Small Business Lending Data Collection Under the Equal Credit Opportunity Act (Regulation B)
| Court | Consumer Financial Protection Bureau |
| Citation | 86 FR 56356 |
| Published date | 08 October 2021 |
| Section | Proposed rules |
| Record Number | 2021-19274 |
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.
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\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).
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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.
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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\
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\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\
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\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).
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[[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\
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\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.
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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\
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\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).
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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.
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\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.
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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.
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\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.
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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.
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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\
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\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.
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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\
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\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.
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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.
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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.
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\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).
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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\
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\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).
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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.
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\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.
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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).
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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.
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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\
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\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.
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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.
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[[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.
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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\
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\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).
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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.
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\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).
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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.
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\162\ Id.
\163\ 12 U.S.C. 2801 et seq.
\164\ 42 U.S.C. 3601 through 3619.
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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\
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\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).
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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\
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\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).
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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\
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\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.
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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\
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\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).
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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\
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\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\
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\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.
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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\
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\192\ 59 FR 2939, 2939 (Jan. 17, 1994).
\193\ See 42 U.S.C. 3613.
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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\
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\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).
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[[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\
---------------------------------------------------------------------------
\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\
---------------------------------------------------------------------------
\201\ ECOA section 704B(a).
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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.''
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\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.
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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\
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\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).
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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.
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\222\ 85 FR 66410 (Oct. 19, 2020).
\223\ Id. at 66459-63.
\224\ Id. at 66462.
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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\
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\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\
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\228\ 12 U.S.C. 4701(b).
\229\ 12 U.S.C. 4701(a)(1).
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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\
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\230\ 12 U.S.C. 4701(b).
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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\
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\231\ 12 CFR 1805.201(b)(1).
\232\ Id.
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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.
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\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).
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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.
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\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.
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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.
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\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/.
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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.
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\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.
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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.
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\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/.
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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.
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\243\ Public Law 104-121, 110 Stat. 857 (1996).
\244\ 5 U.S.C. 609(b).
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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\
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\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/.
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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\
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\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.
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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.
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\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.
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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.
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\249\ Feedback received from these stakeholders on the SBREFA
Outline will be placed on the public docket for this notice.
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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.
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\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.
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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\
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\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).
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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.
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\255\ 15 U.S.C. 1691(a)(1).
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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\
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\256\ 12 CFR part 1002.
\257\ Regulation B Sec. 1002.5(a)(2).
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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.
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\258\ ECOA section 704B.
\259\ ECOA section 704B(a).
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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.
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\260\ ECOA section 704B(g)(1).
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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\
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\261\ ECOA section 704B(b)(1), (b)(2), (c), (d)(1) and (2).
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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.
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\262\ 12 U.S.C. 2801 et seq.
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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\
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\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.
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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.
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\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).
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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.
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\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).
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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.
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\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.
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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.
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\269\ 12 U.S.C. 2801 et seq.
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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.
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\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).
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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\
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\271\ See generally SBREFA Panel Report.
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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.
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\272\ The SER feedback discussed herein can be found in the
SBREFA Panel Report at 17-18.
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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.
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\273\ Id.
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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.
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\290\ The Bureau's interpretations with respect to a separate
data point for small business status are discussed in the next
section.
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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.
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\291\ SBREFA Outline at 25.
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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\
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\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.
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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\
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\293\ 15 U.S.C. 1691(a).
\294\ 15 U.S.C. 1691(b)(5).
\295\ Existing Sec. 1002.5(a)(2).
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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.
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\296\ Equal Credit Opportunity Act (Regulation B) Ethnicity and
Race Information Collection, 82 FR 45680, 45684 (Oct. 2, 2017).
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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.
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\297\ Existing Sec. 1002.5(a)(4)(iii).
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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).
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\298\ 15 U.S.C. 1691b(a).
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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.
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\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.
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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.
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\300\ 12 U.S.C. 1841 et seq.
\301\ See Regulation C comment 4(a)(11)-3.
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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.
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\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).
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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.
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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\
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\306\ Public Law 101-73, section 1204(c)(3), 103 Stat. 183, 521
(1989) (12 U.S.C. 1811 note).
\307\ Id.
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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.
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\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.
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\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\
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\311\ Id. at 44.
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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\
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\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.
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\316\ SBREFA Outline at 18-19.
\317\ See 31 CFR 1010.230.
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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.
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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.
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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\
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\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.
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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.
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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\
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\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).
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\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.
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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\
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\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.''
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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\
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\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\
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\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.
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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\
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\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/.
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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.
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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.
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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.
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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).
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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.
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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.
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[[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\
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\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\
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\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.
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\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).
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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.
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\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.
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\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.
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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\
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\480\ Small Business Credit Survey of Firms Owned by People of
Color at 14.
\481\ 12 U.S.C. 5511(a).
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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\
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\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.
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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.
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\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).
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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\
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\484\ 15 U.S.C. 632.
\485\ 15 U.S.C. 632(a)(2)(C).
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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\
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\486\ 15 U.S.C. 632.
\487\ 13 CFR 121.105.
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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.
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\488\ SBREFA Outline at 14-18.
\489\ 13 CFR 121.105(b).
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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.
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\490\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 20-22.
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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\
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\491\ 15 U.S.C. 632.
\492\ 13 CFR 121.105(a)(1).
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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\
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\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.''
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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\
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\494\ See 12 U.S.C. 5493(c)(2)(A).
\495\ ECOA section 704B(a).
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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.
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\496\ ECOA section 704B(e)(2).
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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\
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\497\ 15 U.S.C. 632(a)(2)(A) and (B).
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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\
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\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).
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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\
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\502\ 13 CFR 121.903(a)(2).
\503\ 13 CFR 121.903(a)(5).
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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.
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\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).
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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).
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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).
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\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).
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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.
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\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.
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\581\ SBREFA Outline at 30.
\582\ SBEFA Panel Report at 28-29.
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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\
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\583\ SBREFA Outline at 29-30.
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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.
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\584\ SBREFA Panel Report at 28-29.
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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.
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\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.
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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\
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\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).
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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.
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\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).
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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.
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\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.
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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.
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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.
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\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 thi