to small
                businesses by nondepository CDFIs. This figure also assumes that all
                CDFI lending is for small businesses.
                ---------------------------------------------------------------------------
                 Categorized here separately so as to distinguish residential from
                non-residential loans, the Bureau estimates outstanding balances for
                loans on 5+ unit residential dwellings to total over $30 billion.\116\
                Using data from the Mortgage Bankers Association, the Bureau scales up
                $11 billion in 2019 annual originations on loans of under $1 million in
                value at origination for 5+ unit residential dwellings to $30 billion
                in estimated outstanding balances, using the ratio between the FFIEC
                Call Report and the CRA data discussed above.\117\
                ---------------------------------------------------------------------------
                 \116\ Depository institutions, discussed above, extend a
                sizeable proportion of loans for 5+ unit residential dwellings; both
                nondepository and depository institutions are included in the total
                for 5+ unit outstanding balances.
                 \117\ See Mortg. Bankers Ass'n, Annual Report on Multi-Family
                Lending--2019, at 5 (2020), https://www.mba.org/store/products/research/general/report/2019-annual-report-on-multifamily-lending.
                This includes both private loans, estimated at around $18 billion,
                and loans extended by Fannie Mae, Freddie Mac, and the FHA,
                estimated at around $13 billion. The share of 5+ unit residential
                dwelling loans of all sizes extended by governmental or government-
                sponsored entities was 41 percent. The Bureau assumes for the
                purposes of this exercise that the same share is reflected in loans
                of under $1 million in value at origination, although arguably this
                share would be higher if government and government-sponsored
                entities are extended disproportionately smaller dollar value loans
                on average.
                ---------------------------------------------------------------------------
                 Also categorized separately from depository institution totals so
                as to distinguish private from government and government-sponsored
                loans, the Bureau estimates that outstanding balances for loans
                extended by the Small Business Administration and the Farm Credit
                System totaled around $200 billion in 2019.\118\
                ---------------------------------------------------------------------------
                 \118\ The grand total for lending by government and government-
                sponsored entities would be approximately $210 billion, including 5+
                unit residential dwelling loans extended by Fannie Mae, Freddie Mac,
                and the FHA, which are separately recorded within the 5+ unit
                residential dwelling loan product category.
                ---------------------------------------------------------------------------
                 The SBA, through its traditional 7(a), 504, and microloan programs
                as well as the Economic Impact Disaster Loan (EIDL) program and funding
                for Small Business Investment Companies (SBICs), is the largest
                governmental lender by value, with $143.5 billion in outstanding
                balances at the end of fiscal 2019.\119\ However, since the outbreak of
                the COVID-19 pandemic, SBA lending has increased in size by over $1
                trillion due to the PPP, which totaled $800 billion, and the EIDL
                Program, which totaled $210 billion.\120\
                ---------------------------------------------------------------------------
                 \119\ Small Bus. Admin., Small Business Administration Loan
                Program Performance (effective Mar. 31, 2021), https://www.sba.gov/document/report-small-business-administration-loan-program-performance. SBA guaranteed loans comprised $134 billion out of this
                total, which amount has been deducted from the totals for depository
                institutions to avoid double counting.
                 \120\ Small Bus. Admin., Paycheck Protection Program (PPP)
                Report (approvals through May 31, 2021), https://www.sba.gov/sites/default/files/2021-06/PPP_Report_Public_210531-508.pdf; Small Bus.
                Admin., Disaster Assistance Update--Nationwide COVID EIDL, Targeted
                EIDL Advances, Supplemental Targeted Advances (June 3, 2021),
                https://www.sba.gov/sites/default/files/2021-06/COVID-19%20EIDL%20TA%20STA_6.3.2021_Public-508.pdf; Small Bus. Admin.,
                Disaster Assistance Update--Nationwide EIDL Loans (Nov. 23, 2020),
                https://www.sba.gov/sites/default/files/2021-02/EIDL%20COVID-19%20Loan%2011.23.20-508_0.pdf.
                ---------------------------------------------------------------------------
                 The Farm Credit System is another important government-related part
                of the small business credit landscape. The Bureau estimates that Farm
                Credit System members had around $55 billion in outstanding balances of
                credit extended to small farms in 2019. Using the same small loan to
                farms proxy as is used in the FFIEC Call Report, the Bureau estimates
                credit to farms with an origination value of less than $500,000. Based
                on the Farm Credit System's 2019 Annual Information Statement of the
                Farm Credit System, the Bureau estimates that outstanding balances of
                such small credit to farms totaled $55 billion at the end of 2019.\121\
                The Bureau notes that, as with the FFIEC Call Report proxy, this number
                may include credit to non-small farms and may exclude larger credit
                transactions extended to small farms.
                ---------------------------------------------------------------------------
                 \121\ Fed. Farm Credit Banks Funding Corp., Farm Credit 2019
                Annual Information Statement of the Farm Credit System, at 54,
                https://www.farmcreditfunding.com/ffcb_live/investorResources/informationStatements.html (last visited Aug. 13, 2021).
                ---------------------------------------------------------------------------
                 Mostly extended by depository institutions, the Bureau estimates
                that the market for small business credit cards totaled over $60
                billion in outstanding balances for 2020.\122\ Using data from Y-14
                Form submissions to the Federal Reserve Board, the Bureau estimates the
                value of outstanding balances for small business credit card accounts
                where the loan is underwritten
                [[Page 56368]]
                with the sole proprietor or primary business owner as an
                applicant.\123\
                ---------------------------------------------------------------------------
                 \122\ See Bd. of Governors of the Fed. Reserve Sys., Report
                Forms FR Y-14M, https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDYnbIw+U9pka3sMtCMopzoV (last visited
                July 12, 2021). The Board's data are received from bank holding
                companies over $50 billion in assets, which represent 70 percent of
                outstanding balances for consumer credit cards; the corresponding
                percent of balances captured for small business cards is not known,
                so the total small business-purpose credit card market could be
                substantially higher or lower. See Bureau of Consumer Fin. Prot.,
                The Consumer Credit Card Market, at 18 (Aug. 2019), https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2019.pdf.
                 \123\ Off. of Mgmt. & Budget, Instructions for the Capital
                Assessments and Stress Testing Information Collection (Reporting
                Form FR-Y14M), OMB No. 7100-0341, at 148 (Mar. 2020), https://omb.report/icr/202101-7100-006/doc/108187801.
                ---------------------------------------------------------------------------
                 Equipment and vehicle leasing, whereby businesses secure the right
                to possess and use a piece of equipment or vehicle for a term in return
                for consideration, is another important product category that is
                estimated to value roughly $160 billion in outstanding balances in
                2019. Using data from the Equipment Leasing and Financing Foundation
                for 2019, the Bureau estimates the total size of the equipment and
                vehicle leasing market for all sized businesses in 2019 to be
                approximately $900 billion.\124\ The Bureau further assumes that small
                businesses comprise around 18 percent of the total equipment and
                vehicle leasing market.\125\
                ---------------------------------------------------------------------------
                 \124\ See Equip. Leasing & Fin. Found., Horizon Report, https://www.leasefoundation.org/industry-resources/horizon-report/ (last
                updated Apr. 22, 2021).
                 \125\ See Karen Mills, Harvard Bus. Sch., State of Small
                Business Lending, at 29 (July 2014), https://www.hbs.edu/ris/Supplemental%20Files/15-004%20HBS%20Working%20Paper%20Chart%20Deck_47695.pdf (estimating
                equipment leasing outstanding balances for small business borrowers
                at approximately $160 billion at Dec. 31, 2013); Monitor Daily, SEFI
                Report Finds Strong Performance Despite Challenges, https://www.monitordaily.com/news-posts/sefi-report-finds-strong-performance-despite-challenges/ (last visited July 27, 2021) ($903
                billion market in 2014, commensurate with an 18 percent market share
                for small business borrowers at the time of the Karen Mills report).
                ---------------------------------------------------------------------------
                 Factoring is a similarly significant product type, estimated at
                around $100 billion in market size for 2019.\126\ In a factoring
                transaction, factors purchase, at a discount, a legally enforceable
                claim for payment (i.e., accounts receivables or invoices) for goods
                already supplied or services already rendered by a business for which
                payment has not yet been made; hence, a factor's risk related to
                repayment often lies with the business's customer and not the business
                itself. In most cases, specific companies, called factors, provide
                factoring products.
                ---------------------------------------------------------------------------
                 \126\ See Secured Fin. Found., 2019 Secured Finance: Market
                Sizing & Impact Study Extract Report, at 7 (June 2019), https://www.sfnet.com/docs/default-source/data-files-and-research-documents/sfnet_market_sizing___impact_study_extract_f.pdf?sfvrsn=72eb7333_2.
                This study estimated the total volume of the U.S. factoring market
                to be $101 billion. To the extent that factoring volumes differ from
                outstanding balances, the value of outstanding balances may be
                higher or lower than this estimate. Also, this estimate captures
                factoring for business borrowers of all sizes, not just small
                business borrowers. The Bureau assumes that most factoring is
                provided to small business customers.
                ---------------------------------------------------------------------------
                 The market for MCAs is developing rapidly and data are even more
                scarce than for other segments of the small business lending market.
                This limits the reliability of estimates as to the MCA market's size.
                Based on market research conducted by Bryant Park Capital (BPC) and
                reported on by deBanked.com, the Bureau estimates the 2019 market size
                to be around $20 billion.\127\ The MCA market is also of particular
                significance for smaller and traditionally underserved businesses that
                may not qualify for other types of credit.\128\ MCAs are typically
                structured to provide a lump sum payment up front (a cash advance) in
                exchange for a share of future revenue until the advance, plus an
                additional amount, is repaid. Unlike the majority of other small
                business financing products, MCAs typically purport to be for short
                durations.\129\ The Bureau understands that MCAs also tend to be
                relatively high-cost products.\130\ Two States, New York and
                California, will soon implement laws that will require providers of
                ``sales-based financing,'' such as MCAs, to provide disclosures
                (including estimated APR) similar to those required under the Truth in
                Lending Act (TILA),\131\ which generally only applies to consumer
                credit.\132\
                ---------------------------------------------------------------------------
                 \127\ Paul Sweeney, Gold Rush: Merchant Cash Advances are Still
                Hot, deBanked (Aug. 18, 2019), https://debanked.com/2019/08/gold-rush-merchant-cash-advances-are-still-hot/. BPC estimates appear to
                reference origination volumes rather than outstanding balances. See
                Nimayi Dixit, S&P Global Market Intelligence, Payment Fintechs Leave
                Their Mark On Small Business Lending (Aug. 28, 2018), https://www.spglobal.com/marketintelligence/en/news-insights/research/payment-fintechs-leave-their-mark-on-small-business-lending.
                Depending on credit multiplier effects, the value of annual
                origination volumes could be smaller or greater than outstanding
                balances. Without information on outstanding balances and for the
                purposes of calculating a market size for small business financing
                in 2019, the Bureau assumes in this paper a 1:1 ratio between annual
                origination volumes and outstanding balances for MCA products. See
                above for discussion of credit multiplier effects.
                 \128\ Cf. Barbara Lipman & Ann Marie Wiersch, Bd. of Governors
                of the Fed. Reserve Sys., Uncertain Terms: What Small Business
                Borrowers Find When Browsing Online Lender websites, at 3 (Dec.
                2019), https://www.federalreserve.gov/publications/files/what-small-business-borrowers-find-when-browsing-online-lender-websites.pdf
                (observing that online lenders, including providers of MCA products,
                position themselves as offering financing to borrowers underserved
                by traditional lenders).
                 \129\ See id. (stating that MCAs are generally repaid in three
                to 18 months).
                 \130\ Id. (stating that annual percentage rates on MCA products
                can exceed 80 percent or rise to triple digits). See also Fed. Trade
                Comm'n, `Strictly Business' Forum, Staff Perspective, at 5 (Feb.
                2020), https://www.ftc.gov/system/files/documents/report/staff-perspective-paper-ftcs-strictly-business-forum/strickly_business__forum_staff_perspective.pdf (observing
                stakeholder concern about the high-cost of MCAs that can reach
                triple digit annual percentage rates).
                 \131\ 15 U.S.C. 1601 et seq.
                 \132\ New York State law will require, as of January 1, 2022,
                that providers of ``sales-based financing'' provide disclosures to
                borrowers which would include calculations of an estimated annual
                percentage rate in accordance with the Bureau's Regulation Z, 12 CFR
                part 1026. See New York S.898, section 803(c) (signed Jan. 6, 2021)
                (amending S.5470-B), https://legislation.nysenate.gov/pdf/bills/2021/s898. Similarly, California's Department of Financial
                Protection and Innovation is in the process of issuing a rule to
                implement a California law requiring disclosures by commercial
                financing companies, including those providing sales-based
                financing. See 10 Cal. Code Reg. 2057(a)(22) (defining sales-based
                financing as ``a commercial financing transaction that is repaid by
                a recipient to the financer as a percentage of sales or income, in
                which the payment amount increases and decreases according to the
                volume of sales made or income received by the recipient'' and
                including ``a true[hyphen]up mechanism''); 10 Cal. Code Reg.
                2065(a)(3) and 3001 (requiring sales-based financing providers
                disclosure estimated annual percentage rate according to Regulation
                Z, 12 CFR part 1026). Under these laws, providers of commercial
                financing generally will be required to disclose: (1) The total
                amount financed, and the amount disbursed if it is different from
                the total amount financed; (2) the finance charge; (3) the APR (or
                the estimated APR for sales-based financing and factoring
                transactions), calculated in accordance with TILA and Regulation Z;
                (4) the total repayment amount; (5) the term (or the estimated term
                for sales-based financing) of the financing; (6) periodic payment
                amounts; (7) prepayment charges; (8) all other fees and charges not
                otherwise disclosed; and (9) any collateral requirements or security
                interests. See Cal. S.B. 1235 (Sept. 30, 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235; N.Y. S.B. S5470B (July
                23, 2020), https://legislation.nysenate.gov/pdf/bills/2019/S5470B.
                ---------------------------------------------------------------------------
                 Finally, trade credit is another significant market, which the
                Bureau estimates to total $51 billion in outstanding balances in 2019.
                Using a report by Fundbox/PYMNTS, the Bureau estimates the trade credit
                market size by adding the total accounts payable for businesses under
                $1 million in annual revenue.\133\ Considering the total value of
                accounts payable for businesses between $1 million and $5 million would
                increase the market size by $88 billion.\134\ Trade credit is an often
                informal, business-to-business transaction, usually between non-
                financial firms whereby suppliers allow their customers to acquire
                goods and/or
                [[Page 56369]]
                services without requiring immediate payment.
                ---------------------------------------------------------------------------
                 \133\ See Fundbox/PYMNTS.com, The Trade Credit Dilemma, at 11
                (May 2019), https://www.pymnts.com/wp-content/uploads/2019/05/Trade-Credit-Dilemma-Report.pdf (estimating accounts payable for
                businesses with revenue of under $250,000 at $6.7 billion and for
                businesses with revenue of $250,000 to $999,000 at $44.6 billion).
                 \134\ Id. The trade credit market is estimated to total $1.6
                trillion across all business sizes in the United States. In the
                overall $1.4 trillion market size total for all small business
                financing products, the Bureau has included only the trade credit
                market for businesses of up to $1 million in revenue for consistency
                with its White Paper.
                ---------------------------------------------------------------------------
                 The Bureau estimates that there were approximately 8,100 financial
                institutions extending small business financing in 2019, almost 80
                percent of which were depository institutions.
                 Based on FFIEC Call Report data for December 2019, the Bureau
                estimates that about 5,100 banks and savings associations are active in
                the small business lending market, out of a total of about 5,200 banks
                and savings associations.\135\ The Bureau assumes that a bank or
                savings association is ``active'' in the market if it reports a
                positive outstanding balance of small loans, lines of credit, and
                credit cards to businesses.
                ---------------------------------------------------------------------------
                 \135\ Calculated from FFIEC Call Report data accessed on June 8,
                2021.
                ---------------------------------------------------------------------------
                 Based on the NCUA Call Report data for December 2019, the Bureau
                estimates that about 1,200 out of 5,300 total credit unions were active
                in the small business lending market.\136\ The Bureau defines a credit
                union as ``active'' in the market if it reported a positive number of
                originations of loans, lines of credit, and credit cards to members for
                commercial purposes in 2019.
                ---------------------------------------------------------------------------
                 \136\ 2019 NCUA Call Report. (One hundred twelve credit unions
                were not federally insured as of December 2019 but are included here
                as depository institutions. Calculated from NCUA Call Report data
                accessed on June 8, 2021.)
                ---------------------------------------------------------------------------
                 The Bureau estimates that there are about 1,800 nondepository
                institutions active in the small business financing market,\137\
                accounting for around $550 billion in outstanding credit to small
                businesses.
                ---------------------------------------------------------------------------
                 \137\ There may also be cooperative or nonprofit lenders as well
                as equipment and vehicle finance dealers originating in their own
                name that are not captured by the Bureau in these figures. For
                example, by searching Uniform Commercial Code (UCC) filings, Manasa
                Gopal and Philipp Schnabl identified 19 cooperative lenders that
                originated at least 1,500 loans over the period from 2006 to 2016.
                Manasa Gopal & Philipp Schnabl, The Rise of Finance Companies and
                FinTech Lenders in Small Business Lending, N.Y.U. Stern Sch. of
                Bus., at 18 (May 13, 2020), https://ssrn.com/abstract=3600068.
                Additionally, these figures do not include trade creditors, which
                are non-financial companies that extend credit by allowing customers
                a period of time in which to pay and which are much greater in
                number since the practice is widespread across the economy.
                ---------------------------------------------------------------------------
                 The Bureau estimates that about 300 commercial finance companies
                are engaged in small business lending. By searching UCC filings, Manasa
                Gopal and Philipp Schnabl identified almost 300 commercial finance
                companies, including both independent and captive finance companies,
                with at least 1,500 small business loans between 2006 and 2016.\138\
                The Bureau also estimates there to be about 30 or more fintechs
                currently active in the small business lending market, not including
                MCA providers. Using the same methodology as for commercial finance
                companies, Gopal and Schnabl identified 19 fintech companies.\139\ The
                Bureau conservatively increases this estimate to 30 to account for
                rapid growth in the industry from 2016 to 2019.
                ---------------------------------------------------------------------------
                 \138\ Id. This figure combines 192 independent finance companies
                with 95 captive finance companies. Since this estimate captures only
                those commercial finance companies averaging at least 150 loans per
                year over the 2006 to 2016 period, it may exclude smaller volume
                lenders and should be considered conservative.
                 \139\ Id. Since this estimate captures only those fintechs
                averaging at least 150 loans per year over the 2006 to 2016 period,
                it may exclude smaller volume lenders and should be considered
                conservative. On the other hand, since 2019, the COVID-19 economic
                shock may have led to some fintechs scaling back or exiting the
                small business financing market. See, e.g., Ingrid Lunden, Amex
                Acquires SoftBank-backed Kabbage After Tough 2020 for the SMB
                Lender, TechCrunch (Aug. 17, 2020), https://techcrunch.com/2020/08/17/amex-acquires-softbank-backed-kabbage-after-tough-2020-for-the-smb-lender/ (noting that Kabbage temporarily shut down credit lines
                to small businesses during April 2020 and then spun off its small
                business loan portfolio when it was subsequently acquired by
                American Express).
                ---------------------------------------------------------------------------
                 The Bureau estimates that 340 nondepository CDFIs are engaged in
                small business lending. Both depository and nondepository institutions
                can be CDFIs. Depository CDFIs are counted in the numbers of banks,
                savings associations, and credit unions engaged in small business
                lending. According to the CDFI fund, 487 nondepository funds (i.e.,
                loan funds and venture capital funds) reported as CDFIs in 2019.\140\
                Of these, 340 institutions reported that business finance or commercial
                real estate finance were a primary or secondary line of business in
                2019.\141\
                ---------------------------------------------------------------------------
                 \140\ CDFI Fund, CDFI Annual Certification and Data Collection
                Report (ACR): A Snapshot for Fiscal Year 2019, at 8 (Oct. 2020),
                https://www.cdfifund.gov/sites/cdfi/files/2021-01/ACR-Public-Report-Final-10292020-508Compliant.pdf.
                 \141\ Id. at 15-16.
                ---------------------------------------------------------------------------
                 The Bureau estimates that about 270 nondepository mortgage lenders
                participated in the credit market for 5+ unit residential dwellings in
                2019 and that about 50 of these institutions extended 25 or more of
                these loans to small businesses. In its ``2019 Multifamily Lending
                Report,'' the Mortgage Bankers Association lists annual multifamily
                lending volumes by institution, including a distinction for loans of
                under $1 million in value at origination.\142\ Using the same small
                loan to business proxy as is used in the FFIEC Call Report, the Bureau
                estimates the number of nondepository mortgage lenders by counting the
                number of institutions that appear on this list that are not depository
                institutions and that extended at least 50 loans in 2019. The Bureau
                counts institutions extending at least 50 loans of any size in order to
                estimate institutions extending at least 25 small loans, based on the
                assumption that some 50 percent of these loans may have been for values
                greater than $1 million.
                ---------------------------------------------------------------------------
                 \142\ See Mortg. Bankers Ass'n, Annual Report on Multi-Family
                Lending--2019, at 9-66 (2020), https://www.mba.org/store/products/research/general/report/2019-annual-report-on-multifamily-lending.
                _____________________________________-
                 Based on data from UCC filings collected by deBanked.com, the
                Bureau estimates that about 100 institutions were active in the market
                for providing MCA products to small businesses in 2021.\143\
                ---------------------------------------------------------------------------
                 \143\ deBanked, UCC-1 and UCC-3 Filings by Merchant Cash Advance
                Companies & Alternative Business Lenders, https://debanked.com/merchant-cash-advance-resource/merchant-cash-advance-ucc/ (last
                visited July 11, 2021).
                ---------------------------------------------------------------------------
                 The Bureau estimates the number of factors to be between 700-900
                and assumes that most factors are providing financing to small
                business.\144\
                ---------------------------------------------------------------------------
                 \144\ See Secured Fin. Found., 2019 Secured Finance: Market
                Sizing & Impact Study Extract Report, at 15 (June 2019), https://www.sfnet.com/docs/default-source/data-files-and-research-documents/sfnet_market_sizing___impact_study_extract_f.pdf?sfvrsn=72eb7333_2
                (estimating the number of factors at between 700 and 900).
                ---------------------------------------------------------------------------
                 Finally, many government agencies and government-sponsored
                enterprises provide or facilitate a significant proportion of small
                business credit. As the flagship government lender, the Small Business
                Administration managed in 2019 a portfolio of over $140 billion in
                loans to small businesses, to which it added over $1 trillion in loans
                extended as part of the COVID-19 emergency lending programs. Across
                Federal, State, and municipal governments, the Bureau estimates that
                there are likely over 100 government small business lending
                programs.\145\ Additionally, the Farm Credit System reports that, as of
                December 2019, the Farm Credit System contains a total of 72 banks and
                associations.\146\ The Bureau assumes that all of these Farm Credit
                System institutions are engaged in lending to small farms.
                ---------------------------------------------------------------------------
                 \145\ In addition to several Federal small business lending
                programs, States and major municipalities also often have one or
                more programs of their own. One State and one municipal program in
                each State would already total 100 government lending programs
                across Federal, State, and municipal governments.
                 \146\ Fed. Farm Credit Banks Funding Corp., Farm Credit 2019
                Annual Information Statement of the Farm Credit System, at 7 (Feb.
                28, 2020), https://www.farmcreditfunding.com/ffcb_live/serve/public/pressre/finin/.pdf?assetId=395570. The Bureau notes that Farm Credit
                System banks do not report FFIEC Call Reports and are thus not
                counted in the number of banks and savings associations discussed
                above.
                ---------------------------------------------------------------------------
                [[Page 56370]]
                E. Challenges for Women-Owned and Minority-Owned Small Businesses
                 Within the context of small business financing, women-owned and
                minority-owned businesses often face relatively more challenges than
                their counterparts. Specifically, women-owned and minority-owned small
                businesses can be even more susceptible to the impact of economic
                shocks and have a harder time accessing credit to survive and thrive in
                better times.
                 Although women-owned and minority-owned businesses are found in
                many industry sectors, women-owned businesses are concentrated in the
                health care and social assistance sector, while minority-owned
                businesses are primarily concentrated in the service sector, the
                healthcare and social assistance sector, and the administrative
                support, waste management and remediation sectors.\147\ During economic
                downturns, such as the Great Recession and the financial crisis
                resulting from the COVID-19 pandemic, women-owned and minority-owned
                small businesses tend to fare worse than other small businesses. Women
                and minority business owners have been disproportionately hurt by the
                COVID-19 pandemic, with rates of business ownership dropping from
                February to April 2020 by 41 percent, 32 percent, and 26 percent for
                African American, Latinx, and Asian individuals, respectively, compared
                with 17 percent for white individuals.\148\ Female business ownership
                declined by 25 percent, compared with 20 percent for male
                ownership.\149\
                ---------------------------------------------------------------------------
                 \147\ White Paper at 12, 15.
                 \148\ Robert Fairlie, Stanford Inst. for Economic Policy
                Research, Working Paper No. 20-022, The Impact of COVID-19 on Small
                Business Owners: Evidence of Early Stage Losses from the April 2020
                Current Population Survey, at 5 (May 2020), https://siepr.stanford.edu/sites/default/files/publications/20-022.pdf. The
                authors define the rate of business ownership as the percentage of
                the labor force that owns and is actively employed in a business as
                their main job in the survey month. Id. at 3. As such, the decline
                in business ownership could reflect owners not only exiting the
                labor market but also switching to a different (wage and salary)
                job. In many cases, these exit or switching trends were temporary
                reactions to public health lockdowns and have since partially
                reversed.
                 \149\ Id. at 6, 8.
                ---------------------------------------------------------------------------
                 Women-owned and minority-owned small businesses often have smaller
                cash reserves on average, leaving them less able to weather downturns
                and credit crunches. For example, in February 2021, 39 percent of
                women-owned businesses had one month or less in cash reserves, compared
                with 29 percent of men-owned firms.\150\ And in around 90 percent of
                majority Black and Hispanic communities, most businesses have fewer
                than 14 days of cash buffer, while this is true of only 35 percent of
                majority white communities.\151\ As a result, many small businesses,
                especially those owned by women and minorities, may have had a greater
                need for financing just as small business lenders began to approve
                fewer loans in response to economic uncertainty. Loan approvals at
                smaller banks dropped from 50 percent pre-pandemic to 12 percent in
                April 2020 and have settled between 18 and 19 percent since June 2020;
                the trend is similar for large banks, credit unions, and fintechs.\152\
                ---------------------------------------------------------------------------
                 \150\ Eric Groves, Cash Strapped SMBs, While 75% Of PPP Is Still
                Available, Alignable (Feb. 9, 2021), https://www.alignable.com/forum/alignable-road-to-recovery-report-february-2021?utm_campaign=February&utm_medium=Press&utm_source=Press.
                 \151\ JPMorgan Chase Inst., Place Matters: Small Business
                Financial Health in Urban Communities, at 5 (Sept. 2019), https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/institute/pdf/institute-place-matters.pdf.
                 \152\ Biz2Credit, Small Business Lending Index, https://www.biz2credit.com/small-business-lending-index (last visited July
                27, 2021).
                ---------------------------------------------------------------------------
                 The PPP--part of the Federal government's response to the
                pandemic--helped to keep many small businesses afloat, but a number of
                factors prevented minority-owned small businesses from accessing PPP
                loans as easily as other firms. For example, established banking
                relationships between applicants and lending providers were often
                critical to approvals in early PPP underwriting; \153\ many minority-
                owned businesses did not have such relationships.\154\ Further, many
                minority-owned firms are sole proprietorships and independent
                contractors, both of which received delayed access to PPP loans.\155\
                Unprofitable non-employer firms were also initially barred from
                receiving loans.\156\ Although Black-owned firms are more likely to use
                fintech providers, these lenders were only belatedly allowed to
                disburse PPP funds.\157\ However, once fintech providers were allowed
                to disburse PPP loans, Black borrowers in particular benefited from
                this access, highlighting the ability of fintech firms to reach
                minority-owned business borrowers.\158\
                ---------------------------------------------------------------------------
                 \153\ Sara Savat, Who you know matters, even when applying for
                PPP loans, The Source, Newsroom, Wash. Univ. in St. Louis (Feb. 15,
                2021), https://source.wustl.edu/2021/02/who-you-know-matters-even-when-applying-for-ppp-loans/ (previous lender relationship increased
                likelihood of obtaining a PPP loan by 57 percent). See generally 86
                FR 7271, 7280 (Jan. 27, 2021) (noting that many banks restricted
                access to PPP loans to existing customers, which may run a risk of
                violating the ECOA and Regulation B).
                 \154\ Claire Kramer Mills, Fed. Reserve Bank of N.Y., Double
                Jeopardy: COVID-19's Concentrated Health and Wealth Effects in Black
                Communities, at 6 (Aug. 2020), https://www.newyorkfed.org/medialibrary/media/smallbusiness/DoubleJeopardy_COVID19andBlackOwnedBusinesses (arguing that a lack
                of strong banking relationships among Black-owned firms may have led
                to relatively lower rates of access to PPP loans for such firms);
                Fed. Reserve Banks, Small Business Credit Survey: 2021 Report on
                Firms Owned by People of Color, at ii (Apr. 15, 2021), https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2021/sbcs-report-on-firms-owned-by-people-of-color (Small Business Credit
                Survey of Firms Owned by People of Color) (finding that ``firms
                owned by people of color tend to have weaker banking
                relationships'').
                 \155\ Greg Iacurci, Coronavirus loan program delayed for
                independent contractors and self-employed workers, CNBC (Apr. 3,
                2020), https://www.cnbc.com/2020/04/03/delays-in-sba-loans-for-independent-contractors-self-employed-workers.html.
                 \156\ Stacy Cowley, `It Was a Joke': Some Small Businesses Got
                $1 Relief Loans, N.Y. Times (Jan. 11, 2021), https://www.nytimes.com/2021/01/11/business/small-businesses-ppp-covid.html
                (observing that sole proprietorships were initially eligible for PPP
                loans only if they were profitable); see also Stacy Cowley, Minority
                Entrepreneurs Struggled to Get Small-Business Relief Loans, N.Y.
                Times (Apr. 4, 2021), https://www.nytimes.com/2021/04/04/business/ppp-loans-minority-businesses.html (noting that sole proprietorships
                and independent contractor business structures are particularly
                prevalent among minority-owned businesses, which led to minority-
                owned businesses being disproportionately restricted from accessing
                PPP loans during initial roll-out of the program).
                 \157\ Claire Kramer Mills, Fed. Reserve Bank of N.Y., Double
                Jeopardy: COVID-19's Concentrated Health and Wealth Effects in Black
                Communities, at 5-7 (Aug. 2020), https://www.newyorkfed.org/medialibrary/media/smallbusiness/DoubleJeopardy_COVID19andBlackOwnedBusinesses.
                 \158\ Jessica Battisto et al., Liberty Street Economics, Fed.
                Reserve Bank of N.Y., Who Benefited from PPP Loans by Fintech
                Lenders? (May 27, 2021), https://libertystreeteconomics.newyorkfed.org/2021/05/who-benefited-from-ppp-loans-by-fintech-lenders.html.
                ---------------------------------------------------------------------------
                 Finally, applicants whose owners belong to protected categories may
                have received different credit outcomes when applying for PPP loans,
                although limitations in demographic information for PPP loans have
                hindered fair lending analyses.\159\
                ---------------------------------------------------------------------------
                 \159\ Rocio Sanchez-Moyano, Fed. Reserve Bank of S.F., Paycheck
                Protection Program Lending in the Twelfth Federal Reserve District
                (Mar. 3, 2021), https://www.frbsf.org/community-development/publications/community-development-research-briefs/2021/february/ppp-lending-12th-district/ (citing matched-pair audit studies that
                found discouragement and provision of incomplete information for
                minority business owners seeking PPP loans); 86 FR 7271, 7280 (Jan.
                27, 2021) (noting that facially neutral PPP policies such as
                limiting loans to businesses with pre-existing relationships may run
                a risk of violating the ECOA and Regulation B due to a
                disproportionate impact on a prohibited basis).
                ---------------------------------------------------------------------------
                 Given the severity of the COVID-19 pandemic for small businesses
                generally and its potentially disproportionate impact on women-owned
                and minority-owned small businesses, it is essential to better
                understand the small business financing landscape to maintain support
                for this key part of the U.S. economy both during and after the
                pandemic.
                [[Page 56371]]
                F. The Purposes and Impact of Section 1071
                 The Dodd-Frank Act sets forth the Bureau's purposes and mission. It
                provides that a key component of the Bureau's fair lending work is to
                ensure fair, equitable, and nondiscriminatory access to credit for both
                individuals and their communities.\160\ And in passing section 1071,
                Congress articulated two purposes for requiring the Bureau to collect
                data on small business credit applications and loans--to ``facilitate
                enforcement of fair lending laws'' and to ``enable communities,
                governmental entities, and creditors to identify business and community
                development needs and opportunities of women-owned, minority-owned, and
                small businesses.'' \161\ Although the Dodd-Frank Act does not further
                explain or clarify these dual statutory purposes, other Federal laws
                shed light on both purposes. That is, a set of existing Federal laws
                form the backdrop for the use of 1071 data to facilitate the
                enforcement of fair lending laws, and to identify business and
                community development needs of small businesses across the United
                States.
                ---------------------------------------------------------------------------
                 \160\ See 12 U.S.C. 5493(c)(2)(A) (directing the Office of Fair
                Lending and Equal Opportunity to provide ``oversight and enforcement
                of Federal laws intended to ensure the fair, equitable, and
                nondiscriminatory access to credit for both individuals and
                communities that are enforced by the Bureau,'' including ECOA and
                the Home Mortgage Disclosure Act).
                 \161\ ECOA section 704B(a).
                ---------------------------------------------------------------------------
                1. Facilitating Enforcement of Fair Lending Laws
                 Congress intended for section 1071 to ``facilitate enforcement of
                fair lending laws,'' \162\ which include ECOA, the Home Mortgage
                Disclosure Act of 1975 (HMDA),\163\ the Fair Housing Act (FHAct),\164\
                and other Federal and State anti-discrimination laws.
                ---------------------------------------------------------------------------
                 \162\ Id.
                 \163\ 12 U.S.C. 2801 et seq.
                 \164\ 42 U.S.C. 3601 through 3619.
                ---------------------------------------------------------------------------
                i. Equal Credit Opportunity Act (ECOA)
                 ECOA, which is implemented by Regulation B, applies to all
                creditors. Congress first enacted ECOA in 1974 to require financial
                institutions and other firms engaged in the extension of credit to
                ``make credit equally available to all creditworthy customers without
                regard to sex or marital status.'' \165\ Two years later, Congress
                expanded ECOA's scope to include age, race, color, religion, national
                origin, receipt of public assistance benefits, and exercise of rights
                under the Federal Consumer Credit Protection Act.\166\
                ---------------------------------------------------------------------------
                 \165\ Public Law 93-495, tit. V, section 502, 88 Stat. 1500,
                1521 (1974).
                 \166\ See Equal Credit Opportunity Act Amendments of 1976,
                Public Law 94-239, section 701(a), 90 Stat. 251, 251 (1976).
                ---------------------------------------------------------------------------
                 ECOA makes it unlawful for any creditor to discriminate against any
                applicant with respect to any aspect of a credit transaction (1) on the
                basis of race, color, religion, national origin, sex (including sexual
                orientation and gender identity),\167\ marital status, or age (provided
                the applicant has the capacity to contract); (2) because all or part of
                the applicant's income derives from any public assistance program; or
                (3) because the applicant has in good faith exercised any right under
                the Consumer Credit Protection Act.\168\ In keeping with the broad
                reach of the statute's prohibition, Regulation B covers creditor
                activities before, during, and after the extension of credit.\169\
                Regulation B also bars creditors from making any oral or written
                statement, in advertising or otherwise, to applicants or prospective
                applicants that would discourage, on a prohibited basis, a reasonable
                person from making or pursuing an application.\170\ Regulation B also
                generally prohibits creditors from making inquiries about whether an
                applicant is a member of certain protected categories.\171\
                ---------------------------------------------------------------------------
                 \167\ In March 2021, the Bureau issued an interpretive rule
                clarifying that the scope of ECOA's and Regulation B's prohibition
                on credit discrimination on the basis of sex encompasses
                discrimination based on sexual orientation and gender identity,
                including discrimination based on actual or perceived nonconformity
                with sex-based or gender-based stereotypes and discrimination based
                on an applicant's associations. 86 FR 14363 (Mar. 16, 2021). See
                also Press Release, Bureau of Consumer Fin. Prot., CFPB Clarifies
                That Discrimination by Lenders on the Basis of Sexual Orientation
                and Gender Identity Is Illegal (Mar. 9, 2021), https://www.consumerfinance.gov/about-us/newsroom/cfpb-clarifies-discrimination-by-lenders-on-basis-of-sexual-orientation-and-gender-identity-is-illegal/. The interpretive rule states that an example
                of discriminatory sex-based or gender-based stereotyping occurs if a
                small business lender discourages a small business owner appearing
                at its office from applying for a business loan and tells the
                prospective applicant to go home and change because, in the view of
                the creditor, the small business customer's attire does not accord
                with the customer's gender. 86 FR at 14365.
                 \168\ 15 U.S.C. 1601 et seq.
                 \169\ See Regulation B Sec. 1002.4(a) and (b).
                 \170\ Id. Sec. 1002.4(b).
                 \171\ Id. Sec. 1002.5(b) through (d).
                ---------------------------------------------------------------------------
                 The Bureau has recognized the following methods of proving lending
                discrimination under ECOA and Regulation B: Overt evidence of
                discrimination, evidence of disparate treatment, and evidence of
                disparate impact.\172\ Overt evidence of discrimination exists when a
                creditor blatantly discriminates on a prohibited basis.\173\ Disparate
                treatment occurs when a creditor treats an applicant differently based
                on a prohibited basis such as race or national origin.\174\ Disparate
                impact occurs when a creditor employs facially neutral policies or
                practices that have an adverse effect or impact on a member of a
                protected class unless the facially neutral policies or practices meet
                a legitimate business need that cannot reasonably be achieved by means
                that are less disparate in their impact.\175\
                ---------------------------------------------------------------------------
                 \172\ See Bureau of Consumer Fin. Prot., CFPB Bulletin 2012-04
                (Fair Lending), Lending Discrimination (Apr. 18, 2012), https://files.consumerfinance.gov/f/201404_cfpb_bulletin_lending_discrimination.pdf (Interagency Policy
                Statement on Discrimination in Lending) (concurring with Interagency
                Task Force on Fair Lending, Policy Statement on Discrimination in
                Lending, 59 FR 18266 (Apr. 15, 1994)).
                 \173\ See Interagency Policy Statement on Discrimination in
                Lending at 18268.
                 \174\ See Regulation B comment 4(a)-1 (stating that
                ``[d]isparate treatment on a prohibited basis is illegal whether or
                not it results from a conscious intent to discriminate''); Bureau of
                Consumer Fin. Prot., Equal Credit Opportunity Act (ECOA) Examination
                Procedures, at 1 (Oct. 30, 2015), https://files.consumerfinance.gov/f/documents/201510_cfpb_ecoa-narrative-and-procedures.pdf (ECOA
                Examination Procedures); see also Interagency Policy Statement on
                Discrimination in Lending at 18268.
                 \175\ See Regulation B comment 6(a)-2; ECOA Examination
                Procedures at 1; see also Interagency Policy Statement on
                Discrimination in Lending at 18269.
                ---------------------------------------------------------------------------
                 Multiple Federal regulators can enforce violations of ECOA and
                Regulation B and apply various penalties. Enforcement and penalties for
                those who violate ECOA and Regulation B are set forth in 15 U.S.C.
                1691e(b) and 12 CFR 1002.16. Violations may also result in civil money
                penalties, which are governed by 12 U.S.C. 5565(c)(3). The Bureau and
                multiple other Federal regulators have the statutory authority to bring
                actions to enforce the requirements of ECOA.\176\ These regulators have
                the authority to engage in research, conduct investigations, file
                administrative complaints, hold hearings, and adjudicate claims through
                the administrative enforcement process regarding ECOA. Regulators also
                have independent litigation authority and can file cases in Federal
                court alleging violations of fair lending laws under their
                jurisdiction. Like other Federal regulators who are assigned
                enforcement authority under section 704 of ECOA, the Bureau is required
                to refer matters to the Department of Justice (DOJ) when it has reason
                to
                [[Page 56372]]
                believe that a creditor has engaged in a pattern or practice of lending
                discrimination.\177\ Private parties may also bring claims under the
                civil enforcement provisions of ECOA, including individual and class
                action claims against creditors for actual and punitive damages for any
                violation of ECOA.\178\
                ---------------------------------------------------------------------------
                 \176\ These regulators include the OCC, the Board, the FDIC, the
                NCUA, the Surface Transportation Board, the Civil Aeronautics Board,
                the Secretary of Agriculture, the Farm Credit Administration, the
                Securities and Exchange Commission, the SBA, the Secretary of
                Transportation, the Bureau, and the FTC. See 15 U.S.C. 1691c;
                Regulation B Sec. 1002.16(a).
                 \177\ See 15 U.S.C. 1691e(h).
                 \178\ 15 U.S.C. 1691e(a); Regulation B Sec. 1002.16(b)(1).
                ---------------------------------------------------------------------------
                ii. Home Mortgage Disclosure Act (HMDA)
                 HMDA, implemented by the Bureau's Regulation C (12 CFR part 1003),
                requires lenders who meet certain coverage tests to report detailed
                information to their Federal supervisory agencies about mortgage
                applications and loans at the transaction level. These reported data
                are a valuable resource for regulators, researchers, economists,
                industry, and advocates assessing housing needs, public investment, and
                possible discrimination as well as studying and analyzing trends in the
                mortgage market for a variety of purposes, including general market and
                economic monitoring. There may be some overlap between what is required
                to be reported under HMDA and what is covered by section 1071 for
                certain mortgage applications and loans for women-owned, minority-
                owned, and small businesses.
                 A violation of HMDA and Regulation C is subject to administrative
                sanctions, including civil money penalties. Compliance can be enforced
                by the Bureau, the U.S. Department of Housing and Urban Development
                (HUD), the FDIC, the Board, the National Credit Union Administration
                (NCUA), or the Office of the Comptroller of Currency (OCC). These
                regulators have the statutory authority to bring actions to enforce the
                requirements of HMDA and to engage in research, conduct investigations,
                file administrative complaints, hold hearings, and adjudicate claims
                through the administrative enforcement process regarding HMDA.
                iii. Fair Housing Act (FHAct)
                 Title VIII of the Civil Rights Act of 1968, as amended (Fair
                Housing Act, or FHAct), prohibits discrimination in the sale, rental,
                or financing of dwellings and in other housing-related activities
                because of race, color, religion, sex (including sexual orientation and
                gender identity),\179\ disability,\180\ familial status, or national
                origin.\181\ The Fair Housing Act \182\ and its implementing
                regulations specifically prohibit discrimination in the making of
                loans,\183\ the purchasing of loans,\184\ and in setting the terms and
                conditions for making loans available,\185\ without reference to
                consumers, legal entities, or the purpose of the loan being made,
                although these prohibitions relate exclusively to dwellings.\186\ As
                with ECOA, the courts have recognized three methods of proof of lending
                discrimination under the FHAct: (1) Overt evidence of discrimination;
                (2) evidence of disparate treatment; and (3) evidence of disparate
                impact.\187\
                ---------------------------------------------------------------------------
                 \179\ See U.S. Dep't of Hous. & Urban Dev., Implementation of
                Executive Order 13988 on the Enforcement of the Fair Housing Act
                (Feb. 11, 2021), https://www.hud.gov/sites/dfiles/PA/documents/HUD_Memo_EO13988.pdf.
                 \180\ The Bureau uses the term ``disability'' to refer to what
                the FHA and its implementing regulations term a ``handicap'' because
                that is the preferred term. See, e.g., Hunt v. Aimco Props., L.P.,
                814 F.3d 1213, 1218 n.1 (11th Cir. 2016) (noting the term disability
                is generally preferred over handicap).
                 \181\ 42 U.S.C. 3601 through 3619, 3631.
                 \182\ 42 U.S.C. 3605(b) (noting that for purposes of 3605(a), a
                ``residential real estate-related transaction'' includes the making
                or purchasing of loans or providing other financial assistance for
                purchasing, constructing, improving, repairing, or maintaining a
                dwelling, or transactions secured by residential real estate).
                 \183\ 24 CFR 100.120.
                 \184\ 24 CFR 100.125.
                 \185\ 24 CFR 100.130.
                 \186\ A ``dwelling,'' as defined by the Fair Housing Act, is any
                building, structure, or portion thereof which is occupied as, or
                designed or intended for occupancy as, a residence by one or more
                families, and any vacant land which is offered for sale or lease for
                the construction or location thereon of any such building,
                structure, or portion thereof. 42 U.S.C. 3602(b).
                 \187\ See Interagency Policy Statement on Discrimination in
                Lending at 18268. See also 78 FR 11459, 11459 (Feb. 15, 2013)
                (stating that HUD, which is statutorily charged with the authority
                and responsibility for interpreting and enforcing the Fair Housing
                Act and with the power to make rules implementing the Act, ``has
                long interpreted the Act to prohibit practices with an unjustified
                discriminatory effect, regardless of whether there was an intent to
                discriminate'').
                ---------------------------------------------------------------------------
                 The DOJ and HUD are jointly responsible for enforcing the Fair
                Housing Act. The Fair Housing Act authorizes the HUD Secretary to issue
                a Charge of Discrimination on behalf of aggrieved persons following an
                investigation and a determination that reasonable cause exists to
                believe that a discriminatory housing practice has occurred.\188\ The
                DOJ may bring lawsuits where there is reason to believe that a person
                or entity is engaged in a ``pattern or practice'' of discrimination or
                where a denial of rights to a group of persons raises an issue of
                general public importance,\189\ or where a housing discrimination
                complaint has been investigated by HUD, HUD has issued a Charge of
                Discrimination, and one of the parties to the case has ``elected'' to
                go to Federal court.\190\ In FHAct cases, HUD and the DOJ can obtain
                injunctive relief, including affirmative requirements for training and
                policy changes, monetary damages and, in pattern or practice cases,
                civil penalties.\191\
                ---------------------------------------------------------------------------
                 \188\ 42 U.S.C. 3610(g)(1) and (2).
                 \189\ See 42 U.S.C. 3614(a).
                 \190\ 42 U.S.C. 3612(o)(1).
                 \191\ See 42 U.S.C. 3612, 3614.
                ---------------------------------------------------------------------------
                 Upon receipt of a complaint alleging facts that may constitute a
                violation of the FHAct or upon receipt of information from a consumer
                compliance examination or other information suggesting a violation of
                the FHAct, Federal executive agencies forward such facts or information
                to HUD and, where such facts or information indicate a possible pattern
                or practice of discrimination in violation of the FHAct, to the
                DOJ.\192\ Private parties may also bring claims under the civil
                enforcement provisions of FHAct.\193\
                ---------------------------------------------------------------------------
                 \192\ 59 FR 2939, 2939 (Jan. 17, 1994).
                 \193\ See 42 U.S.C. 3613.
                ---------------------------------------------------------------------------
                iv. Other Fair Lending Laws
                 Several other Federal statutes seek to promote fair lending. The
                CRA seeks affirmatively to encourage institutions to help to meet the
                credit needs of the entire community served by each institution covered
                by the statute, and CRA ratings take into account lending
                discrimination by those institutions.\194\ The Americans with
                Disabilities Act of 1990 prohibits discrimination against persons with
                disabilities in the provision of goods and services, including credit
                services.\195\ Sections 1981\196\ and 1982 \197\ of the Federal Civil
                Rights Acts are broad anti-discrimination laws that have been applied
                to many aspects of credit transactions.\198\
                ---------------------------------------------------------------------------
                 \194\ See 12 U.S.C. 2901 et seq.
                 \195\ See 42 U.S.C. 12101 et seq.
                 \196\ 42 U.S.C. 1981(a).
                 \197\ 42 U.S.C. 1982.
                 \198\ See, e.g., Jackson v. Novastar Mortg., Inc., 645 F. Supp.
                2d 636 (W.D. Tenn. 2007) (motion to dismiss claim that defendants
                violated sections 1981 and 1982 by racial targeting and by offering
                credit on less favorable terms on the basis of race denied); Johnson
                v. Equicredit Corp., No. 01-CIV-5197, 2002 U.S. Dist. LEXIS 4817
                (N.D. Ill. Mar. 22, 2002) (predatory lending/reverse redlining case
                brought pursuant to section 1981); Hargraves v. Cap. City Mortg.
                Corp., 140 F. Supp. 2d 7 (D.D.C. 2000) (predatory lending/reverse
                redlining case brought under both sections 1981 and 1982),
                reconsideration granted in part, denied in part, 147 F. Supp. 2d 1
                (D.D.C. 2001) (section 1981 claim dismissed for lack of standing,
                but not section 1982 claim); Doane v. Nat'l Westminster Bank USA,
                938 F. Supp. 149 (E.D.N.Y. 1996) (mortgage redlining case brought
                under sections 1981 and 1982); Fairman v. Schaumberg Toyota, Inc.,
                No. 94-CIV-5745, 1996 U.S. Dist. LEXIS 9669 (N.D. Ill. July 10,
                1996) (section 1981 suit over allegedly predatory credit scheme
                targeting African Americans and Hispanics); Steptoe v. Sav. of Am.,
                800 F. Supp. 1542 (N.D. Ohio 1992) (mortgage redlining case brought
                under sections 1981 and 1982 and the Fair Housing Act); Evans v.
                First Fed. Sav. Bank of Ind., 669 F. Supp. 915 (N.D. Ind. 1987)
                (section 1982 can be used in mortgage lending discrimination case);
                Assocs. Home Equity Servs. v. Troup, 778 A.2d 529 (N.J. 2001)
                (predatory lending/reverse redlining case brought pursuant to
                section 1981).
                ---------------------------------------------------------------------------
                [[Page 56373]]
                 Many States and municipalities have also enacted fair lending, fair
                housing, and/or civil rights laws (often modeled on their Federal
                counterparts) that seek to broadly prohibit credit discrimination,
                including protections for business credit.\199\ Some of these laws
                expressly enumerate protections beyond those expressly enumerated in
                the Federal statutes.\200\
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                 \199\ See, e.g., Cal. Civ. Code 51 and 51.5 and Cal. Gov't Code
                12955; Colo. Rev. Stat. 24-34-501(3) and 5-3-210; Conn. Gen. Stat.
                46a-81e, 46a-81f, and 46a-98; Del. Code Ann. tit. 6, 4604; D.C. Code
                2-1402.21; Haw. Rev. Stat. 515-3 and 515-5; 775 Ill. Comp. Stat. 5/
                1-102, 5/1-103, 5/4-102, 5/3-102, and 5/4-103; Iowa Code 216.8A and
                216.10; Me. Rev. Stat. tit. 5, 4553(5-C) and (9-C), 4595 to 4598,
                and 4581 to 4583; Md. Code Ann. State Gov't 20-705, 20-707, and 20-
                1103; Mass. Gen. Laws ch. 151B, 4(3B), (14); Minn. Stat. 363A.03
                (Subd. 44), 363A.09(3), 363A.16 (Subds. 1 and 3), and 363A.17; N.H.
                Rev. Stat. Ann. 354-A:10; N.J. Stat. Ann. 10:5-12(i); N.M. Stat.
                Ann. 28-1-7; N.Y. Civ. Rights Law 40-c(2); N.Y. Exec. Law 296-A; Or.
                Rev. Stat. 174.100(7) and 659A.421; R.I. Gen. Laws 34-37-4(a)
                through (c), 34-37-4.3, and 34-37-5.4; Va. Code Ann. 6.2-501(B)(1),
                15.2-853, and 15.2-965; Vt. Stat. Ann. tit. 8, 10403 and tit. 9,
                2362, 2410, and 4503(a)(6); Wash. Rev. Code 49.60.030, 49.60.040
                (14), (26), and (27), 49.60.175, and 49.60.222; Wis. Stat. 106.50
                and 224.77. There are also a number of municipalities that have
                enacted credit discrimination ordinances. See, e.g., Austin City
                Code 5-1-1 et seq.; N.Y.C. Admin. Code 8-101 and 8-107 et seq.; S.F.
                Police Code 3304(a) et seq.
                 \200\ See, e.g., Mass. Gen. Laws ch. 151B, 4(3B) (prohibiting
                discrimination based on genetic information); N.J. Stat. Ann. 10:5-1
                to 10:5-42 (same); D.C. Code 2-1401.02 and 2-1402.21 (extending
                protections from discrimination to domestic violence victims); Wis.
                Stat. 224.77 (same); N.Y. Exec. Law 296-a (prohibiting
                discrimination on the basis of military status) (credit
                transactions); N.Y. Exec. Law 296(5)(a) through (c) (same) (housing
                transactions); Wash. Rev. Code 49.60.176 (protecting veterans and
                honorably discharged service members); 775 Ill. Comp. Stat. 5/3-101
                and 5/4-101 (prohibiting discrimination based on an applicant's
                unfavorable discharge from the military); 815 Ill. Comp. Stat. 140/
                1a (same). Several other State statutes also prohibit discrimination
                based on the geographic area of residence. See, e.g., 815 Ill. Comp.
                Stat. 120/1 to 120/6; Iowa Code 535A.1 to 535A.9; Md. Code Ann.,
                Com. Law 12-603 (West); Mich. Comp. Laws 445.1601 to 445.1614; Minn.
                Stat. 363A.09(3)(c); N.Y. Banking Law 9-f; Wash. Rev. Code 30.04.500
                to 30.04.515.
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                v. Facilitating Enforcement
                 In order for the 1071 rule to facilitate enforcement of the fair
                lending laws discussed above, the Bureau believes that it must collect
                and make available sufficient data to help the public and regulators
                identify potentially discriminatory lending patterns that could
                constitute violations of fair lending laws. Financial regulators and
                enforcement agencies need a consistent and comprehensive dataset for
                all financial institutions subject to 1071 reporting in order to also
                use 1071 data in their initial prioritization, peer analysis, redlining
                reviews, and screening processes to select institutions for monitoring,
                examination, or investigation. Section 1071 data would facilitate more
                efficient fair lending examinations. For example, regulators could use
                pricing and other data to prioritize fair lending examinations--without
                such data, some financial institutions would face unnecessary
                examination burden while others whose practices warrant closer review
                would not receive sufficient scrutiny.
                 Moreover, as discussed in part V below, the Bureau believes
                specific aspects of its proposal offer particular benefits for the
                enforcement of fair lending laws. For example, the Bureau's proposal
                regarding transactional and institutional coverage would allow
                community groups and government agencies to include most of the small
                business financing market in fair lending analyses. The proposed
                inclusion of pricing data fields such as interest rate and fees would
                provide information on disparities in pricing outcomes, and data fields
                such as gross annual revenue, denial reasons, and time in business
                would allow for a more refined analysis and understanding of
                disparities in both underwriting and pricing outcomes. While 1071 data
                alone generally will not offer proof of compliance with fair lending
                laws, regulators, community groups, researchers, and financial
                institutions will be able to use 1071 data to identify potential
                disparities in small business lending based on disaggregated categories
                of race and ethnicity. Overall, the data collection under 1071 rule
                will allow, for the first time, for comprehensive and market-wide fair
                lending risk analysis.
                2. Identifying Business and Community Development Needs
                 The second purpose of section 1071 is to enable communities,
                governmental entities, and creditors to identify business and community
                development needs and opportunities of women-owned, minority-owned, and
                small businesses.\201\
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                 \201\ ECOA section 704B(a).
                ---------------------------------------------------------------------------
                 Section 1071 does not expressly define the phrase ``business and
                community development needs.'' However, other Federal statutes and
                regulations, including the CRA and the Riegle Community Development and
                Regulatory Improvement Act of 1994,\202\ reference or define the
                phrases ``business development'' and ``community development'' and can
                help explain what it means to enable communities, governmental
                entities, and creditors to ``identify business and community
                development needs and opportunities.''
                ---------------------------------------------------------------------------
                 \202\ Public Law 103-325, tit. I, section 102, 108 Stat. 2160,
                2163 (1994) (12 U.S.C. 4701 through 4719).
                ---------------------------------------------------------------------------
                 The Bureau believes, based on its consideration of these other
                Federal statutes and regulations, that the proposed 1071 rule would
                provide more data to the public--including communities, governmental
                entities, and creditors--for analyzing whether financial institutions
                are serving the credit needs of their small business customers. In
                addition, with 1071 data, the public would be better able to understand
                access to and sources of credit in particular communities or
                industries, such as a higher concentration of risky loan products in a
                given community, and to identify the emergence of new loan products,
                participants, or underwriting practices. The data would not only assist
                in identifying potentially discriminatory practices, but would also
                contribute to a better understanding of the experiences that members
                within certain communities may share in the small business financing
                market.
                i. Community Reinvestment Act (CRA)
                 The CRA, a part of the Housing and Community Development Act, was
                passed by Congress in 1977, which found that ``regulated financial
                institutions have continuing and affirmative obligation to help meet
                the credit needs of the local communities in which they are
                chartered.'' \203\ As such, one of the statutory purposes of the CRA is
                to encourage such institutions to help meet the credit needs of the
                local communities in which they are chartered consistent with the safe
                and sound operation of such institutions.\204\
                ---------------------------------------------------------------------------
                 \203\ 12 U.S.C. 2901(a)(3).
                 \204\ 12 U.S.C. 2901(b).
                ---------------------------------------------------------------------------
                 The legislative history for the CRA suggests that the concerns
                motivating the Act's passage included certain practices by banks
                including redlining (i.e., declining to extend credit in neighborhoods
                populated by ethnic or racial minorities) \205\ and community
                [[Page 56374]]
                disinvestment (i.e., taking deposits from lower-income areas, often
                populated by ethnic or racial minorities, without extending credit or
                banking services to residents of those areas).\206\ The CRA requires
                the ``appropriate Federal financial supervisory agency'' of a given
                depository institution to ``prepare a written evaluation of the
                institution's record of meeting the credit needs of its entire
                community, including low- and moderate-income neighborhoods.'' \207\
                These requirements were first implemented by a 1978 rulemaking,\208\
                and were amended in 1995 \209\ and 2005.\210\ These rulemakings,
                adopted by each of the agencies responsible for ensuring compliance
                with the CRA, established specific performance measures,\211\ requiring
                banks to disclose information about small business, small farm and
                community development lending.\212\
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                 \205\ See H.R. Rep. No. 561, 94th Cong., 1st Sess. 4 (1975)
                (``[The practice of redlining] increasingly has served to polarize
                elements of our society . . . . As polarization intensifies,
                neighborhood decline accelerates.''), reprinted in 1975 U.S.C.C.A.N.
                2303, 2305-06.
                 \206\ Robert C. Art, Social Responsibility in Bank Credit
                Decisions: The Community Reinvestment Act One Decade Later, 18 Pac.
                L.J. 1071, 1076-77 & n.23 (1987) (citing 123 Cong. Rec. S8958 (daily
                ed. June 6, 1977), which stated that Sen. Proxmire, the
                congressional sponsor of the Act described redlining as ``the fact
                that banks and savings and loans will take their deposits from a
                community and instead of reinvesting them in that community, they
                will invest them elsewhere, and they will actually or figuratively
                draw a red line on a map around the areas of their city,'' further
                noting that those lines are drawn ``sometimes in the inner city,
                sometimes in the older neighborhoods, sometimes ethnic and sometimes
                black . . . .'').
                 \207\ 12 U.S.C. 2906(a)(1).
                 \208\ 43 FR 47144 (Oct. 12, 1978).
                 \209\ 60 FR 22156 (May 4, 1995).
                 \210\ 70 FR 44256 (Aug. 2, 2005).
                 \211\ 12 CFR 228.11.
                 \212\ See, e.g., 12 CFR 25.42, 228.11.
                ---------------------------------------------------------------------------
                 The agencies tasked with ensuring compliance--including the
                OCC,\213\ the Board,\214\ and the FDIC \215\--evaluate each insured
                depository institution's record in helping meet the credit needs of its
                entire community.\216\ Overall, the CRA and its regulations generate
                data that help agencies and the public at large identify instances of
                redlining, community disinvestment, and geographical areas that are
                ``banking deserts.'' \217\ The CRA regulations of the Board and the
                FDIC currently have the same definitions of ``community development''
                that include banking and credit services that support the following:
                (1) Affordable housing for low- and moderate-income (LMI) individuals;
                \218\ (2) community services for LMI individuals; \219\ (3) activities
                that promote economic development by financing small business and small
                farms; \220\ and (4) activities that revitalize or stabilize LMI
                geographies, disaster areas, and certain distressed or underserved
                middle-income areas based on other factors.\221\
                ---------------------------------------------------------------------------
                 \213\ 12 CFR part 25.
                 \214\ 12 CFR part 228.
                 \215\ 12 CFR parts 345, 195.
                 \216\ Most specifically, that record is taken into account in
                considering an institution's application for deposit facilities,
                including mergers and acquisitions with other financial institutions
                and the opening of bank branches.
                 \217\ OCC regulations define ``CRA desert'' as an area that has
                ``significant unmet community development or retail lending needs''
                and where: (1) Few banks have branches or non-branch deposit-taking
                facilities, (2) There is ``less retail or community development
                lending than would be expected based on demographic or other
                factors,'' or (3) The area ``lacks community development
                organizations or infrastructure.'' 12 CFR 25.03.
                 \218\ 12 CFR 228.12(g)(1), 345.12(g)(1).
                 \219\ 12 CFR 228.12(g)(2), 345.12(g)(2).
                 \220\ 12 CFR 228.12(g)(3), 345.12(g)(3).
                 \221\ 12 CFR 228.12(g)(4), 345.12(g)(4).
                ---------------------------------------------------------------------------
                 In September 2020, the Board announced an advance notice of
                proposed rulemaking to update its CRA regulations, specifically to more
                effectively meet the needs of LMI communities and address inequities in
                credit access.'' \222\ As part of this exercise, the Board requested
                feedback on potential revisions to its data collection and reporting
                requirements.\223\ The Board suggested that more granular reporting of
                community development loan and investment data may be needed to aid
                community development and improve compliance with the CRA, noting that
                the lack of such data ``means that there is no aggregate community
                development data at a local level available to create the local
                benchmarks for the community development financing metric.'' \224\ As
                such, the publication of 1071 data would also be a useful resource for
                supporting community development efforts under the CRA.
                ---------------------------------------------------------------------------
                 \222\ 85 FR 66410 (Oct. 19, 2020).
                 \223\ Id. at 66459-63.
                 \224\ Id. at 66462.
                ---------------------------------------------------------------------------
                 In June 2020, the OCC promulgated a final rule that adopted a
                broader definition of ``community development'' than the one used by
                the Board and the FDIC.\225\ However, in July 2021, the OCC announced
                that it was reconsidering the June 2020 revisions to its CRA
                regulations,\226\ and that it may join the Board's consideration of
                proposed revisions to strengthen bank compliance with CRA
                regulations.\227\
                ---------------------------------------------------------------------------
                 \225\ The FDIC initially joined the OCC in issuing its early
                2020 proposed rule to expand the definition of ``community
                development'' for purposes of CRA compliance, but it did not join
                the OCC in its issuance of a rule finalizing that proposal. Compare
                85 FR 1204 (Jan. 9, 2020) (joint FDIC-OCC proposal to amend the
                agencies' respective CRA regulations), with 85 FR 34734 (June 5,
                2020) (OCC final rule amending CRA regulations). The rule added to
                the range of activities that comprise ``community development'' for
                purposes of the OCC's revisions to the CRA regulations.
                Specifically, the OCC expanded the qualifying activities criteria to
                capture activities the OCC stated were consistent with the statutory
                purpose of the CRA but that generally did not receive credit under
                CRA regulations prior to the OCC's revisions, including certain
                activities in identified ``areas of need beyond LMI areas (i.e.,
                underserved areas, distressed areas, disaster areas, Indian country
                and other tribal and native lands)'' as well as those activities
                that ``benefit a whole community, while maintaining an appropriate
                focus on LMI neighborhoods.'' 85 FR 34734, 34735 (June 5, 2020); see
                also 12 CFR 25.04(a)(1) (stating that a retail loan, a community
                development loan, a community development investment, or a community
                development service ``that helps to meet the credit needs of a
                bank's entire community, including low- and moderate-income
                communities, is a qualifying activity if it meets the criteria in
                this section at the time the activity is originated, made, or
                conducted''); 12 CFR 25.04(b)(3) (listing 12 sets of activities that
                qualify as community development loans, investments and services).
                 \226\ Off. of the Comptroller of the Currency, OCC Statement on
                Rescinding its 2020 Community Reinvestment Act Rule (News Release
                2021-76) (July 20, 2021), https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-76.html (stating that the OCC will propose
                rescinding its June 2020 CRA final rule).
                 \227\ Id. (noting the crucial nature of strengthening the CRA
                jointly with the Board and FDIC and signaling intention to issue a
                joint notice of proposed rulemaking building on the ANPR proposed by
                the Board in September 2020).
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                ii. Community Development Financial Institution Fund (CDFI Fund)
                 The Riegle Community Development and Regulatory Improvement Act of
                1994 authorized the CDFI Fund.\228\ In passing that statute, Congress
                found that many of the Nation's urban, rural, and Native American
                communities face ``critical social and economic problems arising in
                part from the lack of economic growth, people living in poverty, and
                the lack of employment and other opportunities.'' \229\
                ---------------------------------------------------------------------------
                 \228\ 12 U.S.C. 4701(b).
                 \229\ 12 U.S.C. 4701(a)(1).
                ---------------------------------------------------------------------------
                 To address these problems, Congress created the CDFI Fund to
                ``promote economic revitalization and community development'' through
                investment in and assistance to CDFIs, including enhancing the
                liquidity of CDFIs.\230\
                ---------------------------------------------------------------------------
                 \230\ 12 U.S.C. 4701(b).
                ---------------------------------------------------------------------------
                 The concept of community development is central to the operation of
                the CDFI Fund. While CDFI Fund regulations do not directly define that
                term, any entity applying for CDFI certification must have ``promoting
                community development'' as its ``primary mission.'' \231\ In making
                this determination, the CDFI Fund considers whether the activities of
                the entity are purposefully directed toward improving the social and/or
                economic conditions of underserved people, which may include low-income
                persons or persons
                [[Page 56375]]
                who lack adequate access to capital and financial services and
                residents of economically distressed communities.\232\
                ---------------------------------------------------------------------------
                 \231\ 12 CFR 1805.201(b)(1).
                 \232\ Id.
                ---------------------------------------------------------------------------
                 The CDFI Fund collects data from the recipients of its financial
                and technical assistance, shedding some light on the extent of
                community development in the areas where CDFIs operate.\233\ The CDFI
                Fund also publishes the data it receives with appropriate redactions to
                protect privacy interests.\234\ However, given that CDFIs comprise a
                relatively small share of the overall small business lending market,
                section 1071 would materially enhance understanding of the broader
                extent of community development outside of areas where CDFIs already
                operate. The data from a 1071 rulemaking would also likely augment the
                data the CDFI Fund already receives.
                ---------------------------------------------------------------------------
                 \233\ 12 CFR 1805.803(e) (requiring recipients of technical and
                financial assistance to provide to the CDFI Fund certain information
                and documentation).
                 \234\ 12 CFR 1805.803(e)(4).
                ---------------------------------------------------------------------------
                3. Potential Impact of Section 1071 Data
                 A section 1071 rule would provide on an annual basis application-
                level data on small business credit, including certain protected
                demographic information about applicants and their principal owners.
                This would include information on applications for credit that are
                originated, as well as those that are denied, withdrawn, incomplete, or
                approved by the financial institution but not accepted by the
                applicant. This information would enable stakeholders of all kinds in
                the small business lending market to gain unprecedented insight into
                trends in small business lending, specifically with respect to women-
                owned and minority-owned small businesses. It would also provide
                insight into the interaction of supply and demand over time.
                 In terms of facilitating fair lending enforcement, interested
                government agencies and other stakeholders would be able to use 1071
                data to analyze potential instances of practices resulting in the
                disparate treatment of or disparate impact on women- and minority-owned
                small businesses, using statistical methods to identify possible fair
                lending risks.
                 Regarding the identification of business and community development
                needs, the data that would be made available by the Bureau under this
                rulemaking, if finalized as proposed, would help government entities
                and public and private lenders identify and target sub-segments of the
                market that remain underserved, facilitating entrepreneurship and
                business development in those communities.
                 The advancement of both statutory purposes of section 1071--
                facilitating fair lending enforcement and identifying business and
                community development needs--in turn will support small businesses
                across all sectors of the economy, which are fundamental to the
                economic health of the U.S. and which have been hard hit by recent
                economic and financial crises. The use of data that would be provided
                pursuant to regulations under section 1071 can both support the
                underlying purposes of section 1071 and help the economy as a whole.
                For example, according to one estimate, fair and equitable lending to
                Black entrepreneurs could have added $13 trillion in business revenue
                over the last 20 years and created 6 million jobs.\235\ As the economy
                recovers from the effects of the COVID-19 pandemic, data collected and
                published pursuant to regulations implementing section 1071 would help
                to support equitable and sustainable growth and prosperity in all
                communities in the U.S.
                ---------------------------------------------------------------------------
                 \235\ Citigroup, Citi GPS: Global Perspectives & Solutions,
                Closing the Racial Inequality Gaps: The Economic Cost of Black
                Inequality in the U.S., at 4 (Sept. 2020), https://ir.citi.com/NvIUklHPilz14Hwd3oxqZBLMn1_XPqo5FrxsZD0x6hhil84ZxaxEuJUWmak51UHvYk75VKeHCMI%3D.
                ---------------------------------------------------------------------------
                4. Bureau Priorities
                 On June 2, 2021, the Bureau announced as priorities action to
                address issues of pervasive racial injustice and the long-term economic
                impacts of the COVID-19 pandemic on consumers.\236\ The Acting Director
                explained that the Bureau will use all of its tools and authority--
                including rulemaking--to protect and fight for fairness for all
                consumers in financial markets.\237\ The Bureau believes that
                implementing the section 1071 data collection, maintenance, and
                reporting obligations established in the Dodd-Frank Act would advance
                those priorities.
                ---------------------------------------------------------------------------
                 \236\ Blog post, Dave Uejio, Acting Director, Bureau of Consumer
                Fin. Prot., Addressing racial inequities in consumer finance markets
                (June 2, 2021), https://www.consumerfinance.gov/about-us/blog/addressing-racial-inequities-consumer-finance-markets/.
                 \237\ See Bureau of Consumer Fin. Prot., https://www.consumerfinance.gov/about-us/racial-equity/.
                ---------------------------------------------------------------------------
                 Congress enacted section 1071 for the purposes of facilitating
                enforcement of fair lending laws, and enabling communities,
                governmental entities, and creditors to identify business and community
                development needs and opportunities for women-owned, minority-owned,
                and small businesses. The Bureau believes that 1071 data will come to
                play an important role as HMDA data have done for the mortgage market.
                HMDA data have provided lenders, community groups, and others the tools
                to identify and address fair lending risks and strengthen fair lending
                oversight and enforcement. In a similar way, section 1071 data will
                allow diverse stakeholders to analyze lending patterns that are
                potentially discriminatory. By identifying and addressing
                discriminatory small business lending practices, the Bureau will help
                to ensure fair, equitable, and nondiscriminatory access to credit for
                both individuals and their communities.
                 HMDA data have also proven effective in creating transparency in
                the mortgage market that improves the understanding of credit needs,
                where they may remain unmet, and the relationship between mortgage
                lending and community development. The Bureau believes that the 1071
                data will provide the Bureau and other stakeholders with critical
                insights into the small business lending market. The current COVID-19
                pandemic has shown that transparency is essential at a time of crisis,
                when small businesses, especially those owned by women and minorities,
                may be in urgent need of credit in order to recover from the economic
                shocks. As at least one SER suggested, a 1071 rule would help lenders
                across the country better connect underserved entrepreneurs to working
                capital and resources in order to build a more inclusive economy.
                III. Outreach
                 In the years leading up to the release of this proposed rule, the
                Bureau held over 100 outreach meetings with financial institutions,
                trade associations, community groups, researchers, governmental
                entities, and other stakeholders regarding the 1071 rulemaking. The
                Bureau also took a number of other steps, beyond individual stakeholder
                meetings, to solicit feedback more broadly from the public on a 1071
                rule.
                 Request for information, field hearing, and White Paper on small
                business lending. On May 10, 2017, the Bureau published a request for
                information (RFI) regarding the small business lending market \238\ in
                which it sought public comment to understand more about the products
                that are offered to small businesses, the financial institutions that
                offer such credit, the small business lending data that currently are
                used and may be maintained by financial institutions, the potential
                complexity and cost of small business data collection and reporting,
                [[Page 56376]]
                and privacy concerns related to the disclosure purposes of section
                1071.\239\ On the same date, the Bureau held a field hearing regarding
                section 1071 at which the RFI was announced and then-Director Richard
                Cordray noted the importance of a section 1071 rulemaking given the
                absence of systematic data on how small businesses are faring and
                whether or how much they are being held back by financing
                constraints.\240\ Finally, at the same time, the Bureau also published
                its White Paper on small business lending,\241\ which reflected the
                initial findings of the Bureau's research providing a preliminary
                understanding of the small business lending environment, with a
                particular emphasis on lending to women-owned and minority-owned small
                businesses.
                ---------------------------------------------------------------------------
                 \238\ 82 FR 22318 (May 15, 2017).
                 \239\ In response to the RFI, the Bureau received over 2,000
                comments in total, and over 100 unique comments offering detailed
                substantive responses on the topics raised in the RFI. These
                comments from the public helped to inform the Bureau's approach in
                its SBREFA Outline. See Bureau of Consumer Fin. Prot., Request for
                Information Regarding the Small Business Lending Market, Docket ID
                CFPB-2017-0011, https://www.regulations.gov/docket/CFPB-2017-0011.
                 \240\ See Bureau of Consumer Fin. Prot., Prepared Remarks of
                CFPB Director Richard Cordray at the Small Business Lending Field
                Hearing (May 10, 2017), https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-cfpb-director-richard-cordray-small-business-lending-field-hearing/.
                 \241\ Bureau of Consumer Fin. Prot., Key dimensions of the small
                business lending landscape (May 2017), https://files.consumerfinance.gov/f/documents/201705_cfpb_Key-Dimensions-Small-Business-Lending-Landscape.pdf.
                ---------------------------------------------------------------------------
                 1071 Symposium. In November 2019, the Bureau held a symposium on
                section 1071 to assist the Bureau in its policy development process and
                to receive feedback from experts, including academic, think tank,
                consumer advocate, industry, and government experts in the small
                business lending arena.\242\ The symposium had two panels. The first
                panel focused on the evolution in the small business lending
                marketplace. The second panel included a discussion surrounding the
                implementation of section 1071, including issues raised in response to
                the Bureau's RFI.
                ---------------------------------------------------------------------------
                 \242\ Bureau of Consumer Fin. Prot., Symposium: Section 1071 of
                the Dodd-Frank Act (held Nov. 6, 2019), https://www.consumerfinance.gov/about-us/events/archive-past-events/cfpb-symposium-section-1071-dodd-frank-act/.
                ---------------------------------------------------------------------------
                 Small Business Advisory Review Panel. Under the Small Business
                Regulatory Enforcement Fairness Act of 1996 (SBREFA),\243\ which
                amended the Regulatory Flexibility Act (RFA), the Bureau must convene
                and chair a Small Business Advisory Review Panel (Panel) if it is
                considering a proposed rule that could have a significant economic
                impact on a substantial number of small entities.\244\ The Panel
                considers the impact of the proposals under consideration by the Bureau
                and obtains feedback from representatives of the small entities that
                would likely be subject to the rule. The Panel is comprised of a
                representative from the Bureau, the Chief Counsel for Advocacy of the
                Small Business Administration (SBA), and a representative from the
                Office of Information and Regulatory Affairs (OIRA) in the Office of
                Management and Budget (OMB). Representatives from 20 small businesses
                were selected as small entity representatives (SERs) for this SBREFA
                process. These SERs were representatives of small businesses that are
                financial institutions that would likely be directly affected by a 1071
                rule. These SERs did not represent the small business applicants for
                credit about whom information would be collected and reported under a
                1071 rule.
                ---------------------------------------------------------------------------
                 \243\ Public Law 104-121, 110 Stat. 857 (1996).
                 \244\ 5 U.S.C. 609(b).
                ---------------------------------------------------------------------------
                 On September 15, 2020, the Bureau issued its Outline of Proposals
                under Consideration and Alternatives Considered (Outline or SBREFA
                Outline) for the section 1071 rulemaking, a detailed document that
                discusses (1) the relevant law, (2) the regulatory process, (3) the
                rule proposals the Bureau was considering, and (4) an economic analysis
                of the potential impacts of those proposals on directly affected small
                entities.\245\
                ---------------------------------------------------------------------------
                 \245\ Bureau of Consumer Fin. Prot., Small Business Advisory
                Review Panel for Consumer Financial Protection Bureau Small Business
                Lending Data Collection Rulemaking, Outline of Proposals Under
                Consideration and Alternatives Considered (Sept. 15, 2020), https://files.consumerfinance.gov/f/documents/cfpb_1071-sbrefa_outline-of-proposals-under-consideration_2020-09.pdf (SBREFA Outline). See also
                Bureau of Consumer Fin. Prot., Consumer Financial Protection Bureau
                Releases Outline of Proposals Under Consideration to Implement Small
                Business Lending Data Collection Requirements (Sept. 15, 2020),
                https://www.consumerfinance.gov/about-us/newsroom/cfpb-releases-outline-proposals-implement-small-business-lending-data-collection-requirements/.
                ---------------------------------------------------------------------------
                 The Bureau convened the Panel for this proposed rule on October 15,
                2020 and held a total of four meetings with SERs during October 19-22,
                2020, conducted online via video conference (Panel Outreach Meetings).
                In preparation for the Panel Outreach Meetings and to facilitate an
                informed and detailed discussion of the proposals under consideration,
                discussion questions for the SERs were included throughout the Bureau's
                Outline.\246\
                ---------------------------------------------------------------------------
                 \246\ These questions also appeared in a shorter Discussion
                Guide for Small Entity Representatives. See Bureau of Consumer Fin.
                Prot., Small Business Advisory Review Panel for Consumer Financial
                Protection Bureau Small Business Lending Data Collection Rulemaking,
                Discussion Guide for Small Entity Representatives (Sept. 15, 2020),
                https://files.consumerfinance.gov/f/documents/cfpb_1071-sbrefa_discussion-guide_2020-09.pdf.
                ---------------------------------------------------------------------------
                 In advance of the Panel Outreach Meetings, the Bureau, SBA's Office
                of Advocacy, and OIRA held a series of video conferences with the SERs
                to describe the Small Business Review Process, obtain important
                background information about each SER's current business practices, and
                begin discussions on selected portions of the proposals under
                consideration.
                 All 20 SERs participated in the Panel Outreach Meetings.
                Representatives from the Bureau, SBA's Office of Advocacy, and OIRA
                provided introductory remarks. The meetings were then organized around
                discussions led by the Bureau about each aspect of the proposals under
                consideration and the potential impact on small businesses. The Bureau
                also invited SERs to submit written feedback by November 9, 2020; most
                SERs did so.
                 On December 15, 2020, the Bureau released the Final Report of the
                Small Business Review Panel on the CFPB's Proposals Under Consideration
                for the Small Business Lending Data Collection Rulemaking.\247\ This
                report includes a summary of the feedback received from SERs during the
                panel process (including oral feedback received during the pre-Panel
                video conferences and Panel Outreach Meetings, as well as timely
                submitted written feedback) and findings and recommendations made by
                the Panel.\248\ As required by the RFA, the Bureau considers the
                Panel's findings in its initial regulatory flexibility analysis, as set
                out in part VIII below.
                ---------------------------------------------------------------------------
                 \247\ Bureau of Consumer Fin. Prot., Final Report of the Small
                Business Review Panel on the CFPB's Proposals Under Consideration
                for the Small Business Lending Data Collection Rulemaking (Dec. 14,
                2020), https://files.consumerfinance.gov/f/documents/cfpb_1071-sbrefa-report.pdf (SBREFA Panel Report). See also Bureau of Consumer
                Fin. Prot., Consumer Financial Protection Bureau Releases Report on
                Implementing the Dodd-Frank Act's Small Business Lending Data
                Collection Requirement (Dec. 15, 2020), https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-releases-report-on-implementing-the-dodd-frank-acts-small-business-lending-data-collection-requirement/. The
                Bureau's SBREFA Outline and related materials, as well as the
                Bureau's presentation slides framing the discussion during the Panel
                Outreach Meetings, are appended to the SBREFA Panel Report. See
                SBREFA Panel Report at app. C through F.
                 \248\ The written feedback from SERs is appended to the Panel
                Report. See id. at app. A.
                ---------------------------------------------------------------------------
                 The Bureau also invited other stakeholders to submit feedback on
                the SBREFA Outline by December 14, 2020. The Bureau received
                approximately 60 submissions from a variety of other stakeholders,
                including financial institutions, trade associations,
                [[Page 56377]]
                community groups, a think tank, and a government agency.\249\ Feedback
                from these other stakeholders was not considered by the Panel and is
                not reflected in the Panel Report.
                ---------------------------------------------------------------------------
                 \249\ Feedback received from these stakeholders on the SBREFA
                Outline will be placed on the public docket for this notice.
                ---------------------------------------------------------------------------
                 The Bureau has considered the feedback it received from SERs, the
                findings and recommendations of the Panel, and the feedback from other
                stakeholders in preparing this proposed rule. The feedback, findings,
                and recommendations are summarized throughout this notice where
                relevant.
                 One-Time Cost Survey. On July 22, 2020, the Bureau released a
                voluntary survey to measure the one-time costs of compliance with an
                eventual small business lending data collection rule.\250\ The
                objective of the survey was to solicit, from institutions offering
                small business credit products that could potentially be covered by
                this rule, information about potential one-time costs to prepare to
                collect and report data. The survey did not cover potential on-going
                costs from actually collecting and reporting 1071 data, and assumed
                that reporting was required only for the 13 statutorily required data
                points and that compliance with the statutory firewall requirement was
                not required.\251\ The deadline for responses was October 16, 2020. The
                Bureau received responses from 105 financial institutions.\252\ The
                results of the survey inform the Bureau's analyses of the potential
                impacts of the proposed rule as set out in parts VII and VIII below.
                ---------------------------------------------------------------------------
                 \250\ Bureau of Consumer Fin. Prot., Survey: Small Business
                Compliance Cost Survey (July 22, 2020), https://files.consumerfinance.gov/f/documents/cfpb_1071-survey_2020-10.pdf.
                 \251\ Id. at 1.
                 \252\ See part VI below for additional details regarding this
                survey.
                ---------------------------------------------------------------------------
                 ECOA request for information. On July 28, 2020, the Bureau issued a
                request for information to seek public input on ECOA and Regulation
                B.\253\ In the RFI, the Bureau sought public comment on a number of
                topics, including small business lending and the ways that the Bureau,
                in light of its authority under ECOA and Regulation B, might support
                efforts to meet the credit needs of small businesses, particularly
                those that are minority-owned and women-owned.\254\
                ---------------------------------------------------------------------------
                 \253\ Bureau of Consumer Fin. Prot., Consumer Financial
                Protection Bureau Requests Information on Ways to Prevent Credit
                Discrimination and Build a More Inclusive Financial System (July 28,
                2020), https://www.consumerfinance.gov/about-us/newsroom/cfpb-rfi-prevent-credit-discrimination-build-more-inclusive-financial-system/.
                 \254\ 85 FR 46600, 46602 (Aug. 3, 2020).
                ---------------------------------------------------------------------------
                 Ongoing market monitoring. The Bureau conducts outreach to industry
                and other stakeholders to understand their experiences with the small
                business finance market, economic conditions, and the collection and
                reporting of data regarding that market. A particular near-term
                priority in the Bureau's recent market monitoring has been the impacts
                of the pandemic and the effectiveness of the Federal government
                response. Findings from market monitoring activities inform the Bureau
                on matters affecting the small business sector.
                 Technical outreach. In the months before the publication of this
                proposed rule, the Bureau began conducting technical outreach with
                third party software providers that serve financial institutions and
                software and technology staff from financial institutions that are
                likely to have to report 1071 data to the Bureau. With these software
                vendors and technical staffs, the Bureau has held and, after
                publication of this proposed rule, will continue to hold discussions
                concerning the technical systems and procedures the Bureau will provide
                to collect 1071 data. The Bureau intends to understand the technology
                solutions currently provided by vendors to support the small business
                lending activities of financial institutions. The Bureau believes this
                information will be helpful in informing the Bureau in its design and
                implementation of a platform for intake and processing of 1071 data to
                help the platform integrate, to the degree possible, with existing
                systems and data collection procedures. These meetings also serve to
                raise awareness of technology providers as to their potential future
                role in supporting the 1071 rule as well as the lead time that may be
                necessary for some or all affected financial institutions to come into
                compliance with the requirements of a final section 1071 rule. The
                feedback that the Bureau is gathering is purely technical in nature.
                This outreach process is ongoing and will continue throughout the
                rulemaking.
                IV. Legal Authorities
                 The Bureau is issuing this proposed rule pursuant to its authority
                under section 1071. Some aspects of this rule are also proposed under
                the Bureau's more general rulemaking authorities in ECOA. Congress
                enacted ECOA to prohibit discrimination against any applicant,
                regarding any aspect of a credit transaction, on the basis of, amongst
                other things, race, color, national origin, and sex.\255\ The Bureau
                has certain oversight, enforcement, and supervisory authority over ECOA
                requirements and has rulemaking authority under the statute.
                ---------------------------------------------------------------------------
                 \255\ 15 U.S.C. 1691(a)(1).
                ---------------------------------------------------------------------------
                 ECOA is implemented in Regulation B.\256\ Among other things,
                Regulation B generally prohibits creditors from inquiring about an
                applicant's race, color, religion, national origin, or sex, with
                limited exceptions, including if it is required by law.\257\
                ---------------------------------------------------------------------------
                 \256\ 12 CFR part 1002.
                 \257\ Regulation B Sec. 1002.5(a)(2).
                ---------------------------------------------------------------------------
                 As discussed above, in the Dodd-Frank Act Congress amended ECOA by
                adding section 1071, which directs the Bureau to adopt regulations
                governing the collection and reporting of small business lending data.
                Specifically, section 1071 requires financial institutions to collect
                and report to the Bureau certain data on applications for credit for
                women-owned, minority-owned, and small businesses.\258\ Congress
                enacted section 1071 for the purpose of (1) facilitating enforcement of
                fair lending laws and (2) enabling communities, governmental entities,
                and creditors to identify business and community development needs and
                opportunities of women-owned, minority-owned, and small
                businesses.\259\ The Bureau often refers to these as section 1071's
                fair lending purpose and its business and community development
                purpose, respectively.
                ---------------------------------------------------------------------------
                 \258\ ECOA section 704B.
                 \259\ ECOA section 704B(a).
                ---------------------------------------------------------------------------
                 To advance these statutory purposes, section 1071 grants the Bureau
                general rulemaking authority for section 1071, providing that the
                Bureau shall prescribe such rules and issue such guidance as may be
                necessary to carry out, enforce, and compile data pursuant to section
                1071.\260\ ECOA section 704B(g)(2) also permits the Bureau to adopt
                exceptions to any requirement of section 1071 and to conditionally or
                unconditionally exempt any financial institution or class of financial
                institutions from the requirements of section 1071, as the Bureau deems
                necessary or appropriate to carry out the purposes of section 1071. The
                Bureau principally relies on its 704B(g)(1) authority in this proposed
                rule and relies on 704B(g)(2) when proposing specific exceptions or
                exemptions to section 1071's requirements. Section 704B(g)(3) directs
                the Bureau to issue guidance designed to facilitate compliance with the
                requirements of section 1071.
                ---------------------------------------------------------------------------
                 \260\ ECOA section 704B(g)(1).
                ---------------------------------------------------------------------------
                 In addition, section 703(a) of ECOA gives the Bureau broad
                authority to prescribe regulations to carry out the purposes of ECOA,
                including provisions
                [[Page 56378]]
                that in the judgment of the Bureau are necessary or proper to
                effectuate the purposes of ECOA, to prevent circumvention or evasion
                thereof, or to facilitate or substantiate compliance therewith. That
                section also states that the Bureau may provide for such adjustments
                and exceptions for any class of transactions, as in the judgment of the
                Bureau are necessary or proper to effectuate the purposes of ECOA, to
                prevent circumvention or evasion thereof, or to facilitate or
                substantiate compliance therewith.
                 Section 1071 establishes requirements or obligations for financial
                institutions that the Bureau would implement in this proposed rule.
                These provisions include the requirement in ECOA section 704B(b) that a
                financial institution shall inquire whether an applicant for credit is
                a women-owned, minority-owned, or small business; that a financial
                institution must maintain a record of responses to such inquiry,
                separate from the application; that an applicant may refuse to provide
                any information requested regarding the inquiry under 704B(b); that a
                financial institution must limit access of loan underwriters, or other
                officers or employees of the financial institution or any affiliate, to
                applicant responses to inquiries under 704B(b); and that if a financial
                institution determines that a loan underwriter or other officer or
                employee should have access to any information provided by the
                applicant pursuant to a request under 704B(b) that the financial
                institution shall provide notice to the applicant of the access of the
                underwriter to such information, along with notice that the financial
                institution may not discriminate on the basis of such information.\261\
                ---------------------------------------------------------------------------
                 \261\ ECOA section 704B(b)(1), (b)(2), (c), (d)(1) and (2).
                ---------------------------------------------------------------------------
                 ECOA section 704B(e)(1) directs financial institutions to compile
                and maintain, in accordance with regulations of the Bureau, records of
                the information provided by applicants for credit pursuant to a request
                under 704B(b). Section 704B(e)(2) requires that the information
                compiled and maintained under 704B(e)(1) be itemized in order to
                clearly and conspicuously disclose an enumerated list of data points.
                Section 704B(e)(2)(H) requires financial institutions to compile and
                maintain any additional data that the Bureau determines would aid in
                fulfilling the purposes of section 1071.
                 Several provisions of section 1071 expressly refer to regulations
                that the Bureau shall promulgate to implement certain requirements,
                including in ECOA section 704B(e)(1) regarding how financial
                institutions must compile and maintain data pursuant to section 1071,
                and in 704B(f)(2)(B) and (C) regarding the form of information made
                available by financial institutions to the public and the form and
                manner in which the Bureau itself should make 1071 data available to
                the public generally.
                 Two provisions expressly give the Bureau discretion with respect to
                public availability of 1071 data. Specifically, ECOA section 704B(e)(4)
                states that the Bureau may, at its discretion, delete or modify 1071
                data before making it available to the public if the Bureau determines
                that the deletion or modification of the data would advance a privacy
                interest. Section 704B(f)(3) gives the Bureau the discretion to compile
                and aggregate 1071 data for its own use, as well as to make public such
                compilations of aggregate data.
                V. Section-by-Section Analysis
                Overview
                 In this Overview of part V, the Bureau first provides an overview
                of section 1071 and then a brief summary of the proposed rule. Each
                provision, along with its rationale and relevant feedback received
                through the SBREFA process, is discussed in detail in the section-by-
                section analyses that follow. The Bureau's proposed rule is largely
                consistent with, though more detailed than, its proposals under
                consideration in the SBREFA Outline. However, the Bureau has altered or
                refined its approach since SBREFA in certain respects, which are noted
                in the summary of the proposed rule below and discussed in detail in
                the section-by-section analyses that follow.
                 Next, the Bureau discusses the high-level and general comments
                regarding this rulemaking that it received from SERs and other
                stakeholders on its SBREFA Outline. Finally, the Bureau addresses
                several issues for which there is no proposed regulatory text or
                commentary.
                 The Bureau seeks comment on its proposed approach to implementing
                section 1071. Requests for comment on each provision and on particular
                issues are included throughout the section-by-section analyses in this
                part V.
                A. Overview of Section 1071
                 As discussed above, section 1071 of the Dodd-Frank Act requires
                that financial institutions collect and report to the Bureau certain
                data regarding applications for credit for women-owned, minority-owned,
                and small businesses. Section 1071's statutory purposes are to (1)
                facilitate enforcement of fair lending laws, and (2) to enable
                communities, governmental entities, and creditors to identify business
                and community development needs and opportunities of women-owned,
                minority-owned, and small businesses.
                 Section 1071 specifies a number of data points that financial
                institutions are required to collect and report, and also provides
                authority for the Bureau to require any additional data that the Bureau
                determines would aid in fulfilling section 1071's statutory purposes.
                Section 1071 also contains a number of other requirements, including
                those that address restricting the access of underwriters and other
                persons to certain 1071 data and publication of 1071 data. In addition,
                section 1071 permits the Bureau, at its discretion, to modify or delete
                data prior to publication if it determines that such a deletion or
                modification would advance a privacy interest.
                 Section 1071 directs the Bureau to prescribe such rules, and issue
                such guidance as may be necessary to carry out, enforce, and compile
                data pursuant to section 1071. It also permits the Bureau to adopt
                exceptions to any requirement or to exempt financial institutions from
                the requirements of section 1071 as the Bureau deems necessary or
                appropriate to carry out the purposes of section 1071. Section 1071
                also directs the Bureau to issue guidance designed to facilitate
                compliance with the requirements of section 1071. As discussed in part
                IV above and throughout the section-by-section analyses in this part V,
                most of the Bureau's proposal is dedicated to implementing these
                statutory provisions.
                B. Section 1071 in the Context of HMDA
                 The Bureau's proposal for implementing section 1071 necessarily
                exists against the backdrop of HMDA \262\ (as discussed in part
                II.F.1.ii above). With the passage of the Dodd-Frank Act in 2010,
                Congress enacted section 1071 at the same time that it amended HMDA and
                transferred HMDA rulemaking authority and other functions to the
                Bureau. HMDA is a data collection and reporting statute that requires
                certain depository institutions and for-profit nondepository
                institutions to collect, report, and disclose data about originations
                and purchases of mortgage loans, as well as mortgage loan applications
                that do not result in originations (for example, applications that are
                denied or withdrawn). The Bureau's Regulation C, 12 CFR part
                [[Page 56379]]
                1003, implements HMDA. In light of the similarities between 1071 and
                HMDA, the Bureau's section-by-section analyses in this part V often
                discusses how similar provisions are addressed in the context of HMDA.
                ---------------------------------------------------------------------------
                 \262\ 12 U.S.C. 2801 et seq.
                ---------------------------------------------------------------------------
                 HMDA's purposes are: (1) To help determine whether financial
                institutions are serving their communities' housing needs; (2) to
                assist public officials in distributing public investment to attract
                private investment; and (3) to assist in identifying potential
                discriminatory lending patterns and enforcing antidiscrimination
                statutes.
                 A covered institution for purposes of HMDA reporting is a
                depository or nondepository institution that meets the relevant
                coverage criteria set forth in the regulation. A depository institution
                is required to comply with Regulation C if it meets the asset-size
                threshold, location test, loan activity test, federally related test,
                and the loan-volume threshold for either closed-end loans or open-end
                lines of credit set forth in the regulation. A nondepository
                institution is required to comply with Regulation C if it meets the
                location test and the loan-volume threshold for either closed-end loans
                or open-end lines of credit set forth in the regulation.
                 A covered transaction under HMDA is generally a loan or line of
                credit secured (or, for applications, proposed to be secured) by a lien
                on a dwelling, that is not specifically excluded under Regulation C
                Sec. 1003.3(c). The data points generally required to be reported
                about each covered transaction can be grouped into four broad
                categories: \263\
                ---------------------------------------------------------------------------
                 \263\ Under the Economic Growth, Regulatory Relief, and Consumer
                Protection Act, Public Law 115-174, 132 Stat. 1296 (2018), as
                implemented in Regulation C Sec. 1003.3(d), certain HMDA-covered
                institutions may be eligible for partial exemptions from some of the
                HMDA reporting requirements and only certain covered loans and
                applications are covered under partial exemptions. If a covered loan
                or application is covered under a partial exemption, the covered
                institution is not required to collect, record, and report certain
                data points.
                ---------------------------------------------------------------------------
                 Information about the applicants, borrowers, and
                underwriting process, such as ethnicity, race, and sex of the
                applicant,\264\ the applicant's gross income and debt-to-income ratio,
                the application channel, action taken, and, if applicable, reason(s)
                for denial.
                ---------------------------------------------------------------------------
                 \264\ As with section 1071, collection of an applicant's
                ethnicity, race, and sex under HMDA is an exception to the general
                prohibition on inquiring into protected demographic information in
                existing Sec. 1002.5(b).
                ---------------------------------------------------------------------------
                 Information about the property securing the loan or
                proposed to secure the loan, such as census tract and other property
                location information, construction method, property value, and
                additional information about manufactured and multifamily housing.
                 Information about the features of the loan, such as the
                loan type, pricing information (including interest rate and origination
                charges), loan term, introductory rate period, and non-amortizing
                features.
                 Certain unique identifiers, such as a universal loan
                identifier, loan originator identifier, and a legal entity identifier
                for the financial institution.
                 Covered institutions are required to submit their HMDA data by
                March 1 following the calendar year for which data are collected.
                Covered institutions with larger volumes of covered loans and
                applications are required to submit their HMDA data for each of the
                first three quarters of the year in addition to their annual
                submission.
                 Following the calendar year in which HMDA data are collected, a
                covered institution's disclosure statement \265\ and modified loan/
                application register (LAR) become publicly available on the FFIEC's
                HMDA Platform.\266\ In addition, aggregate reports for each
                Metropolitan Statistical Area and Metropolitan Division that show
                lending patterns by property location, age of housing stock, and income
                level, sex, ethnicity, and race become publicly available.
                ---------------------------------------------------------------------------
                 \265\ A disclosure statement contains aggregated data derived
                from loan-level data.
                 \266\ A HMDA LAR contains the record of information required to
                be collected and the record submitted annually or quarterly, as
                applicable. A modified LAR is a covered institution's LAR modified
                by the Bureau, on its website, to protect applicant and borrower
                privacy. The Bureau interprets HMDA, as amended by the Dodd-Frank
                Act, to call for the use of a balancing test to determine whether
                and how HMDA data should be modified prior to its disclosure to the
                public in order to protect applicant and borrower privacy while also
                fulfilling HMDA's public disclosure purposes. See 80 FR 66127,
                66133-34 (Oct. 28, 2015). In December 2018, the Bureau issued final
                policy guidance describing the modifications the Bureau intends to
                apply to the loan-level HMDA data that covered institutions report
                before the data are disclosed publicly. See 84 FR 649 (Jan. 31,
                2019).
                ---------------------------------------------------------------------------
                 HMDA data are the primary source of information for regulators,
                researchers, economists, industry, and advocates analyzing the mortgage
                market both for HMDA's purposes and for general market monitoring. HMDA
                data are used by the Federal supervisory agencies to support a variety
                of activities. For example, Federal supervisory agencies use HMDA data
                as part of their fair lending \267\ examination process, and also use
                HMDA data in conducting Community Reinvestment Act \268\ performance
                evaluations. HMDA disclosures provide the public with information on
                the home mortgage lending activities of particular reporting entities
                and on activity in their communities. These disclosures are used by
                local, State, and Federal officials to evaluate housing trends and
                issues and by community organizations to monitor financial institution
                lending patterns.
                ---------------------------------------------------------------------------
                 \267\ See ECOA (15 U.S.C. 1691 through 1691f), Regulation B, 12
                CFR part 1002, and FHA, 42 U.S.C. 3605, 24 CFR part 100.
                 \268\ 12 U.S.C. 2901 through 2908, and 12 CFR parts 25, 195,
                228, and 345.
                ---------------------------------------------------------------------------
                C. Summary of the Proposed Rule
                 The Bureau is proposing to add a new subpart B to Regulation B to
                implement the requirements of section 1071 and to make conforming
                amendments to existing Regulation B. The Bureau's proposal is
                summarized below, in the order of the section-by-section analyses in
                this part V that follow.
                1. General Provisions (Sec. Sec. 1002.5(a)(4), 1002.101, and 1002.102)
                 Changes to existing Regulation B (Sec. 1002.5(a)(4)). The Bureau
                is proposing to amend existing Sec. 1002.5(a)(4) to expressly permit
                voluntary collection and reporting of information regarding the
                ethnicity, race, and sex of applicants' principal owners, or whether
                the applicant is a minority-owned business or a women-owned business,
                in certain circumstances.
                 Scope, purpose, and authority (Sec. 1002.101). The Bureau is
                proposing in Sec. 1002.101 to set forth the authority, purpose, and
                scope for proposed subpart B. Among other things, this proposed section
                would set forth section 1071's two statutory purposes of facilitating
                enforcement of fair lending laws and enabling communities, governmental
                entities, and creditors to identify business and community development
                needs and opportunities of women-owned, minority-owned, and small
                businesses.
                 Definitions (Sec. 1002.102). The Bureau is proposing in Sec.
                1002.102 a number of definitions for terms used in proposed subpart B,
                which generally fall into several categories. First, some proposed
                definitions refer to terms defined elsewhere in proposed subpart B--
                specifically, terms of particular importance including business,
                covered application, covered credit transaction, covered financial
                institution, financial institution, and small business. Second, some
                proposed definitions refer to terms defined elsewhere in existing
                Regulation B (i.e., business credit, credit, and State) or other
                regulations (i.e., the definition of dwelling and a portion of the
                definition of affiliate reference Regulation C and an SBA regulation,
                respectively). Finally, the remaining terms are defined in proposed
                Sec. 1002.102, including
                [[Page 56380]]
                applicant, closed-end credit transaction, minority individual,
                minority-owned business, open-end credit transaction, principal owner,
                small business lending application register, women-owned business, and
                a portion of the definition of affiliate.
                2. Coverage (Sec. Sec. 1002.103 Through 1002.106)
                 Covered applications (Sec. 1002.103). The Bureau is proposing
                Sec. 1002.103 to define what is, and is not, a covered application
                under proposed subpart B; this definition would trigger the data
                collection and reporting requirements under subpart B for covered
                financial institutions. The Bureau is proposing to define a covered
                application in Sec. 1002.103(a) as an oral or written request for a
                covered credit transaction that is made in accordance with procedures
                used by a financial institution for the type of credit requested. The
                Bureau is also proposing that a covered application does not include
                (1) reevaluation, extension, or renewal requests on an existing
                business credit account, unless the request seeks additional credit
                amounts; and (2) inquiries and prequalification requests.
                 Covered credit transactions (Sec. 1002.104). The Bureau is
                proposing to require that covered financial institutions collect and
                report data for all covered applications from small businesses for
                transactions that meet the definition of business credit under existing
                Regulation B, with certain exceptions. The Bureau is proposing Sec.
                1002.104(a) to define the term covered credit transaction as an
                extension of business credit that is not an excluded transaction under
                proposed Sec. 1002.104(b). Loans, lines of credit, credit cards, and
                MCAs (including such credit transactions for agricultural purposes and
                those that are also covered by HMDA`` \269\ (that is, HMDA-reportable
                transactions)) would all fall within the scope of this proposed rule.
                The Bureau is proposing in Sec. 1002.104(b) to exclude from the
                requirements of proposed subpart B trade credit, public utilities
                credit, securities credit, and incidental credit. Factoring, leases,
                consumer-designated credit used for business purposes, and credit
                secured by certain investment properties would also not be covered
                credit transactions.
                ---------------------------------------------------------------------------
                 \269\ 12 U.S.C. 2801 et seq.
                ---------------------------------------------------------------------------
                 Covered financial institutions (Sec. 1002.105). The Bureau is
                proposing to define in Sec. 1002.105(a) the term financial
                institution, consistent with the definition in section 1071, as any
                partnership, company, corporation, association (incorporated or
                unincorporated), trust, estate, cooperative organization, or other
                entity that engages in any financial activity. Under this proposed
                definition, proposed subpart B's requirements would apply to a variety
                of entities that engage in small business lending, including depository
                institutions (i.e., banks, savings associations, and credit unions),
                online lenders, platform lenders, CDFIs, lenders involved in equipment
                and vehicle financing (captive financing companies and independent
                financing companies), commercial finance companies, governmental
                lending entities, and nonprofit nondepository lenders. The Bureau is
                not proposing to cover motor vehicle dealers.\270\ The Bureau is
                proposing in Sec. 1002.105(b) to define the term covered financial
                institution as a financial institution that originated at least 25
                covered credit transactions for small businesses in each of the two
                preceding calendar years. Only financial institutions that meet this
                loan-volume threshold would be required to collect and report small
                business lending data under proposed subpart B.
                ---------------------------------------------------------------------------
                 \270\ The Bureau is proposing that subpart B does not apply to a
                person excluded from coverage by section 1029 of the Consumer
                Financial Protection Act of 2010, title X of the Dodd-Frank Wall
                Street Reform and Consumer Protection Act, Public Law 111-203, 124
                Stat. 1376, 2004 (2010).
                ---------------------------------------------------------------------------
                 Small business definition (Sec. 1002.106). The Bureau is proposing
                in Sec. 1002.106 to adopt the SBA's definitions of ``business'' and
                ``small business'' as set out in the Small Business Act and SBA
                regulations. The Bureau is also proposing that, notwithstanding the
                small business size standards established by SBA regulations, for
                purposes of proposed subpart B, a business is a small business if and
                only if its gross annual revenue is $5 million or less for its
                preceding fiscal year. The Bureau is seeking SBA approval for this
                alternate small business size standard pursuant to the Small Business
                Act.
                3. Compiling, Maintaining, and Reporting 1071 Data (Sec. Sec. 1002.107
                Through 1002.111)
                 Compilation of reportable data (Sec. 1002.107). The Bureau is
                proposing in Sec. 1002.107 to address several aspects of collecting
                data on covered applications from small businesses. The Bureau is
                proposing in Sec. 1002.107(a) to require financial institutions to
                compile and maintain the data points enumerated in Sec. 1002.107(a)(1)
                through (21) regarding covered applications from small businesses.
                These data points would be collected and reported in accordance with
                the proposed official commentary and the Filing Instructions Guide that
                the Bureau anticipates later providing for the appropriate year.
                Certain of these data points are or could be collected from the
                applicant (or otherwise determined based on information provided or
                authorized by the applicant); other data points are based on
                information solely within the financial institution's control. Proposed
                appendix E would provide a sample data collection form for requesting
                from applicants their minority- and women-owned business status and the
                race, sex, and ethnicity of their principal owners. Proposed appendices
                F and G provide additional details and guidance regarding collecting
                those data points.
                 The Bureau is proposing in Sec. 1002.107(c)(1) that covered
                financial institutions maintain procedures to collect applicant-
                provided data at a time and in a manner that is reasonably designed to
                obtain a response. The Bureau's proposal also addresses what financial
                institutions should do if, despite having such procedures in place,
                they are unable to obtain certain data from an applicant. Pursuant to
                proposed Sec. 1002.107(b), financial institutions would be permitted
                to rely on statements made by an applicant (whether in writing or
                orally) or information provided by an applicant when collecting and
                reporting 1071 data, although for most data points if the financial
                institution verifies the information provided it must report the
                verified information. Proposed Sec. 1002.107(c)(2) would also permit
                financial institutions to reuse certain previously collected data in
                certain circumstances.
                 Firewall (Sec. 1002.108). The Bureau is proposing Sec. 1002.108
                to implement the requirement in section 1071 that certain data
                collected be shielded from underwriters and certain other persons; the
                Bureau refers to this as the ``firewall.'' Pursuant to proposed Sec.
                1002.108(b), an employee or officer of a financial institution or a
                financial institution's affiliate that is involved in making any
                determination concerning the application would be prohibited from
                accessing an applicant's responses to inquiries that the financial
                institution makes pursuant to section 1071 regarding whether the
                applicant is a minority-owned or women-owned business, and the
                ethnicity, race, and sex of the applicant's principal owners.
                 However, pursuant to proposed Sec. 1002.108(c), this prohibition
                would not apply to an employee or officer if the financial institution
                determines that it is not feasible to limit that employee's or
                officer's access to an applicant's
                [[Page 56381]]
                responses to the financial institution's inquiries regarding the
                applicant's protected demographic information, and the financial
                institution provides a notice to the applicant regarding that access.
                It would not be feasible to limit access if the financial institution
                determines that an employee or officer involved in making any
                determination concerning a covered application should have access to
                one or more applicants' responses to inquiries regarding the
                applicant's protected demographic information. The notice must be
                provided to each applicant whose information will be accessed or,
                alternatively, the financial institution could provide the notice to
                all applicants whose information could be accessed. The Bureau is
                proposing sample language that a financial institution could use in
                providing this notice.
                 Reporting data to the Bureau (Sec. 1002.109). The Bureau is
                proposing Sec. 1002.109 to address several aspects of financial
                institutions' obligations to report section 1071 data to the Bureau.
                First, the Bureau is proposing in Sec. 1002.109(a) that 1071 data be
                collected on a calendar year basis and reported to the Bureau on or
                before June 1 of the following year. The Bureau also addresses
                collection and reporting requirements of subsidiaries of financial
                institutions and collection and reporting requirements of financial
                institutions where multiple financial institutions are involved in a
                transaction in proposed Sec. 1002.109(a). Second, the Bureau lists in
                proposed Sec. 1002.109(b) the information that financial institutions
                would be required to provide about themselves when reporting 1071 data
                to the Bureau, including the financial institution's name, headquarters
                address, contact person, Federal prudential regulator, institutional
                identifiers, and parent entity information. Finally, the Bureau is
                proposing Sec. 1002.109(c) to address technical instructions for the
                submission of data to the Bureau, including information about the
                Filing Instructions Guide, which the Bureau anticipates later providing
                for the appropriate year.
                 Publication of 1071 data by the Bureau (Sec. 1002.110). The Bureau
                is proposing in Sec. 1002.110 to address several issues regarding the
                publication of 1071 data. The Bureau is proposing in Sec. 1002.110(a)
                that it shall make available to the public, on an annual basis and on
                the Bureau's website, the data submitted to it by financial
                institutions. The Bureau is proposing to make these data available
                subject to deletions or modifications made by the Bureau, at its
                discretion, if the Bureau determines that such deletions or
                modifications would advance a privacy interest. To determine whether
                and how the Bureau might use its discretion to modify or delete data
                prior to publication, the Bureau is proposing a ``balancing test'' that
                assesses the risks and benefits of public disclosure. The Bureau's
                proposed approach to the balancing test is discussed in detail in part
                VI below. Proposed Sec. 1002.110(b) would state that the Bureau may,
                at its discretion, compile and aggregate data submitted by financial
                institutions and may publish such compilations or aggregations.
                 Proposed Sec. 1002.110(c) would require a covered financial
                institution to publish on its website a statement that its 1071 data,
                as modified by the Bureau, are or will be available on the Bureau's
                website. Proposed Sec. 1002.110(d) would set forth when a covered
                financial institution shall make this statement available and how long
                the financial institution shall maintain the statement on its website.
                These requirements would satisfy financial institutions' statutory
                obligation to make data available to the public upon request.
                 Recordkeeping (Sec. 1002.111). The Bureau is proposing Sec.
                1002.111 to address several aspects of the recordkeeping requirements
                for 1071 data. First, the Bureau is proposing Sec. 1002.111(a) to
                require a covered financial institution to retain evidence of
                compliance with proposed subpart B, which includes a copy of its small
                business lending application register, for at least three years after
                the register is required to be submitted to the Bureau pursuant to
                proposed Sec. 1002.109. Second, the Bureau is proposing Sec.
                1002.111(b) to require a financial institution to maintain, separately
                from the rest of an application for credit and accompanying
                information, an applicant's responses to a financial institution's
                inquiries regarding the applicant's protected demographic information.
                Finally, the Bureau is proposing Sec. 1002.111(c) to require that, in
                compiling and maintaining its small business lending application
                register, a financial institution not include any personally
                identifiable information concerning any individual who is, or is
                connected with, an applicant.
                4. Other Provisions (Sec. Sec. 1002.112 Through 1002.114)
                 Enforcement (Sec. 1002.112). The Bureau is proposing Sec.
                1002.112 to address several issues related to the enforcement of
                proposed subpart B. First, the Bureau is proposing Sec. 1002.112(a) to
                state that a violation of section 1071 or proposed subpart B is subject
                to administrative sanctions and civil liability as provided in sections
                704 and 706 of ECOA. Second, the Bureau is proposing in Sec.
                1002.112(b) to provide that a bona fide error in compiling,
                maintaining, or reporting data with respect to a covered application is
                an error that was unintentional and occurred despite the maintenance of
                procedures reasonably adapted to avoid such an error, and that such an
                error is presumed not to be a violation of ECOA or proposed subpart B
                if the number of such errors does not exceed the thresholds set forth
                in proposed appendix H. Third, the Bureau is proposing in Sec.
                1002.112(c) to identify four safe harbors under which certain errors--
                specifically those regarding census tract, NAICS code, small business
                status, and application date--would not constitute violations of ECOA
                or Regulation B.
                 Severability (Sec. 1002.113). The Bureau is proposing in Sec.
                1002.113 to provide that the provisions of proposed subpart B are
                separate and severable from one another, and that if any provision is
                stayed or determined to be invalid, it is the Bureau's intent that the
                remaining provisions shall continue in effect.
                 Effective date, compliance date, and special transitional rules
                (Sec. 1002.114). The Bureau is proposing Sec. 1002.114 to address
                several issues related to the Bureau's eventual final rule to implement
                section 1071. First, the Bureau is proposing in Sec. 1002.114(a) that
                its final rule to implement section 1071 would become effective 90 days
                after publication in the Federal Register, but pursuant to proposed
                Sec. 1002.114(b) compliance with the final rule would not be required
                until approximately 18 months after publication in the Federal
                Register. Second, the Bureau is proposing in Sec. 1002.114(c) certain
                transitional provisions that would permit covered financial
                institutions to begin collecting protected applicants' demographic
                information beginning 12 months prior to the compliance date and would
                permit financial institutions to use a different time period to
                determine whether they will be covered by the rule as of the compliance
                date.
                D. High-Level and General Comments on the SBREFA Outline
                 During the SBREFA process, SERs provided feedback on nearly all
                aspects of the Bureau's proposals under consideration as set forth in
                the SBREFA Outline. Other stakeholders did likewise in their written
                feedback on the SBREFA Outline. That feedback
                [[Page 56382]]
                is discussed in the section-by-section analyses of the proposed rule
                below. SERs and other stakeholders also provided feedback of a more
                general nature on the Bureau's section 1071 rulemaking. That feedback
                is summarized here; the SBREFA Panel Report provides a more complete
                summary of the SBREFA process and comments provided by SERs.\271\
                ---------------------------------------------------------------------------
                 \271\ See generally SBREFA Panel Report.
                ---------------------------------------------------------------------------
                 Most SERs and stakeholders were generally supportive of the
                statutory purposes of section 1071.\272\ Several SERs as well as a
                range of other stakeholders--including community groups, CDFIs, several
                community banks, and a State consumer financial protection agency--were
                supportive of the Bureau's statutory mandate to promulgate a section
                1071 rule. Many stakeholders, including community groups, several CDFI
                banks, and a small community bank, expressly supported broad coverage
                of both financial institutions and products in the 1071 rulemaking. One
                community bank stakeholder stated that larger financial institutions
                should not be excluded; another community bank asserted that a 1071
                rule should cover credit unions, governmental entities, commercial
                finance firms, and alternative online lenders.
                ---------------------------------------------------------------------------
                 \272\ The SER feedback discussed herein can be found in the
                SBREFA Panel Report at 17-18.
                ---------------------------------------------------------------------------
                 Several trade association stakeholders supported a more limited
                approach to implementation of a 1071 rulemaking. A number of trade
                associations requested exemptions for the specific types of financial
                institutions they represented, including credit unions, vendor finance
                and dealer-related institutions, and community banks. One trade
                association argued that Federal credit union laws limited the extent to
                which credit unions could seek to expand their small business lending
                operations. Two trade association stakeholders suggested that the
                Bureau adopt a phased or staged approach to implementation, starting
                only with certain products and institutions. One trade association
                suggested that the Bureau adopt a high size-based exemption for
                institutions.
                 A number of SERs and stakeholders, including several CDFIs, a
                number of community groups and a community bank, expressed the view
                that data transparency in the small business lending market is critical
                to advance the goals of fair lending enforcement and access to credit
                for small businesses, especially those that are minority-owned and
                women-owned. One SER and several stakeholders, including two community
                groups and one small business trade association, stated that the
                limited data currently available show that the lending practices of
                many financial institutions exclude women-owned and minority-owned
                businesses, exacerbating a racial wealth gap, and that section 1071 has
                the opportunity to address such lending disparities, which are costly
                to businesses, lenders, and the economy as a whole. The SER also said
                that data transparency and fairness should be an advantage to smaller,
                local financial institutions, allowing them to better distinguish their
                value proposition compared to larger financial institutions or
                predatory lenders.\273\ A CDFI stakeholder and a community group
                stakeholder emphasized that 1071 data would be an important supplement
                to CRA and HMDA data to determine community development needs. Another
                community group stakeholder and a small business trade association
                emphasized the importance of supporting access to credit for women-
                owned and minority-owned small businesses. One community group argued
                that the availability of 1071 data would spur innovation in the small
                business lending market.
                ---------------------------------------------------------------------------
                 \273\ Id.
                ---------------------------------------------------------------------------
                 Several SERs and several community groups and CDFI stakeholders
                stated that the completion of a 1071 rulemaking was welcome, given the
                many years stakeholders have been waiting for these data. Several SERs
                and other stakeholders, including community groups and CDFIs, supported
                a 1071 rulemaking as necessary to better understand the small business
                lending market, as the COVID-19 pandemic highlighted how the most
                vulnerable small businesses can be disproportionately impacted by
                economic shocks. Several community groups and a small business trade
                association stakeholders argued that the response to the COVID-19
                pandemic, including the PPP program, exacerbated existing gender and
                racial disparities, and did not provide access to credit to excluded
                lower- and middle-income communities and women-owned or minority-owned
                small businesses. Two community bank trade associations noted the
                outsized importance of community banks and CDFIs in providing PPP loans
                to their local communities, including to minority-owned small
                businesses, and warned that an unintended consequence of a 1071
                rulemaking may be to impair this existing lending. One trade
                association suggested that the Bureau delay issuing any proposal until
                the economic forces driven by the COVID-19 pandemic have subsided and
                recovery is evident.
                 Other stakeholders expressed concerns about the uses of data coming
                from a 1071 rulemaking. One trade association suggested that the
                collection of data on race and gender would create the perception among
                customers that these factors played a role in credit decisions. One
                community bank stakeholder asserted that 1071 data should not be used
                in regulatory oversight or examinations of financial institutions, but
                rather to better understand the small lending market and help
                regulators support lending. Several trade associations expressed
                concerns that misleading conclusions could be drawn from data from a
                1071 rulemaking, and that small business lending was complex and
                varied.
                 SERs nearly uniformly suggested that the Bureau aim to draft simple
                regulations, and choose simpler options if possible, noting that more
                complex rules tend to make compliance more difficult and drive up
                compliance costs, which could potentially increase prices or reduce
                small businesses' access to credit. A number of stakeholders--including
                community banks, community groups, a small business trade association,
                and bank and credit union trade associations--similarly supported
                simple and clear regulations and requested that the Bureau avoid
                complex or ambiguous rules, which they asserted would make compliance
                more costly. One CDFI bank stakeholder asserted that existing
                ambiguities and conflicts in the law have caused financial institutions
                to avoid collecting the very data they would need to identify lending
                discrimination, and that mandating data collection and clarifying rules
                would be critical to addressing these concerns.
                 Many SERs and a community bank stakeholder requested clear written
                guidance and implementation support materials from the Bureau, such as
                small entity compliance guides, a ``help desk'' for questions, and
                sample disclosure language (translated into languages other than
                English for individuals with limited English proficiency). Several SERs
                also discussed the need for applicant-facing materials explaining what
                the section 1071 regulation is and why the financial institution must
                collect data. Relatedly, one SER requested that the Bureau educate and
                train currently unregulated financial institutions to help them
                implement the rule.
                 A number of SERs (representing financial institutions that operate
                primarily online as well as financial institutions that interact with
                small business applicants in-person) indicated their belief that
                financial institutions
                [[Page 56383]]
                with extensive online lending operations would be able to comply with
                an eventual 1071 rule more easily, more quickly, and at lower cost due
                to their greater degree of automation than financial institutions with
                primarily in-person and/or paper-based operations. SERs and several
                stakeholders (including a community bank trade association, a community
                group, and a community bank) urged the Bureau to align with other
                Federal data reporting regimes--such as HMDA, CRA, CDFI Fund, or SBA--
                if possible, and thought that financial institutions with experience
                complying with these other Federal data reporting regimes would have an
                easier time complying with an eventual 1071 rule than would financial
                institutions, including some SERs, with no such experience. One trade
                association suggested that any comparisons with HMDA were misplaced, as
                the small business lending market is more varied and complex than the
                market for residential mortgage lending.
                 Several SERs stated that a 1071 rule should take into account the
                different types of financial institutions operating in the small
                business lending market. One SER suggested that the Bureau had not
                focused enough attention on the impact of a 1071 rule on nondepository
                institutions, which they said play a vital role in providing essential
                credit to small businesses in the United States, many of which are
                women-owned and minority-owned. Another SER and two trade associations
                asserted that the data collected from credit unions, which are bound by
                their charters (pursuant to Federal and State laws and regulations) to
                serve a specific field of membership, would likely be incomparable with
                data from other financial institutions that are permitted to serve any
                kind of customer.
                 Many SERs supported broad coverage of both financial institutions
                and products, as reflected in section 1071's language covering any
                application to a financial institution for credit for a women-owned,
                minority-owned, or small business.
                 The SBREFA Panel recommended that the Bureau issue implementation
                and guidance materials (including a small entity compliance guide as
                required by the RFA, as well as other materials), specifically to
                assist small financial institutions in complying with the eventual 1071
                rule.\274\ The Panel also recommended that the Bureau consider
                providing sample disclosure language related to the collection of
                ethnicity, race, and sex of applicants.\275\
                ---------------------------------------------------------------------------
                 \274\ Id. at 43.
                 \275\ Id.
                ---------------------------------------------------------------------------
                 The Bureau agrees with the general comments made in favor of
                keeping the scope of the proposed rule broad. In general, the Bureau
                believes that broad coverage of institutions and products as requested
                by a number of SERs and stakeholders would result in the collection of
                more data and would be consistent with the statutory purposes of
                section 1071. The Bureau does not believe that the request made by
                several trade association stakeholders to take a more limited approach
                to scope--including the various limitations on the coverage of certain
                types of financial institutions and products--would be consistent with
                the statutory purposes of section 1071. The Bureau addresses these
                issues directly in the section-by-section analyses of proposed
                Sec. Sec. 1002.104 and 1002.105 below.
                 The Bureau agrees with the SERs and stakeholders that expressed the
                view that data transparency in the small business lending market is
                critical to advancing the statutory purposes of section 1071. The
                Bureau believes that the limited data that do exist, cited by one SER
                and several stakeholders, appear to support the existence of
                disparities in the small business lending markets, as identified in
                part II above. The Bureau agrees--as do other Federal regulators that
                the Bureau has consulted in developing this proposed rule--that 1071
                data would be an important supplementation to CRA and HMDA data in
                helping a variety of parties determine and address business and
                community development needs. The Bureau agrees with the SERs and
                stakeholders that identified specific ways that the publication of 1071
                data would advance this statutory purpose in helping the public
                identify business needs, including, as one SER suggested, creating data
                that would be useful to help smaller, local financial institutions
                distinguish their value proposition compared to other lenders, and
                could be used to spur innovation in the small business lending market.
                 Regarding the support of certain SERs and other stakeholders
                welcoming the completion of a 1071 rulemaking, the Bureau's views on
                this are best expressed in the section-by-section analyses of proposed
                Sec. Sec. 1002.113 and 1002.114 concerning effective date and
                compliance date. Regarding the data cited by SERs and other
                stakeholders concerning lending disparities in the PPP program during
                the COVID-19 pandemic, the Bureau believes that the availability of
                data on PPP lending further supports the importance of collecting and
                publishing 1071 data; it was only the existence of PPP lending data,
                despite its limitations, that enabled these stakeholders to make
                arguments regarding the state of fair lending and business and
                community development under PPP.
                 The Bureau appreciates the concerns expressed by some stakeholders
                concerning the uses of 1071 data. The Bureau believes that the firewall
                provision of proposed Sec. 1002.108, including the proposed notice
                provision, are intended to address the concern by one trade association
                stakeholder that the collection of ethnicity, race, and sex data may
                create the perception among customers that these factors play a role in
                credit decisions. The Bureau disagrees with the stakeholder that
                asserted that 1071 data should not be used in regulatory oversight or
                examinations. Such use is contemplated by ECOA section 704B(a)(2),
                which provides that the data are intended to facilitate the enforcement
                of fair lending laws. The Bureau does agree with the same stakeholder,
                however, that 1071 data should be used to help regulators better
                understand the small business lending markets and better support such
                lending. The Bureau does not disagree in the abstract with the
                assertions made by several trade associations that misleading
                conclusions could be drawn from 1071 data; the Bureau notes that these
                stakeholders did not cite any examples and that any source of data may
                be misinterpreted absent robust procedures and methodologies. The
                Bureau believes, given its experience with HMDA data, that such
                concerns are misplaced--overall, HMDA data have helped shed light on
                previously hidden issues and proven highly effective in accomplishing
                its congressionally mandated purposes.
                 The Bureau has attempted as much as possible to propose rules that
                are both simple and clear, as SERs and other stakeholders suggested.
                For instance, the Bureau is proposing a simple definition of small
                business in proposed Sec. 1002.106 below. While the Bureau has
                endeavored to avoid unnecessary ambiguity and complexity in its
                proposed rule, complexity in the proposed rule reflects the inherent
                complexity of the subject, including the variations and diversity in
                the small business lending market as well as the complications of
                collecting data to conduct fair lending analyses and identify business
                and community development needs.
                 Regarding the request for clear written guidance and implementation
                support materials, the Bureau intends to develop various compliance
                materials, as it does with most major rules. These materials will
                include a small entity compliance
                [[Page 56384]]
                guide that will provide regulatory implementation guidance, and a
                Filing Instructions Guide that will provide technical instructions for
                the submission of 1071 data to the Bureau. With regard to the comment
                that the Bureau should provide applicant-facing materials, the Bureau
                proposes in appendix E a sample data collection form that can be used
                to collect from applicants their minority-owned business status, women-
                owned business status, and the ethnicity, race, and sex of their
                principal owners, along with the related required disclosures.
                 The Bureau generally agrees with the observation of a number SERs
                that financial institutions with extensive online lending operations
                would likely find compliance with a section 1071 rule easier than those
                with primarily in-person operations. The Bureau sets out its
                preliminary assessment of the costs of the rule on financial
                institutions in parts VII and VIII below.
                 The Bureau has attempted, whenever possible, to align or conform
                its proposed rule with other Federal data reporting regimes, as several
                SERs and other stakeholders requested. The Bureau references and, where
                possible, aligns the proposed rule with specific Federal data reporting
                regimes, as explained in the section-by-section analyses below. The
                Bureau appreciates the comments made by some SERs and other
                stakeholders that there are different types of financial institutions
                in the small business lending market and that the differences between
                institutional types may complicate data analysis. The Bureau notes,
                however, that simply excluding certain types of institutions from 1071
                reporting requirements would be inconsistent with the statutory
                purposes of section 1071, and that it would be more congruent with
                section 1071 instead to collect information on financial institution
                type as set out in proposed Sec. 1002.109(b)(9), for the reasons set
                out below.
                E. Cross-Cutting Interpretive Issues
                1. The Bureau's Approach to Non-Small Women-Owned and Minority-Owned
                Businesses in This Rulemaking
                 The Bureau is proposing to require financial institutions to
                collect and report data regarding applications for credit for small
                businesses; the Bureau is not, however, proposing to require financial
                institutions to collect and report data with respect to applicants that
                are not small businesses. ECOA section 704B(b) states that ``in the
                case of any application to a financial institution for credit for [a]
                women-owned, minority-owned, or small business,'' the financial
                institution must ``inquire whether the business is a women-owned,
                minority-owned or small business . . . .'' For the reasons set forth
                below, the Bureau is proposing this approach as an interpretation of
                the statute pursuant to its authority under 704B(g)(1), and, in the
                alternative, pursuant to its authority under 704B(g)(2) to adopt
                exceptions to any requirement of section 1071 as the Bureau deems
                necessary or appropriate to carry out the purposes of section 1071 and
                its implied de minimis authority.
                 The Bureau explained in the SBREFA Outline that in light of the
                comprehensive coverage of women-owned and minority-owned businesses
                within the scope of small businesses (discussed in more detail below),
                it was considering proposing that the data collection and reporting
                requirements of its eventual 1071 rule would apply to any application
                to a financial institution for credit only for small businesses as
                defined under the eventual 1071 rule.\276\ The Bureau explained that it
                was concerned that a requirement to collect and report 1071 data on
                applications for women-owned and minority-owned businesses that are not
                small businesses could affect all aspects of financial institutions'
                commercial lending operations while resulting in limited information
                beyond what would already be collected and reported about women-owned
                and minority-owned small businesses. In addition, financing for large
                businesses can be much more varied and complex than are the products
                used for small business lending. Thus, under the approach the Bureau
                was considering proposing, financial institutions would collect and
                report lending data for all applicants that satisfy the Bureau's
                definition of a small business, including identifying women-owned and
                minority-owned businesses within that pool, but financial institutions
                would not be required to collect and report 1071 data for women-owned
                and minority-owned businesses that are not ``small.''
                ---------------------------------------------------------------------------
                 \276\ SBREFA Outline at 9.
                ---------------------------------------------------------------------------
                 In the SBREFA Outline, the Bureau noted that most existing
                businesses, including almost all women-owned and minority-owned
                businesses, are ``small business concerns'' as that term is currently
                defined by the SBA.\277\ Therefore, the Bureau posited that coverage of
                small businesses by this rule would necessarily include nearly all
                women-owned and minority-owned businesses. Based on the 2018 Annual
                Business Survey by the U.S. Census, the Bureau estimated that 5.72
                million employer firms--99.6 percent of all employer firms--are small
                (defined for the purposes of the survey as having fewer than 500
                employees). That same definition covers one million minority-owned
                employer firms (99.9 percent of all minority-owned firms) and 1.1
                million women-owned employer firms (99.9 percent of all women-owned
                firms).\278\ The Bureau estimated that, among non-small businesses,
                which are only 0.4 percent of all firms nationally, 10 percent of this
                small fraction are minority-owned firms and 13 percent are women-
                owned.\279\
                ---------------------------------------------------------------------------
                 \277\ See the section-by-section analysis of proposed Sec.
                1002.106 below for additional discussion regarding the definition of
                ``small business'' for purposes of this rulemaking.
                 \278\ SBREFA Outline at 9.
                 \279\ Id.
                ---------------------------------------------------------------------------
                 A number of SERs expressed a belief that covering just small
                business applications would supply adequate or nearly complete lending
                data for purposes of section 1071.\280\ However, other SERs stated that
                the Bureau's regulation should collect data regarding applications for
                credit for non-small minority-owned and women-owned businesses as well.
                One SER relayed first-hand observations in their community that larger
                minority-owned and women-owned businesses were excluded from full
                access to credit, and expressed an interest in the Bureau capturing and
                reporting that information. One SER observed that smaller financial
                institutions, or those that generally focus on small business lending,
                might find that collecting and reporting data for all business loan
                applications would be simpler than determining which applications would
                be within the scope of the eventual 1071 rule.
                ---------------------------------------------------------------------------
                 \280\ The SER feedback discussed in herein can be found in the
                SBREFA Panel Report at 18.
                ---------------------------------------------------------------------------
                 The SBREFA Panel recommended that the Bureau continue to explore
                whether the data collection and reporting requirements in its 1071 rule
                should be limited to any application to a financial institution for
                credit only for small businesses (as defined by the Bureau's
                regulation) or whether it should also extend to applications for women-
                owned and minority-owned businesses that are not small.\281\ The Panel
                also recommended that the Bureau seek comment on the costs to small
                financial institutions of collecting and reporting 1071 data regarding
                applications for credit for women-owned and minority-owned businesses
                [[Page 56385]]
                that are not small (as defined by the Bureau's regulation).\282\
                ---------------------------------------------------------------------------
                 \281\ Id. at 43.
                 \282\ Id.
                ---------------------------------------------------------------------------
                 Feedback from other stakeholders generally supported the Bureau's
                approach to limiting 1071 data collection to small businesses,
                including identifying women- and minority-owned businesses within that
                pool. A number of commenters expressed support for the Bureau's
                approach under consideration, arguing that requiring data collection
                for non-small women- and minority-owned businesses would increase
                compliance burden without significantly contributing to 1071's
                purposes. Some responses also stated that this approach was consistent
                with legislative intent, positing that Congress did not intend for
                financial institutions to collect 1071 data on large companies. A
                community group noted that its support for the Bureau's approach was
                conditional on the Bureau adopting a broad definition of small
                business, thus limiting the likelihood of missing significant women-
                and minority-owned business application data. A joint comment from a
                number of community groups urged the Bureau to monitor the market and
                to reevaluate this approach if later publications of the Annual
                Business Survey show that the number of non-small women- and minority-
                owned businesses exceed current estimates. Another joint comment from
                community groups did not support the Bureau's approach under
                consideration, urging the Bureau to consider instead covering non-small
                women- and minority-owned businesses in the data collection and arguing
                that it might be easier for financial institutions to collect data for
                all applicants, as opposed to developing systems for screening out
                applicants that are not covered. Two banks suggested that 1071 data
                collection should extend to all businesses; one was concerned about
                fair lending disparities, while the other remarked that large business
                applicants should not be relieved of the burden of having their data
                collected under 1071.
                 The Bureau believes that section 1071 is ambiguous with respect to
                its coverage of applications for credit for non-small women- or
                minority-owned businesses, and the Bureau therefore proposes to
                interpret this ambiguity pursuant to ECOA section 704B(g)(1). The
                Bureau acknowledges that the plain language of 704B(b) could be read to
                require financial institutions to collect information from all women-
                owned and minority-owned businesses, including those that are not small
                businesses. But based on a close consideration of the text, structure,
                and purpose of the statute, and the interactions between section 1071
                and other provisions of ECOA and Regulation B, the Bureau believes that
                the statute's coverage of, and Congress's intent with respect to, data
                regarding non-small businesses is ambiguous.
                 The Bureau interprets ECOA section 704B(b) and (b)(1) to require
                that financial institutions first determine whether an applicant is a
                small business within the scope of the rule's data collection before
                making the required inquiries that would otherwise be prohibited by
                existing Regulation B. There is a general prohibition in existing
                Regulation B (in Sec. 1002.5(b)) which states that a ``creditor shall
                not inquire about the race, color, religion, national origin, or sex of
                an applicant or any other person in connection with a credit
                transaction, except'' if expressly permitted to do so by law or
                regulation.
                 In the introductory language to ECOA section 704B(b), Congress
                instructed that the 1071 data collection regime applies only ``in the
                case of any application to a financial institution for credit for
                women-owned, minority-owned, or small business'' (emphasis added). The
                Bureau believes that ``in the case of'' indicates Congress's intent to
                limit application of section 1071 to these types of businesses, rather
                than requiring financial institutions to make 1071-related inquiries of
                all business applicants for credit.\283\ The next paragraph
                (704B(b)(1)) does not use the conditional phrase ``in the case of''
                used in 704B(b); rather, it instructs a financial institution to
                ``inquire.'' The Bureau believes that the instruction to ``inquire'' in
                704B(b)(1) is intended to provide the necessary exception to Regulation
                B's general prohibition against ``inquir[ing]'' as to protected
                demographic information in connection with a credit transaction.\284\
                Indeed, absent section 1071's lifting of the prohibition, generally, a
                financial institution could not determine, or even ask about, an
                applicant's women- or minority-owned status, because doing so would
                necessarily constitute ``inquir[ing] about the race, color, religion,
                national origin, or sex of an applicant'' in violation of existing
                Sec. 1002.5(b). The Bureau believes that Congress likely intended to
                ensure that financial institutions could determine whether an applicant
                is covered by the 1071 data collection without risking a violation of
                other provisions of ECOA and Regulation B.
                ---------------------------------------------------------------------------
                 \283\ Merriam-Webster defines ``case'' as meaning ``a set of
                circumstances or conditions,'' ``a situation requiring investigation
                or action (as by the police),'' or ``the object of investigation or
                consideration.''
                 \284\ As discussed in greater detail in the next section, the
                fact that the language of ECOA section 704B(b)(1) is designed to
                expressly permit inquiry into protected demographic information,
                which would otherwise be prohibited by existing Sec. 1002.5(b), is
                also evidenced by the statute's three provisions creating special
                protections for responses to the inquiry: 704B(b)(2) requires that
                responses to protected inquiries remain separate from the
                application and accompanying information; 704B(c) requires that
                applicants have a right to refuse to answer the protected inquiry;
                and 704B(d) requires that certain underwriters or other employees
                involved in making determinations on an application not have access
                to the responses to protected inquiries.
                ---------------------------------------------------------------------------
                 However, unlike with women- and minority-owned business status,
                there is no legal impediment to a financial institution's determining
                whether an applicant is a small business, and financial institutions
                can make that determination as a threshold matter without risking
                running afoul of ECOA and Regulation B. Therefore, the Bureau believes
                that the scope of the introductory ``in the case of'' language in ECOA
                section 704(b) is ambiguous as to coverage of non-small women- and
                minority-owned businesses. To resolve this ambiguity, the Bureau has
                applied its expertise to interpreting the language and structure of
                1071 within the context of the general prohibition on inquiring into
                protected demographic information in existing Sec. 1002.5(b), and
                concludes that ECOA section 704B(b)(1) is best read as only referring
                to questions about applicants' protected demographic information (i.e.,
                women- and minority-owned business status as well as the race, sex, and
                ethnicity of the principal owners of the business). The Bureau believes
                704B(b)'s more general ``in the case of'' language should be understood
                to indicate the conditions under which 1071 data collection should take
                place, and requires financial institutions to make a threshold
                determination that an applicant is a small business before proceeding
                with an inquiry into the applicant's protected demographic information.
                 The Bureau also notes that the collection of data on applications
                for non-small women- or minority-owned businesses would not carry out
                either of section 1071's stated purposes because the data would be of
                only limited usefulness for conducting the relevant analyses of non-
                small businesses. Such analyses would necessitate comparing data
                regarding non-small women-owned and minority-owned business applicants
                to data regarding non-small non-women-owned and non-minority-owned
                business applicants, in order to control for lending outcomes that
                result from differences in applicant size. But section 1071 does not
                require or otherwise address the collection of data for non-small
                business applicants that
                [[Page 56386]]
                are not women- or minority-owned. Therefore, the resulting data set
                will lack a control group, arguably the most meaningful comparator for
                any data on non-small women- or minority-owned businesses. It is
                unlikely that Congress intended, and the statute is reasonably read not
                to require, the collection of data that would be of limited
                utility.\285\
                ---------------------------------------------------------------------------
                 \285\ See, e.g., Pub. Citizen v. U.S. Dep't of Just., 491 U.S.
                440, 454 (1989) (``Where the literal reading of a statutory term
                would `compel an odd result,' Green v. Bock Laundry Machine Co., 490
                U.S. 504, 509 (1989), we must search for other evidence of
                congressional intent to lend the term its proper scope.'').
                ---------------------------------------------------------------------------
                 Finally, the Bureau notes that the title of section 1071 is ``Small
                Business Data Collection,'' and 1071 amends ECOA to add a new section
                titled ``Small Business Loan Data Collection.'' In the presence of
                ambiguity, these titles provide some additional evidence that Congress
                did not intend the statute to authorize the collection of data on
                businesses that are not small.\286\
                ---------------------------------------------------------------------------
                 \286\ Almendarez-Torres v. United States, 523 U.S. 224, 234
                (1998) (`` `[T]he title of a statute and the heading of a section'
                are `tools available for the resolution of a doubt' about the
                meaning of a statute.'') (quoting Bhd. of R.R. Trainmen v. Balt. &
                Ohio R.R., 331 U.S. 519, 529 (1947)).
                ---------------------------------------------------------------------------
                 For these reasons, the Bureau proposes to interpret ECOA section
                704B(b) to cover the collection only of data with respect to small
                businesses, including those that are women- and minority-owned.
                Likewise, as discussed immediately below in E.2 of this Overview to
                part V, the Bureau is proposing to clarify that the 704B(b)(1) inquiry,
                when applicable, pertains to an applicant's minority-owned business
                status and women-owned business status as well as the race, sex, and
                ethnicity of its principal owners. For the same reasons, the Bureau
                believes that not requiring the collection of data with respect to
                applications for non-small businesses would be necessary or appropriate
                to carry out the purposes of section 1071; therefore, in the
                alternative, the Bureau proposes to exercise its exception authority in
                704B(g)(2) to effect this outcome. Finally, because the Bureau believes
                that the collection of data on non-small women- and minority-owned
                businesses would ``yield a gain of trivial or no value,'' the Bureau
                proposes, in the alternative, to exercise its implied de minimis
                authority to create this exception.\287\
                ---------------------------------------------------------------------------
                 \287\ Waterkeeper All. v. EPA, 853 F.3d 527, 530 (D.C. Cir.
                2017) (quoting Pub. Citizen v. FTC, 869 F.2d 1541, 1556 (D.C. Cir.
                1989)); see Alabama Power Co. v. Costle, 636 F.2d 323, 360-61 (D.C.
                Cir. 1979).
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed approach to limiting the
                scope of data collection pursuant to subpart B to covered applications
                for small businesses, but not women- or minority-owned businesses that
                are not small. As recommended by the SBREFA Panel, the Bureau also
                seeks comment on the costs to small financial institutions of
                collecting and reporting 1071 data regarding applications for credit
                for women-owned and minority-owned businesses that are not small
                businesses as defined in proposed Sec. 1002.106(b). See the section-
                by-section analysis of proposed Sec. 1002.106(b) below, where the
                Bureau is seeking comment on the proposed definition of a small
                business.
                2. The Meaning of ``information requested pursuant to subsection (b)''
                 Four different provisions of section 1071 refer to or rely on
                ``information requested pursuant to subsection (b)'' or similar
                language. First, ECOA section 704B(b)(2) provides that financial
                institutions must ``maintain a record of the responses to such
                inquiry'' and keep those records separate from the application and
                information that accompanies it. Second, 704B(c) states that applicants
                for credit ``may refuse to provide any information requested pursuant
                to subsection (b).'' Third, 704B(d) requires financial institutions to
                limit the access of certain employees to ``information provided by the
                applicant pursuant to a request under subsection (b),'' with certain
                exceptions. Fourth, 704B(e) instructs financial institutions that
                ``information provided by any loan applicant pursuant to a request
                under subsection (b) . . . shall be itemized in order to clearly and
                conspicuously disclose'' data including the loan type and purpose,
                amount of credit applied for and approved, and gross annual revenue.
                 In light of these four disparate provisions, the Bureau believes
                that section 1071 is ambiguous with respect to the meaning of ``any
                information provided by the applicant pursuant to a request under
                subsection (b).'' \288\ On the one hand, ECOA section 704B(b)(1)
                directs financial institutions to inquire whether a business is ``a
                women-owned, minority-owned, or small business,'' so the phrase could
                be interpreted as referring only to those three data points. Section
                704B(e), however, indicates that the scope of 704B(b) could be much
                broader; it suggests that all of the information that financial
                institutions are required to compile and maintain--not simply an
                applicant's status as a women-owned, minority-owned, or small
                business--constitutes information provided by an applicant ``pursuant
                to a request under subsection (b).'' But as noted above, information
                deemed provided pursuant to subsection (b) is subject to the notable
                protections of separate recordkeeping under 704B(b)(2), a right to
                refuse under 704B(c), and the firewall under 704B(d). Applying these
                special protections to many of the data points in 704B(e), such as
                gross annual revenue or amount applied for, would be extremely
                difficult to implement, because this information is critical to
                financial institutions' ordinary operations in making credit decisions.
                Additionally, 704B(e) describes as ``provided by any loan applicant''
                under 704B(b) data points that plainly must come from the financial
                institution itself, such as application number and action taken,
                further suggesting that Congress viewed this term as encompassing more
                information than lies within the four corners of 704B(b)(1). Finally,
                as noted above, the circular structure of 704B(b) complicates the
                question of what constitutes information provided ``pursuant to a
                request under subsection (b).'' Read together, the introductory
                language in 704B(b) and (b)(1) direct financial institutions, ``in the
                case of'' a credit application ``for [1] women-owned, [2] minority-
                owned, or [3] small business,'' to ``inquire whether the business is a
                [1] women-owned, [2] minority-owned, or [3] small business.'' The
                Bureau believes that this circularity further demonstrates the
                ambiguity of the phrase ``pursuant to a request under subsection (b).''
                ---------------------------------------------------------------------------
                 \288\ The Bureau does not believe that the minor linguistic
                variations in these four provisions themselves have significance.
                ---------------------------------------------------------------------------
                 The Bureau believes that it is reasonable to resolve these
                ambiguities by giving different meanings to the phrase ``any
                information provided by the applicant pursuant to a request under
                subsection (b)'' (or similar) with respect to ECOA section 704B(e) as
                opposed to 704B(b)(2), (c), and (d).\289\ With respect to 704B(e), the
                Bureau interprets the phrase to refer to all the data points now
                articulated in proposed Sec. 1002.107(a). Section 704B(e) is the
                source of financial institutions' obligation to ``compile and
                maintain'' data that they must then submit to the
                [[Page 56387]]
                Bureau, so it would be reasonable to interpret this paragraph as
                referring to the complete data collection Congress devised in enacting
                section 1071.
                ---------------------------------------------------------------------------
                 \289\ While there is a presumption that a phrase appearing in
                multiple parts of a statute has the same meaning in each, ``this is
                no more than a presumption. It can be rebutted by evidence that
                Congress intended the words to be interpreted differently in each
                section, or to leave a gap for the agency to fill.'' Catskill
                Mountains Chapter of Trout Unlimited, Inc. v. EPA, 846 F.3d 492, 532
                (2d Cir. 2017) (citing Env't Def. v. Duke Energy Corp., 549 U.S.
                561, 575 (2007)). Here, the Bureau believes Congress indicated such
                an intention by using the same phrase in the substantially different
                contexts of providing special protections for sensitive demographic
                information on the one hand and ``itemiz[ing]'' all collected data
                on the other.
                ---------------------------------------------------------------------------
                 But with respect to the three statutory provisions creating special
                protections for certain information--the firewall in ECOA section
                704B(d), separate recordkeeping in 704B(b)(2), and the right to refuse
                in 704B(c)--the Bureau interprets the phrase to refer to the data
                points in proposed Sec. 1002.107(a)(18) (women-owned business status),
                (a)(19) (minority-owned business status), and (a)(20) (ethnicity, race,
                and sex of principal owners).\290\ Each of these data points requests
                sensitive demographic information that has no bearing on the
                creditworthiness of the applicant, about which existing Sec. 1002.5(b)
                would generally prohibit the financial institution from inquiring
                absent section 1071's mandate to collect and report that information,
                and with respect to which applicants are protected from discrimination.
                The Bureau accordingly believes that it would be reasonable to apply
                section 1071's special-protection provisions to apply to this
                information, regardless of whether the statutory authority to collect
                it originates in 704B(b)(1) (women-owned and minority-owned business
                status) or 704B(e)(2)(G) (race, sex, and ethnicity of principal
                owners). The Bureau similarly believes that it would have been
                unreasonable for Congress to have intended that these special
                protections would apply to any of the other data points now proposed in
                Sec. 1002.107(a), which the financial institution is permitted to
                request regardless of coverage under section 1071 which are not the
                subject of Federal antidiscrimination law, and many of which financial
                institutions currently use for underwriting purposes.
                ---------------------------------------------------------------------------
                 \290\ The Bureau's interpretations with respect to a separate
                data point for small business status are discussed in the next
                section.
                ---------------------------------------------------------------------------
                 The Bureau implements these interpretations of ``information
                requested pursuant to subsection (b)'' in several different section-by-
                section discussions. With respect to ECOA section 704B(e), the Bureau
                discusses its interpretation of the phrase in the section-by-section
                analysis of proposed Sec. 1002.107(a). The Bureau's interpretation of
                704B(d)'s firewall requirement is addressed at greater length in the
                section-by-section analysis of proposed Sec. 1002.108, and the
                Bureau's interpretation of the separate recordkeeping requirement in
                704B(b)(2) is addressed in the section-by-section analysis of proposed
                Sec. 1002.111(b). The right to refuse in 704B(c) is discussed in the
                section-by-section analyses of the data points that the Bureau proposes
                to be subject to the right to refuse: Proposed Sec. 1002.107(a)(18)
                (women-owned business status), (19) (minority-owned business status),
                and (20) (ethnicity, race, and sex of principal owners).
                3. No Collection of Small Business Status as a Data Point
                 The Bureau notes that neither of its interpretations of
                ``information requested pursuant to subsection (b)'' reference a
                specific data point for an applicant's status as a small business, nor
                is the Bureau otherwise including in proposed Sec. 1002.107(a) that
                financial institutions collect, maintain, or submit a data point whose
                sole function is to state whether the applicant is or is not a small
                business.
                 At SBREFA, the Bureau conveyed that it was considering proposing
                small business status as a separate data point. The Bureau also stated
                that it was considering not proposing to extend the right to refuse or
                firewall to a financial institution's specific inquiry regarding small
                business status; \291\ the Bureau did not address in the SBREFA Outline
                whether small business status would be subject to the separate
                recordkeeping requirement. In lieu of further details about the
                potential data point on small business status, the Bureau noted that it
                was considering proposing that collection and reporting of whether an
                applicant for credit is a small business be based on applicant-reported
                information, but that the precise nature of the data point would depend
                on the ultimate definition of small business.
                ---------------------------------------------------------------------------
                 \291\ SBREFA Outline at 25.
                ---------------------------------------------------------------------------
                 As discussed below in the section-by-section analysis of proposed
                Sec. 1002.106(b), the Bureau is now proposing a definition of small
                business that largely adopts the SBREFA Outline's First Alternative
                Approach with a threshold of $5 million. After considering the
                implications of this approach, the Bureau now believes that it would
                render redundant any requirement that financial institutions also
                collect a standalone data point whose sole purpose is to state whether
                an applicant is a small business, because the gross annual revenue data
                point wholly encompasses whether an applicant is a small business.
                Indeed, under the proposed definition of small business, when a
                financial institution asks an applicant its gross annual revenue, that
                question is functionally identical to asking, ``are you a small
                business?'' The Bureau believes that it would be a reasonable
                interpretation of ECOA section 704B(b)'s query as to small business
                status for that question to take the form of, ``what is your gross
                annual revenue?'' Furthermore, as discussed above with respect to the
                Bureau's approach to non-small women- and minority-owned businesses,
                the Bureau is interpreting financial institutions' data collection
                obligations as attaching only in the case of applications from small
                businesses; if a financial institution determines that an applicant is
                not a small business, none of the obligations under this rule would
                apply. As such, a standalone data point that serves only to designate
                whether a business qualifies as small for purposes of the rule would be
                redundant with the mere fact that the 1071 data collection occurs at
                all, as well as with the collection of gross annual revenue.
                 The Bureau acknowledges that the plain language of ECOA section
                704B(b) could be read to require financial institutions to ask
                applicants subject to the data collection the precise question, ``are
                you a small business?'' Upon further analysis, however, the Bureau
                believes that Congress's intended treatment of small business status as
                a standalone data point is ambiguous. As described in more detail above
                with respect to the rulemaking's coverage of women- and minority-owned
                businesses that are not small, 704B(b)'s introductory language and
                704B(b)(1) appear to require financial institutions to know the answer
                to whether an applicant is women-owned, minority-owned, or small before
                they make their inquiry; to resolve this ambiguity, the Bureau
                interprets 704B(b)'s introductory language and 704B(b)(1) to require
                that financial institutions first straightforwardly assess whether an
                applicant is a small business before proceeding to inquire into the
                applicant's protected demographic information that would otherwise be
                prohibited by existing Sec. 1002.5(b).
                 In sum, pursuant to its authority under ECOA section 704B(g)(1) to
                prescribe such rules as may be necessary to carry out, enforce, and
                compile data pursuant to section 1071, the Bureau interprets 704B(b)
                and (b)(1) to obviate the need for financial institutions to collect a
                standalone data point whose sole purpose is to note an applicant's
                small business status. For the same reasons, the Bureau believes that
                not requiring the collection of a separate data point on small business
                status would be necessary or appropriate to carry out the purposes of
                section 1071; therefore, in the alternative, the Bureau proposes to
                exercise its exception authority in 704B(g)(2) to effect this outcome.
                [[Page 56388]]
                Finally, because the Bureau believes that the collection of a
                standalone data point on small business status would ``yield a gain of
                trivial or no value,'' the Bureau proposes, in the alternative, to
                exercise its implied de minimis authority to create this
                exception.\292\
                ---------------------------------------------------------------------------
                 \292\ Waterkeeper All., 853 F.3d at 530 (quoting Pub. Citizen,
                869 F.2d at 1556); see Alabama Power, 636 F.2d at 360-61.
                ---------------------------------------------------------------------------
                 In light of the above, the Bureau seeks comment on whether a
                standalone data point solely dedicated to small business status might
                nonetheless be useful and, if so, how it might be implemented.
                F. Conforming Amendments to Existing Regulation B
                 As discussed above, the Bureau is proposing to implement its
                section 1071 rule in a new subpart B of Regulation B. The content of
                existing Regulation B would become subpart A of Regulation B. This
                change would not affect the current section numbering in Regulation B.
                The Bureau believes it is appropriate to make this rule a part of
                Regulation B, as section 1071 is a part of ECOA. Nonetheless, the
                Bureau seeks comment on whether it should instead codify its section
                1071 rule as a free-standing regulation with its own CFR part and, if
                so, why.
                 As noted above and as discussed in more detail below, the Bureau is
                proposing amendments to amend existing Sec. 1002.5(a)(4) and
                associated commentary to expressly permit voluntary collection of
                minority-owned business status, women-owned business status, and the
                race, sex, and ethnicity of applicants' principal owners in accordance
                with the requirements of subpart B. In addition, the Bureau anticipates
                revising certain references to the entire regulation (which use the
                terms ``regulation'' or ``part'') in existing Regulation B to instead
                refer specifically to subpart A. The Bureau does not intend to make any
                substantive changes with these revisions, but rather intends to
                maintain the status quo.
                Subpart A--General
                Section 1002.5 Rules Concerning Requests for Information
                5(a) General Rules
                5(a)(4) Other Permissible Collection of Information
                Background
                 ECOA prohibits creditors from discriminating against applicants,
                with respect to any aspect of a credit transaction, on the basis of--
                among other things--race, color, religion, national origin, sex or
                marital status, or age.\293\ It also states that making an inquiry
                under 15 U.S.C. 1691c-2 (that is, section 1071), in accordance with the
                requirements of that section, shall not constitute discrimination for
                purposes of ECOA.\294\ Regulation B, in existing Sec. 1002.5(b),
                generally prohibits a creditor from inquiring about protected
                demographic information in connection with a credit transaction unless
                otherwise required by Regulation B, ECOA, or other Federal law or
                regulation.\295\
                ---------------------------------------------------------------------------
                 \293\ 15 U.S.C. 1691(a).
                 \294\ 15 U.S.C. 1691(b)(5).
                 \295\ Existing Sec. 1002.5(a)(2).
                ---------------------------------------------------------------------------
                 In 2017, the Bureau amended Regulation B, adding Sec. 1002.5(a)(4)
                to allow creditors to collect ethnicity, race, and sex from mortgage
                applicants in certain cases where the creditor is not required to
                report under HMDA and Regulation C.\296\ As part of this rulemaking,
                the Bureau added Sec. 1002.5(a)(4) to expressly permit the collection
                of ethnicity, race, and sex information from mortgage applicants in
                certain cases where the creditor is not required to report under HMDA
                and Regulation C. For example, existing Sec. 1002.5(a)(4) expressly
                permits the collection of ethnicity, race, and sex information for
                certain transactions for which Regulation C permits optional reporting.
                However, nothing in existing Regulation B (or in ECOA) expressly
                permits voluntary collection and reporting of information regarding the
                ethnicity, race, and sex of applicants' principal owners, or whether
                the applicant is a minority-owned business or women-owned business,
                under section 1071.
                ---------------------------------------------------------------------------
                 \296\ Equal Credit Opportunity Act (Regulation B) Ethnicity and
                Race Information Collection, 82 FR 45680, 45684 (Oct. 2, 2017).
                ---------------------------------------------------------------------------
                SBREFA Proposal Under Consideration and Feedback Received
                 During the SBREFA process, some SERs, primarily small CDFIs and
                mission-oriented community banks, stated that they would be inclined to
                collect and report 1071 data to the Bureau even if not required to do
                so, such as if they fell under loan-volume thresholds. These SERs
                expressed an intent to report data even if not required to out of a
                belief in the importance and utility of 1071 data.
                Proposed Rule
                 The Bureau is proposing to amend existing Sec. 1002.5(a)(4) to add
                three exemptions (in proposed Sec. 1002.5(a)(4)(vii), (viii), and
                (ix)) that would permit certain creditors that are not covered
                financial institutions under the rule to collect small business
                applicants' protected demographic information under certain
                circumstances. The Bureau is also proposing to add comment 5(a)(2)-4
                and to revise existing comment 5(a)(4)-1 to provide guidance on these
                proposed exemptions.
                 Proposed Sec. 1002.5(a)(4)(vii) would provide that a creditor that
                was required to report small business lending data pursuant to proposed
                Sec. 1002.109 for any of the preceding five calendar years but is not
                currently a covered financial institution under proposed Sec.
                1002.105(b) may collect information pursuant to proposed subpart B for
                a covered application as defined in proposed Sec. 1002.103 regarding
                whether the applicant is a minority-owned business or a women-owned
                business, and the ethnicity, race, and sex of the applicant's principal
                owners if it complies with the requirements of proposed subpart B as
                otherwise required for covered financial institutions pursuant to
                proposed Sec. Sec. 1002.107, 1002.108, 1002.111, 1002.112, and
                1002.114 for that application. In short, proposed Sec.
                1002.5(a)(4)(vii) would permit a previously covered financial
                institution to collect such information for covered applications for up
                to five years after it fell below the loan-volume threshold of proposed
                Sec. 1002.105(b), provided that it does so in accordance with the
                relevant requirements of proposed subpart B.
                 The Bureau expects that some creditors that are no longer covered
                financial institutions and thus no longer required to report 1071 data
                in a given reporting year may prefer to continue to collect applicants'
                protected demographic information in the event they become a covered
                financial institution again, in order to maintain consistent compliance
                standards from year to year. As it did in a similar context for HMDA
                reporting,\297\ the Bureau believes that permitting such collection for
                five years provides an appropriate time frame under which a financial
                institution should be permitted to continue collecting the information
                without having to change its compliance processes. The Bureau believes
                that a five-year period is sufficient to help an institution discern
                whether it is likely to have to report 1071 data in the near future but
                not so long as to permit it to collect such information in a period too
                attenuated from previous 1071 reporting.
                ---------------------------------------------------------------------------
                 \297\ Existing Sec. 1002.5(a)(4)(iii).
                ---------------------------------------------------------------------------
                 Therefore, the Bureau believes that it is an appropriate use of its
                statutory authority under sections 703(a) \298\ and
                [[Page 56389]]
                704B(g)(1) of ECOA to permit creditors to collect the 1071 demographic
                information in the manner set out in proposed Sec. 1002.5(a)(4)(vii).
                The proposal would effectuate the purposes of and facilitate compliance
                with ECOA and is necessary to carry out, enforce, and compile data
                pursuant to section 1071 because it would permit creditors to collect
                information without interruption from year to year, thereby
                facilitating compliance with the 1071 rule's data collection
                requirements and improving the quality and reliability of the data
                collected. The Bureau also believes that this provision is narrowly
                tailored and would preserve and respect the general limitations in
                existing Sec. 1002.5(b) through (d).
                ---------------------------------------------------------------------------
                 \298\ 15 U.S.C. 1691b(a).
                ---------------------------------------------------------------------------
                 Proposed Sec. 1002.5(a)(4)(viii) would provide that a creditor
                that exceeded the loan-volume threshold in the first year of the two-
                year threshold period provided in proposed Sec. 1002.105(b) may, in
                the second year, collect information pursuant to proposed subpart B for
                a covered application as defined in proposed Sec. 1002.103 regarding
                whether the applicant is a minority-owned business or a women-owned
                business, and the ethnicity, race, and sex of the applicant's principal
                owners if it complies with the requirements of subpart B as otherwise
                required for covered financial institutions pursuant to proposed
                Sec. Sec. 1002.107, 1002.108, 1002.111, 1002.112, and 1002.114 for
                that application.
                 The Bureau believes that its proposal would benefit creditors in
                certain situations in which the creditor has not previously reported
                1071 data but expects to be covered in the following year and wishes to
                prepare for that future reporting obligation. For example, where a
                creditor surpasses the loan-volume threshold of proposed Sec.
                1002.105(b) for the first time in a given calendar year, it may wish to
                begin collecting applicants' protected demographic information for
                covered applications received in the next calendar year (second
                calendar year) so as to ensure its compliance systems are fully
                functional before it is required to collect and report information
                pursuant to proposed subpart B in the following calendar year (third
                calendar year).
                 The Bureau believes that it is an appropriate use of its statutory
                authority under sections 703(a) and 704B(g)(1) of ECOA to permit
                creditors to collect information under proposed Sec.
                1002.5(a)(4)(viii). A creditor likely would benefit from being able to
                collect applicants' protected demographic information with assurance of
                compliance with existing Sec. 1002.5 regardless of whether it actually
                becomes subject to proposed subpart B reporting at the end of the two-
                year threshold period. The proposal would effectuate the purposes of
                and facilitate compliance with ECOA and is necessary to carry out,
                enforce, and compile data pursuant to section 1071 because it would
                facilitate compliance with the 1071 rule's data collection requirements
                and improve the quality and reliability of the data collected by
                financial institutions that may be transitioning into being required to
                collect and report 1071 data.
                 Proposed Sec. 1002.5(a)(4)(ix) would state that a creditor that is
                not currently a covered financial institution under proposed Sec.
                1002.105(b), and is not otherwise a creditor to which proposed Sec.
                1002.5(a)(4)(vii) or (viii) applies, may collect information pursuant
                to proposed subpart B for a covered application as defined in proposed
                Sec. 1002.103 regarding whether an applicant for a covered credit
                transaction is a minority-owned business or a women-owned business, and
                the ethnicity, race, and sex of the applicant's principal owners if the
                creditor complies with the requirements of proposed subpart B as
                otherwise required for covered financial institutions pursuant to
                proposed Sec. Sec. 1002.107 through 1002.112 and 1002.114 for that
                application. The proposal would permit a financial institution that
                wishes to voluntarily report 1071 data to collect applicants' protected
                demographic information without running afoul of Regulation B. Unlike
                creditors subject to proposed Sec. 1002.5(a)(4)(vii) or (viii), a
                creditor seeking to voluntarily collect applicant's protected
                demographic information under proposed Sec. 1002.5(a)(4)(ix) would be
                required to report it to the Bureau.
                 The Bureau believes that permitting creditors to collect 1071
                demographic information pursuant to proposed Sec. 1002.5(a)(4)(vii) or
                (viii) would facilitate compliance and promote data quality in the
                event that creditors subject to those provisions later become covered
                financial institutions. For those creditors that wish to voluntarily
                report 1071 data, as well as others covered by proposed Sec.
                1002.5(a)(4)(ix) (where reporting is required when applicants'
                protected demographic information is collected), the reported data
                would be additional information that would further the intended
                purposes of the statute. An analysis of business and community
                development needs would benefit from the inclusion of voluntarily
                reported data from financial institutions below the reporting
                threshold. Such institutions more often serve sparsely populated rural,
                underserved communities or are member-owned organizations (such as
                credit unions). As some SERs suggested, the voluntary collection and
                reporting of 1071 data by such financial institutions may stem from a
                community development orientation and commitment to fair lending.
                Further, the reporting of such data would provide a more complete
                picture of total lending activity--and therefore enable a more complete
                analysis of fair lending risks as well as business and community
                development needs--especially given that larger financial institutions
                may be less likely to operate in sparsely populated, rural, and
                underserved communities, for the reasons set out in part II above. The
                Bureau is proposing Sec. 1002.5(a)(4)(ix) in response to feedback from
                some stakeholders that indicated they might want to collect and report
                1071 data even if they were not required to do so. The Bureau believes,
                for the reasons set out above, that it is an appropriate use of its
                general authority under sections 703(a) and 704B(g)(1) of ECOA to
                permit creditors to collect information under proposed Sec.
                1002.5(a)(4)(ix), as such collection would effectuate the purposes of
                and facilitate compliance with ECOA and is necessary to carry out,
                enforce, and compile data pursuant to section 1071. Further, the Bureau
                believes that permitting creditors to collect applicants' protected
                demographic information would result in the collection of additional
                information that could carry out section 1071's business and community
                development purpose.
                 Existing comment 5(a)(4)-1 currently addresses recordkeeping
                requirements for ethnicity, race, and sex information that is
                voluntarily collected for HMDA under the existing provisions of Sec.
                1002.5(a)(4). The Bureau is proposing to revise this comment by adding
                to it a parallel reference to proposed subpart B, along with a
                statement that the information collected pursuant to proposed subpart B
                must be retained pursuant to the requirements set forth in proposed
                Sec. 1002.111.
                 Proposed comment 5(a)(2)-4 would state that proposed subpart B of
                Regulation B generally requires creditors that are covered financial
                institutions as defined in proposed Sec. 1002.105(a) to collect and
                report information about the ethnicity, race, and sex of the principal
                owners of applicants for certain small business credit, as well as
                whether the applicant is minority-owned or women-owned as defined in
                proposed Sec. 1002.102(m) and (s), respectively. The Bureau is
                proposing this comment for parity with existing comment 5(a)(2)-2,
                which
                [[Page 56390]]
                addresses the requirement to collect and report information about the
                race, ethnicity, and sex of applicants under HMDA. Existing comment
                5(a)(2)-3 explains that persons such as loan brokers and correspondents
                do not violate ECOA or Regulation B if they collect information that
                they are otherwise prohibited from collecting, where the purpose of
                collecting the information is to provide it to a creditor that is
                subject to HMDA or another Federal or State statute or regulation
                requiring data collection. The Bureau believes that the reference to
                another Federal statute or regulation adequately encompasses section
                1071 and proposed subpart B, and thus it does not propose to amend this
                existing comment in order to make clear that loan brokers and other
                persons collecting applicants' protected demographic information on
                behalf of covered financial institutions are not violating ECOA or
                Regulation B by doing so.
                 The Bureau seeks comment on these three proposed exemptions to be
                added to existing Sec. 1002.5(a)(4), and associated commentary,
                including whether there are other specific situations that should be
                added to the list of exemptions in Sec. 1002.5(a)(4) to permit the
                collection of applicants' protected demographic information, and
                whether any similar modifications to other provisions are necessary. In
                particular, the Bureau seeks comment on whether it should add another
                exemption to Sec. 1002.5(a)(4) relating to proposed Sec.
                1002.114(c)(1), wherein the Bureau is proposing to permit financial
                institutions to collect, but would not require them to report,
                applicants' protected demographic information prior to the compliance
                date.
                 The Bureau also notes that, as discussed in the section-by-section
                analysis of proposed Sec. 1002.104(a) below, it seeks comment on
                whether it should permit financial institutions to voluntarily collect
                and report 1071 data on applications for products that the Bureau is
                not proposing to cover. If the Bureau were to permit such voluntary
                collection and reporting, the Bureau expects to add a provision similar
                to proposed Sec. 1002.5(a)(4)(ix) to address it.
                Subpart B--Small Business Lending Data Collection
                Section 1002.101 Authority, Purpose, and Scope
                 Proposed Sec. 1002.101 would set forth the authority, purpose, and
                scope for proposed subpart B. Specifically, it would provide that
                proposed subpart B is issued by the Bureau pursuant to section 704B of
                ECOA (15 U.S.C. 1691c-2). It would further state that, except as
                otherwise provided therein, proposed subpart B applies to covered
                financial institutions, as defined in proposed Sec. 1002.105(b), other
                than a person excluded from coverage of this part by section 1029 of
                the Dodd-Frank Act. It also would set out section 1071's two statutory
                purposes of facilitating fair lending enforcement and enabling the
                identification of business and community development needs and
                opportunities for women-owned, minority-owned, and small businesses.
                 The Bureau seeks comment on its proposed approach to this section,
                including whether any other information on the 1071 rule's authority,
                purpose, or scope should be addressed herein.
                Section 1002.102 Definitions
                 The Bureau is proposing a number of definitions for terms used in
                subpart B, in Sec. 1002.102.\299\ These definitions generally fall
                into several categories. First, some definitions in proposed Sec.
                1002.102 refer to terms defined elsewhere in proposed subpart B--
                specifically, the terms business, covered application, covered credit
                transaction, covered financial institution, financial institution, and
                small business are defined in proposed Sec. Sec. 1002.106(a),
                1002.103, 1002.104, 1002.105(b), 1002.105(a), and 1002.106(b),
                respectively. These terms are of particular importance in proposed
                subpart B, and the Bureau is proposing to define them in separate
                sections, rather than in proposed Sec. 1002.102, for ease of reading.
                ---------------------------------------------------------------------------
                 \299\ The Bureau notes that there are certain terms defined in
                proposed subpart B outside of proposed Sec. 1002.102. This occurs
                where a definition is relevant only to a particular section. For
                example, the firewall provisions in proposed Sec. 1002.108 use the
                phrases ``involved in making any determination concerning a covered
                application'' and ``should have access.'' Those phrases are defined
                in Sec. 1002.108(a). Those definitions are discussed in detail in
                the section-by-section analysis of the provisions in which they
                appear.
                ---------------------------------------------------------------------------
                 Second, some terms in proposed Sec. 1002.102 are defined by cross-
                referencing the definitions of terms defined in existing Regulation B--
                specifically, business credit, credit, and State are defined by
                reference to existing Sec. 1002.2(g), (j), and (aa), respectively.
                Similarly, several definitions refer to terms defined in other
                regulations--specifically, a portion of the affiliate definition refers
                to the SBA's regulation at 13 CFR 121.103, and dwelling refers to the
                definition in Regulation C Sec. 1003.2(f). These terms are each used
                in proposed subpart B, and the Bureau believes it is appropriate to
                incorporate them into the subpart B definitions in this manner.
                 Finally, the remaining terms are defined directly in proposed Sec.
                1002.102. These include applicant, closed-end credit transaction,
                minority individual, minority-owned business, open-end credit
                transaction, principal owner, small business lending application
                register, and women-owned business, as well as a portion of the
                definition of affiliate. Some of these definitions draw on definitions
                in existing Regulation B or elsewhere in Federal laws or regulations.
                 The Bureau believes that basing this proposal's definitions on
                previously defined terms (whether in Regulation B, Regulation C, or
                regulations promulgated by another agency), to the extent possible,
                would minimize regulatory uncertainty and facilitate compliance,
                particularly where the other regulations are likely to apply, in their
                own right, to the same transactions. However, as discussed further
                below, the Bureau is in certain instances proposing to deviate from the
                existing definitions for purposes of this proposal.
                 These definitions are each discussed in detail below. The Bureau is
                proposing these definitions pursuant to its authority under section
                704B(g)(1) to prescribe such rules and issue such guidance as may be
                necessary to carry out, enforce, and compile data pursuant to section
                1071. In addition, the Bureau is proposing certain of these definitions
                to implement particular definitions in section 1071 including the
                statutory definitions set out in 704B(h). Any other authorities that
                the Bureau is relying on to propose certain definitions are discussed
                in the section-by-section analysis of those specific definitions.
                 The Bureau seeks comment on its proposed approach to each of these
                definitions, as well as whether there are any other terms that the
                Bureau should define for purposes of proposed subpart B.
                102(a) Affiliate
                 Proposed Sec. 1002.102(a) would define ``affiliate'' based on
                whether the term is used to refer to a financial institution or to an
                applicant.
                 Proposed Sec. 1002.102(a) would define ``affiliate'' with respect
                to a financial institution as any company that controls, is controlled
                by, or is under common control with, another company, as set forth in
                the Bank Holding Company Act of 1956.\300\ Existing Regulation B does
                not define affiliate. This proposed definition
                [[Page 56391]]
                would provide a consistent approach with the Bureau's Regulation C,
                which applies the term to financial institutions, as defined in
                Regulation C, for certain reporting obligations.\301\ The Bureau
                believes that this definition would be appropriate to define an
                affiliate of a financial institution, and that it should provide
                sufficient clarity for financial institutions when determining
                responsibilities under proposed subpart B.
                ---------------------------------------------------------------------------
                 \300\ 12 U.S.C. 1841 et seq.
                 \301\ See Regulation C comment 4(a)(11)-3.
                ---------------------------------------------------------------------------
                 Proposed Sec. 1002.102(a) would define ``affiliate'' with respect
                to a business or an applicant as having the same meaning as described
                in 13 CFR 121.103, which is an SBA regulation titled ``How does SBA
                determine affiliation?'' This proposed definition would provide
                consistency with the Bureau's proposed approach to what constitutes a
                small business for purposes of section 1071, as discussed in the
                section-by-section analysis of proposed Sec. 1002.106(b) below. As
                discussed in the section-by-section analysis of proposed Sec.
                1002.106(b) below, the Bureau is proposing to define a small business
                by reference to the SBA's regulations (with the exception of an
                alternate size standard, as set forth in proposed Sec. 1002.106(b)).
                As discussed in the section-by-section analysis of proposed Sec.
                1002.107(a)(14), the Bureau is proposing to permit, but not require, a
                financial institution to report the gross annual revenue for the
                applicant in a manner that includes the revenue of affiliates as well.
                As discussed in the section-by-section analysis of proposed Sec.
                1002.107(a)(16), the Bureau is proposing that a financial institution,
                if asked, shall explain to the applicant that workers for affiliates of
                the applicant would only be counted if the financial institution were
                also collecting the affiliates' gross annual revenue. The Bureau is
                therefore proposing to define affiliate in subpart B for purposes of a
                business or an applicant by referring to the SBA's definition of
                affiliate.
                 The Bureau seeks comment on its proposed approach to this
                definition.
                102(b) Applicant
                 Proposed Sec. 1002.102(b) would define ``applicant'' to mean any
                person who requests or who has received an extension of business credit
                from a financial institution. The term ``applicant'' is undefined in
                section 1071. Proposed Sec. 1002.102(b) is based on the definition of
                applicant in existing Regulation B, though for consistency with other
                parts of this proposed rule, it adds a limitation that the credit be
                business credit and uses the term financial institution instead of
                creditor. It also omits the references to other persons who are or may
                become contractually liable regarding an extension of credit such as
                guarantors, sureties, endorsers, and similar parties. The Bureau is
                concerned that including other such persons could exceed the scope of
                the data collection anticipated by section 1071. Including them could
                also make the data collection more difficult as financial institutions
                might need to report data points (such as gross annual revenue, NAICS
                code, time in business, and others) regarding multiple persons in
                connection with a single application. Collecting such information on
                guarantors, sureties, endorsers, and similar parties would likely not
                support 1071's business and community development purpose. Thus, the
                Bureau believes it is appropriate to limit the definition of applicant
                in proposed subpart B to only those persons who request, or have
                received, an extension of business credit from a financial institution.
                 The Bureau seeks comment on its proposed approach to this
                definition.
                102(c) Business
                 Proposed Sec. 1002.102(c) would refer to proposed Sec.
                1002.106(a) for a definition of the term ``business.'' See the section-
                by-section analysis of proposed Sec. 1002.106(a) for a detailed
                discussion of that definition.
                102(d) Business Credit
                 Proposed Sec. 1002.102(d) would refer to existing Sec. 1002.2(g)
                for a definition of the term ``business credit.'' The term ``credit''
                is undefined in section 1071. Section 1071 does not use the term
                ``business credit,'' though it does define ``small business loan'' as a
                loan made to a small business. Existing Sec. 1002.2(g) defines
                ``business credit'' as ``referring to extensions of credit primarily
                for business or commercial (including agricultural) purposes, but
                excluding extensions of credit of the types described in Sec.
                1002.3(a) through (d).'' The Bureau believes it is appropriate to
                define business credit by reference to the existing definition in
                Regulation B. The Bureau's proposal uses the term business credit
                principally in defining a covered credit transaction in proposed Sec.
                1002.104(a).
                 As described in the section-by-section analysis of proposed Sec.
                1002.104(a) below, loans, lines of credit, credit cards, and MCAs
                (including such credit transactions for agricultural purposes and those
                that are also covered by HMDA) would all fall under the proposed
                definition for business credit.
                 The Bureau notes existing Sec. 1002.2(g) excludes public utilities
                credit, securities credit, incidental credit, and government credit
                (that is, extensions of credit made to governments or governmental
                subdivisions, agencies, or instrumentalities--not extensions of credit
                made by governments), as defined in existing Sec. 1002.3(a) through
                (d), from certain aspects of existing Regulation B.\302\ As described
                in the section-by-section analysis of proposed Sec. 1002.104(b) below,
                for the purpose of subpart B, the Bureau is proposing complete
                exclusions for public utilities credit, securities credit, and
                incidental credit from the definition of a covered credit transaction
                in proposed Sec. 1002.104(b). The Bureau is not proposing an exclusion
                for extensions of credit made to governments or governmental
                subdivisions, agencies, or instrumentalities, because governmental
                entities would not constitute small businesses under the proposed
                rule.\303\ Moreover, as described in the section-by-section analysis of
                proposed Sec. 1002.104(b) below, the Bureau believes it is appropriate
                to interpret section 1071 as not applying to factoring, leases,
                consumer-designated credit used for business purposes, or credit
                secured by certain investment properties.
                ---------------------------------------------------------------------------
                 \302\ As explained in existing comment 3-1, under Sec. 1002.3,
                procedural requirements of Regulation B do not apply to certain
                types of credit. The comment further states that all classes of
                transactions remain subject to Sec. 1002.4(a) (the general rule
                barring discrimination on a prohibited basis) and to any other
                provision not specifically excepted.
                 \303\ Government entities are not ``organized for profit'' and
                thus would not be a ``business concern'' under proposed Sec.
                1002.106(a).
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed approach to this
                definition.
                102(e) Closed-End Credit Transaction
                 Proposed Sec. 1002.102(e) states that a closed-end credit
                transaction means an extension of credit that is not an open-end credit
                transaction under proposed Sec. 1002.102(n). The Bureau's proposal
                specifies different requirements for collecting and reporting certain
                data points based on whether the application is for a closed-end credit
                transaction or an open-end credit transaction. See the section-by-
                section analysis of proposed Sec. 1002.102(n) for a discussion of what
                constitutes an open-end credit transaction.
                 The Bureau seeks comment on its proposed approach to this
                definition.
                102(f) Covered Application
                 Proposed Sec. 1002.102(f) would refer to proposed Sec. 1002.103
                for a definition of the term ``covered application.'' See the
                [[Page 56392]]
                section-by-section analysis of proposed Sec. 1002.103 for a detailed
                discussion of that definition.
                102(g) Covered Credit Transaction
                 Proposed Sec. 1002.102(g) would refer to proposed Sec. 1002.104
                for a definition of the term ``covered credit transaction.'' See the
                section-by-section analysis of proposed Sec. 1002.104 for a detailed
                discussion of that definition.
                102(h) Covered Financial Institution
                 Proposed Sec. 1002.102(h) would refer to proposed Sec.
                1002.105(b) for a definition of the term ``covered financial
                institution.'' See the section-by-section analysis of proposed Sec.
                1002.105(b) for a detailed discussion of that definition.
                102(i) Credit
                 Proposed Sec. 1002.102(i) would refer to existing Sec. 1002.2(j)
                for a definition of the term ``credit.'' The term ``credit'' is
                undefined in section 1071. Existing Sec. 1002.2(j), which largely
                follows the definition of credit in ECOA,\304\ defines ``credit'' to
                mean the right granted by a creditor to an applicant to defer payment
                of a debt, incur debt and defer its payment, or purchase property or
                services and defer payment therefor. The Bureau believes that referring
                to this existing definition of credit for purposes of subpart B would
                help to foster consistency with existing Regulation B. The term credit
                in proposed subpart B is used in the context of what constitutes a
                covered credit transaction--that is, whether the application is
                reportable under the section 1071 rule. See the section-by-section
                analysis of proposed Sec. 1002.104 below for more details.
                ---------------------------------------------------------------------------
                 \304\ See 15 U.S.C. 1691a. Existing Regulation B uses the term
                ``applicant'' instead of ``debtor.''
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed approach to this
                definition.
                102(j) Dwelling
                 Proposed Sec. 1002.102(j) would refer to Regulation C Sec.
                1003.2(f) for a definition of the term ``dwelling.'' That provision
                defines dwelling to mean a residential structure, whether or not
                attached to real property. The term includes but is not limited to a
                detached home, an individual condominium or cooperative unit, a
                manufactured home or other factory-built home, or a multifamily
                residential structure or community. Proposed comment 102(j)-1 would
                provide that Bureau interpretations that appear in supplement I to part
                1003 containing official commentary in connection with Sec. 1003.2(f)
                are generally applicable to the definition of a dwelling in proposed
                Sec. 1002.102(j). Proposed comment 102(j)-2 would clarify that the
                definition of dwelling under existing Sec. 1002.14(b)(2) applies to
                relevant provisions under existing Regulation B, and proposed Sec.
                1002.102(j) is not intended to repeal, abrogate, annul, impair, or
                interfere with any existing interpretations, orders, agreements,
                ordinances, rules, or regulations adopted or issued pursuant to
                existing Sec. 1002.14(b)(2).
                 The Bureau believes that adopting the Regulation C definition of
                dwelling would streamline reporting and minimize compliance risks for
                financial institutions that are also reporting covered credit
                transactions under HMDA and would simplify data analysis for HMDA-
                reportable transactions. As an alternative, the Bureau considered
                adopting the existing Regulation B definition of dwelling, which is
                similar to the Regulation C definition. The Bureau understands that the
                existing Regulation B definition of dwelling is primarily applied in
                the context of the ECOA Valuations Rule\305\ and would thus not
                streamline reporting and minimize compliance risks in the same way as
                would adopting the Regulation C definition, which is already being
                applied to data collection and reporting requirements. The existing
                Regulation B definition of dwelling is also not supported by the same
                level of clarifying commentary as the definition under Regulation C.
                The Bureau believes that proposed comment 102(j)-1 will address most if
                not all questions related to the definition of dwelling by
                incorporating the Bureau's official commentary related to Sec.
                1003.2(f). Proposed comment 102(j)-2 also seeks to avoid potential
                confusion by clarifying that proposed Sec. 1002.102(j) does not affect
                the status of existing Sec. 1002.14(b)(2), which defines the term
                ``dwelling'' for purposes of existing Regulation B.
                ---------------------------------------------------------------------------
                 \305\ See 12 CFR 1002.14.
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed approach to this
                definition.
                102(k) Financial Institution
                 Proposed Sec. 1002.102(l) would refer to proposed Sec.
                1002.105(a) for a definition of the term ``financial institution.'' See
                the section-by-section analysis of proposed Sec. 1002.105(a) for a
                detailed discussion of that definition.
                102(l) Minority Individual
                Background
                 ECOA section 704B(b)(1) requires a financial institution to ask
                whether an applicant is a minority-owned business. Additionally,
                704B(h)(5) uses the term ``minority individual'' when defining the term
                minority-owned business. Although 704B(h)(5) defines the term
                ``minority,'' section 1071 does not define the term ``minority
                individual.'' Section 704B(h)(4) defines the term ``minority'' as
                having the same meaning as in section 1204(c)(3) of the Financial
                Institutions Reform, Recovery, and Enforcement Act of 1989
                (FIRREA).\306\ That statute defines ``minority'' to mean any Black
                American, Native American, Hispanic American, or Asian American.\307\
                ---------------------------------------------------------------------------
                 \306\ Public Law 101-73, section 1204(c)(3), 103 Stat. 183, 521
                (1989) (12 U.S.C. 1811 note).
                 \307\ Id.
                ---------------------------------------------------------------------------
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated that it was considering
                proposing guidance that would clarify that a minority individual is a
                natural person who is Black or African American, Asian, American Indian
                or Alaska Native, Native Hawaiian or Other Pacific Islander, and/or
                Hispanic or Latino \308\ (i.e., would mirror the aggregate race and
                ethnicity categories in Regulation C).thnsp;\309\ The Bureau also
                stated it was considering proposing guidance clarifying that a multi-
                racial person would be considered a minority individual.
                ---------------------------------------------------------------------------
                 \308\ SBREFA Outline at 18-19.
                 \309\ Appendix B to 12 CFR part 1003.
                ---------------------------------------------------------------------------
                 Several SERs supported clarifying the meaning of minority
                individual using the aggregate categories for race and ethnicity in
                Regulation C.\310\ However, one SER suggested using the disaggregated
                categories in Regulation C, instead of the aggregate categories, for
                this purpose. Other stakeholders providing feedback on the SBREFA
                Outline generally supported using the aggregate categories when
                determining who is a minority individual for purposes of reporting
                whether a business is a minority-owned business.
                ---------------------------------------------------------------------------
                 \310\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 22.
                ---------------------------------------------------------------------------
                 The SBREFA Panel recommended clarifying that, consistent with the
                aggregate categories for race and ethnicity in Regulation C, a minority
                individual is a natural person who is Black or African American, Asian,
                American Indian or Alaska Native, Native Hawaiian or Other Pacific
                Islander, and/or Hispanic or Latino.\311\
                ---------------------------------------------------------------------------
                 \311\ Id. at 44.
                ---------------------------------------------------------------------------
                Proposed Rule
                 Consistent with the approach that the Bureau took during the SBREFA
                process, proposed Sec. 1002.102(1) would clarify that the term
                ``minority
                [[Page 56393]]
                individual'' means a natural person who is American Indian or Alaska
                Native, Asian, Black or African American, Native Hawaiian or Other
                Pacific Islander, and/or Hispanic or Latino. The Bureau believes that
                these categories represent contemporary, more specific delineations of
                the categories described in section 1204(c)(3) of FIRREA.\312\ Proposed
                comment 102(1)-2 would clarify that a multi-racial or multi-ethnic
                person would be a minority individual. Proposed comment 102(1)-1 would
                clarify that this definition would be used only when an applicant
                determines whether it is a minority-owned business pursuant to proposed
                Sec. Sec. 1002.102(m) and 1002.107(a)(18). Proposed comment 102(1)-3
                would clarify the relationship of the definition of minority individual
                to the disaggregated subcategories used to determine a principal
                owner's ethnicity and race. The Bureau's proposed approach is
                consistent with the SBREFA Panel's recommendation discussed above.
                ---------------------------------------------------------------------------
                 \312\ See, e.g., 80 FR 36356 (June 24, 2015) (NCUA interpretive
                ruling and policy statement implementing an identical FIRREA
                definition of minority using this same modern terminology).
                ---------------------------------------------------------------------------
                 The Bureau believes this clarified terminology, which uses the
                aggregate ethnicity and race categories set forth in existing
                Regulation B \313\ and Regulation C,\314\ would avoid the potentially
                confusing situation where an applicant is using one set of aggregate
                race and ethnicity categories when answering questions about the
                principal owners' race and ethnicity but is asked to use a different
                set of aggregate categories when indicating whether a business is a
                minority-owned business. It also avoids creating a situation where a
                financial institution is required to use different race and ethnicity
                categories when complying with different portions of Regulation B and,
                if applicable, Regulation C. Consistency among race and ethnicity data
                collection regimes may also allow for better coordination among data
                users when reviewing data across multiple data collection regimes.\315\
                ---------------------------------------------------------------------------
                 \313\ 12 CFR 1002.13(a)(1)(i).
                 \314\ Appendix B to 12 CFR part 1003.
                 \315\ For example, the OMB uses these same categories for the
                classification of Federal data on race and ethnicity. See Off. of
                Mgmt. & Budget, Revisions to the Standards for the Classification of
                Federal Data on Race and Ethnicity, 62 FR 58785 (Oct. 30, 1996).
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed approach to this
                definition, including its proposed clarification of the definition of
                minority individual, and requests comment on whether additional
                clarification is needed. Additionally, in section-by-section analysis
                of proposed Sec. 1002.107(a)(20), the Bureau is requesting comment
                regarding whether an additional category for Middle Eastern or North
                African should be added for purposes of responding to a financial
                institution's inquiry regarding a principal owner's ethnicity or race
                and, if so, how this category should be included and defined. The
                Bureau also seeks comment on whether the definition of minority
                individual should include a natural person who is Middle Eastern or
                North African, as well as whether the inclusion of a natural person who
                is Middle Eastern or North African in the definition of minority
                individual for purposes of proposed Sec. 1002.102(l) should be
                dependent on whether Middle Eastern or North African is added as an
                aggregate category for purposes of proposed Sec. 1002.107(a)(20).
                102(m) Minority-Owned Business
                Background
                 ECOA section 704B(b)(1) requires financial institutions to inquire
                whether applicants for credit are minority-owned businesses. For
                purposes of the financial institution's inquiry under 704B(b),
                704B(h)(5) defines a business as a minority-owned business if (A) more
                than 50 percent of the ownership or control is held by one or more
                minority individuals, and (B) more than 50 percent of the net profit or
                loss accrues to one or more minority individuals. Section 1071 does not
                expressly define the related terms of ``ownership'' or ``control,'' nor
                does it describe what it means for net profits or losses to accrue to
                an individual.
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated it was considering
                proposing use of the statutory definition of ``minority-owned
                business'' (as set forth above) with further clarification of the terms
                ``ownership'' and ``control.'' \316\ The Bureau considered proposing
                use of concepts set forth in the Financial Crimes Enforcement Network's
                (FinCEN) Customer Due Diligence (CDD) rule \317\ to clarify these
                terms.
                ---------------------------------------------------------------------------
                 \316\ SBREFA Outline at 18-19.
                 \317\ See 31 CFR 1010.230.
                ---------------------------------------------------------------------------
                 Some SERs expressed concerns with certain aspects of the statutory
                definition of minority-owned business, asserting that the definition
                could cause confusion or pose particular complexities.\318\ Several
                SERs and some other stakeholders providing feedback on the SBREFA
                Outline asked that the definition of minority-owned business be revised
                to align with the definition used by other agencies, such as the SBA
                and the CDFI Fund. These SERs and other commenters recommended that the
                Bureau use a ``50 percent or more'' threshold for ownership or control,
                instead of the ``more than 50 percent'' standard in the statutory
                definition. Conversely, two SERs and several other commenters supported
                using the statutory definition of minority-owned business, including
                the ``more than 50 percent'' portion of the definition.
                ---------------------------------------------------------------------------
                 \318\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 22.
                ---------------------------------------------------------------------------
                 A number of SERs recommended that the Bureau simplify the
                definition to ensure it is understandable to small business applicants
                and to thereby facilitate consistent data collection. SERs' suggestions
                included eliminating the portion of the definition that refers to
                accrual of net profits and losses, eliminating the portion of the
                definition that refers to control, and providing a simplified and
                standardized definition.
                 Several SERs supported using the concepts of ownership and control
                in FinCEN's CDD rule when defining minority-owned business; one SER
                said that doing so would be logical and efficient, while another said
                it would create regulatory consistency and ease compliance burden. One
                SER said that most credit unions are familiar with the CDD rule.
                Generally, other commenters supported use of the CDD concepts to
                clarify the terms ``ownership'' and ``control.'' They stated that small
                business applicants are familiar with the concepts in the CDD rule or
                that they appreciated the consistency with existing regulatory
                requirements. However, one trade association commenter requested that
                the Bureau provide simplified applicant-facing materials without
                clarifying the definition, and two other stakeholders suggested that
                applicants might not be familiar with the CDD rule or may not
                understand the CDD rule.
                 The SBREFA Panel recommended seeking comment on potential
                interpretations of the definition of minority-owned business to clarify
                the term and to ensure that small business applicants would be able to
                understand questions asking if they are minority-owned businesses.\319\
                ---------------------------------------------------------------------------
                 \319\ Id. at 44.
                ---------------------------------------------------------------------------
                Proposed Rule
                 Proposed Sec. 1002.102(m) would define a minority-owned business
                as a business for which more than 50 percent of its ownership or
                control is held by one or more minority individuals, and more than 50
                percent of its net profits or
                [[Page 56394]]
                losses accrue to one or more minority individuals. This definition is
                consistent with ECOA section 704B(h)(5) and the Bureau's proposal under
                consideration in the SBREFA Outline.
                 Proposed comment 102(m)-1 would explain that a business must
                satisfy both prongs of the definition to be a minority-owned business--
                that is, (A) more than 50 percent of the ownership or control is held
                by one or more minority individuals, and (B) more than 50 percent of
                the net profits or losses accrue to one or more minority individuals.
                 Proposed comment 102(m)-2 would clarify that the definition of
                minority-owned business is used only when an applicant determines if it
                is a minority-owned business for purposes of proposed Sec.
                1002.107(a)(18). A financial institution would provide the definition
                of minority-owned business when asking the applicant to provide
                minority-owned business status pursuant to proposed Sec.
                1002.107(a)(18), but a financial institution would not be permitted or
                required to make its own determination regarding whether an applicant
                is a minority-owned business for this purpose.
                 Proposed comment 102(m)-3 would further note that a financial
                institution would be permitted to assist an applicant when determining
                whether it is a minority-owned business but would not be required to do
                so, and could provide the applicant with the definitions of ownership,
                control, and accrual of net profits or losses set forth in proposed
                comments 102(m)-4 through -6. Additionally, for purposes of reporting
                an applicant's minority-owned business status, a financial institution
                would rely on the applicant's determinations of its ownership, control,
                and accrual of net profits and losses.
                 Consistent with the approach described during the SBREFA process,
                the Bureau is proposing to clarify ``ownership'' and ``control'' using
                concepts from the CDD rule. Proposed comment 102(m)-4 would clarify
                that a natural person owns a business if that natural person directly
                or indirectly, through any contract, arrangement, understanding,
                relationship or otherwise, has an equity interest in the business.
                Proposed comment 102(m)-4 would also provide examples of ownership and
                clarify that, where applicable, ownership would need to be traced or
                followed through corporate or other indirect ownership structures for
                purposes of proposed Sec. Sec. 1002.102(m) and 1002.107(a)(18).
                Proposed comment 102(m)-5 would clarify that a natural person controls
                a business if that natural person has significant responsibility to
                manage or direct the business, and would provide examples of natural
                persons who control a business. Proposed comment 102(m)-6 would clarify
                that a business's net profits and losses accrue to a natural person if
                that natural person receives the net profits or losses, is legally
                entitled or required to receive the net profits or losses, or is
                legally entitled or required to recognize the net profits or losses for
                tax purposes.
                 The Bureau believes many small business applicants already respond
                to questions about who owns and who controls a business entity when
                completing CDD forms or otherwise responding to questions related to
                the CDD rule and thus should be familiar with the concepts in the CDD
                rule. Because the CDD rule does not address the second prong of the
                definition in ECOA section 704B(h)(5) (regarding accrual of net profit
                or loss), the Bureau is proposing in Sec. 1002.102(m) that this prong
                of the definition be defined to mean that one or more minority
                individuals must receive or be legally entitled to receive the net
                profits or losses or that one or more minority individuals must be
                legally required to recognize the net profits and losses. However, the
                Bureau shares some SERs' concerns that the statutory definition of
                minority-owned business might, in some cases, be difficult for
                applicants to understand, which could in turn jeopardize the accuracy
                of reported data. Thus, consistent with the SBREFA Panel's
                recommendation, the Bureau seeks comment on the proposed definition of
                minority-owned business and possible alternatives that may clarify the
                term in order to help ensure that small business applicants can
                determine whether they are minority-owned businesses for purposes of
                section 1071 data collection.
                102(n) Open-End Credit Transaction
                 Proposed Sec. 1002.102(n) would state that open-end credit
                transaction means an open-end credit plan as defined in Regulation Z
                Sec. 1026.2(a)(20), but without regard to whether the credit is
                consumer credit, as defined in Sec. 1026.2(a)(12), is extended by a
                creditor, as defined in Sec. 1026.2(a)(17), or is extended to a
                consumer, as defined in Sec. 1026.2(a)(11). The term ``open-end credit
                transaction'' is undefined in section 1071. The Bureau's proposal
                specifies different rules for collecting and reporting certain data
                points based on whether the application is for a closed-end credit
                transaction or an open-end credit transaction. The Bureau believes its
                proposed definition is reasonable because it aligns with the definition
                of ``open-end credit transaction'' in Regulation Z Sec. 1026.2(a)(20).
                The Bureau further believes that such alignment will minimize confusion
                and facilitate compliance.
                 The Bureau seeks comment on its proposed approach to this
                definition.
                102(o) Principal Owner
                Background
                 ECOA section 704B(e) requires financial institutions to compile and
                maintain the ethnicity, race, and sex of an applicant's principal
                owners. However, section 1071 does not expressly define who is a
                principal owner of a business.
                SBREFA Proposal Under Consideration and Feedback
                 In the SBREFA Outline, the Bureau stated that it was considering
                proposing to define the term ``principal owner'' in a manner consistent
                with the CDD rule.\320\ Under a definition consistent with the CDD
                rule, an individual would be a principal owner if the individual
                directly or indirectly, through any contract, arrangement,
                understanding, relationship or otherwise, owns 25 percent or more of
                the equity interests of the business.
                ---------------------------------------------------------------------------
                 \320\ SBREFA Outline at 32.
                ---------------------------------------------------------------------------
                 Several SERs and other stakeholders providing feedback on the
                SBREFA Outline expressed familiarity with the CDD rule, and supported
                aligning with that rule's 25 percent ownership standard for defining a
                principal owner for the section 1071 rule.\321\ One SER said that
                aligning definitions with the CDD rule would be logical and efficient.
                Another SER supported use of the CDD rule's concepts in determining who
                was a principal owner. Other SERs and stakeholders said they currently
                collect this information for beneficial owners at or above 20 percent
                in order to comply with SBA or other requirements and suggested
                aligning with that standard instead.
                ---------------------------------------------------------------------------
                 \321\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 30.
                ---------------------------------------------------------------------------
                 The SBREFA Panel recommended that the Bureau propose aligning the
                definition of principal owner with concepts of ownership and control
                that exist in other Federal regulations with which financial
                institutions are already complying, to the extent possible.\322\
                ---------------------------------------------------------------------------
                 \322\ Id. at 46.
                ---------------------------------------------------------------------------
                Proposed Rule
                 Proposed Sec. 1002.102(o) would define principal owner in a manner
                that is, in
                [[Page 56395]]
                part, consistent with the CDD rule. Specifically, a natural person
                would be a principal owner if the natural person directly owns 25
                percent or more of the equity interests of the business. However, as
                proposed comment 102(o)-1 would note, a natural person would need to
                directly own an equity share of 25 percent or more in the business in
                order to be a principal owner. Due to the potential complications with
                collecting a principal owner's ethnicity, race, and sex information
                when a trust or entity is an owner, the Bureau is proposing that
                entities not be considered principal owners and indirect ownership by
                individuals likewise not be considered when determining if someone is a
                principal owner for purposes of collecting and reporting principal
                owners' ethnicity, race, and sex or the number of principal owners.
                Thus, when determining who is a principal owner, ownership would not be
                traced through multiple corporate structures to determine if a natural
                person owns 25 percent or more of the applicant's equity interests.
                Additionally, because only a natural person would be a principal owner
                for the 1071 rule, entities such trusts, partnerships, limited
                liability companies, and corporations, would not be principal owners.
                 Proposed comment 102(o)-2 would clarify that a financial
                institution would provide an applicant with the definition of principal
                owner when asking the applicant to provide the number of its principal
                owners pursuant to proposed Sec. 1002.107(a)(21) and the ethnicity,
                race, and sex of its principal owners pursuant to proposed Sec.
                1002.107(a)(20). If a financial institution meets in person with a
                natural person about a covered application, the financial institution
                may be required to determine if the natural person with whom it meets
                is a principal owner in order to collect and report the principal
                owner's ethnicity and race based on visual observation and/or surname.
                (See proposed comments 107(a)(20)-5 and -9.) Additionally, proposed
                comment 102(o)-2 would note that if an applicant does not provide the
                number of its principal owners in response to the financial
                institution's request pursuant to proposed Sec. 1002.107(a)(21), the
                financial institution may need to determine the number of the
                applicant's principal owners and report that information based on other
                documents or information. (See proposed comments 107(a)(21)-1 through -
                3.)
                 Consistent with its approach in the SBREFA Outline and with the
                SBREFA Panel's recommendation, the Bureau is proposing that the
                definition of principal owner align with the 25 percent ownership
                definition in the CDD rule. The Bureau believes that this standard,
                which aligns with another Federal regulation, is already broadly in use
                and is likely to be familiar to most financial institutions and
                applicants. Banks, credit unions, and certain other financial
                institutions must comply with the CDD rule. The Bureau believes
                applicants, as a general matter, are more likely to be familiar with
                CDD requirements than SBA or CDFI Fund requirements because they have
                to complete CDD forms before opening an initial account (i.e., loan or
                deposit account) at a bank or at certain other institutions. However,
                due to potential complications with collecting ethnicity, race, and sex
                information for principal owners, the Bureau is proposing that
                individuals that only indirectly own 25 percent or more of an
                applicant's equity interests, as well as entities and trusts, are not
                principal owners.
                 The Bureau notes that it is possible under its proposed approach
                that an applicant might not identify any principal owners as being
                women or minorities but nonetheless could be a women- and/or minority-
                owned business. This could occur, for example, if a white male owned 40
                percent of a business while three Asian women each owned 20 percent.
                Only the white male would be designated as a principal owner, but the
                business would be nonetheless both women-owned and minority-owned.
                While the Bureau acknowledges that some applicants could find this
                approach confusing, it is consistent with the statutory language in
                section 1071. To help mitigate against potential confusion, the Bureau
                has proposed that the questions regarding minority-owned business
                status and women-owned business status appear in the proposed sample
                data collection form before questions about the race, sex, and
                ethnicity of principal owners.
                 The Bureau seeks comment on this proposed definition of a principal
                owner, including the proposal not to include individuals that only
                indirectly own 25 percent or more of an applicant's equity interests as
                principal owners. The Bureau requests comment on whether additional
                clarification on any aspect of the proposed definition is needed.
                102(p) Small Business
                 Proposed Sec. 1002.102(p) would refer to proposed Sec.
                1002.106(b) for a definition of the term ``small business.'' See the
                section-by-section analysis of proposed Sec. 1002.106(b) for a
                detailed discussion of that definition.
                102(q) Small Business Lending Application Register
                 Proposed Sec. 1002.102(q) would define the term ``small business
                lending application register'' or ``register'' as the data reported, or
                required to be reported, annually pursuant to proposed Sec. 1002.109.
                The Bureau did not include a definition of small business lending
                application register in the SBREFA Outline, though it did address
                proposals under consideration for compiling, maintaining, and reporting
                1071 data to the Bureau.\323\ See the section-by-section analysis of
                proposed Sec. 1002.109 for a detailed discussion of the proposed
                rule's provisions addressing reporting data to the Bureau, including
                feedback received from SERs and other stakeholders on that subject. The
                Bureau's proposed definition refers only to the data that is reported,
                or required to be reported, annually; it does not refer to the data
                required to be collected and maintained (prior to reporting).\324\
                ---------------------------------------------------------------------------
                 \323\ SBREFA Outline at 39.
                 \324\ In contrast, the term ``Loan/Application Register'' in
                Regulation C Sec. 1003.2(k) refers to both the record of
                information required to be collected pursuant to Sec. 1003.4 as
                well as the record submitted annually or quarterly, as applicable,
                pursuant to Sec. 1003.5(a).
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed definition of ``small
                business lending application register'' or ``register'' in proposed
                Sec. 1002.102(q).
                102(r) State
                 Proposed Sec. 1002.102(r) would refer to existing Sec. 1002.2(aa)
                for a definition of the term ``State.'' Existing Sec. 1002.2(aa)
                defines the term as any State, the District of Columbia, the
                Commonwealth of Puerto Rico, or any territory or possession of the
                United States. The Bureau did not include a definition of State in the
                SBREFA Outline nor did it receive any feedback on the term from SERs.
                This proposed definition of State would be consistent with existing
                Regulation B and familiar to financial institutions.
                 The Bureau seeks comment on its proposed approach to this
                definition.
                102(s) Women-Owned Business
                Background
                 ECOA section 704B(b)(1) requires financial institutions to inquire
                whether applicants for credit are women-owned businesses. For purposes
                of the financial institution's inquiry under 704B(b), 704B(h)(5)
                defines a business as a women-owned business if (A) more than 50
                percent of the ownership or control is held by one or more women, and
                (B) more than 50 percent of the net profit or loss accrues to one or
                more women.
                [[Page 56396]]
                Section 1071 does not expressly define the related terms of
                ``ownership'' or ``control,'' nor does it describe what it means for
                net profits or losses to accrue to an individual.
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated that it was considering
                proposing use of the statutory definition of a ``women-owned business''
                (as set forth above) with further clarification of the terms
                ``ownership'' and ``control'' using concepts set forth in the CDD
                rule.\325\
                ---------------------------------------------------------------------------
                 \325\ SBREFA Outline at 18-19.
                ---------------------------------------------------------------------------
                 Some SERs expressed concerns with certain aspects of the statutory
                definition of women-owned business, asserting that the definition could
                cause confusion or pose particular complexities.\326\ Several SERs and
                some other stakeholders providing feedback on the SBREFA Outline asked
                that the definition of women-owned business be revised to align with
                the definition used by other agencies, such as the SBA and the CDFI
                Fund. Some SERs as well as some other commenters expressed concern that
                a business that is owned equally by a woman and a man would not be a
                ``women-owned business'' under the statutory definition of women-owned
                business because the woman would not own ``more than 50 percent'' of
                the business and the woman might not control more than 50 percent of
                the business. These SERs and other commenters recommended that the
                Bureau instead use a ``50 percent or more'' threshold for ownership or
                control as the standard. Conversely, two SERs and several other
                stakeholders supported using the statutory definition of women-owned
                business, including the ``more than 50 percent'' portion of the
                definition.
                ---------------------------------------------------------------------------
                 \326\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 22.
                ---------------------------------------------------------------------------
                 A number of SERs recommended that the Bureau simplify the
                definition to ensure it is understandable to small business applicants
                and to thereby facilitate consistent data collection. SERs' suggestions
                included eliminating the portion of the definition that refers to
                accrual of net profit and loss, eliminating the portion of the
                definition that refers to control, and providing a simplified and
                standardized definition.
                 Several SERs supported using the concepts of ownership and control
                in the CDD rule when defining women-owned business; one SER said that
                doing so would be logical and efficient, while another said it would
                create regulatory consistency and ease compliance burden. One SER said
                that most credit unions are familiar with the CDD rule. Generally,
                other commenters supported use of the CDD concepts to clarify the terms
                ``ownership'' and ``control.'' They stated that small business
                applicants are familiar with the concepts in the CDD rule or that they
                appreciated the consistency with existing regulatory requirements.
                However, one trade association commenter thought the Bureau should
                provide simplified applicant-facing materials without clarifying the
                definition, and two other stakeholders suggested that applicants might
                not be familiar with the CDD rule or may not understand the CDD rule.
                 The SBREFA Panel recommended seeking comment on potential
                interpretations of the definition of women-owned business to clarify
                the term and to ensure that small business applicants would be able to
                understand questions asking if they are a women-owned business.\327\
                ---------------------------------------------------------------------------
                 \327\ Id. at 44.
                ---------------------------------------------------------------------------
                Proposed Rule
                 Proposed Sec. 1002.102(s) would define a women-owned business as a
                business for which more than 50 percent of its ownership or control is
                held by one or more women, and more than 50 percent of its net profits
                or losses accrue to one or more women. This definition is consistent
                with ECOA section 704B(h)(6) and the Bureau's proposal under
                consideration in the SBREFA Outline.
                 Proposed comment 102(s)-1 would explain that a business must
                satisfy both prongs of the definition to be a women-owned business--
                that is, (A) more than 50 percent of the ownership or control is held
                by one or more women, and (B) more than 50 percent of the net profits
                or losses accrue to one or more women.
                 Proposed comment 102(s)-2 would clarify that the definition of
                women-owned business is used only when an applicant determines if it is
                a women-owned business for purposes of proposed Sec. 1002.107(a)(19).
                A financial institution would provide the definition of women-owned
                business when asking the applicant to provide women-owned business
                status pursuant to proposed Sec. 1002.107(a)(19), but a financial
                institution would not be permitted or required to make its own
                determination regarding whether an applicant is a women-owned business
                for this purpose.
                 Proposed comment 102(s)-3 would further note that a financial
                institution would be permitted to assist an applicant when determining
                whether it is a women-owned business but would not be required to do
                so, and could provide the applicant with the definitions of ownership,
                control, and accrual of net profits or losses set forth in proposed
                comments 102(s)-4 through -6. Additionally, for purposes of reporting
                an applicant's women-owned business status, a financial institution
                would rely on the applicant's determinations of its ownership, control,
                and accrual of net profits and losses.
                 Consistent with the approach during the SBREFA process, the Bureau
                is proposing to clarify ``ownership'' and ``control'' using concepts
                from the CDD rule. Proposed comment 102(s)-4 would clarify that a
                natural person owns a business if that natural person directly or
                indirectly, through any contract, arrangement, understanding,
                relationship or otherwise, has an equity interest in the business.
                Proposed comment 102(s)-4 would also provide examples of ownership and
                clarify that, where applicable, ownership would need to be traced or
                followed through corporate or other indirect ownership structures for
                purposes of proposed Sec. Sec. 1002.102(s) and 1002.107(a)(19).
                Proposed comment 102(s)-5 would clarify that a natural person controls
                a business if that natural person has significant responsibility to
                manage or direct the business and would provide examples of natural
                persons who control a business. Proposed comment 102(s)-6 would clarify
                that a business's net profits and losses accrue to a natural person if
                that natural person receives the net profits, is legally entitled or
                required to receive the net profits or losses, or is legally entitled
                or required to recognize the net profits or losses for tax purposes.
                 The Bureau believes many small business applicants already respond
                to questions about who owns and who controls a business entity when
                completing CDD forms or otherwise responding to questions related to
                the CDD rule and would be familiar with the concepts in the CDD rule.
                Because the CDD rule does not address the second prong of the
                definition in ECOA section 704B(h)(6) (regarding accrual of net profit
                or loss), the Bureau is proposing in comment 102(s)-4 that this prong
                of the definition be defined to mean that one or more women must
                receive or be legally entitled to receive the net profits or losses or
                that one or more women must be legally required to recognize the net
                profits or losses. However, the Bureau shares some SERs' concerns that
                the statutory definition of women-owned business might, in some cases,
                be difficult for applicants to
                [[Page 56397]]
                understand, which could in turn jeopardize the accuracy of reported
                data. Thus, consistent with the SBREFA Panel's recommendation, the
                Bureau seeks comment on the proposed definition of women-owned business
                and possible alternatives that may clarify the term in order to help
                ensure that small business applicants can determine whether they are a
                women-owned business for purposes of section 1071 data collection.
                Section 1002.103 Covered Applications
                 ECOA section 704B(b) requires that financial institutions collect,
                maintain, and report to the Bureau certain information regarding ``any
                application to a financial institution for credit.'' For covered
                financial institutions, the definition of ``application'' will trigger
                data collection and reporting obligations with respect to covered
                credit transactions. However, section 1071 does not expressly define
                ``application.''
                 The Bureau is proposing Sec. 1002.103 to define what is, and is
                not, a covered application for purposes of subpart B pursuant to its
                authority in ECOA section 704B(g)(1) to prescribe such rules and issue
                such guidance as may be necessary to carry out, enforce, and compile
                data pursuant to section 1071. Proposed Sec. 1002.103(a) would provide
                a general definition of the term ``covered application,'' followed by a
                list of the circumstances that are not covered applications in proposed
                Sec. 1002.103(b).
                103(a) Covered Application
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated it was considering
                defining an ``application'' largely consistent with the definition of
                that term in existing Sec. 1002.2(f)--i.e., ``an oral or written
                request for an extension of credit that is made in accordance with
                procedures used by a creditor for the type of credit requested.''\328\
                The Bureau considered possible alternative definitions of
                ``application,'' including defining the term by using the definition of
                the term ``completed application'' in existing Sec. 1002.2(f) (when
                ``a creditor has received all the information that the creditor
                regularly obtains and considers in evaluating applications for the
                amount and type of credit requested . . . ''). The Bureau also
                considered defining ``application'' as particular documents or specific
                data points that, if collected, would trigger a duty to collect and
                report data.
                ---------------------------------------------------------------------------
                 \328\ SBREFA Outline at 22-23.
                ---------------------------------------------------------------------------
                 SERs discussed their varied methods of defining what constitutes an
                ``application'' within their institutions.\329\ Many SERs define an
                application as the point when there is enough information to make a
                credit decision. Several SERs define an application as meeting the
                requirements of a checklist, stating that obtaining all the information
                and satisfying due diligence can take a long time. Other SERs define an
                application as the submission of specific data or documents, or
                obtaining sufficient information about the borrower to pull a credit
                report. One SER explained that their in-person application process is
                iterative, not readily definable, and unique for each applicant. The
                SER also explained that a single underwriting process could be used at
                their financial institution for multiple loans requested throughout the
                year.
                ---------------------------------------------------------------------------
                 \329\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 24.
                ---------------------------------------------------------------------------
                 Several SERs supported using the definition of ``application'' in
                existing Sec. 1002.2(f). One of these SERs emphasized the importance
                of capturing data that may indicate potential discouragement of
                minority-owned businesses, including discouragement that could occur in
                advance of an application being submitted for underwriting. Another SER
                stated that using the definition in existing Sec. 1002.2(f) would be
                helpful for training purposes, rather than creating a wholly new
                definition for purposes of implementing section 1071. Many SERs urged
                the Bureau in an eventual 1071 rule to define an application as a
                completed application, that is, at the point when there is sufficient
                information to render a credit decision. One SER opposed using the
                definition of ``completed application,'' explaining that it would be
                too restrictive and less aligned with the purposes of section 1071.
                Another SER opposed use of the definition of application in existing
                Sec. 1002.2(f), explaining that in a ``relationship lending'' model,
                each small business application is unique.
                 SERs expressed varying views on whether withdrawn and incomplete
                applications should be captured in the 1071 data. Some SERs felt
                incomplete applications should be captured in the 1071 data as a
                potential indicator of discouragement. One SER stated that small and
                unsophisticated businesses are more likely to leave an application
                incomplete. Another SER recommended not capturing incomplete
                applications, asserting that such data would not be informative or
                useful. Another SER expressed concern about whether incomplete or
                withdrawn applications would include sufficient data for reporting.
                 Other stakeholders also provided feedback on the definition of
                ``application.'' The overwhelming majority of commenters, including
                both community groups and industry representatives, supported use of
                the definition of an ``application'' in existing Sec. 1002.2(f).
                Community groups, CDFIs, and a SER noted that use of the definition
                would further the purposes of 1071 by capturing applicants dissuaded
                from completing an application, potentially due to unlawful
                discouragement or other discrimination. Commenters highlighted research
                that minority-owned and women-owned businesses are disproportionately
                discouraged from applying for credit and the frequency of
                discrimination during the pre-application stage. One commenter stated
                that the definition could better identify barriers to credit,
                consistent with the community development purpose of section 1071.
                Other commenters, including many industry commenters, stated that
                financial institutions are familiar with the definition in existing
                Sec. 1002.2(f), and so use of this definition would reduce burden by
                minimizing the need for additional training or different procedures.
                Several commenters also stated that using the definition in existing
                Sec. 1002.2(f) is appropriate given that section 1071 amends ECOA,
                which is implemented by existing Regulation B. One industry commenter
                also highlighted the flexibility provided by the definition in existing
                Sec. 1002.2(f).
                 Although supportive of using the definition in existing Sec.
                1002.2(f) for the 1071 rule, several industry commenters sought further
                clarification or illustrations of the definition given considerable
                variations in practices among financial institutions. One commenter
                suggested a safe harbor that allows a financial institution to define
                what constitutes an ``application.'' One industry trade representative
                expressed that many of its members have no formal ``application'' and
                so attempts to leverage existing definitions or stages to define an
                application would be unfamiliar to their members and could create an
                inflexible process.
                 Several industry commenters supported triggering section 1071 data
                collection and reporting based on the ``completed application''
                definition in existing Sec. 1002.2(f) and stated that the Bureau
                should not require data collection on withdrawn and incomplete
                applications. These commenters stated that using a
                [[Page 56398]]
                ``completed application'' definition would provide more complete and
                meaningful data, more uniformity across products and lenders, and
                conserve resources that would otherwise be required to gather missing
                data points on incomplete or withdrawn applications. One commenter
                stated that collection of data on incomplete applications would not
                further section 1071's purposes or reflect potential discrimination,
                but rather would merely represent borrower confusion in the application
                process. One commenter suggested using a defined set of criteria to
                define an ``application.''
                 Several SERs and other stakeholders also provided comments on
                applicant requests for more than one product at the same time. For
                example, in connection with the application/loan number data point
                (referred to in this proposal as the unique identifier data point), one
                SER stated that if an applicant requests more than one type of credit
                product, a separate application/loan number is assigned to each product
                request. In contrast, other SERs indicated they use a single
                application number even if multiple products are requested. Among other
                stakeholders, some commenters supported reporting separate applications
                in instances where the applicant requests multiple covered credit
                transactions at the same time, while others supported requiring
                reporting of only one application. One commenter suggested that the
                Bureau should accommodate both approaches. Another commenter remarked
                that if a business is applying for multiple products, the basic
                information is going to be the same, the only difference being that
                only one product is funded. This same commenter suggested that if these
                requests are reported as multiple applications, that will overinflate
                the data.
                 Relatedly, two SERs discussed the issue of multiple extensions of
                credit resulting from a single application. One of these SERs explained
                that such multiple extensions of credit are assigned separate
                application/loan numbers at their financial institution. The other SER
                suggested that reporting in this situation will be complex, and that
                combining the separate loans that could result into a single reporting
                line would be extremely difficult.
                 The SBREFA Panel recommended that, if the Bureau proposes using the
                Regulation B definition of the term ``application''\330\ for 1071 data
                collection, the Bureau consider clarifying when a completed
                application--i.e., an application sufficient to make a credit
                decision--falls within the proposed definition of the term
                ``application.'' \331\ The SBREFA Panel further recommended the Bureau
                seek comment on the benefits and costs of collecting 1071 data on
                incomplete or withdrawn applications.\332\ Finally, with respect to
                lines of credit, the SBREFA Panel recommended (in the context of the
                loan/credit type and loan/credit purpose data points) that the Bureau
                seek comment on how financial institutions currently handle increases
                in lines of credit and how best to require reporting of multiple lines
                of credit within the same account.\333\
                ---------------------------------------------------------------------------
                 \330\ 12 CFR 1002.2(f).
                 \331\ SBREFA Panel Report at 45.
                 \332\ Id.
                 \333\ Id.
                ---------------------------------------------------------------------------
                Proposed Rule
                 The Bureau is proposing to define a covered application in Sec.
                1002.103(a) as an oral or written request for a covered credit
                transaction that is made in accordance with procedures used by a
                financial institution for the type of credit requested. This proposed
                definition of ``covered application'' is consistent with the definition
                of ``application'' that the Bureau said it was considering proposing in
                the SBREFA Outline.\334\ As noted above, the term ``application'' is
                undefined in section 1071. The Bureau believes its proposed definition
                of the term is reasonable, particularly as it aligns with the
                definition of ``application'' in existing Sec. 1002.2(f). The Bureau
                is also proposing commentary to accompany this definition.
                Circumstances that are not covered applications are addressed in the
                section-by-section analysis of proposed Sec. 1002.103(b) below.
                Pursuant to ECOA section 704B(b)(1), an ``application'' triggering data
                collection and reporting obligations occurs 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.
                ---------------------------------------------------------------------------
                 \334\ SBREFA Outline at 22-23.
                ---------------------------------------------------------------------------
                 Several SERs and a majority of other commenters supported use of
                this definition, noting that it best aligns with the purposes of
                section 1071 and is familiar to creditors. The Bureau agrees with
                certain SERs and other commenters that incomplete and withdrawn
                applications--which would generally be captured under proposed Sec.
                1002.103(a)--are essential to the purposes of section 1071 as a tool to
                identify potential discrimination (including through discouragement)
                and to better understand the credit market. The definition of ``covered
                application'' in proposed Sec. 1002.103(a), which is similar to the
                definition of ``application'' in existing Sec. 1002.2(f), is also
                familiar to creditors and provides flexibility to accommodate different
                application processes described by the SERs (including written and oral
                applications; online and relationship lending models; and use of
                standard forms, checklists, and other minimum requirements).\335\
                Finally, the Bureau believes this approach strikes an appropriate
                balance by triggering 1071 collection and reporting requirements only
                after there is a request for credit (using procedures defined by the
                financial institution), but still early enough in the process to
                capture most incomplete, withdrawn, and denied applications.
                ---------------------------------------------------------------------------
                 \335\ Business creditors should be familiar with
                operationalizing this definition based on their experience providing
                adverse action notices under existing Regulation B, which can be
                triggered in relation to an incomplete application. See Sec.
                1002.9(a)(1) and (c) (requiring notice within 30 days after taking
                adverse action on an incomplete application or 30 days after
                receiving an incomplete application). Financial institutions may
                also be familiar with Regulation C's definition of ``application,''
                which aligns with existing Sec. 1002.2(f)'s definition of the term.
                See Sec. 1003.2(b) (generally defining an ``application'' as ``an
                oral or written request for a covered loan that is made in
                accordance with procedures used by a financial institution for the
                type of credit requested''); see also Regulation C comment 2(b)-1
                (noting that Bureau interpretations that appear in the official
                commentary to Regulation B are generally applicable to the
                definition of application under Regulation C).
                ---------------------------------------------------------------------------
                 The Bureau recognizes that the proposed definition of ``covered
                application'' in Sec. 1002.103(a), while flexible, would mean that
                1071 data collection and reporting may be triggered at different times
                for different financial institutions and different types of covered
                credit transactions. For example, for a financial institution that
                defines an application under its procedures as the submission of a
                standard form either online or in-person, a ``covered application''
                would be triggered when an applicant submits the form. In contrast,
                another financial institution may not use a standard form and instead
                define an application as a request for credit and authorization to pull
                a credit check on the business and principal owners. In that
                circumstance, a ``covered application'' under proposed Sec.
                1002.103(a) would not be triggered until that process is satisfied.
                Using the same example, if the financial institution orally collects
                certain information from a prospective applicant (such as gross annual
                revenue and business location) and discusses with the prospective
                applicant potential credit product options offered by the
                [[Page 56399]]
                financial institution, no ``covered application'' would be triggered
                until the prospective applicant indicates that it wants to proceed to
                apply for credit and authorizes the financial institution to pull a
                credit check. Similarly, if a prospective applicant merely expresses
                interest in obtaining credit--not yet focusing on any particular type
                of covered credit transaction and not submitting a ``covered
                application''--the interaction also would not be reportable. While the
                proposed definition of ``covered application'' does not provide a
                bright-line rule, the Bureau believes the proposed definition would be
                familiar to financial institutions and provide consistency with
                existing Regulation B and Regulation C.
                 During SBREFA, SERs asked the Bureau to clarify when an application
                sufficient to make a credit decision would align with an
                ``application'' triggering 1071 collection and reporting requirements.
                Accordingly, the Bureau notes that a ``covered application'' may align
                with the information necessary to make a credit decision or it may be
                possible to have a ``covered application'' before having information
                necessary to make a credit decision--it depends on each financial
                institution's own procedures. For example, suppose a financial
                institution defines an application under its procedures as the point
                when an applicant, or someone on the applicant's behalf, fills out
                certain key pieces of information on an application form. If the
                financial institution's process is to immediately transmit the
                application to underwriting for a decision once the form is submitted,
                1071 collection and reporting would likely be triggered at the same
                time there is sufficient information to make a credit decision. On the
                other hand, if the financial institution requires additional
                verification of documents and follow-up requests before submitting the
                loan file to underwriting, the financial institution would likely have
                a ``covered application'' before it has sufficient information to make
                a credit decision.
                 Proposed comment 103(a)-1 would underscore that a financial
                institution has latitude to establish its own application process or
                procedure and to decide the type and amount of information it will
                require from applicants. Proposed comment 103(a)-2 would explain that
                the term ``procedures'' refers to the actual practices followed by a
                financial institution as well as its stated application procedures, and
                provides an example. Because the definition of ``covered application''
                is based on a financial institution's actual practices, a financial
                institution should have little incentive to attempt to artificially
                define an ``application'' in its written procedures as occurring later
                in the process; for example, if a financial institution has near a 100
                percent approval rate because all ``applications'' have already been
                vetted earlier in the process, the financial institution's stated
                definition of an application likely does not reflect its actual
                practices. Proposed comment 103(a)-3 would provide that the commentary
                accompanying existing Sec. Sec. 1002.2(f) and 1002.9 is generally
                applicable to the proposed definition of ``covered application,''
                except as provided otherwise in proposed Sec. 1002.103(b).
                 Proposed comments 103(a)-4 through -6 would address how a financial
                institution reports multiple covered credit transaction requests at one
                time or a request for a credit transaction that results in the
                origination of multiple covered credit transactions. Proposed comment
                103(a)-4 would provide that if an applicant makes a request for two or
                more covered credit transactions at one time, the financial institution
                reports each request for a covered credit transaction as a separate
                covered application. The Bureau believes the proposed approach would
                further the purposes of section 1071 by better capturing demand for
                credit, including demand for different covered credit transactions at
                the same time. The Bureau also believes that the simplicity of this
                approach would reduce data reporting errors compared to potential
                alternatives, for example, alternatives in which the financial
                institution may sometimes report such requests as a single covered
                application or, in other circumstances, as multiple covered
                applications. Finally, the Bureau believes that concerns about
                duplicative information requests would be mitigated by permitting
                financial institutions to reuse certain previously collected data, as
                set forth in proposed Sec. 1002.107(c)(2). In response to SERs'
                feedback, proposed comment 103(a)-5 would address the circumstance
                where an initial request for a single covered credit transaction
                results in the origination of multiple covered credit transactions.
                Similarly, in response to the SBREFA Panel's recommendations, proposed
                comment 103(a)-6 would address requests for multiple lines of credit at
                one time, proposing that such requests would be reported based on the
                procedures used by the financial institution for the type of credit
                account.
                 Proposed comment 103(a)-7 would address how a financial institution
                would report applications where there is a change in whether the
                applicant is requesting a covered credit transaction. If the applicant
                initially requests a covered credit transaction, but during the
                application process is offered and accepts instead a product that is
                not reportable, the Bureau is proposing to designate this circumstance
                as not a covered application, due in part to concerns that reporting in
                this scenario could affect data quality. For example, reporting on
                product types that are not covered credit transactions (for example,
                leases) could raise data quality questions if there are not appropriate
                fields to capture the terms of those transactions. Despite these
                concerns, the Bureau is also considering whether capturing such
                transactions in the 1071 data could be useful to identifying potential
                steering or other forms of discrimination, therefore furthering the
                purposes of section 1071. As noted below, the Bureau seeks comment on
                whether to require full or limited reporting in these circumstances. If
                an applicant initially requests a product that is not a covered credit
                transaction, but during the application process decides to seek instead
                a product that is a covered credit transaction, the application is a
                covered application and must be reported.
                 The Bureau seeks comment on its proposed definition of a covered
                application in Sec. 1002.103(a) and associated commentary. The Bureau
                also seeks comment on the advantages and disadvantages of collecting
                data on incomplete or withdrawn applications, as well as how collection
                would or would not further the purposes of section 1071. In addition,
                the Bureau seeks comment on reporting of multiple lines of credit on a
                single credit account, including how financial institutions internally
                consider multiple lines of a credit on a single account and the
                Bureau's proposed approach in comment 103(a)-6.
                 As noted above, the Bureau also seeks comment on how a financial
                institution should report applications where there is a change in
                whether the request for credit involves a covered credit transaction.
                Specifically, the Bureau seeks comment on the advantages and
                disadvantages of requiring full or limited reporting where an applicant
                initially seeks a product that is a covered credit transaction, but
                ultimately is offered and accepts a product that is not reportable. For
                example, whether in those circumstances the financial institution
                should report limited data points related to the transaction (such as
                whether the applicant is a small business; whether the applicant is a
                women-owned business or a minority-owned business;
                [[Page 56400]]
                the principal owners' race, sex, and ethnicity; number of principal
                owners; gross annual revenue; and loan type reported as ``Non-
                reportable credit product'' or something similar). The Bureau is
                particularly interested in receiving comments on the utility of such
                data to identify potential steering or other forms of discrimination,
                the effect on data quality, and other factors related to the purposes
                of section 1071.
                Alternatives Considered
                 The Bureau considered several other options for defining
                ``application.'' First, the Bureau considered triggering 1071
                collection and reporting based on a ``completed application,'' which is
                defined in existing Sec. 1002.2(f) as an application in which the
                creditor has received ``all the information that the creditor regularly
                obtains and considers'' in evaluating similar products. The Bureau is
                not proposing to use the definition of ``completed application'' in
                existing Sec. 1002.2(f) for its definition of covered application in
                subpart B, as doing so would exclude incomplete applications and many
                withdrawn applications that may reflect demand for credit and potential
                discrimination during the application process. While some commenters
                noted that use of this definition would provide uniformity in the data
                across financial institutions and product types, the Bureau is
                concerned about the loss of data on incomplete and withdrawn
                applications. Although some commenters suggested that the ``completed
                application'' definition could result in more accurate and complete
                data because it is collected later in the application process, the
                Bureau believes that this benefit can largely be obtained under the
                current proposal by requiring financial institutions to report, where
                available, verified applicant-provided information, as set forth in
                proposed Sec. 1002.107(b). Although some SERs and other stakeholders
                urged the Bureau to define an application based on when there is
                sufficient information to render a credit decision, as pointed out by
                another SER, such a definition may not be as effective in furthering
                the purposes of 1071. For example, it would capture few to no
                incomplete applications and a smaller share of withdrawn applications.
                Moreover, as discussed above, in certain situations--depending on a
                financial institution's application procedures--the definition of a
                covered application in proposed Sec. 1002.103(a) may align with the
                point where there is enough information to render a credit decision.
                 The Bureau also considered defining ``covered application'' as a
                set of specific data points that, if collected, would trigger a duty to
                collect and report 1071 data. The Bureau is not proposing this approach
                for a few reasons. First, this approach would introduce another
                regulatory definition of ``application,'' \336\ which could cause
                confusion and hinder compliance. Second, this approach could require
                financial institutions to alter their existing practices, resulting in
                burden. Third, this approach could lead some financial institutions to
                intentionally delay the gathering of one or more data points until
                after a credit decision was made in order to avoid triggering 1071
                obligations. Last, this approach may be difficult to execute given that
                financial institutions use different data points in underwriting based
                on product type, lending model, exposure, and other factors.
                ---------------------------------------------------------------------------
                 \336\ Although certain regulations define an ``application'' as
                a set of specific data points (e.g., name, income, property address,
                estimated property value, etc.), many of the data points in those
                regulations are specific to the mortgage context and would not be
                applicable to small business lending. These regulations also do not
                relate to data collection. See, e.g., Regulation X Sec. 1024.2(b)
                and Regulation Z Sec. 1026.2(a)(3).
                ---------------------------------------------------------------------------
                103(b) Circumstances That Are Not Covered Applications
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated it was considering
                clarifying circumstances that would not be reportable under section
                1071, even if certain of those circumstances would otherwise be
                considered an ``application'' under existing Sec. 1002.2(f).
                Specifically, those circumstances were: (1) Inquiries/
                prequalifications; (2) reevaluation, extension, and renewal requests,
                except requests for additional credit amounts; and (3) solicitations
                and firm offers of credit.\337\
                ---------------------------------------------------------------------------
                 \337\ SBREFA Outline at 22-24.
                ---------------------------------------------------------------------------
                 Reevaluation, extension, or renewal requests on an existing
                business credit account, unless the request seeks additional credit
                amounts. Several SERs supported the Bureau's proposal under
                consideration to exclude renewals unless additional credit is
                requested; one SER also supported excluding solicitations.\338\ Several
                SERs urged the Bureau to exclude line increases as a distinct type of
                application, explaining that financial institutions may not require a
                new application for such requests and that underwriting a line increase
                request is substantively distinct from underwriting a request for new
                credit because a line increase extensively relies on past performance
                data and prior relationships. Due to these differences, one SER
                suggested that including line increases may skew 1071 data, causing
                misinterpretations. The SBREFA Panel recommended the Bureau seek
                comment on whether to include line increases as a separate reportable
                application.\339\ The SBREFA Panel also recommended that the Bureau
                seek comment on how financial institutions currently handle increases
                in lines of credit.\340\
                ---------------------------------------------------------------------------
                 \338\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 24-25.
                 \339\ Id. at 45-46.
                 \340\ Id.
                ---------------------------------------------------------------------------
                 A number of other industry stakeholders also supported the Bureau's
                proposal under consideration to exclude reevaluations, extensions, and
                renewal requests (except requests for additional credit amounts). The
                commenters stated that such collection would be duplicative since
                financial institutions would also be reporting data on the original
                application (perhaps in the same reporting year). The commenters also
                noted that extension requests are often short term and granted without
                a full application process, that requiring reporting could lead to
                fewer financial institutions offering extensions due to the added
                collection and reporting burden (particularly for open-ended credit),
                and that providing an exemption would be consistent with HMDA
                reporting. One commenter sought exclusion of rate adjustments.
                Community group commenters opposed exclusion of reevaluations,
                renewals, and extensions.
                 Several industry commenters opposed 1071 collection and reporting
                on reevaluations, extensions, or renewals that seek additional credit
                amounts. These commenters stated that 1071 collection and reporting
                should focus on data collected at the time of origination, that
                collecting data repeatedly from the same borrowers would add burden,
                and that collecting data for line increases would make it difficult for
                financial institutions to provide timely approvals. One commenter
                suggested only reporting on additional credit amounts if the original
                note is replaced. Other industry commenters--while not explicitly
                opposing such collection--suggested the Bureau further consider whether
                increases or renewals with additional credit amounts should be an
                ``application'' for purposes of the rule. The commenters noted that
                such increases/renewals are typically more streamlined than a standard
                application given the financial institution already has the applicant's
                information in its possession, and that the Bureau should carefully
                balance burden (which could
                [[Page 56401]]
                affect how such requests could be processed) with benefit (obtaining
                additional data on the same applicant). One industry representative
                supported collection on requests that include additional credit
                amounts. Another commenter sought clarification on what would be
                reported in such circumstances: The newly advanced funds or the entire
                outstanding amount.
                 Inquiries and prequalification requests. Several SERs urged the
                Bureau not to require reporting on prequalifications or inquiries.
                These SERs explained that they encounter a high number of inquiries
                from rate shoppers asking about qualification requirements and
                potential rates, many of which are abandoned or otherwise do not
                progress to a completed application.\341\ A significant number of other
                industry commenters also supported the Bureau's proposal under
                consideration to exclude inquiries and prequalifications. These
                commenters noted that such inquiries could include countless informal
                interactions that would be difficult to collect in a consistent manner
                and that may lead to misleading or erroneous data. The commenters also
                stated that collection would be duplicative and impose significant
                burden without countervailing benefits. Community group commenters
                expressed support for collecting data on inquiries and
                prequalifications to identify discrimination that occurs before an
                application is submitted.
                ---------------------------------------------------------------------------
                 \341\ Id. at 24-25.
                ---------------------------------------------------------------------------
                 Solicitations and firm offers of credit. A number of industry
                commenters supported exclusion of solicitations and firm offers of
                credit. One commenter noted that excluding such data would avoid
                duplicative steps and be consistent with the purposes of section 1071.
                Proposed Rule
                 Proposed Sec. 1002.103(b) would identify certain circumstances
                that are not covered applications--even if they otherwise would be
                considered an application under existing Sec. 1002.2(f). Specifically,
                the Bureau is proposing that a covered application does not include (1)
                reevaluation, extension, or renewal requests on an existing business
                credit account, unless the request seeks additional credit amounts; and
                (2) inquiries and prequalification requests. As discussed below,
                solicitations and firm offers of credit would also not be ``covered
                applications'' under the proposed definition. The Bureau is also
                proposing comments 103(b)-1 through -5 to provide additional guidance
                and examples of circumstances that do and do not trigger 1071
                collection and reporting as a covered application. For example,
                proposed comment 103(b)-4 clarifies that the term ``covered
                application'' does not include evaluations or reviews of existing
                accounts initiated by the financial institution.
                 Reevaluation, extension, or renewal requests on an existing
                business credit account, unless the request seeks additional credit
                amounts. The Bureau is proposing to exclude from the definition of a
                ``covered application'' requests by borrowers to modify the terms or
                duration of an existing extension of credit, other than (as explained
                below) requests for additional credit amounts. The Bureau believes that
                requests to modify the terms or duration of an existing extension of
                credit, which occur with high frequency in the small business lending
                space, may add complexity and burden for financial institutions, while
                potentially providing limited additional information relevant to the
                purposes of section 1071. Moreover, broadly including requests to
                modify the terms or duration of existing extensions of credit might
                affect the quality of the data absent additional flags to distinguish
                the transactions from new originations. The Bureau is also concerned
                about the impact of adding 1071 collection and reporting requirements
                to what are otherwise streamlined evaluations, particularly given the
                limited additional data that would be gained from such reporting. The
                Bureau also notes that Regulation C takes a similar approach by
                excluding reporting of loan modifications.\342\
                ---------------------------------------------------------------------------
                 \342\ See Regulation C comment 2(d)-2.
                ---------------------------------------------------------------------------
                 In contrast, the Bureau is not proposing to exclude requests for
                additional credit amounts (such as line increases or new money on
                existing facilities). That is, reporting would be required for requests
                for additional credit amounts. The Bureau believes that capturing
                requests for additional credit amounts will further the purposes of
                section 1071, particularly the community development purpose, as it
                would more accurately capture demand for credit. Although several SERs
                and other commenters opposed reporting on new credit amounts--due to
                the potentially streamlined nature of such reviews (which may differ
                from underwriting of new applications) and concerns about duplicative
                reporting--the Bureau believes these factors do not outweigh the
                potential community development benefits of reporting and collection.
                Moreover, the Bureau believes that concerns about duplicative reporting
                would be mitigated by proposed Sec. 1002.107(c)(2), which would permit
                a financial institution to reuse certain data points under certain
                circumstances. In addition, under proposed Sec. 1002.107(a)(7) and
                (8), when reporting a covered application that seeks additional credit
                amounts on an existing account, the financial institution would only
                report the additional credit amount sought (and approved or originated,
                as applicable), and not the entire credit amount extended. A request to
                withdraw additional credit amounts at or below a previously approved
                credit limit amount on an existing open-end line of credit would not be
                a covered application as the request falls within the terms of a
                previously approved covered credit agreement.
                 Inquiries and prequalification requests. Existing Regulation B
                recognizes that before a consumer or business requests credit in
                accordance with the procedures used by a creditor for the type of
                credit requested, a creditor may provide a prospective applicant with
                information about credit terms. Existing Regulation B comments 2(f)-3
                and 9-5 refer to these situations as inquiries and prequalification
                requests. Generally, an inquiry occurs when a consumer or business
                requests information about credit terms offered by a creditor; a
                prequalification request generally refers to a request by a consumer or
                business for a preliminary determination on whether the prospective
                applicant would likely qualify for credit under a creditor's standards
                or for what amount.\343\ Under existing Regulation B comments 2(f)-3
                and 9-5, an inquiry or prequalification request may become an
                ``application'' that triggers adverse action notification requirements
                if the creditor evaluates information about the consumer or business,
                decides to decline the request, and communicates this to the consumer
                or business; otherwise, such inquiries and prequalification requests
                are generally not considered applications under existing Regulation B.
                As explained in existing comment 2(f)-3,
                [[Page 56402]]
                whether the inquiry or prequalification request becomes an application
                depends on how the creditor responds to the consumer or business, not
                on what the consumer or business says or asks.
                ---------------------------------------------------------------------------
                 \343\ See also Regulation C comment 2(b)-2 (describing
                prequalification requests). In addition, a preapproval as described
                in existing comment 2(f)-5.i of Regulation B is an example of an
                application under existing Regulation B. Under that comment, a
                preapproval occurs when a creditor reviews a request under a program
                in which the creditor, after a comprehensive analysis of an
                applicant's creditworthiness, issues a written commitment valid for
                a designated period of time to extend a loan up to a specified
                amount. If a creditor's program does not provide for giving written
                commitments, requests for preapprovals are treated as
                prequalification requests.
                ---------------------------------------------------------------------------
                 Regulation C excludes all prequalification requests from HMDA
                reporting, even if the prequalification request becomes an application
                under existing Regulation B.\344\ Regulation C does not address
                reporting of inquiries more generally.
                ---------------------------------------------------------------------------
                 \344\ See Regulation C comment 2(b)-2.
                ---------------------------------------------------------------------------
                 The Bureau is proposing to exclude inquiries and prequalification
                requests as a ``covered application,'' even if the inquiry or
                prequalification request may become an ``application'' under existing
                Sec. 1002.2(f) that may trigger notification requirements. The Bureau
                agrees with SERs and other commenters that requiring data collection
                for all inquiries and prequalifications could create operational
                challenges given that such interactions may be voluminous and typically
                occur before a financial institution has the relevant data or processes
                in place for tracking requests for credit. The Bureau is likewise
                concerned that requiring the collection of 1071 data for these requests
                could pose data accuracy issues, given the often informal nature of
                these interactions, which may raise the risk of missing, unavailable,
                or erroneous data. In addition, reporting of inquiries and
                prequalifications could be duplicative if the applicant subsequently
                applies for credit in accordance with the procedures designated by the
                financial institution.
                 The Bureau also has concerns about requiring reporting of inquiries
                and prequalification requests only in situations that would otherwise
                be treated as an ``application'' under existing Regulation B--i.e.,
                when the financial institution evaluates information about the consumer
                or business, decides to decline the request, and communicates this to
                the consumer or business. The Bureau is concerned that the logistics of
                reporting an inquiry or prequalification only in certain
                circumstances--if the institution evaluates the information, declines
                the request, and communicates it to the business--would be
                operationally challenging for financial institutions and could lead to
                data distortion as only denials would be captured. In these
                circumstances, a financial institution may prefer reporting all
                inquiries and prequalifications, which could lead to some of the
                challenges identified above. The Bureau is also considering the market
                effects of requiring reporting only for certain inquiries and
                prequalification requests, including whether it would cause financial
                institutions to restrict such interactions or services.
                 The Bureau, however, remains concerned about potential
                discrimination that may occur in these early interactions with a
                financial institution. In particular, the Bureau is concerned about
                excluding data on inquiries and prequalification requests when the
                financial institution evaluates information about a business and
                declines the request, which may be useful for identifying potential
                prohibited discouragement of or discrimination against applicants or
                prospective applicants.
                 On balance, the Bureau believes it is appropriate to interpret
                ``application'' as used in section 1071 to exclude inquiries and
                prequalification requests given the considerations identified above,
                including the timing and often informal nature of such interactions,
                the operational challenges of implementing such a definition, and
                related concerns about the reliability of the data.
                 Although the Bureau is proposing to exclude inquiries and
                prequalification requests from the definition of ``covered
                application,'' the Bureau notes that the relevant analysis of whether
                an inquiry or prequalification request is reportable focuses on how the
                financial institution structures, processes, and responds to such
                requests, not what they are called. For example, if a financial
                institution has a formalized process to screen businesses requesting
                credit and deny those it considers ineligible, a request for credit
                that goes through that process may be a ``covered application,'' even
                if the financial institution labels the review a ``prequalification''
                request or an ``inquiry.''
                 The Bureau further notes that requests for credit that meet the
                proposed definition of ``covered application'' would be reportable,
                even if the application was preceded by an inquiry or prequalification
                request. For example, if a business initially seeks information about
                potential credit offerings, the financial institution responds, and
                then the business submits an application for a covered credit
                transaction following the financial institution's procedures, the
                application would be reportable. If, on the other hand, the business
                asks about potential credit offerings, but then chooses not to submit
                an application, there is no covered application.
                 Finally, the Bureau notes that inquiries and prequalification
                requests where the institution evaluates the information, declines the
                request, and communicates it to the business or consumer, are
                ``applications'' under existing Regulation B, and are thus subject to
                its requirements regarding ``applications,'' including its adverse
                action notification requirements and nondiscrimination provisions. In
                no way are the exclusions in proposed Sec. 1002.103(b) intended to
                repeal, abrogate, annul, impair, change, or interfere with the scope of
                the term application in existing Sec. 1002.2(f) as applicable to
                existing Regulation B.
                 Solicitations and firm offers of credit. Proposed comment 103(b)-4
                would clarify that the term covered application does not include
                solicitations and firm offers of credit; like other reviews or
                evaluations initiated by the financial institution, these
                communications do not involve an applicant requesting credit, and so
                are not ``covered applications.'' Excluding solicitations and firm
                offers of credit is also consistent with the language of ECOA section
                704B(b)(1), which provides that an application in response to a
                solicitation by a financial institution could be an application under
                section 1071, but the text is silent on solicitations without any
                applicant response. Thus, consistent with the statutory language, a
                solicitation or firm offer of credit may become a ``covered
                application'' under the proposed definition if an applicant responds to
                the solicitation or offer by requesting a covered credit transaction.
                 In conclusion and for the reasons identified above, the Bureau
                believes its proposed exclusion of inquiries and prequalification
                requests is reasonable. Similarly, the Bureau believes its proposed
                exclusion of reevaluation, extension, or renewal requests on an
                existing business credit account, unless the request seeks additional
                credit amounts, is a reasonable interpretation of an ``application'' as
                used in section 1071 for the reasons described above, including that
                the original extension of credit would be collected and reported and
                further reporting would yield limited additional data. The Bureau also
                believes its proposed treatment of solicitations and firm offers of
                credit is a reasonable interpretation of an ``application'' as used in
                section 1071, as discussed above.
                 The Bureau seeks comment on its proposed definition of a covered
                application in Sec. 1002.103(b) and associated commentary. The Bureau
                also seeks comment on whether instead to define a ``covered
                application,'' consistent with existing Regulation B, to include
                inquiries or prequalification requests where the financial institution
                evaluates information about the business, decides to decline the
                request,
                [[Page 56403]]
                and communicates this to the business. Related to this alternative
                approach, the Bureau further seeks comment on whether additional data
                fields may be necessary in order to distinguish prequalification
                requests and inquiries from other reported applications. In addition,
                if the Bureau were to require reporting of declined inquiries or
                prequalification requests (as described above), the Bureau seeks
                comment on whether financial institutions would want the option to
                report all prequalification requests and inquiries, to allow for a
                comparison with denials.
                 In addition, the Bureau seeks comment on whether, alternatively, to
                define a ``covered application'' consistent with Regulation C, which
                (as discussed above) does not require a financial institution to report
                prequalification requests, even if those requests may constitute
                applications under existing Regulation B for purposes of adverse action
                notices, but does not address reporting of inquiries more generally.
                Related to this alternative approach, the Bureau also seeks comment on
                whether greater clarity could be achieved by defining, for purposes of
                proposed subpart B only, inquiries as requests for information about
                loan terms that do not become applications under existing Regulation B,
                and prequalification requests as requests that may become applications
                under existing Regulation B. In addition, the Bureau also seeks comment
                on the frequency with which financial institutions accept
                prequalification requests (as described in Regulation C comment 2(b)-2,
                but with respect to prospective business applicants) and what data are
                collected in connection with such prequalification requests, as well as
                potential effects on the market if some or all prequalification
                requests were reportable under section 1071.
                 Consistent with the SBREFA Panel's recommendation, the Bureau also
                seeks comment on whether to include line increase requests as a
                ``covered application'' and information on how financial institutions
                currently process requests for a line of credit increase. In addition
                to line increases, the Bureau also seeks comment on financial
                institution practices related to other types of requests for additional
                credit amounts, and whether such requests should be captured in 1071
                data.
                 Lastly, the Bureau notes that Regulation C requires the reporting
                of assumptions for HMDA,\345\ but the Bureau does not have information
                on whether assumptions are similarly used in the small business lending
                context. The Bureau seeks comment on this issue, including how an
                assumption in small business lending might be structured (for example,
                whether it is typically a modification of an existing extension of
                credit or a new extension of credit), the frequency of assumptions in
                the small business lending context, and whether reporting of
                assumptions for small business lending would further the purposes of
                section 1071.
                ---------------------------------------------------------------------------
                 \345\ See Regulation C comment 2(j)-5 (discussing when
                assumptions should be reported as home purchase loans).
                ---------------------------------------------------------------------------
                Section 1002.104 Covered Credit Transactions and Excluded Transactions
                104(a) Covered Credit Transaction
                 ECOA section 704B(b) requires financial institutions to collect and
                report information regarding any application for ``credit'' made by
                women-owned, minority-owned, or small businesses. Although the term
                ``credit'' is not specifically defined in section 1071, ECOA defines
                ``credit'' as ``the right granted by a creditor to a debtor to defer
                payment of debt or to incur debts and defer its payment or to purchase
                property or services and defer payment therefor.'' \346\ As noted above
                in the section-by-section analysis of Sec. 1002.102(d), existing
                Regulation B further defines ``business credit'' as ``extensions of
                credit primarily for business or commercial (including agricultural)
                purposes,'' with some exclusions.\347\ As discussed in detail below,
                the Bureau is proposing to require that covered financial institutions
                report data for all applications for transactions that meet the
                definition of business credit unless otherwise excluded. Proposed Sec.
                1002.104(a) would define the term ``covered credit transaction'' as an
                extension of business credit that is not an excluded transaction under
                proposed Sec. 1002.104(b). Loans, lines of credit, credit cards, and
                MCAs (including such credit transactions for agricultural purposes and
                HMDA-reportable transactions) would all fall within the scope of this
                proposed rule, which would cover the majority of products that small
                businesses use to obtain financing.\348\ As such, the Bureau believes
                that the inclusion of these products in the Bureau's 1071 rule is
                important to fulfilling the purposes of section 1071. Pursuant to this
                approach, the Bureau notes that the products discussed below do not
                constitute an exhaustive list of covered credit transactions; other
                types of business credit not specifically described below would
                nevertheless constitute covered credit transactions unless excluded by
                proposed Sec. 1002.104(b).
                ---------------------------------------------------------------------------
                 \346\ 15 U.S.C. 1691a(d); see also Sec. 1002.2(j).
                 \347\ 12 CFR 1002.2(g).
                 \348\ See White Paper at 21-22.
                ---------------------------------------------------------------------------
                 Proposed Sec. 1002.104(b), in turn, would state that the
                requirements of subpart B do not apply to trade credit, public
                utilities credit, securities credit, and incidental credit. Associated
                commentary would make clear that the term ``covered credit
                transaction'' also does not cover factoring, leases, consumer-
                designated credit used for business purposes, or credit secured by
                certain investment properties.
                 For the reasons set forth below, the Bureau is proposing Sec.
                1002.104 pursuant to its authority under ECOA section 704B(g)(1) to
                prescribe such rules and issue such guidance as may be necessary to
                carry out, enforce, and compile data under section 1071.
                 In the SBREFA Outline, the Bureau stated that it was considering
                proposing that a covered product under section 1071 is one that meets
                the definition of ``credit'' under ECOA and is not otherwise excluded
                from collection and reporting requirements.\349\ Specifically, the
                Bureau stated that it was considering proposing that covered products
                under section 1071 would include term loans, lines of credit, and
                credit cards. The Bureau stated that term loans, lines of credit, and
                credit cards meet the definition of ``credit'' under ECOA and these
                products collectively make up the majority of business financing
                products used by small businesses and are an essential source of
                financing for such businesses.\350\ The Bureau also proffered in the
                SBREFA Outline that the inclusion of these products in the Bureau's
                1071 rule is important to fulfilling the purposes of section 1071.\351\
                The Bureau also stated in SBREFA Outline that it was considering
                proposing that the following products not be covered by the 1071 rule:
                consumer credit used for business purposes; leases; trade credit;
                factoring; and MCAs.\352\
                ---------------------------------------------------------------------------
                 \349\ SBREFA Outline at 19-20.
                 \350\ Id. at 20.
                 \351\ Id.
                 \352\ Id.
                ---------------------------------------------------------------------------
                 SERs and other stakeholders providing feedback on the SBREFA
                Outline generally supported the Bureau's proposal under consideration
                to include term loans, lines of credit, and credit cards as covered
                products under section 1071.\353\ Many stakeholders (including roughly
                half the SERs) urged the Bureau to pursue
                [[Page 56404]]
                expansive product coverage in order to adequately capture small
                businesses' experiences with obtaining financing, especially for women-
                owned and minority-owned small businesses. Many SERs and other
                stakeholders advocated for including MCAs within the scope of the
                eventual 1071 rule; some SERs and stakeholders also advocated for
                including factoring, and in some cases leases as well, in order to
                capture the full landscape of small business financing. Multiple
                stakeholders expressed concern that the exclusions under consideration
                for certain products (e.g., MCAs) would disproportionately burden
                traditional lenders who do not offer such products.
                ---------------------------------------------------------------------------
                 \353\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 22-23.
                ---------------------------------------------------------------------------
                 As discussed below, the Bureau proposes that the 1071 rule cover
                loans, lines of credit, credit cards, and MCAs. The Bureau also
                explains below that ``covered credit transaction'' would encompass
                agricultural-purpose credit and HMDA-reportable transactions.
                 Loans, lines of credit, and credit cards. As noted above,
                stakeholders generally presume and support the coverage of loans, lines
                of credit, and credit cards. These products are commonly offered to
                small business applicants (making up almost 60 percent of the aggregate
                dollar volume of various financial products used by small
                businesses).\354\ The Bureau is not proposing definitions for loans,
                lines of credit, and credit cards because the Bureau believes these
                products are generally and adequately covered by the proposed
                definition of ``credit'' in proposed Sec. 1002.102(i).\355\
                ---------------------------------------------------------------------------
                 \354\ See id. at 21 fig. 2.
                 \355\ As noted in the section-by-section analysis of proposed
                Sec. 1002.107(a)(5) below, the Bureau distinguishes between secured
                and unsecured loans and lines of credit when financial institutions
                report the type of credit product being applied for. The Bureau does
                not believe that this distinction has relevance to whether these
                products constitute ``credit.''
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed approach to covered credit
                transactions and particularly on whether it should define loans, lines
                of credit, and credit cards, and, if so, how.
                 Merchant cash advances. MCAs are a form of financing for small
                businesses that purport to be structured as a sale of potential future
                income. MCAs vary in form and substance, but under a typical MCA, a
                merchant receives a cash advance and promises to repay it plus some
                additional amount or multiple of the amount advanced (e.g., 1.2 or 1.5,
                the ``payback'' or ``factor'' ``rate''). The merchant promises to repay
                by either pledging a percentage of its future revenue, such as its
                daily credit and debit card receipts (the ``holdback percentage''), or
                agreeing to pay a fixed daily withdrawal amount to the MCA provider
                until the agreed upon payment amount is satisfied. MCA contracts often
                provide for repayment directly through the merchant's card processor
                and/or via ACH withdrawals from the merchant's bank account.\356\ MCAs
                constitute the primary product under an umbrella that the Bureau refers
                to as ``sales-based financing''; generally, transactions wherein a
                financial institution extends funds to a business and repayment is
                based on the business's anticipated sales, revenue, or invoices.\357\
                ---------------------------------------------------------------------------
                 \356\ This description is based on the Bureau's review of a
                sample of MCA contracts that the Bureau believes fairly represent
                typical MCA contracts in the market. The Bureau's review comports
                with observations made by industry and community groups regarding
                MCAs.
                 \357\ As stated below, the Bureau is not proposing to
                specifically define sales-based financing in the 1071 rule because
                the Bureau believes these products are covered by the proposed
                definition of ``credit'' in proposed Sec. 1002.102(i). New York and
                California laws have recently sought to define sales-based
                financing. New York law, for example, defines ``sales-based
                financing'' as ``a transaction that is repaid by the recipient to
                the provider, over time, as a percentage of sales or revenue, in
                which the payment amount may increase or decrease according to the
                volume of sales made or revenue received by the recipient.'' N.Y.
                Fin. Serv. 801(j). New York's definition of sales-based financing
                also encompasses a true-up mechanism where the financing is repaid
                as a fixed payment but provides for a reconciliation process that
                adjusts the payment to an amount that is a percentage of sales or
                revenue. Id. California law uses a similar definition. See 10 Cal.
                Code Reg. 2057(a)(22) (defining sales-based financing as ``a
                commercial financing transaction that is repaid by a recipient to
                the financer as a percentage of sales or income, in which the
                payment amount increases and decreases according to the volume of
                sales made or income received by the recipient'' and including ``a
                true[hyphen]up mechanism'').
                ---------------------------------------------------------------------------
                 The Bureau understands that the MCA market is generally dominated
                by nondepository lenders not subject to Federal safety and soundness
                supervision or reporting requirements. The Bureau also understands that
                MCA providers may not be required to obtain State lending licenses. As
                a result, information on MCA lending volume and practices is limited.
                The Bureau notes, however, that California recently enacted a law that
                brings providers of commercial financing options, including factoring
                and MCAs, into the California Financing Law (CFL), which will impose
                disclosure requirements.\358\ New York also enacted a law that would
                impose similar disclosure requirements upon certain New York commercial
                financing providers, including MCA providers.\359\
                ---------------------------------------------------------------------------
                 \358\ The new law does not go so far as to amend the CFL to
                require factors or MCA providers to be licensed, but it does impose
                first-in-the-nation disclosure requirements in connection with these
                products similar to those imposed under TILA. See Cal. S.B. 1235
                (Sept. 30, 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235. The law will be
                implemented through regulations, which have not been finalized yet.
                See State of Cal. Dep't of Bus. Oversight (DBO), Draft Regulations
                (July 26, 2019), https://dbo.ca.gov/wp-content/uploads/sites/296/2019/07/SB-1235-Draft-Regulations-7-26-19.pdf.
                 \359\ N.Y. S.B. S5470B (Dec. 23, 2020), https://legislation.nysenate.gov/pdf/bills/2019/S5470B.
                ---------------------------------------------------------------------------
                 Although the Bureau's 2017 White Paper estimated the MCA market
                constituted less than 1 percent of the aggregate dollar volume of
                various financial products used by small businesses in the U.S. in
                2014,\360\ the Bureau finds that more recent evidence suggests the
                industry may now be much larger. For example, the 2020 Federal Reserve
                Banks' survey of firms with 1-499 employees (``employer firms'') found
                that 8 percent of such businesses applied for and regularly used
                MCAs.\361\ Moreover, on August 18, 2019, the trade website deBanked
                reported that according to an investment bank's projections, ``the MCA
                industry will have more than doubled its small business funding to
                $19.2 billion by year-end 2019, up from $8.6 billion in 2014.'' \362\
                ---------------------------------------------------------------------------
                 \360\ See White Paper at 21 fig. 2, 22 fig. 3.
                 \361\ Fed. Reserve Banks, Small Business Credit Survey--2021
                Report on Employer Firms, at 24 (Feb. 3, 2021), https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2021/2021-sbcs-employer-firms-report (2021 Small Business Credit Survey).
                Starting in 2017, the Federal Reserve Banks began to gather specific
                data on MCAs for its annual reports on small business financing for
                employer firms--in the 2017 report, the survey found that 7 percent
                of such businesses applied for and regularly used MCAs. Fed. Reserve
                Banks, Small Business Credit Survey--2017 Report on Employer Firms,
                at 9 (Apr. 11, 2017), https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2018/sbcs-employer-firms-report.pdf (2017
                Small Business Credit Survey).
                 \362\ Paul Sweeney, Gold Rush: Merchant Cash Advances Are Still
                Hot, deBanked (Aug. 18, 2019), https://debanked.com/2019/08/gold-rush-merchant-cash-advances-are-still-hot/.
                ---------------------------------------------------------------------------
                 Based on stakeholder feedback and available data, the Bureau
                understands that MCAs are often used by merchants due to the speed and
                ease with which they can be obtained,\363\ particularly for merchants
                unable to obtain financing from more traditional sources.\364\
                According to the 2020 Federal Reserve Banks' report regarding firms
                owned by people of color (both small employer firms and non-employer
                firms), Black-owned firms, Hispanic-owned firms, and Asian-owned firms
                were more likely to have applied for MCAs (14 percent, 10 percent, and
                10 percent
                [[Page 56405]]
                respectively) than white-owned firms (7 percent).\365\ The Bureau
                believes that this report supports stakeholders' assertions that
                minority-owned businesses are more likely to use MCAs.
                ---------------------------------------------------------------------------
                 \363\ See 2021 Small Business Credit Survey at 26 (reporting
                that 84 percent of surveyed credit applicants were approved for an
                MCA, as compared to a 43 percent approval rate for personal loans).
                 \364\ See id. at 22 (noting that only 7 percent of ``high credit
                risk'' applicants obtained all the financing sought).
                 \365\ Small Business Credit Survey of Firms Owned by People of
                Color at 30.
                ---------------------------------------------------------------------------
                 The Bureau believes that the higher frequency of MCA use among
                minority-owned businesses coupled with reports of problematic provider
                practices lends credence to many stakeholders' claims that MCAs may
                raise fair lending concerns. The FTC released a Staff Perspective in
                February 2020 discussing its concerns with the MCA industry \366\ and
                noting the industry's tendency to ``cater to higher-risk businesses or
                owners with low credit scores--typically offering them higher-cost
                products.'' \367\ The FTC has also filed enforcement actions against
                MCA providers and their principals, in one case alleging that they
                misrepresented the terms of MCAs that they provided, and then used
                ``unfair collection practices, including sometimes threatening physical
                violence, to compel consumers to pay.'' \368\ The FTC recently obtained
                a settlement that requires an MCA provider to pay more than $9.8
                million to settle charges that it took money from businesses' bank
                accounts without permission and deceived them about the amount of
                financing business owners would receive and other features of its
                financing products.\369\ Moreover, the Bureau understands that the
                default rate amongst small businesses that use MCAs is relatively
                high--5 to 15 percent according to one estimate (compared with a 2
                percent default rate on SBA loans).\370\ The Bureau believes this high
                default rate may be explained by the fact that the typical MCA holdback
                percentage--10 to 20 percent of gross receipts or revenues--may be
                onerous for already cash-strapped small businesses.\371\ The Bureau
                also understands that it is not uncommon for small businesses that use
                MCAs to obtain new MCAs from other MCA providers (more than a quarter
                of such businesses, by one account); \372\ they also may use one MCA to
                pay off another. Firms that take on added debt loads in this way (a
                process known as ``stacking'') ``may not fully recognize the costs
                involved, which could potentially jeopardize the financial health of
                their businesses.'' \373\
                ---------------------------------------------------------------------------
                 \366\ Fed. Trade Comm'n, `Strictly Business' Forum, Staff
                Perspective, at 6-8 (Feb. 2020), https://www.ftc.gov/system/files/documents/reports/staff-perspective-paper-ftcs-strictly-business-forum/strictly_business_forum_staff_perspective.pdf.
                 \367\ See id. at 2.
                 \368\ Press Release, Fed. Trade Comm'n, New York-Based Finance
                Companies Deceived Small Businesses, Non-Profits and Seized Their
                Personal and Business Assets (June 10, 2020), https://www.ftc.gov/news-events/press-releases/2020/06/new-york-based-finance-companies-deceived-small-businesses. See also Press Release, Fed. Trade
                Comm'n, FTC Alleges Merchant Cash Advance Provider Overcharged Small
                Businesses Millions (Aug. 3, 2020), https://www.ftc.gov/news-events/press-releases/2020/08/ftc-alleges-merchant-cash-advance-provider-overcharged-small.
                 \369\ Press Release, Fed. Trade Comm'n, Cash Advance Firm to Pay
                $9.8M to Settle FTC Complaint It Overcharged Small Businesses (Apr.
                22, 2021), https://www.ftc.gov/news-events/press-releases/2021/04/cash-advance-firm-pay-98m-settle-ftc-complaint-it-overcharged.
                 \370\ Kevin Voigt, It's the Wild West Out There: NerdWallet
                Special Report, NerdWallet (Oct. 13, 2016), https://www.nerdwallet.com/blog/small-business-special-report-mca/.
                 \371\ See Bd. of Governors of the Fed. Reserve Sys., Browsing to
                Borrow: ``Mom & Pop'' Small Business Perspectives on Online Lenders,
                at 9 (June 2018), https://www.federalreserve.gov/publications/files/2018-small-business-lending.pdf (Board Small Business Perspectives)
                (noting that when asked ``about the toughest part of running their
                businesses, most participants cited the challenges of managing their
                cash flow''); id. at 5 (noting that ``[s]ome observers have argued
                that the owner's loss of control over cash flow puts some small
                businesses at risk''). The Bureau also notes that many MCA providers
                believe that they are not subject to State usury laws.
                 \372\ See Opportunity Fund, Unaffordable and Unsustainable: The
                New Business Lending, at 3 (May 2016), https://www.leg.state.nv.us/App/InterimCommittee/REL/Document/13129 (stating that ``[m]ore than
                a quarter of the businesses in our dataset had loans outstanding
                with multiple alternative lenders'').
                 \373\ Board Small Business Perspectives at 6.
                ---------------------------------------------------------------------------
                 As small businesses struggle with the COVID-19 pandemic, the Bureau
                is seeing more reports of MCA providers employing aggressive collection
                practices, such as ``pursuing legal claims against owners that freeze
                their bank accounts and . . . pressing their family members, neighbors,
                insurers, distributors--even their customers.'' \374\ Given the fact
                that 84 percent of the credit applicants surveyed by the Federal
                Reserve Banks were approved for an MCA \375\ and the fact that it
                appears significantly more difficult to obtain credit as a ``high
                credit risk'' applicant during the COVID-19 pandemic,\376\ the Bureau
                believes that vulnerable small businesses are increasingly seeking MCAs
                to support their pandemic recovery.
                ---------------------------------------------------------------------------
                 \374\ Gretchen Morgenson, FTC official: Legal `loan sharks' may
                be exploiting coronavirus to squeeze small businesses, NBC News
                (Apr. 3 2020), https://www.nbcnews.com/business/economy/ftc-official-legal-loan-sharks-may-be-exploiting-coronavirus-squeeze-n1173346.
                 \375\ See 2021 Small Business Credit Survey at 26.
                 \376\ Compare id. at 22 (noting that only 7 percent of ``high
                credit risk'' applicants obtained all the financing sought), with
                Fed. Reserve Banks, Small Business Credit Survey--2020 Report on
                Employer Firms, at 12 (Apr. 7, 2020), https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2020/2020-sbcs-employer-firms-report (reporting that 23 percent of ``high
                credit risk'' applicants obtained all the financing sought) (2020
                Small Business Credit Survey).
                ---------------------------------------------------------------------------
                 In its SBREFA Outline, the Bureau stated that it was considering
                proposing that MCAs not be a covered product under section 1071 since
                including them may add additional complexity or reporting burden given
                the unique structure of the transactions.\377\
                ---------------------------------------------------------------------------
                 \377\ SBREFA Outline at 22.
                ---------------------------------------------------------------------------
                 During and following the SBREFA Panel meetings, many SERs advocated
                for including MCAs within the scope of the 1071 rule due, in part, to
                their widespread use by small businesses in the same way as traditional
                loans. In response to the SBREFA Outline, many other stakeholders,
                including community groups and industry representatives, urged the
                inclusion of MCAs for one or more of the following reasons:
                 MCAs are widely used by small businesses and have a
                rapidly growing market share.
                 MCAs are often advertised as loans even though MCA
                providers have been strongly opposed to labeling their products as
                loans.
                 The complexity of MCAs is not a good reason to exclude
                them from coverage.
                 Minority-owned small businesses disproportionately use
                MCAs.
                 Excluding the largely unregulated MCA industry would
                create unequal regulatory burdens for entities that may compete for the
                same small business clients.
                 MCAs should be considered ``credit'' for the purposes of
                section 1071.
                 Small businesses do not distinguish these products from
                other forms of financing.
                 Some MCA providers engage in harmful practices and should
                be subject to oversight.
                 The Bureau observes that, throughout the development of the 1071
                rule, MCAs have been the focus of significant attention and a unique
                source of near-consensus among a diverse array of stakeholders--almost
                all of whom advocated for covering MCAs in the 1071 rule.\378\ The only
                commenters that have supported the exclusion of MCAs from the 1071 rule
                were MCA providers or trade associations representing MCA providers.
                These stakeholders argue that MCAs do not meet the definition of
                [[Page 56406]]
                credit under ECOA or State law and are instead much like traditional
                factoring arrangements, which are generally understood not to be
                credit.
                ---------------------------------------------------------------------------
                 \378\ For instance, of the substantive responses to the 2017
                RFI, comments authored or co-authored by dozens of stakeholders
                (including community and business groups, industry, and trade
                associations) expressed explicit support for requiring the reporting
                of MCAs (and additional letters expressed support for covering
                ``fintech'' or ``alternative online'' products more generally).
                ---------------------------------------------------------------------------
                 Potential coverage of MCAs under the 1071 rule has also drawn the
                attention of government entities seeking to regulate the industry. For
                example, in response to the SBREFA Outline, the California Department
                of Financial Protection and Innovation submitted a comment letter
                stating that ``nearly all the data points would be just as easy for an
                MCA company to report as any other financial institution.'' In
                addition, FTC staff submitted a comment letter in response to the
                Bureau's Request for Information on the Equal Credit Opportunity Act
                and Regulation B \379\ noting that the FTC has brought many actions
                protecting small businesses but that detecting illegal conduct in this
                space can be challenging, particularly with regard to MCAs. The FTC
                comment letter urges the Bureau to remind small business lenders that
                whether a particular law applies depends on actual facts and
                circumstances and not solely on how one party chooses to characterize
                the transaction. FTC staff also recommends the Bureau help small
                businesses through data collection, collecting complaints, and
                education.
                ---------------------------------------------------------------------------
                 \379\ 85 FR 46600 (Aug. 3, 2020).
                ---------------------------------------------------------------------------
                 Upon further consideration and in light of stakeholder feedback
                provided during the SBREFA process, the Bureau is proposing to cover
                MCAs as reportable under 1071. The Bureau believes that the statutory
                term ``credit'' in ECOA is ambiguous as to whether it covers sales-
                based financing products like MCAs, and existing Regulation B offers no
                further clarity except to note in commentary that factoring, as ``a
                purchase of accounts receivable,'' is not covered by ECOA or Regulation
                B.\380\ Based on its review of typical MCA arrangements and its
                expertise with respect to the nature of credit transactions, the Bureau
                believes that the better reading of the term ``credit'' is that it
                encompasses MCAs and other types of sales-based financing. As noted
                above, ECOA defines ``credit'' to mean ``the right granted by a
                creditor to a debtor to defer payment of debt or to incur debts and
                defer its payment or to purchase property or services and defer payment
                therefor.'' The Bureau is thus not proposing to specifically define
                MCAs or other sales-based financing in the 1071 rule because the Bureau
                believes these products are covered by the proposed definition of
                ``credit'' in Sec. 1002.102(i). Nor does the Bureau believe that MCAs
                should be excluded from the rule as a species of factoring (as defined
                in proposed comment 104(a)-2), because MCAs are not based on accounts
                receivable from ``goods that the recipient has supplied or services
                that the recipient has rendered.''
                ---------------------------------------------------------------------------
                 \380\ Existing comment 9(a)(3)-3.
                ---------------------------------------------------------------------------
                 As an initial matter, the Bureau believes that MCAs do not
                constitute factoring within the meaning of the existing commentary to
                Regulation B or the definition in proposed comment 104(b)-1, discussed
                in greater detail below. In factoring transactions, entities receiving
                financing sell their legal right to payment from a third party for
                goods supplied or services rendered, and that right exists at the time
                of the transaction itself; the provider of funds seeks payment directly
                from the third party, and the transaction between the recipient and the
                provider of funds is complete at the time of the sale. In other words,
                the recipient of the financing has no remaining payment obligation,
                meaning that no payment is deferred. In contrast, at the time of the
                advance in an MCA, the recipient of the financing has no existing
                rights to payment that it can transfer. The transaction thus
                constitutes only a promise by the ``seller'' to transfer funds to the
                ``buyer'' once they materialize at a later date. The Bureau believes
                that the ECOA definition of credit, by referring to the right to
                ``defer'' payments, necessarily invokes this temporal consideration.
                 Furthermore, the Bureau interprets ECOA's definition of credit as
                making dispositive whether one party has granted another the right to
                repay at some time subsequent to the initial transaction, without
                consideration of factors such as the existence of recourse or analysis
                of who bears the risk of loss. MCA providers grant such a right: They
                advance funds to small businesses and grant them the right to defer
                repayment by allowing them to repay over time. Additionally, as a
                practical matter, the Bureau understands that MCAs are underwritten and
                function like a typical loan (i.e., underwriting of the recipient of
                the funds; repayment that functionally comes from the recipient's own
                accounts rather than from a third party; repayment of the advance
                itself plus additional amounts akin to interest; and, at least for some
                subset of MCAs, repayment in regular intervals over a predictable
                period of time).
                 Finally, the Bureau believes that the inclusion of MCAs in the
                Bureau's 1071 rule is important to fulfilling both the fair lending and
                the business and community development purposes of section 1071.\381\
                The Bureau also believes that including MCAs would create a more level
                playing field across financial institutions that provide cash flow
                financing to small businesses as well as create a data set that better
                reflects demand for such financing by the smallest and most vulnerable
                businesses.
                ---------------------------------------------------------------------------
                 \381\ ECOA section 704B(a).
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed approach to covered credit
                transactions, and in particular, on whether it should define MCAs and/
                or other sales-based financing transactions, and if so, how.
                 Agricultural-purpose credit. In the SBREFA Outline, the Bureau did
                not expressly address credit used for agricultural purposes, although
                such credit is generally covered by the broad definition of credit
                under ECOA and agricultural businesses are included in section 1071's
                definition of small business.\382\ Based on questions from SERs about
                the Bureau's intended approach, however, the SBREFA Panel recommended
                that the Bureau address in the proposed rule whether it intends to
                cover agricultural loans in the eventual 1071 rule.\383\ Moreover, in a
                July 2019 report, the U.S. Government Accountability Office (GAO)
                discussed its finding that information on the amount and types of
                agricultural credit to socially disadvantaged farmers and ranchers
                (SDFRs) \384\ is limited, and suggested that the 1071 rulemaking may be
                a way to engage in ``additional data collection and reporting for
                nonmortgage loans.'' \385\
                ---------------------------------------------------------------------------
                 \382\ ECOA section 704B(h)(2) (defining a small business as
                having the same meaning as the term ``small business concern'' in
                section 3 of the Small Business Act (15 U.S.C. 632)''). Section
                704B(h)(2) defines small business by reference to the Small Business
                Act definition of a small business concern, which includes
                independently owned and operated ``enterprises that are engaged in
                the business of production of food and fiber, ranching and raising
                of livestock, aquaculture, and all other farming and agricultural
                related industries.'' 15 U.S.C. 632(a)(1).
                 \383\ SBREFA Panel Report at 44.
                 \384\ The U.S. Department of Agriculture (USDA) defines SDFRs as
                members of certain racial and ethnic minority groups and women.
                According to the GAO, USDA regulations further define SDFRs as
                belonging to the following groups: American Indians or Alaskan
                Natives, Asians, Blacks or African Americans, Native Hawaiians or
                other Pacific Islanders, Hispanics, and women. See Gov't
                Accountability Off., Agricultural Lending: Information on Credit and
                Outreach to Socially Disadvantaged Farmers and Ranchers is Limited,
                at 2 (2019), https://www.gao.gov/assets/710/700218.pdf (GAO Report).
                The Bureau notes that those five categories align with the Bureau's
                proposed categories used in the definition of ``minority
                individual'' in proposed Sec. 1002.102(l).
                 \385\ GAO Report at 16.
                ---------------------------------------------------------------------------
                [[Page 56407]]
                 According to the 2017 Census of Agriculture,\386\ there are about
                3.4 million farmers and ranchers (``producers'') working on 2 million
                farming and ranching operations (``farms'') in the United States. The
                U.S. Department of Agriculture (USDA) Economic Research Service found
                that family farms (where the majority of the business is owned by the
                operator and individuals related to the operator) of various types
                together accounted for nearly 98 percent of U.S. farms in 2019.\387\
                Small family farms (less than $350,000 in gross cash farm income
                (GCFI)) accounted for 90 percent of all U.S. farms and large-scale
                family farms ($1 million or more in GCFI) make up about 3 percent of
                farms but 44 percent of the value of production.\388\
                ---------------------------------------------------------------------------
                 \386\ The Census of Agriculture is conducted by the USDA every
                five years and provides a detailed picture of farms and the people
                who operate them. See generally U.S. Dep't of Agric., 2017 Census of
                Agriculture (Apr. 2019), https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_US/usv1.pdf.
                 \387\ Econ. Research Serv., U.S. Dep't of Agric., Farming and
                Farm Income (updated May 10, 2021), https://www.ers.usda.gov/data-products/ag-and-food-statistics-charting-the-essentials/farming-and-farm-income/.
                 \388\ Id.
                ---------------------------------------------------------------------------
                 According to the 2019 Annual Report of the Farm Credit
                Administration, most agricultural lending (approximately 83 percent) is
                done by either commercial banks or the Farm Credit System (FCS), a
                network of government-sponsored entities (GSEs) regulated by the Farm
                Credit Administration, an independent government agency.\389\ The
                USDA's Farm Service Agency accounts for a small share (3 percent) of
                agricultural credit through direct loans and guarantees of loans made
                by private lenders.\390\
                ---------------------------------------------------------------------------
                 \389\ Farm Credit Admin., 2019 Annual Report of the Farm Credit
                Administration, at 18 (2019), https://www.fca.gov/template-fca/about/2019AnnualReport.pdf.
                 \390\ Id.
                ---------------------------------------------------------------------------
                 The GAO found that, using 2015-2017 USDA survey data, SDFRs
                represented an estimated 17 percent of primary producers in the survey,
                but accounted for only an estimated 8 percent of total outstanding
                agricultural debt.\391\ Loans to purchase agricultural real estate
                accounted for most of SDFRs' outstanding debt (67 percent).\392\ Farms
                with minority or women primary producers \393\ are, on average, smaller
                and bring in less revenue than farms with a non-SDFR primary producer
                (i.e., a white male)--while SDFRs represented 30 percent of all farms,
                they operated 21 percent of total farm land and accounted for 13
                percent of the market value of agricultural products sold in 2017.\394\
                ---------------------------------------------------------------------------
                 \391\ GAO Report at 16. ``The primary producer is the individual
                on a farm who is responsible for the most decisions. Each farm has
                only one primary producer.'' Id. at 5.
                 \392\ Id. at 2.
                 \393\ ``Producers'' are individuals involved in farm decision-
                making. A single farm may have more than one producer.
                 \394\ See GAO Report at 7.
                ---------------------------------------------------------------------------
                 The share of minority representation in farming, particularly that
                of Black farmers, has declined sharply over the last 100 years.\395\
                The number of female producers has increased significantly over the
                last 100 years but remains relatively small compared to male farm
                producers.\396\ Based on the disposition of numerous lawsuits alleging
                discrimination against minority farmers,\397\ the Bureau believes that
                credit discrimination may play a role in this decline. The GAO cites
                SDFR advocacy groups, which have said some SDFRs face actual or
                perceived unfair treatment in lending or may be dissuaded from applying
                for credit because of past instances of alleged discrimination.\398\ In
                addition, the GAO cites SDFR advocacy groups, lending industry
                representatives, and Federal officials in stating that SDFRs are more
                likely to operate smaller, lower-revenue farms, have weaker credit
                histories, or lack clear title to their agricultural land, which can
                make it difficult for them to qualify for loans.\399\ The Bureau
                understands that determining the ``creditworthiness'' of a farmer is
                often a judgmental process in which lending decisions are de-
                centralized and involve weighing many discretionary factors, the Bureau
                believes that there are heightened fair lending risks in agricultural
                lending.
                ---------------------------------------------------------------------------
                 \395\ In 1910, approximately 893,370 Black farmers operated
                approximately 41.1 million acres of farmland, representing
                approximately 14 percent of farmers. U.S. Census Bureau, 1910
                Census: Volume 5 (Agriculture), Statistics of Farms, Classified by
                Race, Nativity, and Sex of Farmers, at 298 (1910), https://www2.census.gov/library/publications/decennial/1920/volume-5/06229676v5ch04.pdf. In 2017, of the country's 3.4 million total
                producers, only 45,508 of them (1.3 percent) are Black and they farm
                on only 4.1 million acres (0.5 percent of total farmland); by
                comparison, 95 percent of U.S. producers are white and own 94
                percent of farmland. U.S. Dep't of Agric., 2017 Census of
                Agriculture, at 62, 72 (Apr. 2019), https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_US/usv1.pdf.
                 \396\ In 1910, women farmers represented approximately 4 percent
                of farm workers. See U.S. Census Bureau, 1910 Census: Volume 5
                (Agriculture), Statistics of Farms, Classified by Race, Nativity,
                and Sex of Farmers, at 340 (1910), https://www2.census.gov/library/publications/decennial/1920/volume-5/06229676v5ch04.pdf. As of 2017,
                women account for approximately 36 percent of farmers. See U.S.
                Dep't of Agric., 2017 Census of Agriculture, at 62 (Apr. 2019),
                https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_US/usv1.pdf.
                 \397\ See, e.g., Order, In re Black Farmers Discrimination
                Litig., No. 08-mc-0511 (D.D.C. filed Aug. 8, 2008), https://blackfarmercase.com/Documents/2008.08.08%20-%20PLF%20Consolidation%20Order_0.pdf; Pigford v. Glickman, 206 F.3d
                1212 (D.C. Cir. 2000). See also Garcia v. Vilsack, 563 F.3d 519
                (D.C. Cir. 2009); Love v. Connor, 525 F. Supp. 2d 155 (D.D.C. 2007);
                Keepseagle v. Veneman, No. 99-CIV-03119, 2001 U.S. Dist. LEXIS 25220
                (D.D.C. Dec. 12, 2001).
                 \398\ GAO Report at introductory highlights. Additionally, the
                GAO cited these sources as noting that some SDFRs may not be fully
                aware of credit options and lending requirements, especially if they
                are recent immigrants or new to agriculture. Id.
                 \399\ Id.
                ---------------------------------------------------------------------------
                 In light of the above, the Bureau believes that covering
                agricultural credit in its 1071 rule is important for both of section
                1071's statutory purposes, and is not proposing to define covered
                credit in a way that would exclude agricultural credit from the rule.
                The Bureau seeks comment on the potential costs and complexities
                associated with covering such credit.
                 HMDA-reportable transactions. By adopting Regulation C's definition
                of dwelling and its commentary regarding investment properties, the
                Bureau seeks to ensure consistency and minimize compliance burdens for
                financial institutions that must also report credit transactions
                covered by HMDA (that is, HMDA-reportable transactions). Based on
                Bureau calculations using the 2019 HMDA data, the Bureau found that
                close to 2,000 lenders and around 530,000 applications indicated a
                ``business or commercial purpose'' and around 500,000 applications were
                used for an ``investment'' (as defined by the occupancy code) purpose.
                Of those applications, around 50,000 were for 5+ unit properties. The
                overall number of applications the Bureau expects to be reported
                annually under the proposed rule is around 26 million. Thus, the Bureau
                anticipates a relatively small but not insignificant overlap regarding
                real estate investment loans between HMDA and 1071.
                 The Bureau has considered excluding all transactions that were also
                reportable under HMDA, but believes such an exclusion would add
                complexity to data analysis. The Bureau understands that requiring
                lenders to find and delete from databases that supply their 1071
                submission only those transactions that also appear in HMDA may require
                a separate scrub of the data and create additional compliance burden,
                as well as compliance risk if HMDA-reportable transactions are not
                deleted from a 1071 submission. For example, if the Bureau were to
                exclude HMDA reportable transactions from 1071 and a small business
                wants to purchase a 5+ dwelling unit property (that the financial
                institution would need to know is HMDA reportable), the
                [[Page 56408]]
                financial institution would have to make sure it is not collecting
                protected demographic information on principal owners, even though that
                information must be collected for every other type of loan that same
                business might apply for. The Bureau also believes that it may not be
                possible to identify loans in the HMDA data that, but for this
                exclusion, would be reported under 1071 because the financial
                institution would need to know which HMDA applications are for small
                businesses versus large businesses. Moreover, excluding HMDA-reportable
                applications could mean that a financial institution that is below the
                HMDA reporting threshold would not report these loans at all.
                 Further, in addition to not being able to distinguish which
                applications are from small and not large businesses, the Bureau
                believes that excluding all transactions that were also reportable
                under HMDA may be at odds with the statutory purposes of section 1071.
                The following information will not be collected for applications only
                reported under HMDA: (1) The principal owner's race, sex, or ethnicity
                where the applicant is not a natural person; (2) minority-owned and
                women-owned business status; (3) gross annual revenue; and (4) other
                1071 data points such as pricing, NAICS code, and number of workers.
                The Bureau is concerned that not collecting this information would run
                contrary to section 1071's fair lending and business and community
                development purposes.
                 For applications that would be reported under both HMDA and 1071
                (generally, business credit secured by dwellings, with the exception of
                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), the Bureau seeks comment on whether it should require such
                applications to be flagged as such when reported under subpart B. The
                Bureau believes that for data integrity and analysis purposes, it may
                be helpful to know if a loan is in both datasets and a dual reporting
                flag may help ensure any data analysis is not double-counting certain
                applications.
                104(b) Excluded Transactions
                 Proposed Sec. 1002.104(b) would provide that the requirements of
                subpart B do not apply to trade credit, public utilities credit,
                securities credit, and incidental credit. Proposed comments 104(b)-1
                and -2 would make clear that the term covered credit transaction also
                does not cover factoring and leases. The proposed treatment of each of
                these types of transactions is discussed in detail below. Proposed
                comments 104(b)-3 and -4 would clarify that the term covered credit
                transaction does not include consumer-designated credit or credit
                secured by certain investment properties because, as discussed in
                detail below, such transactions are not business credit. The Bureau
                also discusses its proposed treatment of extensions of credit made to
                governments or governmental subdivisions, agencies, or
                instrumentalities and certain purchases of covered credit transactions.
                Finally, the Bureau discusses its proposed exclusions for trade credit,
                public utilities credit, securities credit, and incidental credit.
                 The Bureau seeks comment on whether it should permit financial
                institutions to voluntarily collect applicants' protected demographic
                information (that is, the applicant's minority-owned business status
                and women-owned business status, and the ethnicity, race, and sex of
                the applicant's principal owners) for applications for some or all of
                the types of transactions that the Bureau is proposing not to cover,
                and to report those applications to the Bureau pursuant to proposed
                Sec. 1002.109.
                 Factoring. In traditional factoring arrangements, a business in
                need of financing sells all or a portion of its accounts receivable
                (existing but unpaid invoices) to another business, known as a
                ``factor.'' The factor then receives payments on the accounts
                receivable from the business's debtors or customers directly, and not
                from the business that had entered into the factoring transaction. If
                the business has sold only a portion of its invoices, then once the
                account debtors pay their invoices to the factor, the factor remits the
                remainder of the balance to the business after deducting a fee
                (specifically, a discount applied to the sold accounts receivable
                usually stated on a percentage basis).
                 The Bureau understands that like the market for MCAs, the factoring
                market is generally dominated by nondepository lenders not subject to
                Federal safety and soundness supervision or reporting requirements. The
                Bureau also understands that generally, factors may not be required to
                obtain State lending licenses. As a result, information on factoring
                volume and practices is limited. The Bureau notes, however, that the
                California and New York disclosure laws mentioned above cover
                factoring.\400\
                ---------------------------------------------------------------------------
                 \400\ See Cal. S.B. 1235 (Sept. 30, 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235; N.Y. S.B. S5470B (July
                23, 2020), https://legislation.nysenate.gov/pdf/bills/2019/S5470B.
                ---------------------------------------------------------------------------
                 The Bureau's 2017 White Paper estimated the factoring market as
                constituting around 8 percent of the number of accounts used by small
                businesses in the U.S. in 2014.\401\ Based on more recent evidence, the
                Bureau believes the industry has not significantly grown. For example,
                the 2017 and 2020 Federal Reserve Banks' surveys of firms with 1-499
                employees (``employer firms'') found that 4 percent of such businesses
                applied for and regularly used factoring.\402\ In the 2020 Small
                Business Credit Survey of Employer Firms, this figure dropped to 3
                percent of employer firms.\403\
                ---------------------------------------------------------------------------
                 \401\ White Paper at 21 fig. 2, 22 fig. 3.
                 \402\ 2020 Small Business Credit Survey; 2017 Small Business
                Credit Survey.
                 \403\ See 2021 Small Business Credit Survey at 24.
                ---------------------------------------------------------------------------
                 In the SBREFA Outline, the Bureau stated that it was considering
                excluding factoring from coverage under the 1071 rule.\404\ As a
                general matter, the Bureau received fewer comments from stakeholders
                regarding factoring compared to some other products, though some SERs
                did advocate for including factoring. Moreover, several stakeholders
                (representing both community group and industry perspectives) argued
                that factoring should be covered under section 1071: First, factoring
                is widely used by small businesses, particularly very small businesses,
                who are more likely to face heightened challenges accessing business
                credit; second, both New York and California have passed disclosure
                laws covering factoring and exclusion would potentially lead to a
                regulatory advantage for lenders offering higher-cost, less-transparent
                credit products.
                ---------------------------------------------------------------------------
                 \404\ SBREFA Outline at 22.
                ---------------------------------------------------------------------------
                 A community group commenter stated that the Bureau should require
                the reporting of these agreements regardless of whether there is a
                credit agreement incident to the factoring agreement under Regulation B
                (this concept is discussed in more detail below). A few commenters that
                supported the proposed exclusion under consideration of factoring did
                so on the basis that factoring is not ``credit'' under ECOA. Commenters
                did not raise fair lending concerns or concerns about predatory
                practices related to factoring.
                 An existing comment in Regulation B (comment 9(a)(3)-3) provides
                that ``[f]actoring refers to a purchase of accounts receivable, and
                thus is not subject to [ECOA or Regulation B].'' Existing Regulation B
                does not offer a definition for ``accounts receivable.'' However, if
                there is a ``credit extension incident to the factoring arrangement,''
                [[Page 56409]]
                Regulation B's notification rules \405\ apply, as do other relevant
                sections of ECOA and Regulation B.\406\ The Bureau understands that the
                Board's treatment of credit extensions incident to factoring
                arrangements--as a type of credit but one entitled to exemptions from
                certain requirements--was motivated by its reading of congressional
                intent related to the Women's Business Ownership Act of 1988,\407\
                which amended ECOA to extend notification and record retention
                requirements to business credit. In its proposed rule on this issue,
                the Board explained that it was treating credit extensions incident to
                factoring arrangements differently from other forms of business credit
                based on ``evidence of congressional intent that the amendments should
                not apply to . . . certain types of business credit (such as
                applications for trade credit and credit incident to factoring
                arrangements).'' \408\ Based on the Bureau's work to date and
                conversations with industry stakeholders, the Bureau understands that
                purported factoring arrangements may take various forms, including
                longer-term or revolving transactions that appear to have credit or
                credit-like features, and the Bureau believes that a subset of such
                arrangements may constitute credit incident to the factoring
                arrangement, particularly if they involve goods or services that have
                not been supplied or rendered.
                ---------------------------------------------------------------------------
                 \405\ See existing Sec. 1002.9(a)(3)(ii) (requiring a creditor
                to notify an applicant, within a reasonable time (as opposed to
                within 30 days for credit sought by consumers and businesses with
                gross revenues of $1 million or less in preceding fiscal year),
                orally or in writing, of the action taken).
                 \406\ Comment 9(a)(3)-3.
                 \407\ Public Law 100-533, 102 Stat. 2689 (1988).
                 \408\ 54 FR 29734, 29736 (July 14, 1989); see also 134 Cong.
                Rec. H9282-89 (daily ed. Oct 3, 1988) (explaining that the committee
                recognizes that some forms of commercial loan transactions and
                extensions of credit may ``require specialized rules,'' and that,
                for example, the committee believes that loans and credit extensions
                incidental to trade credit, factoring arrangements, and
                sophisticated asset-based loans should continue to be exempted from
                the record retention and automatic notification requirements).
                ---------------------------------------------------------------------------
                 The Bureau is proposing to not cover factoring under the 1071 rule.
                Modeled on the definitions set forth in the New York and California
                commercial financing disclosure laws,\409\ proposed comment 104(b)-1
                would provide that factoring is an accounts receivable purchase
                transaction between businesses that includes an agreement to purchase,
                transfer, or sell a legally enforceable claim for payment for goods
                that the recipient has supplied or services that the recipient has
                rendered but for which payment has not yet been made. Proposed comment
                104(b)-1 would also clarify that an extension of business credit
                incident to a factoring arrangement is a covered credit transaction and
                that a financial institution shall report such a transaction as an
                ``Other sales-based financing transaction'' under proposed Sec.
                1002.107(a)(5).
                ---------------------------------------------------------------------------
                 \409\ See Cal. S.B. 1235 (Sept. 30, 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235; N.Y. S.B. S5470B (July
                23, 2020), https://legislation.nysenate.gov/pdf/bills/2019/S5470B.
                ---------------------------------------------------------------------------
                 The Bureau believes that, as discussed with respect to MCAs above,
                a traditional factoring agreement, as described in proposed comment
                104(b)-1, is not credit under ECOA because the provider of the funds
                does not grant the recipient the right to defer payment. Instead, the
                provider of funds seeks payment directly from a third party, and the
                transaction between the recipient and the provider of funds is complete
                at the time of the sale. The Bureau also believes that treating
                factoring as credit under the 1071 rule could create inconsistencies
                and compliance concerns related to existing Regulation B, which
                currently states that factoring (as a purchase of accounts receivable)
                is not subject to ECOA. Moreover, while a few commenters did suggest
                covering factoring as part of a broader effort to adequately capture
                small businesses' experiences with obtaining financing, the Bureau
                notes that commenters did not raise particular fair lending concerns
                related to factoring. The Bureau is proposing a more detailed
                description of what constitutes factoring in proposed comment 104(b)-1
                because it is concerned that the existing Regulation B commentary
                regarding factoring may not provide sufficient clarity for purposes of
                collecting and reporting data under section 1071 as it does not offer a
                definition for ``accounts receivable.'' Proposed comment 104(b)-1 would
                state that it is not intended to repeal, abrogate, annul, impair, or
                interfere with any existing interpretations, orders, agreements,
                ordinances, rules, or regulations adopted or issued pursuant to
                existing comment 9(a)(3)-3.
                 The Bureau seeks comment on its proposed approach to factoring. The
                Bureau also seeks comment on how the subset of purported factoring
                arrangements that may in fact be credit (i.e., those that are revolving
                in nature or that cover anticipated receivables) should be reported
                under the 1071 rule. Specifically, the Bureau seeks comment on whether
                such arrangements should be reported as credit extensions incident to
                factoring (and thus reported ``other sales-based financing'') or as
                MCAs.
                 Leases. A leasing transaction generally refers to an agreement in
                which a lessor transfers the right of possession and use of a good or
                asset to a lessee in return for consideration.\410\ Under a ``true'' or
                ``operating'' lease, a lessee (the user) makes regular payments to a
                lessor (the owner) in exchange for the right to use an asset (such as
                equipment, buildings, motor vehicles, etc.).
                ---------------------------------------------------------------------------
                 \410\ See UCC Art. 2A-103(1)(j) (defining a ``lease'').
                ---------------------------------------------------------------------------
                 Leases are not expressly addressed in ECOA or Regulation B. The
                Bureau has never opined on whether ECOA and Regulation B apply to
                leases, and the Board made only one statement about the applicability
                of ECOA and Regulation B to leases, in the preamble to a final rule
                under ECOA. In that 1985 statement, the Board responded to the Ninth
                Circuit's opinion in Brothers v. First Leasing,\411\ which concluded
                that consumer leasing falls under ECOA.\412\ The Board stated that it
                believes that ``Congress did not intend the ECOA, which on its face
                applies only to credit transactions, to cover lease transactions unless
                the transaction results in a `credit sale' as defined in the Truth in
                Lending Act and Regulation Z.'' \413\ The Board then noted that it
                would continue to monitor leasing transactions and take further action
                as appropriate.\414\ The Bureau is unaware of any such further actions
                taken by the Board.
                ---------------------------------------------------------------------------
                 \411\ 724 F.2d 789 (9th Cir. 1984).
                 \412\ 50 FR 48018, 48020 (Nov. 20, 1985).
                 \413\ Id.
                 \414\ Id. Since then, courts have gone both ways on the issue.
                Compare Ferguson v. Park City Mobile Homes, No. 89-CIV-1909, 1989 WL
                111916, at *5 (N.D. Ill. Sept. 18, 1989) (leases are ``credit''
                under ECOA), with Laramore v. Ritchie Realty Mgmt. Co., 397 F.3d
                544, 547 (7th Cir. 2005) (leases are not ``credit'' under ECOA).
                ---------------------------------------------------------------------------
                 The Bureau understands that many financial institutions (such as
                equipment finance companies) offer both loans and leases to their small
                business customers and some financial institutions comply with
                Regulation B for their leases as well as their loans as a matter of
                course. Lessor stakeholders have told Bureau staff that from their
                perspective, as well as that of their customers, loans and leases are
                indistinguishable. The Bureau understands that this is particularly
                true of ``financial'' or ``capital'' leases, as defined under article
                2A of the UCC,\415\ which closely resemble (and according to some
                stakeholders, in some cases are indistinguishable from) term loans. The
                Bureau understands that financial leases
                [[Page 56410]]
                are treated like assets on buyers' balance sheets, whereas operating
                leases are treated as expenses that remain off the balance sheet. The
                Bureau understands that the ownership characteristics of a financial
                lease also resemble those of a loan--the financial lease term is the
                substantial economic life of the asset (as evidenced by a one dollar
                purchase option at the end of the lease term and/or lack of residual
                financial obligations at the end of the lease term) and the lessee
                claims both interest and depreciation on their taxes. The Bureau
                understands that for some financial institutions, reporting loans but
                not leases may require added cost and effort to separate them in
                databases. The Bureau also understands that because depository
                institutions currently report both loan and lease activity to other
                regulators in their Call Reports, they may prefer to maintain a
                consistent approach for section 1071.
                ---------------------------------------------------------------------------
                 \415\ The Bureau notes that the UCC separately defines a
                ``consumer lease.'' See UCC 2A-103(1)(e). The Bureau's analysis
                regarding leases does not apply to leases primarily for a personal,
                family, or household purpose.
                ---------------------------------------------------------------------------
                 In its SBREFA Outline, the Bureau stated that it was considering
                proposing that leases not be a covered product under section 1071
                unless the product is a credit sale.\416\ The Bureau stated that for
                purposes of section 1071, it was considering proposing a definition of
                ``credit sale'' similar to the Regulation Z definition of that term as
                a transaction in which the lessor is a creditor and the lessee (i)
                agrees to pay as compensation for use a sum substantially equivalent
                to, or in excess of, the total value of the property and services
                involved; and (ii) will become (or has the option to become), for no
                additional consideration or for nominal consideration, the owner of the
                property upon compliance with the agreement.\417\
                ---------------------------------------------------------------------------
                 \416\ SBREFA Outline at 21.
                 \417\ See Regulation Z Sec. 1026.2(16).
                ---------------------------------------------------------------------------
                 In response to the SBREFA Outline, several stakeholders argued that
                leases should be covered in an eventual 1071 rule, one noting that
                leasing products make up 13 percent of the small business financing
                market share in dollar terms. A few other stakeholders stated that
                leases should not be covered. For example, a trade association stated
                that (1) given the unique structure of the transactions, including
                leases would add unnecessary, additional complexity and reporting
                burdens, and that (2) unlike credit, in a lease, the lessee does not
                have an ownership interest in the leased property and that this
                difference could lead to data integrity issues.
                 The Bureau is proposing to not cover leases under the 1071 rule.
                Drawing from the UCC definition of ``lease,'' \418\ which was adopted
                by the New York and California commercial financing disclosure
                laws,\419\ proposed comment 104(b)-2 would provide that the term
                covered credit transaction does not cover leases, and that a lease, for
                purposes of proposed subpart B, is a transfer from one business to
                another of the right to possession and use of goods for a term, and for
                primarily business or commercial (including agricultural) purposes, in
                return for consideration. It would further state that a lease does not
                include a sale, including a sale on approval or a sale or return, or a
                transaction resulting in the retention or creation of a security
                interest.
                ---------------------------------------------------------------------------
                 \418\ UCC 2A-103(1)(j) (`` `Lease' means a transfer of the right
                to possession and use of goods for a term in return for
                consideration, but a sale, including a sale on approval or a sale or
                return, or retention or creation of a security interest is not a
                lease. Unless the context clearly indicates otherwise, the term
                includes a sublease.'').
                 \419\ See Cal. S.B. 1235 (Sept. 30, 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235; N.Y. S.B. S5470B (July
                23, 2020), https://legislation.nysenate.gov/pdf/bills/2019/S5470B.
                ---------------------------------------------------------------------------
                 The Bureau considered several other approaches to covering leasing,
                including referring to Regulation Z's definition of ``credit sale.''
                The Bureau understands that financial institutions focused on offering
                leases and loans for business purposes are generally not familiar with
                the Regulation Z definition of ``credit sale,'' given that Regulation Z
                applies only to consumer credit.\420\ The Bureau thus believes that
                referring to the Regulation Z definition of ``credit sale'' could
                create confusion and would not align with current industry practices.
                The Bureau understands that such financial institutions offering leases
                primarily for business or commercial (including agricultural) purposes
                are more accustomed to applying the UCC definitions of ``lease'' \421\
                and ``finance lease,'' \422\ and/or the generally accepted accounting
                principles (GAAP) rules issued by the Financial Accounting Standards
                Board (FASB) governing ``operating,'' ``capital,'' and ``finance''
                leases.\423\ The Bureau believes that drawing from the UCC definition
                of lease will lead to more consistency with financial institutions'
                current practices. Nearly all U.S. jurisdictions have adopted Article
                2A of the UCC,\424\ and the Bureau understands that virtually every
                form of lease used by major leasing companies provides that it is
                governed by the laws of one of the jurisdictions that has adopted
                Article 2A.
                ---------------------------------------------------------------------------
                 \420\ See Regulation Z Sec. 1026.2(a)(12) (defining ``consumer
                credit'' as ``credit offered or extended to a consumer primarily for
                personal, family, or household purposes'') and 1026.3(a)(1)
                (excluding extensions of credit ``primarily for a business,
                commercial or agricultural purpose'').
                 \421\ Id.
                 \422\ UCC 2A-103(1)(g).
                 \423\ See Fin. Acct. Standards Bd., Accounting Standards Update:
                Leases (Topic 842), No. 2016-02 (Feb. 2016), https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176167901010&acceptedDisclaimer=true.
                 \424\ See Ala. Code 7-2A-101 et seq.; Alaska Stat. 45.12.101 et
                seq.; Ariz. Rev. Stat. 47-2A101 et seq.; Ark. Code Ann. 4-2A-101 et
                seq.; Cal. Com. Code 10101 et seq.; Choctaw Tribal Code 26-2A-101 et
                seq.; Colo. Rev. Stat. 4-2.5-101 et seq.; Conn. Gen. Stat. 42a-2A-
                101 et seq.; DC Code 28:2A-101 et seq.; Del. Code Ann. tit. 6, 2A-
                101 et seq.; Fla. Stat. 680.1011 et seq.; Ga. Code Ann. 11-2A-101 et
                seq.; Haw. Rev. Stat. 490:2A-101 et seq.; Idaho Code 28-12-101 et
                seq.; 810 Ill. Comp. Stat. 5/2A-101 et seq.; Ind. Code 26-1-2.1-101
                et seq.; Iowa Code 554.13101 et seq.; Kan. Stat. Ann. 84-2a-101 et
                seq.; Ky. Rev. Stat. Ann. 355.2A-101 et seq.; Mass. Gen. Laws ch.
                106, 2A-101 et seq.; Md. Code Ann., Com. Law 2A-101 et seq.; Me.
                Stat. tit. 11, 2-1101 et seq.; Mich. Comp. Laws 440.2801 et seq.;
                Minn. Stat. 336.2A-101 et seq.; Miss. Code Ann. 75-2A-101 et seq.;
                Mo. Rev. Stat. 400.2A-101 et seq.; Mont. Code Ann. 30-2A-101 et
                seq.; N.C. Gen. Stat. 25-2A-101 et seq.; N.D. Cent. Code 41-02.1-01
                et seq.; N.H. Rev. Stat. Ann. 382-A:2A-101 et seq.; N.J. Stat. Ann.
                12A:2A-101 et seq.; N.M. Stat. Ann. 55-2A-101 et seq.; N.Y. UCC Law
                2-A-101 et seq.; Neb. Rev. Stat. UCC 2A-101 et seq.; Nev. Rev. Stat.
                104A.2101 et seq.; Ohio Rev. Code Ann. 1310.01 et seq.; Okla. Stat.
                tit. 12A, 2A-101 et seq.; Or. Rev. Stat. 72A.1010 et seq.; Pa. Cons.
                Stat. 2A101 et seq.; R.I. Gen. Laws 6A-2.1-101 et seq.; S.C. Code
                Ann. 36-2A-101 et seq.; S.D. Codified Laws 57A-2A-101 et seq.; Tenn.
                Code Ann. 47-2A-101 et seq.; Tex. Bus. & Com. Code Ann. 2A.101 et
                seq.; Utah Code Ann. 70A-2a-101 et seq.; V.I. Code Ann. tit. 11A,
                2A-101 et seq.; Va. Code Ann. 8.2A-101 et seq.; Vt. Stat. Ann. tit.
                9A, 2A-101 et seq.; W. Va. Code 46-2A-101 et seq.; Wash. Rev. Code
                62A.2A-101 et seq.; Wisc. Stat. 411.101 et seq.; Wyo. Stat. Ann.
                34.1-2.A-101 et seq.
                ---------------------------------------------------------------------------
                 Based on its review of business-purpose leases and its expertise
                with respect to the meaning of ``credit,'' the Bureau believes that the
                better reading of the term ``credit'' is that it does not encompass
                such leases. In the business-purpose context, the Bureau understands
                that in a true lease, the lessor retains title and will receive the
                property back after the conclusion of the lease term, without any
                expectation by either party that, for example, ownership of the
                property will be transferred or that payments made pursuant to the
                lease agreement constitute anything other than payments in exchange for
                the temporary use of the property. As a result, the Bureau does not
                believe that in the business-purpose context a true lease transaction
                involves the right to incur debt and defer its payment, defer payment
                of a debt, or defer payment for goods or services.
                 The Bureau is aware that there are other types of leases with
                characteristics that bear some resemblance to forms of credit like
                credit sales, such as a contemplated transfer of ownership at the end
                of the lease term. The Bureau is not proposing at this time to parse
                whether different types of leases might
                [[Page 56411]]
                constitute ``credit'' but notes that proposed comment 104(b)-2's
                definition of lease would not include a sale, including a sale on
                approval or a sale or return, or a transaction resulting in the
                retention or creation of a security interest. The Bureau seeks comment
                on whether there are types of leases, or leases with certain
                characteristics, that should be excluded from proposed comment 104(b)-2
                and thus treated as reportable under 1071. Based on the practical
                difficulty cited by some stakeholders of distinguishing leases from
                loans, the Bureau also seeks comment on whether financial institutions
                should be permitted to voluntarily report lease transactions.
                 Consumer-designated credit. In the SBREFA Outline, the Bureau
                stated that it was considering proposing that the 1071 rule not cover
                products designated by the creditor as consumer purpose products.\425\
                In response, several SERs asserted that consumer-designated credit is
                often an important source of financing for small businesses
                (particularly for women-owned and minority-owned small businesses, and
                sole proprietorships), and ideally should be included within the scope
                of the eventual 1071 rule. One SER stated that consumer-designated
                credit used for business purposes should be included in an eventual
                1071 rule if trends show increasing usage. However, these SERs
                acknowledged the potential complexity and burden of trying to identify
                the intended use of consumer-designated credit, such as whether a
                consumer's home equity line of credit will be used for a business
                purpose.
                ---------------------------------------------------------------------------
                 \425\ SBREFA Outline at 20-21.
                ---------------------------------------------------------------------------
                 Several SERs supported excluding consumer-designated credit. One
                SER asserted that including consumer credit would not support the
                purposes of section 1071. Another SER stated that including consumer-
                designated credit used for business purposes would double their cost of
                complying with an eventual 1071 rule. The SBREFA Panel recommended that
                the Bureau continue to explore the potential costs to financial
                institutions associated with reporting consumer-designated credit used
                for business purposes in the 1071 rule as well as the implications of
                including such credit in a small business lending data set.\426\ The
                Panel also recommended that the Bureau seek comment in the proposed
                rule on how best to define consumer-designated credit in the event the
                Bureau determines that an exclusion for such products is
                appropriate.\427\
                ---------------------------------------------------------------------------
                 \426\ SBREFA Panel Report at 44.
                 \427\ Id. at 45.
                ---------------------------------------------------------------------------
                 Many non-SER stakeholders supported the proposed exclusion under
                consideration of consumer-designated credit from section 1071 for one
                or more of the following reasons: First, that financial institutions
                should be able to rely on the applicant's stated purpose for the use of
                funds and institutions would not know, nor should they be expected to
                know, if a borrower instead starts or invests in a business using the
                proceeds of a personal loan. Second, that this approach would greatly
                simplify the regulatory effort necessary to define and identify
                business uses of consumer products. Third, that inclusion of consumer
                credit could vastly expand the scope of the data collected beyond
                usefulness and also greatly increase the costs of compliance.
                 One credit union trade association stakeholder stated that the
                Bureau should adopt a clearer definition of consumer-designated credit
                and that it should clarify that it will not challenge a credit union's
                judgment when designating a consumer or business purpose for credit.
                 The Bureau is proposing that the 1071 rule not cover products
                designated by the creditor as consumer purpose products (consumer-
                designated credit). Proposed comment 104(b)-3 would make clear that the
                term covered credit transaction does not include consumer-designated
                credit used for business purposes, because such transactions are not
                business credit. Proposed comment 104(b)-3 would provide that a
                transaction qualifies as consumer-designated credit if the financial
                institution offers or extends the credit primarily for personal,
                family, or household purposes. For example, an open-end credit account
                used for both personal and business purposes is not business credit for
                the purpose of proposed subpart B unless the financial institution
                designated or intended for the primary purpose of the account to be
                business-related.
                 The Bureau understands that some small business owners may use
                consumer-designated credit in order to finance their small businesses--
                such as taking out a home equity line of credit or charging business
                expenses on their personal credit cards. Nonetheless, the Bureau
                believes it is appropriate to interpret section 1071 as not applying to
                this type of credit. Most notably, ECOA section 704B(b) directs
                financial institutions to collect data in the case of an application
                ``for credit for women-owned, minority-owned, or small business''
                (emphasis added). The statute thus applies only to applications for
                credit for a business; at the time of an application for consumer-
                designated credit, however, the application is not for a business.
                Several policy reasons also support this approach. First, the Bureau is
                concerned about financial institutions' ability to consistently
                identify when consumer-designated credit is being used for business
                purposes. Inconsistent reporting across financial institutions could
                lead to data quality concerns. Credit sought by consumers for both
                personal and business purposes could be particularly difficult to
                separate into reportable and non-reportable portions. The Bureau
                believes the proposal to define business credit to exclude consumer-
                designated credit will simplify compliance by obviating the need for
                financial institutions to identify and distinguish business uses of
                consumer-purpose credit products. Second, not including consumer-
                designated credit used for business purposes within the scope of this
                rulemaking would make it clear that the applications reported will all
                be seeking credit to use for business purposes, which supports 1071's
                directive to collect and report data in the case of an application for
                credit for a business. Third, not covering consumer-designated credit
                used for business purposes would provide certainty to financial
                institutions that offer only consumer-designated credit that they would
                not be subject to this proposal's data collection and reporting
                requirements.
                 As recommended by the SBREFA Panel, the Bureau seeks comment on
                this proposed interpretation, including how the Bureau has defined the
                scope of consumer-designated credit. The Bureau also seeks comment on
                whether it should permit financial institutions to voluntarily report
                consumer-designated credit when they have reason to believe the credit
                might be used for business purposes.
                 Credit secured by certain investment properties. In the SBREFA
                Outline, the Bureau did not expressly discuss treatment of real estate-
                secured loans used for investment purposes. Based on questions from
                SERs about the Bureau's intended approach, however, the SBREFA Panel
                recommended that the Bureau address in the proposed rule whether it
                intends to cover real estate-secured investment loans in the 1071
                rule.\428\ One SER had asked that the Bureau clarify whether loans
                covering 1-4 family properties used for investment purposes are
                business loans under section 1071, and several SERs recommended that
                the Bureau cover real estate investment loans (for both non-owner
                occupied residential property
                [[Page 56412]]
                and commercial property) under section 1071. Several other SERs sought
                to distinguish certain types of real estate investment loans; one SER
                remarked, for example, that owning a single non-owner occupied
                residential property as an investment may be more of a ``hobby'' but
                owning multiple properties could be considered a business.
                ---------------------------------------------------------------------------
                 \428\ Id. at 44-45.
                ---------------------------------------------------------------------------
                 A number of other stakeholders suggested that the Bureau should
                exclude at least some real estate investment loans under section 1071.
                A few stakeholders stated that the Bureau should consider an exemption
                for loans that are reported under another regulatory framework, such as
                HMDA and/or CRA because the effort of collecting and reporting
                information regarding such real estate loans would not be worth the
                added burden given the availability of alternative data sources. A few
                stakeholders argued that Congress did not intend to include real estate
                investment loans within the scope of section 1071. One such stakeholder
                stated that this intention is evident because many of the proposed loan
                purpose categories reflect a desire to collect data regarding credit
                offered to businesses which offer a product or service. One stakeholder
                seeking exclusion of certain real estate loans explained that most
                commercial real estate loans are made to borrowers as investments and
                not for operating their business. A few stakeholders suggested that the
                Bureau should only treat as reportable loans secured by owner-occupied
                commercial real estate where the primary source of repayment is the
                cash flow from the ongoing business operations. One stakeholder noted
                that because commercial real estate loans made to investors are
                typically made to business entities with complex ownership structures,
                their inclusion under 1071 would create additional hurdles for lenders
                seeking to determine the principal owners.
                 Based on this feedback as well as its general knowledge regarding
                both consumer and commercial real estate lending, the Bureau
                understands that many financial institutions use their consumer
                mortgage lending channels to process credit applications secured by 1-4
                family residential property and used for investment purposes, while
                applications for credit secured by 5+ unit multifamily properties or
                rental portfolio loans secured by more than four 1-4 unit residential
                properties are generally processed through commercial mortgage lending
                channels. The Bureau also understands that loans made through consumer
                mortgage lending channels are often made pursuant to the guidelines of
                Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), and
                the Department of Veterans Affairs (VA), and are likely already
                reported under HMDA.
                 In light of the feedback received and the Panel's recommendation,
                the Bureau is proposing that the 1071 rule not cover credit secured by
                certain investment properties, because such credit may not always be
                primarily for business or commercial purposes. Specifically, proposed
                comment 104(b)-4 would explain that a covered credit transaction does
                not include an extension of credit that is 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. The Bureau is not
                proposing to exclude credit secured by owner-occupied dwellings; for
                example, those secured by a dwelling occupied by a business's sole
                proprietor/principal owner. The Bureau is thus proposing to exclude
                real estate investment loans only in certain limited circumstances
                (such as when credit is secured by non-owner occupied 1-4 dwelling
                units and not 5+ dwelling units). As discussed above in the section-by-
                section analysis of proposed Sec. 1002.102(j), the Bureau is proposing
                to define ``dwelling'' to have the same meaning as Regulation C Sec.
                1003.2(f). Similarly, proposed comment 104(b)-4, which would address
                what does and does not constitute an investment property, is modeled on
                Regulation C's comment 4(a)(6)-4.
                 The Bureau is proposing a definition of ``covered credit
                transaction'' that does not cover certain real estate investment loans
                in the scope of a ``covered credit transaction'' pursuant to its
                authority under ECOA section 704B(g)(1) to prescribe such rules and
                issue such guidance as may be necessary to carry out, enforce, and
                compile data under section 1071. The Bureau believes that its exclusion
                of credit secured by certain investment properties will better capture
                lending to true small businesses (as opposed to consumers seeking to
                diversify their investments) and will also better align with financial
                institution lending practices. The Bureau understands that it may not
                always be easy for financial institutions to distinguish between
                business-purpose real estate investment loans and consumer-purpose real
                estate investment loans; however, covering all such loans would likely
                include some percentage of consumer-purpose loans in the 1071 rule,
                which could be contrary to section 1071's business and community
                development purpose.
                 The Bureau seeks comment on its proposed approach for credit
                secured by certain investment properties, including whether it is
                appropriate to consider credit not to be business credit when it is
                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;
                and, if not, whether a different number of dwelling units in the
                property securing the credit would be an appropriate way to make a
                distinction between business and consumer-designated credit. The Bureau
                also solicits comment on whether to permit financial institutions to
                voluntarily report real estate investment loan transactions that are
                secured by non-owner occupied 1-4 dwelling units.
                 Government credit. The existing definition of business credit in
                Sec. 1002.2(g) excludes public utilities credit, securities credit,
                incidental credit, and government credit (that is, extensions of credit
                made to governments or governmental subdivisions, agencies, or
                instrumentalities--not extensions of credit made by governments), as
                defined in existing Sec. 1002.3(a) through (d), from certain aspects
                of existing Regulation B.\429\ For the purpose of proposed subpart B,
                the Bureau is proposing complete exclusions for public utilities
                credit, securities credit, and incidental credit from the definition of
                a covered credit transaction in proposed Sec. 1002.104(b), as
                discussed below.
                ---------------------------------------------------------------------------
                 \429\ As explained in existing comment 3-1, under Sec. 1002.3,
                procedural requirements of Regulation B do not apply to certain
                types of credit. The comment further states that all classes of
                transactions remain subject to Sec. 1002.4(a) (the general rule
                barring discrimination on a prohibited basis) and to any other
                provision not specifically excepted.
                ---------------------------------------------------------------------------
                 However, the Bureau is not proposing to exclude government credit,
                as defined in existing Sec. 1002.3(d)(1) to mean ``extensions of
                credit made to governments or governmental subdivisions, agencies, or
                instrumentalities.'' The Bureau believes that an express exclusion for
                extensions of credit made to governments or governmental subdivisions,
                agencies, or instrumentalities is not necessary because such
                governmental entities would not constitute small businesses under the
                proposed rule.\430\ The Bureau seeks comment on its approach to
                government credit.
                ---------------------------------------------------------------------------
                 \430\ Government entities are not ``organized for profit'' and
                are thus not a ``business concern'' under proposed Sec.
                1002.106(a).
                ---------------------------------------------------------------------------
                 Certain purchases of covered credit transactions. In the SBREFA
                Outline, the Bureau did not expressly discuss treatment of loan
                purchases, but the Bureau sought feedback on any products that should
                or should not be covered by
                [[Page 56413]]
                the Bureau's eventual 1071 rule.\431\ Several SERs voiced support for
                generally aligning small business lending reporting requirements for
                financial institutions with the approach taken for HMDA reporting in
                the Bureau's Regulation C. One SER stressed that imposing section 1071
                requirements for loan buyers, who play an important role in assisting
                CDFIs but do not make credit decisions, might risk their continued
                participation. Feedback from other stakeholders was limited, although a
                few stakeholders suggested that the Bureau should generally exclude
                purchased loans. The Panel did not provide a specific recommendation on
                this topic.
                ---------------------------------------------------------------------------
                 \431\ SBREFA Outline at 19-20.
                ---------------------------------------------------------------------------
                 The Bureau believes that this feedback may be based in part on the
                requirements that apply to HMDA, where Regulation C requires financial
                institutions to report purchases of covered loans under HMDA.\432\ This
                requirement is based on statutory language that contemplates data
                collection for loan purchases.\433\ As discussed in the section-by-
                section analysis of proposed Sec. 1002.103, ECOA section 704B(b)
                requires that financial institutions collect, maintain, and report to
                the Bureau certain information regarding ``any application to a
                financial institution for credit.'' For covered financial institutions,
                the definition of ``application'' will trigger data collection and
                reporting obligations with respect to covered credit transactions.
                Under proposed subpart B, purchasing a loan does not, in itself,
                generate an obligation for a covered financial institution to report
                small business lending data. Rather, a reporting obligation may arise
                on the basis of making a final credit decision on an application. (See
                the section-by-section analysis of proposed Sec. 1002.109(a)(3) for
                additional information.) The Bureau also notes the corollary point that
                selling a covered loan would not, in itself, obviate an existing
                obligation of a covered financial institution to report small business
                lending data for that application, pursuant to proposed comment 107(a)-
                1.i.
                ---------------------------------------------------------------------------
                 \432\ See Regulation C Sec. 1003.4(a) (stating that a financial
                institution ``shall collect data regarding . . . covered loans that
                it purchases for each calendar year'').
                 \433\ See 12 U.S.C. 2803(a)(1) (stating that institutions
                ``shall compile and make available . . . the number and total dollar
                amount of mortgage loans which were (A) originated (or for which the
                institution received completed applications), or (B) purchased by
                that institution'').
                ---------------------------------------------------------------------------
                 Because under this proposal purchasing a loan does not, in itself,
                generate an obligation for a covered financial institution to report
                small business lending data regarding the underlying application, the
                Bureau is not proposing a specific exclusion for these purchases.
                 The Bureau seeks comment on its proposal not to expressly exclude
                the purchase of covered credit transactions in the proposed rule's
                regulatory text or commentary.
                 Certain purchases of covered credit transactions--pooled loans. In
                the SBREFA Outline, the Bureau did not expressly discuss treatment of
                pooled loan purchases, but the Bureau sought feedback on any products
                that should or should not be covered by the Bureau's eventual 1071
                rule.\434\ A CDFI SER that occasionally participates in pooled loan
                purchases recommended that the Bureau ensure that reporting obligations
                for such pooled loans are clear.
                ---------------------------------------------------------------------------
                 \434\ SBREFA Outline at 19-20.
                ---------------------------------------------------------------------------
                 The Panel did not provide a specific recommendation on this topic.
                The Bureau believes that this feedback may be based in part on the
                requirements that apply to HMDA, where Regulation C requires financial
                institutions to report purchases of covered loans under HMDA.\435\ This
                requirement is based on statutory language that contemplates data
                collection for loan purchases.\436\ However, Regulation C exempts from
                these general reporting requirements ``[t]he purchase of an interest in
                a pool of closed-end mortgage loans or open-end lines of credit'' \437\
                As discussed in the section-by-section analysis of proposed Sec.
                1002.103 above, ECOA section 704B(b) requires that financial
                institutions collect, maintain, and report to the Bureau certain
                information regarding ``any application to a financial institution for
                credit.'' For covered financial institutions, the definition of
                ``application'' (or, as used in this proposed rule, ``covered
                application'') will trigger data collection and reporting obligations
                with respect to covered credit transactions. Under this proposed
                subpart, the purchase of an interest in a pool of loans does not, in
                itself, generate an obligation for a covered financial institution to
                report small business lending data. There is thus no need to propose a
                similar exclusion in this proposed subpart.
                ---------------------------------------------------------------------------
                 \435\ See Regulation C Sec. 1003.4(a) (stating that a financial
                institution ``shall collect data regarding . . . covered loans that
                it purchases for each calendar year'').
                 \436\ See 12 U.S.C. 2803(a)(1) (stating that depository
                institutions ``shall compile and make available . . . the number and
                total dollar amount of mortgage loans which were (A) originated (or
                for which the institution received completed applications), or (B)
                purchased by that institution'').
                 \437\ 12 CFR 1003.3(c)(4).
                ---------------------------------------------------------------------------
                 The Bureau believes that requiring covered financial institutions
                to collect and maintain data related to the purchase of an interest in
                a pool of covered credit transactions would do little to further the
                purposes of section 1071. The Bureau generally believes that a pooled
                loan purchase would arise after a final credit decision on the relevant
                loans has already been made (e.g., after the loans were originated) and
                therefore the Bureau believes that the purchaser of an interest in a
                pool of loans would understand that there would be no section 1071
                obligation. Section 1071 would already capture the lending information
                of the loans in this pool, as the application for each origination in
                the pool would already be reported (assuming it was originated by a
                covered financial institution and otherwise satisfies the requirements
                of proposed subpart B). For clarity, however, the Bureau is stating
                here that no reporting obligations arise from purchasing an interest in
                a pool of covered credit transactions, including credit-backed
                securities or real estate investment conduits. The Bureau believes that
                this clarification, similar to Regulation C comment 3(c)(4)-1, will
                assist covered financial institutions in understanding the scope of
                their obligations.
                 The Bureau seeks comment on its proposal not to expressly exclude
                the purchase of an interest in a pool of covered credit transactions in
                the proposed rule's regulatory text or commentary.
                 Certain purchases of covered credit transactions--partial interests
                in a covered credit transaction. In the SBREFA Outline, the Bureau did
                not specifically solicit feedback on a financial institution's
                obligation to report the purchase of a partial interest in a covered
                credit transaction (such as through participation loans, where multiple
                financial institutions fund a single origination); however, the Bureau
                did receive some feedback on this issue. One SER noted that there was
                some uncertainty with respect to how the Bureau intended to treat loan
                participations. This SER urged the Bureau not to discourage smaller
                credit unions in rural markets, who the SER stated may be likely to
                take part in loan participations, from helping their communities. The
                Panel did not provide a specific recommendation on this topic. Several
                other stakeholders also requested that the Bureau exempt participation
                loans.
                 The Bureau believes that this feedback may be based in part on the
                requirements that apply to HMDA, where Regulation C requires financial
                institutions to report purchases of
                [[Page 56414]]
                covered loans under HMDA.\438\ This requirement is based on statutory
                language that contemplates data collection for loan purchases.\439\
                However, Regulation C exempts from these general reporting requirements
                ``[t]he purchase of a partial interest in a closed-end mortgage loan or
                open-end line of credit'' \440\ As discussed in the section-by-section
                analysis of proposed Sec. 1002.103 above, ECOA section 704B(b)
                requires that financial institutions collect, maintain, and report to
                the Bureau certain information regarding ``any application to a
                financial institution for credit.'' For covered financial institutions,
                the definition of ``application'' (or, as used in this proposed rule,
                ``covered application'') will trigger data collection and reporting
                obligations with respect to covered credit transactions. Under this
                subpart, a partial purchase of a loan does not, in itself, generate an
                obligation for a covered financial institution to report small business
                lending data. There is thus no need to propose a similar exclusion in
                this subpart.
                ---------------------------------------------------------------------------
                 \438\ See Regulation B Sec. 1003.4(a) (stating that a financial
                institution ``shall collect data regarding . . . covered loans that
                it purchases for each calendar year'').
                 \439\ See 12 U.S.C. 2803(a)(1) (stating that depository
                institutions ``shall compile and make available . . . the number and
                total dollar amount of mortgage loans which were (A) originated (or
                for which the institution received completed applications), or (B)
                purchased by that institution'').
                 \440\ 12 CFR 1003.3(c)(8).
                ---------------------------------------------------------------------------
                 The Bureau believes that this approach, combined with proposed
                Sec. 1002.109(a)(3), provides sufficient clarity for financial
                institutions that choose to take part in loan participations. For
                example, Financial Institution A receives an application for a covered
                credit transaction and approves the loan, and then Financial
                Institution A elects to organize a loan participation agreement where
                Financial Institutions B and C agree to purchase a partial interest.
                This is a covered credit transaction for Financial Institution A, but
                it is not a covered credit transaction for Financial Institutions B and
                C. The Bureau believes that this approach differs from how loan
                participations are reported by banks and savings associations under the
                CRA. That is, under the CRA, if the loan originated by Financial
                Institution A met the definition of a small business loan, then if any
                (or all) of the financial institutions were CRA loan reporters the
                loans may be reported under the CRA.\441\
                ---------------------------------------------------------------------------
                 \441\ See, e.g., 12 CFR 228.21(f) (stating that when assessing
                the record of a nonminority-owned and nonwomen-owned bank, the Board
                considers loan participation as a factor).
                ---------------------------------------------------------------------------
                 The Bureau believes that the purposes of section 1071 counsel
                towards the broad collection of small business lending by financial
                institutions. The Bureau is further unaware of any reason why data with
                respect to such lending should not be collected because more than one
                financial institution holds an interest in a covered product.
                Conversely, the Bureau does not believe that requiring reporting by
                each financial institution with a partial interest in a covered credit
                transaction would further section 1071's purposes, and is concerned
                that having a single loan reported by multiple financial institutions
                could compromise the quality of the section 1071 dataset. Read in
                conjunction with proposed Sec. 1002.109(a)(3), however, the Bureau
                believes that the covered credit transactions at issue here will
                nonetheless generally be reported by one covered financial institution,
                the financial institution that sold portions of the loan to other
                participants.
                 The Bureau seeks comment on its proposal not to expressly exclude
                the purchase of a partial interest in a covered credit transaction in
                the proposed rule's regulatory text or commentary. In particular, the
                Bureau solicits comment on how this proposed exclusion may differ from
                reporting obligations under the CRA, and if the Bureau adopted another
                approach, how overlapping reporters or data might be flagged to avoid
                double-counting certain information.
                 Trade credit. Under existing Regulation B, trade credit refers to a
                ``financing arrangement that involves a buyer and a seller--such as a
                supplier who finances the sale of equipment, supplies, or inventory; it
                does not apply to an extension of credit by a bank or other financial
                institution for the financing of such items.'' \442\ Thus, trade credit
                typically involves a transaction in which a seller allows a business to
                purchase its own goods without requiring immediate payment, and the
                seller is not otherwise in the financial services business. Businesses
                offering trade credit generally do so as a means to facilitate the sale
                of their own goods and not as a stand-alone financing product.
                ---------------------------------------------------------------------------
                 \442\ Comment 9(a)(3)-2.
                ---------------------------------------------------------------------------
                 Most of the notification requirements of existing Regulation B do
                not apply to trade credit transactions.\443\ In a typical trade credit
                transaction, the seller is not otherwise in the financial services
                business.\444\ The Bureau's White Paper estimated that trade credit
                represents approximately 21 percent of the aggregate dollar volume of
                various financial products used by small businesses.\445\ The Bureau
                understands that there are tens of thousands of merchants and
                wholesalers that extend credit to small businesses solely in connection
                with sale of goods and services by these trade creditors.
                ---------------------------------------------------------------------------
                 \443\ See Sec. 1002.9(a)(3)(ii).
                 \444\ See comment 9(a)(3)-2.
                 \445\ White Paper at 21 fig. 2.
                ---------------------------------------------------------------------------
                 In its SBREFA Outline, the Bureau stated that it was considering
                proposing that trade credit not be a covered product under section
                1071.\446\ The Bureau stated that trade credit can be offered by
                entities that are themselves very small businesses and that the Bureau
                was concerned that these entities, in particular, may incur large costs
                relative to their size to collect and report 1071 data in an accurate
                and consistent manner.\447\
                ---------------------------------------------------------------------------
                 \446\ SBREFA Outline at 21.
                 \447\ See id.
                ---------------------------------------------------------------------------
                 The Bureau only received a few comments regarding its proposal
                under consideration to exclude trade credit. A few stakeholders
                suggested that trade credit should be covered. One commenter noted that
                trade credit is used for a significant number of agricultural finance
                transactions (equipment financing and input financing for row crop
                farmers) and suggested that the Bureau should monitor this sector of
                the agricultural finance industry. A trade association stated that the
                exclusion of trade credit should apply not only to the seller of
                inventory and businesses facilitating the sale of inventory, but also
                its affiliates and facilitators because these entities generally
                provide financing only for the seller's products and not for competing
                or unrelated products. The trade association cautioned that the
                collection and publication of data, if applied to such an affiliate,
                could significantly impact the seller's ability to maintain trade
                secrets, as these data would provide competitors a comprehensive
                insight into the seller's distribution and wholesale strategies, and it
                would also create a substantial risk to the applicants themselves due
                to privacy concerns.
                 The Bureau is proposing to not cover trade credit in its 1071 rule.
                Proposed Sec. 1002.104(b)(1) would define trade credit as a financing
                arrangement wherein a business acquires goods or services from another
                business without making immediate payment to the business providing the
                goods or services. Proposed comment 104(b)(1)-1 would provide that an
                example of trade credit is one that involves a supplier that finances
                the sale of equipment,
                [[Page 56415]]
                supplies, or inventory. Proposed comment 104(b)(1)-1 would provide that
                an extension of business credit by a financial institution other than
                the supplier for the financing of such items is not trade credit.
                Proposed comment 104(b)(1)-2 would clarify that the definition of trade
                credit under existing comment 9(a)(3)-2 applies to relevant provisions
                under existing Regulation B, and that proposed Sec. 1002.104(b)(1) is
                not intended to repeal, abrogate, annul, impair, or interfere with any
                existing interpretations, orders, agreements, ordinances, rules, or
                regulations adopted or issued pursuant to existing comment 9(a)(3)-2.
                 The Bureau is proposing a definition of ``covered credit
                transaction'' that excludes trade credit pursuant to its authority
                under ECOA section 704B(g)(1) to prescribe such rules and issue such
                guidance as may be necessary to carry out, enforce, and compile data
                under section 1071. While trade credit constitutes ``credit'' within
                the meaning of proposed Sec. 1002.102(k), the Bureau believes that
                trade credit is categorically different from products like loans, lines
                of credit, credit cards, and MCAs and that there are several reasons to
                exclude it from coverage. Trade credit is not a general-use business
                lending product--that is, trade creditors generally extend credit as a
                means to facilitate the sale of their own goods, rather than offering
                it as a stand-alone financial product. The Bureau believes that while
                trade creditors might meet the definition in section 1071 of a
                financial institution, they are not financial services providers that
                manage compliance with regulatory requirements associated with making
                extensions of credit. The Bureau understands that trade credit can be
                offered by entities that are themselves very small businesses; the
                Bureau continues to be concerned that these entities, in particular,
                may incur large costs relative to their size to collect and report 1071
                data in an accurate and consistent manner.\448\ Taken together, the
                Bureau is concerned that requiring trade credit to be reported under
                proposed subpart B may lead to significant data quality issues. The
                Bureau is also concerned that the fixed costs of coming into compliance
                with its 1071 rule could lead these businesses to reduce or cease
                offering trade credit to their small business customers, which would
                run contrary to the community development purpose of section 1071.
                ---------------------------------------------------------------------------
                 \448\ See Leora Klapper et al., The Review of Financial Studies,
                Trade Credit Contracts, at 838-67 (vol. 25, issue 3, 2012), https://academic.oup.com/rfs/article/25/3/838/1616515, and Justin Murfin &
                Ken Njoroge, The Review of Financial Studies, The Implicit Costs of
                Trade Credit Borrowing by Large Firms, at 112-45 (vol. 28, issue 1,
                2015), https://academic.oup.com/rfs/article/28/1/112/1681329.
                ---------------------------------------------------------------------------
                 The Bureau notes that its proposed definition of trade credit in
                Sec. 1002.104(b)(1) is focused on the business providing the goods or
                services being financed. It thus does not extend to affiliates and
                facilitators of trade creditors that provide financing, even if only
                for the trade creditor's products and not for competing or unrelated
                products. Provided that they otherwise meet the definition of a covered
                financial institution in proposed Sec. 1002.105(b), such affiliates
                and facilitators must collect and report data under the 1071 rule. The
                Bureau believes that, unlike trade creditors themselves, such
                affiliates and facilitators offer stand-alone credit products in the
                same way as other financial institutions. As such, the Bureau does not
                have the same concerns about data quality or market exit by affiliates
                and facilitators that it does about trade creditors themselves.
                 The Bureau seeks comment on its proposal to exclude trade credit
                from the 1071 rule and on its proposed definition of trade credit.
                 Public utilities credit. As noted above, the existing definition of
                business credit in Sec. 1002.2(g) excludes public utilities credit,
                securities credit, incidental credit, and government credit, as defined
                in existing Sec. 1002.3(a) through (d), from certain procedural
                requirements of existing Regulation B. For the purpose of proposed
                subpart B, the Bureau is proposing complete exclusions for public
                utilities credit from the definition of a covered credit transaction in
                proposed Sec. 1002.104(b).
                 In the SBREFA Outline, the Bureau did not expressly discuss
                treatment of public utilities credit transactions. However, the Bureau
                sought feedback on any products that should or should not be covered by
                the Bureau's eventual 1071 rule, and did not receive any feedback
                specific to public utilities credit.
                 Proposed Sec. 1002.104(b)(2) would exclude public utilities
                credit, as defined in existing Sec. 1002.3(a)(1). Existing Sec.
                1002.3(a)(1) states that the term public utilities credit refers to
                extensions of credit that involve public utility services provided
                through pipe, wire, or other connected facilities, or radio or similar
                transmission (including extensions of such facilities), if the charges
                for service, delayed payment, and any discount for prompt payment are
                filed with or regulated by a government unit. Several existing
                Regulation B requirements do not apply to public utilities credit
                transactions.\449\ Existing comment 3(a)-1 explains that the definition
                applies only to credit for the purchase of a utility service, such as
                electricity, gas, or telephone service. Credit provided or offered by a
                public utility for some other purpose--such as for financing the
                purchase of a gas dryer, telephone equipment, or other durable goods,
                or for insultation or other home improvements--would not be excepted
                under proposed Sec. 1002.104(b)(2) but may be excepted if it
                constitutes trade credit under proposed Sec. 1002.104(b)(1), or in the
                case of financing for certain home improvements, for example, if it
                does not constitute an extension of business credit under proposed
                Sec. 1002.104(a). Existing comment 3(a)-2 states in part that a
                utility company is a creditor when it supplies utility service and
                bills the user after the service has been provided.
                ---------------------------------------------------------------------------
                 \449\ See Sec. 1002.3(a).
                ---------------------------------------------------------------------------
                 The Bureau is proposing a definition of ``covered credit
                transaction'' that excludes public utilities credit pursuant to its
                authority under ECOA section 704B(g)(1) to prescribe such rules and
                issue such guidance as may be necessary to carry out, enforce, and
                compile data under section 1071. The Bureau believes that excluding
                public utilities credit from the 1071 rule is reasonable for the same
                reasons as the Board enumerated when it adopted exemptions from certain
                procedural requirements under subpart A. Specifically, the Bureau is
                concerned that covering public utilities credit under 1071 could
                require ``substantial changes in the forms and procedures of public
                utilities companies. Costs associated with such changes would, in all
                likelihood, be passed along to [small business owners].'' \450\ The
                Bureau notes that many of the policies and procedures of public
                utilities companies are separately regulated at the State and Municipal
                levels by public service commissions, and at the Federal level by the
                Federal Energy Regulatory Commission. The Bureau also believes that
                public utilities credit is akin to trade credit and thus is proposing
                to exclude it from coverage under subpart B for the same reasons.
                ---------------------------------------------------------------------------
                 \450\ 40 FR 49298, 49305 (Oct. 22, 1975).
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposal to exclude public
                utilities credit.
                 Securities credit. As noted above, the existing definition of
                business credit in Sec. 1002.2(g) excludes public utilities credit,
                securities credit, incidental credit, and government credit, as defined
                in existing Sec. 1002.3(a) through
                [[Page 56416]]
                (d), from certain procedural requirements of existing Regulation B. For
                the purpose of proposed subpart B, the Bureau is proposing complete
                exclusions for securities credit from the definition of a covered
                credit transaction in proposed Sec. 1002.104(b).
                 In the SBREFA Outline, the Bureau did not expressly discuss
                treatment of securities credit transactions, but the Bureau sought
                feedback on any products that should or should not be covered by the
                Bureau's eventual 1071 rule. The Bureau did not receive any feedback
                specific to securities credit.
                 Proposed Sec. 1002.104(b)(3) would exclude securities credit, as
                defined in existing Sec. 1002.3(b)(1). Existing Sec. 1002.3(b)(1)
                states that the term securities credit refers to extensions of credit
                subject to regulation under section 7 of the Securities Exchange Act of
                1934 or extensions of credit by a broker or dealer subject to
                regulation as a broker or dealer under the Securities Exchange Act of
                1934. Several existing Regulation B requirements do not apply to
                securities credit transactions.\451\
                ---------------------------------------------------------------------------
                 \451\ See Sec. 1002.3(b).
                ---------------------------------------------------------------------------
                 The Bureau is proposing a definition of ``covered credit
                transaction'' that excludes securities credit pursuant to its authority
                under ECOA section 704B(g)(1) to prescribe such rules and issue such
                guidance as may be necessary to carry out, enforce, and compile data
                under section 1071. The Bureau is proposing to exclude securities
                credit to foster consistency with existing Regulation B.
                 The Bureau seeks comment on its proposal to exclude securities
                credit.
                 Incidental credit. As noted above, the existing definition of
                business credit in Sec. 1002.2(g) excludes public utilities credit,
                securities credit, incidental credit, and government credit, as defined
                in existing Sec. 1002.3(a) through (d), from certain procedural
                requirements of existing Regulation B. For the purpose of proposed
                subpart B, the Bureau is proposing complete exclusions for incidental
                credit from the definition of a covered credit transaction in proposed
                Sec. 1002.104(b).
                 In the SBREFA Outline, the Bureau did not expressly discuss
                treatment of incidental credit transactions, but the Bureau sought
                feedback on any products that should or should not be covered by the
                Bureau's eventual 1071 rule. The Bureau did not receive any feedback
                specific to incidental credit.
                 Proposed Sec. 1002.104(b)(4) would exclude incidental credit, as
                defined in existing Sec. 1002.3(c)(1), but without regard to whether
                the credit is consumer credit, as defined in existing Sec. 1002.2(h).
                Existing Sec. 1002.3(c)(1) states that incidental credit refers to
                extensions of consumer credit other than the types described in Sec.
                1002(a) and (b): (i) That are not made pursuant to the terms of a
                credit card account; (ii) that are not subject to a finance charge (as
                defined in Regulation Z Sec. 1026.4); and (iii) that are not payable
                by agreement in more than four installments. A number of existing
                Regulation B requirements do not apply to ``incidental credit''
                (referring to extensions of consumer credit).\452\ Existing comment
                3(c)-1 explains that if a service provider (such as a hospital, doctor,
                lawyer, or merchant) allows the client or customer to defer the payment
                of a bill, this deferral of debt is credit for purposes of the
                regulation, even though there is no finance charge and no agreement for
                payment in installments. Because of the exceptions provided by existing
                Sec. 1002.3, however, these particular credit extensions are excepted
                from compliance with certain procedural requirements as specified in
                Sec. 1002.3(c).
                ---------------------------------------------------------------------------
                 \452\ See Sec. 1002.3(c).
                ---------------------------------------------------------------------------
                 The Bureau is proposing a definition of ``covered credit
                transaction'' that excludes incidental credit pursuant to its authority
                under ECOA section 704B(g)(1) to prescribe such rules and issue such
                guidance as may be necessary to carry out, enforce, and compile data
                under section 1071. The Bureau believes that the Board's reasoning with
                respect to incidental credit's limited exception under existing
                Regulation B is equally applicable and relevant here. The Board sought
                to minimize burdens on businesses that ``permit their customers to
                defer payment of debt as a convenience and are not in the business of
                extending credit.'' \453\ The Board cited the example of doctors and
                dentists that permit their patients to defer payment of fees and who
                are extending credit as incidental to their principal activity of
                health care.\454\ The Board also noted that ``[s]mall neighborhood
                businesses such as drugstores and grocery stores frequently permit
                their customers to postpone payment on an informal basis not associated
                with a formal credit plan.'' \455\ The Bureau believes that incidental
                credit, as described above, is akin to trade credit and thus is
                proposing to exclude it from coverage under subpart B for the same
                reasons.
                ---------------------------------------------------------------------------
                 \453\ 40 FR 49298, 49304 (Oct. 22, 1975).
                 \454\ Id.
                 \455\ Id.
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposal to exclude incidental
                credit.
                Section 1002.105 Covered Financial Institutions and Exempt Institutions
                 ECOA section 704B(h)(1) defines the term ``financial institution''
                as ``any partnership, company, corporation, association (incorporated
                or unincorporated), trust, estate, cooperative organization, or other
                entity that engages in any financial activity.'' The Bureau is
                proposing to define a financial institution in Sec. 1002.105(a)
                consistent with that statutory language. The Bureau is proposing to
                define a covered financial institution in Sec. 1002.105(b) as a
                financial institution that originated at least 25 covered credit
                transactions from small businesses in each of the two preceding
                calendar years. Only those financial institutions that meet this loan-
                volume threshold in the definition of a covered financial institution
                would be required to collect and report small business lending data
                pursuant to proposed subpart B.
                 The Bureau's proposed definitions reflect the broad nature of the
                data collection specified in section 1071, while recognizing the risks
                that financial institutions with the lowest volume of small business
                lending might reduce or cease their small business lending activity
                because of the fixed costs of coming into compliance with this rule.
                 The Bureau is proposing Sec. 1002.105 to implement ECOA section
                704B(h)(1) and pursuant to its authority under 704B(g)(1) to prescribe
                such rules and issue such guidance as may be necessary to carry out,
                enforce, and compile data pursuant to section 1071. The Bureau is also
                proposing Sec. 1002.105(b) pursuant to its authority under 704B(g)(2)
                to conditionally or unconditionally exempt any financial institution or
                class of financial institutions from the statute's requirements, as the
                Bureau deems necessary or appropriate to carry out the purposes of
                section 1071. The Bureau is proposing these provisions and proposing to
                use its exemption authority under 704B(g)(2) for the reasons set forth
                below.
                105(a) Financial Institution
                Background
                 ECOA section 704B(h)(1) defines the term ``financial institution''
                as ``any partnership, company, corporation, association (incorporated
                or unincorporated), trust, estate, cooperative organization, or other
                entity that engages in any financial activity.''
                [[Page 56417]]
                SBREFA Proposals Under Consideration and Feedback Received
                 At SBREFA, the Bureau stated it was considering proposing a general
                definition of ``financial institution'' consistent with the section
                1071 definition.\456\ The Bureau noted that Regulation B, which
                implements ECOA, has not otherwise defined this term.
                ---------------------------------------------------------------------------
                 \456\ SBREFA Outline at 10.
                ---------------------------------------------------------------------------
                 SERs generally did not express concern regarding the general
                definition of a ``financial institution'' under consideration, although
                one SER expressed concern at the broad reach of what might be
                considered a financial activity.\457\ The SBREFA Panel did not provide
                any recommendations on the definition of a financial institution.
                Feedback on the definition of ``financial institution'' from other
                stakeholders was likewise nearly universally positive, with most
                opining that a definition that encompasses all small business lenders
                would be appropriate.
                ---------------------------------------------------------------------------
                 \457\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 18-20.
                ---------------------------------------------------------------------------
                Proposed Rule
                 Proposed Sec. 1002.105(a) would define a financial institution as
                any partnership, company, corporation, association (incorporated or
                unincorporated), trust, estate, cooperative organization, or other
                entity that engages in any financial activity. This proposed definition
                restates the statute and is the same definition that the Bureau stated
                it was considering proposing in the SBREFA Outline.\458\ The Bureau
                believes that this definition reflects the broad nature of small
                business lending data collection specified in section 1071. Under such
                a definition, the rule's data collection and reporting requirements
                would apply to a variety of entities that engage in small business
                lending, including depository institutions (i.e., banks, savings
                associations, and credit unions),\459\ online lenders, platform
                lenders, CDFIs, lenders involved in equipment and vehicle financing
                (captive financing companies and independent financing companies),
                commercial finance companies, governmental lending entities, and
                nonprofit, nondepository lenders.
                ---------------------------------------------------------------------------
                 \458\ SBREFA Outline at 10.
                 \459\ For purposes of this notice of proposed rulemaking, the
                Bureau is using the term depository institution to mean any bank or
                savings association defined by the Federal Deposit Insurance Act, 12
                U.S.C. 1813(c)(1), or credit union defined pursuant to the Federal
                Credit Union Act, as implemented by 12 CFR 700.2. The Bureau notes
                that the Dodd-Frank Act defines a depository institution to mean any
                bank or savings association defined by the Federal Deposit Insurance
                Act; there, that term does not encompass credit unions. 12 U.S.C.
                5301(18)(A), 1813(c)(1). To facilitate analysis and discussion, the
                Bureau is referring to banks and savings associations together with
                credit unions as depository institutions throughout this notice,
                unless otherwise specified.
                ---------------------------------------------------------------------------
                 As noted above, one SER expressed concern at the broad reach of
                this definition. But the broad scope of what may be considered a
                ``financial activity'' in the proposed definition of financial
                institution is not the principal determinative factor as to whether
                small business lending data collection and reporting is required; the
                proposed definition of a covered financial institution, the proposed
                definition of a covered application, and the proposed definition of a
                covered credit transaction, among others, all would impose limits on
                what entities could be subject to this proposed rule's data collection
                and reporting requirements.
                 Proposed comment 105(a)-1 would provide a non-exhaustive list of
                examples of entities that may fit within the definition of a financial
                institution. This proposed comment would make clear that nonprofit and
                governmental entities, governmental subdivisions, or governmental
                agencies, among others, who conduct financial activity fit within the
                definition of a financial institution. The definition of the term
                ``financial institution'' in ECOA section 704B(h)(1) includes the
                phrase ``or other entity.'' That term readily encompasses governments
                and government entities. Even if the term were ambiguous, the Bureau
                believes--based on its expertise and experience--that interpreting it
                to encompass governments and government entities would promote the
                purposes of section 1071. For example, the Bureau believes that it will
                be helpful to identify the business and community development needs of
                women-owned, minority-owned, and small businesses by collecting lending
                data from both a county-run assistance program for establishing new
                businesses and financial institutions that operate nationwide, like
                online lenders. The Bureau also believes that the terms ``companies''
                or ``corporations'' under the definition of ``person,'' on their face,
                cover all companies and corporations, including government-owned or -
                affiliated companies and corporations. And even if those terms were
                ambiguous, the Bureau believes--based on its expertise and experience--
                that interpreting them to cover government-owned or -companies and
                corporations would promote the purposes of section 1071. The Bureau
                emphasizes that the list of examples of entities in proposed comment
                105(a)-1 is not exhaustive and that other entities not specifically
                described would nonetheless fit within the definition of a financial
                institution under proposed Sec. 1002.105(a). For example, the Bureau
                believes that an organization offering insurance premium financing,
                where the organization provides short-term loans to businesses to pay
                for property and casualty insurance, is included within the definition
                of proposed Sec. 1002.105(a), even though this specific business model
                is not described in proposed comment 105(a)-1.
                 Proposed comment 105(a)-2 would refer to proposed Sec. 1002.101(a)
                to reiterate the statutory exclusion for motor vehicle dealers.
                 The Bureau seeks comment on this proposed definition of a financial
                institution, and generally requests comment on whether additional
                clarification is needed.
                105(b) Covered Financial Institution
                Background
                 The Bureau has received requests to adopt exemptions from section
                1071 collection and reporting requirements for financial institutions
                that do not frequently engage in small business lending. Reasons cited
                have included encouraging market entry, ensuring data quality, alleged
                lack of materiality of data from smaller lenders that rarely make small
                business loans, and lack of capacity by the lenders sufficient to
                justify small business lending as a line of business in light of the
                cost of complying with an eventual 1071 rule.
                SBREFA Proposals Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated that it was considering,
                in light of section 1071's statutory purposes, proposing to exempt
                financial institutions from any collection and reporting requirements
                based on either or both a size-based and/or activity-based threshold.
                In the SBREFA Outline, the Bureau set forth several alternative
                thresholds under consideration for such an exemption.\460\
                ---------------------------------------------------------------------------
                 \460\ SBREFA Outline at 11-13.
                ---------------------------------------------------------------------------
                 There was a diversity of perspectives with respect to the Bureau's
                approaches under consideration regarding potential exemptions.\461\
                While some SERs stressed the need for expansive lender coverage to
                fulfill section 1071's purposes, others suggested that such purposes
                could be fulfilled by the Bureau collecting and reporting data from
                only the largest lenders. SERs also offered varying opinions regarding
                the exemption metrics and thresholds under
                [[Page 56418]]
                consideration, with some SERs favoring activity-based exemptions and
                others preferring an asset-based approach. SERs uniformly supported
                clear, predictable collection and reporting exemption thresholds.
                ---------------------------------------------------------------------------
                 \461\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 18-20.
                ---------------------------------------------------------------------------
                 The SBREFA Panel recommended that the Bureau continue to explore
                whether either or both a size-based or activity-based test might be
                appropriate to determine whether a financial institution must collect
                and report 1071 data or should be exempt, given section 1071's
                statutory purposes.\462\ The SBREFA Panel also recommended that the
                Bureau continue to explore whether the fixed costs of coming into
                compliance with an eventual 1071 rule might cause certain financial
                institutions to reduce or cease lending to small businesses, as it
                considers the possible exemptions for financial institutions based on
                size and/or activity, along with any alternative approaches.\463\
                ---------------------------------------------------------------------------
                 \462\ Id. at 43.
                 \463\ Id.
                ---------------------------------------------------------------------------
                 Feedback from other stakeholders generally was in support of
                exempting certain financial institutions from 1071 collection and
                reporting obligations. Most feedback in support of pursuing exemptions
                focused on the potential burden of a new regulatory regime, with some
                stakeholders cautioning that collection and reporting obligations could
                lead to an increase in the cost of credit. A few stakeholders connected
                these potential costs with section 1071's purpose to identify community
                development needs and opportunities (chiefly arguing that costs might
                lead to higher costs of lending or lower lending volume), or otherwise
                expressed a general belief that some exemptions were consistent with
                statutory purposes. Several stakeholders, mostly community groups,
                urged caution with respect to the extent of any such exemptions,
                arguing that significant data limitations would run contrary to the
                general purposes of section 1071.
                 Activity-based exemption. In the SBREFA Outline, the Bureau stated
                that it was considering whether only financial institutions that engage
                in a certain amount of small business lending activity should be
                required to collect and report 1071 data.\464\ The Bureau explained
                that in light of 1071's potentially broad application to financial
                institutions, an activity-based test to determine reporting
                responsibility might be appropriate. In particular, the Bureau
                expressed concern that financial institutions with the lowest volume of
                small business lending might reduce or cease their small business
                lending activity because of the fixed costs of coming into compliance
                with an eventual 1071 rule. The Bureau stated that this result could be
                contrary to the community development purpose of section 1071.
                ---------------------------------------------------------------------------
                 \464\ SBREFA Outline at 12-13.
                ---------------------------------------------------------------------------
                 The Bureau specifically mentioned three possible activity-based
                threshold levels, each defined by a financial institution's annual
                number of small business loans originated or the financial
                institution's annual total dollar value of small business loans
                originated. (That is, if either measurement is exceeded, then the
                financial institution must collect and report 1071 data.) Those three
                possible activity-based threshold levels were: Originations of at least
                25 loans or $2.5 million (Option 1 Exemption Threshold); originations
                of at least 50 loans or $5 million (Option 2 Exemption Threshold); and
                originations of at least 100 loans or $10 million (Option 3 Exemption
                Threshold). These possible activity-based thresholds could be based on
                the financial institution's lending as of the end of the last calendar
                year, or the end of each of the last two calendar years. An activity-
                based exemption could apply to depository and nondepository
                institutions alike.
                 Some SERs advocated for an activity-based exemption. Several of
                these SERs preferred an annual 25-loan threshold (with at least one
                expressing support specifically for the Option 1 Exemption Threshold).
                One SER preferred the Option 2 Exemption Threshold, while another
                preferred the Bureau's Option 3 Exemption Threshold. Another SER
                recommended setting a threshold of more than 100 small business
                applications (rather than originations) for two consecutive years.
                These SERs emphasized a general need for thorough data reporting from a
                wide variety of lenders, and cautioned that in many smaller and rural
                markets, larger exemptions might result in little or no data collection
                given that many lenders in those markets make very few small business
                loans annually.
                 One SER suggested setting an activity-based threshold based on loan
                portfolio size rather than annual originations. Another SER suggested
                that the Bureau consider exempting certain financial institutions using
                a location test similar or identical to what is used for HMDA, which
                does not apply to institutions that do not have a home or branch office
                in a Metropolitan Statistical Area.
                 There was no uniformity in the feedback from other stakeholders
                with respect to an activity-based exemption and its potential level.
                Many commenters, including lenders, trade associations, and community
                groups, expressed support for the Option 1 Exemption Threshold,
                although most explicitly supported only the 25-loan threshold. On the
                other hand, a few comments advocated for versions of the Option 3
                Exemption Threshold and many comments urged the Bureau to adopt a
                threshold higher than the Option 3 Exemption Threshold. Commenters who
                advocated for higher thresholds consisted of lenders and trade
                associations.
                 Size-based exemption. In the SBREFA Outline, the Bureau stated that
                it was concerned that the smallest financial institutions might reduce
                or cease their small business lending activity because of the fixed
                costs of coming into compliance with an eventual 1071 rule, which could
                be contrary to the community development purpose of section 1071.\465\
                Specifically, the Bureau considered whether depository institutions
                with assets under a given threshold should be exempt from collecting
                and reporting small business lending data.
                ---------------------------------------------------------------------------
                 \465\ Id. at 11-12.
                ---------------------------------------------------------------------------
                 The Bureau stated that it was considering proposing to exempt
                depository institutions with assets under a given threshold from
                section 1071's data collection and reporting requirements. The Bureau
                postulated that this size-based approach could provide a
                straightforward exemption for very small depository institutions and
                avoid the need for those entities to measure or monitor their small
                business lending activity in order to determine whether they would be
                exempt from the Bureau's 1071 rule. In particular, the Bureau
                considered possible asset-based exemption threshold levels of $100
                million (Option A Exemption Level) and $200 million (Option B Exemption
                Level). For purposes of this exemption, the Bureau considered proposing
                that a depository institution measure assets as of the end of the last
                calendar year, or the end of both of the last two calendar years. The
                Bureau asked SERs whether there were alternative approaches to a size-
                based exemption that the Bureau should consider.
                 SERs did not suggest size-based exemptions other than an asset-
                based metric that would apply to depository institutions. A few SERs
                advocated that the Bureau should consider initially exempting lenders
                other than ``large'' financial institutions (which, one SER suggested,
                might be defined for depository institutions as those having more than
                $1 billion in assets). These SERs stated that this approach would
                capture the vast majority of small business loans while avoiding
                imposing
                [[Page 56419]]
                undue regulatory burden on smaller lenders, who might be less capable
                of absorbing such costs. They suggested that the Bureau might later
                consider whether to expand section 1071 data collection and reporting
                requirements to smaller financial institutions after first analyzing
                the available data. Several SERs cautioned that some financial
                institutions, particularly small nondepository lenders, might cease
                lending to small businesses if the eventual 1071 rule's one-time costs
                are too high.
                 One SER stated that a $200 million asset-based exemption would be
                helpful to small depository lenders, and others suggested that a
                threshold of $600 million was appropriate. Another SER countered,
                however, that they were unaware of data to support an asset-based
                exemption larger than $100 million. Some SERs expressly opposed an
                asset-based exemption; one SER cautioned that an exemption based solely
                on asset size would be inadvisable because many lenders do not hold
                their loans on their balance sheet. Another SER stated that adopting an
                asset-based exemption would risk excluding the collection of nearly all
                small business lending data in certain regions.
                 Input from other stakeholders was split. Many stakeholders
                supported a size-based exemption (typically an asset-based exemption),
                contending that small depository institutions faced substantial
                compliance costs and presented a lower likelihood of fair lending
                violations. Small depository institutions were also particularly
                concerned about data security issues. However, a number of other
                stakeholders counseled against a size-based exemption, arguing that
                exemptions should be based instead on lending activity, and that size-
                based exemptions risked under-reporting in important markets. In
                addition, some stakeholders noted that because there was no ready
                equivalent size-based measurement for nondepository institutions,
                including an asset-based exemption in the 1071 rule would put other
                small financial institutions at a cost disadvantage.
                 Combined exemption. The Bureau stated that it was exploring whether
                to combine the size- and activity-based approaches.\466\ Under a
                combined approach, a financial institution would be required to collect
                and report 1071 data if it exceeds either: (1) A given annual number of
                small business loans originated; or (2) annual total small business
                lending, measured in dollars. However, depository institutions with
                assets under a given asset threshold would be exempt from reporting,
                regardless of the number or dollar value of small business loans they
                originated during the relevant time period.
                ---------------------------------------------------------------------------
                 \466\ Id. at 13.
                ---------------------------------------------------------------------------
                 At least one SER supported a combined size-based and activity-based
                exemption. Some SERs also suggested other possible bases for setting
                exemption thresholds. For example, several SERs suggested that the
                Bureau focus on the number of small business loans that would be
                covered or excluded, rather than the number of financial institutions,
                in setting an exemption threshold. One SER suggested setting a
                threshold based on loan portfolio size rather than annual originations.
                As discussed above, another SER suggested that the Bureau consider
                exempting certain financial institutions using a location test similar
                or identical to what is used for HMDA, which does not apply to
                institutions that do not have a home or branch office in a Metropolitan
                Statistical Area.
                 Alternative exemptions. The Bureau did not express that it was
                considering other collection and reporting exemptions. However, the
                Bureau did request feedback on alternative approaches. In particular,
                the Bureau asked whether there were certain types of financial
                institutions, such as governmental lending entities or nonprofit
                nondepository lenders, that the Bureau should consider not including
                within 1071's data collection and reporting requirements.
                 One credit union SER requested that the Bureau exempt all credit
                unions from section 1071 data collection and reporting requirements,
                asserting that credit unions had not displayed what they characterized
                as a ``pattern of unfair lending.'' In contrast, another SER cautioned
                against providing exemptions for particular types of financial
                institutions, noting the risk of missing important lending data. A few
                SERs, particularly CDFIs, strongly preferred that all lenders,
                including nonprofit and government lenders, be subject to section 1071
                data collection and reporting requirements. One SER asserted that
                disparities exist in many forms of small business lending, including
                the SBA's 7(a) Loan Program, State lending programs, and funds
                distributed through the recent Coronavirus Aid, Relief, and Economic
                Security Act (CARES Act).\467\ Another SER stated that in certain parts
                of the country, such as the Midwest, Farm Credit System loans are
                available to small businesses, and thus Farm Credit institutions are in
                competition with other lenders and should be covered entities. One SER
                stated that the Bureau should consider exempting nondepository,
                nonprofit Native CDFIs because section 1071 data collection and
                reporting requirements might impose significant compliance costs and
                privacy concerns.\468\ The SBREFA Panel recommendations did not
                directly address this topic, although the Panel did recommend that the
                Bureau continue to consider alternative approaches to exemptions.\469\
                ---------------------------------------------------------------------------
                 \467\ Public Law 116-136, 134 Stat. 281 (2020).
                 \468\ Native CDFIs are organizations certified as community
                development financial institutions that primarily serve a Native
                Community and are therefore eligible for Financial Assistance and
                Technical Assistance awards provided by the Native American CDFI
                Assistance Program. CDFI Fund, Fostering Economic Self-Determination
                for Your Native Community, https://www.cdfifund.gov/sites/cdfi/files/documents/cdfi7205_fs_ni_updatedfeb20.pdf (last visited Aug.
                12, 2021).
                 \469\ SBREFA Panel Report at 43.
                ---------------------------------------------------------------------------
                 Feedback from other stakeholders included a variety of suggestions
                for other types of financial institutions that the Bureau should
                consider exempting. These suggestions were made by financial
                institutions (or their trade associations) to describe either
                themselves or portions of their membership. The Bureau received this
                feedback pertaining to CDFIs, credit unions, minority depository
                institutions, financial institutions in rural areas or low- and
                moderate-income areas, financial institutions that would themselves be
                small businesses under the rule, and motor vehicle dealers. Conversely,
                some stakeholders encouraged the Bureau not to provide any such
                categorical exemptions. One stakeholder also urged the Bureau not to
                exempt government or nonprofit lenders, arguing that they were an
                important element of achieving broad coverage in 1071 data.
                Proposed Rule--Activity-Based Exemption
                 Proposed Sec. 1002.105(b) would define a covered financial
                institution as a financial institution that originated at least 25
                covered credit transactions for small businesses in each of the two
                preceding calendar years. This proposed definition adopts the portion
                of the Option 1 Exemption Threshold based on number of originations
                discussed at SBREFA, using the two consecutive year approach that was
                also described at SBREFA. The Bureau believes this definition will
                facilitate compliance by describing which financial institutions are
                required to collect and report small business data. The Bureau is also
                proposing commentary to accompany proposed Sec. 1002.105(b). The
                Bureau's
                [[Page 56420]]
                rationale for proposing this exemption, and for not proposing any
                others, is discussed in detail below.
                 In general, the Bureau believes that fulfilling the purposes of
                section 1071 necessitates collecting small business lending data from
                all sizes and types of financial institutions (other than those with a
                low volume of lending activity), particularly given the variety of
                entities identified in ECOA section 704B(h)(1). The Bureau is proposing
                to exempt certain financial institutions from its small business
                lending data collection rule because it remains concerned that
                financial institutions with the lowest volume of small business lending
                might reduce or cease their small business lending activity due to the
                fixed costs of coming into compliance with the 1071 rule. A reduction
                in access to credit would run contrary to the community development
                purpose of section 1071. Section 1071 describes its community
                development purpose as ``enabl[ing] communities, governmental entities,
                and creditors to identify business and community development needs and
                opportunities of women-owned, minority-owned, and small businesses.''
                \470\ In the Bureau's view, such business and community development
                opportunities cannot be appropriately identified if the 1071 rule
                unduly eliminates those opportunities by reducing access to credit,
                which, as explained below, supports the Bureau's use of its exemption
                authority under 704B(g)(2) here. Feedback from SBREFA showed that a
                broad array of financial institutions, trade associations, community
                groups, and others share the Bureau's concern about the risk of
                reducing access to small business credit, particularly with respect to
                financial institutions that infrequently lend to small businesses.
                ---------------------------------------------------------------------------
                 \470\ ECOA section 704B(a).
                ---------------------------------------------------------------------------
                 The Bureau is proposing Sec. 1002.105(b) pursuant to its authority
                under ECOA section 704B(g)(1) to prescribe such rules and issue such
                guidance as may be necessary to carry out, enforce, and compile data
                pursuant to section 1071 and its authority under 704B(g)(2) to adopt
                exceptions to any requirement of section 1071 and, conditionally or
                unconditionally, exempt any financial institution or class of financial
                institutions from the requirements of section 1071, as the Bureau deems
                necessary or appropriate to carry out the purposes of section 1071.
                 The Bureau believes that an activity-based threshold would provide
                a simple basis for financial institutions that infrequently lend to
                small businesses to determine whether they have conducted sufficient
                lending activity as to be required to collect and report data under
                proposed subpart B. With respect to setting an activity-based
                threshold, feedback favored using only originations. SERs uniformly
                supported clear, predictable collection and reporting exemption
                thresholds. With respect to feedback from other stakeholders, nearly
                all of the comments that expressed support for the Option 1 Exemption
                Threshold provided support only for the 25-loan metric, and not the
                total lending metric (and several comments explicitly urged the Bureau
                not to adopt the $2.5 million lending threshold). The Bureau believes
                that furnishing a dual activity-based threshold, under which infrequent
                lenders must ascertain both measurements to determine whether reporting
                may be required, would cut against the goal of simplifying the rule as
                lenders would then have to track two metrics, not one. The Bureau
                believes that a dual threshold would create more regulatory complexity
                as, among other things, the resulting rule would have to address issues
                such as how lines of credit and credit cards are meant to be counted
                towards the dollar volume threshold. (For example, should the rule use
                the maximum amount that could be extended or something else, like an
                average of the amount actually outstanding? If the former, how should
                changes in the limit be treated?) In contrast, tracking total annual
                small business originations does not entail such complexity.
                 In particular, the Bureau believes that a primary advantage of an
                activity-based threshold--ease of compliance--would be undermined if
                the Bureau were to implement a complex, dual threshold eligibility
                test. The Bureau wishes to ensure that infrequent lenders are not
                incurring significant undue compliance costs, particularly while not
                reporting data. In general, tracking two thresholds is more complex
                than tracking one. And of these two thresholds, the Bureau believes
                that tracking total originations is simpler than tracking total
                lending. The Bureau believes it is also more likely that financial
                institutions are already tracking total originations. The Bureau
                believes that proposing an activity-based threshold that employs data
                already generally collected by financial institutions could mitigate
                the risk that section 1071, when implemented, would result in reduced
                access to credit.
                 The Bureau is thus proposing to set the loan-volume threshold at 25
                covered credit transactions from small businesses in each of the past
                two years. This proposal is based, in part, on feedback received at
                SBREFA. As mentioned above, several SERs recommended an annual 25-loan
                threshold and many comments, including those from lenders, trade
                associations, and community groups, expressed support for the Option 1
                Exemption Threshold, with most explicitly supporting just the 25-loan
                threshold and not total lending.
                 The Bureau continues to consider whether this loan-volume threshold
                should be set at a different level, such as 50 or 100 originations, as
                described in the SBREFA Outline.\471\ The Bureau notes that there was
                also substantial support for a much higher loan-volume threshold than
                25 originations. In addition to the SER feedback discussed above,
                several stakeholders advocated for 100 loans and many others advocated
                for an even higher threshold. However, at least to this point, the
                Bureau is not convinced, based on the feedback from SERs and other
                stakeholders, that higher thresholds would be more necessary or
                appropriate to carry out the purposes of section 1071. Rather, such
                advocacy focused either on concerns that lower thresholds would not
                exempt a particular financial institution or type of financial
                institution, such as community banks, or that higher thresholds would
                not substantially diminish overall data collection.
                ---------------------------------------------------------------------------
                 \471\ SBREFA Outline at 12.
                ---------------------------------------------------------------------------
                 Supporters of the 25-loan threshold and supporters of the 100-loan
                threshold each argued that such a threshold would be similar to that
                used in HMDA. The Bureau's 2015 HMDA Rule set the closed-end loan
                threshold
                [[Page 56421]]
                at 25 originated loans for each of the two preceding calendar
                years.\472\ However, in 2020, the Bureau increased the threshold to 100
                closed-end loans, effective the same year.\473\ The Bureau set the HMDA
                threshold pursuant to its authority to provide adjustments or
                exceptions that it judges as necessary and proper to effectuate the
                purposes of HMDA or to facilitate compliance with HMDA. In the present
                case, with respect to institutional coverage thresholds, the Bureau
                does not believe a direct comparison with HMDA is instructive because
                of differences in the relevant statutory authorities and between home
                mortgages and small business loans.
                ---------------------------------------------------------------------------
                 \472\ See 80 FR 66127 (Oct. 28, 2015). The Bureau also provided
                a higher threshold of 100 for open-end lines of credit. Id.
                 \473\ See 85 FR 28364 (May 12, 2020).
                ---------------------------------------------------------------------------
                 The Bureau also considered how its proposed threshold of 25 covered
                credit transactions for small businesses (and the other thresholds
                under consideration at SBREFA) might affect overall collection and
                reporting of 1071 data from banks and credit unions, based on data as
                of 2019. Table 1 below provides the Bureau's estimated share of
                depository institutions, estimated share of small business loans from
                those institutions (measured in total number of loans), and estimated
                share of small business credit from those institutions (measured in
                dollars) that would be covered by a loan-volume threshold of 25, 50, or
                100 small business loans. The Bureau estimates that a depository
                institution is covered for a particular loan-volume threshold as of
                2019 if the estimated number of originations for that institution
                exceeded the threshold in both 2017 and 2018. Given the limitations of
                the source data, the Bureau cautions that these estimates are not
                intended to provide a complete sense of the possible consequences of
                adopting each particular threshold. Nonetheless, the Bureau is
                providing estimates based on these data because it is the best
                information currently available to the Bureau. Moreover, the Bureau
                emphasizes that these estimates apply only to depository institutions.
                This information is based on FFIEC and Credit Union Call Reports, as
                well as Community Reinvestment Act submissions.\474\ Under these data
                collections, banks report small loans made to businesses and farms
                (regardless of the borrower's size). Credit unions report commercial
                loans over $50,000 made to members (also, regardless of the borrower's
                size). The Bureau is unable to determine the degree to which these data
                provide an adequate proxy for the applications from small businesses
                that would be subject to 1071 reporting. The methodologies and
                assumptions used to produce these estimates are further documented in
                part VII.D below and in more detail in its Supplemental estimation
                methodology for institutional coverage and market-level cost estimates
                in the small business lending data collection notice of proposed
                rulemaking released concurrently with this proposal.\475\
                ---------------------------------------------------------------------------
                 \474\ On the bank Call Report and in the Community Reinvestment
                Act data, for small bank and small farm loans, banks report on
                business loans with original amounts of $1 million or less and farm
                loans with original amounts of $500,000 or less. For lines of credit
                or loan commitments, banks report the size of the line of credit or
                commitment when it was most recently approved. Banks include loans
                guaranteed by the SBA and other government entities in their small
                loans to businesses. Banks do not report loans to nonprofit
                organizations in this category. Thus, these data collections would
                include loans made to purchase, for example, individual vehicles and
                pieces of equipment for the nation's largest businesses.
                 \475\ This document is available at https://www.consumerfinance.gov/data-research/research-reports/supplemental-estimation-methodologies-small-business-lending-data-collection-nprm/.
                [GRAPHIC] [TIFF OMITTED] TP08OC21.000
                [[Page 56422]]
                 Table 1 above shows that as the loan-volume threshold rises, the
                estimated share of depository institutions subject to section 1071
                decreases substantially. Likewise, the estimated share of small
                business loans and small business credit captured by the rule would
                also decrease, although those decreases are less pronounced. The Bureau
                has no information for nondepository institutions such that the Bureau
                could provide similar estimates for comment. The Bureau requests in
                response to this proposal such information and data that might bear on
                any activity-based exemption for nondepository
                institutions.476 477 478 
                ---------------------------------------------------------------------------
                 \476\ There were 10,525 depository institutions as of December
                31, 2019, including 112 credit unions that are not federally
                insured.
                 \477\ Based on FFIEC Call Report data, there were 5,177 banks
                and savings associations as of December 31, 2019.
                 \478\ Based on the 2019 NCUA Call Report data, there were 5,348
                credit unions as of December 31, 2019, including 112 credit unions
                that are not federally insured.
                ---------------------------------------------------------------------------
                 The Bureau notes that the above estimates represent small business
                lending data prior to the COVID-19 pandemic and ensuing policy
                responses. The Bureau is keenly aware that many financial institutions,
                including those that may not have historically participated actively in
                small business lending, served their communities by becoming
                participating lenders in the SBA's Paycheck Protection Program. This
                program ended on May 31, 2021. The Bureau expects that by the time its
                1071 rule is finalized and implemented, lending activity conducted
                pursuant to the SBA's Paycheck Protection Program will not be
                determinative of whether a given financial institution qualifies as a
                covered financial institution under the 1071 rule. The Bureau will
                continue to monitor the market and consider what other adjustments, if
                any, may be needed to ensure that, to the best of the Bureau's ability,
                the 1071 rulemaking is informed by up-to-date and accurate information
                about the small business lending market.
                 The Bureau seeks comment on its proposed 25 originations threshold
                incorporated into the definition of a covered financial institution.
                The Bureau also solicits comment on whether this threshold should
                alternatively be set at 50 or 100 covered credit transactions.
                 The Bureau is proposing to define a covered financial institution
                using a loan-volume threshold that must be achieved in each of the two
                preceding calendar years. SERs provided relatively little feedback
                directly on the measurement period, but broadly expressed a desire for
                clear, predictable collection and reporting thresholds. The Bureau
                received substantial feedback advocating for a two-year approach, but
                little feedback asking for a one-year threshold period. A few
                stakeholders also expressed interest in a measurement period longer
                than two years.
                 The Bureau acknowledges that a loan-volume threshold based on a
                two-year period could create some operational complexity for some
                financial institutions. To be sure that it was not a covered financial
                institution, a financial institution would need to maintain records
                sufficient to show total small business originations for both years of
                the threshold period. The Bureau believes that two years is not a
                prohibitively long time, although it is possible that infrequent
                lenders may have smaller staff or fewer resources to reliably track
                such information for 1071 purposes. The Bureau believes that a two-year
                threshold period is advisable to eliminate uncertainty surrounding data
                collection responsibilities. Under this proposal, a financial
                institution that may not frequently lend to small businesses, but that
                experiences an unusual and unexpectedly high lending volume in a single
                year would not be a covered financial institution. As discussed in part
                VII below, in order to comply with the Bureau's proposed 1071 rule, a
                financial institution may need to undertake substantial one-time costs
                that include operational changes, such as staff training, information
                technology changes, and develop policies and procedures. Therefore, the
                Bureau believes that it is appropriate to propose a two-year threshold
                period to provide more stability around reporting responsibilities.
                Regulations that implement HMDA and the Community Reinvestment Act
                provide similar periods to determine coverage.
                 The Bureau notes that employing a two-year approach would delay
                reporting for new, potentially active entrants. For example, under this
                proposal a large lender that enters the market and originates hundreds
                or even thousands of small business loans in its first two calendar
                years of lending would not report its covered applications. That is,
                under the Bureau's proposal, this financial institution would not be
                required to collect and report 1071 data on its covered applications
                for small businesses in those first two years, although the institution
                could choose to voluntarily collect and report data. The Bureau has
                concerns, however, about triggering data collection and reporting
                requirement based on lenders' estimates of their projected future
                volume.
                 The proposed two-year threshold period may pose other
                considerations for financial institutions that conduct small business
                lending activity near the proposed 25 small business originations
                threshold. See the section-by-section analysis of proposed Sec.
                1002.5(a)(4) above for a discussion of proposed Sec.
                1002.5(a)(4)(viii), which would allow a financial institution to
                collect ethnicity, race, and sex information pursuant to proposed
                subpart B for a covered application under certain circumstances during
                the second year of the threshold period. See the section-by-section
                analysis of proposed Sec. 1002.114(c) below for discussion of
                additional flexibility that the Bureau is proposing regarding measuring
                lending activity prior to the rule's compliance date.
                 The Bureau is proposing to set the activity-based threshold based
                on small business originations, rather than applications. The statutory
                language of 1071 generally applies to applications; however, the Bureau
                believes that using small business originations for purposes of
                defining a covered financial institution is the better approach. The
                Bureau expects that financial institutions track their small business
                application volumes in various ways, but whether an origination
                resulted is a clear and readily identifiable metric. The Bureau is
                concerned that attempting to use an exemption metric based on
                applications would impose new obligations on financial institutions
                solely for purposes of determining whether or not they are subject to
                this rule. As discussed above, the Bureau believes that proposing an
                activity-based threshold that employs data already generally collected
                by financial institutions could mitigate the risk that section 1071,
                when implemented, would result in reduced access to credit. In
                addition, even those financial institutions that track total
                applications now may not do so in a way that fully aligns with how the
                Bureau is proposing to define covered applications for purposes of
                proposed subpart B. Using originations is also consistent with the
                Bureau's Regulation C. In addition, the Bureau received limited
                feedback advocating for the use of applications to set the activity-
                based threshold.
                 Proposed comment 105(b)-1 would clarify the meaning of a preceding
                calendar year for purposes of the proposed activity-based exemption.
                See the section-by-section analysis of proposed Sec. 1002.114(c)(2)
                below for additional discussion regarding measuring lending activity
                prior to the rule's compliance date. Proposed
                [[Page 56423]]
                comment 105(b)-2 would emphasize that a financial institution qualifies
                as a covered financial institution based on total covered credit
                transactions originated for small businesses, rather than covered
                applications received from small businesses. Proposed comment 105(b)-3
                would explain that whether a financial institution is a covered
                financial institution depends on its particular small business lending
                activity in the two preceding calendar years, and that the obligations
                of a covered financial institution is an annual consideration for each
                year that data may be compiled and maintained under proposed Sec.
                1002.107(a).
                 The Bureau is proposing to clarify in Sec. 1002.105(b) that for
                purposes of defining a covered financial institution, if more than one
                financial institution was involved in the origination of a covered
                credit transaction, only the financial institution that made the final
                credit decision approving the application shall count the origination.
                The Bureau believes that providing this clarifying language would
                assist financial institutions in understanding which transactions count
                towards the loan-volume threshold. This approach is consistent with the
                Bureau's proposed Sec. 1002.109(a)(3).
                 Proposed comments 105(b)-4 and -5 would explain when a financial
                institution is a covered financial institution following a merger or
                acquisition. These proposed comments are largely consistent with the
                Bureau's approach to reporting obligations surrounding a merger under
                Regulation C,\479\ with modifications to reflect the nature of the
                small business lending market and to provide additional clarifications.
                ---------------------------------------------------------------------------
                 \479\ See Regulation C comments 2(g)-3 and -4.
                ---------------------------------------------------------------------------
                 Proposed comment 105(b)-6 would clarify that Regulation B
                (including proposed subpart B) generally does not apply to lending
                activities that occur outside the United States.
                 Finally, proposed comment 105(b)-7 would address financial
                institutions that do not qualify as covered financial institutions but
                may nonetheless wish to voluntarily collect and report small business
                lending data. This proposed comment would reiterate that proposed Sec.
                1002.5(a)(4)(vii) through (ix) permits a creditor that is not a covered
                financial institution under proposed Sec. 1002.105(b) to voluntarily
                collect and report information regarding covered applications in
                certain circumstances. If a creditor is voluntarily collecting
                applicants' protected demographic information for covered applications,
                it shall do so in compliance with proposed Sec. Sec. 1002.107,
                1002.108, 1002.111, 1002.112, and 1002.114 as though it were a covered
                financial institution. Proposed comment 105(b)-7 would further state
                that if a creditor is voluntarily reporting those covered applications
                to the Bureau, it shall do so in compliance with proposed Sec. Sec.
                1002.109 and 1002.110 as though it were a covered financial
                institution.
                 The Bureau seeks comment on its proposed definition of a covered
                financial institution, which uses a loan-volume threshold of 25 covered
                credit transactions from small businesses. The Bureau continues to
                consider whether this loan-volume threshold should be changed to a
                different threshold, such as 50 or 100 originations from small
                businesses, and seeks feedback and data related to any of these three
                potential thresholds. In addition, the Bureau seeks comment on whether
                an activity-based threshold should be based on the total number of
                small business applications, rather than originations. The Bureau also
                requests comment on whether additional clarification is needed for this
                proposed definition.
                Alternatives Considered--Size-Based Exemption and Combined Exemptions
                 The Bureau is not proposing to define a covered financial
                institution on the basis of the size of the financial institution, as
                measured by total assets for depository institutions or some other
                metric. Likewise, the Bureau is not proposing to define a covered
                financial institution with reference to the financial institution's
                size in combination with its small business lending activity.
                 For the reasons discussed above, the Bureau believes that proposing
                an exemption based on a financial institution's recent small business
                lending activity would be appropriate to carry out the purposes of
                section 1071. The Bureau believes that in comparison to a size-based
                exemption, an activity-based exemption is a more compelling basis for
                exempting certain financial institutions from coverage in light of
                section 1071's community development purpose. As previously stated, the
                Bureau is concerned that certain financial institutions might reduce or
                cease their small business lending activity because of the fixed costs
                of coming into compliance with this rule, and that a reduction in
                access to credit would run contrary to the community development
                purpose of section 1071. However, the Bureau is persuaded that small
                business lending activity holds a more direct relationship to a given
                financial institution's role in the small business lending market than
                a more general measurement of the financial institution's size as
                measured in total assets. Using a size-based metric would present a
                much rougher proxy for the risk that a financial institution may reduce
                or eliminate its small business lending activities as a result of the
                one-time costs of coming into compliance with this rule.
                 The Bureau also believes that proposing an activity-based exemption
                is a superior approach to proposing a size-based exemption because an
                exemption based on asset size would apply only to depository
                institutions. The Bureau is unaware of a similar size metric for
                nondepository institutions, and SERs and other stakeholders who
                provided feedback on the SBREFA Outline were not able to offer one. A
                size-based exemption approach might therefore risk distorting the
                collected data and create an uneven playing field. As noted above,
                other stakeholders explained that because there was no readily
                available equivalent size-based measurement for nondepository
                institutions, including an asset-based exemption might risk presenting
                a cost disadvantage for other small financial institutions. Moreover,
                exempting proportionately more depository institutions than
                nondepository institutions may present demographic data collection
                concerns. A recent small business credit survey revealed racial
                disparities in applications under the SBA's Paycheck Protection
                Program: the data showed white-owned firms were most likely to apply
                for a loan through a small bank (defined as under $10 billion in
                assets), while Black-owned firms were three times as likely as white-
                owned firms to apply for a loan through an online lender.\480\ The
                Bureau is concerned that collecting data under different standards for
                depository institutions versus nondepository institutions would run
                contrary to the purposes of section 1071 and undermine the utility of
                the data, as well as the purposes of the Bureau, which are, in part,
                ``to implement and, where applicable, enforce . . . consistently''
                Federal laws including ECOA.\481\
                ---------------------------------------------------------------------------
                 \480\ Small Business Credit Survey of Firms Owned by People of
                Color at 14.
                 \481\ 12 U.S.C. 5511(a).
                ---------------------------------------------------------------------------
                 The Bureau also considered whether proposing a size-based
                exemption, on the basis of total assets for depository institutions,
                would be appropriate in combination with the above-discussed activity-
                based exemption. The Bureau is not persuaded that proposing such an
                additional exemption would be necessary or appropriate to carry out the
                [[Page 56424]]
                purposes of section 1071. In particular, the Bureau considered two
                types of depository institutions that might be exempt by virtue of a
                size-based exemption:
                 An Active Small Depository Institution (ASDI), meaning any
                depository institution smaller than a particular asset size that lends
                at or above a given activity-based threshold, and
                 An Inactive Small Depository Institution (ISDI), meaning
                any depository institution smaller than a particular asset size that
                lends below a given activity-based threshold.
                 In examining the case for ASDIs and ISDIs, the Bureau believes that
                an additional, asset-based exemption may provide a slightly less costly
                means of ascertaining exemption status for a small number of ISDIs, but
                such an exemption would eliminate small business lending data from a
                moderate share of ASDIs that would otherwise provide valuable data in
                fulfilling both of section 1071's purposes.
                 Using the same data that were compiled for the activity-based
                exemption analysis, the Bureau estimates that under its proposed 25
                originations threshold approximately 6,300 to 6,500 depository
                institutions would not be covered financial institutions, and therefore
                would be exempt from collection and reporting. The Bureau further
                estimates that proposing an asset-based exemption of $200 million would
                result in approximately 1,300 to 1,500 additional depository
                institutions not reporting (all of which, by definition, are ASDIs),
                while 5,200 to 5,400 depository institutions would already have been
                exempt, but have a somewhat lower-cost method of ascertaining this
                information (e.g., ISDIs).\482\
                ---------------------------------------------------------------------------
                 \482\ For the purposes of this analysis, the Bureau assumes that
                the alternative proposal would have been that a depository
                institution would be required to report its small business lending
                activity for 2019 if it had more originations than the loan-volume
                threshold in 2017 and 2018 and had assets over the asset-based
                threshold on December 31, 2018. The Bureau further assumes that if
                two institutions merged in 2019 then the resulting institution would
                be required to report if the sum of the separate institutions'
                assets on December 31, 2018 exceeded the asset-based threshold. Of
                the 10,525 depository institutions that existed at the end of 2019,
                6,687 either didn't exist at the end of 2018 or had merger adjusted
                assets below $200 million.
                ---------------------------------------------------------------------------
                 Table 2 below indicates the estimated number of ASDIs that would
                report under various loan-volume thresholds, by asset size. As shown in
                Table 2, if the Bureau proposed an asset-based exemption of $100
                million in addition to the proposed activity-based exemption of 25
                originated covered credit transactions for small businesses, 500 to 592
                more depository institutions would not be covered financial
                institutions, although these institutions originated more than 25
                covered credit transactions for small businesses in each of the
                previous two years. Likewise, if the Bureau proposed an asset-based
                exemption of $200 million in addition to the proposed 25-originations
                activity-based exemption, 1,299 to 1,466 more depository institutions
                would not be covered financial institutions, although these
                institutions originated more than 25 covered credit transactions for
                small businesses in each of the previous two years.
                [GRAPHIC] [TIFF OMITTED] TP08OC21.001
                 Of the estimated 5,200 to 5,400 ISDIs, as defined by a 25
                originations threshold and $200 million asset threshold, about 4,200
                are credit unions and about 1,000 or 1,200 are banks. Furthermore, the
                vast majority of these ISDI credit unions (88 percent) had either no
                small business originations in 2017 and 2018 or fewer than 10 small
                business originations in 2017 and 2018 (97 percent).\483\ The Bureau
                believes that it is likely that these institutions would be able to
                determine that they do not meet a loan-volume threshold almost as
                easily as they can determine that they do not meet an asset-based
                threshold. Only 34 credit unions with assets below $200 million had
                between 10 and 25 small business originations in both 2017 and 2018.
                The Bureau estimates that as many as 1,200 banks and 34 credit unions
                would benefit from a simpler method of determining exemption status.
                However, as stated above, the Bureau believes that such cost savings
                likely would still be minimal.
                ---------------------------------------------------------------------------
                 \483\ However, it is possible that these credit unions have
                originated loans to small businesses with values below $50,000.
                Credit unions report commercial loans over $50,000 made to members
                (regardless of the borrower's size).
                ---------------------------------------------------------------------------
                 The Bureau therefore believes that providing an additional, asset-
                based exemption might provide a somewhat less costly means of
                ascertaining exemption status for some ISDIs, although this number may
                be relatively modest. However, the tradeoff of providing a simpler
                exemption for some depository institutions is that a $200 million
                asset-based exemption would increase the overall percent of exempt
                depository institutions by some 13 percentage points by also extending
                to ASDIs. The Bureau estimates that these ASDIs accounted for between
                171,000 and 226,000 originations in 2019, or about 2 percent of total
                covered originations under the 25 originations threshold. Exempting
                additional depository institutions by adding an asset-based exemption
                would curtail
                [[Page 56425]]
                both the volume of and possible variety of data, and the Bureau is
                concerned that exempting ASDIs would detract from the utility of 1071
                data in carrying out the purposes of section 1071 by removing important
                data from disclosure and review.
                 The Bureau also considered feedback from SERs and other
                stakeholders who suggested that the Bureau exempt lenders other than
                ``large'' financial institutions, such as depository institutions with
                more than $1 billion in assets, and then potentially extend the rule to
                smaller lenders at a later time. These SERs and stakeholders argued
                that this approach would capture the vast majority of small business
                loans while avoiding imposing undue regulatory burden on smaller
                lenders, who might be less capable of absorbing such costs. However,
                the Bureau is not currently persuaded that capturing lending data only
                from large financial institutions would be necessary or appropriate to
                carry out section 1071's statutory purposes.
                 Supporters of collecting data only from large depository
                institutions argue that such depository institutions may be more
                capable of absorbing compliance costs. However, the Bureau is concerned
                that data collection from only large depository institutions may not
                provide adequate data for community development purposes, as there may
                be demographic disparities among applications by the type (and size) of
                financial institution. Likewise, data collection from only large
                depository institutions would not allow the Bureau to conduct fair
                lending analyses for other types of financial institutions. In general,
                the Bureau believes that appropriately carrying out the purposes of
                section 1071 necessitates collecting small business lending data from
                all sizes and types of financial institutions (other than those with
                the lowest volume of lending activity), particularly given the variety
                of entities identified in section 704B(h)(1), discussed above. See the
                section-by-section analysis of proposed Sec. 1002.114 below, however,
                for further discussion of a possible tiered compliance date based on
                the size of the financial institution.
                 Therefore, for the reasons described above, Bureau is not proposing
                an asset-based exemption to the definition of a covered financial
                institution.
                Alternative Considered--Other Exemptions
                 The Bureau is not proposing to adopt alternative exemptions or
                exceptions to the definition of covered financial institution, other
                than the loan-volume threshold as described above.
                 As discussed above, the Bureau believes that, in light of the text
                and purposes of section 1071, the Bureau should generally adopt the
                posture that all manner of small business lenders should be subject to
                reporting. Feedback from SERs and others generally did not provide
                compelling policy reasons or legal arguments for exempting entire
                classes of financial institutions. Moreover, the Bureau believes that
                most policy arguments that were raised in this context are better
                addressed through potential activity-based considerations.
                 With respect to government lenders, the Bureau has not identified,
                nor did SERs or other stakeholders provide, policy or legal rationales
                for excluding government lenders from data collection. To the contrary,
                a few SERs, particularly CDFIs, strongly preferred that all lenders,
                including government entities, be subject to section 1071 data
                collection and reporting requirements; one stakeholder likewise urged
                the Bureau not to exempt government lenders. The Bureau believes that
                collecting information on small business lending by government entities
                furthers the purposes of section 1071. Moreover, the Bureau believes,
                as described above in the discussion of proposed comment 105(a)-1, that
                government entities are included within the phrase ``other entity'' in
                the ECOA section 704B(h)(1) definition of ``financial institution.''
                For example, the Bureau believes that it will be helpful to identify
                the business and community development needs of women-owned, minority-
                owned, and small businesses by collecting lending data from both an
                online lender and a county-run assistance program for establishing new
                businesses.
                 For the same reasons, the Bureau does not believe that exempting
                not-for-profit lenders from data collection is consistent with the
                purposes of section 1071. The Bureau believes that organizations exempt
                from taxation pursuant to 26 U.S.C. 501(c) play a crucial role in
                lending to small businesses, particularly those that are women- or
                minority-owned, in certain communities.
                 Those providing feedback generally argued for categorical
                exemptions because, they said, certain financial institutions (1) would
                encounter difficulty absorbing compliance costs; (2) are integral to a
                community's lending needs; and/or (3) employ business methods or offer
                products not conducive to data collection and reporting. With respect
                to compliance costs, the Bureau believes that directly considering a
                financial institution's activity is a more appropriate way to address
                this concern. With respect to a financial institution's lending
                importance for a community or region (such as low income or rural), the
                Bureau believes that such arguments emphasize the importance of
                collecting and analyzing such data to further the purposes of section
                1071 rather than justify an exemption. Finally, with respect to
                considering the particularities of certain business models, the Bureau
                is persuaded that it can most appropriately address such concerns by
                considering potentially modified reporting rules for particular
                business models and specific products. See the section-by-section
                analyses of proposed Sec. Sec. 1002.104(b) and 1002.109(a)(3). The
                Bureau is proposing comment 105(a)-1, discussed above, consistent with
                the considerations discussed here.
                 Therefore, for the reasons described above, the Bureau is not
                proposing to define a covered financial institution by providing
                alternative exemptions or exceptions. The Bureau seeks comment on this
                approach, including data or information that might bear upon any such
                alternative exemptions in light of section 1071's purposes.
                Section 1002.106 Business and Small Business
                 ECOA section 704B(h)(2) defines the term ``small business'' as
                having the same meaning as ``small business concern'' in section 3 of
                the Small Business Act.\484\ The Bureau is proposing to define a small
                business consistent with the statutory language. In particular, the
                Bureau is proposing to define a small business concern to have the same
                meaning as the term ``small business concern'' in 15 U.S.C. 632(a), as
                implemented by 13 CFR 121.101 through 121.107. Notwithstanding the size
                standards set forth in 13 CFR 121.201, for purposes of proposed subpart
                B, the Bureau is proposing that a business is a small business if and
                only if its gross annual revenue for its preceding fiscal year is $5
                million or less. The Bureau is seeking SBA approval for this alternate
                small business size standard pursuant to the Small Business Act.\485\
                ---------------------------------------------------------------------------
                 \484\ 15 U.S.C. 632.
                 \485\ 15 U.S.C. 632(a)(2)(C).
                ---------------------------------------------------------------------------
                 The Bureau believes it may be instructive for financial
                institutions to first consider whether an applicant may be a business
                under proposed Sec. 1002.106(a), and then to consider, if the
                applicant is a business, whether the business is small under Sec.
                1002.106(b). Furthermore, the Bureau believes that these proposed
                definitions implement the statutory language of section 1071
                [[Page 56426]]
                while reflecting the need for a wide variety of financial institutions
                to apply a simple, broad definition of a small business that would be
                practical across the many product types, application types, technology
                platforms, and applicants in the market.
                 For the reasons set forth below, the Bureau is proposing Sec.
                1002.106 to implement ECOA section 704B(h)(2) and pursuant to its
                authority under ECOA section 704B(g)(1) to prescribe such rules and
                issue such guidance as may be necessary to carry out, enforce, and
                compile data under section 1071.
                106(a) Business
                Background
                 ECOA section 704B(h)(2) defines the term ``small business'' as
                having the same meaning as ``small business concern'' in section 3 of
                the Small Business Act.\486\ The Small Business Act provides a general
                definition of a ``small business concern,'' authorizes SBA to establish
                detailed size standards for use by all agencies, and permits an agency
                to request SBA approval for a size standard specific to an agency's
                program. The SBA's regulations define a ``business concern'' as ``a
                business entity organized for profit, with a place of business located
                in the United States, and which operates primarily within the United
                States or which makes a significant contribution to the U.S. economy
                through payment of taxes or use of American products, materials or
                labor.'' \487\
                ---------------------------------------------------------------------------
                 \486\ 15 U.S.C. 632.
                 \487\ 13 CFR 121.105.
                ---------------------------------------------------------------------------
                SBREFA Proposals Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated it was considering
                proposing to define ``small business'' by cross-referencing the SBA's
                general definition of ``small business concern'' but adopting a
                simplified size standard for purposes of its section 1071 rule.\488\
                Thus, the Bureau explained that it was considering a proposal under
                which financial institutions would not be required to collect and
                report 1071 data for not-for-profit applicants, because they are not
                ``organized for profit'' and are thus not a ``business concern.'' The
                Bureau explained that a business concern may take a number of different
                legal forms, including a sole proprietorship, partnership, LLC,
                corporation, joint venture, trust, or cooperative.\489\ The Bureau
                explained that, because the definition is limited to American
                businesses, if the Bureau adopted this definition for purposes of 1071,
                loans to foreign companies would be outside the scope of 1071 data
                collection and reporting requirements.
                ---------------------------------------------------------------------------
                 \488\ SBREFA Outline at 14-18.
                 \489\ 13 CFR 121.105(b).
                ---------------------------------------------------------------------------
                 Feedback from stakeholders regarding the proposal under
                consideration focused primarily on how the Bureau might define a
                business size standard, addressed below.\490\ The Bureau did receive
                limited feedback, however, suggesting that the Bureau consider certain
                modifications or adjustments to the definition of a business concern,
                such as clarifying that the term does not include foreign-owned
                entities, certain trusts, and certain real estate holding companies.
                ---------------------------------------------------------------------------
                 \490\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 20-22.
                ---------------------------------------------------------------------------
                Proposed Rule
                 Proposed Sec. 1002.106(a) would define a business as having the
                same meaning as the term ``business concern or concern'' in 13 CFR
                121.105. This proposed definition is consistent with ECOA section
                704B(h)(2), which defines the term ``small business'' as having the
                same meaning as ``small business concern'' in section 3 of the Small
                Business Act.\491\ The SBA has issued 13 CFR 121.105, ``How does SBA
                define `business concern or concern,''' pursuant to the Small Business
                Act. The Bureau refers to the entirety of that section for additional
                information. In particular, the Bureau notes that this definition
                includes elements such as being ``a business entity organized for
                profit'' that has ``a place of business located in the United States''
                and ``operates primarily within the United States or . . . makes a
                significant contribution to the U.S. economy.'' \492\
                ---------------------------------------------------------------------------
                 \491\ 15 U.S.C. 632.
                 \492\ 13 CFR 121.105(a)(1).
                ---------------------------------------------------------------------------
                 The Bureau is not providing interpretations of this SBA regulation
                in proposed subpart B because the Bureau believes that existing SBA
                interpretations are responsive to the general questions posed at
                SBREFA.\493\
                ---------------------------------------------------------------------------
                 \493\ See, e.g., 13 CFR 121.105(b), which states that a business
                concern may be in the legal form of an individual proprietorship,
                partnership, limited liability company, corporation, joint venture,
                association, trust or cooperative, except that where the form is a
                joint venture there can be no more than 49 percent participation by
                foreign business entities in the joint venture. Thus, for example,
                financial institutions would not be required to collect and report
                data under proposed subpart B for not-for-profit applicants, because
                they are not ``organized for profit'' and are thus not a ``business
                concern.''
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on this proposed definition of a business,
                and generally seeks comment on whether additional clarification is
                needed.
                106(b) Small Business
                Background
                 Section 1071 data collection purposes, requirements, and potential
                impacts. A key component of the Bureau's fair lending work under the
                Dodd-Frank Act is to ensure fair, equitable, and nondiscriminatory
                access to credit for both individuals and their communities.\494\
                Section 1071 of the Dodd-Frank Act, which amended ECOA, requires
                financial institutions to collect and report to the Bureau data
                regarding applications for credit for women-owned, minority-owned, and
                small businesses. ECOA section 704B(h)(2) states that ``[t]he term
                `small business' has the same meaning as the term `small business
                concern' in section 3 of the Small Business Act (15 U.S.C. 632).''
                Section 1071 was adopted for the dual statutory purposes of
                facilitating fair lending enforcement and enabling communities,
                governmental entities, and creditors to identify business and community
                development needs and opportunities of women-owned, minority-owned, and
                small businesses.\495\
                ---------------------------------------------------------------------------
                 \494\ See 12 U.S.C. 5493(c)(2)(A).
                 \495\ ECOA section 704B(a).
                ---------------------------------------------------------------------------
                 As set forth in section 1071, the data that financial institutions
                would be required to collect and report to the Bureau include, among
                other things, the gross annual revenue of the business in the preceding
                fiscal year, the type and purpose of the loan, the census tract for the
                applicant's principal place of business, and the race, sex, and
                ethnicity of the principal owners of the business.\496\ ECOA section
                704B(f)(2)(C) further provides that information compiled and maintained
                under the statute shall be ``annually made available to the public
                generally by the Bureau, in such form and in such manner as is
                determined by the Bureau, by regulation.'' The Bureau believes that the
                collection and subsequent publication of robust and granular data
                pursuant to section 1071 regarding credit applications for small
                businesses, including those that are women- and minority-owned, will
                provide much-needed transparency to an otherwise opaque market and
                better ensure fair, equitable, and nondiscriminatory access to credit.
                ---------------------------------------------------------------------------
                 \496\ ECOA section 704B(e)(2).
                ---------------------------------------------------------------------------
                 The Bureau understands that access to fair, equitable, and
                nondiscriminatory credit is crucial to the success of small businesses.
                Small businesses--including women-owned and minority-owned small
                businesses--need access to credit to smooth out business cash flows
                [[Page 56427]]
                and to enable entrepreneurial investments that take advantage of, and
                sustain, opportunities for growth. The market these businesses turn to
                for credit is vast, varied, and complex. Overall, small businesses have
                many options when it comes to financing, including a wide range of
                products and providers. Yet market-wide data on credit to small
                businesses remains very limited, particularly with respect to
                applicants' protected demographic information at the core of section
                1071. The Bureau believes that a section 1071 rulemaking would provide
                data that could serve as a significant resource for financial
                institutions, community groups, policy makers, and small businesses.
                 SBA size standards. The Small Business Act permits the Small
                Business Administrator to prescribe detailed size standards by which a
                business concern may be categorized as a small business, which may be
                based on the number of employees, dollar volume of business, net worth,
                net income, a combination of these, or other appropriate factors.\497\
                ---------------------------------------------------------------------------
                 \497\ 15 U.S.C. 632(a)(2)(A) and (B).
                ---------------------------------------------------------------------------
                 As implemented by the SBA, these size standards generally hinge on
                average annual receipts or the average number of employees of the
                business concern and are customized industry-by-industry across 1,057
                6-digit NAICS codes. Specifically, the SBA typically uses two primary
                measures of business size for size standards purposes: (i) Average
                annual gross receipts \498\ for businesses in services, retail trade,
                agricultural, and construction industries, and (ii) average number of
                employees for businesses in all manufacturing, most mining and
                utilities industries, and some transportation, information and research
                and development industries. To measure business size, the SBA also uses
                financial assets for certain financial industries, and for the
                petroleum refining industry, it uses refining capacity and employees.
                The SBA's size standards are used to establish eligibility for a
                variety of Federal small business assistance programs, including for
                Federal government contracting and business development programs
                designed to assist small businesses in obtaining Federal contracts and
                for SBA's loan guarantee programs, which provide access to capital for
                small businesses that are unable to qualify for and receive
                conventional loans elsewhere. Under the Small Business Jobs Act of 2010
                (Small Business Act),\499\ the SBA is required to review all size
                standards no less frequently than once every five years.\500\ The Small
                Business Act further provides that no Federal agency may prescribe a
                size standard for categorizing a business concern as a small business
                concern unless certain conditions are met, including approval by the
                SBA's Administrator.\501\
                ---------------------------------------------------------------------------
                 \498\ The SBA recently changed its regulations on the
                calculation of average annual receipts for all of SBA's receipts-
                based size standards, and for other agencies' proposed receipts-
                based size standards, from a three-year averaging period to a five-
                year averaging period, outside of the SBA Business Loan and Disaster
                Loan Programs. 84 FR 66561 (Dec. 5, 2019).
                 \499\ Public Law 111-240, 124 Stat. 2504 (2010).
                 \500\ 15 U.S.C. 632 note.
                 \501\ 15 U.S.C. 632(a)(2)(C).
                ---------------------------------------------------------------------------
                 The SBA's rule governing its consideration of other agencies'
                requests for approval of alternate size standards requires that the
                agency seeking to adopt an alternate size standard consult in writing
                with the SBA's Division Chief for the Office of Size Standards in
                advance of issuing an NPRM containing the proposed alternate size
                standard.\502\ The Bureau has met this requirement. After issuing an
                NPRM, the agency must provide a copy of the published NPRM to the
                Division Chief for the Office of Size Standards, and the agency cannot
                adopt a final rule including its alternate size standard until the size
                standard has been approved by the SBA's Administrator.\503\
                ---------------------------------------------------------------------------
                 \502\ 13 CFR 121.903(a)(2).
                 \503\ 13 CFR 121.903(a)(5).
                ---------------------------------------------------------------------------
                 Market considerations. A wide variety of financial institutions,
                with varying levels of sophistication and experience, extend credit to
                small businesses. As proposed, section 1071 applies to abroad range of
                financial institutions. Banks and credit unions that serve a breadth of
                customers typically organize their commercial lending operations into
                segments based on a combination of risk, underwriting, product
                offering, and customer management factors that are appropriate to each
                segment. The three most frequent organizational groupings are retail/
                small business, middle market, and large corporate banking. Commercial
                customers are generally assigned based on their revenue potential and
                aggregate credit exposure, with smaller accounts assigned to the
                retail/small business banking area. The overwhelming preponderance of
                small businesses are generally found in the retail/small business
                banking group, which may also conduct consumer banking.
                 Today, the distinguishing characteristic that many larger financial
                institutions (principally banks with $10 billion or more in assets) use
                to assign small businesses into the retail/small business banking group
                is gross annual revenue. While cut-offs vary by financial institution,
                the most common demarcations categorize small/retail customers as those
                below $5 million, or up to $10 million, in gross annual revenue. The
                maximum amount of a retail/small business banking term loan or credit
                line is typically $5 million or less.
                 Financial institutions that do not conduct SBA lending generally do
                not collect or consider the number of employees of a small business
                applying for credit, but they often capture gross annual revenue
                information, including for regulatory compliance purposes.
                Specifically, retail/small business lenders routinely collect
                applicants' gross annual revenue information because notification
                requirements under existing Regulation B vary for business credit
                applicants depending on whether or not they ``had gross revenues of $1
                million or less in [their] preceding fiscal year.'' \504\ For a
                business applicant with gross annual revenues of $1 million or less, a
                creditor must provide a notification following an adverse action, such
                as a credit denial, that is generally similar to that provided to a
                consumer in both substance and timing.\505\ As a result, small business
                lenders often adopt compliance management systems similar to those
                found among consumer lenders.
                ---------------------------------------------------------------------------
                 \504\ 12 CFR 1002.9(a)(3)(i).
                 \505\ Id. The notification requirements for applicants with
                gross annual revenues in excess of $1 million are generally more
                flexible in substance and also do not impose a firm deadline for
                provision of a Regulation B notification. 12 CFR 1002.9(a)(3)(ii).
                ---------------------------------------------------------------------------
                 The Bureau believes it is important for a financial institution to
                be able to quickly determine at the beginning of the application
                process whether an applicant is a ``small business'' for purposes of
                the 1071 rule. Financial institutions generally cannot inquire about an
                applicant's protected demographic information (including the race, sex,
                and ethnicity of an applicant's principal owners) without being legally
                required to do so.\506\ As discussed in the Overview of this part V,
                this proposal will only require (and thus only permit) such inquiries
                for small businesses. While the Bureau is proposing to allow financial
                institutions flexibility in when they seek this protected demographic
                information, the Bureau believes that financial institutions generally
                have the best chance of obtaining it, and supporting the purposes of
                section 1071, if they ask for it in the earlier stages of the
                application process. As a result, a
                [[Page 56428]]
                financial institution may need to know, even before the application is
                initiated, which application path the applicant must follow--a 1071-
                governed or a non-1071-governed application path.
                ---------------------------------------------------------------------------
                 \506\ See 12 CFR 1002.5(a).
                ---------------------------------------------------------------------------
                 Early feedback. From very early on in its discussions with
                stakeholders regarding section 1071, the Bureau has received feedback
                focused primarily on how the Bureau might define a business size
                standard. For example, in response to the Bureau's 2017 RFI, many
                stakeholders expressed concern about the difficulties in determining
                the appropriate NAICS code for businesses and in applying the NAICS-
                based standards in determining whether a business loan applicant is a
                small business. Commenters who addressed the issue of a small business
                definition were universally in favor of the Bureau adopting something
                less complex than the SBA's size standards based on 6-digit NAICS
                codes. Commenters noted that the use of these standards is relatively
                complex and would introduce burdens for the 1071 rule with limited
                benefit. There was broad support in this particular context for a
                simpler definition of small business, particularly echoing the 2017
                RFI's mention of gross annual revenue as a threshold delineation
                defining a small business. In addition to revenue, number of employees,
                loan amount, total exposure of the business, or some combination of
                those factors were also mentioned as possible bases for alternate size
                standards. While community groups supported a simpler definition, some
                cautioned that whatever definition the Bureau chooses must cover most
                small businesses in order to comport with congressional intent.
                SBREFA Proposals Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated that it believed that
                using a simpler, more straightforward approach to the size standard
                aspect of the ``small business'' definition was a better approach for
                purposes of its 1071 rule.\507\ The Bureau further stated that such an
                approach would assist both financial institutions and applicants
                seeking to quickly understand whether a business is ``small'' and to
                employ a workable size standard for small business data collection
                without navigating the potential complexities of determining the
                appropriate 6-digit NAICS code, and then the relevant size standard
                based on that NAICS code, for each applicant.
                ---------------------------------------------------------------------------
                 \507\ SBREFA Outline at 16.
                ---------------------------------------------------------------------------
                 The Bureau stated in the SBREFA Outline that it was considering
                three alternative approaches to determining whether an applicant
                business is small.\508\ These three approaches, described in more
                detail below, would have used: (1) Only gross annual revenue (``SBREFA
                First Alternative Approach''); (2) either the number of employees or
                average annual receipts/gross annual revenue, depending on whether the
                business is engaged in either manufacturing/wholesale or services
                (``SBREFA Second Alternative Approach''); or (3) size standards across
                13 industry groups that correspond to 2-digit NAICS code industry
                groupings (``SBREFA Third Alternative Approach'').
                ---------------------------------------------------------------------------
                 \508\ Id.
                ---------------------------------------------------------------------------
                 Under the SBREFA First Alternative Approach, the Bureau considered
                proposing a size standard using the gross annual revenue of the
                applicant business in the prior year, with a potential ``small''
                threshold of $1 million or $5 million.
                 Under the SBREFA Second Alternative Approach, the Bureau considered
                proposing a size standard of a maximum of 500 employees for
                manufacturing and wholesale industries and a maximum of $8 million in
                gross annual revenue for all other industries. The Bureau selected 500
                employees as a potential threshold for manufacturing and wholesale
                industries because that figure is the most common of the SBA's
                employee-based size standards. The Bureau selected $8 million for all
                other industries because that figure is the most common size standard
                threshold for average annual receipts. The Bureau stated that it was
                considering using gross annual revenue, rather than the SBA's average
                annual receipts, for consistency with the 1071 statutorily required
                gross annual revenue data point.
                 Under the SBREFA Third Alternative Approach, the Bureau considered
                proposing a size standard using gross annual revenue or the number of
                employees based on a size standard in each of 13 2-digit NAICS code
                categories that applies to the largest number of firms within each 2-
                digit NAICS code category.\509\ Applying the SBA's 2019 size standards,
                the third alternative would result in eight different size standards
                across the 13 categories.
                ---------------------------------------------------------------------------
                 \509\ Specifically, under this approach, the Bureau first
                considered the total number of employer firms in each NAICS 6-digit
                industry, based on U.S. Census Bureau data. U.S. Census Bureau, 2017
                Statistics of U.S. Businesses (2017), https://www.census.gov/data/datasets/2017/econ/susb/2017-susb.html. Next, within each NAICS 2-
                digit industry, the Bureau determined how many unique size standards
                are applied within that 2-digit industry and the total number of
                employer firms to which each unique standard is applied. The
                simplified standard for each NAICS 2-digit industry is the one that
                applies to the largest number of firms within that industry.
                ---------------------------------------------------------------------------
                 The Bureau stated it was not planning to propose requiring that
                financial institutions verify information provided by applicants
                necessary for determining whether an applicant is small, regardless of
                the Bureau's approach to a small business size standard. Rather, the
                Bureau was considering proposing that a financial institution would
                generally report the information as provided by the applicant. However,
                if the financial institution verifies such information for its own
                purposes, it would report the verified information to the Bureau.
                 SERs generally preferred a simple small business definition and
                expressed concern that the SBA's approach to defining a small
                business--which bases classification on an applicant's 6-digit NAICS
                code--is relatively complex. The Bureau discusses the concerns with
                respect to the potential complexity of gathering NAICS codes in the
                section-by-section analysis of proposed Sec. 1002.107(a)(15) below,
                and the Bureau discusses the concerns with respect to the potential
                complexity using NAICS codes to determine small business status below.
                 Nearly all SERs expressed some familiarity with the SBA's small
                business definition. More than half the SERs currently gather an
                applicant's NAICS code as a routine part of the application process,
                because NAICS codes are used for SBA loans and for CDFI Fund reporting.
                One SER also uses this information for tracking the concentration of
                its loans across certain industries. Some SERs gather NAICS codes from
                applicants' tax documents or business credit reports and others rely on
                information provided directly by the applicants; these SERs emphasized
                the importance of permitting reliance on applicant self-reported data.
                 One SER remarked that it would be critical for the purposes of
                section 1071 to have sectoral industry information about applicants in
                some form, such as NAICS codes, in order to ensure meaningful data. The
                Bureau discusses the independent value of NAICS codes, and related
                comments from SERs regarding certain difficulties and challenges
                surrounding collecting NAICS codes from applicants, in the section-by-
                section analysis of proposed Sec. 1002.107(a)(15) below. Another SER
                expressly opposed using NAICS codes to determine whether an applicant
                is a small business for purposes of section 1071. A few SERs stated
                that they did not think it would be particularly costly to collect
                NAICS codes for all of their small business loans, and one SER
                described the SBA's classification
                [[Page 56429]]
                approach as precise and not very burdensome.
                 Some SERs supported the SBREFA First Alternative Approach for
                defining a small business, which would use an applicant's gross annual
                revenue with a potential ``small'' threshold of $1 million or $5
                million. Several SERs were supportive of this simple approach but
                thought the potential threshold should be higher. For most SERs, nearly
                all their small business customers had less than $5 million in gross
                annual revenue; most are under $1 million. Several SERs remarked that a
                $1 million gross annual revenue threshold would be too low, noting that
                it would exclude many businesses defined by SBA regulations as
                ``small''; some of these SERs said that a $5 million gross annual
                revenue threshold would be acceptable. Some SERs advocated for higher
                revenue thresholds, such as $8 million or $10 million. One SER
                cautioned that a small business definition based only on gross annual
                revenue would not account for regional variations in business size. One
                SER specifically suggested that the Bureau align its small business
                definition with the $1 million standard used by certain supervisory
                agencies for CRA reporting (which requires the reporting of loans in
                original amounts of $1 million or less to businesses and, if known,
                identification of whether the business's gross annual revenue is $1
                million or less). However, this SER also supported other versions of
                the SBREFA First Alternative Approach and SBREFA Second Alternative
                Approach if the Bureau did not adopt the CRA approach. Relatedly, there
                were some concerns about capturing revenue information from small
                businesses. Some SERs do not collect these data now, or do not do so
                across all lending products. SERs also expressed a concern that some
                applicants likely would not know their gross annual revenue as a
                precise dollar amount. See the section-by-section analysis of proposed
                Sec. 1002.107(a)(14) below for a discussion of the gross annual
                revenue data point.
                 Some SERs supported the Bureau's SBREFA Second Alternative
                Approach, which would distinguish between applicants in manufacturing
                and wholesale industries (500 employees) and all other industries ($8
                million in gross annual revenue). These SERs stated that while this
                approach was still relatively simple, it would nonetheless capture most
                relevant data. One SER noted a discrepancy between the thresholds,
                stating that a manufacturer with 500 employees would be much larger
                than a business with $8 million in gross annual revenue. Some SERs
                expressed concerns about how to collect data on the number of
                employees, particularly regarding how part-time and seasonal employees,
                and contractors, would be counted. One SER suggested that a small
                business be defined as having less than $10 million in annual revenue
                and 50 or fewer employees. Another SER emphasized the importance of
                including collection and reporting requirements for applicants with
                very few or no employees on payroll, stating that most minority-owned
                and women-owned small businesses have no employees. One SER opposed the
                SBREFA Second Alternative Approach, stating that it would be too
                complex and potentially confusing.
                 One SER also supported the SBREFA Third Alternative Approach as
                closest to the SBA approach, stating that it reflects the SBA's
                substantially different definitions of a small business across
                different industries. This SER stated that the SBREFA First and Second
                Alternative Approaches would exclude many SBA-qualified small
                businesses. Other SERs also stated that this 2-digit NAICS code
                alternative was significantly less complex and prone to less human
                error than the SBA definition using 6-digit NAICS codes. On the other
                hand, one SER stated that the SBREFA Third Alternative Approach would
                be the most costly and difficult to implement compared to the other two
                alternatives under consideration.
                 The SBREFA Panel recommended that the Bureau seek to adopt a
                definition of ``small business'' that is easy for small business
                applicants to understand and straightforward for financial institutions
                to implement, while still collecting comprehensive data regarding
                lending to small businesses.\510\ The SBREFA Panel also recommended
                that the Bureau continue to explore how information that small
                financial institutions may or may not currently collect from small
                business applicants (specifically, gross annual revenue, number of
                employees, and NAICS code) might inform the potential selection of an
                alternative for a ``small business'' size standard.\511\ The SBREFA
                Panel also recommended that the Bureau continue to explore ways to
                minimize burden on both the small financial institutions collecting
                NAICS code information as well as the small business applicants who
                need to provide it, for example the possibility of collecting the 2-
                digit NAICS code rather than the 6-digit code.\512\
                ---------------------------------------------------------------------------
                 \510\ SBREFA Panel Report at 44.
                 \511\ Id.
                 \512\ Id.
                ---------------------------------------------------------------------------
                 Feedback on the SBREFA materials from stakeholders other than SERs
                showed broad support for the Bureau pursuing a simplified version of
                the SBA small business definition, focusing chiefly on the size
                standard. A diverse array of stakeholders requested that the Bureau
                provide a simplified small business definition, including a wide
                variety of lenders, trade associations, and community groups. However,
                at least one commenter explicitly urged the Bureau to adopt the SBA
                definition. Reasons for supporting a simpler definition included that
                it might lower compliance costs (and therefore, the commenters noted,
                the cost of credit), it would obviate the need for financial
                institutions to understand or track the SBA size standards, and a more
                complex definition might impact data consistency or quality (either
                because financial institutions might incorrectly report data, or
                because the data itself might not lend itself to analysis). Several
                stakeholders voiced concern with respect to the SBA's detailed approach
                to categorizing the applicant's business, arguing that NAICS codes were
                developed for procurement, contained too many categories, and were not
                familiar to many financial institutions and applicants.
                 Stakeholders offered varying levels of support for the Bureau's
                proffered size standard alternatives, although in general there was
                more support for a standard using only gross annual revenue. Many
                stakeholders, including a variety of trade associations, supported the
                SBREFA First Alternative Approach; a few explicitly opposed it. Those
                voicing support generally preferred the simplicity of the approach;
                some stakeholders noted that a definition using gross annual revenue
                aligned with how lenders typically consider an applicant's size for
                other purposes. Stakeholders suggested that the Bureau select a
                specific revenue limit for small businesses including $500,000, $1
                million, $5 million, and $8 million. Some stakeholders expressing
                support for a $8 million revenue limit noted that it would better
                capture small businesses in wholesale and manufacturing, while allowing
                the Bureau to adopt a single, uniform standard. Stakeholders opposing
                the SBREFA First Alternative Approach generally expressed concern with
                using gross annual revenue, either citing concerns about its accuracy
                or because they said a uniform gross annual revenue standard would not
                account for regional variation among
                [[Page 56430]]
                businesses or reflect the SBA's general approach to distinguishing
                businesses by industry. One stakeholder generally expressed concern
                that the SBREFA First Alternative Approach might exclude too many small
                business applicants from the 1071 rule.
                 Several stakeholders, mostly community groups, supported the SBREFA
                Second Alternative Approach; several comments from industry opposed the
                approach. Those in support of the SBREFA Second Alternative Approach
                characterized it as providing a balance between simplicity and
                providing results more closely aligned with the more comprehensive SBA
                approach, which distinguishes businesses by industry. Some stakeholders
                expressed concern with respect to distinguishing the nature of the
                applicant's business (e.g., whether it was engaged in manufacturing or
                wholesale), and others thought that there may be difficulties
                accurately measuring the number of employees.
                 A few stakeholders supported the SBREFA Third Alternative Approach,
                while several explicitly opposed it. Supporters of the SBREFA Third
                Alternative Approach praised how closely the alternative aligned with
                the SBA's definition, while those in opposition criticized it as overly
                complex. In particular, those opposing this approach were concerned
                that it would still require financial institutions to have a close
                working knowledge of NAICS codes.
                 A few stakeholders advocated that the Bureau consider adopting a
                small business definition that incorporated loan size. Some of these
                stakeholders suggested that the Bureau consider aligning this
                definition with standards in the CRA. One stakeholder suggested that
                the Bureau define a small business as one with gross annual revenue of
                $1 million where the business has requested a loan of $1 million or
                less.
                Proposed Rule
                 Proposed Sec. 1002.106(b) would define a small business as having
                the same meaning as the term ``small business concern'' in 15 U.S.C.
                632(a), as implemented in 13 CFR 121.101 through 121.107. The Bureau
                believes that adopting existing statutory and regulatory small business
                definitions, which are widely understood and already the subject of
                notice and comment, is consistent with the purposes of section 1071 and
                will facilitate compliance. Proposed Sec. 1002.106(b) would further
                state that, notwithstanding the size standards set forth in 13 CFR
                121.201, for purposes of proposed subpart B, a business is a small
                business if and only if its gross annual revenue, as defined in
                proposed Sec. 1002.107(a)(14), for its preceding fiscal year is $5
                million or less. This proposed definition largely adopts the SBREFA
                First Alternative Approach with a threshold of $5 million. The Bureau
                believes this proposed definition implements the statutory language of
                section 1071 while reflecting a need for financial institutions to
                apply a simple, broad definition of a small business. The Bureau is
                seeking SBA approval for this alternate small business size standard
                pursuant to the Small Business Act.\513\
                ---------------------------------------------------------------------------
                 \513\ 15 U.S.C. 632(a)(2)(C).
                ---------------------------------------------------------------------------
                 Proposed comments 106(b)-1 and 106(b)-2 would clarify the
                obligations of covered financial institutions when new information may
                arise that could change the determination of whether an applicant is a
                small business, which in turn gives rise to requirements under proposed
                subpart B and/or prohibitions under existing Regulation B. The Bureau
                acknowledges that a financial institution's understanding of an
                applicant's gross annual revenue may change as the institution proceeds
                through underwriting. Proposed comment 106(b)-1 would explain that if a
                financial institution initially determines an applicant is a small
                business as defined in proposed Sec. 1002.106 based on available
                information and obtains data required by proposed Sec. 1002.107(a)(18)
                through (20), but the financial institution later concludes that the
                applicant is not a small business, the financial institution may
                process and retain the data without violating ECOA or this regulation
                if it meets the requirements of proposed Sec. 1002.112(c)(3). Proposed
                comment 106(b)-2 would explain that if a financial institution
                initially determines that the applicant is not a small business as
                defined in proposed Sec. 1002.106, but then later concludes the
                applicant is a small business, the financial institution shall endeavor
                to compile, maintain, and report the data required under proposed Sec.
                1002.107(a) in a manner that is reasonable under the circumstances.
                 Proposed comment 106(b)-3 would explain that a financial
                institution may rely on an applicant's representations regarding gross
                annual revenue (which may or may not include an affiliate's revenue)
                for purposes of determining small business status under Sec.
                1002.106(b).
                 For the reasons discussed above in the section-by-section analysis
                of proposed Sec. 1002.106(a), the Bureau is proposing to define a
                small business as having the same meaning as the term ``small business
                concern'' in 15 U.S.C. 632(a), as implemented in 13 CFR 121.101 through
                121.107. However, for reasons discussed in detail below, the Bureau is
                proposing that notwithstanding the size standards set forth in 13 CFR
                121.201, for purposes of subpart B, a business is a small business if
                and only if its gross annual revenue, as defined in proposed Sec.
                1002.107(a)(14), for its preceding fiscal year is $5 million or less.
                Generally, the Bureau believes that adopting this gross annual revenue
                standard from the SBREFA First Alternative Approach is consistent with
                the purposes of section 1071 and addresses the concerns that the Bureau
                has heard with respect to determining whether applicants are small
                businesses for purposes of complying with section 1071, particularly
                with respect to the concerns regarding determining the applicant's
                NAICS code, and the implications thereof. Due to concerns expressed by
                other stakeholders, which are described above, and upon its own further
                consideration as discussed in this section-by-section analysis under
                Alternatives Considered below, the Bureau is not proposing the $1
                million gross annual revenue standard from the SBREFA First Alternative
                Approach.
                 The Bureau seeks comment on this proposed definition of a small
                business, including the $5 million gross annual revenue size standard,
                as well as whether additional clarification is needed for any aspect of
                this proposed definition. The Bureau also seeks comment on whether
                another variation of the proposed size standard would better serve the
                purposes of section 1071, such as a lower revenue size standard or a
                higher one, potentially at the $8 million or $10 million level. The
                Bureau also seeks comment on whether, in addition to the above-
                described gross annual revenue-based size standard, a small business
                definition that also included any business that was furnished a loan
                pursuant to an SBA program (regardless of the applicant's gross annual
                revenue) would further the purposes of 1071.
                 Similarly, the Bureau seeks comment on whether the SBREFA Second
                Alternative Approach at $8 million gross annual revenue or 500
                employees (depending on the type of business) would align more closely
                with section 1071's purposes. Likewise, the Bureau seeks comment on
                whether a variation of the proposed size standard, such as using an
                applicant's average gross annual revenue averaged over two or five
                years, would better serve the purposes of section 1071. In addition,
                the Bureau seeks comment on defining
                [[Page 56431]]
                a small business consistent with the entirety of existing SBA
                regulations, including any advantages or disadvantages that using such
                a definition might pose specifically in the context of this rulemaking.
                Specifically, the Bureau seeks comment on how the proposed size
                standard would fit in with a financial institution's current lending or
                organization practices. If the financial institution is an SBA lender,
                the Bureau seeks comment on whether the proposed size standard would
                introduce additional difficulties or challenges.
                 In order to keep pace with changes to the SBA's own size standards
                and the potential impact of future inflation, the Bureau is considering
                whether it might update its proposed $5 million gross annual revenue
                size standard over time (perhaps at the end of a calendar year in order
                to allow financial institutions to use the same threshold consistently
                throughout the year). The Bureau seeks comment on how this should be
                done and the frequency at which it should occur.
                Alternatives Considered
                 Gross annual revenue of $1 million. Under the SBREFA First
                Alternative Approach, the Bureau considered proposing a size standard
                using the gross annual revenue of the applicant business in the prior
                year, with a potential ``small'' threshold of $1 million or $5
                million.\514\ However, upon further consideration, the Bureau is
                concerned that the $1 million threshold considered under the SBREFA
                First Alternative Approach likely would not satisfy the SBA's
                requirements for an alternative size standard across industries and
                would exclude too many businesses designated as small under the SBA's
                size standards.
                ---------------------------------------------------------------------------
                 \514\ SBREFA Outline at 16.
                ---------------------------------------------------------------------------
                 Loan size. The Bureau considered defining a small business based at
                least in part on loan size. For example, one SER suggested that the
                Bureau align its small business definition with the $1 million standard
                for revenue and loan size used by certain supervisory agencies for CRA
                reporting. The Bureau also considered that under the FFIEC Call Report
                collections, banks report small loans made to businesses and farms.
                Through the Credit Union Call Report, credit unions report commercial
                loans over $50,000 made to members.
                 The Bureau believes that such potential definitions do not bear a
                sufficient relationship to the size of the business or its operations.
                The above-mentioned Call Report data, for example, is reported
                regardless of the size of the business. Thus, such Call Reports would
                capture lending information regarding small loans furnished to
                businesses that may be dominant in their field. Likewise, under a
                definition similar to the CRA, application data for businesses with low
                revenue that may be applying for large loans would be excluded. The
                Bureau does not believe that adopting such an approach would further
                the purposes of section 1071. The Bureau also received some stakeholder
                feedback cautioning against using the CRA definition based on loan
                size, because such a definition would exclude substantial portions of
                small business lending.
                 Existing SBA size standards. As discussed above, the Bureau is
                seeking approval from the SBA to use a $5 million gross annual revenue
                alternative size standard in defining a ``small business'' for purposes
                of this rulemaking, as the Bureau does not believe the SBA's size
                standards are suitable for this data collection initiative and prefers
                to establish a more appropriate small business definition limited to
                the section 1071 rulemaking.
                 The Bureau believes that requiring application of existing SBA size
                standards for the section 1071 rule could result in many financial
                institutions having to undergo operational and/or compliance management
                system changes. The Bureau believes that it will reduce burden for
                financial institutions, particularly those without sophisticated
                compliance management systems or familiarity with SBA lending, to
                comply with a gross annual revenue size standard for the section 1071
                small business definition that better aligns with current lending
                practices.
                 If the Bureau were to adopt a small business definition using the
                existing SBA size standards that vary by industry based on 6-digit
                NAICS codes, financial institutions would only be able to request an
                applicant's protected demographic information further along in the
                application process, once they have obtained the multiple pieces of
                data that would be necessary to determine whether the applicant is
                small and, therefore, the 1071 process applies. The Bureau is concerned
                that this delay would make it more difficult for financial institutions
                to collect applicants' protected demographic information that is
                important to both of section 1071's statutory purposes. The Bureau is
                particularly concerned about financial institutions' ability to collect
                these data for applications that are withdrawn or closed for
                incompleteness early in the application process. These data collection
                considerations differ from those applicable to SBA lending programs,
                whereby a lender often cannot (and should not) make an accurate
                eligibility determination for an SBA loan until later in the
                application process, often after a loan has already been initially
                decisioned and after the lender has collected information related to
                size, time in business, and other data.
                 In order to allow financial institutions to quickly determine
                whether the section 1071 rule applies, the Bureau is seeking to
                minimize complexity for financial institutions in determining whether a
                covered application is reportable because the applicant business is a
                small business--a necessary determination for the 1071-based collection
                of any other information. The Bureau believes that the section 1071
                rule would benefit from a universal, easy-to-apply reporting trigger
                that does not need to be supported by additional documentation or
                research. Such a reporting trigger must be easily understood by small
                business owners who may be completing an application online, or by the
                tens of thousands of customer-facing personnel who take small business
                applications in an industry with a typical annual turnover rate of 10
                to 20 percent. The Bureau believes that a gross annual revenue
                reporting trigger will facilitate better compliance with 1071
                requirements because it aligns with current lending and organizational
                practices.
                 The Bureau is concerned that requiring financial institutions to
                rely on the SBA's existing size standards for purposes of the section
                1071 data collection and reporting requirements would pose risks to the
                efficient operation of small business lending. Based on the
                overwhelmingly consistent feedback the Bureau has received from
                stakeholders on this issue, the Bureau believes that using the SBA's
                existing size standards for the purposes of section 1071--wherein the
                financial institution must quickly determine the appropriate 6-digit
                NAICS code for businesses and then apply a variety of standards,
                including potentially gathering information to determine five years of
                the applicant's average annual receipts or employee information--would
                not align with current lending and organizational practices.
                Application of the existing size standards, at the beginning of the
                application process, could slow down the application process,
                particularly at institutions that are often able to render credit
                decisions in a matter of minutes; the Bureau is concerned that
                financial institutions may be compelled to raise the cost of credit or
                originate fewer
                [[Page 56432]]
                covered credit transactions as a result. Such an outcome could
                needlessly affect access to credit for small businesses. Eliminating
                credit opportunities or reducing access to credit to small businesses,
                including women-owned and minority-owned small businesses, in this way
                would conflict with the statutory purpose of section 1071 to ``enable
                communities, governmental entities, and creditors to identify business
                and community development needs and opportunities of women-owned,
                minority-owned, and small businesses.'' \515\
                ---------------------------------------------------------------------------
                 \515\ ECOA section 704B(a).
                ---------------------------------------------------------------------------
                 The Bureau expects that many financial institutions, for
                efficiency, will bifurcate their business credit application procedures
                based on an initial determination of whether the application will be
                subject to section 1071. The Bureau therefore believes that many
                financial institutions will not proceed with taking applicant
                information until the financial institution is able to determine that
                the applicant is small (in which case, section 1071 will require the
                financial institution to collect and report the applicant's protected
                demographic information) or that the applicant is not small (where ECOA
                generally prohibits the financial institution from collecting protected
                demographic information). If this process requires determining the
                correct NAICS code for the applicant, and in many cases, requesting
                five years of average annual receipts or employee information from the
                applicant, the Bureau believes that businesses seeking access to credit
                will encounter, at a minimum, otherwise avoidable delays in processing
                applications.
                 The Bureau believes that the $5 million gross annual revenue
                standard it is proposing is a more efficient and appropriate measure of
                applicant size for purposes of determining whether small business
                lending data collection is required pursuant to section 1071. The
                Bureau understands that the SBA generally bases business concern size
                standards on average annual receipts or the average number of employees
                of the business concern, as customized industry-by-industry across
                1,057 6-digit NAICS codes. The SBA typically uses two primary measures
                of business size for size standards purposes: (i) Average annual gross
                receipts \516\ for businesses in services, retail trade, agricultural,
                and construction industries, and (ii) average number of employees \517\
                for businesses in all manufacturing industries, most mining and
                utilities industries, and some transportation, information, and
                research and development industries.\518\ The Bureau understands that
                SBA's size standards are used to establish eligibility for a variety of
                Federal small business assistance programs, including for Federal
                government contracting and business development programs designed to
                assist small businesses in obtaining Federal contracts and for SBA's
                loan guarantee programs, which provide access to capital for small
                businesses that are unable to qualify for and receive conventional
                loans elsewhere. The Bureau notes that the size standard used under
                section 1071 would only be used to determine whether small business
                lending data collection is required pursuant to section 1071, and would
                have no bearing on eligibility for Federal small business assistance.
                Moreover, the Bureau believes it is far more likely that an applicant
                will be able to readily respond to a question regarding its gross
                annual revenue for the preceding fiscal year--something already
                contemplated by existing Regulation B for all business credit to
                determine whether notice requirements apply \519\--than offer the
                closest metric currently in use by SBA regulations, which is generally
                average annual receipts for the previous five fiscal years.\520\
                Furthermore, use of this gross annual revenue standard would be
                efficient, as a financial institution is statutorily required to
                collect and report gross annual revenue by ECOA section 704B(e)(2)(F).
                ---------------------------------------------------------------------------
                 \516\ The Bureau understands that the SBA recently changed its
                regulations on the calculation of average annual receipts for all of
                SBA's receipts-based size standards, and for other agencies'
                proposed receipts-based size standards, from a three-year averaging
                period to a five-year averaging period, outside of the SBA Business
                Loan and Disaster Loan Programs. 84 FR 66561 (Dec. 5, 2019).
                 \517\ Generally, the average number of employees of the business
                concern is used (including the employees of its domestic and foreign
                affiliates) based upon numbers of employees for each of the pay
                periods for the preceding completed 12 calendar months. See 13 CFR
                121.106(b)(1).
                 \518\ To measure business size, the SBA also uses financial
                assets for certain financial industries, and for the petroleum
                refining industry, it uses refining capacity and employees.
                 \519\ See 12 CFR 1002.9(a)(3).
                 \520\ 13 CFR 121.104(a) and (c).
                ---------------------------------------------------------------------------
                 The Bureau believes that section 1071 differs from other programs
                that may have been contemplated pursuant to the Small Business Act's
                provisions pertaining to the establishment of size standards. First and
                most notably, the rulemaking contemplated by section 1071 is not a
                ``program'' in the traditional sense of a procurement or other Federal
                assistance program; the rule would not confer a direct benefit or
                advantage to the small business applicant or financial institution in
                terms of contract, procurement, loan guaranty, or government backed
                debenture. Rather, financial institutions will be contributing
                information about credit applications for businesses identified as
                small under section 1071--information that will be valuable to the
                Bureau, financial institutions, policymakers, and other stakeholders,
                including small businesses. Second, unlike other such alternative size
                standard requests, the Bureau notes that a size standard under section
                1071 would apply to businesses across all sectors applying for
                financing, rather than a particular industry or sector. And third, the
                Bureau believes that arriving at a simplified size standard is an
                essential element to this ``program,'' as more complex approaches may
                limit opportunities for small businesses by reducing access to credit.
                 Section 1071 is also unique in that Congress specified that the
                data collection regime include a particular form of revenue for the
                businesses at issue. As discussed in the section-by-section analysis of
                proposed Sec. 1002.107(a)(14) below, section 1071 requires a financial
                institution to collect ``the gross annual revenue of the business in
                the last fiscal year of the women-owned, minority-owned, or small
                business loan applicant preceding the date of the application.'' \521\
                The Bureau considered whether under section 1071 a financial
                institution should have to apply two different revenue-based rules
                (first, one for determining whether the business is small under the
                existing SBA size standards and therefore section 1071 data must be
                collected and reported; and, second, if the business is small, another
                for reporting the business's gross annual revenue in the last fiscal
                year), or whether applying only one revenue-based rule for section 1071
                could be sufficient. The Bureau believes that requiring financial
                institutions to apply both would be unnecessarily confusing and
                burdensome, and would also increase potential for errors in data
                collection. The Bureau does not believe it is appropriate to use only
                average annual receipts, given the language of section 1071. Moreover,
                as discussed below, section 1071 amends ECOA, which already
                incorporates gross annual revenue as implemented under existing
                Regulation B.
                ---------------------------------------------------------------------------
                 \521\ Id.
                ---------------------------------------------------------------------------
                 ECOA section 704B(e)(2)(G) requires a financial institution to
                collect and report the race, sex, and ethnicity of the principal owners
                of the business. Existing Regulation B generally prohibits a creditor
                from inquiring about
                [[Page 56433]]
                such protected demographic information in connection with a credit
                transaction unless otherwise required by Regulation B, ECOA, or other
                State or Federal law, regulation, order, or agreement.\522\ Thus, in
                order to avoid potential liability under ECOA and existing Regulation
                B, a financial institution must accurately determine that a business
                credit application is subject to section 1071 before inquiring about
                the applicant's protected demographic information. The Bureau does not
                believe the SBA's existing size standards allow for the quick and
                accurate determination of small business status required for this 1071
                data collection initiative. Specifically, the Bureau does not believe
                this determination can be quickly and accurately made if, as required
                under the SBA's existing size standards, the financial institution must
                determine the appropriate NAICS code for the business and then apply
                the NAICS-based size standards to determine whether a business loan
                applicant is a small business.
                ---------------------------------------------------------------------------
                 \522\ Existing Sec. 1002.5(a)(2). ECOA states that it is not
                discrimination for a financial institution to inquire about women-
                owned or minority-owned business status, or the race, sex, and
                ethnicity of principal owners pursuant to section 1071. 15 U.S.C.
                1691(b)(5).
                ---------------------------------------------------------------------------
                 As discussed above, SERs and other stakeholders have expressed
                concern to the Bureau about the difficulties in determining the
                appropriate NAICS code for businesses and in applying the NAICS-based
                size standards. They generally preferred a simple small business
                definition and expressed concern that the SBA's approach to defining a
                small business--which bases classification on an applicant's 6-digit
                NAICS code--is relatively complex in this context. The Bureau believes
                that removing a NAICS-based small business determination as a step in
                determining small business status will both facilitate compliance and
                better achieve the purposes of section 1071. The Bureau understands
                that one reason that SERs and others expressed a strong desire for a
                simple approach to determining whether an applicant is small is that
                this initial determination may drive the application process. To comply
                with section 1071 requirements, financial institutions may use a
                different application process, or different or additional application
                materials, with applicants for business credit that are small
                businesses than they do with applicants that are not small businesses.
                Thus, quickly and accurately determining whether an applicant is a
                small business at the outset of the application process may be a
                crucial step, one that financial institutions would benefit from being
                able to seamlessly accomplish. Considering the requirements and
                prohibitions in ECOA with respect to protected demographic information,
                the Bureau understands the import that financial institutions have
                placed on both the speed and accuracy of this determination.
                 As discussed in the section-by-section analysis of proposed Sec.
                1002.107(a)(15) below, the Bureau believes that NAICS codes possess
                considerable value for section 1071's fair lending purpose as well as
                its business and community development purpose beyond being necessary
                for determining whether an applicant is a small business under the
                SBA's size standards. The Bureau is therefore proposing that financial
                institutions be required to collect and report NAICS codes as one of
                the data fields for applications subject to section 1071. However, the
                Bureau believes that gathering NAICS code information at some point
                during the application process, while still the subject of some concern
                for financial institutions, is a different consideration from requiring
                NAICS information as a necessary step to beginning an application (and
                correctly determining which type of application to initiate).
                 The Bureau also believes that this simplified alternative size
                standard will provide largely consistent reporting results, as compared
                to adopting the full SBA size standards. The Bureau used data from the
                U.S. Census's 2012 Statistics of U.S. Businesses (SUSB) and the U.S.
                Department of Agriculture's 2012 Census of Agriculture to analyze how
                each of the Bureau's contemplated alternative approaches would change
                the number of businesses defined as ``small'' relative to the SBA
                definition.\523\ If all NAICS classifications and size assessments
                could be done correctly, applying the SBA's full 6-digit NAICS code-
                based size standards would result in complete coverage of small
                businesses as defined by the SBA--all applications by small businesses
                would be reported (other than those made to financial institutions that
                qualify for an exemption) and no applications made by non-small
                businesses would be reported. The Bureau estimates that 270,000
                businesses that would be small under the SBA's existing size standards
                (out of 7.2 million small employer businesses and farms) would not be
                covered by the Bureau's proposed $5 million gross revenue standard. The
                Bureau further estimates that the Bureau's proposed rule would cover
                some 77,000 businesses that would not be small under the SBA size
                standards. The Bureau believes that such variation with respect to the
                SBA's current size standards is an appropriate trade-off for the
                reasons described herein.
                ---------------------------------------------------------------------------
                 \523\ The 2012 SUSB is the most recent Census product to have
                categories of revenue and employees granular enough to conduct this
                analysis. The Bureau constructed the 2012 equivalents of the second
                and third alternatives due to the vintage of the SUSB data available
                and used the SBA's 2012 size standards for the analysis. The 2012
                SUSB only covers employer firms or businesses with at least one
                employee.
                ---------------------------------------------------------------------------
                 The Bureau notes, however, that a $5 million gross annual revenue
                alternative size standard would affect some industries more than
                others. That is, applications for small businesses would be reported to
                the Bureau less from some industries than others. In general, there
                will be a larger proportion of businesses whose applications would not
                be reported in industries with a higher revenue-based size standard.
                The industries most affected by this are the retail trade and
                construction industries. Other industries that would be
                disproportionately affected may include manufacturing, wholesale trade,
                health care and social assistance, and professional, scientific, and
                technical services. The Bureau received little public feedback with
                respect to such concerns, although the Bureau seeks comment with
                respect to any potential effects on particular subsets of applicants
                that may be disproportionately included or excluded on the basis of a
                gross annual revenue standard (such as those subject to employee-based
                size standards), particularly in light of section 1071's purposes.
                 The Bureau also believes that a simplified size standard will be
                important for financial institutions that may not frequently engage in
                small business lending in determining whether they are covered under
                the 1071 rule. As discussed in the section-by-section analysis of
                proposed Sec. 1002.105(b), the Bureau is proposing to mandate section
                1071 small business lending data collection only from those financial
                institutions that originated at least 25 covered credit transactions
                from small businesses in each of the two preceding calendar years.
                Those financial institutions that do not frequently lend to small
                businesses will be seeking to track precisely how many covered credit
                transactions for small businesses they have originated. The Bureau
                believes that it is important to empower financial institutions to
                quickly ascertain whether a covered credit transaction was furnished to
                a small business, such that infrequent lenders can continue to monitor
                [[Page 56434]]
                whether section 1071 compliance is required.
                 Average gross annual revenue. The Bureau considered proposing an
                approach that would use an average gross annual revenue calculated over
                an averaging or ``lookback'' period instead of using the gross annual
                revenue for the preceding fiscal year. This alternative approach would
                be similar to the SBA approach of using a five-year annual receipts
                average. The Bureau understands that the SBA expects the five-year
                average to: (i) Enable some mid-size businesses currently categorized
                above their corresponding size standards to gain or regain small
                business status and thereby qualify for participation in Federal
                assistance intended for small businesses, and (ii) allow some advanced
                and larger small businesses close to their size thresholds to lengthen
                their small business status for a longer period and thereby continue
                their participation in Federal small business programs.\524\ However,
                because the 1071 rule is not connected to eligibility for participation
                in any Federal programs for small business loans, grants, procurement,
                or otherwise, the Bureau believes that allowing financial institutions
                to consider applicants' gross annual revenue for the preceding fiscal
                year is sufficient for 1071 purposes. The Bureau also notes that using
                gross annual revenue for the preceding fiscal year is consistent with
                the notification requirements of existing Regulation B and the Bureau's
                approach in proposed Sec. 1002.107(a)(14) regarding the gross annual
                revenue data point. The Bureau believes that using this measure instead
                of an average will better align with current lending practices and will
                simplify determinations regarding 1071 reporting status.
                ---------------------------------------------------------------------------
                 \524\ See 84 FR 66561, 66562 (Dec. 5, 2019).
                ---------------------------------------------------------------------------
                Section 1002.107 Compilation of Reportable Data
                107(a) Data Format and Itemization
                Background
                 ECOA section 704B(e) requires financial institutions to ``compile
                and maintain'' records of information provided by applicants ``pursuant
                to a request under subsection (b),'' and requires them to ``itemiz[e]''
                such information to ``clearly and conspicuously disclose'' a number of
                data points; \525\ the Bureau refers to these as statutory data points.
                Section 704B(e)(2)(H) provides the Bureau with authority to require
                ``any additional data that the Bureau determines would aid in
                fulfilling the purposes of [section 1071]''; the Bureau refers to data
                points adopted under this authority as discretionary data points. The
                stated statutory purposes of 1071 are twofold: (1) To facilitate
                enforcement of fair lending laws; and (2) to enable communities,
                governmental entities, and creditors to identify business and community
                development needs and opportunities of women-owned, minority-owned, and
                small businesses.\526\ The Bureau notes that ``discretionary'' in this
                context means discretionary for the Bureau to adopt, not discretionary
                for financial institutions to comply with.
                ---------------------------------------------------------------------------
                 \525\ As discussed in greater detail above in E.2 of the
                Overview to this part V, the Bureau interprets the phrase ``pursuant
                to a request under subsection (b)'' in section 1071 as referring to
                all of the data points contemplated by ECOA section 704B(e), not
                merely whether the applicant is a minority-owned, women-owned, or
                small business.
                 \526\ ECOA section 704B(a).
                ---------------------------------------------------------------------------
                 The 1071 data collected and reported by financial institutions
                would generally be made available to the public unless the Bureau
                decides to delete or modify certain data to advance a privacy
                interest.\527\ As discussed below in part VI, the Bureau is proposing
                to use a balancing test to determine what data should be deleted or
                modified, but does not intend to apply the balancing test until
                financial institutions have reported at least a full year of 1071 data
                to the Bureau. The Bureau notes that the utility of 1071 data to
                particular groups of data users will depend on the specific data
                collected and the form, manner, and extent to which the Bureau makes
                such data available to the public.
                ---------------------------------------------------------------------------
                 \527\ ECOA section 704B(e)(4), (f).
                ---------------------------------------------------------------------------
                 The users of data from the Bureau's proposed 1071 rule could
                include the Bureau itself; other Federal agencies including the
                prudential banking regulators; Congress; State and local governments;
                community, consumer, and civil rights groups; researchers and
                academics; financial institutions; small businesses; and small business
                trade organizations. The comprehensive data that would be collected
                under the Bureau's rule is not available elsewhere, though some
                aggregate information for some loans to businesses--but not
                applications--exists in other sources. For example, there are several
                datasets on loans to businesses by depository institutions. The FFIEC
                Call Report data provide information on banks' and savings
                associations' total outstanding number and amount of loans to
                businesses for loans under $1 million and farms for loans under
                $500,000. The CRA requires banks and savings associations with assets
                over a specified threshold ($1.322 billion as of 2021) to report data
                on loans to businesses with origination amounts of $1 million or less
                and loans to farms with origination amounts of $500,000 or less. NCUA
                Call Reports include information on credit unions' outstanding and
                originated commercial loans to members over $50,000. Though the Bureau
                and other agencies with supervisory jurisdiction can currently
                approximate some 1071 data through requests during examinations of
                individual institutions, the agencies would only have access to data
                from a relatively small number of such institutions at any one time and
                the data obtained would not be uniform among institutions. The
                availability of uniform 1071 data across different types of financial
                institutions should significantly improve agencies' ability to focus
                limited supervisory resources on institutions with higher fair lending
                risk. Section 1071 data may also provide insight into how well the
                market is meeting the credit needs of small businesses in general, as
                well as women- and minority-owned small businesses in particular, and
                could potentially be used to identify market opportunities.
                 The Bureau has received feedback relevant to the 1071 rulemaking
                from a variety of sources, including through the SBREFA process as well
                as the Bureau's 1071 Symposium and the 2017 RFI on small business
                lending. This feedback addressed, among other things, the potential
                inclusion of discretionary data points in the 1071 rulemaking, which is
                discussed further below. By discussing these potential discretionary
                data points under consideration in the SBREFA Outline, the Bureau
                obtained helpful feedback on costs and benefits from the SERs and other
                stakeholders to inform the Bureau's decision-making for purposes of
                this NPRM.
                SBREFA Proposals Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau explained its understanding of
                the data points enumerated in section 1071.\528\ The Outline noted that
                ECOA section 704B(b) requires financial institutions to inquire whether
                an applicant for credit is a women-owned, minority-owned, or small
                business. In addition, the statute states that the information compiled
                and maintained by a financial institution under section 704B(e)(1)
                shall be itemized in order to clearly and conspicuously disclose a
                number of particular items that are enumerated in the statute. In the
                Outline, the Bureau
                [[Page 56435]]
                stated that it was considering proposing to require all of these data
                points.\529\
                ---------------------------------------------------------------------------
                 \528\ SBREFA Outline at 24.
                 \529\ Id. at 24-36.
                ---------------------------------------------------------------------------
                 The Bureau also discussed in the SBREFA Outline its proposals under
                consideration regarding data points adopted pursuant to its
                discretionary data points authority under ECOA section
                704B(e)(2)(H).\530\ The Bureau explained that it was considering
                proposing to require that financial institutions report discretionary
                data points regarding pricing, time in business, NAICS code, and number
                of employees.
                ---------------------------------------------------------------------------
                 \530\ Id. at 33.
                ---------------------------------------------------------------------------
                 SERs provided feedback on nearly all aspects of the data points
                under consideration, including certain feedback applicable to all data
                points.\531\ Regarding data points generally, most SERs requested that
                the Bureau make the collection and reporting of data points as simple
                as possible. Two SERs stated that collecting and reporting the
                statutory data points would not pose any issues because they collect
                them now. A number of SERs urged the Bureau to require collection and
                reporting of a number of data points based only on information as
                provided by the applicant. One SER stated that the Bureau should be
                aware that, as with HMDA reporting, the cost of collecting and
                reporting the data points will include expensive data quality scrubs in
                order to avoid negative examination findings. Another SER stated that
                it will be challenging to standardize the data so reporting can be
                automated, and that this will likely require significant training and a
                tremendous amount of human intervention.
                ---------------------------------------------------------------------------
                 \531\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 25-30.
                ---------------------------------------------------------------------------
                 Furthermore, some SERs expressed concern about asking applicants to
                provide certain information (in particular the race, sex, and ethnicity
                of principal owners), as they believed that applicants would feel
                uncomfortable providing, or even being asked about, that information,
                and that if applicants are denied credit they might feel it was because
                of the protected demographic information they provided. One SER stated
                that the collection of 1071 data could seem like an intrusion of
                privacy by the financial institution, particularly to minority
                borrowers. The SER stated that prospective applicants may decide to
                seek financing elsewhere. Another SER stated that some prospective
                applicants' distrust of the Federal government (and concern over how
                1071 data might be used) might adversely impact their ability to lend
                to the communities they serve. Other SERs that currently collect this
                information (for example, because they are CDFIs or SBA lenders)
                indicated that they generally do not have difficulty collecting
                demographic information from borrowers.
                 Several SERs suggested that the Bureau develop a system to assist
                in the collection of applicants' protected demographic information, and
                possibly other applicant-provided 1071 data, that would avoid the need
                for financial institutions to request and store sensitive information
                about applicants. One SER suggested that this system could also permit
                applicants to input their addresses for geocoding.
                 SERs also provided detailed feedback on the discretionary data
                points that the Bureau was considering. One SER stated that the cost of
                collecting and reporting the discretionary data points under
                consideration would be significant, and another SER stated that the
                Bureau should include as few data points as possible to avoid
                unnecessary costs. Another SER stated that the Bureau should finalize a
                rule with just the statutorily required data points and avoid adding
                any discretionary data points. That SER suggested that if the Bureau
                does include discretionary data points, the Bureau could consider
                providing an exemption from discretionary data point collecting and
                reporting for certain small 1071 reporters, similar to the partial data
                point exemption approach taken under HMDA.\532\
                ---------------------------------------------------------------------------
                 \532\ See Regulation C Sec. 1003.3(d).
                ---------------------------------------------------------------------------
                 Other SERs favored the inclusion of some or all of the
                discretionary data points. Two SERs stated their support for the
                inclusion of all four discretionary data points under consideration.
                One of these SERs suggested that the Bureau also collect information
                regarding the way the application was taken (in person, by phone, or
                online) in order to monitor possible discouragement of applicants. The
                other SER suggested that the Bureau also collect credit score
                information.
                 Stakeholders commenting on the statutory data points and data
                points in general largely echoed the SERs' concerns. Industry
                commenters suggested that the method of collection be as clear and
                simple as possible, that the cost burden be taken into account, and
                that the Bureau not require verification of applicant-provided
                information. Community groups largely supported the Bureau's proposals
                under consideration for the statutory data points, and emphasized the
                importance of the new 1071 data collection regime.
                 A large majority of industry stakeholders commenting on the SBREFA
                Outline opposed the collection of any discretionary data points,
                stating that including them would be overly burdensome and unnecessary.
                Industry commenters argued that the 1071 rule would be very burdensome
                in any case, requiring new software and onerously different business
                processes, and adding data points would only increase that burden. Some
                commenters stated that collecting and reporting the discretionary data
                points would increase compliance obligations and costs, and likely
                impact credit costs and availability for small business customers. Some
                commenters were concerned about the discretionary data points being
                made public without contextual information, potentially leading to
                damaging misinterpretations. One stakeholder stated that unnecessary
                discretionary data points would add to the already significant privacy
                concerns of financial institutions and borrowers. Several commenters
                suggested that the Bureau consider an incremental approach to expanding
                the data collection in the future should the statutory fields not be
                sufficient to accomplish the original intent of 1071. Several other
                stakeholders suggested that if the Bureau includes discretionary data
                points, it should provide an exemption from reporting them for smaller
                financial institutions.
                 Community groups and several community development lenders
                supported mandatory reporting of the discretionary data points under
                consideration, saying that they would help achieve section 1071's
                purposes. One stakeholder stated that the discretionary data points
                under consideration relate to underwriting decisions and must be
                accounted for so credit providers cannot--as they said HMDA reporters
                have done for years--hide behind data not collected as justification
                for their lending disparities. A community development lender supported
                the collection of the discretionary data points, but suggested that the
                Bureau not collect number of employees. Some stakeholders suggested
                additional discretionary data points.
                 Regarding data points in general, the SBREFA Panel recommended that
                the Bureau consider proposing in the NPRM that applicant-provided data
                points be self-reported by the applicant only, without an obligation
                for the financial institution to verify the information
                [[Page 56436]]
                provided by the applicant.\533\ Regarding the discretionary data
                points, the SBREFA Panel recommended that if time in business, number
                of employees, and NAICS code become part of the proposal, the Bureau
                continue to explore ways to minimize the burden to small financial
                institutions of collecting and reporting such data; and with respect to
                NAICS code specifically, the burden on small business applicants who
                need to provide the information.\534\ As to pricing, the Panel
                recommended that if this data point becomes part of the proposal, the
                Bureau seek comment on potential methods for avoiding
                misinterpretations of disparities.\535\
                ---------------------------------------------------------------------------
                 \533\ SBREFA Panel Report at 46.
                 \534\ Id.
                 \535\ Id.
                ---------------------------------------------------------------------------
                Proposed Rule
                 The Bureau is proposing to adopt the statutory data points largely
                consistent with its proposals under consideration at SBREFA, but with
                certain changes as discussed in the section-by-section analyses of the
                individual data points below. Consistent with its approach under
                consideration in the SBREFA Outline,\536\ the Bureau is proposing
                discretionary data points relating to pricing, time in business, NAICS
                code, and number of workers. In addition, based on feedback from SERs
                and other stakeholders and in the course of developing the proposed
                rule, the Bureau identified several additional data points that it
                believes would be important to the quality and completeness of the 1071
                data collected and would aid significantly in furthering the purposes
                of section 1071. The proposed rule would adopt additional discretionary
                data points regarding application method, application recipient, denial
                reasons, and number of principal owners. In addition, the Bureau is
                relying on ECOA section 704B(e)(2)(H), as well as its authority under
                704B(g)(1), to make certain clarifications to the statutory data
                points. These data points are all discussed in detail in the section-
                by-section analyses of proposed Sec. 1002.107(a)(1) through (21)
                below.
                ---------------------------------------------------------------------------
                 \536\ SBREFA Outline at 34-35.
                ---------------------------------------------------------------------------
                 The Bureau continues to believe that discretionary data points for
                pricing, time in business, NAICS code, and number of workers would
                serve the purposes of 1071, improve the utility of the data for
                stakeholders, and potentially reduce the occurrence of
                misinterpretations or incorrect conclusions based on analysis of an
                otherwise more limited data set. The Bureau also believes that
                discretionary data points for application method, application
                recipient, denial reasons, and number of principal owners would help to
                achieve these goals more effectively.
                 In proposing these discretionary data points, the Bureau considered
                the additional operational complexity and potential reputational harm
                that collecting and reporting discretionary data points could impose on
                financial institutions. The Bureau has sought to respond to industry
                concerns regarding discretionary data points by proposing a limited
                number of discretionary data points that would offer the highest value
                in light of 1071's statutory purposes. For this reason, the Bureau is
                not proposing certain additional discretionary data points suggested by
                SERs and other stakeholders such as credit score or applicant's
                business structure (see the discussion below). In addition, the Bureau
                has not chosen to take an incremental approach to adding data points,
                as one stakeholder suggested, or permitting collecting and reporting of
                discretionary data points to be phased in over time. The Bureau
                believes the information from the proposed discretionary data points
                would further section 1071's purposes for the reasons stated above, and
                should be collected and reported as soon as possible. In addition, data
                from these discretionary data points would be an important part of the
                privacy balancing test analysis that would be conducted after the first
                year of 1071 data is received.\537\ The Bureau will consider industry
                concerns about potential reputational harm that collecting and
                reporting discretionary data points could impose on financial
                institutions when it conducts the privacy balancing test analysis.
                ---------------------------------------------------------------------------
                 \537\ See part VI below.
                ---------------------------------------------------------------------------
                 In regard to the specific method by which a financial institution
                would collect the 1071 data points, the proposed rule would require a
                covered financial institution to compile and maintain data regarding
                covered applications from small businesses, and require that the data
                be compiled in the manner prescribed for each data point and as
                explained in associated Official Interpretations (included in this
                proposed rule) and the Filing Instructions Guide (FIG) that the Bureau
                anticipates later providing on a yearly basis. The proposed rule would
                then explain that the data compiled shall include the items described
                in proposed Sec. 1002.107(a)(1) through (21). The Official
                Interpretations, sometimes referred to as official comments or official
                commentary, provide important guidance on compliance with the
                regulation and are discussed in this preamble in relation to each data
                point as well as other regulatory provisions. The FIG would provide
                instructions on the operational methods for compiling and reporting
                data, including which codes to report for different required
                information. The FIG would be updated yearly, as is the FIG that is
                used with HMDA compilation and reporting.\538\
                ---------------------------------------------------------------------------
                 \538\ See generally Fed. Fin. Insts. Examination Council, The
                Home Mortgage Disclosure Act, https://ffiec.cfpb.gov/ (last visited
                July 28, 2021).
                ---------------------------------------------------------------------------
                 The Bureau notes that some of the details contained in the proposed
                regulatory text and commentary may also be appropriate for inclusion in
                the FIG, and it anticipates that it may choose to relocate some such
                details to the FIG when issuing the final rule. For example, proposed
                Sec. 1002.107(a)(1) addresses the unique identifier data point. A
                portion of proposed comment 107(a)(1)-1 would explain that the unique
                identifier must not exceed 45 characters, and may only include standard
                numerical and/or alphabetical characters and cannot include dashes,
                other special characters, or characters with diacritics. At the final
                rule stage, the Bureau might consider removing those details from the
                commentary and addressing them instead in the FIG, in order to preserve
                flexibility in how the submission platform is ultimately designed and
                implemented.
                 Proposed comment 107(a)-1 would provide general guidance on
                complying with Sec. 1002.107(a), and would explain that: (i) A covered
                financial institution reports the data even if the credit originated
                pursuant to the reported application was subsequently sold by the
                institution; (ii) a covered financial institution annually reports data
                for covered applications for which final action was taken in the
                previous calendar year; and (iii) a financial institution reports data
                for a covered application on its small business lending application
                register for the calendar year during which final action was taken on
                the application, even if the institution received the application in a
                previous calendar year. The Bureau believes that these operational
                instructions would clarify a financial institution's collection and
                reporting requirements and so facilitate compliance. The Bureau also
                believes that these instructions would help to ensure the accuracy and
                consistency of the data collected and reported.
                 The Bureau crafted the proposed rule in consideration of the
                concerns and input of the SERs and other stakeholders. First, the
                proposed rule would generally not require a financial
                [[Page 56437]]
                institution to verify applicant-provided information, as discussed more
                fully in the section-by-section analysis of proposed Sec. 1002.107(b)
                below, and has limited the discretionary data points to those that the
                Bureau believes would be most useful for the purposes of section 1071.
                In addition, the Bureau has considered the costs, including data
                quality scrubs, automation and training, that would be imposed by the
                collection and reporting of the statutory and discretionary data
                points; these are discussed in detail in part VII below. The Bureau has
                attempted to craft the collection and reporting requirements to be as
                clear and operationally manageable as possible, and requests comment on
                potential methods for increasing clarity and manageability.
                 In regard to concerns from SERs and other stakeholders about being
                required to collect applicants' protected demographic information for
                purposes of section 1071, the Bureau notes that several SERs reported
                collecting this kind of information currently (because they are CDFIs,
                or because they are participating in certain SBA or similar loan
                guarantee programs). In addition, the Bureau crafted the proposed rule
                to provide flexibility for financial institutions in the collection and
                reporting of this information. The Bureau is also not proposing an
                exemption for small financial institutions from reporting the
                discretionary data points, as suggested by some SERs and commenters. As
                explained in the section-by-section analysis of proposed Sec.
                1002.105(b) above, certain institutions with limited small business
                loan originations would be exempt from 1071 collection and reporting
                obligations. Furthermore, the Bureau is concerned that the usefulness
                of the data collected would be reduced if the data set is incomplete
                for some financial institutions. Finally, the Bureau is not proposing
                at this time to establish a Federal collection system for protected
                demographic or other information for use with 1071 reporting that would
                avoid the need for financial institutions to request and store this
                information about applicants, as suggested by several SERs.
                 The Bureau seeks comment on its proposed approach to the collection
                and reporting of the 1071 data points, including the specific requests
                for input above and in the section-by-section analysis of each of the
                proposed data points below.
                Proposed Rule--Other Discretionary Data Points Considered But Not
                Proposed
                 As mentioned above, SERs and other stakeholders suggested some
                additional data points for the Bureau's consideration, and the Bureau
                considered others in the development of this proposed rule. Because of
                the operational complexities likely to be posed by each of these
                potential data points, as well as the reasons explained below, the
                Bureau has chosen not to propose to include any of the following data
                points in the 1071 rule. Nonetheless, the Bureau seeks comment on
                whether the following potential data points or any others would further
                the purposes of section 1071 and thus should be considered for
                inclusion in the final rule.
                 Type of business/entity structure (sole proprietorship, C-
                corp, LLC, partnership, etc.). This information could be useful in
                providing context to the race, sex, and ethnicity data regarding
                applicants' principal owners. However, the Bureau believes that
                collecting the number of principal owners, as proposed in Sec.
                1002.107(a)(21), would better serve this purpose.
                 Credit score. Collecting credit score and other credit
                information could be particularly useful for the fair lending purpose
                of section 1071. However, because of the different types of scores and
                different situations in which a financial institution would or would
                not access scores, the Bureau believes that this data point could be
                quite complicated and involve complex sub-fields, which could pose
                operational difficulties for financial institutions in collecting and
                reporting this information. These complexities could also make it
                difficult for data users to understand and interpret credit score data.
                 Credit reporting information, including whether credit
                information was accessed. This data point could also be complicated and
                involve complex sub-fields, making it difficult for financial
                institutions to collect and report. As with credit score, these
                complexities could also make it difficult for data users to understand
                and interpret these data. In addition, it is not clear that this
                information would be useful without also collecting credit score.
                 Percentage ownership of each principal owner and
                percentage ownership by women and by minorities. This information could
                be useful in providing context to the ethnicity, race, and sex data
                regarding applicants' principal owners. However, the Bureau is
                concerned that requesting this type of percentage data could be
                confusing to applicants and could result in inconsistent responses
                across applicants and institutions. The Bureau believes that collecting
                the number of principal owners, as proposed in Sec. 1002.107(a)(21),
                would better serve this same purpose.
                 Whether the applicant has an existing relationship with
                the financial institution and the nature of that relationship. This
                information could provide additional context for a financial
                institution's credit decision, and thus could be useful for both of
                section 1071's statutory purposes. However, the Bureau believes that
                the usefulness of the data collected may not justify the additional
                operational complexity of identifying and tracking such relationships
                for reporting.
                 Customer number, and/or unique (but anonymous)
                identification number for applicants or associated persons for tracking
                of multiple applications. This information could be useful to track
                multiple applications by a single small business within a particular
                financial institution, whether submitted at one time or over the course
                of the year. However, the Bureau believes that the potential
                difficulties posed by requiring the reporting of this information--
                particularly for applications that have been withdrawn or abandoned--
                would not be warranted in light of the utility of the data.
                107(a)(1) Unique Identifier
                Background
                 ECOA section 704B(e)(2)(A) requires financial institutions to
                collect and report ``the number of the application . . . .'' Regulation
                C includes a similar reporting requirement for a universal loan
                identifier (ULI),\539\ though some insured credit unions and
                depositories whose lending activity falls below applicable thresholds
                are partially exempt and only need to report a non-universal loan
                identifier (NULI).\540\ Both the ULI and the NULI use only alphanumeric
                characters, and do not allow use of identifying information about the
                applicant or borrower in the identifier. The ULI is ``unique'' in the
                national HMDA reporting market because it uses a unique legal entity
                identifier (LEI) for the reporting institution and then the identifier
                is required to be unique within that
                [[Page 56438]]
                institution.\541\ The ULI must be no more than 45 characters and the
                NULI must be no more than 22 characters.\542\
                ---------------------------------------------------------------------------
                 \539\ 12 CFR 1003.4(a)(1)(i).
                 \540\ 12 CFR 1003.3(d)(5).
                 \541\ 12 CFR 1003.4(a)(1)(i)(A), (B)(2). The NULI is only
                required to be unique within the annual loan/application register in
                which the covered loan or application is included. 12 CFR
                1003.3(d)(5)(ii).
                 \542\ The ULI length limit is included in the Bureau's yearly
                Filing Instructions Guide. See Bureau of Consumer Fin. Prot., Filing
                instructions guide for HMDA Data collected in 2021 (2021), https://s3.amazonaws.com/cfpb-hmda-public/prod/help/2021-hmda-fig.pdf. The
                limit for the NULI is in Regulation C Sec. 1003.3(d)(5).
                ---------------------------------------------------------------------------
                SBREFA Proposals Under Consideration and Feedback Received
                 The Bureau stated in the SBREFA Outline that it was considering
                proposing that financial institutions report an alphanumeric
                application or loan number of no more than 45 characters that is
                unique, within the financial institution, to the referenced extension
                (or requested extension) of credit and that remains uniform through the
                application and origination stages of the process.\543\ The financial
                institution would assign this number to an application, and the number
                would be reported as the application number if the credit applied for
                was not originated. The same number would be reported as the loan
                number if the credit applied for was originated. The application/loan
                number would not include any identifying information about the
                applicant. The Bureau stated that it was considering proposing a
                structure for the method of assigning and reporting the application/
                loan number under section 1071 to follow HMDA/Regulation C formatting
                and other requirements, which might reduce initial software development
                costs.
                ---------------------------------------------------------------------------
                 \543\ SBREFA Outline at 26.
                ---------------------------------------------------------------------------
                 SERs reported varied practices with respect to assigning
                application and loan numbers.\544\ Some SERs stated they do not assign
                application numbers; some of those SERs indicated, however, that they
                do assign loan numbers at or before origination. Two SERs reported
                tracking applications and loans using an identification number assigned
                to the customer. One SER expressed concern about reporting actual loan
                numbers to the Bureau due to potential identity theft, and requested
                that the Bureau permit financial institutions to generate a new
                application/loan number specifically for 1071 reporting purposes. One
                SER stated that if an applicant requests more than one type of credit
                product, a separate application/loan number is assigned to each product
                request, while other SERs indicated they use a single application
                number even if multiple products are requested.
                ---------------------------------------------------------------------------
                 \544\ SBREFA Panel Report at 26-27.
                ---------------------------------------------------------------------------
                 The SBREFA Panel recommended that in the NPRM the Bureau consider
                proposing to permit financial institutions to report ``dummy''
                application/loan numbers assigned specifically for 1071 reporting
                purposes, rather than the numbers they use internally.\545\
                ---------------------------------------------------------------------------
                 \545\ Id. at 45.
                ---------------------------------------------------------------------------
                 Feedback from other stakeholders echoed many of the SERs' concerns,
                making clear that many lenders do not assign numbers at the application
                stage and others assign them at various points in the process. One
                commenter explained that being required to assign an application number
                early would disrupt its procedures. Another commenter stated that the
                Bureau should provide flexibility in this data point to account for the
                wide range of practices.
                Proposed Rule
                 The Bureau is proposing to require that financial institutions
                report an alphanumeric identifier starting with the LEI of the
                financial institution. This unique alphanumeric identifier would be
                required to be unique within the financial institution to the specific
                covered application, and would be required to be usable to identify and
                retrieve the specific file corresponding to the application for or
                extension of credit. The Bureau is also proposing commentary with
                additional details, as discussed below.
                 This proposed unique identifier requirement closely follows the
                SBREFA Outline approach for this data point, with certain adjustments
                and clarifications. First, the Bureau has chosen to propose the more
                precise term of ``unique identifier,'' instead of ``application/loan
                number,'' which was the term used in the SBREFA Outline. In addition,
                the Bureau had stated that its approach in the SBREFA Outline would
                follow Regulation C formatting and other requirements, but did not
                explicitly discuss the use of ``dummy'' numbers, as is done with
                HMDA.\546\ For clarity, the Bureau is including language in proposed
                comment 107(a)(1)-1 that would explain that the identifier does not
                have to be the number that the financial institution uses for the
                application internally. Proposed comment 107(a)(1)-1 would also provide
                the formatting requirements for the unique identifier. The Bureau is
                proposing an identifier of 45 characters or fewer, as is currently
                required for HMDA.
                ---------------------------------------------------------------------------
                 \546\ SBREFA Outline at 26.
                ---------------------------------------------------------------------------
                 The Bureau notes that the SBREFA Outline language could be read to
                suggest that the financial institution must assign a number to an
                application and then keep that number uniform throughout its subsequent
                processing of the application; this is not what was intended. The
                Bureau is making clear in the proposal that the unique identifier would
                not need to stay ``uniform'' throughout the application and subsequent
                processing. Proposed comment 107(a)(1)-1 would explain that the
                financial institution may assign the unique identifier at any time
                prior to reporting the application. Proposed comment 107(a)(1)-1 would
                also explain that refinancings or applications for refinancing must be
                assigned a different identifier than the transaction that is being
                refinanced.
                 Proposed comment 107(a)(1)-2 would make clear that the unique
                identifier must not include any directly identifying information
                regarding the applicant or persons (natural or legal) associated with
                the applicant. The Bureau is aware that internal identification numbers
                assigned by the financial institution to the application or applicant
                could be considered directly or indirectly identifying information, and
                requests comment on this issue. The Bureau also notes that, as
                discussed in part VI.C.6.i, due to privacy risks the Bureau is
                proposing to not publish the unique identifier data field in unmodified
                form; the Bureau is seeking comment on potential modifications to or
                deletion of this data field in the published application-level 1071
                data.
                 Proposed comment 107(a)(1)-2 would also cross-reference proposed
                Sec. 1002.111(c) and related commentary, which prohibit any personally
                identifiable information concerning any individual who is, or is
                connected with, an applicant, in records retained under proposed Sec.
                1002.111.
                 As stated above, the Bureau is proposing to require that the unique
                identifier begin with the financial institution's LEI; this requirement
                was not stated in the SBREFA Outline. Pursuant to proposed Sec.
                1002.109(b)(1)(vi), any covered financial institution that does not
                currently use an LEI would be required to obtain and maintain an LEI in
                order to identify itself when reporting the 1071 data. Including the
                financial institution's LEI in the unique identifiers that it assigns
                to its applications should not cause extra operational difficulty once
                the programming to do so has been
                [[Page 56439]]
                implemented. The Bureau believes that including the LEI will increase
                the specificity and usefulness of the identifier and the record it
                identifies. Although a ``check digit'' is required for the HMDA ULI,
                the Bureau is not proposing to require its use in the 1071 unique
                identifier. The Bureau believes that, based on its current expectations
                for a 1071 reporting platform, a check digit would be unnecessary.
                 The Bureau's proposal is intended to avoid the potential problems
                identified by SERs during the SBREFA process. The method proposed would
                accommodate different institutions' numbering systems because the
                unique identifier can be created separately from that internal system.
                The Bureau's proposed approach would also alleviate the identity theft
                concerns raised with respect to reporting actual loan numbers, though
                the Bureau is unlikely to release the unique identifier data reported
                to the Bureau publicly in any case. In regard to the issue of requests
                by the same applicant for more than one credit product at the same
                time, the Bureau proposes to treat those as separate applications. See
                the section-by-section analysis of proposed Sec. 1002.103 above.
                 The Bureau seeks comment on its proposed approach to the unique
                identifier data point. In addition, the Bureau requests comment on the
                use of the LEI in the unique identifier and the possible use of a check
                digit.
                107(a)(2) Application Date
                Background
                 ECOA section 704B(e)(2)(A) requires financial institutions to
                collect and report the ``date on which the application was received.''
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated it was considering
                proposing that financial institutions report the application date using
                either (i) the date shown on a paper or electronic application form; or
                (ii) the day on which a credit request becomes an ``application.''
                \547\ The Bureau considered proposing that application date be reported
                with a day, month, and year. The Bureau also considered proposing that
                financial institutions have a grace period of several days on either
                side of the date reported to reduce the compliance burden of
                pinpointing an exact date on which an application was received.
                ---------------------------------------------------------------------------
                 \547\ Id.
                ---------------------------------------------------------------------------
                 Most SERs stated that application date would not be difficult to
                report, though some suggested different triggers for the reporting of
                application date.\548\ This feedback overlapped with feedback on the
                definition of an application. Several SERs suggested the date an
                application is completed and submitted for underwriting review should
                be the triggering date. Several other SERs expressed support for
                reporting the date based on when a credit memorandum is generated. One
                SER suggested that each financial institution be permitted to develop
                its own process for reporting application date, so long as it is done
                consistently. Another SER expressed concern with reporting application
                date as a general matter, explaining that a date is not currently
                recorded in their system as a matter of practice. Instead of
                application date, that SER suggested that financial institutions report
                the date they make a decision on the loan. Several SERs were strongly
                in favor of the Bureau providing a grace period of several days on
                either side of the date reported to reduce compliance burden.
                ---------------------------------------------------------------------------
                 \548\ SBREFA Panel Report at 27.
                ---------------------------------------------------------------------------
                 Other stakeholders to comment on this data point were generally in
                favor of the proposal under consideration, and particularly the grace
                period, which they expressed would reduce the compliance burden of
                pinpointing an exact date. One stakeholder suggested a 7-day grace
                period. One financial institution suggested that application date be
                assigned up through and including at closing in order to accommodate
                financing requests outside normal business hours.
                 The SBREFA Panel recommended that the Bureau seek comment on how
                best to define ``application date'' in light of how it decides to
                propose defining an ``application.'' \549\
                ---------------------------------------------------------------------------
                 \549\ Id. at 45.
                ---------------------------------------------------------------------------
                Proposed Rule
                 The Bureau is proposing to require reporting of application date in
                Sec. 1002.107(a)(2) as the date the covered application was received
                by the financial institution or the date on a paper or electronic
                application form. Proposed Sec. 1002.107(a)(2) is consistent with the
                Bureau's proposal under consideration in the SBREFA Outline, with
                revised language for clarity. Proposed comments 107(a)(2)-1 and -2
                would clarify the need for a financial institution to take a consistent
                approach when reporting application date, and provide guidance on how
                to report application date for indirect applications. In light of SER
                and other stakeholder feedback \550\ supportive of permitting a grace
                period for reporting the date of application, the Bureau is proposing a
                safe harbor in Sec. 1002.112(c)(4), which would provide that a
                financial institution does not violate proposed subpart B if it reports
                on its small business lending application register an application date
                that is within three calendar days of the actual application date
                pursuant to proposed Sec. 1002.107(a)(2).
                ---------------------------------------------------------------------------
                 \550\ SER feedback primarily directed at how to define an
                application under section 1071, rather than the date reported for
                that application, are discussed in connection with the section-by-
                section analysis of proposed Sec. 1002.103(a) above.
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed approach to collecting
                application date in Sec. 1002.107(a)(2) and associated commentary. As
                recommended by the SBREFA Panel, the Bureau also seeks comment on how
                best to define this data point in light of the Bureau's proposed
                definition of ``covered application'' in Sec. 1002.103.
                107(a)(3) Application Method
                 ECOA section 704B(e)(2)(H) authorizes the Bureau to require
                financial institutions to compile and maintain ``any additional data
                that the Bureau determines would aid in fulfilling the purposes of
                [section 1071].'' The Bureau believes that application method data will
                aid in fulfilling the purposes of section 1071, as explained below.
                 The Bureau did not address the method of application as a potential
                data point under consideration in the SBREFA Outline. However, during
                the SBREFA process, one CDFI SER suggested collecting information
                regarding the way an application was taken (in person, by phone, or
                online) in order to monitor for possible discouragement of
                applicants.\551\ Relatedly, several SERs that took applications for
                credit primarily or entirely online asserted that such channels were
                less likely to result in discrimination and more likely to increase
                access to credit to women-owned and minority-owned small businesses.
                ---------------------------------------------------------------------------
                 \551\ SBREFA Panel Report at 30.
                ---------------------------------------------------------------------------
                 In light of this feedback during the SBREFA process, pursuant to
                its authority under ECOA section 704B(e)(2)(H), and for the reasons set
                forth below, the Bureau is proposing to require financial institutions
                to collect and report application method. Proposed Sec. 1002.107(a)(3)
                would define this data point as the means by which the applicant
                submitted the covered application directly or indirectly to the
                financial institution. The Bureau is also proposing commentary to
                accompany proposed Sec. 1002.107(a)(3).
                [[Page 56440]]
                 The Bureau believes that data on application method would improve
                the market's understanding of how applicants apply for credit which, in
                turn, would facilitate fair lending enforcement, including helping
                determine whether certain application methods are more or less likely
                to be associated with violations of fair lending laws. This proposed
                data field would also permit comparisons across financial institutions
                for a given application method. In addition, data on application method
                supports 1071's statutory purposes by assisting with an understanding
                of the business and community development needs of a particular
                geographic region. For instance, application method may help users of
                1071 data analyze the extent to which financial institutions may be
                providing access to credit online or by telephone in ``credit deserts''
                where financial institutions do not have branch operations.
                 The Bureau also believes that collecting data on application method
                will aid in analysis of multiple 1071 data points collected and
                reported by financial institutions, including the ethnicity, race, and
                sex of applicants' principal owners. First, these data will assist the
                Bureau and other data users in identifying whether applicants are more
                or less likely to provide this (and other) 1071 information in
                different application channels. This information may also assist in
                determining whether a financial institution has procedures to collect
                applicant-provided data at a time and in a manner that is reasonably
                designed to obtain a response, as would be required by proposed Sec.
                1002.107(c)(1).
                 Finally, data on application method would assist in analyzing data
                reported under, and assessing compliance with, proposed Sec.
                1002.107(a)(20), which requires financial institutions to collect
                principal owners' ethnicity and race via visual observation or surname
                in certain circumstances. Having application method reporting will
                allow the Bureau and other data users to determine, for example, which
                applications could be subject to data collection via visual observation
                or surname (because the financial institution met with the applicant in
                person) and, together with information reported under proposed Sec.
                1002.107(a)(20), which of those applications did and did not have
                information collected that way.
                 Proposed comment 107(a)(3)-1 would clarify that a financial
                institution complies with proposed Sec. 1002.107(a)(3) by reporting
                the means by which the applicant submitted the application from one of
                the following options: in-person, telephone, online, or mail. Proposed
                comment 107(a)(3)-1 would explain how financial institutions are to
                choose which application method to report, including via a ``waterfall
                approach'' when they have contact with an applicant in multiple ways.
                 Proposed comment 107(a)(3)-1.i would provide that an financial
                institution reports the application method as ``in-person'' if the
                financial institution, or another party acting on the financial
                institution's behalf, meets with the applicant in person (for example,
                in a branch office, at the applicant's place of business, or via
                electronic media with a video component). Proposed comment 107(a)(3)-
                1.ii would provide that a financial institution reports the application
                method as ``telephone'' if the financial institution, or another party
                acting on the financial institution's behalf, did not meet with the
                applicant in person as described in proposed comment 1002.107(a)(3)-1.i
                but communicated with the applicant by telephone or via electronic
                media without a video component.
                 Proposed comment 107(a)(3)-1.iii would provide that a financial
                institution reports the application method as ``online'' if it, or
                another party acting on the financial institution's behalf, did not
                meet with the applicant in person and did not communicate with the
                applicant by telephone as described in proposed comments
                1002.107(a)(3)-1.i and ii but communicated with the applicant through
                an online application, electronic mail, text message, and/or some other
                form of online communication. Proposed comment 107(a)(3)-1.iv would
                provide that a financial institution reports the application method as
                ``mail'' if the financial institution, or another party acting on the
                financial institution's behalf, did not meet with the applicant in
                person and did not communicate with the applicant by telephone, as
                described in proposed comments 1002.107(a)(3)-1.i and ii, but
                communicated with the applicant in writing via United States mail,
                courier or overnight service, or hand-delivery (including hand-delivery
                of documents via an overnight drop box or at a teller window).
                 Proposed comment 107(a)(3)-2 would provide guidance on what
                application method a financial institution would report for
                interactions with applicants both online and by mail. In short, a
                financial institution would report application method based on the
                method by which it, or another party acting on its behalf, requested
                the ethnicity, race, and sex of the applicant's principal owners
                pursuant to proposed Sec. 1002.107(a)(20). Proposed comment 107(a)(3)-
                2 also would provide separate examples of when the application method
                should be reported as ``online'' and ``mail.''
                 The Bureau seeks comment on its proposed approach to this data
                point.
                107(a)(4) Application Recipient
                 ECOA section 704B(e)(2)(H) authorizes the Bureau to require
                financial institutions to compile and maintain ``any additional data
                that the Bureau determines would aid in fulfilling the purposes of
                [section 1071].'' Although the Bureau did not address application
                recipient as a potential data point under consideration in the SBREFA
                Outline, the Bureau believes that application recipient data would aid
                in fulfilling the purposes of section 1071, as explained below.
                 Financial institutions employ a wide variety of lending models in
                extending credit to small businesses. During the SBREFA process, the
                Bureau explored section 1071's requirement to collect and report
                certain data for any ``application to a financial institution for
                credit,'' which could be read as applying to more than one financial
                institution when an intermediary provides the application to another
                financial institution that takes final action on the application.\552\
                See the section-by-section analysis of proposed Sec. 1002.109(a)(3)
                below for a discussion of proposed reporting obligations where multiple
                financial institutions are involved in a covered credit transaction.
                Financial institutions, of course, may receive applications for credit
                directly from small businesses--depending on the institution,
                applications may be submitted online, by telephone, by mail, or in
                person at a branch location, the applicant's place of business, or some
                other place. In addition, some financial institutions may receive
                applications routed to them through third parties, such as brokers or
                vehicle or equipment dealers. Some financial institutions issue credit
                cards branded for particular retailers, for which applications are
                taken in person at the retailer's store locations. Some brokers and
                dealers may send applications to a single financial institution, while
                others may send them to multiple financial institutions at the same
                time. In these types of application scenarios involving third parties,
                the financial institution may not directly interact with the
                [[Page 56441]]
                applicant at all during the application process.
                ---------------------------------------------------------------------------
                 \552\ ECOA section 704B(b).
                ---------------------------------------------------------------------------
                 In the SBREFA Outline, the Bureau noted the wide array of small
                business lending models operating today. The Bureau noted that certain
                section 1071 requirements might apply to intermediaries in the
                application chain.\553\ As discussed in the section-by-section analysis
                of proposed Sec. 1002.109(a)(3) below, several SERs voiced support for
                aligning reporting requirements for financial institutions that are not
                the lender of record with the approach taken for HMDA reporting in the
                Bureau's Regulation C. The Bureau did not receive feedback from SERs on
                whether data concerning the existence of intermediaries should be
                collected. Other stakeholders did urge the Bureau, however, to provide
                clear rules for lenders that work with partners, including when lenders
                should, and need not, collect 1071 data. Stakeholders also urged the
                Bureau to provide clear rules that would work for a broad array of
                business models, including lenders working with partners and agents.
                ---------------------------------------------------------------------------
                 \553\ SBREFA Outline at 13.
                ---------------------------------------------------------------------------
                 The Bureau believes that information regarding how an application
                is received would enhance small business lending data and further the
                purposes of section 1071. Pursuant to its authority under ECOA section
                704B(e)(2)H), the Bureau is thus proposing Sec. 1002.107(a)(4), which
                would require financial institutions to collect and report the
                application recipient, meaning whether the applicant submitted the
                covered application directly to the financial institution or its
                affiliate, or whether the applicant submitted the covered application
                indirectly to the financial institution via a third party. Proposed
                comment 107(a)(4)-1 would clarify that if a financial institution is
                reporting actions taken by its agent consistent with proposed comment
                109(a)(3)-3, then the agent is considered the financial institution for
                the purposes of proposed Sec. 1002.107(a)(4).
                 The Bureau believes that collecting data on application recipient,
                in combination with application method, as discussed above, would
                improve the market's understanding of how small businesses interact
                with financial institutions when applying for credit which, in turn,
                would facilitate fair lending analysis, including identifying risks in
                small business lending. Information about application method and
                whether the application was submitted directly or indirectly also would
                promote the community and business development purposes of the statute
                by improving the public's understanding of the structure of small
                business lending originations across the market, the methods by which
                credit is originated for particular groups or underserved markets, and
                trends over time (for example, to the extent applicant preferences
                shift from in-person to online interactions). It will also be helpful
                for the Bureau and data users to know the relationship between the
                covered financial institution and the applicant in the context of
                certain other collected and reported data.
                 The Bureau also believes that collecting and reporting information
                on the application recipient may facilitate fair lending analysis
                because particular business models may provide more or less reliable
                information with respect to the ethnicity, race, and sex of the
                principal owners of the applicant. In addition, the Bureau believes
                that collecting and reporting information on the application recipient
                may assist with an understanding of the business and community
                development needs of an area or applicant. For instance, the proposed
                collection of application recipient may help users of 1071 data
                understand whether financial institutions making credit decisions are
                directly interacting with the applicant and/or generally operate in the
                same community as the applicant. Finally, the Bureau expects that
                financial institutions know and track how they receive applications for
                credit from small businesses and thus does not believe that this data
                point should be difficult for financial institutions to collect and
                report.
                 The Bureau seeks comment on its proposed approach to this data
                point.
                107(a)(5) Credit Type
                Background
                 Section 1071 requires financial institutions to collect and report
                ``the type and purpose of the loan or other credit being applied for.''
                \554\ (The credit purpose data point is addressed in proposed Sec.
                1002.107(a)(6).) For HMDA reporting, Regulation C requires numerous
                data points that indicate the type of credit applied for or originated:
                the type of guarantees used; lien order; loan term; the presence of
                nontraditional contract terms including balloon, interest only, and
                negative amortization payments; variable rate information; open-end
                status; and reverse mortgage status.\555\ Section 1071 provides no
                additional information or details regarding what aspects of credit type
                should be collected and reported.
                ---------------------------------------------------------------------------
                 \554\ ECOA section 704B(e)(2)(B).
                 \555\ Regulation C Sec. 1003.4(a)(2), (14), (25), (27), (28),
                (37), and (38).
                ---------------------------------------------------------------------------
                SBREFA Proposals Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated it was considering
                proposing that financial institutions report the loan/credit type data
                point via three sub-components: (1) Type of Loan Product (chosen from a
                specified list); (2) Type of Guarantee (chosen from a specified list);
                and (3) Loan Term (in months, or using ``Not Applicable'' for products
                that do not have a loan term and for applications that did not specify
                a loan term). The SBREFA Outline included lists of types of loan
                product and types of guarantees.\556\
                ---------------------------------------------------------------------------
                 \556\ SBREFA Outline at 26-27.
                ---------------------------------------------------------------------------
                 The Bureau explained in the SBREFA Outline that a separate category
                for the presence of a guarantee was included in recognition of the fact
                that a guaranteed loan is often made as a counteroffer for either a
                requested loan by the applicant or because the applicant does not
                qualify for a conventional loan.\557\ Having guarantee status captured
                as a feature of loan type therefore would provide useful information.
                The Bureau also noted that some borrowers specifically request a
                government guaranteed loan program and/or receive a loan from a
                financial institution that only participates in such a program.\558\
                ---------------------------------------------------------------------------
                 \557\ Id.
                 \558\ Id.
                ---------------------------------------------------------------------------
                 For reporting when an application requests more than one type of
                loan product, the Bureau stated in the SBREFA Outline that it was
                considering whether to propose that (1) financial institutions choose
                up to three items from the subcomponent lists for the Loan Type data
                point if there is only one application and multiple products/
                guarantees/terms were asked for; or (2) financial institutions report
                separate applications/originations for each loan type requested or
                originated. The Bureau explained that financial institutions would be
                able to choose more than one guarantee for originated or approved but
                not accepted credit. For loan product and loan term, however, financial
                institutions would report only one of each subcomponent on originated
                credit or credit approved but not accepted.\559\
                ---------------------------------------------------------------------------
                 \559\ Id. at 27.
                ---------------------------------------------------------------------------
                 A number of SERs requested certain products be added to the
                ``product type'' list; this feedback generally aligned with feedback
                regarding product coverage (see the section-by-section analysis of
                proposed Sec. 1002.104 above). Two SERs suggested that line increases
                should be
                [[Page 56442]]
                excluded. Some SERs requested that the Bureau permit multiple types of
                guarantees to be selected for a single application, and one SER
                suggested that FHA guarantees be added to the guarantee list. One SER
                explained that government guarantees and personal guarantees are
                different--the government guarantee being a credit enhancement and a
                personal guarantee being a form of collateral.
                 The SBREFA Panel recommended that the Bureau consider modifying the
                product type and guarantee lists in accordance with the various
                suggestions made by SERs. The Panel also recommended that the Bureau
                seek comment on how financial institutions currently handle increases
                in lines of credit and how best to require reporting of this data point
                for multiple lines of credit within the same account.\560\
                ---------------------------------------------------------------------------
                 \560\ SBREFA Panel Report at 45.
                ---------------------------------------------------------------------------
                 The Bureau also received feedback from other stakeholders regarding
                this data point. A community group commenter stated that the three data
                fields making up this data point are appropriate choices because each
                is necessary separately and in combination to help determine whether
                lenders are responding to the needs for credit by offering affordable
                and sustainable products to traditionally underserved small businesses.
                Commenters requesting that additional products be covered by the rule,
                such as MCAs, likewise said those products would need to be added to
                the loan product list. Another commenter stated that the Bureau should
                also expand the number of guarantees that a financial institution can
                select because creditors will sometimes stack four or five guarantees
                on a single loan product.
                 One commenter stated that the ``type and purpose of the financing''
                are fluid in the application process, and the Bureau should make it
                clear that high-level, general, or categorical information is
                sufficient for these data points. Other commenters appreciated the
                inclusion of ``other,'' ``unknown,'' and ``other/unknown'' in the field
                lists to facilitate compliance. One commenter asked that the Bureau
                provide clear guidance on how this data point should be reported, and
                another stated that reporting this data point should not be costly if
                it is defined simply and left unchanged.
                 Treatment of multiple products requested at the same time.
                Regarding how a single request for multiple loan/credit products should
                be reported, some commenters supported reporting separate applications
                while others supported requiring reporting as a single application. One
                commenter suggested that the Bureau should accommodate both approaches.
                Another commenter remarked that if a business is applying for multiple
                products, the basic information is going to be the same, the only
                difference would be which product is funded. This same commenter
                suggested that if multiple applications are reported, that will
                overinflate the data points as the business does not have three
                separate applications, but only one application for different products.
                This commenter further pointed out that there are instances where a
                business is only applying for a loan but ends up liking the terms of a
                line of credit, and asked whether that change in decision would become
                a new application.
                Proposed Rule
                 The Bureau is proposing in Sec. 1002.107(a)(5) to require that
                financial institutions collect and report the following information
                regarding the type of credit applied for or originated: (i) The credit
                product; (ii) The type or types of guarantees that were obtained for an
                extension of credit, or that would have been obtained if the covered
                credit transaction were originated; and (iii) The length of the loan
                term, in months, if applicable. These aspects of credit type are
                discussed in turn below. This proposal is consistent with the approach
                presented in the SBREFA Outline, and would require the financial
                institution to choose the credit product and guarantee(s) from a
                specified list. (These lists are provided in the commentary
                accompanying proposed Sec. 1002.107(a)(5).) The lists include choices
                for ``Other'' and ``Not provided by applicant and otherwise
                undetermined,'' as appropriate, to facilitate compliance. Based on the
                feedback from SERs and other stakeholders, and consistent with the
                SBREFA Panel's recommendation to consider modifying the product type
                and guarantee lists in accordance with the suggestions made by SERs,
                the Bureau has updated the lists to reflect additional credit products
                and types of guarantees. The Bureau is also proposing to use the term
                ``credit type'' for this data point, rather than the SBREFA Outline
                term ``loan/credit type,'' for clarity and consistency with terminology
                used elsewhere in the proposal.
                 The Bureau believes that it is reasonable to interpret the
                statutory term ``credit type'' to comprise the proposed three data
                fields, because they are critical to understanding the nature of small
                business credit applied for and provided, as explained below. For the
                reasons discussed herein, the Bureau believes that the subcategories of
                credit product (including collateral), guarantee type, and loan term
                would aid in fulfilling the purposes of section 1071. Financial
                institutions generally have all of the information required for this
                data point when they process applications (and the reporting regime
                would be sufficiently flexible when they do not), so the Bureau does
                not believe there is anything in this approach that would impose
                particular operational difficulty. Additionally, the Bureau believes it
                is reasonable to interpret type of credit ``applied for'' to include
                the type of credit actually originated when an application results in
                an extension of credit.
                 The Bureau seeks comment on its proposed approach to the credit
                type data point, including the lists of products and guarantees
                proposed and the other specific requests for input below.
                 Credit product. The first data field the Bureau is proposing to
                include in the credit type data point is the credit product (i.e., a
                commonly understood category of small business lending like term loans
                or lines of credit) which the Bureau considers to be an integral part
                of the statutory requirement to collect credit type. The Bureau
                believes information about the various products sought by applicants
                would further the purposes of section 1071 by demonstrating, for
                example, how small businesses of different sizes or in different
                sectors choose to pursue, or ultimately access, different forms of
                credit.
                 The Bureau distinguishes between secured and unsecured term loans
                and lines of credit in its list of credit products because it believes
                that whether a term loan or line of credit is collateralized can have
                such a significant effect on things like approval rates and pricing
                that secured and unsecured products fundamentally differ in kind. For
                this reason, the Bureau believes that including information on the use
                of collateral in the credit product data field will help data users to
                avoid inaccurate interpretations of 1071 data. The Bureau believes that
                whether a loan is secured or unsecured will be part of an application
                or loan file and, as a result, should not be operationally difficult to
                report once a financial institution's 1071 compliance system is set up.
                 Proposed comment 107(a)(5)-1 would present the instructions for
                collecting and reporting credit product and the proposed list of credit
                products from which financial institutions would select. Proposed
                comment 107(a)(5)-1 would explain that a financial
                [[Page 56443]]
                institution complies with Sec. 1002.107(a)(5)(i) by selecting the
                credit product requested from the list provided in the comment. It
                would also explain that if an applicant requests more than one credit
                product, the financial institution reports each credit product
                requested as a separate application.
                 The issue of how to collect and report multiple products applied
                for at the same time affects several data points, but is most salient
                for credit type. The Bureau believes that requiring a separate
                application to be reported for each credit product requested would
                yield more complete and useful data, and that a financial institution
                should not experience operational difficulties in copying the relevant
                information, identical for most data points, to separate lines in the
                small business lending application register. This issue is discussed
                more fully in the section-by-section analysis of proposed Sec.
                1002.103(a), which also addresses the Bureau's proposed approach to
                multiple lines of credit within the same account.
                 The Bureau intends the list of credit products provided in proposed
                comment 107(a)(5)-1 to align with the most common types of credit
                products in small business lending. As explained above, the list for
                credit product included in the SBREFA Outline has been amended based on
                SER and stakeholder input, as well as other considerations.
                Specifically, ``Merchant cash advance'' and ``Other sales-based
                financing transaction'' have been added to the list to correspond with
                their inclusion as covered credit transactions under proposed Sec.
                1002.104. See the section-by-section analysis of proposed Sec.
                1002.104 above for a more complete discussion of products covered by
                and excluded from the Bureau's proposal. Proposed comment 107(a)(5)-6
                would explain when ``other sales-based financing transaction'' is used
                for reporting.
                 Proposed comment 107(a)(5)-1 would also explain that if the credit
                product for an application does not appear on the list of products
                provided, the financial institution selects ``other'' as the credit
                product and reports the specific product via free-form text. The Bureau
                believes that allowing financial institutions to choose ``other'' when
                the credit product for the application does not appear on the provided
                list would facilitate compliance. In addition, collecting this
                information on ``other'' credit products would assist the Bureau in
                monitoring product trends and key developments in the small business
                lending market, which the Bureau could use to inform any future
                iterations of the list.
                 Proposed comment 107(a)(5)-2 would explain that, pursuant to
                proposed Sec. 1002.107(c)(1), a financial institution is required to
                maintain procedures reasonably designed to collect applicant-provided
                data, which includes credit product. However, if a financial
                institution is nonetheless unable to collect or otherwise determine
                credit product information because the applicant does not indicate what
                credit product it seeks and the application is denied, withdrawn, or
                closed for incompleteness before a credit product is identified, the
                proposed comment would explain that the financial institution reports
                that the credit product is ``not provided by applicant and otherwise
                undetermined.'' This option is similar to the ``unknown'' response
                under consideration during SBREFA, but has been revised to more
                accurately reflect the situations in which the response would be
                appropriate. The Bureau believes that permitting use of this response
                would facilitate compliance and enhance the quality of data collected.
                As discussed above, commenting stakeholders supported the flexibility
                afforded by this kind of response.
                 Proposed comment 107(a)(5)-3 would explain how a financial
                institution reports a transaction that involves a counteroffer. The
                comment would state that if a financial institution presents a
                counteroffer for a different credit product than the product the
                applicant had initially requested, and the applicant does not agree to
                proceed with the counteroffer, a financial institution reports the
                application for the original credit product as denied pursuant to
                proposed Sec. 1002.107(a)(9). If the applicant agrees to proceed with
                consideration of the financial institution's counteroffer, the
                financial institution reports the disposition of the application based
                on the credit product that was offered, and does not report the
                original credit product applied for. The Bureau believes that, in the
                complex circumstances created by counteroffers, the meaning of the type
                of credit ``applied for'' is ambiguous, and it is reasonable to
                interpret the credit product ``applied for'' to mean the credit product
                considered via the applicant's response to the counteroffer. For a
                discussion of the Bureau's proposed treatment of counteroffers more
                generally, see the section-by-section analysis of proposed Sec.
                1002.107(a)(9) below.
                 The Bureau notes that, under its proposal, line increases would be
                reportable so that the small business lending market can be tracked
                accurately. See the section-by-section analysis of proposed Sec.
                1002.103(a) above for additional details. However, the Bureau is not
                proposing that line increases be included as a separate item in the
                credit product list.
                 The Bureau seeks comment on its proposed approach to this data
                field, including the appropriateness and usefulness of the products
                included in the list, whether there are other products that should be
                added, and the proposed treatment of counteroffers. The Bureau also
                seeks comment on how financial institutions currently handle increases
                in lines of credit and whether a line increase should be considered a
                credit product, and on whether an overdraft line of credit should be
                considered a product separate from a line of credit and thus added to
                the product list.
                 Type of guarantee. The second data field the Bureau is proposing to
                include in the credit type data point is guarantee. The Bureau
                considers the guarantee obtained for an extension of credit to be part
                of the credit ``type'' because it is fundamental to the nature of the
                transaction in that it meaningfully impacts terms such as interest
                rates, such that guarantee information could help to explain potential
                disparities in outcomes and reduce inaccurate conclusions, aiding in
                fulfilling the fair lending purpose of section 1071. Indeed, in common
                parlance, small business credit transactions are often referred to
                using the name of the guarantee (e.g., ``a 7(a) loan,'' referring to
                the SBA 7(a) guarantee). Because various types of guarantees are
                available for different credit products, the Bureau believes that
                guarantee type should constitute a separate data field within the
                credit type data point, so that data users can conduct separate
                analyses with respect to credit product and guarantees, and to avoid
                excessive complexity in the credit product data field. Information on
                the distribution of government loan guarantees (such as those provided
                in SBA programs) across different geographic areas and applicant groups
                should allow a better understanding of how those programs function on
                the ground, aiding in fulfilling the business and community development
                purpose of section 1071. As with collateral, information on guarantees
                is generally a part of an application or loan file and should not be
                operationally difficult to report once a financial institution's 1071
                compliance system is set up.
                 Proposed comment 107(a)(5)-4 would present the instructions for
                collecting and reporting type of guarantee and the proposed list of
                guarantees from which financial institutions would select.
                [[Page 56444]]
                Proposed comment 107(a)(5)-4 would explain that a financial institution
                complies with Sec. 1002.107(a)(5)(ii) by selecting the type or types
                of guarantee(s) obtained for an originated covered credit transaction,
                or that would have been obtained if the covered credit transaction were
                originated, from the list provided in the comment.
                 The Bureau intends the list of guarantee types provided in proposed
                comment 107(a)(5)-4 to align with the most common types of guarantees
                used in small business lending. As explained above, the list for
                guarantee type included in the SBREFA Outline has been amended based on
                SER and stakeholder input. Specifically, ``FHA insurance'' and ``Bureau
                of Indian Affairs guarantee,'' which the Bureau believes are often used
                with small business credit, have been added.
                 Proposed comment 107(a)(5)-4 would also explain that the financial
                institution may select, if applicable, up to a maximum of five
                guarantees for a single application or transaction. In the SBREFA
                Outline, the Bureau stated that it was considering allowing financial
                institutions to report more than one guarantee for an application or
                originated credit.\561\ The Bureau understands that small business
                credit may have more than one guarantee, such as an SBA guarantee and a
                personal guarantee, and believes that more complete information can be
                collected by requiring as many as five to be reported.
                ---------------------------------------------------------------------------
                 \561\ SBREFA Outline at 27.
                ---------------------------------------------------------------------------
                 Proposed comment 107(a)(5)-4 would also explain that if the type of
                guarantee for an application or originated transaction does not appear
                on the list of guarantees provided, the financial institution selects
                ``other guarantee,'' and reports the type of guarantee as free-form
                text. As with credit product, the Bureau believes that allowing
                financial institutions to choose ``other'' when a guarantee for the
                application does not appear on the provided list will facilitate
                compliance. In addition, collecting this information on ``other''
                guarantee types would assist the Bureau in monitoring trends in usage
                of other types of guarantees and key developments in the small business
                lending market, which the Bureau could use to inform any future
                iterations of the list.
                 Finally, proposed comment 107(a)(5)-4 would provide that if no
                guarantee is obtained or would have been obtained if the covered credit
                transaction were originated, the financial institution selects ``no
                guarantee.'' Because a small business credit transaction does not
                always involve use of a guarantee, the Bureau is not proposing to
                include ``not provided by applicant and otherwise undetermined'' as an
                option. If no guarantee is identified for an application, the financial
                institution would report ``no guarantee.''
                 In regard to the distinction one SER made between government and
                personal guarantees, the Bureau notes that the proposed rule would
                identify them as separate options within the data field, thereby
                allowing data users to analyze them independently.
                 The Bureau seeks comment on its proposed approach to this data
                field, including the appropriateness and usefulness of the items
                listed, and whether there are other guarantees that should be added.
                The Bureau also seeks comment on whether five is the appropriate upper
                limit for reporting guarantees.
                 Loan term. The third data field the Bureau is proposing to include
                in the credit type data point is the loan term. As with the consumer
                lending market, the pricing and sustainability of closed-end credit
                transactions for small businesses are associated with term length, and
                without awareness of the term of the loan, data users will have less of
                an understanding of the types of credit being made available to
                applicants. Credit with a one-month term may differ not just in degree
                but in kind from credit with a 60-month term. The Bureau thus believes
                that the length of the loan term is a fundamental attribute of the type
                of credit that applicants are seeking such that it should be treated as
                a separate data field within credit type. As with other elements of the
                credit type data point, loan term information would allow data users to
                reduce inaccurate conclusions or misinterpretations of the 1071 data,
                aiding in fulfilling both the fair lending and business and community
                development purposes of section 1071. Likewise, the loan term will be
                part of the application or loan file and should not be operationally
                difficult to report once a financial institution's 1071 compliance
                system is set up.
                 Proposed comment 107(a)(5)-5 would present the instructions for
                collecting and reporting loan term. Specifically, it would explain that
                a financial institution complies with proposed Sec.
                1002.107(a)(5)(iii) by reporting the number of months in the loan term
                for the covered credit transaction, and that the loan term is the
                number of months after which the legal obligation will mature or
                terminate. The comment would further explain how to measure the loan
                term and the possible use of rounding.
                 Proposed comment 107(a)(5)-5 would also make clear that if a credit
                product, such as a credit card, does not have a loan term, the
                financial institution reports loan term as ``not applicable.'' The
                financial institution also reports ``not applicable'' if the
                application is denied, withdrawn, or determined to be incomplete before
                a loan term has been identified. The Bureau believes that permitting
                the use of ``not applicable'' in these situations would facilitate
                compliance and aid in the collection of appropriate data. The Bureau
                believes that the proposed regulatory text and commentary described
                above would alleviate many of the concerns of the SERs and other
                commenting stakeholders regarding the credit type data point. The
                credit product and guarantee type lists have been updated using their
                input and continued Bureau consideration. Multiple types of guarantees
                would be permitted by the proposal, and FHA guarantees have been added
                to the list.
                 The Bureau believes the statutory term ``type . . . of the loan''
                to be ambiguous, and reasonably interprets the term to include the
                credit product, any guarantee obtained, and the term of a closed-end
                loan because an accurate and useful record of the ``type'' of loan or
                credit would include those data fields. In the alternative, ECOA
                section 704B(e)(2)(H) authorizes the Bureau to require inclusion of
                ``any additional data that the Bureau determines would aid in
                fulfilling the purposes of [section 1071],'' and for the reasons
                discussed above, the Bureau has also determined that the subcategories
                of credit product (including collateral), guarantee type, and loan term
                would aid in fulfilling those purposes.
                 The Bureau seeks comment on its proposed approach to this data
                field.
                107(a)(6) Credit Purpose
                Background
                 Section 1071 requires financial institutions to collect and report
                ``the type and purpose of the loan or other credit being applied for.''
                \562\ (The credit type data point is addressed in proposed Sec.
                1002.107(a)(5).)
                ---------------------------------------------------------------------------
                 \562\ ECOA section 704B(e)(2)(B).
                ---------------------------------------------------------------------------
                SBREFA Proposals Under Consideration and Feedback Received
                 The Bureau stated in the SBREFA Outline that it was considering
                proposing that financial institutions report the loan/credit purpose
                data point by choosing one or more purposes from a specified list. In
                addition to several specific business purposes, the list included
                choices for ``Other'' or
                [[Page 56445]]
                ``Unknown'' to facilitate compliance. The Bureau also explained that it
                was considering proposing that financial institutions be allowed to
                choose up to three purposes when the applicant indicates more than one
                purpose.\563\
                ---------------------------------------------------------------------------
                 \563\ SBREFA Outline at 28.
                ---------------------------------------------------------------------------
                 Some SERs stated that they collect information on loan/credit
                purpose, although the information they collect may be different from
                that in the loan/credit purpose list in the SBREFA Outline.\564\ One
                SER did, however, suggest that the Bureau's purposes list was similar
                to their list. Some SERs made suggestions of additional loan/credit
                purposes to add to the list, including for inventory loans,
                agricultural loans, and contract financing. One SER requested that the
                Bureau clarify whether this data point is intended to capture the
                purpose of the loan or the type of collateral. Another SER recommended
                combining the categories of motor vehicle finance and equipment
                finance, explaining that certain financing can span both categories
                (such as for a truck and a trailer as a combined purchase). One of the
                SERs expressed concern about possible confusion regarding credit with
                multiple purposes, and another SER suggested that the Bureau provide
                clear instructions on this data point. Another SER suggested that the
                Bureau explain how a line of credit should be reported if there can be
                multiple lines for different purposes all within the same account.
                ---------------------------------------------------------------------------
                 \564\ SBREFA Panel Report at 27.
                ---------------------------------------------------------------------------
                 The SBREFA Panel recommended that the Bureau consider modifying the
                loan/credit purpose lists in accordance with the various suggestions
                made by SERs.\565\
                ---------------------------------------------------------------------------
                 \565\ Id. at 45.
                ---------------------------------------------------------------------------
                 Like the SERs, the other stakeholders who provided feedback on the
                SBREFA Outline stated that they often collect loan purpose information
                from applicants, but that the specific loan purposes they use differ
                somewhat from those listed in the SBREFA Outline. Stakeholders
                supported the inclusion of ``other'' and ``unknown'' in the list of
                purposes, and one suggested that the Bureau add ``Not Applicable'' for
                products, such as credit cards, that do not have a specific purpose. As
                with the SERs, these stakeholders requested clarifications and several
                changes to the loan purposes list. One commenter stated that financial
                institutions should not have to present the entire list to applicants
                where a loan product's terms do not allow the loan to be used for one
                or more of the specified purposes. That same commenter suggested that
                financial institutions should be allowed to include additional purposes
                not on the list, and in the instance an applicant selects an additional
                purpose, the financial institution would include it as ``other'' unless
                the selected purpose squarely fits within, or is a subset of, a purpose
                specified on the Bureau's list.
                Proposed Rule
                 The Bureau is proposing in Sec. 1002.107(a)(6) to require that
                financial institutions collect and report the purpose or purposes of
                the credit applied for or originated. The Bureau's proposed approach
                aligns with the SBREFA Outline approach, with certain adjustments.
                First, the Bureau is proposing to use the term ``credit purpose'' for
                this data point, rather than ``loan/credit purpose,'' for clarity and
                consistency with terminology used elsewhere in the proposal. In
                addition, the proposal would provide a more complete description of the
                purposes listed, which would clarify the relation between the purpose
                of the credit and the form of collateral used. The proposal also
                reflects other changes to the list of purposes presented in the SBREFA
                Outline, as explained below.
                 Proposed comment 107(a)(6)-1 would present instructions for
                collecting and reporting credit purpose and would provide the proposed
                list of credit purposes from which financial institutions would select.
                 The proposed list is similar to the list in the SBREFA Outline
                although, consistent with the SBREFA Panel's recommendation, the Bureau
                has made adjustments based on SERs' suggestions, as well as those of
                other stakeholders and its own further consideration. First, the items
                on the SBREFA list that described types of collateral, such as
                commercial real estate, have been updated to more clearly reflect that
                the financial institution is collecting and reporting the purpose of
                the loan, and not the form of collateral, though the form of collateral
                may be referred to in describing that purpose. In addition, the listed
                purposes involving real estate now differentiate between dwelling and
                non-dwelling real estate. The Bureau believes that this distinction
                would help in collecting more precise and useful data. To facilitate
                compliance the Bureau is also proposing to add ``not applicable'' to
                the purposes list for use when an application is for a credit product
                that generally has indeterminate or numerous potential purposes, such
                as a credit card. Proposed comment 107(a)(6)-5 would also explain the
                use of ``not applicable'' as a response. In addition to the changes
                described above, the proposed list of purposes also reflects small
                nonsubstantive edits for clarity.
                 Proposed comment 107(a)(6)-2 would explain that if the applicant
                indicates or the financial institution is otherwise aware of more than
                one purpose for the credit applied for or originated, the financial
                institution would report those purposes, up to a maximum of three,
                using the list provided, in any order it chooses. Since an applicant
                may have more than one purpose for a credit transaction, the Bureau
                believes it is appropriate to require collection and reporting of more
                than one credit purpose for this data point in that situation. The
                Bureau believes that having financial institutions report up to three
                purposes would provide useful and substantive data. The Bureau also
                believes that allowing financial institutions discretion as to the
                order of the purposes would facilitate compliance.
                 Proposed comment 107(a)(6)-3 would explain that if a purpose of the
                covered credit transaction does not appear on the list of purposes
                provided, the financial institution reports ``other'' as the credit
                purpose and reports the purpose as free-form text. The Bureau believes
                that allowing financial institutions to choose ``other'' when a credit
                purpose for the application does not appear on the provided list would
                facilitate compliance. In addition, collecting this information on
                ``other'' credit purposes would assist the Bureau in monitoring trends
                in this area and key developments in the small business lending market,
                which the Bureau could use to inform any future iterations of the list.
                For efficiency and to facilitate compliance, proposed comment
                107(a)(6)-3 would also explain that if the application has more than
                one ``other'' purpose, the financial institution chooses the most
                significant ``other'' purpose, in its discretion, and reports that
                ``other'' purpose. The comment would then explain that a financial
                institution reports a maximum of three credit purposes, including any
                ``other'' purpose reported.
                 Proposed comment 107(a)(6)-4 would explain that, pursuant to
                proposed Sec. 1002.107(c)(1), a financial institution shall maintain
                procedures reasonably designed to collect applicant-provided
                information, which includes credit purpose. However, if a financial
                institution is nonetheless unable to collect or determine credit
                purpose information, the financial institution would report that the
                credit purpose is ``not provided by applicant and otherwise
                undetermined.'' The Bureau believes that permitting use of this
                response would facilitate compliance
                [[Page 56446]]
                and enhance the quality of data collected.
                 In order to facilitate compliance, the Bureau is also proposing
                comments 107(a)(6)-6 and -7. Proposed comment 107(a)(6)-6 would clarify
                that, as explained in proposed comment 104(b)-4, subpart B does not
                apply to an extension of credit that is 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. Proposed comment
                107(a)(6)-7 would clarify the collection and reporting obligations of
                financial institutions with respect to the credit purpose data point,
                explaining that the financial institution would be permitted, but not
                required, to present the list of credit purposes provided in comment
                107(a)(6)-1 to the applicant. Proposed comment 107(a)(6)-7 would
                further explain that the financial institution would also be permitted
                to ask about purposes not included on the list provided in proposed
                comment 107(a)(6)-1. Finally, proposed comment 107(a)(6)-7 would
                clarify that if an applicant chooses a purpose or purposes that are
                similar to purposes on the list provided, but uses different language,
                the financial institution would report the purpose or purposes from the
                list provided. The Bureau believes that minimizing use of free-form
                text here would improve the usefulness of the data collected and
                facilitate compliance.
                 The Bureau believes that, with the modifications discussed above,
                the list of credit purposes provided in proposed comment 107(a)(6)-1
                appropriately aligns with the purposes of credit sought in the small
                business credit market. As explained above, the Bureau has clarified
                the distinction between the purpose of the credit and the collateral
                involved, as one SER suggested. In addition, the Bureau believes that
                the explanations and instructions in the proposed commentary
                accompanying Sec. 1002.107(a)(6) should reduce any confusion as to how
                a financial institution would comply when an application involves
                multiple purposes, and in other situations. In regard to the SER
                comment about multiple lines of credit for different purposes within
                the same account, see the discussion of ``covered application'' in the
                section-by-section analysis of proposed Sec. 1002.103(a) above.
                 The Bureau seeks comment on its proposed approach to the credit
                purpose data point. In addition, the Bureau seeks comment on whether
                there are any purposes that should be added to or modified on its
                proposed list including, in particular, on the potential usefulness of
                including ``agricultural credit'' and ``overdraft line of credit'' in
                the credit purposes list. Finally, the Bureau requests comment on
                whether further explanations or instructions with respect to this data
                point would facilitate compliance.
                107(a)(7) Amount Applied For
                Background
                 Section 1071 requires financial institutions to collect and report
                ``the amount of the credit or credit limit applied for, and the amount
                of the credit transaction or the credit limit approved.'' \566\
                ---------------------------------------------------------------------------
                 \566\ ECOA section 704B(e)(2)(C).
                ---------------------------------------------------------------------------
                 The Bureau notes that for HMDA, Regulation C Sec. 1003.4(a)(7)
                requires reporting of ``the amount of the covered loan or the amount
                applied for, as applicable,'' which requires reporting of the amount
                applied for only when the credit is not originated. Because section
                1071 uses the conjunction ``and'' rather than ``or,'' the Bureau reads
                section 1071 to require collection and reporting of the amount applied
                for regardless of whether the application is ultimately approved or
                originated. (The amount approved or originated data point is addressed
                in proposed Sec. 1002.107(a)(8).)
                SBREFA Proposals Under Consideration and Feedback Received
                 The Bureau stated in the SBREFA Outline that it was considering
                requiring financial institutions to report the amount applied for data
                point using the initial amount of credit or credit limit requested by
                the applicant at the application stage, or later in the process but
                prior to the financial institution's evaluation of the credit
                request.\567\ The Bureau further explained in the SBREFA Outline that
                this method would not require reporting of amounts discussed before an
                application is made to a financial institution, but would capture the
                initial amount requested at the application stage or later, and would
                reflect the amount of the request that was evaluated by the financial
                institution in making a credit decision. In addition, if the applicant
                did not request a particular amount, but the financial institution
                underwrote the application as being for a specific amount, the
                financial institution would report the amount considered for
                underwriting. If the particular product applied for would not involve a
                specific amount requested or underwritten, the financial institution
                would report ``Not Applicable'' for this data point. Finally, the
                Bureau suggested in the SBREFA Outline \568\ that when an applicant
                responds to a ``firm offer'' that specifies an amount, which may occur
                in conjunction with a pre-approved credit solicitation, the amount
                applied for would generally be the amount of the firm offer.
                ---------------------------------------------------------------------------
                 \567\ SBREFA Outline at 28-29.
                 \568\ Id.
                ---------------------------------------------------------------------------
                 Because of the relationship between the amount applied for and the
                amount approved or originated data points, the following summary of SER
                feedback includes input on both.\569\ One SER articulated the
                importance of capturing data on both the amount applied for and the
                amount approved, stating that both data points were necessary to
                identify potentially discriminatory practices, such as discouragement,
                in the lending process. Another SER explained that the amount applied
                for could change during the iterative application process, particularly
                with a business that may not have previously had a banking relationship
                with the financial institution, but that the amount generally stayed
                consistent through underwriting. Other SERs asserted that differences
                between the amounts requested and approved were frequent, for a variety
                of reasons. One SER stated that they notify applicants of a preliminary
                offered amount, which often changes after documentation and
                underwriting. One example offered was that disparities between the
                amount applicants applied for and the amount the lenders approved may
                be attributable to collateral being assessed at a different value than
                the amount the applicants initially requested. Some SERs also remarked
                that differences in these amounts were often attributable to financial
                institutions acting as counselors or advisors to small businesses,
                including start-ups, and going back and forth until arriving at an
                amount that is appropriate given the customer's needs.
                ---------------------------------------------------------------------------
                 \569\ See SBREFA Panel Report at 27-28.
                ---------------------------------------------------------------------------
                 One SER (who supported reporting the amount initially applied for
                and the amount approved) strongly opposed reporting counteroffers,
                stating that negotiation is quite prevalent in small business lending.
                Another SER suggested that the Bureau use ranges for reporting the
                amount applied for, rather than specific numbers, and that the Bureau
                allow a financial institution to report ``not applicable'' if an
                applicant does not specify an amount requested. A SER also suggested
                there could be other potential complexities in capturing data on credit
                amount/limit the applicant applied for and credit amount/limit the
                lender approved, such as simultaneous or grouped financings involving
                multiple products, different sub-limits for each product or loan, and
                [[Page 56447]]
                a general credit limit for an entire facility. SERs asked that these
                data points be captured in a manner that took these complexities into
                account.
                 The SBREFA Panel recommended that the Bureau seek comment on
                potential methods for avoiding misinterpretations of disparities
                between the credit amount/limit applied for and the credit amount/limit
                approved.\570\
                ---------------------------------------------------------------------------
                 \570\ Id.
                ---------------------------------------------------------------------------
                 The Bureau also received feedback from other stakeholders regarding
                this data point. Industry stakeholders providing feedback on the SBREFA
                Outline emphasized that arriving at an applied for amount is a complex,
                iterative process and that the reporting requirement should be
                flexible. One stakeholder suggested that the Bureau propose to require
                reporting of the amount of the request that was evaluated by the
                financial institution in making the credit decision. That stakeholder
                echoed the comments of others when it explained that the amount of
                credit requested can change a great deal in formulating an application.
                The stakeholder further explained that some borrowers request a
                specific amount immediately, others may not arrive at a number until
                after two or three sessions, and still others may float multiple
                numbers during several conversations, trying to gauge a loan officer's
                reaction. Another stakeholder commented that an applicant's stated
                credit desires can be arbitrary and that comparing the initial amount
                requested against the amount approved could be misleading and is not a
                reliable measure of the health or efficacy of small business lending.
                Other stakeholders stated that an applicant will often or usually state
                a specific amount early on, but that the amount will usually change
                during the process for various appropriate reasons. One stakeholder
                explained that small business loans generally are not a quick affair
                and require substantial review by and interaction between the lender
                and borrower, and business credit that it is uncommon for a small
                business applicant's requested credit amount to stay the same from
                application to underwriting. One trade association stated that many
                small businesses will request a much higher loan amount than what is
                ultimately approved after evaluation of collateral, particularly in
                transactions involving real estate or equipment, and that for start-ups
                and sole proprietorships a lack of sophistication can also lead to
                initial requests being unrealistic. That trade association further
                explained that in these cases, the financial institution will work with
                the applicant to arrive at a more reasonable amount, which could take
                place over a period of weeks or months. The trade association then
                recommended that the Bureau allow reporting of an amount that is
                determined at a later stage than the first request. Finally, another
                industry stakeholder requested that the Bureau propose to allow
                reporting of the applied for amount using ranges of numbers, stating
                that applicants often request credit this way.
                 A community group stakeholder stated that the Bureau should require
                financial institutions to report the initial amount requested at the
                time of application, explaining that the amount of credit requested is
                important for the purposes of section 1071, which it described as
                including enforcing fair lending laws and assessing whether credit
                needs are met.
                 Two stakeholders supported the use of ``not applicable'' when the
                credit product does not have a specific amount or limit, and another
                stakeholder said that no ``applied for'' credit limit should be
                required for open-end products. Two other stakeholders requested that
                the Bureau allow the use of ``not applicable'' whenever an applicant
                does not request a specific amount.
                Proposed Rule
                 The Bureau is proposing in Sec. 1002.107(a)(7) to require that a
                financial institution collect and report ``the initial amount of credit
                or the initial credit limit requested by the applicant.'' Proposed
                comment 107(a)(7)-1 would explain that a financial institution is not
                required to report credit amounts or limits discussed before an
                application is made, but must capture the amount initially requested at
                the application stage or later. In addition, proposed comment
                107(a)(7)-1 would state that if the applicant does not request a
                specific amount, but the financial institution underwrites the
                application for a specific amount, the financial institution reports
                the amount considered for underwriting as the amount applied for.
                Finally, proposed comment 107(a)(7)-1 would instruct that if the
                applicant requests an amount as a range of numbers, the financial
                institution reports the midpoint of that range.
                 The Bureau is aware that there could be complexity in pinpointing
                the specific initial amount requested by an applicant in the fluid
                process of a small business credit application, which the Bureau
                acknowledges could make this data point difficult for financial
                institutions to collect and report. Nonetheless, the statute requires
                that the amount applied for be reported, and that information could be
                important for both of section 1071's statutory purposes. The Bureau
                believes that its proposed regulatory text and commentary, described
                above, would provide a flexible compliance regime for this data point
                that would accommodate different business practices. A financial
                institution would not be required to report amounts discussed before
                the application is made, which would accommodate preliminary informal
                interactions. In addition, the proposed comment's instruction on how to
                report this data point when the applicant requests a range of numbers
                would facilitate compliance in that situation and yield data that would
                be comparable to the other data collected for this data point (i.e.,
                specific numbers and not ranges of numbers). The Bureau believes that
                more precise information will be more useful and should not create
                extra difficulty for financial institutions to collect.
                 Furthermore, proposed comment 107(a)(7)-1 would address the method
                for reporting when no initial amount is requested by the applicant--
                that is, the financial institution reports the amount considered for
                underwriting as the amount applied for. The Bureau believes that this
                method would aid compliance and yield appropriate data by avoiding the
                need to report a preliminary number when a financial institution's
                business practices do not result in there being such a number to
                report. The Bureau understands that a specific amount is often not
                required by many financial institutions for products such as credit
                cards, as the financial institution assigns the credit limit as part of
                the credit evaluation process.
                 The SER and stakeholder feedback from SBREFA suggest that mandating
                reporting of an amount applied for in all cases could impose undue
                compliance burden and complicate Regulation B compliance for entities
                that do not, for certain products, currently require that the borrower
                request a specific credit amount or credit limit as part of the
                financial institution's application process. In light of the
                complexities and concerns described by the SERs and other stakeholders,
                and the Bureau's understanding that sometimes there is no amount
                underwritten to, the Bureau believes that the amount applied for data
                point should avoid interfering with this arrangement by allowing use of
                ``not applicable'' in certain instances. Thus, proposed comment
                107(a)(7)-2 would explain that if the particular product applied for
                does not involve a
                [[Page 56448]]
                specific amount requested or underwritten, the financial institution
                reports that the requirement is ``not applicable.''
                 In addition to situations in which no amount applied for is
                requested by the financial institution or underwritten to and the
                amount applied for would be ``not applicable,'' as described above, the
                Bureau understands that there may be situations where the financial
                institution requests an amount applied for but the applicant
                nonetheless does not provide one. To address this situation, proposed
                comment 107(a)(7)-2 would explain that, in compliance with proposed
                Sec. 1002.107(c)(1), a financial institution shall maintain procedures
                reasonably designed to collect applicant-provided information, which
                includes the credit amount initially requested by the applicant.
                However, if a financial institution is nonetheless unable to collect or
                otherwise determine the amount initially requested, the financial
                institution reports that the amount applied for is ``not provided by
                applicant and otherwise undetermined.'' The Bureau believes that
                providing the reporting flexibilities in proposed comment 107(a)(7)-2,
                along with the proposed reporting of the amount presented for
                underwriting when appropriate, would facilitate compliance by
                accommodating different business practices and would also allow for
                collection of useful data.
                 Proposed comment 107(a)(7)-3 would provide instructions for
                reporting the amount applied for in regard to firm offers. ``Firm
                offers'' involve solicitations to small businesses when they have been
                pre-approved for a term loan, line of credit, or credit card.\571\
                Proposed comment 107(a)(7)-3 would explain that when an applicant
                responds to a ``firm offer'' that specifies an amount or limit, which
                may occur in conjunction with a pre-approved credit solicitation, the
                financial institution reports the amount applied for as the amount of
                the firm offer, unless the applicant requests a different amount. If
                the firm offer does not specify an amount or limit and the applicant
                does not request a specific amount, the amount applied for is the
                amount underwritten by the financial institution. The Bureau believes
                that when the applicant knows the amount of the pre-approval before
                responding, that figure could appropriately be considered as the amount
                applied for. The Bureau understands that financial institutions often
                provide an amount in such solicitations. But if no amount appears in
                the pre-approved solicitation, the Bureau considers that an applicant
                responding to the firm offer has not requested a specific amount, and
                reporting of the amount underwritten would be appropriate. The Bureau's
                proposal follows the SBREFA Outline's approach under consideration for
                handling firm offers, and the SERs and other stakeholders did not
                object to this method. The Bureau seeks comment, however, on whether it
                should handle reporting of the amount applied for in connection with
                firm offers in a different manner than as set forth in this proposed
                comment, such as by requiring reporting of ``not applicable'' in
                situations where the firm offer does not specify an amount or limit and
                the applicant does not request one.
                ---------------------------------------------------------------------------
                 \571\ See 15 U.S.C. 1681a(l); see also Regulation B comment
                12(b)(7)-1 (describing offers of credit).
                ---------------------------------------------------------------------------
                 Proposed comment 107(a)(7)-4 would explain that when reporting a
                covered application that seeks additional credit amounts on an existing
                account, the financial institution reports only the additional credit
                amount sought, and not any previous amounts sought or extended. The
                Bureau believes that this comment would facilitate compliance by
                providing clear guidance on reporting in this situation, and that
                avoiding double reporting of previous amounts would result in more
                appropriate and useful data. The Bureau notes that a request to
                withdraw additional credit amounts at or below a previously approved
                credit limit amount on an existing open-end line of credit would not be
                a covered application, and so proposed comment 107(a)(7)-4 would not
                apply to such a situation.
                 The Bureau believes that the proposed regulatory text and
                commentary described above would alleviate many of the concerns of the
                SERs and other stakeholders providing feedback on the SBREFA Outline.
                The Bureau notes that the proposal would accommodate different business
                practices and the often fluid nature of amounts applied for in small
                business lending. In regard to concerns about disparities between the
                amount applied for and the amount approved or originated, section 1071
                requires the collection and reporting of the amount applied for, which
                is important for both of section 1071's statutory purposes.
                 The Bureau seeks comment on its proposed approach to the amount
                applied for data point. The Bureau also requests comment on how best to
                require reporting of amount applied for in situations involving
                multiple products or credit lines under a single credit limit. The
                Bureau also requests comment on potential methods for avoiding
                misinterpretations of disparities between the amount applied for and
                the amount approved or originated. Finally, the Bureau requests comment
                on its proposed approach to reporting when a range of numbers is
                requested.
                107(a)(8) Amount Approved or Originated
                Background
                 Section 1071 requires financial institutions to collect and report
                ``the amount of the credit or credit limit applied for, and the amount
                of the credit transaction or the credit limit approved.'' \572\ (The
                amount applied for data point is addressed in proposed Sec.
                1002.107(a)(7).) As explained in the section-by-section analysis of
                proposed Sec. 1002.107(a)(7) above, the Bureau reads section 1071 to
                require collection and reporting of the amount or limit applied for as
                well as the amount of the credit transaction or credit limit approved.
                ---------------------------------------------------------------------------
                 \572\ ECOA section 704B(e)(2)(C).
                ---------------------------------------------------------------------------
                SBREFA Proposals Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau explained that it was considering
                proposing that financial institutions report (1) the amount of the
                originated loan for a closed-end origination; (2) the amount approved
                for a closed-end loan application that is approved but not accepted;
                and (3) the amount of the credit limit approved for open-end products
                (regardless of whether the open-end product is originated or approved
                but not accepted).\573\ In light of the potential meaning of the
                statutory language, the Bureau explained that it was considering
                proposing different standards for closed-end and open-end products. In
                addition, the financial institution would report ``Not Applicable'' for
                this data point for applications that are denied, closed for
                incompleteness, or withdrawn by the applicant before a credit decision
                is made.
                ---------------------------------------------------------------------------
                 \573\ SBREFA Outline at 23.
                ---------------------------------------------------------------------------
                 The relevant SBREFA Panel Report section summarized feedback on
                both the amount applied for and the amount approved data points. For
                ease of reading, the Bureau has included the discussion of both above
                in the section-by-section analysis of proposed Sec. 1002.107(a)(7).
                The following summary focuses more on the amount approved or originated
                data point. One SER articulated the importance of capturing data on
                both the amount applied for and the amount approved, stating that both
                data points were necessary to identify practices, such as
                [[Page 56449]]
                discouragement, in the lending process. Other SERs asserted that
                differences between the amounts requested and approved were frequent,
                for a variety of reasons. One SER stated that they notify applicants of
                a preliminary offered amount, which often changes after documentation
                and underwriting. One example offered was that disparities between the
                amount applicants applied for and the amount the lenders approved may
                be attributable to collateral being assessed at a different value than
                the amount the applicants initially requested.
                 One SER (who supported reporting the amount initially applied for
                and the amount approved) strongly opposed reporting counteroffers,
                stating that negotiation is quite prevalent in small business
                lending.\574\ Another SER also suggested there could be other potential
                complexities in capturing data on credit amount/limit the applicant
                applied for and credit amount/limit the lender approved, such as
                simultaneous or grouped financings involving multiple products,
                different sub-limits for each product or loan, and a general credit
                limit for an entire facility. SERs asked that these data points be
                captured in a manner that took these complexities into account.
                ---------------------------------------------------------------------------
                 \574\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 27-28.
                ---------------------------------------------------------------------------
                 As noted in the feedback summary above, the SBREFA Panel
                recommendation addressed both the amount applied for and the amount
                approved data points. The Panel recommended that the Bureau seek
                comment on potential methods for avoiding misinterpretations of
                disparities between the credit amount/limit applied for and the credit
                amount/limit approved.\575\
                ---------------------------------------------------------------------------
                 \575\ Id. at 46.
                ---------------------------------------------------------------------------
                 Few of the stakeholders who provided written feedback on the SBREFA
                Outline objected to the reporting method under consideration for amount
                approved/originated. One commenter asked that this data point be
                reported using ranges of numbers rather than specific amounts, in order
                for it to be uniform with the method it suggested for the amount
                applied for data point. Other commenters pointed out possible confusion
                as to the definitions of closed-end and open-end credit. In addition,
                commenters stated that sometimes applicants are provided more than one
                approval amount, and one commenter suggested that in such cases the
                Bureau should require reporting of the highest approval amount when the
                credit is approved but not accepted.
                Proposed Rule
                 The Bureau is proposing in Sec. 1002.107(a)(8) that the amount
                approved or originated data point be collected and reported as follows:
                (i) For an application for a closed-end credit transaction that is
                approved but not accepted, the financial institution collects and
                reports the amount approved by the financial institution; (ii) for a
                closed-end credit transaction that is originated, the financial
                institution collects and reports the amount of credit originated; and
                (iii) for an application for an open-end credit transaction that is
                originated or approved but not accepted, the financial institution
                collects and reports the amount of the credit limit approved.
                 The Bureau's proposal follows the SBREFA Outline approach for this
                data point, with certain adjustments and clarifications. First, for
                clarity the proposed rule refers to this data point as ``amount
                approved or originated.'' In addition, the Bureau is proposing comment
                107(a)(8)-2 to explain that when a financial institution presents
                multiple approval amounts from which the applicant may choose, and the
                credit is approved but not accepted, the financial institution reports
                the highest amount approved. The Bureau believes that reporting the
                highest amount approved when credit is approved but not accepted, as
                addressed in this proposed comment, would most accurately reflect the
                amount of credit that was made available to the applicant in this
                situation.
                 Proposed comment 107(a)(8)-1 would provide general instructions for
                the amount approved or originated data point, explaining that a
                financial institution would comply with proposed Sec. 1002.107(a)(8)
                by reporting the amount approved or originated for credit that is
                originated or approved but not accepted. For applications that the
                financial institution, pursuant to proposed Sec. 1002.107(a)(9),
                reports as denied, withdrawn by the applicant, or incomplete, the
                financial institution would report that the amount approved or
                originated is ``not applicable.'' The Bureau believes that these
                instructions and providing for reporting of ``not applicable'' in
                certain circumstances will facilitate compliance for this data point
                and elicit accurate and appropriate data.
                 Proposed comments 107(a)(8)-3 and -4 would provide specific
                instructions for identifying and reporting the amount approved or
                originated for closed-end transactions, including refinancings. The
                Bureau believes that the instructions provided would facilitate
                compliance and elicit accurate and useful data.
                 Proposed comment 107(a)(8)-5 would provide instructions regarding
                counteroffers and the amount approved or originated data point,
                explaining that if an applicant agrees to proceed with consideration of
                a counteroffer for an amount or limit different from the amount for
                which the applicant applied, and the covered credit transaction is
                approved and originated, the financial institution reports the amount
                granted. Proposed comment 107(a)(8)-5 would further explain that if an
                applicant does not agree to proceed with consideration of a
                counteroffer or fails to respond, the institution reports the action
                taken on the application as denied and reports ``not applicable'' for
                the amount approved or originated. The proposed comment would then
                provide a reference to proposed comment 107(a)(9)-2, which discusses
                the action taken data point in relation to counteroffers. For a more
                complete discussion of how the proposed rule would treat reporting
                obligations for applications involving counteroffers, see the section-
                by-section analysis of proposed Sec. 1002.107(a)(9) below (action
                taken).
                 Most of the SER feedback on the amount approved or originated data
                point focused on its relation to the amount applied for data point.
                That issue is discussed in the section-by-section analysis of proposed
                Sec. 1002.107(a)(7) above (amount applied for). One SER also expressed
                concern about reporting counteroffers in relation to the amount
                approved or originated data point. The Bureau believes that, as
                explained above, proposed comment 107(a)(8)-5 provides an appropriate
                and manageable method for reporting amount approved or originated in
                counteroffer situations. Other stakeholders asked that the Bureau take
                into account the complexity of multiple product or account situations.
                The Bureau has done so in relation to its treatment of covered
                applications, discussed in the section-by-section analysis of proposed
                Sec. 1002.103(a) above. In regard to the comment concerning confusion
                between closed-end and open-end credit, the Bureau is proposing to
                define these terms clearly in the regulatory text at proposed Sec.
                1002.102(e) and (n). As for the suggestion that the amount approved or
                originated data point be reported using ranges of numbers (for
                consistency with its request to report the amount applied for data
                point using ranges), the Bureau is not proposing to have financial
                institutions report the amount applied for using ranges of numbers,
                though it
                [[Page 56450]]
                does seek comment on this possibility in the section-by-section
                analysis of proposed Sec. 1002.107(a)(7) above.
                 The Bureau reads the statutory language ``the amount of the credit
                transaction or the credit limit approved'' to require the amount of the
                credit limit approved to be reported for open-end applications, and the
                amount of the credit transaction to be reported for closed-end
                applications. The Bureau believes the phrase ``the amount of the credit
                transaction or the credit limit approved'' to be ambiguous in regard to
                closed-end transactions because the most common meaning of the word
                ``transaction'' in the context for closed-end credit transactions would
                be an originated loan. Thus, the Bureau reasonably interprets the
                statute as requiring reporting of the amount originated for closed-end
                credit transactions. In the alternative, section 1071 authorizes the
                Bureau to include any ``additional data that the Bureau determines
                would aid in fulfilling the purposes of [section 1071].'' The Bureau
                has determined that for closed-end credit transactions that are
                originated, reporting of the amount originated would aid in fulfilling
                the enforcement of fair lending laws, by indicating the credit that had
                been provided to different types of applicants in actual transactions.
                The Bureau has also determined that reporting of the amount originated
                for closed-end credit transactions would aid in fulfilling the business
                and community development purpose of section 1071 by providing a more
                complete and accurate picture of the credit actually being provided to
                different businesses and communities. In addition, in the alternative,
                the Bureau believes that it is appropriate to use its exception
                authority under ECOA section 704B(g)(2) to require the amount
                originated, rather than the amount approved, for originated closed-end
                credit transactions, because collecting data on the amount approved
                instead of the amount originated for a closed-end transaction would
                compromise the utility and quality of the data being reported, thus
                inhibiting the fair lending and business and community development
                purposes of section 1071.
                 Similarly, the Bureau has determined that for closed-end credit
                that is approved but not accepted, the amount approved would aid in
                fulfilling the purposes of section 1071. Primarily, reporting of the
                amount approved for closed-end credit would aid in fulfilling the
                enforcement of fair lending laws, by indicating the credit that had
                been offered to different types of applicants when the transaction does
                not close and there is no amount originated to report. Reporting of the
                amount approved for closed-end credit would also aid in fulfilling the
                business and community development purpose of section 1071 by providing
                a more complete picture of the credit being offered to different
                businesses and communities.
                 The Bureau seeks comment on its proposed approach to the amount
                approved or originated data point, including on the specific requests
                for input above. As recommended by the SBREFA Panel and explained in
                the section-by-section analysis of proposed Sec. 1002.107(a)(7) above,
                the Bureau requests comment on potential methods for avoiding
                misinterpretations of disparities between the credit amount or limit
                applied for and the credit amount or limit originated or approved and
                on the possible use of ranges of numbers for reporting the amount
                applied for and amount approved or originated data points. In addition,
                the Bureau requests comment on whether it would be useful and
                appropriate to require reporting of the amount approved as well as the
                amount originated for originated closed-end credit transactions.
                107(a)(9) Action Taken
                Background
                 ECOA section 704B(e)(2)(D) requires financial institutions to
                report the ``type of action taken'' on an application.
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated it was considering
                proposing five categories for reporting ``action taken'': Loan
                originated, application approved but not accepted, application denied,
                incomplete application (closed or denied), and application withdrawn by
                the applicant.\576\
                ---------------------------------------------------------------------------
                 \576\ SBREFA Outline at 29-30.
                ---------------------------------------------------------------------------
                 Action taken categories in general. Most SERs were supportive of
                the action taken categories under consideration.\577\ Several SERs
                stated that the categories align with information they currently
                collect. One SER explained that a single application could pass through
                all of these stages and expressed concern that identifying the right
                category to report may be subjective and questioned by examiners or
                auditors after the fact. Another SER asked for additional clarity on
                the difference between denied applications and incomplete applications.
                This SER also suggested adding a category for lenders to indicate if an
                applicant is rate shopping. The SBREFA Panel recommended that the
                Bureau further clarify the circumstances in which each of the action
                taken categories should be used.\578\
                ---------------------------------------------------------------------------
                 \577\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 28-29.
                 \578\ Id. at 46.
                ---------------------------------------------------------------------------
                 Of the other stakeholders that provided feedback on this issue,
                several supported the action taken codes set forth in the SBREFA
                Outline. One industry commenter stated that the data point would
                generally not be difficult or expensive to report and two commenters
                reported currently tracking some similar (though not identical) fields.
                One community group commenter underscored the importance of collecting
                action taken codes (including approvals and denials) in order to track
                demand for credit and identify potential discrimination. The commenter
                also noted current available data (Community Reinvestment Act data and
                surveys) on small business lending provides limited information on
                supply and demand. The commenter stated that capturing incomplete and
                withdrawn applications was important as it may reflect discouragement
                or discriminatory treatment, and that the approved but not accepted
                category could reflect less favorable pricing or loan terms. Two
                industry commenters suggested the Bureau further simplify the action
                taken categories by eliminating the approved but not accepted and
                incomplete categories, and including only originated, abandoned, and
                denied categories. One stakeholder suggested adding a field for other
                circumstances, such as rate shopping. Several community group
                commenters suggested the action taken categories be expanded to include
                all the HMDA action taken categories.
                 Treatment of counteroffers. In response to a question in the SBREFA
                Outline about whether counteroffers should be separately identified in
                the 1071 data set, several SERs discussed the frequency of
                counteroffers in small business lending and the potential utility of
                capturing counteroffers in 1071 data. One SER expressed concern with
                reporting each adjustment in the application process because, they
                said, not all counteroffers are memorialized in writing. In the context
                of discussions on the amount approved data point, a SER strongly
                opposed reporting counteroffers, stating that negotiation is quite
                prevalent in small business lending. The SBREFA Panel recommended the
                Bureau seek comment on whether to capture counteroffers in 1071 data,
                and if so, the best method for doing so.\579\
                ---------------------------------------------------------------------------
                 \579\ Id.
                ---------------------------------------------------------------------------
                 Other stakeholders also commented on counteroffers. Several
                industry
                [[Page 56451]]
                commenters stated that counteroffers should not be reported. The
                commenters noted that there are often multiple rounds of back-and-forth
                communications in small business lending, that capturing counteroffers
                is unnecessary as the information is practically captured in the loan
                decision and other 1071 data (such as loan amount approved), and that
                counteroffers are not necessary to show the availability of credit. If
                reported, several industry commenters suggested use of a data flag to
                simplify reporting, avoid reporting of potentially numerous
                counteroffers in a single application, and avoid the additional costs
                for financial institutions to conduct edits and validity checks on each
                separate counteroffer. Another industry representative also urged that
                if counteroffers are reported, they should be considered a single
                application. No community groups commented on this topic.
                Proposed Rule
                 The Bureau is proposing in Sec. 1002.107(a)(9) to require
                reporting of the action taken by the financial institution on the
                covered application, reported as originated, approved but not accepted,
                denied, withdrawn by the applicant, or incomplete. As discussed above,
                most SERs and other stakeholders were generally supportive of these
                categories. In addition, the Bureau is proposing to categorize all
                incomplete applications as a single category of ``incomplete''; while
                this proposed approach is not consistent with Regulation C comments
                4(a)(8)(i)-4 and -6, the Bureau is concerned about potential errors in
                the data if financial institutions report incomplete denials separate
                from notices of incompleteness. There may also be some benefit for fair
                lending analysis to reserve the denied category solely for credit-
                related denials, rather than denials that are based on incompleteness.
                As noted below, the Bureau seeks comment on reporting the
                ``incomplete'' action taken category.
                 In response to commenter suggestions, the Bureau considered
                removing or combining several action taken categories. For example, the
                Bureau considered eliminating the approved but not accepted category;
                however, because the Bureau believes data collected under this category
                would reflect demand for credit, the Bureau is retaining this category
                in its proposal. The Bureau also considered removing the category of
                incomplete applications. However, because the Bureau believes capturing
                data on incomplete applications is essential to identifying potential
                discrimination and discouragement during the application process, the
                Bureau is retaining this action taken category as well. Finally, the
                Bureau considered combining the incomplete and withdrawn categories,
                since both actions reflect an applicant's inability or affirmative
                decision not to proceed with the request for credit. However, the
                Bureau is retaining incomplete and withdrawn as separate categories, as
                a high incidence of incomplete applications could signal an issue with
                the level of assistance provided by the financial institution (for
                example, not providing reasonable support or assistance to ensure an
                applicant satisfies all credit conditions; or providing more support to
                some applicants than others). As noted below, the Bureau seeks comment
                on this issue.
                 The Bureau is not proposing additional action taken categories
                beyond what was considered in the SBREFA Outline. Although some
                commenters suggested the Bureau expand the action taken codes to those
                currently used in Regulation C (including preapprovals or purchased
                loans), the Bureau does not believe those additional fields would be
                appropriate or necessary in the context of section 1071 given the
                diversity of processes and other complexities in the small business
                lending space and because section 1071, unlike HMDA, does not expressly
                reference loan purchases.
                 The Bureau also considered, but is not proposing, adding an action
                taken category or flag for counteroffers. As noted by certain SERs and
                other commenters, it would be potentially infeasible to capture all of
                the proposed 1071 data fields for every back-and-forth counteroffer
                with an applicant, and attempting to do so would likely lead to
                confusion and data errors. The Bureau also agrees with commenter
                feedback that, even without a counteroffer flag or field, the proposed
                section 1071 data fields would capture many of the terms of accepted
                counteroffers (such as pricing, guarantee, etc.), as well as the amount
                initially requested by the applicant. Thus, the Bureau believes the
                addition of a counteroffer flag or field would provide limited useful
                information beyond what would be captured under the current proposal.
                Moreover, while a counteroffer flag or field might be useful as a
                screening tool for potential discrimination (for example, if women-
                owned businesses or minority-owned businesses are provided
                counteroffers or denied at a higher rate than male- or non-Hispanic
                white-owned businesses), a flag alone would lack any specificity to
                provide further fair lending analysis.
                 Following the SBREFA Panel's recommendation and feedback from other
                stakeholders, proposed comment 107(a)(9)-1 would provide additional
                clarity on when a financial institution should select each of the
                proposed action taken codes. The financial institution identifies the
                applicable action taken code based on final action taken on the covered
                application.
                 Proposed comment 107(a)(9)-2 would provide instructions for
                reporting action taken on covered applications that involve a
                counteroffer, along with examples. The Bureau's proposed treatment of
                counteroffers aligns with how counteroffers are treated under existing
                Sec. 1002.9 notification procedures. Specifically, proposed comment
                107(a)(9)-2 would state that if a financial institution makes a
                counteroffer to grant credit on terms other than those originally
                requested by the applicant and the applicant declines to proceed with
                the counteroffer or fails to respond, the institution reports the
                action taken as a denial on the original terms requested by the
                applicant. If the applicant agrees to proceed with consideration of the
                financial institution's counteroffer, the financial institution reports
                the action taken as the disposition of the application based on the
                terms of the counteroffer. This proposed approach to reporting
                counteroffers also aligns with how they are reported under Regulation
                C.\580\
                ---------------------------------------------------------------------------
                 \580\ Regulation C comment 4(a)(8)(i)-9.
                ---------------------------------------------------------------------------
                 Proposed comment 107(a)(9)-3 would discuss reporting action taken
                for rescinded transactions. Proposed comment 107(a)(9)-4 would clarify
                that a financial institution reports covered applications on its small
                business lending application register for the year in which final
                action is taken. Finally, proposed comment 107(a)(9)-5 would provide
                guidance for reporting action taken if a financial institution issues
                an approval that is subject to the applicant meeting certain
                conditions.
                 The Bureau seeks comment on proposed Sec. 1002.107(a)(9) that
                would require reporting of action taken and the associated commentary.
                The Bureau also specifically seeks comment on whether the ``withdrawn
                by applicant'' category should be merged with the ``incomplete''
                category for purposes of reporting action taken. The Bureau seeks
                comment as well on whether the Bureau's proposal to categorize all
                incomplete applications as a single category of ``incomplete'' (closed
                or denied) should instead be reported consistent with the approach in
                [[Page 56452]]
                Regulation C, which provides separate categories for denials (including
                on the basis of incompleteness) and files closed for incompleteness (if
                the financial institution sent a written notice of incompleteness). In
                addition, the Bureau seeks comment on whether counteroffers that are
                not accepted, such as a credit offer for a lower credit amount than
                requested, should be reported as ``approved but not accepted'' rather
                than ``denied,'' in order to reflect the availability of credit. As
                recommended by the SBREFA Panel, the Bureau also seeks comment on
                whether to specifically capture counteroffers in section 1071 data, and
                if so, whether to use a counteroffer flag in the data or some other
                method.
                107(a)(10) Action Taken Date
                 In addition to requiring financial institutions to collect and
                report the type of action they take on an application, as discussed in
                the section-by-section analysis of proposed Sec. 1002.107(a)(9) above,
                ECOA section 704B(e)(2)(D) requires financial institutions to collect
                and report the ``date of such action.''
                 In the SBREFA Outline, the Bureau indicated that it was considering
                proposing that the action taken date be reported with a day, month, and
                year, and requested feedback on potential challenges financial
                institutions may have in identifying such date for each of the action
                taken categories.\581\ The Bureau received limited comments on this
                data point during the SBREFA process.\582\ One SER suggested that the
                Bureau provide a grace period of several days before and after the
                action taken date. Another SER recommended that the date assigned as
                the action taken date be to the best of the financial institution's
                knowledge or belief given the uncertainty in assigning a particular
                date. The Bureau received similar feedback from other stakeholders. Two
                industry stakeholders suggested that a grace period or tolerance be
                provided to ease compliance burden, similar to the tolerance under
                consideration for the ``application date'' data point. One stakeholder
                recommended that the action taken date for approved and denied loans be
                the exact date such actions occurred.
                ---------------------------------------------------------------------------
                 \581\ SBREFA Outline at 30.
                 \582\ SBEFA Panel Report at 28-29.
                ---------------------------------------------------------------------------
                 Proposed Sec. 1002.107(a)(10) would require action taken date to
                be reported as the date of the action taken by the financial
                institution. Proposed comments 107(a)(10)-1 through -5 would provide
                additional details on how to report the action taken date for each of
                the action taken categories in proposed Sec. 1002.107(a)(9). For
                example, proposed comment 107(a)(10)-1 would explain that for denied
                applications, the financial institution reports either the date the
                application was denied or the date the denial notice was sent to the
                applicant.
                 The Bureau notes that its proposed approach for this data point
                largely mirrors the Regulation C approach for action taken date in
                Sec. 1003.4(a)(8)(ii) and related commentary, with modifications to
                align with the action taken categories in proposed Sec.
                1002.107(a)(9). Regarding the request from a SER and other stakeholders
                to adopt a grace period for the action taken date data point, the
                Bureau believes that a grace period or tolerance to report the action
                taken date would not be necessary, in light of the flexibility already
                provided in proposed comments 107(a)(10)-1 through -5. Further, the
                Bureau believes that financial institutions generally already have
                policies and procedures in place to capture the date an action is taken
                in the normal course of their business operations.
                 Proposed comment 107(a)(10)-4 would explain that for covered credit
                transactions that are originated, a financial institution generally
                reports the closing or account opening date. That proposed comment also
                states that if the disbursement of funds takes place on a date later
                than the closing or account opening date, the institution may,
                alternatively, use the date of initial disbursement.
                 The Bureau seeks comment on its proposed approach to the action
                taken date data point.
                 In addition, for originated transactions, the Bureau is considering
                whether the date the application was approved should be captured in
                addition to, or instead of, the date of closing or account opening. The
                Bureau is also considering whether the date of closing or account
                opening should be reported separately from the date of disbursement of
                funds (for term loans) or funds availability (for lines of credit).
                Having these dates reported separately would permit the Bureau and
                other data users to determine the length of time elapsed between when
                an application is approved, when the closing occurred or the account
                was opened, and when the applicant actually received the loan funds or
                access to funds. Specifically, the Bureau is concerned that a lengthy
                gap between the loan approval date and the date the funds are made
                available to applicants could have adverse effects particularly on
                certain types of small businesses. For example, in agricultural lending
                where planting and harvesting seasons fall within certain time frames,
                if loan proceeds are not provided within a certain period of time after
                the financial institution receives and approves an application, the
                loan proceeds may no longer be of maximum value to the applicant. The
                Bureau seeks comment on whether it should adopt data points to capture
                application approval date and/or the date funds are disbursed or made
                available.
                107(a)(11) Denial Reasons
                Background
                 ECOA section 704B(e)(2)(H) authorizes the Bureau to require
                financial institutions to compile and maintain ``any additional data
                that the Bureau determines would aid in fulfilling the purposes of
                [section 1071].'' In addition to requiring financial institutions to
                collect and report the action taken date for denied applications, as
                discussed in the section-by-section analysis of proposed Sec.
                1002.107(a)(10) above, the Bureau is proposing to require financial
                institutions to collect and report the principal reason or reasons an
                application was denied. The Bureau believes that collection of denial
                reason information would aid in fulfilling the purposes of section
                1071, as explained below.
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, as part of its discussion regarding the
                action taken data point, the Bureau requested feedback on whether
                financial institutions would prefer to report denial reasons to help
                explain the decision on an application, and if so, whether reporting
                denial reasons should be mandatory or optional.\583\
                ---------------------------------------------------------------------------
                 \583\ SBREFA Outline at 29-30.
                ---------------------------------------------------------------------------
                 When asked whether they would prefer reporting denial reasons to
                help explain the decision on an application, some SERs expressed
                concern about reporting denial reasons.\584\ These SERs asserted that
                requiring lenders to report reasons for denial could add more burden
                than benefit, may not be useful given the number of possible reasons
                for a denial, might not shed light on the actual reasons for a denial,
                may be difficult to standardize for uniform reporting, would require
                additional processes to ensure accurate reporting, and may present
                heightened privacy concerns. One SER expressed a preference to report
                denial reasons.
                ---------------------------------------------------------------------------
                 \584\ SBREFA Panel Report at 28-29.
                ---------------------------------------------------------------------------
                 Feedback received from other stakeholders was mixed. Stakeholders
                [[Page 56453]]
                opposing reporting denial reasons expressed concerns about the privacy
                of applicants' information if such data were released to the public.
                For example, they asserted that if denial reasons were released to the
                public, such information would make it easy to identify applicants from
                small communities and expose an applicant's sensitive business
                information like insufficient cashflow. One stakeholder mentioned that
                denial reasons may encompass multiple reasons and would therefore be
                burdensome to collect and store.
                 Stakeholders in favor of optional (rather than mandatory) reporting
                of denial reasons asserted that reporting this information would be
                unnecessary and burdensome and may further push small and mid-size
                financial institutions out of small business lending, and suggested
                that, if included in the rule, reporting not be made mandatory (that
                is, financial institutions would be permitted but not required to
                report such information, at the financial institution's discretion).
                One stakeholder suggested that rural community banks under $1 billion
                be exempted from reporting denial reasons due to data privacy concerns.
                 Finally, stakeholders in favor of mandatory reporting of denial
                reasons asserted that such data provide regulators and the public with
                important--and currently unavailable--data necessary to uncover fair
                lending issues and identify underwriting factors that need to be
                addressed. They stressed that the collection of denial data (via the
                action taken data point) accompanied by robust denial reasons will
                provide small business applicants with useful and actionable
                information. In addition, commenters noted that these data will help
                identify barriers to credit for small businesses and provide deeper
                insight into the reasons why credit is denied. The SBREFA Panel did not
                make any recommendations related to denial reasons.
                Proposed Rule
                 Proposed Sec. 1002.107(a)(11) would require reporting of the
                principal reason or reasons the financial institution denied the
                covered application. Proposed comment 107(a)(11)-1 would explain that a
                financial institution complies with proposed Sec. 1002.107(a)(11) by
                reporting the principal reason or reasons it denied the application,
                indicating up to four reasons. The financial institution reports only
                the principal reason or reasons it denied the application, even if
                there are fewer than four reasons. The proposed comment provides an
                example to illustrate. The proposed comment would also state that
                reasons reported must accurately describe the principal reason or
                reasons the financial institution denied the application. Finally, the
                proposed comment provides a list of denial reasons from which financial
                institutions would select the principal reason or reasons for denying a
                covered application.
                 Proposed comment 107(a)(11)-1 also explains that a financial
                institution reports the denial reason as ``other'' where none of the
                enumerated denial reasons adequately describe the principal reason or
                reasons it denied the application, and the institution reports the
                denial reason or reasons as free-form text. The Bureau believes that
                allowing financial institutions to choose ``other'' in this situation
                would facilitate compliance. In addition, collecting information on
                ``other'' denials would assist the Bureau in monitoring trends in this
                area and key developments in the small business lending market, which
                the Bureau could use to inform any future iterations of the list.
                 Proposed comment 107(a)(11)-2 would clarify that a financial
                institution complies with proposed Sec. 1002.107(a)(11) by reporting
                that the requirement is not applicable if the action taken on the
                application, pursuant to proposed Sec. 1002.107(a)(9), is not a
                denial, and provides an example.
                 The Bureau notes that its proposed approach for this data point
                largely mirrors the Regulation C approach for denial reasons in Sec.
                1003.4(a)(16) and related commentary, with modifications to align with
                the reasons applications are denied in the small business lending
                (rather than residential mortgage lending) context.
                 Pursuant to its authority under ECOA section 704B(e)(2)(H), the
                Bureau believes that data regarding denial reasons would further the
                purposes of section 1071 by allowing data users to better understand
                the rationale behind denial decisions, help identify potential fair
                lending concerns, and provide financial institutions with data to
                evaluate their business underwriting criteria and address potential
                gaps as needed. In addition, robust data on application denial reasons
                across applicants, financial institutions, products, and communities
                could help target limited resources and assistance to applicants and
                communities, thus furthering section 1071's community development
                purpose. With respect to fair lending compliance, denial reasons data
                would help data users analyze potential denial disparities.
                 With regard to the potential additional compliance burdens SERs and
                other commenters referenced, the Bureau believes that, as a practical
                matter, most financial institutions are already documenting the
                principal reason or reasons for the denial in an adverse action notice,
                or should be prepared to do so if requested.\585\ However, the Bureau
                recognizes that if a financial institution is not currently covered by
                existing adverse action notice requirements under Regulation B, it may
                face greater challenges in reporting this information than financial
                institutions that currently provide adverse action notifications. The
                concerns raised by SERs and other stakeholders regarding the privacy
                implications of denial reasons are addressed in part VI.C.viii below.
                ---------------------------------------------------------------------------
                 \585\ Existing Sec. 1002.9(a)(3) requires creditors to provide
                the specific reasons for action taken or to notify business credit
                applicants of their right to request the reasons for denying an
                application or taking other adverse action.
                ---------------------------------------------------------------------------
                 The Bureau also believes that exempting certain financial
                institutions from the requirement to report denial reasons, or
                permitting financial institutions to report denial reasons voluntarily,
                would not be appropriate given the need for consistent and meaningful
                data to further the purposes of section 1071. In addition, the Bureau
                considered gaps in the existing small business lending data and notes
                that available survey data are often not representative across the
                industry, does not provide timely information, and does not cover all
                entities involved in small business lending.\586\ The Bureau notes that
                the 2015 HMDA Final Rule added mandatory reporting of denial reasons to
                Regulation C because the Bureau recognized that the collection of
                denial reason data could facilitate more efficient and less burdensome
                fair lending examinations.\587\
                ---------------------------------------------------------------------------
                 \586\ See 2020 Small Business Credit Survey. The survey provides
                baseline data on the financing and credit positions of small firms
                in 2020. It delivers information on small business financing needs,
                decisions, and outcomes to policymakers, lenders, and service
                providers. However, the survey is not representative because it
                surveys only employer firms (with less than 500 employees) and is
                subject to the firms' self-reporting. Also, only aggregate denial
                reasons are provided, and further breakdowns are unavailable. In
                addition, the survey provides a very limited list of denial reasons
                to survey respondents that may not correspond to denial reasons from
                financial institutions. See also Fed. Deposit Ins. Corp., Small
                Business Lending Survey (2018), https://www.fdic.gov/bank/historical/sbls/section5.pdf.
                 \587\ See 80 FR 66127, 66204-05 (Oct. 28, 2015).
                ---------------------------------------------------------------------------
                 Finally, the Bureau is aware that certain stakeholders are
                concerned that reporting denial reason data may result in fair lending
                actions against financial institutions for potential discriminatory
                [[Page 56454]]
                disparities. The Bureau, however, believes that including denial
                reasons in 1071 data might actually reduce this risk, as it would allow
                financial institutions to point to potentially legitimate reasons for
                disparities.
                 The Bureau seeks comment on its proposed approach to this data
                point, including regarding whether the denial reason categories listed
                and explained in proposed comment 107(a)(11)-1 sufficiently cover the
                common credit denial reasons in the small business lending industry. If
                not, the Bureau seeks input on other denial reason categories to
                consider including in the proposed list of denial reasons. The Bureau
                also requests further comment on the potential utility of denial reason
                data as well as on the potential burdens to industry in reporting
                denial reasons, in light of the denial reason categories it is
                proposing and the data's ability to aid in fulfilling the purposes of
                section 1071.
                107(a)(12) Pricing Information
                Background
                 ECOA section 704B(e)(2)(H) authorizes the Bureau to require
                financial institutions to compile and maintain ``any additional data
                that the Bureau determines would aid in fulfilling the purposes of
                [section 1071].'' The Bureau believes that pricing data would serve to
                further both the fair lending purpose and the business and community
                development purpose of 1071. The majority of small businesses are run
                by a single owner without extensive financial experience or expert
                staff to navigate the commercial credit marketplace, which lacks many
                of the Federal protections found in consumer lending.\588\ Heightened
                risks to fair lending and small business development may arise from
                different pricing for the same products and the selective marketing of
                higher-priced or even predatory and unsustainable products. Because
                price-setting is integral to the functioning of any market, any
                analysis of the small business lending market--including to enforce
                fair lending laws or identify community and business development
                opportunities--would be less meaningful without this information.
                ---------------------------------------------------------------------------
                 \588\ For example, TILA's standardized disclosure requirements
                and limits on linking compensation to loan terms, including pricing,
                do not apply to business loans. See, e.g., 15 U.S.C. 1639b,
                Regulation Z Sec. 1026.36 (TILA's prohibition on basing loan
                originator compensation on loan terms).
                ---------------------------------------------------------------------------
                 Research conducted for the Department of Commerce has found that
                minority-owned businesses tend to pay higher interest rates on business
                loans than those that are not minority-owned,\589\ and a recent report
                by the Federal Reserve Bank of Atlanta found that minority-owned firms
                more frequently applied for potentially higher-cost credit products,
                and were also more likely to report challenges in applying for credit
                such as being offered high interest rates.\590\ In addition, research
                conducted for the SBA has found that Black- and Hispanic-owned
                businesses were less likely to have business bank loans and more likely
                to use more expensive credit card financing.\591\ The 2020 Small
                Business Credit Survey by a collaboration of Federal Reserve Banks
                found that small business applicants to nonbank lenders, such as online
                lenders and finance companies, were more likely to report high interest
                rates or unfavorable terms than applicants to depository
                institutions.\592\ To the extent that the recovery from the COVID-19
                pandemic and resulting economic crisis is still ongoing when the
                Bureau's final 1071 rule becomes effective, and in regard to economic
                emergencies affecting small business access to credit that may occur in
                the future, tracking pricing in this segment of the market is
                particularly important.
                ---------------------------------------------------------------------------
                 \589\ U.S. Dep't of Com., Minority Business Development Agency,
                Disparities in Capital Access between Minority and Non-Minority-
                Owned Businesses: The Troubling Reality of Capital Limitations Faced
                by MBEs, at 3, 5, 21, 36-37 (2010), https://archive.mbda.gov/page/executive-summary-disparities-capital-access-between-minority-and-non-minority-businesses.html.
                 \590\ Fed. Reserve Bank of Atlanta, Report on Minority Owned
                Firms: Small Business Credit Survey (Dec. 2019), https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2019/20191211-ced-minority-owned-firms-report.pdf.
                 \591\ Alicia Robb, Financing Patterns and Credit Market
                Experiences: A Comparison by Race and Ethnicity for U.S. Employer
                Firms, at 47 (2018) (prepared for Off. of Advocacy, Small Bus.
                Admin.), https://www.sba.gov/sites/default/files/Financing_Patterns_and_Credit_Market_Experiences_report.pdf.
                 \592\ However, the survey noted that online lenders tended to
                receive applications with lower credit scores so applicant risk
                could play a role in higher interest rates for nonbank lenders. See
                2020 Small Business Credit Survey at 15.
                ---------------------------------------------------------------------------
                 The Bureau believes pricing data are important because the
                statutory data points alone offer (1) limited insight into underwriting
                disparities and (2) no insight into predatory prices or pricing
                disparities. For example, they might show that a particular market
                segment is expanding and apparently filling an important need, but this
                could actually be an area with predatory conduct. Pricing information
                would allow the Bureau and others to understand the situation more
                accurately. Data collection without pricing information could have the
                unintended consequence of incentivizing irresponsible lending, as
                providers seeking to increase representation of underserved groups
                could be encouraged to adopt high-cost models of lending.
                 Without information on pricing, data users would be unable to
                screen for fair lending pricing risks, and regulators would be less
                able to focus their enforcement and supervision resources appropriately
                on situations of greater possibility for questionable activities. In
                addition, if potential discriminatory conduct is monitored effectively
                in regard to loan approvals, but not in regard to pricing, industry
                compliance systems may focus solely on approvals and denials and ignore
                potential pricing disparities. Having pricing data available under 1071
                would also increase transparency and help demonstrate to lenders where
                business opportunities exist to offer credit to underserved markets. In
                addition, it could demonstrate to small businesses the availability of
                more affordable credit.
                SBREFA Proposal Under Consideration and Feedback Received
                 At SBREFA, the Bureau stated that it was considering proposing to
                include pricing of originated credit and credit that is approved but
                not accepted as a discretionary data point because it could further the
                fair lending purpose of section 1071 by enhancing the ability to
                effectively and efficiently enforce fair lending laws. In addition, the
                Bureau stated that pricing data could add value in promoting market
                transparency and new product development opportunities, thus furthering
                the business and community development purpose of section 1071. The
                Bureau also stated that a pricing data point could be reported on the
                basis of annual percentage rate (APR), total cost of credit (TCC),
                interest rate and total fees, or some other pricing metric. The SBREFA
                Panel recommended that, if pricing were to be part of this proposal,
                the Bureau seek comment on potential methods for avoiding
                misinterpretations of disparities in pricing data.\593\
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                 \593\ SBREFA Panel Report at 47.
                ---------------------------------------------------------------------------
                 During the SBREFA process, SERs provided various comments on the
                inclusion of pricing data in the rule.\594\ Feedback relevant to a
                specific pricing data point is discussed in the section-by-section
                analysis of proposed Sec. 1002.107(a)(12)(i) through (vi) below.
                Immediately below, the Bureau
                [[Page 56455]]
                addresses feedback relevant to reporting pricing information in
                general.
                ---------------------------------------------------------------------------
                 \594\ Id. at 31-32.
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                 Some SERs urged the Bureau to require submission of a pricing
                metric, stating, for example, that pricing data are essential to
                understanding the operation of the market and the nature of credit
                extended. Some SERs supported use of APR as a pricing metric, including
                several who stated that they currently calculate APR. One SER (a CDFI)
                stated that they disclose APR to applicants now, and that if they are
                able to easily collect and report this data point without additional
                cost and burden, other FIs should be able to do the same. Several SERs
                supported the use of APR to enable comparisons of pricing across
                various small business lending products, and suggested the Bureau look
                to State-mandated and Truth in Lending Act APR disclosures for guidance
                on methodologies. One SER supported the use of APR as the metric if
                lenders and not the Bureau did the calculation. Another SER suggested
                the Bureau collect detailed pricing information, including APR, but
                ``hold harmless'' the reporting financial institutions to ensure the
                accuracy of the data. Conversely, at least two SERs opposed using APR
                as a pricing metric; one cited the burden associated with making that
                calculation and the other said pricing information based on APR would
                be confusing to small business owners. Several SERs supported reporting
                pricing information as interest rate and fees. Two SERs preferred using
                TCC. One SER suggested that the Bureau consider allowing financial
                institutions to choose which pricing metric they prefer to report.
                 A large majority of industry stakeholders opposed inclusion of any
                discretionary data points, and they were particularly concerned about a
                pricing data point. Several stakeholders stated that a pricing data
                point would be complex and costly to implement across various product
                types. One stakeholder was concerned about contracts that bundle
                services with credit, stating that pricing data would not capture the
                true economics of the transaction. Several stakeholders were worried
                about reputational risk because pricing could be publicly reported
                without contextual information such as the nature of the collateral,
                credit scores, size of down payment, compensating deposit balances,
                bundled services, etc., that would explain the pricing variations. One
                commenter opposed including pricing data, but said that if the Bureau
                chose to do so it should also allow voluntary submission of some of
                this contextual information. One stakeholder stated that pricing of
                commercial loans is often complex and cannot be adequately analyzed
                with the limited factors proposed, which may lead to erroneous
                conclusions and have severe negative impacts on the financial industry
                from regulatory and reputational risk standpoints. A community bank
                stakeholder commented that community banks price risk on a case-by-case
                basis and asserted that if this ability to price risk appropriately is
                restricted by uninformed fair lending guidelines, the Bureau risks
                removing a large number of community banks from existence. The bank
                went on to opine that this could further reduce the ability of
                thousands of small businesses to access credit. Another bank stated
                that pricing data alone would provide an incomplete picture that could
                be easily distorted to suit the political agenda of the user. That bank
                was also concerned about disparate impact analysis or similar tools
                being used because this could be unfair to the bank or its borrowers
                considering the small data set that the reported data of this small