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

Published date08 October 2021
Record Number2021-19274
SectionProposed rules
CourtConsumer Financial Protection Bureau
Federal Register, Volume 86 Issue 193 (Friday, October 8, 2021)
[Federal Register Volume 86, Number 193 (Friday, October 8, 2021)]
                [Proposed Rules]
                [Pages 56356-56606]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2021-19274]
                [[Page 56355]]
                Vol. 86
                Friday,
                No. 193
                October 8, 2021
                Part II Bureau of Consumer Financial Protection-----------------------------------------------------------------------12 CFR Part 1002 Small Business Lending Data Collection Under the Equal Credit
                Opportunity Act (Regulation B); Proposed Rule
                Federal Register / Vol. 86 , No. 193 / Friday, October 8, 2021 /
                Proposed Rules
                [[Page 56356]]
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                BUREAU OF CONSUMER FINANCIAL PROTECTION
                12 CFR Part 1002
                [Docket No. CFPB-2021-0015]
                RIN 3170-AA09
                Small Business Lending Data Collection Under the Equal Credit
                Opportunity Act (Regulation B)
                AGENCY: Bureau of Consumer Financial Protection.
                ACTION: Proposed rule; request for public comment.
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                SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is
                publishing for public comment a proposed rule amending Regulation B to
                implement changes to the Equal Credit Opportunity Act (ECOA) made by
                section 1071 of the Dodd-Frank Wall Street Reform and Consumer
                Protection Act (Dodd-Frank Act). Consistent with section 1071, the
                Bureau is proposing to require covered financial institutions to
                collect and report to the Bureau data on applications for credit for
                small businesses, including those that are owned by women or
                minorities. The Bureau's proposal also addresses its approach to
                privacy interests and the publication of section 1071 data; shielding
                certain demographic data from underwriters and other persons;
                recordkeeping requirements; enforcement provisions; and the proposed
                rule's effective and compliance dates.
                DATES: Comments must be received on or before January 6, 2022.
                ADDRESSES: You may submit comments, identified by Docket No. CFPB-2021-
                0015 or RIN 3170-AA09, by any of the following methods:
                 Federal eRulemaking Portal: https://www.regulations.gov.
                Follow the instructions for submitting comments.
                 Email: [email protected]. Include Docket No. CFPB-
                2021-0015 or RIN 3170-AA09 in the subject line of the message.
                 Mail/Hand Delivery/Courier: Comment Intake--Section 1071
                Small Business Lending Data Collection, Bureau of Consumer Financial
                Protection, 1700 G Street NW, Washington, DC 20552.
                 Instructions: The Bureau encourages the early submission of
                comments. All submissions should include the agency name and docket
                number or Regulatory Information Number (RIN) for this rulemaking.
                Because paper mail in the Washington, DC area and at the Bureau is
                subject to delay, and in light of difficulties associated with mail and
                hand deliveries during the COVID-19 pandemic, commenters are encouraged
                to submit comments electronically. In general, all comments received
                will be posted without change to https://www.regulations.gov. In
                addition, once the Bureau's headquarters reopens, comments will be
                available for public inspection and copying at 1700 G Street NW,
                Washington, DC 20552, on official business days between the hours of 10
                a.m. and 5 p.m. Eastern Time. At that time, you can make an appointment
                to inspect the documents by telephoning 202-435-7275.
                 All comments, including attachments and other supporting materials,
                will become part of the public record and subject to public disclosure.
                Proprietary information or sensitive personal information, such as
                account numbers or Social Security numbers, or names of other
                individuals, should not be included. Comments will not be edited to
                remove any identifying or contact information.
                FOR FURTHER INFORMATION CONTACT: Camille Gray, Paralegal Specialist;
                Tola Adenuga, Regulatory Implementation and Guidance Specialist;
                Tarrian Ellis, Honors Attorney; Jaydee DiGiovanni, Counsel; Kristine M.
                Andreassen, Pavitra Bacon, Benjamin Cady, Joseph Devlin, Amy Durant,
                Gregory Evans, David Jacobs, Kathryn Lazarev, Lawrence Lee, Kristen
                Phinnessee, or Michael Scherzer, Senior Counsels, Office of
                Regulations, at 202-435-7700 or https://reginquiries.consumerfinance.gov/. If you require this document in an
                alternative electronic format, please contact
                [email protected].
                SUPPLEMENTARY INFORMATION:
                I. Summary of the Proposed Rule
                 In 2010, Congress passed the Dodd-Frank Act. Section 1071 of that
                Act amended ECOA\1\ to require that financial institutions collect and
                report to the Bureau certain data regarding applications for credit for
                women-owned, minority-owned, and small businesses.\2\ Section 1071's
                statutory purposes are to (1) facilitate enforcement of fair lending
                laws, and (2) enable communities, governmental entities, and creditors
                to identify business and community development needs and opportunities
                of women-owned, minority-owned, and small businesses.
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                 \1\ 15 U.S.C. 1691 et seq.
                 \2\ Public Law 111-203, tit. X, section 1071, 124 Stat. 1376,
                2056 (2010), codified at ECOA section 704B, 15 U.S.C. 1691c-2.
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                 Section 1071 specifies a number of data points that financial
                institutions are required to collect and report, and also provides
                authority for the Bureau to require any additional data that the Bureau
                determines would aid in fulfilling section 1071's statutory purposes.
                Section 1071 also contains a number of other requirements, including
                those that address restricting the access of underwriters and other
                persons to certain 1071 data; recordkeeping; publication of 1071 data;
                and modifications or deletions of data prior to publication in order to
                advance a privacy interest.
                 Section 1071 directs the Bureau to prescribe such rules and issue
                such guidance as may be necessary to carry out, enforce, and compile
                data pursuant to section 1071, and permits the Bureau to adopt
                exceptions to any requirement or to exempt financial institutions from
                the requirements of section 1071 as the Bureau deems necessary or
                appropriate to carry out the purposes of section 1071. The Bureau is
                proposing to add a new subpart B to Regulation B to implement the
                requirements of section 1071.\3\ Key aspects of the Bureau's proposal
                are summarized below.
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                 \3\ The Bureau interpreted section 1071 to mean that obligations
                for financial institutions to collect, maintain, and submit data
                ``do not arise until the Bureau issues implementing regulations and
                those regulations take effect.'' See Letter from Leonard Kennedy,
                General Counsel, CFPB, to Chief Executive Officers of Financial
                Institutions under Section 1071 of the Dodd-Frank Act (Apr. 11,
                2011), https://files.consumerfinance.gov/f/2011/04/GC-letter-re-1071.pdf.
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                 If finalized, the Bureau's proposed rule would create the first
                comprehensive database of small business credit applications in the
                United States. This would include critical information about women-
                owned and minority-owned small businesses to help regulators and the
                public identify and address fair lending concerns. The database would
                also enable a range of stakeholders to better identify business and
                community development needs and opportunities for small businesses,
                including women-owned and minority-owned small businesses. Just as the
                Bureau works in other ways to help foster fairness and opportunity in
                consumer financial services markets for all consumers, the proposed
                1071 rule is structured to realize these same goals for the small
                business market--for all small businesses within the scope of the rule,
                including those that are owned by women and minorities. Research
                indicates that minority-owned small businesses face particular
                obstacles, as do those that are women-owned, but the current lack of
                comprehensive, quantitative data has made it difficult to understand
                the extent of these obstacles and address them with responsive
                [[Page 56357]]
                policy. By shining a light on lending practices in this area, the
                Bureau believes that the 1071 data would not only foster a culture of
                compliance but bring particular attention to the underserved parts of
                the small business market that have traditionally faced the greatest
                obstacles to success. In this way, the proposed rule is intended to
                help small businesses drive inclusive and equitable growth.
                 Scope. The Bureau is proposing to require financial institutions to
                collect and report 1071 data regarding applications for credit for
                small businesses, including those that are owned by women and
                minorities. The Bureau is not proposing to require that financial
                institutions collect and report data regarding applications for women-
                owned and minority-owned businesses that are not small. Because most
                existing businesses are small businesses, covering small businesses
                necessarily means nearly all women-owned and minority-owned businesses
                will also be covered. The Bureau believes that this scope is consistent
                with the statute and will allow the rule to carry out section 1071's
                purposes without requiring collection of data that would be of limited
                utility.
                 Covered financial institutions. Consistent with language from
                section 1071, the Bureau is proposing to define a ``financial
                institution'' to include any partnership, company, corporation,
                association (incorporated or unincorporated), trust, estate,
                cooperative organization, or other entity that engages in any financial
                activity. Under the proposed definition, the Bureau's 1071 rule would
                apply to a variety of entities that engage in small business lending,
                including depository institutions (i.e., banks, savings associations,
                and credit unions),\4\ online lenders, platform lenders, community
                development financial institutions (both depository and nondepository
                institutions), lenders involved in equipment and vehicle financing
                (captive financing companies and independent financing companies),
                commercial finance companies, governmental lending entities, and
                nonprofit nondepository lenders.\5\
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                 \4\ For purposes of this notice of proposed rulemaking, the
                Bureau is using the term depository institution to mean any bank or
                savings association defined by the Federal Deposit Insurance Act, 12
                U.S.C. 1813(c)(1), or credit union defined pursuant to the Federal
                Credit Union Act, 12 U.S.C. 1751 et seq., as implemented by 12 CFR
                700.2. The Bureau notes that the Dodd-Frank Act defines a depository
                institution to mean any bank or savings association defined by the
                Federal Deposit Insurance Act, 12 U.S.C. 1811 et seq.; there, that
                term does not encompass credit unions. 12 U.S.C. 5301(18)(A),
                1813(c)(1). To facilitate analysis and discussion, the Bureau is
                referring to banks and savings associations together with credit
                unions as depository institutions throughout this notice, unless
                otherwise specified.
                 \5\ The Bureau's rules, including this proposed rule to
                implement section 1071, generally do not apply to motor vehicle
                dealers, as defined in section 1029(f)(2) of the Dodd-Frank Act,
                that are predominantly engaged in the sale and servicing of motor
                vehicles, the leasing and servicing of motor vehicles, or both. 12
                U.S.C. 5519.
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                 The Bureau's proposal uses the term ``covered financial
                institution'' to refer to those financial institutions that would be
                required to comply with section 1071's data collection and reporting
                requirements. The Bureau is proposing that a covered financial
                institution would be a financial institution that originated at least
                25 covered credit transactions for small businesses in each of the two
                preceding calendar years. The Bureau is not proposing an asset-based
                exemption threshold for depository institutions, or any other general
                exemptions for particular categories of financial institutions.
                 The Bureau is also proposing to permit creditors that are not
                covered financial institutions to voluntarily collect and report data
                under section 1071 in certain circumstances.
                 Covered credit transactions. The Bureau is proposing to require
                that covered financial institutions collect and report data regarding
                covered applications from small businesses for covered credit
                transactions. The Bureau is proposing to define a ``covered credit
                transaction'' as one that meets the definition of business credit under
                existing Regulation B, with certain exceptions. Loans, lines of credit,
                credit cards, and merchant cash advances (including such credit
                transactions for agricultural purposes and those that are also covered
                by the Home Mortgage Disclosure Act of 1975 (HMDA) \6\) would all be
                covered credit transactions within the scope of this proposed rule. The
                Bureau is proposing to exclude trade credit, public utilities credit,
                securities credit, and incidental credit. Factoring, leases, consumer-
                designated credit used for business purposes, and credit secured by
                certain investment properties would also not be covered credit
                transactions.
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                 \6\ 12 U.S.C. 2801 et seq.
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                 Covered applications. The Bureau is proposing to define a ``covered
                application''--which would trigger data collection and reporting and
                related requirements--as an oral or written request for a covered
                credit transaction that is made in accordance with procedures used by a
                financial institution for the type of credit requested. This proposed
                definition of covered application is largely consistent with the
                existing Regulation B definition of that term. However, the Bureau is
                also proposing that certain circumstances would not be covered
                applications, even if they are considered applications under existing
                Regulation B. Specifically, the Bureau is proposing that a covered
                application does not include (1) reevaluation, extension, or renewal
                requests on an existing business credit account, unless the request
                seeks additional credit amounts; or (2) inquiries and prequalification
                requests.
                 Small business definition. The Bureau is proposing to define a
                ``small business,'' about whose applications for credit data must be
                collected and reported, by reference to the definitions of ``business
                concern'' and ``small business concern'' as set out in the Small
                Business Act \7\ and Small Business Administration (SBA) regulations.
                However, in lieu of using the SBA's size standards for defining a small
                business concern, the Bureau's proposed definition would look to
                whether the business had $5 million or less in gross annual revenue for
                its preceding fiscal year. The Bureau is seeking SBA approval for its
                alternate small business size standard pursuant to the Small Business
                Act.\8\
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                 \7\ 15 U.S.C. 631 et seq.
                 \8\ See 15 U.S.C. 632(a)(2)(C).
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                 Data to be collected and reported. The Bureau's proposal addresses
                the data points that must be collected and reported by covered
                financial institutions for covered applications from small businesses.
                Many of the proposed data points are specifically enumerated in section
                1071; for the others, the Bureau is proposing to use the authority
                granted by section 1071 to require financial institutions to collect
                and report any additional data that the Bureau determines would aid in
                fulfilling the purposes of section 1071. Certain of these data points
                are or could be collected from the applicant (or otherwise determined
                based on information provided or authorized by the applicant); other
                data points are based on information solely within the financial
                institution's control. The Bureau is proposing that covered financial
                institutions maintain procedures to collect applicant-provided data at
                a time and in a manner that is reasonably designed to obtain a
                response. The Bureau's proposal also addresses what financial
                institutions should do if, despite having such procedures in place,
                they are unable to obtain certain data from an applicant. A financial
                institution would be permitted to rely on statements made by an
                [[Page 56358]]
                applicant (whether in writing or orally) or information provided by an
                applicant when collecting and reporting 1071 data, although for most
                data points if the financial institution verifies the information
                provided it must report the verified information. The Bureau's proposal
                would also permit financial institutions to reuse certain previously
                collected data in certain circumstances.
                 As noted above, the Bureau's proposal includes certain data points
                that are, or could be, provided by the applicant. Some data points
                specifically relate to the credit being applied for: The credit type
                (which includes information on the credit product, types of guarantees,
                and loan term); The credit purpose; and the amount applied for. There
                are also data points that relate to the applicant's business: A census
                tract based on an address or location provided by the applicant; gross
                annual revenue for the applicant's preceding full fiscal year; the 6-
                digit North American Industry Classification System (NAICS) code
                appropriate for the applicant; the number of workers that the applicant
                has (i.e., non-owners working for the applicant); the applicant's time
                in business; and the number of principal owners of the applicant.
                 There are also data points that would be provided by the applicant
                addressing the demographics of the applicant's ownership: Whether the
                applicant is a minority-owned business; whether the applicant is a
                women-owned business; and the ethnicity, race, and sex of the
                applicant's principal owners. The Bureau refers to these data points
                collectively as an applicant's ``protected demographic information.''
                The Bureau is proposing that principal owners' ethnicity and race be
                collected from applicants using aggregate categories as well as
                disaggregated subcategories. The Bureau is proposing to permit
                principal owners to self-describe their sex (instead of or in addition
                to choosing male and/or female), and is seeking comment on whether and,
                if so, how its collection of principal owners' sex should incorporate
                sexual orientation and gender identity in light of the recent Supreme
                Court decision in Bostock v. Clayton County \9\ and the Bureau's
                subsequent ECOA interpretive rule.\10\ If an applicant does not provide
                any ethnicity, race, or sex information for any principal owners, the
                Bureau is proposing that the financial institution must collect at
                least one principal owner's race and ethnicity (but not sex) via visual
                observation or surname, but only if the financial institution meets
                with any principal owners in person or via electronic media with an
                enabled video component. The Bureau is proposing detailed instructions
                to assist financial institutions in collecting and reporting
                applicants' protected demographic information pursuant to section 1071.
                The Bureau is also proposing a sample data collection form, which would
                include a required notice to applicants that the financial institution
                cannot discriminate on the basis of an applicant's minority- or women-
                owned business status or any principal owner's ethnicity, race, or sex.
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                 \9\ 140 S. Ct. 1731 (2020).
                 \10\ 86 FR 14363 (Mar. 16, 2021).
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                 In addition, the Bureau's proposal includes data points that would
                be generated or supplied solely by the financial institution. These
                data points include, for all applications: A unique identifier for each
                application for or extension of credit; the application date; the
                application method (i.e., the means by which the applicant submitted
                its application); the application recipient (that is, whether the
                financial institution or its affiliate received the application
                directly, or whether it was received by the financial institution via a
                third party); the action taken by the financial institution on the
                application; and the action taken date. For denied applications, there
                is also a data point for denial reasons. For applications that are
                originated or approved but not accepted, there is a data point for the
                amount originated or approved, and a data point for pricing information
                (which would include, as applicable, interest rate, total origination
                charges, broker fees, initial annual charges, additional cost for
                merchant cash advances or other sales-based financing, and prepayment
                penalties).
                 Firewall. The Bureau's proposal includes a section to implement the
                requirement in section 1071 that certain data collected be shielded
                from underwriters and certain other persons; the Bureau refers to this
                as the ``firewall.'' An employee or officer of a financial institution
                or a financial institution's affiliate that is involved in making any
                determination concerning the application would be prohibited from
                accessing an applicant's responses to inquiries that the financial
                institution makes pursuant to section 1071 regarding whether the
                applicant is a minority-owned or women-owned business, and the
                ethnicity, race, and sex of the applicant's principal owners.
                 This prohibition would not apply to an employee or officer,
                however, if the financial institution determines that it is not
                feasible to limit that employee's or officer's access to an applicant's
                responses to the financial institution's inquiries regarding the
                applicant's protected demographic information, and the financial
                institution provides a notice to the applicant regarding that access.
                It would not be feasible to limit access if the financial institution
                determines that an employee or officer involved in making any
                determination concerning a covered application should have access to
                one or more applicants' responses to inquiries regarding protected
                demographic information. The notice must be provided to each applicant
                whose information will be accessed or, alternatively, the financial
                institution could provide the notice to all applicants whose
                information could be accessed. The Bureau is proposing sample language
                that a financial institution could use in providing this notice.
                 Reporting data to the Bureau; publication of data by the Bureau;
                and privacy considerations. The Bureau is proposing to require that
                1071 data be collected on a calendar year basis and reported to the
                Bureau on or before June 1 of the following year. Financial
                institutions reporting data to the Bureau would be required to provide
                certain identifying information about themselves as part of their
                submission. The Bureau is proposing to provide technical instructions
                for the submission of 1071 data in a Filing Instructions Guide and
                related materials.
                 The Bureau is proposing to make available to the public, on an
                annual basis and on the Bureau's website, the data submitted to it by
                financial institutions, subject to modifications or deletions made by
                the Bureau, at its discretion, to protect privacy interests. To
                determine whether and how the Bureau might use its discretion to modify
                or delete data prior to publication, the Bureau is proposing a
                ``balancing test'' that would assess the risks and benefits of public
                disclosure. After the Bureau receives at least one full year of 1071
                data following the compliance date of the final rule, the Bureau plans
                to issue a policy statement in which it would set forth its intended
                modifications and deletions. The Bureau is also proposing that the
                Bureau's publication of the data would satisfy financial institutions'
                statutory obligation to make data available to the public upon request.
                 Recordkeeping, enforcement, severability, and effective and
                compliance dates. The Bureau's proposal addresses issues related to
                recordkeeping and to severability of the rule. It also addresses
                enforcement of violations of the rule, along with provisions regarding
                bona fide errors
                [[Page 56359]]
                under the rule as well as several safe harbors.
                 Finally, the Bureau is proposing that its final rule to implement
                section 1071 would become effective 90 days after publication in the
                Federal Register, though compliance with the rule would not be required
                until approximately 18 months after publication in the Federal
                Register. The Bureau is also proposing several related transitional
                provisions that would permit covered financial institutions to begin
                collecting applicants' protected demographic information prior to the
                compliance date and would permit financial institutions to use a
                different time period to determine whether they will be covered by the
                rule as of the compliance date.
                II. Background
                 As discussed above, in 2010, Congress enacted the Dodd-Frank Act.
                Section 1071 of the Dodd-Frank Act, which amended ECOA, requires
                financial institutions to collect and report to the Bureau data
                regarding applications for credit for women-owned, minority-owned, and
                small businesses. Section 1071 was adopted for the dual purposes of
                facilitating fair lending enforcement and enabling communities,
                governmental entities, and creditors to identify business and community
                development needs and opportunities of such businesses. Section 1071
                complements other Federal efforts to ensure fair lending and to promote
                community development for small businesses, including through ECOA, the
                Community Reinvestment Act of 1977 (CRA),\11\ and the Community
                Development Financial Institutions (CDFI) Fund.\12\
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                 \11\ 12 U.S.C. 2901 et seq.
                 \12\ The Riegle Community Development Banking and Financial
                Institutions Act of 1994, 12 U.S.C. 4701 et seq., authorized the
                Community Development Financial Institution Fund (CDFI Fund). The
                CDFI Fund is discussed in more detail in part II.F.2.ii below.
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                 The collection and subsequent publication of more robust and
                granular data regarding credit applications for small businesses,
                including those that are women- and minority-owned, will provide much-
                needed transparency to the small business lending market. The current
                COVID-19 pandemic has shown that transparency is essential,
                particularly at a time of crisis, when small businesses, especially
                those owned by women and minorities, may be in urgent need of credit in
                order to recover from economic shocks.
                 Furthermore, in the years and decades to come, the collection and
                publication of these data will be helpful in identifying potential fair
                lending violations and in facilitating the enforcement of anti-
                discrimination laws. It will also help governments, community groups,
                financial institutions, and other stakeholders to identify
                opportunities and gaps in the market, thereby enhancing business and
                community development and boosting broad-based economic activity and
                growth.
                Overview
                 Small businesses are a cornerstone of the U.S. economy. There were
                over 30 million small businesses in the U.S. in 2017, employing almost
                half of all private sector employees.\13\ Small businesses,
                particularly start-ups, also generated 65 percent of new jobs since
                2000.\14\ Small businesses were hit hard by two major shocks in the
                last two decades. First, the Great Recession, which began in 2007,
                disproportionately affected small businesses.\15\ Between 2007 and
                2009, employment at businesses with under 50 employees fell by 10.4
                percent, compared with 7.5 percent at larger firms,\16\ while between
                2008 and 2011 lending to small firms fell by 18 percent, compared with
                9 percent at larger firms.\17\ Small businesses suffered again because
                of the COVID-19 pandemic. Around 40 percent of small businesses were
                temporarily closed in late March and early April 2020, due primarily to
                demand shocks and employee health concerns.\18\ Across the first year
                of the pandemic, ``excess'' business establishment exits from the
                market, in comparison to exits over the same period from prior years,
                numbered up to 200,000.\19\ As of mid-2021, loan approvals (other than
                for government emergency programs) still remained low, and some 845,000
                non-farm private sector jobs had not yet been recovered.\20\
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                 \13\ Off. of Advocacy, Small Bus. Admin., 2020 Small Business
                Profile (May 2020), https://cdn.advocacy.sba.gov/content/uploads/2020/06/04144214/2020-Small-Business-Economic-Profile-States-Territories.pdf (estimating 31.7 million small businesses in the
                United States).
                 \14\ Off. of Advocacy, Small Bus. Admin., Frequently Asked
                Questions About Small Business, at 1 (Oct. 2020), https://cdn.advocacy.sba.gov/wp-content/uploads/2020/11/05122043/Small-Business-FAQ-2020.pdf (SBA OA 2020 FAQs) (small businesses accounted
                for 65.1 percent of new jobs since 2000). See generally
                Congressional Research Serv., Small Business Administration and Job
                Creation (updated June 23, 2021), https://fas.org/sgp/crs/misc/R41523.pdf (discussing small business job creation); Jon Haltiwanger
                et al., Who Creates Jobs? Small Versus Large Versus Young, 95 Rev.
                Econ. Stat. 347, 347-48 (May 2013), https://direct.mit.edu/rest/article/95/2/347/58100/Who-Creates-Jobs-Small-versus-Large-versus-Young (finding that young firms, which are generally small,
                contribute disproportionately to both gross and net job creation).
                 \15\ Jason Dietrich et al., Bureau of Consumer Fin. Prot., Data
                Point: Small Business Lending and the Great Recession, at 9 (Jan.
                23, 2020), https://files.consumerfinance.gov/f/documents/cfpb_data-point_small-business-lending-great-recession.pdf (finding that small
                business lending fell sharply during the Great Recession and
                recovered slowly, still not reaching pre-Recession levels by 2017).
                 \16\ Ay[scedil]eg[uuml]l [Scedil]ahin et al., Fed. Reserve Bank
                of N.Y., Current Issues in Economics & Finance, Why Small Businesses
                Were Hit Harder by the Recent Recession, at 1 (Vol. 17, No. 4,
                2011), https://www.newyorkfed.org////_issues/ci17-4.pdf.
                 \17\ Rebel A. Cole, Off. of Advocacy, Small Bus. Admin, How Did
                the Financial Crisis Affect Small Business Lending in the United
                States?, at 2 (Nov. 2012), https://www.microbiz.org/content/ploads//04/SmallBizLending-and-FiscalCrisis.pdf.
                 \18\ Alexander W. Bartik et al., The Impact of COVID-19 on Small
                Business Outcomes and Expectations, 117 Proc. Nat'l Acad. Sci.
                17656, 17656 (July 2020), https://www.pnas.org/content/pnas/117/30/17656.full.pdf.
                 \19\ Leland D. Crane et al., Bd. of Governors of the Fed.
                Reserve Sys., Finance and Economics Discussion Series, 2020-089,
                Business Exit During the COVID-19 Pandemic: Non-Traditional Measures
                in Historical Context, at 4 (2020), https://www.federalreserve.gov/econres/feds/files/2020089r1pap.pdf (estimating excess establishment
                exits and analyzing other estimates of small business exits during
                the pandemic). The paper defines ``exit'' as permanent shutdown and
                calculates ``excess'' exits by comparing the number of exits during
                the 12-month period from March 2020 to February 2021 with previous
                years. Id. at 2-4.
                 \20\ ADP Research Inst., ADP National Employment Report (May
                2021), https://adpemploymentreport.com////May-2021.aspx (non-farm
                private sector jobs as of June 2021 as compared to Feb. 2020);
                Biz2Credit, Biz2Credit Small Business Lending Index Finds April 2021
                Non-PPP Loan Approval Rates Move Little for All Types of Lenders
                (Apr. 2021), https://www.biz2credit.com/business-lending-index/april-2021 (approvals as of May 2021).
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                 During the last two decades, the small business lending landscape
                has also transformed. Traditional providers--namely banks--
                consolidated, leading to branch closures. The number of banks in the
                U.S. has declined from over 18,000 in 1986 to under 5,200 today and the
                number of branches declined by 14 percent from 2009 to 2020.\21\
                Meanwhile, new providers and products, such as fintechs and merchant
                cash advances (MCAs), have become increasingly prevalent in the small
                business lending market. Financing by MCA providers is estimated to
                have increased from $8.6 billion in volume during 2014 to $15.3 billion
                in 2017.\22\ From 2017 to 2019, the volume may
                [[Page 56360]]
                have increased further to $19 billion.\23\ Meanwhile, financing by
                fintechs \24\ is estimated to have increased from $1.4 billion \25\ in
                outstanding balances in 2013 to approximately $25 billion \26\ in 2019.
                ---------------------------------------------------------------------------
                 \21\ Congressional Research Serv., Small Business Credit Markets
                and Selected Policy Issues, at 6 (Aug. 20, 2019), https://fas.org/sgp//misc/R45878.pdf (decline since 1986); Bruce C. Mitchell et al.,
                Nat'l Cmty. Reinvestment Coal., Relationships Matter: Small Business
                and Bank Branch Locations, https://ncrc.org/relationships-matter-small-business-and-bank-branch-locations/ (last visited Aug. 24,
                2021) (branch closures).
                 \22\ PYMNTS, How Long Can MCAs Avoid the `Loan' Label? (Jan. 20,
                2016), https://www.pymnts.com/in-depth/2016/how-long-can-mcas-avoid-the-loan-label/.
                 \23\ Paul Sweeney, Gold Rush: Merchant Cash Advances are Still
                Hot, deBanked (Aug. 18, 2019), https://debanked.com/2019/08/gold-rush-merchant-cash-advances-are-still-hot/. Although the article
                does not specify one way or the other, estimates by the underlying
                source, Bryant Park Capital, appear to reference origination volumes
                rather than outstanding balances. See Nimayi Dixit, S&P Global
                Market Intelligence, Payment Fintechs Leave Their Mark On Small
                Business Lending (Aug. 28, 2018), https://www.spglobal.com/marketintelligence/en/news-insights/research/payment-fintechs-leave-their-mark-on-small-business-lending. Depending on credit multiplier
                effects, the value of annual origination volumes could be smaller or
                greater than outstanding balances. Without information on
                outstanding balances and for the purposes of calculating a market
                size for small business financing in 2019, the Bureau assumes in
                this paper a 1:1 ratio between annual origination volumes and
                outstanding balances for MCA products. See part II.D below for
                discussion of credit multiplier effects and for market size
                calculations for MCA and other small business financing products in
                2019.
                 \24\ Fintechs are defined as ``technology companies providing
                alternatives to traditional banking services, most often exclusively
                in an online environment,'' and may overlap in part with other
                categories of financial institution, such as commercial finance
                companies and/or providers of specialized products, including
                factoring and MCAs. Brett Barkley & Mark Schweitzer, The Rise of
                Fintech Lending to Small Businesses: Businesses' Perspectives on
                Borrowing, 17 Int'l J. Cent. Banking 35, 35-36 (Mar. 2021), https://www.ijcb.org/journal/ijcb21q1a2.pdf.
                 \25\ Id. (citing Katie Darden et al., S&P Global Market
                Intelligence, 2018 US Fintech Market Report, at 5, https://www.spglobal.com/marketintelligence/en/documents/2018-us-fintech-market-report.pdf (2018 US Fintech Market Report)). This figure
                annualizes $121 million in estimated 2013 quarterly originations to
                $484 million in annual originations and scales up to estimated
                outstanding balances using the ratio between the FFIEC Call Report
                and the CRA data discussed in part II.D below.
                 \26\ 2018 US Fintech Market Report at 6. This figure scales up
                $9.3 billion in estimated 2019 credit originations for small to
                medium sized enterprise (SME) borrowers to outstanding balances
                using the ratio methodology discussed in part II.D below.
                ---------------------------------------------------------------------------
                 Both recent economic shocks and changes in patterns of small
                business financing have had fair lending and community development
                implications. In terms of the effect of economic shocks, data suggest
                that women-owned and minority-owned small businesses were impacted
                disproportionately by the economic crises of the last two decades.\27\
                Data further suggest that women-owned and minority-owned small
                businesses, compared to other small businesses, had fewer cash reserves
                and faced steeper hurdles in accessing credit that would have allowed
                them to better weather these crises.\28\
                ---------------------------------------------------------------------------
                 \27\ See part II.E below.
                 \28\ Id.
                ---------------------------------------------------------------------------
                 Regarding trends in the small business financing landscape, the
                shift away from traditional providers of small business credit toward
                newer types of providers gives rise to both potential harm and
                opportunity. In terms of potential harms, bank closures may have made
                it more difficult for small businesses, particularly women-owned and
                minority-owned small businesses, to access credit and remain open--
                particularly in low- and moderate-income areas and rural communities.
                Newer providers, often offering newer products, have less experience
                complying with both Federal and State lending laws and regulations.
                Additionally, they may use algorithms and artificial intelligence (AI),
                which may create or heighten ``risks of unlawful discrimination,
                unfair, deceptive, or abusive acts or practices . . . or privacy
                concerns.'' \29\ In addition, opaque product terms and high interest
                rates could trap business owners in cycles of debt.
                ---------------------------------------------------------------------------
                 \29\ 86 FR 16837, 16839 (Mar. 31, 2021).
                ---------------------------------------------------------------------------
                 In terms of opportunity, innovative products and lending models,
                including the use of AI, may yield benefits of more accurate, lower-
                cost, and faster underwriting, as well as expanded credit access for
                small businesses that may not have obtained credit under traditional
                credit underwriting approaches.\30\ Specifically, newer providers and
                approaches may permit those with low or nonexistent personal or
                business credit scores--including women and minorities who own or seek
                to start small businesses but on average have relatively lower personal
                credit scores than male and white business owners \31\--to more easily
                access credit.\32\ Non-traditional credit providers may help offset
                decreases in lending associated with the closure of bank branches. For
                instance, fintechs may help provide financing to small businesses in
                rural communities that lack bank branches.
                ---------------------------------------------------------------------------
                 \30\ Id. See also Patrice Ficklin et al., Bureau of Consumer
                Fin. Prot., Innovation Spotlight: Providing Adverse Action Notices
                When Using AI/ML Models (July 7, 2020), https://www.consumerfinance.gov/about-us/blog/innovation-spotlight-providing-adverse-action-notices-when-using-ai-ml-models/
                (discussing potential benefits and risks from financial institutions
                using AI in credit underwriting and other areas).
                 \31\ Geng Li, Bd. of Governors of the Fed. Reserve Sys., FEDS
                Notes: Gender-Related Differences in Credit Use and Credit Scores
                (June 22, 2018), https://www.federalreserve.gov/econres/notes/feds-notes/gender-related-differences-in-credit-use-and-credit-scores-20180622.htm (finding that single women on average have lower credit
                scores than single men); Alicia Robb, Off. of Advocacy, Small Bus.
                Admin., Minority-Owned Employer Businesses and their Credit Market
                Experiences in 2017, at 4 (July 22, 2020), https://cdn.advocacy.sba.gov/wp-content/uploads/2020/07/22172533/Minority-Owned-Employer-Businesses-and-their-Credit-Market-Experiences-in-2017.pdf (finding that Black and Hispanic small business borrowers
                are disproportionately denied credit or discouraged from applying
                for credit on the basis of their credit score).
                 \32\ See Jessica Battisto et al., Who Benefited from PPP Loans
                by Fintech Lenders?, Liberty Street Economics (May 27, 2021),
                https://libertystreeteconomics.newyorkfed.org/2021/05/who-received-ppp-loans-by-fintech-lenders.html (showing that fintech lenders were
                an important source of credit for Black owners during the COVID-19
                pandemic).
                ---------------------------------------------------------------------------
                 The precise impacts of these broader trends are not well understood
                at present because there are no comprehensive, comparable, and
                application-level data across the fragmented and complex small business
                lending market. Some small business lending data exist, provided mostly
                by Federal regulators, but available data are incomplete in certain
                ways. Some do not include lending by certain categories of
                institutions, such as smaller depository institutions. And none include
                lending by nondepository institutions, which comprises almost half of
                all small business financing.\33\
                ---------------------------------------------------------------------------
                 \33\ The Bureau estimates that nondepository private business
                financing totaled approximately $550 billion out of around $1.2
                trillion in total private outstanding balances in 2019 (47 percent).
                This $550 billion figure includes estimated financing by fintechs
                (around $25 billion), commercial finance companies (around $160
                billion), nondepository CDFIs (around $1.5 billion), MCA providers
                (around $19 billion), factors (around $100 billion), equipment
                leasing providers (around $160 billion), nondepository mortgage
                lenders originating loans for 5+ unit residential developments
                (around $30 billion), and non-financial trade creditors (around $50
                billion). There may additionally be lending by equipment and vehicle
                dealers originating loans in their own name that is not captured
                here. Public lenders include the Small Business Association (SBA),
                the Federal Housing Association (FHA), Fannie Mac and Freddie Mac,
                and the Farm Credit System (FCS), with public lending totaling
                around $210 billion in traditional lending programs plus $1 trillion
                in emergency COVID-19 SBA lending programs. See part II.D below for
                methodology and sources regarding market size estimates for each
                lending category.
                ---------------------------------------------------------------------------
                 The datasets that do exist both over- and underestimate small
                business lending in certain respects by including small dollar loans to
                non-small businesses and by excluding larger loans to small
                businesses.\34\ Further, these datasets all concern originated loans;
                they do not include information on applications that do not result in
                originated loans. Nor do they generally include borrower demographics.
                Other public, private, and nonprofit datasets offer only partial
                snapshots of particular areas of the market. Finally, much of the
                publicly available data are aggregated, which does not permit more
                granular, loan- or application-level analysis that
                [[Page 56361]]
                would facilitate fair lending or business and community development
                analysis by stakeholders other than those that collected the data. See
                part II.B below for a detailed discussion on existing data on small
                business financing.
                ---------------------------------------------------------------------------
                 \34\ See part II.B below.
                ---------------------------------------------------------------------------
                 The remainder of this part II focuses on several broad topics that
                explain, in more detail, the need for the small business lending data
                that the proposed rule to implement section 1071 would provide: (A) The
                role of small businesses in the U.S. economy; (B) existing data on
                small business financing; (C) the landscape of small business
                financing; (D) estimating the size of the small business financing
                market despite limited data; (E) the particular challenges faced by
                women-owned and minority-owned small businesses; and (F) the purposes
                and impact of section 1071.
                A. Small Businesses in the United States
                 Small businesses are an important, dynamic, and widely diverse part
                of the U.S. economy. They are critical to employment, innovation, and
                economic growth and stability, both overall and specifically for
                minority and women entrepreneurs.
                 The Small Business Act, as implemented by the SBA, defines a small
                business using size standards that generally hinge on the average
                number of employees or average annual receipts of the business concern
                and are customized industry by industry across 1,057 6-digit North
                American Industry Classification System (NAICS) codes.\35\ Size
                standards based on average number of employees are used in all
                industries in the manufacturing and wholesale trade sectors, as well as
                in certain industries across a variety of other sectors as well.
                Employee-based size standards range from 100 (used almost entirely in
                certain industries within the wholesale trade sector) to 1,000 (used in
                industries across a variety of sectors including, for example,
                petroleum refineries, automobile manufacturing, and greeting card
                publishers).\36\ Size standards based on average annual receipts are
                used in nearly all other industries, and range from $1 million (used in
                most industries in the crop production and animal production and
                aquaculture subsectors) to $41.5 million (used in industries across a
                variety of sectors including, for example, passenger car leasing,
                television broadcasting, and general medical and surgical
                hospitals).\37\
                ---------------------------------------------------------------------------
                 \35\ See Small Bus. Admin., Table of Small Business Size
                Standards Matched to North American Industry Classification System
                Codes (effective Aug. 19, 2019), https://www.sba.gov/sites/default/files/2019-08/SBA%20%20%20Size%20Standards_Effective%20Aug%2019%2C%202019_Rev.pdf.
                 \36\ See id.
                 \37\ A small number of industries use a size standard based on a
                metric other than average annual receipts or average number of
                employees. For example, the commercial banking industry (NAICS
                522110) is subject to an asset-based size standard. See id.
                ---------------------------------------------------------------------------
                 Simpler definitions of what constitutes a small business are used
                in certain contexts. For example, in certain annual research releases
                the SBA's Office of Advocacy defines a small business as one that has
                fewer than 500 employees.\38\ According to the Office of Advocacy, and
                based on this definition of a small business, there are 31.7 million
                such businesses in the U.S. that represent 99.9 percent of all U.S.
                firms and employ over 60 million Americans.\39\ Six million of these
                small businesses have paid employees, while 25.7 million are non-
                employer businesses (i.e., the owner(s) are the only people involved in
                the business).\40\ From 2000 to 2019, small businesses, particularly
                young businesses and start-ups, created 10.5 million net new jobs in
                the U.S., while large businesses created 5.6 million.\41\
                ---------------------------------------------------------------------------
                 \38\ See SBA OA 2020 FAQs at 1.
                 \39\ See id.
                 \40\ See id.
                 \41\ See id.; see also Haltiwanger et al., 95 Rev. Econ. Stat.
                at 347-48 (finding that young firms, which are generally small,
                contribute disproportionately to both gross and net job creation).
                ---------------------------------------------------------------------------
                 Nearly one third of all businesses are minority-owned and more than
                one third are women-owned, though minorities and women own a smaller
                share of employer firms. As of 2018, minorities owned over one million
                employer firms in the U.S. (amounting to 18.3 percent of all employer
                firms) \42\ and, as of 2017, approximately 8.2 million non-employer
                firms.\43\ Likewise, as of 2018, women owned about 1.1 million employer
                firms (19.9 percent of all employer firms) \44\ and, as of 2017,
                approximately 10.6 million non-employer firms.\45\
                ---------------------------------------------------------------------------
                 \42\ See Press Release, U.S. Census Bureau, Annual Business
                Survey Release Provides Data on Minority-Owned, Veteran-Owned and
                Women-Owned Businesses (Jan. 28, 2021), https://www.census.gov/newsroom/press-releases//business-survey.html.
                 \43\ Minority Bus. Dev. Agency, U.S. Dep't of Com., The Number
                of Minority Nonemployer Firms Grew by Nearly 17% between 2014 and
                2017 (Dec. 18, 2020), https://www.mbda.gov/news/press-releases/2020/12/the-number-of-minority-nonemployer (stating that the nearly 8.2
                million minority non-employer firms in the U.S. generated $279.3
                billion in revenues in 2017, and grew in number at four times the
                rate of non-minority non-employer firms between 2014 and 2017). See
                also SBA OA 2020 FAQs at 3 (showing over 7.6 million minority-owned
                non-employer firms as of 2016).
                 \44\ See Press Release, U.S. Census Bureau, Annual Business
                Survey Release Provides Data on Minority-Owned, Veteran-Owned and
                Women-Owned Businesses (Jan. 28, 2021), https://www.census.gov/newsroom/press-releases//business-survey.html.
                 \45\ See Press Release, Nat'l Women's Bus. Council, NWBC Shares
                2017 Nonemployer Statistics by Demographics Estimates for Women-
                Owned Businesses (Dec. 17, 2020), https://www.nwbc.gov/2020/12/17/nwbc-shares-2017-nonemployer-statistics-by-demographics-estimates-for-women-owned-businesses/ (also stating that these 10.6 million
                non-employer firms generate $286.1 billion in revenue, and that
                nearly half of all women-owned non-employer firms generate less than
                $10,000 in annual receipts, while only 0.05 percent generate $1
                million or more in revenue).
                ---------------------------------------------------------------------------
                 Businesses are legally structured in several ways. In 2017, 87
                percent of non-employer businesses were sole proprietorships, which
                means that the business is not distinguishable from the owner for tax
                and legal purposes; the owner receives profits directly but is also
                legally responsible for the business's obligations.\46\ Seven percent
                of non-employer businesses were partnerships, which can be structured
                to limit the personal liability of some or all owners; limited partners
                may exchange control for limited liability, while general partners that
                run the business may remain personally liable.\47\ Six percent of non-
                employer businesses were structured as corporations--4.6 percent are S-
                corporations and 1.5 percent are C-corporations--which are independent
                legal entities owned by shareholders who are not personally liable for
                the corporation's obligations.\48\ In 2017, most small employer
                businesses were corporations, with 50.5 percent choosing to be S-
                corporations and 16.8 percent preferring C-corporation status, although
                sole proprietorship and partnership structures remained relatively
                popular at 12.9 percent and 11.8 percent respectively. By contrast,
                74.2 percent of large employer businesses chose to be C-corporations,
                with 9.3 percent preferring a partnership structure and 8.1 percent S-
                corporation status.\49\
                ---------------------------------------------------------------------------
                 \46\ See SBA OA 2020 FAQs at 3.
                 \47\ Id. at 4.
                 \48\ Id.
                 \49\ Id.
                ---------------------------------------------------------------------------
                 Small businesses are particularly important in specific sectors of
                the economy. In 2016, in the services sector, small businesses supplied
                45 percent of 19.7 million healthcare and social services jobs, over 60
                percent of 13.7 million accommodation and food services jobs, and over
                80 percent of 6.3 million construction jobs.\50\ In the same year, in
                manufacturing, small businesses made up 44 percent out of 11.6 million
                [[Page 56362]]
                jobs.\51\ Finally, in 2016, small family farms totaled 96 percent out
                of 2.2 million farms,\52\ and small businesses provided over 80 percent
                of agriculture, forestry, and fishing and hunting jobs out of
                161,000.\53\ As such, the financial health of small businesses is
                essential to the U.S. economy, especially to the supply of critical and
                basic goods and services--from producing food to serving it at
                restaurants, and from home building to healthcare.
                ---------------------------------------------------------------------------
                 \50\ See Off. of Advocacy, Small Bus. Admin., 2019 Small
                Business Profile (Apr. 2019), https://cdn.advocacy.sba.gov/wp-content/uploads/2019/04/23142719/2019-Small-Business-Profiles-US.pdf
                (2019 Small Business Profile).
                 \51\ Id. at 3.
                 \52\ Nat'l Inst. of Food & Agric., U.S. Dep't of Agric., Family
                Farms, https://nifa.usda.gov/family-farms (last visited July 26,
                2021) (classifying family farms as any farm organized as a sole
                proprietorship, partnership, or family corporation. Family farms
                exclude farms organized as non-family corporations or cooperatives,
                as well as farms with hired managers.).
                 \53\ 2019 Small Business Profile at 3.
                ---------------------------------------------------------------------------
                 Small businesses have been especially hard-hit by the COVID-19
                pandemic. At a low point in the pandemic in April 2020, 20 percent of
                self-employed workers had temporarily exited the labor market.\54\
                Industries in which small businesses played a large role have been
                particularly impacted. For example, comparing April 2020 with April
                2019, employment declined by almost 50 percent in the leisure and
                hospitality industries (also declining by 50 percent among food
                services and drinking establishments within the leisure and hospitality
                industry), in which small businesses employ 60 percent of workers.\55\
                ---------------------------------------------------------------------------
                 \54\ Daniel Wilmoth, Off. of Advocacy, Small Bus. Admin., The
                Effects of the COVID-19 Pandemic on Small Businesses (Issue Brief
                No. 16) (Mar. 2021), https://cdn.advocacy.sba.gov/wp-content/uploads/2021/03/02112318/COVID-19-Impact-On-Small-Business.pdf.
                 \55\ Id. By August 2021, many of these jobs had since returned
                as mandatory closure orders ended and the economy began to recover.
                ---------------------------------------------------------------------------
                B. Existing Data on Small Business Lending
                 While small businesses are a critical part of the U.S. economy and
                require financial support, it is still true, as it was in 2017 when the
                Bureau published its White Paper on small business lending, that it is
                not possible with current data to confidently answer basic questions
                regarding the state of small business lending. This limitation is
                especially the case with regard to the race, sex, and ethnicity of
                small business owners, applications as opposed to originations, and for
                small business financing products that are not currently reported in
                Call Report data.\56\
                ---------------------------------------------------------------------------
                 \56\ Bureau of Consumer Fin. Prot., Key dimensions of the small
                business lending landscape, at 39-40 (May 2017), https://files.consumerfinance.gov/f/documents/201705_cfpb_Key-Dimensions-Small-Business-Lending-Landscape.pdf (White Paper).
                ---------------------------------------------------------------------------
                 Data on small business lending are fragmented, incomplete, and not
                standardized, making it difficult to conduct meaningful comparisons
                across products and over time. This hinders attempts by policymakers
                and other stakeholders to understand the size, shape, and dynamics of
                the small business lending marketplace, including the interaction of
                supply and demand, as well as potentially problematic lending
                practices, gaps in the market, or trends in funding that may be holding
                back some communities.\57\ For example, absent better data, it is hard
                to determine if relatively lower levels of bank loans to small
                businesses in the decade before the pandemic began were reflective of a
                net relative decline in lending to small businesses as compared to
                large businesses or rather a shift within small business lending from
                banks to alternative lenders.\58\ To the extent there may have been a
                relative decline, it is difficult to assess if that decline affected
                certain types of small businesses more than others, including women-
                owned and minority-owned small businesses.\59\
                ---------------------------------------------------------------------------
                 \57\ While Call Report and CRA data provide some indication of
                the level of supply of small business credit, the lack of data on
                small business credit applications makes demand for credit by small
                businesses more difficult to assess, including with respect to local
                markets or protected classes.
                 \58\ Rebel A. Cole, Off. of Advocacy, Small Bus. Admin., How Did
                Bank Lending to Small Business in the United States Fare After the
                Financial Crisis?, at 26 (Jan. 2018), https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf (showing a decline in bank loans to small
                businesses from 2008 to 2015 from $710 billion to $600 billion). The
                level of bank lending to small businesses has recovered somewhat
                since a trough in 2012-13 that represented the lowest amount of
                lending since 2005. Fed. Deposit Ins. Corp., https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx (last visited July 22, 2021).
                 \59\ White Paper at 40.
                ---------------------------------------------------------------------------
                 The primary sources of information on lending by depository
                institutions are the Federal Financial Institutions Examination Council
                (FFIEC) and National Credit Union Administration (NCUA) Consolidated
                Reports of Condition and Income (Call Reports), as well as reporting
                under the CRA. Under the FFIEC and CRA reporting regimes, small loans
                to businesses of any size are used in whole or in part as a proxy for
                loans to small businesses. The FFIEC Call Report captures banks'
                outstanding number and amount of small loans to businesses (that is,
                loans originated under $1 million to businesses of any size; small
                loans to farms are those originated under $500,000).\60\ The CRA
                requires banks and savings associations with assets over a specified
                threshold to report loans in original amounts of $1 million or less to
                businesses; reporters are asked to indicate whether the borrower's
                gross annual revenue is $1 million or less, if they have that
                information.\61\ The NCUA Call Report captures data on all loans over
                $50,000 to members for commercial purposes, regardless of any indicator
                about the business's size.\62\ There are no similar sources of
                information about lending to small businesses by nondepository
                institutions. The SBA also releases data concerning its loan programs,
                but these typically do not include demographic information, and this
                covers only a small portion of the overall small business financing
                market.
                ---------------------------------------------------------------------------
                 \60\ See Fed. Fin. Insts. Examination Council, Reporting Forms
                31, 41, and 51 (last modified Mar. 16, 2021), https://www.ffiec.gov/ffiec_report_forms.htm (FFIEC Call Report).
                 \61\ See Fed. Fin. Insts. Examination Council, A Guide to CRA
                Data Collection and Reporting, at 11, 13 (2015), https://www.ffiec.gov/cra/pdf/2015_CRA_Guide.pdf (2015 FFIEC CRA Guide).
                Small business loans are defined for CRA purposes as loans whose
                original amounts are $1 million or less and that were reported on
                the institution's Call Report or Thrift Financial Report as either
                ``Loans secured by nonfarm or nonresidential real estate'' or
                ``Commercial and industrial loans.'' Small farm loans are defined
                for CRA purposes as loans whose original amounts are $500,000 or
                less and were reported as either ``Loans to finance agricultural
                production and other loans to farmers'' or ``Loans secured by
                farmland.'' Id. at 11. Beginning in 2023, national banks supervised
                by the OCC with assets greater than $2.5 billion will be required to
                report loans of $1.6 million or less and indicate whether the
                borrower's gross annual review is $1.6 million or less. See 85 FR
                34734 (June 5, 2020).
                 \62\ See Nat'l Credit Union Admin., Call Report Form 5300 (June
                2020), https://www.ncua.gov/files/publications/regulations/form-5300-june-2020.pdf.
                ---------------------------------------------------------------------------
                 These public data sources provide some of the most extensive
                information currently available on small business lending. However,
                they suffer from four material limitations, namely that the data
                capture only parts of the market, are published at a high level of
                aggregation, do not permit detailed analysis across the markets, and
                lack standardization across different agencies.
                 First, these datasets exclude entire categories of lenders. For
                example, banks under $1.322 billion in assets do not have to report
                under the CRA.\63\ The FFIEC and NCUA Call Reports and CRA data do not
                include lending by nondepository financial institutions, which the
                Bureau estimates to represent 40 percent of the small business
                financing market and is rapidly growing.\64\
                ---------------------------------------------------------------------------
                 \63\ Fed. Fin. Insts. Examination Council, Community
                Reinvestment Act 2021 Reporting Criteria, https://www.ffiec.gov/cra/reporter21.htm (last visited Aug. 5, 2021).
                 \64\ Nondepository lending is estimated to total approximately
                $550 billion out of $1.4 trillion in total lending, excluding $1
                trillion in COVID-19 emergency program lending. See part II.D below
                (providing a detailed breakdown and methodology of estimates across
                lending products).
                ---------------------------------------------------------------------------
                [[Page 56363]]
                 Second, Federal agencies publish summary data at a high level in a
                manner that does not facilitate independent analysis by other agencies
                or stakeholders. The FFIEC and NCUA Call Reports and the CRA data are
                all available at a higher level of aggregation than loan-level,
                limiting fair lending and detailed geographic analyses since race, sex,
                and ethnicity as well as business location data are rarely disclosed.
                 Third, the detailed data collected by these Federal sources have
                significant limitations as well, preventing any analysis into certain
                issues or types of borrowers, even by the regulators possessing these
                data. Neither Call Report nor CRA data include applications, which
                limits insights into any potential discrimination or discouragement in
                application processes as well as into the interaction between credit
                supply and demand. The Call Report and CRA data separately identify
                loans of under $1 million in value, and CRA data also identify loans to
                businesses with annual revenues of $1 million or less.\65\ However, the
                Call Report definition of small business loans as those with a loan
                size of $1 million or less at origination is both overinclusive, as it
                counts small loans to businesses of all sizes, and underinclusive, as
                it excludes loans over $1 million made to small businesses. Credit
                unions report any loans under $50,000 as consumer loans and not as
                commercial loans,\66\ potentially excluding from measurement an
                important source of funding for many small businesses, particularly the
                smallest and often most underserved.
                ---------------------------------------------------------------------------
                 \65\ Fed. Fin. Insts. Examination Council, Schedule RC-C, Part
                II Loans to Small Businesses and Farms, at 1, https://www.fdic.gov/regulations/resources/call/crinst-031-041/2017/2017-03-rc-c2.pdf
                (detailing the Call Report loan size threshold of $1 million at
                origination for loans to small businesses); 2015 FFIEC CRA Guide at
                11 (detailing the CRA size thresholds of $1 million both for loan
                amount at origination and for revenue of small business borrowers).
                 \66\ Nat'l Credit Union Admin., Call Report Form 5300
                Instructions, at 26 (effective Mar. 31, 2021), https://www.ncua.gov/files/publications/regulations/call-report-instructions-march-2021.pdf.
                ---------------------------------------------------------------------------
                 Finally, the Federal sources of small business lending data are not
                standardized across agencies and cannot be easily compared. For
                example, the FFIEC Call Report collects small loans to businesses as a
                proxy for small business lending, whereas the NCUA Call Report collects
                loans to members for commercial purposes above $50,000 but with no
                upper limit. The loan-level data for the Paycheck Protection Program
                (PPP) offer an unprecedented level of insight into small business
                lending, but this dataset is a one-off snapshot into the market for a
                specific lending program at an acute moment of crisis and is also
                limited in utility by relatively low response levels to demographic
                questions concerning borrowers.\67\
                ---------------------------------------------------------------------------
                 \67\ Zachary Warmbrodt, Tracking the Money: Bid to Make Business
                Rescue More Inclusive Undercut by Lack of Data, Politico (Mar. 2,
                2021), https://www.politico.com/news/2021/03/02/businesses-inclusive-coronavirus-relief-money-data-472539 (reporting that 75
                percent of PPP recipients did not report their ethnicity and 58
                percent did not reveal their gender).
                ---------------------------------------------------------------------------
                 The Federal government also conducts and releases a variety of
                statistics, surveys, and research reports on small business lending
                through the member banks for the Federal Reserve System, the FDIC, CDFI
                Fund, and the U.S. Census Bureau. These data sources offer insights
                into broad trends and specific small business lending issues but are
                less useful for detailed fair lending analyses or identification of
                specific areas, industries, or demographic groups being underserved.
                Periodic changes in survey methodology and questions can also limit
                comparability and the ability to track developments over time.
                 There are also a variety of non-governmental data sources, issued
                by both private and nonprofit entities, that cover small businesses
                and/or the small business financing market. These include datasets and
                surveys published by commercial data and analytics firms, credit
                reporting agencies, trade associations, community groups, and academic
                institutions. Certain of these data sources are publicly available and
                track specific topics, such as small business optimism,\68\ small
                business employment,\69\ rates of small business credit application
                approvals,\70\ small business lending and delinquency levels,\71\ and
                rates of small business closure.\72\ Other databases have more
                granularity and provide detailed information on individual businesses,
                including revenue, credit utilization, industry, and location.\73\
                ---------------------------------------------------------------------------
                 \68\ Nat'l Fed'n of Indep. Bus., Small Business Optimism Index
                (June 2021), https://www.nfib.com/surveys/small-business-economic-trends/.
                 \69\ ADP, Employment Reports, https://adpemploymentreport.com/
                (last visited July 22, 2021).
                 \70\ Biz2Credit, Biz2Credit Small Business Lending Index,
                https://www.biz2credit.com/small-business-lending-index (last
                visited July 27, 2021).
                 \71\ PayNet, Small Business Lending Index, https://sbinsights.paynetonline.com/lending-activity/ (last visited July 27,
                2021).
                 \72\ Opportunity Insights Economic Tracker, https://tracktherecovery.org/ (last visited July 27, 2021). The Opportunity
                Insights Economic Tracker and similar data sources may materially
                overestimate the number of business closures by not controlling for
                attrition in the small business client base of data providers. See
                Leland D. Crane et al., Bd. of Governors of the Fed. Reserve Sys.,
                Finance and Economics Discussion Series, 2020-089, Business Exit
                During the COVID-19 Pandemic: Non-Traditional Measures in Historical
                Context, at 21-22 (2020), https://www.federalreserve.gov/econrest/feds/files2020089r1pap.pdf.
                 \73\ See, e.g., Dun & Bradstreet, https://www.dnb.com/ (data
                provider and credit reporter); Data Axle, https://www.data-axle.com/
                (data provider); Equifax, https://www.equifax.com/business/business-credit-reports/ (credit reporter); Experian, https://www.experian.com/small-business/business-credit-reports (credit
                reporter).
                ---------------------------------------------------------------------------
                 While these non-public sources of data on small businesses may
                provide a useful supplement to existing Federal sources of small
                business lending data, these private and nonprofit sources often do not
                have lending information, may rely in places on unverified research
                based on public internet sources, and/or narrowly limit use cases for
                parties accessing data. Further, commercial datasets are generally not
                free to public users and can be costly, raising equity issues for
                stakeholders who cannot afford access.
                C. The Landscape of Small Business Finance
                 Notwithstanding the lack of data on the market, it is clear that
                financing plays an important role in enabling small businesses to grow
                and contribute to the economy. When it is available, financing not only
                provides resources for small businesses to smooth cash flows for
                current operations, but also affords business owners the opportunity to
                invest in business growth. An analysis by the National Small Business
                Association, which examined data from 1993 through 2016, found a
                correlation between small business owners' ability to access credit and
                their ability to hire.\74\ This same study found that, while not the
                sole cause, the inability to secure financing may have led 16 percent
                of small businesses to reduce their number of employees and
                approximately 10 percent of small businesses to reduce employee
                benefits. Lack of access to financing also contributed to a further 10
                percent of small businesses being unable to increase store inventory in
                order to meet existing demand.\75\
                ---------------------------------------------------------------------------
                 \74\ Nat'l Small Bus. Ass'n, 2016 Year-End Economic Report (July
                2017), https://www.nsba.biz/wp-content/uploads/2017/02/Year-End-Economic-Report-2016.pdf.
                 \75\ Id.
                ---------------------------------------------------------------------------
                 To support their growth or to make it through harder times, small
                businesses look to a variety of funding sources. Especially when
                starting out, entrepreneurs often rely on their own
                [[Page 56364]]
                savings and help from family and friends. If a business generates a
                profit, its owners may decide to reinvest retained earnings to fund
                further growth. However, for many aspiring business owners--and their
                personal networks--savings and retained earnings may not be sufficient
                to fund a new venture or grow it, leading owners to seek other sources
                of funding. This is particularly true for minority- and women-led
                households, which on average have less wealth than their white- and
                men-led counterparts.\76\
                ---------------------------------------------------------------------------
                 \76\ Emily Moss et al., The Black-White Wealth Gap Left Black
                Households More Vulnerable, Brookings Inst. (Dec. 8, 2020), https://www.brookings.edu/blog/up-front/2020/12/08/the-black-white-wealth-gap-left-black-households-more-vulnerable/ (detailing wealth gaps in
                2019 by race and sex that show white male households with more
                wealth than white female or Black male or female households at all
                age brackets). See also Erin Ruel & Robert Hauser, Explaining the
                Gender Wealth Gap, 50 Demography 1155, 1165 (Dec. 2012), https://read.dukeupress.edu/demography/article/50/4/1155/169553/Explaining-the-Gender-Wealth-Gap (finding a gender wealth gap of over $100,000
                in a longitudinal study over 50 years of a single age cohort in
                Wisconsin); Neil Bhutta et al., Bd. of Governors of the Fed. Reserve
                Sys., Disparities in Wealth by Race and Ethnicity in the 2019 Survey
                of Consumer Finances (Sept. 28, 2020), https://www.federalreserve.gov/econres/notes/feds-notes/disparities-in-wealth-by-race-and-ethnicity-in-the-2019-survey-of-consumer-finances-20200928.htm (finding median white family wealth in 2019 of
                $188,200 compared with $24,100 for Black families and $36,100 for
                Hispanic families).
                ---------------------------------------------------------------------------
                 One such source of funding comes from others besides family and
                friends, whether high net worth individuals or ``angel investors,''
                venture capital funds, or, in a more recent development usually
                facilitated by online platforms, via crowdsourcing from retail
                investors. Often, these early investments take the form of equity
                funding, which business owners are not obligated to repay to investors.
                However, equity funding requires giving up some ownership and control
                to investors, which certain entrepreneurs may not wish to do. For small
                businesses, equity funding also tends to be somewhat more expensive
                than debt financing in the longer run. This is for a number of reasons,
                including that loan interest payments, unlike capital gains, are tax-
                deductible.\77\ Finally, equity investments from others besides family
                and friends are available to only a minority of small businesses.
                ---------------------------------------------------------------------------
                 \77\ Jim Woodruff, The Advantages and Disadvantages of Debt and
                Equity Financing, CHRON (updated Mar. 4, 2019), https://smallbusiness.chron.com/advantages-disadvantages-debt-equity-financing-55504.html.
                ---------------------------------------------------------------------------
                 Many small businesses instead seek debt financing from a wide range
                of providers. These providers include depository institutions, such as
                banks, savings associations, and credit unions,\78\ as well as fintechs
                and commercial finance companies, specialized providers of specific
                financing products, and a range of government and government-sponsored
                enterprises, among others.
                ---------------------------------------------------------------------------
                 \78\ For purposes of this notice of proposed rulemaking, the
                Bureau is using the term depository institution to mean any bank or
                savings association defined by section 3(c)(1) of the Federal
                Deposit Insurance Act, 12 U.S.C. 1813(c)(1), or credit union defined
                pursuant to the Federal Credit Union Act, as implemented by 12 CFR
                700.2. The Bureau notes that the Dodd-Frank Act defines a depository
                institution to mean any bank or savings association defined by the
                Federal Deposit Insurance Act; there, that term does not encompass
                credit unions. 12 U.S.C. 5301(18)(A), 1813(c)(1). The Bureau is
                referring to banks and savings associations together with credit
                unions as depository institutions throughout this notice, unless
                otherwise specified, to facilitate analysis and discussion.
                ---------------------------------------------------------------------------
                 In the past, small businesses principally sought credit from banks;
                however, as banks have merged and consolidated, particularly in the
                wake of the Great Recession, they have provided less financing to small
                businesses.\79\ As noted earlier, the number of banks has declined
                significantly since a post-Great Depression peak in 1986 of over 18,000
                institutions to around 5,200 institutions today,\80\ while 13,500
                branches closed from 2009 to mid-2020, representing a 14 percent
                decrease.\81\ Although nearly half of counties either gained bank
                branches or retained the same number between 2012 and 2017, the
                majority lost branches over this period.\82\ Out of 44 counties that
                were deeply affected by branch closures, defined as having 10 or fewer
                branches in 2012 and seeing five or more of those close by 2017, 39
                were rural counties.\83\ Of rural counties, just over 40 percent lost
                bank branches in that period; the rural counties that experienced
                substantial declines in bank branches tend to be lower-income and with
                a higher proportion of African-American residents relative to other
                rural counties,\84\ raising concerns about equal access to credit.
                ---------------------------------------------------------------------------
                 \79\ Rebel A. Cole, Off. of Advocacy, Small Bus. Admin., How Did
                Bank Lending to Small Business in the United States Fare After the
                Financial Crisis?, at 26 (Jan. 2018), https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf (showing a decline in bank loans to small
                businesses from 2008 to 2015 from $710 billion to $600 billion). The
                level of bank lending to small businesses has recovered somewhat
                since a trough in 2012-13 that represented the lowest amount of
                lending since 2005. Fed. Deposit Ins. Corp., https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx (last visited July 22, 2021).
                 \80\ Congressional Research Serv., Small Business Credit Markets
                and Selected Policy Issues, at 6 (Aug. 20, 2019), https://fas.org/sgp/crs/misc/R45878.pdf.
                 \81\ Bruce C. Mitchell et al., Nat'l Cmty. Reinvestment Coal.,
                Relationships Matter: Small Business and Bank Branch Locations, at 6
                (2020), https://ncrc.org/relationships-matter-small-business-and-bank-branch-locations/ (stating that in 2009 there were 95,596 brick
                and mortar full-service branches or retail locations but, as of June
                30, 2020, that number had fallen to 82,086).
                 \82\ Bd. of Governors of the Fed. Reserve Sys., Perspectives
                from Main Street: Bank Branch Access in Rural Communities, at 1, 3-
                4, 19 (Nov. 2019), https://www.federalreserve.gov/publications/files/bank-branch-access-in-rural-communities.pdf.
                 \83\ Id.
                 \84\ Id.
                ---------------------------------------------------------------------------
                 As banks and branches have merged and/or closed, the share of
                banking assets has also become increasingly concentrated in the largest
                institutions, with banks of over $10 billion in assets representing 84
                percent of all industry assets in 2018,\85\ totaling $15.1 out of $17.9
                trillion.\86\ Nevertheless, banks of under $10 billion in assets
                continue to hold approximately half of all small business loans (using
                the FFIEC Call Report definition of loans of under $1 million),
                highlighting the importance of smaller banks to the small business
                lending market.\87\ Since smaller bank credit approvals have
                traditionally been close to 50 percent, while large banks approve only
                25-30 percent of applications, bank consolidation may have implications
                for small business credit access.\88\ Since institutions under $1.322
                billion in assets are not required to report on lending under the
                CRA,\89\ it is difficult to precisely assess the
                [[Page 56365]]
                impact of bank consolidation and shuttered branches on small business
                lending and access to credit in local areas.\90\ By contrast, credit
                unions increased their small business lending from $30 billion in 2008
                to at least $55 billion in 2019.\91\ Like banks, credit unions
                typically receive high satisfaction scores among small business
                borrowers, reflecting more high-contact, relationship-based lending
                models.\92\
                ---------------------------------------------------------------------------
                 \85\ Congressional Research Serv., Small Business Credit Markets
                and Selected Policy Issues, at 6 (Aug. 20, 2019), https://fas.org/sgp/crs/misc/R45878.pdf.
                 \86\ Fed. Deposit Ins. Corp., Bank Data and Statistics, https://www.fdic.gov/bank/statistical/ (last visited Aug. 22, 2021).
                 \87\ Speech by Board Governor Lael Brainard: Community Banks,
                Small Business Credit, and Online Lending (Sept. 30, 2015), https://www.federalreserve.gov/newsevents/speech/brainard20150930a.htm.
                Banks with under $10 billion in assets are often referred to as
                ``community banks.'' Congressional Research Serv., Over the Line:
                Asset Thresholds in Bank Regulation, at 2-3 (May 3, 2021), https://fas.org/sgp/crs/misc/R46779.pdf (noting that the Board of Governors
                of the Federal Reserve System (Board) and the Office of the
                Comptroller of the Currency (OCC) define community banks as having
                under $10 billion in assets, although there may be other criteria,
                with the FDIC considering also geographic footprint and a relative
                emphasis on making loans and taking deposits as opposed to engaging
                in securities and derivatives trading). Community banks are also
                more likely to engage in relationship-based lending. See id. at 3.
                 \88\ Biz2Credit, Biz2Credit Small Business Lending Index,
                https://www.biz2credit.com/small-business-lending-index (last
                visited July 22, 2021). These historical approval rates are
                reflected in pre-pandemic Small Business Lending Index releases by
                Biz2Credit. See, e.g., Biz2Credit, Small Business Loan Approval
                Rates at Big Banks Remain at Record High in February 2020:
                Biz2Credit Small Business Lending Index, https://www.biz2credit.com/small-business-lending-index/february-2020 (last visited July 29,
                2021) (showing large bank approvals of 28.3 percent in February 2020
                and of 27.2 percent in February 2019 and smaller bank approvals of
                50.3 percent in February 2020 and of 48.6 percent in February 2019).
                 \89\ See part II.B above.
                 \90\ Bruce C. Mitchell et al., Nat'l Cmty. Reinvestment Coal.,
                Relationships Matter: Small Business and Bank Branch Locations,
                https://ncrc.org/relationships-matter-small-business-and-bank-branch-locations/ (last visited July 27, 2021).
                 \91\ Rebel A. Cole, Off. of Advocacy, Small Bus. Admin., How Did
                Bank Lending to Small Business in the United States Fare After the
                Financial Crisis?, at 26 (Jan. 2018), https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf.
                 \92\ Fed. Reserve Banks, Small Business Credit Survey, 2021
                Report On Employer Firms (2021), https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2021/2021-sbcs-employer-firms-report.
                ---------------------------------------------------------------------------
                 Certain banks and credit unions choose to be mission-based lenders,
                as CDFIs or Minority Depository Institutions (MDIs).\93\ Mission-based
                lenders focus on providing credit to traditionally underserved and low-
                income communities and individuals to promote community development and
                expand economic opportunity, making them a relatively smaller by dollar
                value but essential part of the small business lending market. There
                were over 1,200 CDFIs (around half of which are depository
                institutions) as of May 2021 and over 140 MDIs as of March 2021.\94\
                ---------------------------------------------------------------------------
                 \93\ According to the FDIC, FDIC-insured MDIs and CDFI banks are
                banks, savings banks, and savings associations (collectively, banks)
                that serve minority, low- or moderate-income (LMI), and rural
                communities at higher rates than mainstream banks. MDIs serve
                minority communities including African American, Asian American,
                Hispanic American, and Native American. CDFI banks are certified
                through the U.S. Department of the Treasury by demonstrating they
                serve LMI communities. See, e.g., Fed. Deposit Ins. Corp. Minority
                Depository Institutions Program website, https://www.fdic.gov/regulations/resources/minority/mission-driven/index.html (last
                visited July 11, 2021).
                 \94\ Cmty. Dev. Fin. Inst., CDFI Certification, https://www.cdfifund.gov/programs-training/certification/cdfi (last visited
                July 21, 2021); Fed. Deposit Ins. Corp., Minority Depository
                Institutions Program (last updated June 9, 2021), https://www.fdic.gov/regulations/resources/minority/mdi.html.
                ---------------------------------------------------------------------------
                 During a period in which that depository institutions have been
                providing relatively less funding to small businesses,\95\ small
                businesses have increasingly relied on other nondepository institutions
                for financing. Since nondepositories typically do not report their
                small business financing activities to regulators, however, there are
                no authoritative sources for either the number of such entities or the
                dollar value of financing they provide to small businesses.\96\
                However, what data are available make clear that fintech firms are
                rapidly increasing their share of the small business financing
                market.\97\
                ---------------------------------------------------------------------------
                 \95\ See Rebel A. Cole, Off. of Advocacy, Small Bus. Admin., How
                Did Bank Lending to Small Business in the United States Fare After
                the Financial Crisis?, at 26 (Jan. 2018), https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf (showing a decline in
                bank loans to small businesses from 2008-15 from $710 billion to
                $600 billion). The level of bank lending to small businesses has
                recovered somewhat since a trough in 2012-13 that represented the
                lowest amount of lending since 2005. See also Fed. Deposit Ins.
                Corp., https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx (last visited July 21,
                2021) (tabulating outstanding balances for credit extended to small-
                and non-small business lending by banks and thrifts over time).
                 \96\ See part II.B above.
                 \97\ See part II.D below.
                ---------------------------------------------------------------------------
                 Whether depository or nondepository, each provider of small
                business financing assesses a variety of different criteria to
                determine whether and on what terms to grant an extension of credit or
                other financing product, including business and financial performance,
                the credit history of the business and its owner(s), the time in
                business, and the industry, among other factors. Protections such as
                guarantees, collateral, and insurance can mitigate perceived risks,
                potentially enabling a lender to offer better terms or facilitating an
                extension of credit that would otherwise not meet lending limit or
                underwriting criteria. Often, government agencies, including the SBA,
                FHA, and USDA, guarantee or insure loans themselves to encourage
                lenders to provide credit to borrowers that may not otherwise be able
                to obtain credit, either on affordable terms and conditions or at
                all.\98\ Different lenders also employ diverse methods for assessing
                risk, with smaller banks generally relying more on traditional
                underwriting methods and typically managing multi-product
                relationships. Fintechs increasingly use algorithms, automation, and
                even AI and machine learning to assess risk and make underwriting
                decisions, with originations typically being less relationship-based in
                nature.
                ---------------------------------------------------------------------------
                 \98\ Congressional Research Serv., Small Business Administration
                7(a) Loan Guaranty Program (updated June 21, 2021), https://fas.org/sgp/crs/misc/R41146.pdf (discussing the SBA's flagship 7(a) loan
                guarantee program); U.S. Dep't of Hous. & Urban Dev., Descriptions
                Of Multifamily Programs, https://www.hud.gov/program_offices/housing/mfh/progdesc (last visited July 27, 2021) (listing FHA
                mortgage insurance programs for 5+ unit residential developments);
                Farm Serv. Agency, U.S. Dep't of Agric., Guaranteed Loan Program
                Fact Sheet (Mar. 2020), https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/guaranteed_loan_program-factsheet.pdf
                (discussing the USDA's Farm Service Agency guaranteed loan program).
                ---------------------------------------------------------------------------
                 As well as diversity in underwriting methodology and criteria,
                there are also considerable differences across small business financing
                products and providers with respect to pricing methods and repayment
                structures. As a result, it can be challenging to compare the
                competitiveness of product pricing and terms. The Bureau understands
                that term loans, lines of credit, and credit cards typically disclose
                annualized interest rates; leases often take into account depreciation;
                factoring products discount an invoice's value and add a fee; and MCAs
                apply a multiple to the value of the up-front payment.\99\ Moreover,
                providers may add additional fees that are not standardized within
                industries, much less across them. The Bureau believes that this
                complexity may confuse business owners and render them unable to secure
                more favorable rates due to opacity in offers presented--which in some
                cases may even be deliberate \100\--and a corresponding inability to
                effectively compare across different financing options.\101\ This may
                impair applicants' ability to make informed choices.
                ---------------------------------------------------------------------------
                 \99\ See part II.D below for definitions of the different
                product categories.
                 \100\ Press Release, Fed. Trade Comm'n, Cash Advance Firm to Pay
                $9.8M to Settle FTC Complaint It Overcharged Small Businesses (Apr.
                22, 2021), https://www.ftc.gov/news-events/press-releases/2021/04/cash-advance-firm-pay-98m-settle-ftc-complaint-it-overcharged
                (settling a lawsuit between the Federal Trade Commission (FTC) and
                an MCA provider for $9.8 million where the complaint alleged that
                the provider ``deceived'' and ``misle[d]'' business borrowers about
                the amount and terms of financing); Bd. of Governors of the Fed.
                Reserve Sys., Record of Meeting: Community Advisory Council and the
                Board of Governors, at 7 (Oct. 5, 2018), https://www.federalreserve.gov/aboutthefed/files/cac-20181005.pdf (noting a
                growing trend of small business owners facing difficulty with
                expensive loan products such as MCAs where the pricing and structure
                of the loans is often deliberately obscured).
                 \101\ Fed. Trade Comm'n, `Strictly Business' Forum, Staff
                Perspective, at 5 (Feb. 2020), https://www.ftc.gov/system/files/documents/reports/staff-perspective-paper-ftcs-strictly-business-forum/strictly_business_forum_staff_perspective.pdf (discussing the
                difficulty in comparing across financing products with widely
                differing methods for calculating and describing key features).
                ---------------------------------------------------------------------------
                D. Estimating the Size and Scope of the Small Business Financing Market
                 In light of the lack of data and the heterogeneity of products and
                providers within the small business financing market, it can be
                difficult to get a clear sense of the size and scope of the market. In
                this section, the Bureau describes its estimates of the total
                outstanding balances of credit in the market, the number of
                institutions that are active in the small business
                [[Page 56366]]
                financing market, and how the Bureau arrived at these estimates. Where
                possible, the Bureau tries to estimate the state of the small business
                financing market at the end of 2019 in order to estimate the state of
                the market during a year unaffected by the COVID-19 pandemic.
                 One challenge is that some of the data report the dollar value of
                originations and some report outstanding balances. For the purposes of
                this exercise and for most, but not all, products, the Bureau assumes
                that for every $1 originated in the market in a given year, there is
                approximately a corresponding $3 of outstanding balances. This
                assumption is based on the ratio of the 2019 FFIEC Call Report data,
                which totaled $721 billion in outstanding balances on bank loans to
                small businesses and small farms, and the 2019 CRA data, which recorded
                $264 billion in bank loan originations to small businesses and small
                farms.\102\ This assumption is limited by the extent to which other
                small business financing products differ from loans and lines of
                credit, which make up the majority of financing products captured by
                the FFIEC Call Report data and the CRA data.\103\
                ---------------------------------------------------------------------------
                 \102\ FFIEC Call Report data records outstanding balances on
                loans with origination amounts less than $1 million across
                Commercial & Industrial, Nonfarm Nonresidential, Agricultural, and
                Secured by Farmland lending categories. See FDIC Quarterly Banking
                Profile Time Series, https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx (last
                visited August 29, 2021).
                 \103\ FFIEC Call Report data and CRA data on small business
                credit products also include business credit card products, but
                loans and lines of credit made up $713 billion out of $775 billion
                in outstanding balances on bank, savings association, and credit
                union loans to small businesses in 2019. One important caveat to
                this assumption is that products with materially shorter average
                term lengths, for example credit cards, factoring products, and
                MCAs, may have an inverse ratio of originations to outstanding
                balances. For example, top issuers of general purpose credit cards
                recorded purchase volumes of two to seven times their outstanding
                balances in 2020. Nilson Report, Issue 1192, at 6 (Feb. 2021),
                https://nilsonreport.com/publication_newsletter_archive_issue.php?issue=1192. If business-
                purpose credit cards, factoring products, and MCAs behaved similarly
                with respect to the ratio of originations to outstanding balances,
                then for every $1 originated in the market in a given year, there
                could be a corresponding $0.14-0.50 in outstanding balances for such
                products ($1 divided by two to seven).
                ---------------------------------------------------------------------------
                 As detailed in this section, the Bureau estimates that the market
                for small business financing products totaled $1.4 trillion in
                outstanding balances in 2019. The Bureau estimates that small business
                financing by depository institutions makes up just over half of small
                business financing by private institutions. In 2020 and 2021, COVID-19
                emergency lending programs added a further $1 trillion to this value,
                bringing the overall size of the small business financing market up to
                $2.4 trillion. Below, the Bureau estimates the market share for
                different small business financing products.
                 Since the available data regarding depository institutions' small
                loans to businesses address term loans, lines of credit, and credit
                cards together, the respective share of different products in the
                overall small business financing market is difficult to assess. As
                detailed in this section, the Bureau estimates that together, private
                term loans and lines of credit constitute the largest small business
                credit product by value, totaling approximately $770 billion in
                outstanding balances in 2019, although PPP and EIDL Program loans have
                since added $1 trillion to this figure.
                 Lending by banks, saving associations, and credit unions comprises
                the largest part of this total amount for private term loans and lines
                of credit. Using FFIEC Call Report data for December 2019, the Bureau
                estimates that banks and savings associations account for a total of
                about $721 billion in outstanding credit to small businesses and small
                farms as of December 2019.\104\ Using NCUA Call Report data for
                December 2019, the Bureau estimates that credit unions account for a
                total of about $55 billion in outstanding credit to members for
                commercial purposes.\105\ From this value, the Bureau subtracts $62
                billion in credit card lending to arrive at $713 billion in outstanding
                balances for term loans and lines of credit. From this value, the
                Bureau further subtracts $134 billion in SBA guaranteed loans to arrive
                at $580 billion in outstanding balances for private term loans and
                lines of credit extended by depository institutions (i.e., banks,
                savings associations, and credit unions) as of December 2019.
                ---------------------------------------------------------------------------
                 \104\ Calculated from FFIEC Call Report data accessed on June 8,
                2021. The Bureau notes that, as discussed in part II.B above, these
                estimates rely on small loans to businesses as a proxy for loans to
                small businesses. As such, the Bureau acknowledges that the true
                outstanding value of credit extended to small businesses by such
                institutions may be different than what is presented here. For
                example, the small loans to businesses proxy would overestimate the
                value of outstanding credit if a significant number of small loans
                to businesses and farms are to businesses or farms that are actually
                large. Alternatively, the proxy would underestimate the value of
                outstanding credit to small businesses if a significant number of
                businesses and farms that are small under the proposed rule take out
                loans that are larger than $1 million or $500,000, for businesses
                and farms, respectively.
                 \105\ Nat'l Credit Union Admin., 2019 Call Report Quarterly
                Data, https://www.ncua.gov/analysis/credit-union-corporate-call-report-data/quarterly-data (last visited Aug. 24, 2021) (2019 NCUA
                Call Report). The Bureau notes that, as discussed in part II.B
                above, credit unions only report credit transactions made to members
                for commercial purposes with values over $50,000. The Bureau uses
                this value as a proxy for small business credit. The Bureau
                acknowledges that the true value of small business credit extended
                by credit unions may be different than what is presented here. For
                example, this proxy may overestimate the value of outstanding small
                business credit because some members are taking out loans for large
                businesses. Alternatively, this proxy may underestimate the value of
                outstanding small business credit if credit unions originate a
                substantial number of small business loans with origination values
                of under $50,000. For this analysis, the Bureau includes all types
                of commercial loans to members except construction and development
                loans and multifamily residential property. This includes loans
                secured by farmland; loans secured by owner-occupied, non-farm, non-
                residential property; loans secured by non-owner occupied, non-farm,
                non-residential property; loans to finance agricultural production
                and other loans to farmers; commercial and industrial loans;
                unsecured commercial loans; and unsecured revolving lines of credit
                for commercial purposes. The Bureau does include multifamily in part
                VII below.
                ---------------------------------------------------------------------------
                 The remaining $190 billion in outstanding balances for private term
                loans and lines of credit was extended by various nondepository
                institutions, namely commercial finance companies, fintechs, and
                nondepository CDFIs.\106\
                ---------------------------------------------------------------------------
                 \106\ There may additionally be lending by equipment and vehicle
                dealers originating loans in their own name that is not captured
                here.
                ---------------------------------------------------------------------------
                 Commercial finance companies specialize in financing equipment and
                vehicle purchases. The Bureau estimates that the value of outstanding
                balances on credit extended by commercial finance companies totaled
                approximately $160 billion. Using data from the Federal Reserve Board's
                Finance Company Business Receivables data on owned assets as of
                December 2019, the Bureau estimates commercial finance companies
                outstanding credit for commercial purposes as the value of retail motor
                vehicle loans plus equipment loans and other business receivables,
                which totaled about $215 billion.\107\ The Bureau further assumes that
                about 75 percent of this value, or $162 billion, can be attributed to
                loans to small businesses.\108\
                ---------------------------------------------------------------------------
                 \107\ Bd. of Governors of the Fed. Reserve Sys., Finance
                Companies--G.20 (updated July 15, 2021), https://www.federalreserve.gov/releases/g20/hist/fc_hist_b_levels.html. The
                Bureau does not include leases, since they are already counted
                within the product category of equipment and vehicle leasing, or
                wholesale loans, which it assumes are typically made to non-small
                businesses.
                 \108\ This methodology is consistent with the approach taken by
                Gopal and Schnabl (2020).
                ---------------------------------------------------------------------------
                 Typical fintech providers are characterized primarily by providing
                banking services exclusively in an online environment.\109\ The Bureau
                estimates that total outstanding loan balances for fintech providers
                reached around $25 billion in 2019. In a 2018 report, S&P Global
                projected that online
                [[Page 56367]]
                platform lenders would originate about $9.3 billion in credit to small
                and medium enterprises in 2019.\110\ Using this estimate, the Bureau
                scales up the value of originations to $25 billion in estimated
                outstanding balances, under the assumptions discussed above.\111\ At
                the beginning of the COVID-19 pandemic and financial crisis, fintechs
                originated around $22 billion in PPP loans to small businesses from
                March to August 2020 \112\ and likely continued to originate billions
                more during the third wave of PPP loans in 2021, which represents an
                almost 90 percent increase or more in outstanding balances since
                2019.\113\ This follows already rapid growth from $1.4 billion in
                estimated outstanding balances in 2013.\114\
                ---------------------------------------------------------------------------
                 \109\ Barkley & Schweitzer, 17 Int'l J. Cent. Banking at 35-36.
                 \110\ 2018 US Fintech Market Report at 6.
                 \111\ The Bureau notes that this figure may underestimate the
                total value of fintech lending because it focuses on platform
                lenders and may overestimate the value of lending to small
                businesses because it also includes credit to medium businesses.
                Additionally, the Bureau notes that fintechs often offer products
                besides loans and lines of credit, and that there is no clear
                demarcation between fintech, commercial finance company, and MCA
                provider, limiting the precision of market size estimates. Finally,
                fintechs often sell loans once originated to other entities,
                securitize their originations, or purchase loans that banks have
                originated, which may further present challenges to the precision of
                market size estimates for this market segment.
                 \112\ Jessica Battisto et al., Who Benefited from PPP Loans by
                Fintech Lenders?, Liberty Street Economics (May 27, 2021), https://libertystreeteconomics.newyorkfed.org/2021/05/who-received-ppp-loans-by-fintech-lenders.html; Small Bus. Admin., Paycheck
                Protection Program (PPP) Report (approvals through 12 p.m. EST Apr.
                16, 2020), https://www.sba.gov/sites/default/files/2020-06/PPP%20Deck%20copy-508.pdf; Small Bus. Admin., Paycheck Protection
                Program (PPP) Report (approvals through Aug. 8, 2020), https://www.sba.gov/sites/default/files/2020-08/PPP_Report%20-%202020-08-10-508.pdf.
                 \113\ Per the program's intent, many PPP loans have been
                forgiven since the program began, which may mean that outstanding
                balances on PPP loans extended by fintech providers have since
                declined.
                 \114\ Barkley & Schweitzer, 17 Int'l J. Cent. Banking at 35-36
                (citing 2018 US Fintech Market Report at 5). This figure annualizes
                $121 million in estimated 2013 quarterly originations to $484
                million in annual originations and scales up to estimated
                outstanding balances using the ratio between the FFIEC Call Report
                and the CRA data discussed above.
                ---------------------------------------------------------------------------
                 The Bureau estimates the value of outstanding balances on credit
                extended by nondepository CDFIs to small business borrowers to be
                around $1.5 billion. Using reporting by the CDFI Fund for 2019, the
                Bureau scales down the outstanding balances for loan funds of $13.8
                billion and for venture capital funds of $0.3 billion by the proportion
                of all CDFI lending attributable to business borrowers, which totaled
                $15.4 billion out of $141.2 billion.\115\
                ---------------------------------------------------------------------------
                 \115\ CDFI Fund, CDFI Annual Certification and Data Collection
                Report (ACR): A Snapshot for Fiscal Year 2019, at 17, 22 (Oct.
                2020), https://www.cdfifund.gov/sites/cdfi/files/2021-01/ACR-Public-Report-Final-10292020-508Compliant.pdf. To the extent that CDFI loan
                funds and venture capital funds extend credit to business customers
                at different rates than CDFI banks and credit unions, this
                calculation may over- or underestimate the value of lending to small
                businesses by nondepository CDFIs. This figure also assumes that all
                CDFI lending is for small businesses.
                ---------------------------------------------------------------------------
                 Categorized here separately so as to distinguish residential from
                non-residential loans, the Bureau estimates outstanding balances for
                loans on 5+ unit residential dwellings to total over $30 billion.\116\
                Using data from the Mortgage Bankers Association, the Bureau scales up
                $11 billion in 2019 annual originations on loans of under $1 million in
                value at origination for 5+ unit residential dwellings to $30 billion
                in estimated outstanding balances, using the ratio between the FFIEC
                Call Report and the CRA data discussed above.\117\
                ---------------------------------------------------------------------------
                 \116\ Depository institutions, discussed above, extend a
                sizeable proportion of loans for 5+ unit residential dwellings; both
                nondepository and depository institutions are included in the total
                for 5+ unit outstanding balances.
                 \117\ See Mortg. Bankers Ass'n, Annual Report on Multi-Family
                Lending--2019, at 5 (2020), https://www.mba.org/store/products/research/general/report/2019-annual-report-on-multifamily-lending.
                This includes both private loans, estimated at around $18 billion,
                and loans extended by Fannie Mae, Freddie Mac, and the FHA,
                estimated at around $13 billion. The share of 5+ unit residential
                dwelling loans of all sizes extended by governmental or government-
                sponsored entities was 41 percent. The Bureau assumes for the
                purposes of this exercise that the same share is reflected in loans
                of under $1 million in value at origination, although arguably this
                share would be higher if government and government-sponsored
                entities are extended disproportionately smaller dollar value loans
                on average.
                ---------------------------------------------------------------------------
                 Also categorized separately from depository institution totals so
                as to distinguish private from government and government-sponsored
                loans, the Bureau estimates that outstanding balances for loans
                extended by the Small Business Administration and the Farm Credit
                System totaled around $200 billion in 2019.\118\
                ---------------------------------------------------------------------------
                 \118\ The grand total for lending by government and government-
                sponsored entities would be approximately $210 billion, including 5+
                unit residential dwelling loans extended by Fannie Mae, Freddie Mac,
                and the FHA, which are separately recorded within the 5+ unit
                residential dwelling loan product category.
                ---------------------------------------------------------------------------
                 The SBA, through its traditional 7(a), 504, and microloan programs
                as well as the Economic Impact Disaster Loan (EIDL) program and funding
                for Small Business Investment Companies (SBICs), is the largest
                governmental lender by value, with $143.5 billion in outstanding
                balances at the end of fiscal 2019.\119\ However, since the outbreak of
                the COVID-19 pandemic, SBA lending has increased in size by over $1
                trillion due to the PPP, which totaled $800 billion, and the EIDL
                Program, which totaled $210 billion.\120\
                ---------------------------------------------------------------------------
                 \119\ Small Bus. Admin., Small Business Administration Loan
                Program Performance (effective Mar. 31, 2021), https://www.sba.gov/document/report-small-business-administration-loan-program-performance. SBA guaranteed loans comprised $134 billion out of this
                total, which amount has been deducted from the totals for depository
                institutions to avoid double counting.
                 \120\ Small Bus. Admin., Paycheck Protection Program (PPP)
                Report (approvals through May 31, 2021), https://www.sba.gov/sites/default/files/2021-06/PPP_Report_Public_210531-508.pdf; Small Bus.
                Admin., Disaster Assistance Update--Nationwide COVID EIDL, Targeted
                EIDL Advances, Supplemental Targeted Advances (June 3, 2021),
                https://www.sba.gov/sites/default/files/2021-06/COVID-19%20EIDL%20TA%20STA_6.3.2021_Public-508.pdf; Small Bus. Admin.,
                Disaster Assistance Update--Nationwide EIDL Loans (Nov. 23, 2020),
                https://www.sba.gov/sites/default/files/2021-02/EIDL%20COVID-19%20Loan%2011.23.20-508_0.pdf.
                ---------------------------------------------------------------------------
                 The Farm Credit System is another important government-related part
                of the small business credit landscape. The Bureau estimates that Farm
                Credit System members had around $55 billion in outstanding balances of
                credit extended to small farms in 2019. Using the same small loan to
                farms proxy as is used in the FFIEC Call Report, the Bureau estimates
                credit to farms with an origination value of less than $500,000. Based
                on the Farm Credit System's 2019 Annual Information Statement of the
                Farm Credit System, the Bureau estimates that outstanding balances of
                such small credit to farms totaled $55 billion at the end of 2019.\121\
                The Bureau notes that, as with the FFIEC Call Report proxy, this number
                may include credit to non-small farms and may exclude larger credit
                transactions extended to small farms.
                ---------------------------------------------------------------------------
                 \121\ Fed. Farm Credit Banks Funding Corp., Farm Credit 2019
                Annual Information Statement of the Farm Credit System, at 54,
                https://www.farmcreditfunding.com/ffcb_live/investorResources/informationStatements.html (last visited Aug. 13, 2021).
                ---------------------------------------------------------------------------
                 Mostly extended by depository institutions, the Bureau estimates
                that the market for small business credit cards totaled over $60
                billion in outstanding balances for 2020.\122\ Using data from Y-14
                Form submissions to the Federal Reserve Board, the Bureau estimates the
                value of outstanding balances for small business credit card accounts
                where the loan is underwritten
                [[Page 56368]]
                with the sole proprietor or primary business owner as an
                applicant.\123\
                ---------------------------------------------------------------------------
                 \122\ See Bd. of Governors of the Fed. Reserve Sys., Report
                Forms FR Y-14M, https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDYnbIw+U9pka3sMtCMopzoV (last visited
                July 12, 2021). The Board's data are received from bank holding
                companies over $50 billion in assets, which represent 70 percent of
                outstanding balances for consumer credit cards; the corresponding
                percent of balances captured for small business cards is not known,
                so the total small business-purpose credit card market could be
                substantially higher or lower. See Bureau of Consumer Fin. Prot.,
                The Consumer Credit Card Market, at 18 (Aug. 2019), https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2019.pdf.
                 \123\ Off. of Mgmt. & Budget, Instructions for the Capital
                Assessments and Stress Testing Information Collection (Reporting
                Form FR-Y14M), OMB No. 7100-0341, at 148 (Mar. 2020), https://omb.report/icr/202101-7100-006/doc/108187801.
                ---------------------------------------------------------------------------
                 Equipment and vehicle leasing, whereby businesses secure the right
                to possess and use a piece of equipment or vehicle for a term in return
                for consideration, is another important product category that is
                estimated to value roughly $160 billion in outstanding balances in
                2019. Using data from the Equipment Leasing and Financing Foundation
                for 2019, the Bureau estimates the total size of the equipment and
                vehicle leasing market for all sized businesses in 2019 to be
                approximately $900 billion.\124\ The Bureau further assumes that small
                businesses comprise around 18 percent of the total equipment and
                vehicle leasing market.\125\
                ---------------------------------------------------------------------------
                 \124\ See Equip. Leasing & Fin. Found., Horizon Report, https://www.leasefoundation.org/industry-resources/horizon-report/ (last
                updated Apr. 22, 2021).
                 \125\ See Karen Mills, Harvard Bus. Sch., State of Small
                Business Lending, at 29 (July 2014), https://www.hbs.edu/ris/Supplemental%20Files/15-004%20HBS%20Working%20Paper%20Chart%20Deck_47695.pdf (estimating
                equipment leasing outstanding balances for small business borrowers
                at approximately $160 billion at Dec. 31, 2013); Monitor Daily, SEFI
                Report Finds Strong Performance Despite Challenges, https://www.monitordaily.com/news-posts/sefi-report-finds-strong-performance-despite-challenges/ (last visited July 27, 2021) ($903
                billion market in 2014, commensurate with an 18 percent market share
                for small business borrowers at the time of the Karen Mills report).
                ---------------------------------------------------------------------------
                 Factoring is a similarly significant product type, estimated at
                around $100 billion in market size for 2019.\126\ In a factoring
                transaction, factors purchase, at a discount, a legally enforceable
                claim for payment (i.e., accounts receivables or invoices) for goods
                already supplied or services already rendered by a business for which
                payment has not yet been made; hence, a factor's risk related to
                repayment often lies with the business's customer and not the business
                itself. In most cases, specific companies, called factors, provide
                factoring products.
                ---------------------------------------------------------------------------
                 \126\ See Secured Fin. Found., 2019 Secured Finance: Market
                Sizing & Impact Study Extract Report, at 7 (June 2019), https://www.sfnet.com/docs/default-source/data-files-and-research-documents/sfnet_market_sizing___impact_study_extract_f.pdf?sfvrsn=72eb7333_2.
                This study estimated the total volume of the U.S. factoring market
                to be $101 billion. To the extent that factoring volumes differ from
                outstanding balances, the value of outstanding balances may be
                higher or lower than this estimate. Also, this estimate captures
                factoring for business borrowers of all sizes, not just small
                business borrowers. The Bureau assumes that most factoring is
                provided to small business customers.
                ---------------------------------------------------------------------------
                 The market for MCAs is developing rapidly and data are even more
                scarce than for other segments of the small business lending market.
                This limits the reliability of estimates as to the MCA market's size.
                Based on market research conducted by Bryant Park Capital (BPC) and
                reported on by deBanked.com, the Bureau estimates the 2019 market size
                to be around $20 billion.\127\ The MCA market is also of particular
                significance for smaller and traditionally underserved businesses that
                may not qualify for other types of credit.\128\ MCAs are typically
                structured to provide a lump sum payment up front (a cash advance) in
                exchange for a share of future revenue until the advance, plus an
                additional amount, is repaid. Unlike the majority of other small
                business financing products, MCAs typically purport to be for short
                durations.\129\ The Bureau understands that MCAs also tend to be
                relatively high-cost products.\130\ Two States, New York and
                California, will soon implement laws that will require providers of
                ``sales-based financing,'' such as MCAs, to provide disclosures
                (including estimated APR) similar to those required under the Truth in
                Lending Act (TILA),\131\ which generally only applies to consumer
                credit.\132\
                ---------------------------------------------------------------------------
                 \127\ Paul Sweeney, Gold Rush: Merchant Cash Advances are Still
                Hot, deBanked (Aug. 18, 2019), https://debanked.com/2019/08/gold-rush-merchant-cash-advances-are-still-hot/. BPC estimates appear to
                reference origination volumes rather than outstanding balances. See
                Nimayi Dixit, S&P Global Market Intelligence, Payment Fintechs Leave
                Their Mark On Small Business Lending (Aug. 28, 2018), https://www.spglobal.com/marketintelligence/en/news-insights/research/payment-fintechs-leave-their-mark-on-small-business-lending.
                Depending on credit multiplier effects, the value of annual
                origination volumes could be smaller or greater than outstanding
                balances. Without information on outstanding balances and for the
                purposes of calculating a market size for small business financing
                in 2019, the Bureau assumes in this paper a 1:1 ratio between annual
                origination volumes and outstanding balances for MCA products. See
                above for discussion of credit multiplier effects.
                 \128\ Cf. Barbara Lipman & Ann Marie Wiersch, Bd. of Governors
                of the Fed. Reserve Sys., Uncertain Terms: What Small Business
                Borrowers Find When Browsing Online Lender websites, at 3 (Dec.
                2019), https://www.federalreserve.gov/publications/files/what-small-business-borrowers-find-when-browsing-online-lender-websites.pdf
                (observing that online lenders, including providers of MCA products,
                position themselves as offering financing to borrowers underserved
                by traditional lenders).
                 \129\ See id. (stating that MCAs are generally repaid in three
                to 18 months).
                 \130\ Id. (stating that annual percentage rates on MCA products
                can exceed 80 percent or rise to triple digits). See also Fed. Trade
                Comm'n, `Strictly Business' Forum, Staff Perspective, at 5 (Feb.
                2020), https://www.ftc.gov/system/files/documents/report/staff-perspective-paper-ftcs-strictly-business-forum/strickly_business__forum_staff_perspective.pdf (observing
                stakeholder concern about the high-cost of MCAs that can reach
                triple digit annual percentage rates).
                 \131\ 15 U.S.C. 1601 et seq.
                 \132\ New York State law will require, as of January 1, 2022,
                that providers of ``sales-based financing'' provide disclosures to
                borrowers which would include calculations of an estimated annual
                percentage rate in accordance with the Bureau's Regulation Z, 12 CFR
                part 1026. See New York S.898, section 803(c) (signed Jan. 6, 2021)
                (amending S.5470-B), https://legislation.nysenate.gov/pdf/bills/2021/s898. Similarly, California's Department of Financial
                Protection and Innovation is in the process of issuing a rule to
                implement a California law requiring disclosures by commercial
                financing companies, including those providing sales-based
                financing. See 10 Cal. Code Reg. 2057(a)(22) (defining sales-based
                financing as ``a commercial financing transaction that is repaid by
                a recipient to the financer as a percentage of sales or income, in
                which the payment amount increases and decreases according to the
                volume of sales made or income received by the recipient'' and
                including ``a true[hyphen]up mechanism''); 10 Cal. Code Reg.
                2065(a)(3) and 3001 (requiring sales-based financing providers
                disclosure estimated annual percentage rate according to Regulation
                Z, 12 CFR part 1026). Under these laws, providers of commercial
                financing generally will be required to disclose: (1) The total
                amount financed, and the amount disbursed if it is different from
                the total amount financed; (2) the finance charge; (3) the APR (or
                the estimated APR for sales-based financing and factoring
                transactions), calculated in accordance with TILA and Regulation Z;
                (4) the total repayment amount; (5) the term (or the estimated term
                for sales-based financing) of the financing; (6) periodic payment
                amounts; (7) prepayment charges; (8) all other fees and charges not
                otherwise disclosed; and (9) any collateral requirements or security
                interests. See Cal. S.B. 1235 (Sept. 30, 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235; N.Y. S.B. S5470B (July
                23, 2020), https://legislation.nysenate.gov/pdf/bills/2019/S5470B.
                ---------------------------------------------------------------------------
                 Finally, trade credit is another significant market, which the
                Bureau estimates to total $51 billion in outstanding balances in 2019.
                Using a report by Fundbox/PYMNTS, the Bureau estimates the trade credit
                market size by adding the total accounts payable for businesses under
                $1 million in annual revenue.\133\ Considering the total value of
                accounts payable for businesses between $1 million and $5 million would
                increase the market size by $88 billion.\134\ Trade credit is an often
                informal, business-to-business transaction, usually between non-
                financial firms whereby suppliers allow their customers to acquire
                goods and/or
                [[Page 56369]]
                services without requiring immediate payment.
                ---------------------------------------------------------------------------
                 \133\ See Fundbox/PYMNTS.com, The Trade Credit Dilemma, at 11
                (May 2019), https://www.pymnts.com/wp-content/uploads/2019/05/Trade-Credit-Dilemma-Report.pdf (estimating accounts payable for
                businesses with revenue of under $250,000 at $6.7 billion and for
                businesses with revenue of $250,000 to $999,000 at $44.6 billion).
                 \134\ Id. The trade credit market is estimated to total $1.6
                trillion across all business sizes in the United States. In the
                overall $1.4 trillion market size total for all small business
                financing products, the Bureau has included only the trade credit
                market for businesses of up to $1 million in revenue for consistency
                with its White Paper.
                ---------------------------------------------------------------------------
                 The Bureau estimates that there were approximately 8,100 financial
                institutions extending small business financing in 2019, almost 80
                percent of which were depository institutions.
                 Based on FFIEC Call Report data for December 2019, the Bureau
                estimates that about 5,100 banks and savings associations are active in
                the small business lending market, out of a total of about 5,200 banks
                and savings associations.\135\ The Bureau assumes that a bank or
                savings association is ``active'' in the market if it reports a
                positive outstanding balance of small loans, lines of credit, and
                credit cards to businesses.
                ---------------------------------------------------------------------------
                 \135\ Calculated from FFIEC Call Report data accessed on June 8,
                2021.
                ---------------------------------------------------------------------------
                 Based on the NCUA Call Report data for December 2019, the Bureau
                estimates that about 1,200 out of 5,300 total credit unions were active
                in the small business lending market.\136\ The Bureau defines a credit
                union as ``active'' in the market if it reported a positive number of
                originations of loans, lines of credit, and credit cards to members for
                commercial purposes in 2019.
                ---------------------------------------------------------------------------
                 \136\ 2019 NCUA Call Report. (One hundred twelve credit unions
                were not federally insured as of December 2019 but are included here
                as depository institutions. Calculated from NCUA Call Report data
                accessed on June 8, 2021.)
                ---------------------------------------------------------------------------
                 The Bureau estimates that there are about 1,800 nondepository
                institutions active in the small business financing market,\137\
                accounting for around $550 billion in outstanding credit to small
                businesses.
                ---------------------------------------------------------------------------
                 \137\ There may also be cooperative or nonprofit lenders as well
                as equipment and vehicle finance dealers originating in their own
                name that are not captured by the Bureau in these figures. For
                example, by searching Uniform Commercial Code (UCC) filings, Manasa
                Gopal and Philipp Schnabl identified 19 cooperative lenders that
                originated at least 1,500 loans over the period from 2006 to 2016.
                Manasa Gopal & Philipp Schnabl, The Rise of Finance Companies and
                FinTech Lenders in Small Business Lending, N.Y.U. Stern Sch. of
                Bus., at 18 (May 13, 2020), https://ssrn.com/abstract=3600068.
                Additionally, these figures do not include trade creditors, which
                are non-financial companies that extend credit by allowing customers
                a period of time in which to pay and which are much greater in
                number since the practice is widespread across the economy.
                ---------------------------------------------------------------------------
                 The Bureau estimates that about 300 commercial finance companies
                are engaged in small business lending. By searching UCC filings, Manasa
                Gopal and Philipp Schnabl identified almost 300 commercial finance
                companies, including both independent and captive finance companies,
                with at least 1,500 small business loans between 2006 and 2016.\138\
                The Bureau also estimates there to be about 30 or more fintechs
                currently active in the small business lending market, not including
                MCA providers. Using the same methodology as for commercial finance
                companies, Gopal and Schnabl identified 19 fintech companies.\139\ The
                Bureau conservatively increases this estimate to 30 to account for
                rapid growth in the industry from 2016 to 2019.
                ---------------------------------------------------------------------------
                 \138\ Id. This figure combines 192 independent finance companies
                with 95 captive finance companies. Since this estimate captures only
                those commercial finance companies averaging at least 150 loans per
                year over the 2006 to 2016 period, it may exclude smaller volume
                lenders and should be considered conservative.
                 \139\ Id. Since this estimate captures only those fintechs
                averaging at least 150 loans per year over the 2006 to 2016 period,
                it may exclude smaller volume lenders and should be considered
                conservative. On the other hand, since 2019, the COVID-19 economic
                shock may have led to some fintechs scaling back or exiting the
                small business financing market. See, e.g., Ingrid Lunden, Amex
                Acquires SoftBank-backed Kabbage After Tough 2020 for the SMB
                Lender, TechCrunch (Aug. 17, 2020), https://techcrunch.com/2020/08/17/amex-acquires-softbank-backed-kabbage-after-tough-2020-for-the-smb-lender/ (noting that Kabbage temporarily shut down credit lines
                to small businesses during April 2020 and then spun off its small
                business loan portfolio when it was subsequently acquired by
                American Express).
                ---------------------------------------------------------------------------
                 The Bureau estimates that 340 nondepository CDFIs are engaged in
                small business lending. Both depository and nondepository institutions
                can be CDFIs. Depository CDFIs are counted in the numbers of banks,
                savings associations, and credit unions engaged in small business
                lending. According to the CDFI fund, 487 nondepository funds (i.e.,
                loan funds and venture capital funds) reported as CDFIs in 2019.\140\
                Of these, 340 institutions reported that business finance or commercial
                real estate finance were a primary or secondary line of business in
                2019.\141\
                ---------------------------------------------------------------------------
                 \140\ CDFI Fund, CDFI Annual Certification and Data Collection
                Report (ACR): A Snapshot for Fiscal Year 2019, at 8 (Oct. 2020),
                https://www.cdfifund.gov/sites/cdfi/files/2021-01/ACR-Public-Report-Final-10292020-508Compliant.pdf.
                 \141\ Id. at 15-16.
                ---------------------------------------------------------------------------
                 The Bureau estimates that about 270 nondepository mortgage lenders
                participated in the credit market for 5+ unit residential dwellings in
                2019 and that about 50 of these institutions extended 25 or more of
                these loans to small businesses. In its ``2019 Multifamily Lending
                Report,'' the Mortgage Bankers Association lists annual multifamily
                lending volumes by institution, including a distinction for loans of
                under $1 million in value at origination.\142\ Using the same small
                loan to business proxy as is used in the FFIEC Call Report, the Bureau
                estimates the number of nondepository mortgage lenders by counting the
                number of institutions that appear on this list that are not depository
                institutions and that extended at least 50 loans in 2019. The Bureau
                counts institutions extending at least 50 loans of any size in order to
                estimate institutions extending at least 25 small loans, based on the
                assumption that some 50 percent of these loans may have been for values
                greater than $1 million.
                ---------------------------------------------------------------------------
                 \142\ See Mortg. Bankers Ass'n, Annual Report on Multi-Family
                Lending--2019, at 9-66 (2020), https://www.mba.org/store/products/research/general/report/2019-annual-report-on-multifamily-lending.
                _____________________________________-
                 Based on data from UCC filings collected by deBanked.com, the
                Bureau estimates that about 100 institutions were active in the market
                for providing MCA products to small businesses in 2021.\143\
                ---------------------------------------------------------------------------
                 \143\ deBanked, UCC-1 and UCC-3 Filings by Merchant Cash Advance
                Companies & Alternative Business Lenders, https://debanked.com/merchant-cash-advance-resource/merchant-cash-advance-ucc/ (last
                visited July 11, 2021).
                ---------------------------------------------------------------------------
                 The Bureau estimates the number of factors to be between 700-900
                and assumes that most factors are providing financing to small
                business.\144\
                ---------------------------------------------------------------------------
                 \144\ See Secured Fin. Found., 2019 Secured Finance: Market
                Sizing & Impact Study Extract Report, at 15 (June 2019), https://www.sfnet.com/docs/default-source/data-files-and-research-documents/sfnet_market_sizing___impact_study_extract_f.pdf?sfvrsn=72eb7333_2
                (estimating the number of factors at between 700 and 900).
                ---------------------------------------------------------------------------
                 Finally, many government agencies and government-sponsored
                enterprises provide or facilitate a significant proportion of small
                business credit. As the flagship government lender, the Small Business
                Administration managed in 2019 a portfolio of over $140 billion in
                loans to small businesses, to which it added over $1 trillion in loans
                extended as part of the COVID-19 emergency lending programs. Across
                Federal, State, and municipal governments, the Bureau estimates that
                there are likely over 100 government small business lending
                programs.\145\ Additionally, the Farm Credit System reports that, as of
                December 2019, the Farm Credit System contains a total of 72 banks and
                associations.\146\ The Bureau assumes that all of these Farm Credit
                System institutions are engaged in lending to small farms.
                ---------------------------------------------------------------------------
                 \145\ In addition to several Federal small business lending
                programs, States and major municipalities also often have one or
                more programs of their own. One State and one municipal program in
                each State would already total 100 government lending programs
                across Federal, State, and municipal governments.
                 \146\ Fed. Farm Credit Banks Funding Corp., Farm Credit 2019
                Annual Information Statement of the Farm Credit System, at 7 (Feb.
                28, 2020), https://www.farmcreditfunding.com/ffcb_live/serve/public/pressre/finin/.pdf?assetId=395570. The Bureau notes that Farm Credit
                System banks do not report FFIEC Call Reports and are thus not
                counted in the number of banks and savings associations discussed
                above.
                ---------------------------------------------------------------------------
                [[Page 56370]]
                E. Challenges for Women-Owned and Minority-Owned Small Businesses
                 Within the context of small business financing, women-owned and
                minority-owned businesses often face relatively more challenges than
                their counterparts. Specifically, women-owned and minority-owned small
                businesses can be even more susceptible to the impact of economic
                shocks and have a harder time accessing credit to survive and thrive in
                better times.
                 Although women-owned and minority-owned businesses are found in
                many industry sectors, women-owned businesses are concentrated in the
                health care and social assistance sector, while minority-owned
                businesses are primarily concentrated in the service sector, the
                healthcare and social assistance sector, and the administrative
                support, waste management and remediation sectors.\147\ During economic
                downturns, such as the Great Recession and the financial crisis
                resulting from the COVID-19 pandemic, women-owned and minority-owned
                small businesses tend to fare worse than other small businesses. Women
                and minority business owners have been disproportionately hurt by the
                COVID-19 pandemic, with rates of business ownership dropping from
                February to April 2020 by 41 percent, 32 percent, and 26 percent for
                African American, Latinx, and Asian individuals, respectively, compared
                with 17 percent for white individuals.\148\ Female business ownership
                declined by 25 percent, compared with 20 percent for male
                ownership.\149\
                ---------------------------------------------------------------------------
                 \147\ White Paper at 12, 15.
                 \148\ Robert Fairlie, Stanford Inst. for Economic Policy
                Research, Working Paper No. 20-022, The Impact of COVID-19 on Small
                Business Owners: Evidence of Early Stage Losses from the April 2020
                Current Population Survey, at 5 (May 2020), https://siepr.stanford.edu/sites/default/files/publications/20-022.pdf. The
                authors define the rate of business ownership as the percentage of
                the labor force that owns and is actively employed in a business as
                their main job in the survey month. Id. at 3. As such, the decline
                in business ownership could reflect owners not only exiting the
                labor market but also switching to a different (wage and salary)
                job. In many cases, these exit or switching trends were temporary
                reactions to public health lockdowns and have since partially
                reversed.
                 \149\ Id. at 6, 8.
                ---------------------------------------------------------------------------
                 Women-owned and minority-owned small businesses often have smaller
                cash reserves on average, leaving them less able to weather downturns
                and credit crunches. For example, in February 2021, 39 percent of
                women-owned businesses had one month or less in cash reserves, compared
                with 29 percent of men-owned firms.\150\ And in around 90 percent of
                majority Black and Hispanic communities, most businesses have fewer
                than 14 days of cash buffer, while this is true of only 35 percent of
                majority white communities.\151\ As a result, many small businesses,
                especially those owned by women and minorities, may have had a greater
                need for financing just as small business lenders began to approve
                fewer loans in response to economic uncertainty. Loan approvals at
                smaller banks dropped from 50 percent pre-pandemic to 12 percent in
                April 2020 and have settled between 18 and 19 percent since June 2020;
                the trend is similar for large banks, credit unions, and fintechs.\152\
                ---------------------------------------------------------------------------
                 \150\ Eric Groves, Cash Strapped SMBs, While 75% Of PPP Is Still
                Available, Alignable (Feb. 9, 2021), https://www.alignable.com/forum/alignable-road-to-recovery-report-february-2021?utm_campaign=February&utm_medium=Press&utm_source=Press.
                 \151\ JPMorgan Chase Inst., Place Matters: Small Business
                Financial Health in Urban Communities, at 5 (Sept. 2019), https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/institute/pdf/institute-place-matters.pdf.
                 \152\ Biz2Credit, Small Business Lending Index, https://www.biz2credit.com/small-business-lending-index (last visited July
                27, 2021).
                ---------------------------------------------------------------------------
                 The PPP--part of the Federal government's response to the
                pandemic--helped to keep many small businesses afloat, but a number of
                factors prevented minority-owned small businesses from accessing PPP
                loans as easily as other firms. For example, established banking
                relationships between applicants and lending providers were often
                critical to approvals in early PPP underwriting; \153\ many minority-
                owned businesses did not have such relationships.\154\ Further, many
                minority-owned firms are sole proprietorships and independent
                contractors, both of which received delayed access to PPP loans.\155\
                Unprofitable non-employer firms were also initially barred from
                receiving loans.\156\ Although Black-owned firms are more likely to use
                fintech providers, these lenders were only belatedly allowed to
                disburse PPP funds.\157\ However, once fintech providers were allowed
                to disburse PPP loans, Black borrowers in particular benefited from
                this access, highlighting the ability of fintech firms to reach
                minority-owned business borrowers.\158\
                ---------------------------------------------------------------------------
                 \153\ Sara Savat, Who you know matters, even when applying for
                PPP loans, The Source, Newsroom, Wash. Univ. in St. Louis (Feb. 15,
                2021), https://source.wustl.edu/2021/02/who-you-know-matters-even-when-applying-for-ppp-loans/ (previous lender relationship increased
                likelihood of obtaining a PPP loan by 57 percent). See generally 86
                FR 7271, 7280 (Jan. 27, 2021) (noting that many banks restricted
                access to PPP loans to existing customers, which may run a risk of
                violating the ECOA and Regulation B).
                 \154\ Claire Kramer Mills, Fed. Reserve Bank of N.Y., Double
                Jeopardy: COVID-19's Concentrated Health and Wealth Effects in Black
                Communities, at 6 (Aug. 2020), https://www.newyorkfed.org/medialibrary/media/smallbusiness/DoubleJeopardy_COVID19andBlackOwnedBusinesses (arguing that a lack
                of strong banking relationships among Black-owned firms may have led
                to relatively lower rates of access to PPP loans for such firms);
                Fed. Reserve Banks, Small Business Credit Survey: 2021 Report on
                Firms Owned by People of Color, at ii (Apr. 15, 2021), https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2021/sbcs-report-on-firms-owned-by-people-of-color (Small Business Credit
                Survey of Firms Owned by People of Color) (finding that ``firms
                owned by people of color tend to have weaker banking
                relationships'').
                 \155\ Greg Iacurci, Coronavirus loan program delayed for
                independent contractors and self-employed workers, CNBC (Apr. 3,
                2020), https://www.cnbc.com/2020/04/03/delays-in-sba-loans-for-independent-contractors-self-employed-workers.html.
                 \156\ Stacy Cowley, `It Was a Joke': Some Small Businesses Got
                $1 Relief Loans, N.Y. Times (Jan. 11, 2021), https://www.nytimes.com/2021/01/11/business/small-businesses-ppp-covid.html
                (observing that sole proprietorships were initially eligible for PPP
                loans only if they were profitable); see also Stacy Cowley, Minority
                Entrepreneurs Struggled to Get Small-Business Relief Loans, N.Y.
                Times (Apr. 4, 2021), https://www.nytimes.com/2021/04/04/business/ppp-loans-minority-businesses.html (noting that sole proprietorships
                and independent contractor business structures are particularly
                prevalent among minority-owned businesses, which led to minority-
                owned businesses being disproportionately restricted from accessing
                PPP loans during initial roll-out of the program).
                 \157\ Claire Kramer Mills, Fed. Reserve Bank of N.Y., Double
                Jeopardy: COVID-19's Concentrated Health and Wealth Effects in Black
                Communities, at 5-7 (Aug. 2020), https://www.newyorkfed.org/medialibrary/media/smallbusiness/DoubleJeopardy_COVID19andBlackOwnedBusinesses.
                 \158\ Jessica Battisto et al., Liberty Street Economics, Fed.
                Reserve Bank of N.Y., Who Benefited from PPP Loans by Fintech
                Lenders? (May 27, 2021), https://libertystreeteconomics.newyorkfed.org/2021/05/who-benefited-from-ppp-loans-by-fintech-lenders.html.
                ---------------------------------------------------------------------------
                 Finally, applicants whose owners belong to protected categories may
                have received different credit outcomes when applying for PPP loans,
                although limitations in demographic information for PPP loans have
                hindered fair lending analyses.\159\
                ---------------------------------------------------------------------------
                 \159\ Rocio Sanchez-Moyano, Fed. Reserve Bank of S.F., Paycheck
                Protection Program Lending in the Twelfth Federal Reserve District
                (Mar. 3, 2021), https://www.frbsf.org/community-development/publications/community-development-research-briefs/2021/february/ppp-lending-12th-district/ (citing matched-pair audit studies that
                found discouragement and provision of incomplete information for
                minority business owners seeking PPP loans); 86 FR 7271, 7280 (Jan.
                27, 2021) (noting that facially neutral PPP policies such as
                limiting loans to businesses with pre-existing relationships may run
                a risk of violating the ECOA and Regulation B due to a
                disproportionate impact on a prohibited basis).
                ---------------------------------------------------------------------------
                 Given the severity of the COVID-19 pandemic for small businesses
                generally and its potentially disproportionate impact on women-owned
                and minority-owned small businesses, it is essential to better
                understand the small business financing landscape to maintain support
                for this key part of the U.S. economy both during and after the
                pandemic.
                [[Page 56371]]
                F. The Purposes and Impact of Section 1071
                 The Dodd-Frank Act sets forth the Bureau's purposes and mission. It
                provides that a key component of the Bureau's fair lending work is to
                ensure fair, equitable, and nondiscriminatory access to credit for both
                individuals and their communities.\160\ And in passing section 1071,
                Congress articulated two purposes for requiring the Bureau to collect
                data on small business credit applications and loans--to ``facilitate
                enforcement of fair lending laws'' and to ``enable communities,
                governmental entities, and creditors to identify business and community
                development needs and opportunities of women-owned, minority-owned, and
                small businesses.'' \161\ Although the Dodd-Frank Act does not further
                explain or clarify these dual statutory purposes, other Federal laws
                shed light on both purposes. That is, a set of existing Federal laws
                form the backdrop for the use of 1071 data to facilitate the
                enforcement of fair lending laws, and to identify business and
                community development needs of small businesses across the United
                States.
                ---------------------------------------------------------------------------
                 \160\ See 12 U.S.C. 5493(c)(2)(A) (directing the Office of Fair
                Lending and Equal Opportunity to provide ``oversight and enforcement
                of Federal laws intended to ensure the fair, equitable, and
                nondiscriminatory access to credit for both individuals and
                communities that are enforced by the Bureau,'' including ECOA and
                the Home Mortgage Disclosure Act).
                 \161\ ECOA section 704B(a).
                ---------------------------------------------------------------------------
                1. Facilitating Enforcement of Fair Lending Laws
                 Congress intended for section 1071 to ``facilitate enforcement of
                fair lending laws,'' \162\ which include ECOA, the Home Mortgage
                Disclosure Act of 1975 (HMDA),\163\ the Fair Housing Act (FHAct),\164\
                and other Federal and State anti-discrimination laws.
                ---------------------------------------------------------------------------
                 \162\ Id.
                 \163\ 12 U.S.C. 2801 et seq.
                 \164\ 42 U.S.C. 3601 through 3619.
                ---------------------------------------------------------------------------
                i. Equal Credit Opportunity Act (ECOA)
                 ECOA, which is implemented by Regulation B, applies to all
                creditors. Congress first enacted ECOA in 1974 to require financial
                institutions and other firms engaged in the extension of credit to
                ``make credit equally available to all creditworthy customers without
                regard to sex or marital status.'' \165\ Two years later, Congress
                expanded ECOA's scope to include age, race, color, religion, national
                origin, receipt of public assistance benefits, and exercise of rights
                under the Federal Consumer Credit Protection Act.\166\
                ---------------------------------------------------------------------------
                 \165\ Public Law 93-495, tit. V, section 502, 88 Stat. 1500,
                1521 (1974).
                 \166\ See Equal Credit Opportunity Act Amendments of 1976,
                Public Law 94-239, section 701(a), 90 Stat. 251, 251 (1976).
                ---------------------------------------------------------------------------
                 ECOA makes it unlawful for any creditor to discriminate against any
                applicant with respect to any aspect of a credit transaction (1) on the
                basis of race, color, religion, national origin, sex (including sexual
                orientation and gender identity),\167\ marital status, or age (provided
                the applicant has the capacity to contract); (2) because all or part of
                the applicant's income derives from any public assistance program; or
                (3) because the applicant has in good faith exercised any right under
                the Consumer Credit Protection Act.\168\ In keeping with the broad
                reach of the statute's prohibition, Regulation B covers creditor
                activities before, during, and after the extension of credit.\169\
                Regulation B also bars creditors from making any oral or written
                statement, in advertising or otherwise, to applicants or prospective
                applicants that would discourage, on a prohibited basis, a reasonable
                person from making or pursuing an application.\170\ Regulation B also
                generally prohibits creditors from making inquiries about whether an
                applicant is a member of certain protected categories.\171\
                ---------------------------------------------------------------------------
                 \167\ In March 2021, the Bureau issued an interpretive rule
                clarifying that the scope of ECOA's and Regulation B's prohibition
                on credit discrimination on the basis of sex encompasses
                discrimination based on sexual orientation and gender identity,
                including discrimination based on actual or perceived nonconformity
                with sex-based or gender-based stereotypes and discrimination based
                on an applicant's associations. 86 FR 14363 (Mar. 16, 2021). See
                also Press Release, Bureau of Consumer Fin. Prot., CFPB Clarifies
                That Discrimination by Lenders on the Basis of Sexual Orientation
                and Gender Identity Is Illegal (Mar. 9, 2021), https://www.consumerfinance.gov/about-us/newsroom/cfpb-clarifies-discrimination-by-lenders-on-basis-of-sexual-orientation-and-gender-identity-is-illegal/. The interpretive rule states that an example
                of discriminatory sex-based or gender-based stereotyping occurs if a
                small business lender discourages a small business owner appearing
                at its office from applying for a business loan and tells the
                prospective applicant to go home and change because, in the view of
                the creditor, the small business customer's attire does not accord
                with the customer's gender. 86 FR at 14365.
                 \168\ 15 U.S.C. 1601 et seq.
                 \169\ See Regulation B Sec. 1002.4(a) and (b).
                 \170\ Id. Sec. 1002.4(b).
                 \171\ Id. Sec. 1002.5(b) through (d).
                ---------------------------------------------------------------------------
                 The Bureau has recognized the following methods of proving lending
                discrimination under ECOA and Regulation B: Overt evidence of
                discrimination, evidence of disparate treatment, and evidence of
                disparate impact.\172\ Overt evidence of discrimination exists when a
                creditor blatantly discriminates on a prohibited basis.\173\ Disparate
                treatment occurs when a creditor treats an applicant differently based
                on a prohibited basis such as race or national origin.\174\ Disparate
                impact occurs when a creditor employs facially neutral policies or
                practices that have an adverse effect or impact on a member of a
                protected class unless the facially neutral policies or practices meet
                a legitimate business need that cannot reasonably be achieved by means
                that are less disparate in their impact.\175\
                ---------------------------------------------------------------------------
                 \172\ See Bureau of Consumer Fin. Prot., CFPB Bulletin 2012-04
                (Fair Lending), Lending Discrimination (Apr. 18, 2012), https://files.consumerfinance.gov/f/201404_cfpb_bulletin_lending_discrimination.pdf (Interagency Policy
                Statement on Discrimination in Lending) (concurring with Interagency
                Task Force on Fair Lending, Policy Statement on Discrimination in
                Lending, 59 FR 18266 (Apr. 15, 1994)).
                 \173\ See Interagency Policy Statement on Discrimination in
                Lending at 18268.
                 \174\ See Regulation B comment 4(a)-1 (stating that
                ``[d]isparate treatment on a prohibited basis is illegal whether or
                not it results from a conscious intent to discriminate''); Bureau of
                Consumer Fin. Prot., Equal Credit Opportunity Act (ECOA) Examination
                Procedures, at 1 (Oct. 30, 2015), https://files.consumerfinance.gov/f/documents/201510_cfpb_ecoa-narrative-and-procedures.pdf (ECOA
                Examination Procedures); see also Interagency Policy Statement on
                Discrimination in Lending at 18268.
                 \175\ See Regulation B comment 6(a)-2; ECOA Examination
                Procedures at 1; see also Interagency Policy Statement on
                Discrimination in Lending at 18269.
                ---------------------------------------------------------------------------
                 Multiple Federal regulators can enforce violations of ECOA and
                Regulation B and apply various penalties. Enforcement and penalties for
                those who violate ECOA and Regulation B are set forth in 15 U.S.C.
                1691e(b) and 12 CFR 1002.16. Violations may also result in civil money
                penalties, which are governed by 12 U.S.C. 5565(c)(3). The Bureau and
                multiple other Federal regulators have the statutory authority to bring
                actions to enforce the requirements of ECOA.\176\ These regulators have
                the authority to engage in research, conduct investigations, file
                administrative complaints, hold hearings, and adjudicate claims through
                the administrative enforcement process regarding ECOA. Regulators also
                have independent litigation authority and can file cases in Federal
                court alleging violations of fair lending laws under their
                jurisdiction. Like other Federal regulators who are assigned
                enforcement authority under section 704 of ECOA, the Bureau is required
                to refer matters to the Department of Justice (DOJ) when it has reason
                to
                [[Page 56372]]
                believe that a creditor has engaged in a pattern or practice of lending
                discrimination.\177\ Private parties may also bring claims under the
                civil enforcement provisions of ECOA, including individual and class
                action claims against creditors for actual and punitive damages for any
                violation of ECOA.\178\
                ---------------------------------------------------------------------------
                 \176\ These regulators include the OCC, the Board, the FDIC, the
                NCUA, the Surface Transportation Board, the Civil Aeronautics Board,
                the Secretary of Agriculture, the Farm Credit Administration, the
                Securities and Exchange Commission, the SBA, the Secretary of
                Transportation, the Bureau, and the FTC. See 15 U.S.C. 1691c;
                Regulation B Sec. 1002.16(a).
                 \177\ See 15 U.S.C. 1691e(h).
                 \178\ 15 U.S.C. 1691e(a); Regulation B Sec. 1002.16(b)(1).
                ---------------------------------------------------------------------------
                ii. Home Mortgage Disclosure Act (HMDA)
                 HMDA, implemented by the Bureau's Regulation C (12 CFR part 1003),
                requires lenders who meet certain coverage tests to report detailed
                information to their Federal supervisory agencies about mortgage
                applications and loans at the transaction level. These reported data
                are a valuable resource for regulators, researchers, economists,
                industry, and advocates assessing housing needs, public investment, and
                possible discrimination as well as studying and analyzing trends in the
                mortgage market for a variety of purposes, including general market and
                economic monitoring. There may be some overlap between what is required
                to be reported under HMDA and what is covered by section 1071 for
                certain mortgage applications and loans for women-owned, minority-
                owned, and small businesses.
                 A violation of HMDA and Regulation C is subject to administrative
                sanctions, including civil money penalties. Compliance can be enforced
                by the Bureau, the U.S. Department of Housing and Urban Development
                (HUD), the FDIC, the Board, the National Credit Union Administration
                (NCUA), or the Office of the Comptroller of Currency (OCC). These
                regulators have the statutory authority to bring actions to enforce the
                requirements of HMDA and to engage in research, conduct investigations,
                file administrative complaints, hold hearings, and adjudicate claims
                through the administrative enforcement process regarding HMDA.
                iii. Fair Housing Act (FHAct)
                 Title VIII of the Civil Rights Act of 1968, as amended (Fair
                Housing Act, or FHAct), prohibits discrimination in the sale, rental,
                or financing of dwellings and in other housing-related activities
                because of race, color, religion, sex (including sexual orientation and
                gender identity),\179\ disability,\180\ familial status, or national
                origin.\181\ The Fair Housing Act \182\ and its implementing
                regulations specifically prohibit discrimination in the making of
                loans,\183\ the purchasing of loans,\184\ and in setting the terms and
                conditions for making loans available,\185\ without reference to
                consumers, legal entities, or the purpose of the loan being made,
                although these prohibitions relate exclusively to dwellings.\186\ As
                with ECOA, the courts have recognized three methods of proof of lending
                discrimination under the FHAct: (1) Overt evidence of discrimination;
                (2) evidence of disparate treatment; and (3) evidence of disparate
                impact.\187\
                ---------------------------------------------------------------------------
                 \179\ See U.S. Dep't of Hous. & Urban Dev., Implementation of
                Executive Order 13988 on the Enforcement of the Fair Housing Act
                (Feb. 11, 2021), https://www.hud.gov/sites/dfiles/PA/documents/HUD_Memo_EO13988.pdf.
                 \180\ The Bureau uses the term ``disability'' to refer to what
                the FHA and its implementing regulations term a ``handicap'' because
                that is the preferred term. See, e.g., Hunt v. Aimco Props., L.P.,
                814 F.3d 1213, 1218 n.1 (11th Cir. 2016) (noting the term disability
                is generally preferred over handicap).
                 \181\ 42 U.S.C. 3601 through 3619, 3631.
                 \182\ 42 U.S.C. 3605(b) (noting that for purposes of 3605(a), a
                ``residential real estate-related transaction'' includes the making
                or purchasing of loans or providing other financial assistance for
                purchasing, constructing, improving, repairing, or maintaining a
                dwelling, or transactions secured by residential real estate).
                 \183\ 24 CFR 100.120.
                 \184\ 24 CFR 100.125.
                 \185\ 24 CFR 100.130.
                 \186\ A ``dwelling,'' as defined by the Fair Housing Act, is any
                building, structure, or portion thereof which is occupied as, or
                designed or intended for occupancy as, a residence by one or more
                families, and any vacant land which is offered for sale or lease for
                the construction or location thereon of any such building,
                structure, or portion thereof. 42 U.S.C. 3602(b).
                 \187\ See Interagency Policy Statement on Discrimination in
                Lending at 18268. See also 78 FR 11459, 11459 (Feb. 15, 2013)
                (stating that HUD, which is statutorily charged with the authority
                and responsibility for interpreting and enforcing the Fair Housing
                Act and with the power to make rules implementing the Act, ``has
                long interpreted the Act to prohibit practices with an unjustified
                discriminatory effect, regardless of whether there was an intent to
                discriminate'').
                ---------------------------------------------------------------------------
                 The DOJ and HUD are jointly responsible for enforcing the Fair
                Housing Act. The Fair Housing Act authorizes the HUD Secretary to issue
                a Charge of Discrimination on behalf of aggrieved persons following an
                investigation and a determination that reasonable cause exists to
                believe that a discriminatory housing practice has occurred.\188\ The
                DOJ may bring lawsuits where there is reason to believe that a person
                or entity is engaged in a ``pattern or practice'' of discrimination or
                where a denial of rights to a group of persons raises an issue of
                general public importance,\189\ or where a housing discrimination
                complaint has been investigated by HUD, HUD has issued a Charge of
                Discrimination, and one of the parties to the case has ``elected'' to
                go to Federal court.\190\ In FHAct cases, HUD and the DOJ can obtain
                injunctive relief, including affirmative requirements for training and
                policy changes, monetary damages and, in pattern or practice cases,
                civil penalties.\191\
                ---------------------------------------------------------------------------
                 \188\ 42 U.S.C. 3610(g)(1) and (2).
                 \189\ See 42 U.S.C. 3614(a).
                 \190\ 42 U.S.C. 3612(o)(1).
                 \191\ See 42 U.S.C. 3612, 3614.
                ---------------------------------------------------------------------------
                 Upon receipt of a complaint alleging facts that may constitute a
                violation of the FHAct or upon receipt of information from a consumer
                compliance examination or other information suggesting a violation of
                the FHAct, Federal executive agencies forward such facts or information
                to HUD and, where such facts or information indicate a possible pattern
                or practice of discrimination in violation of the FHAct, to the
                DOJ.\192\ Private parties may also bring claims under the civil
                enforcement provisions of FHAct.\193\
                ---------------------------------------------------------------------------
                 \192\ 59 FR 2939, 2939 (Jan. 17, 1994).
                 \193\ See 42 U.S.C. 3613.
                ---------------------------------------------------------------------------
                iv. Other Fair Lending Laws
                 Several other Federal statutes seek to promote fair lending. The
                CRA seeks affirmatively to encourage institutions to help to meet the
                credit needs of the entire community served by each institution covered
                by the statute, and CRA ratings take into account lending
                discrimination by those institutions.\194\ The Americans with
                Disabilities Act of 1990 prohibits discrimination against persons with
                disabilities in the provision of goods and services, including credit
                services.\195\ Sections 1981\196\ and 1982 \197\ of the Federal Civil
                Rights Acts are broad anti-discrimination laws that have been applied
                to many aspects of credit transactions.\198\
                ---------------------------------------------------------------------------
                 \194\ See 12 U.S.C. 2901 et seq.
                 \195\ See 42 U.S.C. 12101 et seq.
                 \196\ 42 U.S.C. 1981(a).
                 \197\ 42 U.S.C. 1982.
                 \198\ See, e.g., Jackson v. Novastar Mortg., Inc., 645 F. Supp.
                2d 636 (W.D. Tenn. 2007) (motion to dismiss claim that defendants
                violated sections 1981 and 1982 by racial targeting and by offering
                credit on less favorable terms on the basis of race denied); Johnson
                v. Equicredit Corp., No. 01-CIV-5197, 2002 U.S. Dist. LEXIS 4817
                (N.D. Ill. Mar. 22, 2002) (predatory lending/reverse redlining case
                brought pursuant to section 1981); Hargraves v. Cap. City Mortg.
                Corp., 140 F. Supp. 2d 7 (D.D.C. 2000) (predatory lending/reverse
                redlining case brought under both sections 1981 and 1982),
                reconsideration granted in part, denied in part, 147 F. Supp. 2d 1
                (D.D.C. 2001) (section 1981 claim dismissed for lack of standing,
                but not section 1982 claim); Doane v. Nat'l Westminster Bank USA,
                938 F. Supp. 149 (E.D.N.Y. 1996) (mortgage redlining case brought
                under sections 1981 and 1982); Fairman v. Schaumberg Toyota, Inc.,
                No. 94-CIV-5745, 1996 U.S. Dist. LEXIS 9669 (N.D. Ill. July 10,
                1996) (section 1981 suit over allegedly predatory credit scheme
                targeting African Americans and Hispanics); Steptoe v. Sav. of Am.,
                800 F. Supp. 1542 (N.D. Ohio 1992) (mortgage redlining case brought
                under sections 1981 and 1982 and the Fair Housing Act); Evans v.
                First Fed. Sav. Bank of Ind., 669 F. Supp. 915 (N.D. Ind. 1987)
                (section 1982 can be used in mortgage lending discrimination case);
                Assocs. Home Equity Servs. v. Troup, 778 A.2d 529 (N.J. 2001)
                (predatory lending/reverse redlining case brought pursuant to
                section 1981).
                ---------------------------------------------------------------------------
                [[Page 56373]]
                 Many States and municipalities have also enacted fair lending, fair
                housing, and/or civil rights laws (often modeled on their Federal
                counterparts) that seek to broadly prohibit credit discrimination,
                including protections for business credit.\199\ Some of these laws
                expressly enumerate protections beyond those expressly enumerated in
                the Federal statutes.\200\
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                 \199\ See, e.g., Cal. Civ. Code 51 and 51.5 and Cal. Gov't Code
                12955; Colo. Rev. Stat. 24-34-501(3) and 5-3-210; Conn. Gen. Stat.
                46a-81e, 46a-81f, and 46a-98; Del. Code Ann. tit. 6, 4604; D.C. Code
                2-1402.21; Haw. Rev. Stat. 515-3 and 515-5; 775 Ill. Comp. Stat. 5/
                1-102, 5/1-103, 5/4-102, 5/3-102, and 5/4-103; Iowa Code 216.8A and
                216.10; Me. Rev. Stat. tit. 5, 4553(5-C) and (9-C), 4595 to 4598,
                and 4581 to 4583; Md. Code Ann. State Gov't 20-705, 20-707, and 20-
                1103; Mass. Gen. Laws ch. 151B, 4(3B), (14); Minn. Stat. 363A.03
                (Subd. 44), 363A.09(3), 363A.16 (Subds. 1 and 3), and 363A.17; N.H.
                Rev. Stat. Ann. 354-A:10; N.J. Stat. Ann. 10:5-12(i); N.M. Stat.
                Ann. 28-1-7; N.Y. Civ. Rights Law 40-c(2); N.Y. Exec. Law 296-A; Or.
                Rev. Stat. 174.100(7) and 659A.421; R.I. Gen. Laws 34-37-4(a)
                through (c), 34-37-4.3, and 34-37-5.4; Va. Code Ann. 6.2-501(B)(1),
                15.2-853, and 15.2-965; Vt. Stat. Ann. tit. 8, 10403 and tit. 9,
                2362, 2410, and 4503(a)(6); Wash. Rev. Code 49.60.030, 49.60.040
                (14), (26), and (27), 49.60.175, and 49.60.222; Wis. Stat. 106.50
                and 224.77. There are also a number of municipalities that have
                enacted credit discrimination ordinances. See, e.g., Austin City
                Code 5-1-1 et seq.; N.Y.C. Admin. Code 8-101 and 8-107 et seq.; S.F.
                Police Code 3304(a) et seq.
                 \200\ See, e.g., Mass. Gen. Laws ch. 151B, 4(3B) (prohibiting
                discrimination based on genetic information); N.J. Stat. Ann. 10:5-1
                to 10:5-42 (same); D.C. Code 2-1401.02 and 2-1402.21 (extending
                protections from discrimination to domestic violence victims); Wis.
                Stat. 224.77 (same); N.Y. Exec. Law 296-a (prohibiting
                discrimination on the basis of military status) (credit
                transactions); N.Y. Exec. Law 296(5)(a) through (c) (same) (housing
                transactions); Wash. Rev. Code 49.60.176 (protecting veterans and
                honorably discharged service members); 775 Ill. Comp. Stat. 5/3-101
                and 5/4-101 (prohibiting discrimination based on an applicant's
                unfavorable discharge from the military); 815 Ill. Comp. Stat. 140/
                1a (same). Several other State statutes also prohibit discrimination
                based on the geographic area of residence. See, e.g., 815 Ill. Comp.
                Stat. 120/1 to 120/6; Iowa Code 535A.1 to 535A.9; Md. Code Ann.,
                Com. Law 12-603 (West); Mich. Comp. Laws 445.1601 to 445.1614; Minn.
                Stat. 363A.09(3)(c); N.Y. Banking Law 9-f; Wash. Rev. Code 30.04.500
                to 30.04.515.
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                v. Facilitating Enforcement
                 In order for the 1071 rule to facilitate enforcement of the fair
                lending laws discussed above, the Bureau believes that it must collect
                and make available sufficient data to help the public and regulators
                identify potentially discriminatory lending patterns that could
                constitute violations of fair lending laws. Financial regulators and
                enforcement agencies need a consistent and comprehensive dataset for
                all financial institutions subject to 1071 reporting in order to also
                use 1071 data in their initial prioritization, peer analysis, redlining
                reviews, and screening processes to select institutions for monitoring,
                examination, or investigation. Section 1071 data would facilitate more
                efficient fair lending examinations. For example, regulators could use
                pricing and other data to prioritize fair lending examinations--without
                such data, some financial institutions would face unnecessary
                examination burden while others whose practices warrant closer review
                would not receive sufficient scrutiny.
                 Moreover, as discussed in part V below, the Bureau believes
                specific aspects of its proposal offer particular benefits for the
                enforcement of fair lending laws. For example, the Bureau's proposal
                regarding transactional and institutional coverage would allow
                community groups and government agencies to include most of the small
                business financing market in fair lending analyses. The proposed
                inclusion of pricing data fields such as interest rate and fees would
                provide information on disparities in pricing outcomes, and data fields
                such as gross annual revenue, denial reasons, and time in business
                would allow for a more refined analysis and understanding of
                disparities in both underwriting and pricing outcomes. While 1071 data
                alone generally will not offer proof of compliance with fair lending
                laws, regulators, community groups, researchers, and financial
                institutions will be able to use 1071 data to identify potential
                disparities in small business lending based on disaggregated categories
                of race and ethnicity. Overall, the data collection under 1071 rule
                will allow, for the first time, for comprehensive and market-wide fair
                lending risk analysis.
                2. Identifying Business and Community Development Needs
                 The second purpose of section 1071 is to enable communities,
                governmental entities, and creditors to identify business and community
                development needs and opportunities of women-owned, minority-owned, and
                small businesses.\201\
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                 \201\ ECOA section 704B(a).
                ---------------------------------------------------------------------------
                 Section 1071 does not expressly define the phrase ``business and
                community development needs.'' However, other Federal statutes and
                regulations, including the CRA and the Riegle Community Development and
                Regulatory Improvement Act of 1994,\202\ reference or define the
                phrases ``business development'' and ``community development'' and can
                help explain what it means to enable communities, governmental
                entities, and creditors to ``identify business and community
                development needs and opportunities.''
                ---------------------------------------------------------------------------
                 \202\ Public Law 103-325, tit. I, section 102, 108 Stat. 2160,
                2163 (1994) (12 U.S.C. 4701 through 4719).
                ---------------------------------------------------------------------------
                 The Bureau believes, based on its consideration of these other
                Federal statutes and regulations, that the proposed 1071 rule would
                provide more data to the public--including communities, governmental
                entities, and creditors--for analyzing whether financial institutions
                are serving the credit needs of their small business customers. In
                addition, with 1071 data, the public would be better able to understand
                access to and sources of credit in particular communities or
                industries, such as a higher concentration of risky loan products in a
                given community, and to identify the emergence of new loan products,
                participants, or underwriting practices. The data would not only assist
                in identifying potentially discriminatory practices, but would also
                contribute to a better understanding of the experiences that members
                within certain communities may share in the small business financing
                market.
                i. Community Reinvestment Act (CRA)
                 The CRA, a part of the Housing and Community Development Act, was
                passed by Congress in 1977, which found that ``regulated financial
                institutions have continuing and affirmative obligation to help meet
                the credit needs of the local communities in which they are
                chartered.'' \203\ As such, one of the statutory purposes of the CRA is
                to encourage such institutions to help meet the credit needs of the
                local communities in which they are chartered consistent with the safe
                and sound operation of such institutions.\204\
                ---------------------------------------------------------------------------
                 \203\ 12 U.S.C. 2901(a)(3).
                 \204\ 12 U.S.C. 2901(b).
                ---------------------------------------------------------------------------
                 The legislative history for the CRA suggests that the concerns
                motivating the Act's passage included certain practices by banks
                including redlining (i.e., declining to extend credit in neighborhoods
                populated by ethnic or racial minorities) \205\ and community
                [[Page 56374]]
                disinvestment (i.e., taking deposits from lower-income areas, often
                populated by ethnic or racial minorities, without extending credit or
                banking services to residents of those areas).\206\ The CRA requires
                the ``appropriate Federal financial supervisory agency'' of a given
                depository institution to ``prepare a written evaluation of the
                institution's record of meeting the credit needs of its entire
                community, including low- and moderate-income neighborhoods.'' \207\
                These requirements were first implemented by a 1978 rulemaking,\208\
                and were amended in 1995 \209\ and 2005.\210\ These rulemakings,
                adopted by each of the agencies responsible for ensuring compliance
                with the CRA, established specific performance measures,\211\ requiring
                banks to disclose information about small business, small farm and
                community development lending.\212\
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                 \205\ See H.R. Rep. No. 561, 94th Cong., 1st Sess. 4 (1975)
                (``[The practice of redlining] increasingly has served to polarize
                elements of our society . . . . As polarization intensifies,
                neighborhood decline accelerates.''), reprinted in 1975 U.S.C.C.A.N.
                2303, 2305-06.
                 \206\ Robert C. Art, Social Responsibility in Bank Credit
                Decisions: The Community Reinvestment Act One Decade Later, 18 Pac.
                L.J. 1071, 1076-77 & n.23 (1987) (citing 123 Cong. Rec. S8958 (daily
                ed. June 6, 1977), which stated that Sen. Proxmire, the
                congressional sponsor of the Act described redlining as ``the fact
                that banks and savings and loans will take their deposits from a
                community and instead of reinvesting them in that community, they
                will invest them elsewhere, and they will actually or figuratively
                draw a red line on a map around the areas of their city,'' further
                noting that those lines are drawn ``sometimes in the inner city,
                sometimes in the older neighborhoods, sometimes ethnic and sometimes
                black . . . .'').
                 \207\ 12 U.S.C. 2906(a)(1).
                 \208\ 43 FR 47144 (Oct. 12, 1978).
                 \209\ 60 FR 22156 (May 4, 1995).
                 \210\ 70 FR 44256 (Aug. 2, 2005).
                 \211\ 12 CFR 228.11.
                 \212\ See, e.g., 12 CFR 25.42, 228.11.
                ---------------------------------------------------------------------------
                 The agencies tasked with ensuring compliance--including the
                OCC,\213\ the Board,\214\ and the FDIC \215\--evaluate each insured
                depository institution's record in helping meet the credit needs of its
                entire community.\216\ Overall, the CRA and its regulations generate
                data that help agencies and the public at large identify instances of
                redlining, community disinvestment, and geographical areas that are
                ``banking deserts.'' \217\ The CRA regulations of the Board and the
                FDIC currently have the same definitions of ``community development''
                that include banking and credit services that support the following:
                (1) Affordable housing for low- and moderate-income (LMI) individuals;
                \218\ (2) community services for LMI individuals; \219\ (3) activities
                that promote economic development by financing small business and small
                farms; \220\ and (4) activities that revitalize or stabilize LMI
                geographies, disaster areas, and certain distressed or underserved
                middle-income areas based on other factors.\221\
                ---------------------------------------------------------------------------
                 \213\ 12 CFR part 25.
                 \214\ 12 CFR part 228.
                 \215\ 12 CFR parts 345, 195.
                 \216\ Most specifically, that record is taken into account in
                considering an institution's application for deposit facilities,
                including mergers and acquisitions with other financial institutions
                and the opening of bank branches.
                 \217\ OCC regulations define ``CRA desert'' as an area that has
                ``significant unmet community development or retail lending needs''
                and where: (1) Few banks have branches or non-branch deposit-taking
                facilities, (2) There is ``less retail or community development
                lending than would be expected based on demographic or other
                factors,'' or (3) The area ``lacks community development
                organizations or infrastructure.'' 12 CFR 25.03.
                 \218\ 12 CFR 228.12(g)(1), 345.12(g)(1).
                 \219\ 12 CFR 228.12(g)(2), 345.12(g)(2).
                 \220\ 12 CFR 228.12(g)(3), 345.12(g)(3).
                 \221\ 12 CFR 228.12(g)(4), 345.12(g)(4).
                ---------------------------------------------------------------------------
                 In September 2020, the Board announced an advance notice of
                proposed rulemaking to update its CRA regulations, specifically to more
                effectively meet the needs of LMI communities and address inequities in
                credit access.'' \222\ As part of this exercise, the Board requested
                feedback on potential revisions to its data collection and reporting
                requirements.\223\ The Board suggested that more granular reporting of
                community development loan and investment data may be needed to aid
                community development and improve compliance with the CRA, noting that
                the lack of such data ``means that there is no aggregate community
                development data at a local level available to create the local
                benchmarks for the community development financing metric.'' \224\ As
                such, the publication of 1071 data would also be a useful resource for
                supporting community development efforts under the CRA.
                ---------------------------------------------------------------------------
                 \222\ 85 FR 66410 (Oct. 19, 2020).
                 \223\ Id. at 66459-63.
                 \224\ Id. at 66462.
                ---------------------------------------------------------------------------
                 In June 2020, the OCC promulgated a final rule that adopted a
                broader definition of ``community development'' than the one used by
                the Board and the FDIC.\225\ However, in July 2021, the OCC announced
                that it was reconsidering the June 2020 revisions to its CRA
                regulations,\226\ and that it may join the Board's consideration of
                proposed revisions to strengthen bank compliance with CRA
                regulations.\227\
                ---------------------------------------------------------------------------
                 \225\ The FDIC initially joined the OCC in issuing its early
                2020 proposed rule to expand the definition of ``community
                development'' for purposes of CRA compliance, but it did not join
                the OCC in its issuance of a rule finalizing that proposal. Compare
                85 FR 1204 (Jan. 9, 2020) (joint FDIC-OCC proposal to amend the
                agencies' respective CRA regulations), with 85 FR 34734 (June 5,
                2020) (OCC final rule amending CRA regulations). The rule added to
                the range of activities that comprise ``community development'' for
                purposes of the OCC's revisions to the CRA regulations.
                Specifically, the OCC expanded the qualifying activities criteria to
                capture activities the OCC stated were consistent with the statutory
                purpose of the CRA but that generally did not receive credit under
                CRA regulations prior to the OCC's revisions, including certain
                activities in identified ``areas of need beyond LMI areas (i.e.,
                underserved areas, distressed areas, disaster areas, Indian country
                and other tribal and native lands)'' as well as those activities
                that ``benefit a whole community, while maintaining an appropriate
                focus on LMI neighborhoods.'' 85 FR 34734, 34735 (June 5, 2020); see
                also 12 CFR 25.04(a)(1) (stating that a retail loan, a community
                development loan, a community development investment, or a community
                development service ``that helps to meet the credit needs of a
                bank's entire community, including low- and moderate-income
                communities, is a qualifying activity if it meets the criteria in
                this section at the time the activity is originated, made, or
                conducted''); 12 CFR 25.04(b)(3) (listing 12 sets of activities that
                qualify as community development loans, investments and services).
                 \226\ Off. of the Comptroller of the Currency, OCC Statement on
                Rescinding its 2020 Community Reinvestment Act Rule (News Release
                2021-76) (July 20, 2021), https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-76.html (stating that the OCC will propose
                rescinding its June 2020 CRA final rule).
                 \227\ Id. (noting the crucial nature of strengthening the CRA
                jointly with the Board and FDIC and signaling intention to issue a
                joint notice of proposed rulemaking building on the ANPR proposed by
                the Board in September 2020).
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                ii. Community Development Financial Institution Fund (CDFI Fund)
                 The Riegle Community Development and Regulatory Improvement Act of
                1994 authorized the CDFI Fund.\228\ In passing that statute, Congress
                found that many of the Nation's urban, rural, and Native American
                communities face ``critical social and economic problems arising in
                part from the lack of economic growth, people living in poverty, and
                the lack of employment and other opportunities.'' \229\
                ---------------------------------------------------------------------------
                 \228\ 12 U.S.C. 4701(b).
                 \229\ 12 U.S.C. 4701(a)(1).
                ---------------------------------------------------------------------------
                 To address these problems, Congress created the CDFI Fund to
                ``promote economic revitalization and community development'' through
                investment in and assistance to CDFIs, including enhancing the
                liquidity of CDFIs.\230\
                ---------------------------------------------------------------------------
                 \230\ 12 U.S.C. 4701(b).
                ---------------------------------------------------------------------------
                 The concept of community development is central to the operation of
                the CDFI Fund. While CDFI Fund regulations do not directly define that
                term, any entity applying for CDFI certification must have ``promoting
                community development'' as its ``primary mission.'' \231\ In making
                this determination, the CDFI Fund considers whether the activities of
                the entity are purposefully directed toward improving the social and/or
                economic conditions of underserved people, which may include low-income
                persons or persons
                [[Page 56375]]
                who lack adequate access to capital and financial services and
                residents of economically distressed communities.\232\
                ---------------------------------------------------------------------------
                 \231\ 12 CFR 1805.201(b)(1).
                 \232\ Id.
                ---------------------------------------------------------------------------
                 The CDFI Fund collects data from the recipients of its financial
                and technical assistance, shedding some light on the extent of
                community development in the areas where CDFIs operate.\233\ The CDFI
                Fund also publishes the data it receives with appropriate redactions to
                protect privacy interests.\234\ However, given that CDFIs comprise a
                relatively small share of the overall small business lending market,
                section 1071 would materially enhance understanding of the broader
                extent of community development outside of areas where CDFIs already
                operate. The data from a 1071 rulemaking would also likely augment the
                data the CDFI Fund already receives.
                ---------------------------------------------------------------------------
                 \233\ 12 CFR 1805.803(e) (requiring recipients of technical and
                financial assistance to provide to the CDFI Fund certain information
                and documentation).
                 \234\ 12 CFR 1805.803(e)(4).
                ---------------------------------------------------------------------------
                3. Potential Impact of Section 1071 Data
                 A section 1071 rule would provide on an annual basis application-
                level data on small business credit, including certain protected
                demographic information about applicants and their principal owners.
                This would include information on applications for credit that are
                originated, as well as those that are denied, withdrawn, incomplete, or
                approved by the financial institution but not accepted by the
                applicant. This information would enable stakeholders of all kinds in
                the small business lending market to gain unprecedented insight into
                trends in small business lending, specifically with respect to women-
                owned and minority-owned small businesses. It would also provide
                insight into the interaction of supply and demand over time.
                 In terms of facilitating fair lending enforcement, interested
                government agencies and other stakeholders would be able to use 1071
                data to analyze potential instances of practices resulting in the
                disparate treatment of or disparate impact on women- and minority-owned
                small businesses, using statistical methods to identify possible fair
                lending risks.
                 Regarding the identification of business and community development
                needs, the data that would be made available by the Bureau under this
                rulemaking, if finalized as proposed, would help government entities
                and public and private lenders identify and target sub-segments of the
                market that remain underserved, facilitating entrepreneurship and
                business development in those communities.
                 The advancement of both statutory purposes of section 1071--
                facilitating fair lending enforcement and identifying business and
                community development needs--in turn will support small businesses
                across all sectors of the economy, which are fundamental to the
                economic health of the U.S. and which have been hard hit by recent
                economic and financial crises. The use of data that would be provided
                pursuant to regulations under section 1071 can both support the
                underlying purposes of section 1071 and help the economy as a whole.
                For example, according to one estimate, fair and equitable lending to
                Black entrepreneurs could have added $13 trillion in business revenue
                over the last 20 years and created 6 million jobs.\235\ As the economy
                recovers from the effects of the COVID-19 pandemic, data collected and
                published pursuant to regulations implementing section 1071 would help
                to support equitable and sustainable growth and prosperity in all
                communities in the U.S.
                ---------------------------------------------------------------------------
                 \235\ Citigroup, Citi GPS: Global Perspectives & Solutions,
                Closing the Racial Inequality Gaps: The Economic Cost of Black
                Inequality in the U.S., at 4 (Sept. 2020), https://ir.citi.com/NvIUklHPilz14Hwd3oxqZBLMn1_XPqo5FrxsZD0x6hhil84ZxaxEuJUWmak51UHvYk75VKeHCMI%3D.
                ---------------------------------------------------------------------------
                4. Bureau Priorities
                 On June 2, 2021, the Bureau announced as priorities action to
                address issues of pervasive racial injustice and the long-term economic
                impacts of the COVID-19 pandemic on consumers.\236\ The Acting Director
                explained that the Bureau will use all of its tools and authority--
                including rulemaking--to protect and fight for fairness for all
                consumers in financial markets.\237\ The Bureau believes that
                implementing the section 1071 data collection, maintenance, and
                reporting obligations established in the Dodd-Frank Act would advance
                those priorities.
                ---------------------------------------------------------------------------
                 \236\ Blog post, Dave Uejio, Acting Director, Bureau of Consumer
                Fin. Prot., Addressing racial inequities in consumer finance markets
                (June 2, 2021), https://www.consumerfinance.gov/about-us/blog/addressing-racial-inequities-consumer-finance-markets/.
                 \237\ See Bureau of Consumer Fin. Prot., https://www.consumerfinance.gov/about-us/racial-equity/.
                ---------------------------------------------------------------------------
                 Congress enacted section 1071 for the purposes of facilitating
                enforcement of fair lending laws, and enabling communities,
                governmental entities, and creditors to identify business and community
                development needs and opportunities for women-owned, minority-owned,
                and small businesses. The Bureau believes that 1071 data will come to
                play an important role as HMDA data have done for the mortgage market.
                HMDA data have provided lenders, community groups, and others the tools
                to identify and address fair lending risks and strengthen fair lending
                oversight and enforcement. In a similar way, section 1071 data will
                allow diverse stakeholders to analyze lending patterns that are
                potentially discriminatory. By identifying and addressing
                discriminatory small business lending practices, the Bureau will help
                to ensure fair, equitable, and nondiscriminatory access to credit for
                both individuals and their communities.
                 HMDA data have also proven effective in creating transparency in
                the mortgage market that improves the understanding of credit needs,
                where they may remain unmet, and the relationship between mortgage
                lending and community development. The Bureau believes that the 1071
                data will provide the Bureau and other stakeholders with critical
                insights into the small business lending market. The current COVID-19
                pandemic has shown that transparency is essential at a time of crisis,
                when small businesses, especially those owned by women and minorities,
                may be in urgent need of credit in order to recover from the economic
                shocks. As at least one SER suggested, a 1071 rule would help lenders
                across the country better connect underserved entrepreneurs to working
                capital and resources in order to build a more inclusive economy.
                III. Outreach
                 In the years leading up to the release of this proposed rule, the
                Bureau held over 100 outreach meetings with financial institutions,
                trade associations, community groups, researchers, governmental
                entities, and other stakeholders regarding the 1071 rulemaking. The
                Bureau also took a number of other steps, beyond individual stakeholder
                meetings, to solicit feedback more broadly from the public on a 1071
                rule.
                 Request for information, field hearing, and White Paper on small
                business lending. On May 10, 2017, the Bureau published a request for
                information (RFI) regarding the small business lending market \238\ in
                which it sought public comment to understand more about the products
                that are offered to small businesses, the financial institutions that
                offer such credit, the small business lending data that currently are
                used and may be maintained by financial institutions, the potential
                complexity and cost of small business data collection and reporting,
                [[Page 56376]]
                and privacy concerns related to the disclosure purposes of section
                1071.\239\ On the same date, the Bureau held a field hearing regarding
                section 1071 at which the RFI was announced and then-Director Richard
                Cordray noted the importance of a section 1071 rulemaking given the
                absence of systematic data on how small businesses are faring and
                whether or how much they are being held back by financing
                constraints.\240\ Finally, at the same time, the Bureau also published
                its White Paper on small business lending,\241\ which reflected the
                initial findings of the Bureau's research providing a preliminary
                understanding of the small business lending environment, with a
                particular emphasis on lending to women-owned and minority-owned small
                businesses.
                ---------------------------------------------------------------------------
                 \238\ 82 FR 22318 (May 15, 2017).
                 \239\ In response to the RFI, the Bureau received over 2,000
                comments in total, and over 100 unique comments offering detailed
                substantive responses on the topics raised in the RFI. These
                comments from the public helped to inform the Bureau's approach in
                its SBREFA Outline. See Bureau of Consumer Fin. Prot., Request for
                Information Regarding the Small Business Lending Market, Docket ID
                CFPB-2017-0011, https://www.regulations.gov/docket/CFPB-2017-0011.
                 \240\ See Bureau of Consumer Fin. Prot., Prepared Remarks of
                CFPB Director Richard Cordray at the Small Business Lending Field
                Hearing (May 10, 2017), https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-cfpb-director-richard-cordray-small-business-lending-field-hearing/.
                 \241\ Bureau of Consumer Fin. Prot., Key dimensions of the small
                business lending landscape (May 2017), https://files.consumerfinance.gov/f/documents/201705_cfpb_Key-Dimensions-Small-Business-Lending-Landscape.pdf.
                ---------------------------------------------------------------------------
                 1071 Symposium. In November 2019, the Bureau held a symposium on
                section 1071 to assist the Bureau in its policy development process and
                to receive feedback from experts, including academic, think tank,
                consumer advocate, industry, and government experts in the small
                business lending arena.\242\ The symposium had two panels. The first
                panel focused on the evolution in the small business lending
                marketplace. The second panel included a discussion surrounding the
                implementation of section 1071, including issues raised in response to
                the Bureau's RFI.
                ---------------------------------------------------------------------------
                 \242\ Bureau of Consumer Fin. Prot., Symposium: Section 1071 of
                the Dodd-Frank Act (held Nov. 6, 2019), https://www.consumerfinance.gov/about-us/events/archive-past-events/cfpb-symposium-section-1071-dodd-frank-act/.
                ---------------------------------------------------------------------------
                 Small Business Advisory Review Panel. Under the Small Business
                Regulatory Enforcement Fairness Act of 1996 (SBREFA),\243\ which
                amended the Regulatory Flexibility Act (RFA), the Bureau must convene
                and chair a Small Business Advisory Review Panel (Panel) if it is
                considering a proposed rule that could have a significant economic
                impact on a substantial number of small entities.\244\ The Panel
                considers the impact of the proposals under consideration by the Bureau
                and obtains feedback from representatives of the small entities that
                would likely be subject to the rule. The Panel is comprised of a
                representative from the Bureau, the Chief Counsel for Advocacy of the
                Small Business Administration (SBA), and a representative from the
                Office of Information and Regulatory Affairs (OIRA) in the Office of
                Management and Budget (OMB). Representatives from 20 small businesses
                were selected as small entity representatives (SERs) for this SBREFA
                process. These SERs were representatives of small businesses that are
                financial institutions that would likely be directly affected by a 1071
                rule. These SERs did not represent the small business applicants for
                credit about whom information would be collected and reported under a
                1071 rule.
                ---------------------------------------------------------------------------
                 \243\ Public Law 104-121, 110 Stat. 857 (1996).
                 \244\ 5 U.S.C. 609(b).
                ---------------------------------------------------------------------------
                 On September 15, 2020, the Bureau issued its Outline of Proposals
                under Consideration and Alternatives Considered (Outline or SBREFA
                Outline) for the section 1071 rulemaking, a detailed document that
                discusses (1) the relevant law, (2) the regulatory process, (3) the
                rule proposals the Bureau was considering, and (4) an economic analysis
                of the potential impacts of those proposals on directly affected small
                entities.\245\
                ---------------------------------------------------------------------------
                 \245\ Bureau of Consumer Fin. Prot., Small Business Advisory
                Review Panel for Consumer Financial Protection Bureau Small Business
                Lending Data Collection Rulemaking, Outline of Proposals Under
                Consideration and Alternatives Considered (Sept. 15, 2020), https://files.consumerfinance.gov/f/documents/cfpb_1071-sbrefa_outline-of-proposals-under-consideration_2020-09.pdf (SBREFA Outline). See also
                Bureau of Consumer Fin. Prot., Consumer Financial Protection Bureau
                Releases Outline of Proposals Under Consideration to Implement Small
                Business Lending Data Collection Requirements (Sept. 15, 2020),
                https://www.consumerfinance.gov/about-us/newsroom/cfpb-releases-outline-proposals-implement-small-business-lending-data-collection-requirements/.
                ---------------------------------------------------------------------------
                 The Bureau convened the Panel for this proposed rule on October 15,
                2020 and held a total of four meetings with SERs during October 19-22,
                2020, conducted online via video conference (Panel Outreach Meetings).
                In preparation for the Panel Outreach Meetings and to facilitate an
                informed and detailed discussion of the proposals under consideration,
                discussion questions for the SERs were included throughout the Bureau's
                Outline.\246\
                ---------------------------------------------------------------------------
                 \246\ These questions also appeared in a shorter Discussion
                Guide for Small Entity Representatives. See Bureau of Consumer Fin.
                Prot., Small Business Advisory Review Panel for Consumer Financial
                Protection Bureau Small Business Lending Data Collection Rulemaking,
                Discussion Guide for Small Entity Representatives (Sept. 15, 2020),
                https://files.consumerfinance.gov/f/documents/cfpb_1071-sbrefa_discussion-guide_2020-09.pdf.
                ---------------------------------------------------------------------------
                 In advance of the Panel Outreach Meetings, the Bureau, SBA's Office
                of Advocacy, and OIRA held a series of video conferences with the SERs
                to describe the Small Business Review Process, obtain important
                background information about each SER's current business practices, and
                begin discussions on selected portions of the proposals under
                consideration.
                 All 20 SERs participated in the Panel Outreach Meetings.
                Representatives from the Bureau, SBA's Office of Advocacy, and OIRA
                provided introductory remarks. The meetings were then organized around
                discussions led by the Bureau about each aspect of the proposals under
                consideration and the potential impact on small businesses. The Bureau
                also invited SERs to submit written feedback by November 9, 2020; most
                SERs did so.
                 On December 15, 2020, the Bureau released the Final Report of the
                Small Business Review Panel on the CFPB's Proposals Under Consideration
                for the Small Business Lending Data Collection Rulemaking.\247\ This
                report includes a summary of the feedback received from SERs during the
                panel process (including oral feedback received during the pre-Panel
                video conferences and Panel Outreach Meetings, as well as timely
                submitted written feedback) and findings and recommendations made by
                the Panel.\248\ As required by the RFA, the Bureau considers the
                Panel's findings in its initial regulatory flexibility analysis, as set
                out in part VIII below.
                ---------------------------------------------------------------------------
                 \247\ Bureau of Consumer Fin. Prot., Final Report of the Small
                Business Review Panel on the CFPB's Proposals Under Consideration
                for the Small Business Lending Data Collection Rulemaking (Dec. 14,
                2020), https://files.consumerfinance.gov/f/documents/cfpb_1071-sbrefa-report.pdf (SBREFA Panel Report). See also Bureau of Consumer
                Fin. Prot., Consumer Financial Protection Bureau Releases Report on
                Implementing the Dodd-Frank Act's Small Business Lending Data
                Collection Requirement (Dec. 15, 2020), https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-releases-report-on-implementing-the-dodd-frank-acts-small-business-lending-data-collection-requirement/. The
                Bureau's SBREFA Outline and related materials, as well as the
                Bureau's presentation slides framing the discussion during the Panel
                Outreach Meetings, are appended to the SBREFA Panel Report. See
                SBREFA Panel Report at app. C through F.
                 \248\ The written feedback from SERs is appended to the Panel
                Report. See id. at app. A.
                ---------------------------------------------------------------------------
                 The Bureau also invited other stakeholders to submit feedback on
                the SBREFA Outline by December 14, 2020. The Bureau received
                approximately 60 submissions from a variety of other stakeholders,
                including financial institutions, trade associations,
                [[Page 56377]]
                community groups, a think tank, and a government agency.\249\ Feedback
                from these other stakeholders was not considered by the Panel and is
                not reflected in the Panel Report.
                ---------------------------------------------------------------------------
                 \249\ Feedback received from these stakeholders on the SBREFA
                Outline will be placed on the public docket for this notice.
                ---------------------------------------------------------------------------
                 The Bureau has considered the feedback it received from SERs, the
                findings and recommendations of the Panel, and the feedback from other
                stakeholders in preparing this proposed rule. The feedback, findings,
                and recommendations are summarized throughout this notice where
                relevant.
                 One-Time Cost Survey. On July 22, 2020, the Bureau released a
                voluntary survey to measure the one-time costs of compliance with an
                eventual small business lending data collection rule.\250\ The
                objective of the survey was to solicit, from institutions offering
                small business credit products that could potentially be covered by
                this rule, information about potential one-time costs to prepare to
                collect and report data. The survey did not cover potential on-going
                costs from actually collecting and reporting 1071 data, and assumed
                that reporting was required only for the 13 statutorily required data
                points and that compliance with the statutory firewall requirement was
                not required.\251\ The deadline for responses was October 16, 2020. The
                Bureau received responses from 105 financial institutions.\252\ The
                results of the survey inform the Bureau's analyses of the potential
                impacts of the proposed rule as set out in parts VII and VIII below.
                ---------------------------------------------------------------------------
                 \250\ Bureau of Consumer Fin. Prot., Survey: Small Business
                Compliance Cost Survey (July 22, 2020), https://files.consumerfinance.gov/f/documents/cfpb_1071-survey_2020-10.pdf.
                 \251\ Id. at 1.
                 \252\ See part VI below for additional details regarding this
                survey.
                ---------------------------------------------------------------------------
                 ECOA request for information. On July 28, 2020, the Bureau issued a
                request for information to seek public input on ECOA and Regulation
                B.\253\ In the RFI, the Bureau sought public comment on a number of
                topics, including small business lending and the ways that the Bureau,
                in light of its authority under ECOA and Regulation B, might support
                efforts to meet the credit needs of small businesses, particularly
                those that are minority-owned and women-owned.\254\
                ---------------------------------------------------------------------------
                 \253\ Bureau of Consumer Fin. Prot., Consumer Financial
                Protection Bureau Requests Information on Ways to Prevent Credit
                Discrimination and Build a More Inclusive Financial System (July 28,
                2020), https://www.consumerfinance.gov/about-us/newsroom/cfpb-rfi-prevent-credit-discrimination-build-more-inclusive-financial-system/.
                 \254\ 85 FR 46600, 46602 (Aug. 3, 2020).
                ---------------------------------------------------------------------------
                 Ongoing market monitoring. The Bureau conducts outreach to industry
                and other stakeholders to understand their experiences with the small
                business finance market, economic conditions, and the collection and
                reporting of data regarding that market. A particular near-term
                priority in the Bureau's recent market monitoring has been the impacts
                of the pandemic and the effectiveness of the Federal government
                response. Findings from market monitoring activities inform the Bureau
                on matters affecting the small business sector.
                 Technical outreach. In the months before the publication of this
                proposed rule, the Bureau began conducting technical outreach with
                third party software providers that serve financial institutions and
                software and technology staff from financial institutions that are
                likely to have to report 1071 data to the Bureau. With these software
                vendors and technical staffs, the Bureau has held and, after
                publication of this proposed rule, will continue to hold discussions
                concerning the technical systems and procedures the Bureau will provide
                to collect 1071 data. The Bureau intends to understand the technology
                solutions currently provided by vendors to support the small business
                lending activities of financial institutions. The Bureau believes this
                information will be helpful in informing the Bureau in its design and
                implementation of a platform for intake and processing of 1071 data to
                help the platform integrate, to the degree possible, with existing
                systems and data collection procedures. These meetings also serve to
                raise awareness of technology providers as to their potential future
                role in supporting the 1071 rule as well as the lead time that may be
                necessary for some or all affected financial institutions to come into
                compliance with the requirements of a final section 1071 rule. The
                feedback that the Bureau is gathering is purely technical in nature.
                This outreach process is ongoing and will continue throughout the
                rulemaking.
                IV. Legal Authorities
                 The Bureau is issuing this proposed rule pursuant to its authority
                under section 1071. Some aspects of this rule are also proposed under
                the Bureau's more general rulemaking authorities in ECOA. Congress
                enacted ECOA to prohibit discrimination against any applicant,
                regarding any aspect of a credit transaction, on the basis of, amongst
                other things, race, color, national origin, and sex.\255\ The Bureau
                has certain oversight, enforcement, and supervisory authority over ECOA
                requirements and has rulemaking authority under the statute.
                ---------------------------------------------------------------------------
                 \255\ 15 U.S.C. 1691(a)(1).
                ---------------------------------------------------------------------------
                 ECOA is implemented in Regulation B.\256\ Among other things,
                Regulation B generally prohibits creditors from inquiring about an
                applicant's race, color, religion, national origin, or sex, with
                limited exceptions, including if it is required by law.\257\
                ---------------------------------------------------------------------------
                 \256\ 12 CFR part 1002.
                 \257\ Regulation B Sec. 1002.5(a)(2).
                ---------------------------------------------------------------------------
                 As discussed above, in the Dodd-Frank Act Congress amended ECOA by
                adding section 1071, which directs the Bureau to adopt regulations
                governing the collection and reporting of small business lending data.
                Specifically, section 1071 requires financial institutions to collect
                and report to the Bureau certain data on applications for credit for
                women-owned, minority-owned, and small businesses.\258\ Congress
                enacted section 1071 for the purpose of (1) facilitating enforcement of
                fair lending laws and (2) enabling communities, governmental entities,
                and creditors to identify business and community development needs and
                opportunities of women-owned, minority-owned, and small
                businesses.\259\ The Bureau often refers to these as section 1071's
                fair lending purpose and its business and community development
                purpose, respectively.
                ---------------------------------------------------------------------------
                 \258\ ECOA section 704B.
                 \259\ ECOA section 704B(a).
                ---------------------------------------------------------------------------
                 To advance these statutory purposes, section 1071 grants the Bureau
                general rulemaking authority for section 1071, providing that the
                Bureau shall prescribe such rules and issue such guidance as may be
                necessary to carry out, enforce, and compile data pursuant to section
                1071.\260\ ECOA section 704B(g)(2) also permits the Bureau to adopt
                exceptions to any requirement of section 1071 and to conditionally or
                unconditionally exempt any financial institution or class of financial
                institutions from the requirements of section 1071, as the Bureau deems
                necessary or appropriate to carry out the purposes of section 1071. The
                Bureau principally relies on its 704B(g)(1) authority in this proposed
                rule and relies on 704B(g)(2) when proposing specific exceptions or
                exemptions to section 1071's requirements. Section 704B(g)(3) directs
                the Bureau to issue guidance designed to facilitate compliance with the
                requirements of section 1071.
                ---------------------------------------------------------------------------
                 \260\ ECOA section 704B(g)(1).
                ---------------------------------------------------------------------------
                 In addition, section 703(a) of ECOA gives the Bureau broad
                authority to prescribe regulations to carry out the purposes of ECOA,
                including provisions
                [[Page 56378]]
                that in the judgment of the Bureau are necessary or proper to
                effectuate the purposes of ECOA, to prevent circumvention or evasion
                thereof, or to facilitate or substantiate compliance therewith. That
                section also states that the Bureau may provide for such adjustments
                and exceptions for any class of transactions, as in the judgment of the
                Bureau are necessary or proper to effectuate the purposes of ECOA, to
                prevent circumvention or evasion thereof, or to facilitate or
                substantiate compliance therewith.
                 Section 1071 establishes requirements or obligations for financial
                institutions that the Bureau would implement in this proposed rule.
                These provisions include the requirement in ECOA section 704B(b) that a
                financial institution shall inquire whether an applicant for credit is
                a women-owned, minority-owned, or small business; that a financial
                institution must maintain a record of responses to such inquiry,
                separate from the application; that an applicant may refuse to provide
                any information requested regarding the inquiry under 704B(b); that a
                financial institution must limit access of loan underwriters, or other
                officers or employees of the financial institution or any affiliate, to
                applicant responses to inquiries under 704B(b); and that if a financial
                institution determines that a loan underwriter or other officer or
                employee should have access to any information provided by the
                applicant pursuant to a request under 704B(b) that the financial
                institution shall provide notice to the applicant of the access of the
                underwriter to such information, along with notice that the financial
                institution may not discriminate on the basis of such information.\261\
                ---------------------------------------------------------------------------
                 \261\ ECOA section 704B(b)(1), (b)(2), (c), (d)(1) and (2).
                ---------------------------------------------------------------------------
                 ECOA section 704B(e)(1) directs financial institutions to compile
                and maintain, in accordance with regulations of the Bureau, records of
                the information provided by applicants for credit pursuant to a request
                under 704B(b). Section 704B(e)(2) requires that the information
                compiled and maintained under 704B(e)(1) be itemized in order to
                clearly and conspicuously disclose an enumerated list of data points.
                Section 704B(e)(2)(H) requires financial institutions to compile and
                maintain any additional data that the Bureau determines would aid in
                fulfilling the purposes of section 1071.
                 Several provisions of section 1071 expressly refer to regulations
                that the Bureau shall promulgate to implement certain requirements,
                including in ECOA section 704B(e)(1) regarding how financial
                institutions must compile and maintain data pursuant to section 1071,
                and in 704B(f)(2)(B) and (C) regarding the form of information made
                available by financial institutions to the public and the form and
                manner in which the Bureau itself should make 1071 data available to
                the public generally.
                 Two provisions expressly give the Bureau discretion with respect to
                public availability of 1071 data. Specifically, ECOA section 704B(e)(4)
                states that the Bureau may, at its discretion, delete or modify 1071
                data before making it available to the public if the Bureau determines
                that the deletion or modification of the data would advance a privacy
                interest. Section 704B(f)(3) gives the Bureau the discretion to compile
                and aggregate 1071 data for its own use, as well as to make public such
                compilations of aggregate data.
                V. Section-by-Section Analysis
                Overview
                 In this Overview of part V, the Bureau first provides an overview
                of section 1071 and then a brief summary of the proposed rule. Each
                provision, along with its rationale and relevant feedback received
                through the SBREFA process, is discussed in detail in the section-by-
                section analyses that follow. The Bureau's proposed rule is largely
                consistent with, though more detailed than, its proposals under
                consideration in the SBREFA Outline. However, the Bureau has altered or
                refined its approach since SBREFA in certain respects, which are noted
                in the summary of the proposed rule below and discussed in detail in
                the section-by-section analyses that follow.
                 Next, the Bureau discusses the high-level and general comments
                regarding this rulemaking that it received from SERs and other
                stakeholders on its SBREFA Outline. Finally, the Bureau addresses
                several issues for which there is no proposed regulatory text or
                commentary.
                 The Bureau seeks comment on its proposed approach to implementing
                section 1071. Requests for comment on each provision and on particular
                issues are included throughout the section-by-section analyses in this
                part V.
                A. Overview of Section 1071
                 As discussed above, section 1071 of the Dodd-Frank Act requires
                that financial institutions collect and report to the Bureau certain
                data regarding applications for credit for women-owned, minority-owned,
                and small businesses. Section 1071's statutory purposes are to (1)
                facilitate enforcement of fair lending laws, and (2) to enable
                communities, governmental entities, and creditors to identify business
                and community development needs and opportunities of women-owned,
                minority-owned, and small businesses.
                 Section 1071 specifies a number of data points that financial
                institutions are required to collect and report, and also provides
                authority for the Bureau to require any additional data that the Bureau
                determines would aid in fulfilling section 1071's statutory purposes.
                Section 1071 also contains a number of other requirements, including
                those that address restricting the access of underwriters and other
                persons to certain 1071 data and publication of 1071 data. In addition,
                section 1071 permits the Bureau, at its discretion, to modify or delete
                data prior to publication if it determines that such a deletion or
                modification would advance a privacy interest.
                 Section 1071 directs the Bureau to prescribe such rules, and issue
                such guidance as may be necessary to carry out, enforce, and compile
                data pursuant to section 1071. It also permits the Bureau to adopt
                exceptions to any requirement or to exempt financial institutions from
                the requirements of section 1071 as the Bureau deems necessary or
                appropriate to carry out the purposes of section 1071. Section 1071
                also directs the Bureau to issue guidance designed to facilitate
                compliance with the requirements of section 1071. As discussed in part
                IV above and throughout the section-by-section analyses in this part V,
                most of the Bureau's proposal is dedicated to implementing these
                statutory provisions.
                B. Section 1071 in the Context of HMDA
                 The Bureau's proposal for implementing section 1071 necessarily
                exists against the backdrop of HMDA \262\ (as discussed in part
                II.F.1.ii above). With the passage of the Dodd-Frank Act in 2010,
                Congress enacted section 1071 at the same time that it amended HMDA and
                transferred HMDA rulemaking authority and other functions to the
                Bureau. HMDA is a data collection and reporting statute that requires
                certain depository institutions and for-profit nondepository
                institutions to collect, report, and disclose data about originations
                and purchases of mortgage loans, as well as mortgage loan applications
                that do not result in originations (for example, applications that are
                denied or withdrawn). The Bureau's Regulation C, 12 CFR part
                [[Page 56379]]
                1003, implements HMDA. In light of the similarities between 1071 and
                HMDA, the Bureau's section-by-section analyses in this part V often
                discusses how similar provisions are addressed in the context of HMDA.
                ---------------------------------------------------------------------------
                 \262\ 12 U.S.C. 2801 et seq.
                ---------------------------------------------------------------------------
                 HMDA's purposes are: (1) To help determine whether financial
                institutions are serving their communities' housing needs; (2) to
                assist public officials in distributing public investment to attract
                private investment; and (3) to assist in identifying potential
                discriminatory lending patterns and enforcing antidiscrimination
                statutes.
                 A covered institution for purposes of HMDA reporting is a
                depository or nondepository institution that meets the relevant
                coverage criteria set forth in the regulation. A depository institution
                is required to comply with Regulation C if it meets the asset-size
                threshold, location test, loan activity test, federally related test,
                and the loan-volume threshold for either closed-end loans or open-end
                lines of credit set forth in the regulation. A nondepository
                institution is required to comply with Regulation C if it meets the
                location test and the loan-volume threshold for either closed-end loans
                or open-end lines of credit set forth in the regulation.
                 A covered transaction under HMDA is generally a loan or line of
                credit secured (or, for applications, proposed to be secured) by a lien
                on a dwelling, that is not specifically excluded under Regulation C
                Sec. 1003.3(c). The data points generally required to be reported
                about each covered transaction can be grouped into four broad
                categories: \263\
                ---------------------------------------------------------------------------
                 \263\ Under the Economic Growth, Regulatory Relief, and Consumer
                Protection Act, Public Law 115-174, 132 Stat. 1296 (2018), as
                implemented in Regulation C Sec. 1003.3(d), certain HMDA-covered
                institutions may be eligible for partial exemptions from some of the
                HMDA reporting requirements and only certain covered loans and
                applications are covered under partial exemptions. If a covered loan
                or application is covered under a partial exemption, the covered
                institution is not required to collect, record, and report certain
                data points.
                ---------------------------------------------------------------------------
                 Information about the applicants, borrowers, and
                underwriting process, such as ethnicity, race, and sex of the
                applicant,\264\ the applicant's gross income and debt-to-income ratio,
                the application channel, action taken, and, if applicable, reason(s)
                for denial.
                ---------------------------------------------------------------------------
                 \264\ As with section 1071, collection of an applicant's
                ethnicity, race, and sex under HMDA is an exception to the general
                prohibition on inquiring into protected demographic information in
                existing Sec. 1002.5(b).
                ---------------------------------------------------------------------------
                 Information about the property securing the loan or
                proposed to secure the loan, such as census tract and other property
                location information, construction method, property value, and
                additional information about manufactured and multifamily housing.
                 Information about the features of the loan, such as the
                loan type, pricing information (including interest rate and origination
                charges), loan term, introductory rate period, and non-amortizing
                features.
                 Certain unique identifiers, such as a universal loan
                identifier, loan originator identifier, and a legal entity identifier
                for the financial institution.
                 Covered institutions are required to submit their HMDA data by
                March 1 following the calendar year for which data are collected.
                Covered institutions with larger volumes of covered loans and
                applications are required to submit their HMDA data for each of the
                first three quarters of the year in addition to their annual
                submission.
                 Following the calendar year in which HMDA data are collected, a
                covered institution's disclosure statement \265\ and modified loan/
                application register (LAR) become publicly available on the FFIEC's
                HMDA Platform.\266\ In addition, aggregate reports for each
                Metropolitan Statistical Area and Metropolitan Division that show
                lending patterns by property location, age of housing stock, and income
                level, sex, ethnicity, and race become publicly available.
                ---------------------------------------------------------------------------
                 \265\ A disclosure statement contains aggregated data derived
                from loan-level data.
                 \266\ A HMDA LAR contains the record of information required to
                be collected and the record submitted annually or quarterly, as
                applicable. A modified LAR is a covered institution's LAR modified
                by the Bureau, on its website, to protect applicant and borrower
                privacy. The Bureau interprets HMDA, as amended by the Dodd-Frank
                Act, to call for the use of a balancing test to determine whether
                and how HMDA data should be modified prior to its disclosure to the
                public in order to protect applicant and borrower privacy while also
                fulfilling HMDA's public disclosure purposes. See 80 FR 66127,
                66133-34 (Oct. 28, 2015). In December 2018, the Bureau issued final
                policy guidance describing the modifications the Bureau intends to
                apply to the loan-level HMDA data that covered institutions report
                before the data are disclosed publicly. See 84 FR 649 (Jan. 31,
                2019).
                ---------------------------------------------------------------------------
                 HMDA data are the primary source of information for regulators,
                researchers, economists, industry, and advocates analyzing the mortgage
                market both for HMDA's purposes and for general market monitoring. HMDA
                data are used by the Federal supervisory agencies to support a variety
                of activities. For example, Federal supervisory agencies use HMDA data
                as part of their fair lending \267\ examination process, and also use
                HMDA data in conducting Community Reinvestment Act \268\ performance
                evaluations. HMDA disclosures provide the public with information on
                the home mortgage lending activities of particular reporting entities
                and on activity in their communities. These disclosures are used by
                local, State, and Federal officials to evaluate housing trends and
                issues and by community organizations to monitor financial institution
                lending patterns.
                ---------------------------------------------------------------------------
                 \267\ See ECOA (15 U.S.C. 1691 through 1691f), Regulation B, 12
                CFR part 1002, and FHA, 42 U.S.C. 3605, 24 CFR part 100.
                 \268\ 12 U.S.C. 2901 through 2908, and 12 CFR parts 25, 195,
                228, and 345.
                ---------------------------------------------------------------------------
                C. Summary of the Proposed Rule
                 The Bureau is proposing to add a new subpart B to Regulation B to
                implement the requirements of section 1071 and to make conforming
                amendments to existing Regulation B. The Bureau's proposal is
                summarized below, in the order of the section-by-section analyses in
                this part V that follow.
                1. General Provisions (Sec. Sec. 1002.5(a)(4), 1002.101, and 1002.102)
                 Changes to existing Regulation B (Sec. 1002.5(a)(4)). The Bureau
                is proposing to amend existing Sec. 1002.5(a)(4) to expressly permit
                voluntary collection and reporting of information regarding the
                ethnicity, race, and sex of applicants' principal owners, or whether
                the applicant is a minority-owned business or a women-owned business,
                in certain circumstances.
                 Scope, purpose, and authority (Sec. 1002.101). The Bureau is
                proposing in Sec. 1002.101 to set forth the authority, purpose, and
                scope for proposed subpart B. Among other things, this proposed section
                would set forth section 1071's two statutory purposes of facilitating
                enforcement of fair lending laws and enabling communities, governmental
                entities, and creditors to identify business and community development
                needs and opportunities of women-owned, minority-owned, and small
                businesses.
                 Definitions (Sec. 1002.102). The Bureau is proposing in Sec.
                1002.102 a number of definitions for terms used in proposed subpart B,
                which generally fall into several categories. First, some proposed
                definitions refer to terms defined elsewhere in proposed subpart B--
                specifically, terms of particular importance including business,
                covered application, covered credit transaction, covered financial
                institution, financial institution, and small business. Second, some
                proposed definitions refer to terms defined elsewhere in existing
                Regulation B (i.e., business credit, credit, and State) or other
                regulations (i.e., the definition of dwelling and a portion of the
                definition of affiliate reference Regulation C and an SBA regulation,
                respectively). Finally, the remaining terms are defined in proposed
                Sec. 1002.102, including
                [[Page 56380]]
                applicant, closed-end credit transaction, minority individual,
                minority-owned business, open-end credit transaction, principal owner,
                small business lending application register, women-owned business, and
                a portion of the definition of affiliate.
                2. Coverage (Sec. Sec. 1002.103 Through 1002.106)
                 Covered applications (Sec. 1002.103). The Bureau is proposing
                Sec. 1002.103 to define what is, and is not, a covered application
                under proposed subpart B; this definition would trigger the data
                collection and reporting requirements under subpart B for covered
                financial institutions. The Bureau is proposing to define a covered
                application in Sec. 1002.103(a) as an oral or written request for a
                covered credit transaction that is made in accordance with procedures
                used by a financial institution for the type of credit requested. The
                Bureau is also proposing that a covered application does not include
                (1) reevaluation, extension, or renewal requests on an existing
                business credit account, unless the request seeks additional credit
                amounts; and (2) inquiries and prequalification requests.
                 Covered credit transactions (Sec. 1002.104). The Bureau is
                proposing to require that covered financial institutions collect and
                report data for all covered applications from small businesses for
                transactions that meet the definition of business credit under existing
                Regulation B, with certain exceptions. The Bureau is proposing Sec.
                1002.104(a) to define the term covered credit transaction as an
                extension of business credit that is not an excluded transaction under
                proposed Sec. 1002.104(b). Loans, lines of credit, credit cards, and
                MCAs (including such credit transactions for agricultural purposes and
                those that are also covered by HMDA`` \269\ (that is, HMDA-reportable
                transactions)) would all fall within the scope of this proposed rule.
                The Bureau is proposing in Sec. 1002.104(b) to exclude from the
                requirements of proposed subpart B trade credit, public utilities
                credit, securities credit, and incidental credit. Factoring, leases,
                consumer-designated credit used for business purposes, and credit
                secured by certain investment properties would also not be covered
                credit transactions.
                ---------------------------------------------------------------------------
                 \269\ 12 U.S.C. 2801 et seq.
                ---------------------------------------------------------------------------
                 Covered financial institutions (Sec. 1002.105). The Bureau is
                proposing to define in Sec. 1002.105(a) the term financial
                institution, consistent with the definition in section 1071, as any
                partnership, company, corporation, association (incorporated or
                unincorporated), trust, estate, cooperative organization, or other
                entity that engages in any financial activity. Under this proposed
                definition, proposed subpart B's requirements would apply to a variety
                of entities that engage in small business lending, including depository
                institutions (i.e., banks, savings associations, and credit unions),
                online lenders, platform lenders, CDFIs, lenders involved in equipment
                and vehicle financing (captive financing companies and independent
                financing companies), commercial finance companies, governmental
                lending entities, and nonprofit nondepository lenders. The Bureau is
                not proposing to cover motor vehicle dealers.\270\ The Bureau is
                proposing in Sec. 1002.105(b) to define the term covered financial
                institution as a financial institution that originated at least 25
                covered credit transactions for small businesses in each of the two
                preceding calendar years. Only financial institutions that meet this
                loan-volume threshold would be required to collect and report small
                business lending data under proposed subpart B.
                ---------------------------------------------------------------------------
                 \270\ The Bureau is proposing that subpart B does not apply to a
                person excluded from coverage by section 1029 of the Consumer
                Financial Protection Act of 2010, title X of the Dodd-Frank Wall
                Street Reform and Consumer Protection Act, Public Law 111-203, 124
                Stat. 1376, 2004 (2010).
                ---------------------------------------------------------------------------
                 Small business definition (Sec. 1002.106). The Bureau is proposing
                in Sec. 1002.106 to adopt the SBA's definitions of ``business'' and
                ``small business'' as set out in the Small Business Act and SBA
                regulations. The Bureau is also proposing that, notwithstanding the
                small business size standards established by SBA regulations, for
                purposes of proposed subpart B, a business is a small business if and
                only if its gross annual revenue is $5 million or less for its
                preceding fiscal year. The Bureau is seeking SBA approval for this
                alternate small business size standard pursuant to the Small Business
                Act.
                3. Compiling, Maintaining, and Reporting 1071 Data (Sec. Sec. 1002.107
                Through 1002.111)
                 Compilation of reportable data (Sec. 1002.107). The Bureau is
                proposing in Sec. 1002.107 to address several aspects of collecting
                data on covered applications from small businesses. The Bureau is
                proposing in Sec. 1002.107(a) to require financial institutions to
                compile and maintain the data points enumerated in Sec. 1002.107(a)(1)
                through (21) regarding covered applications from small businesses.
                These data points would be collected and reported in accordance with
                the proposed official commentary and the Filing Instructions Guide that
                the Bureau anticipates later providing for the appropriate year.
                Certain of these data points are or could be collected from the
                applicant (or otherwise determined based on information provided or
                authorized by the applicant); other data points are based on
                information solely within the financial institution's control. Proposed
                appendix E would provide a sample data collection form for requesting
                from applicants their minority- and women-owned business status and the
                race, sex, and ethnicity of their principal owners. Proposed appendices
                F and G provide additional details and guidance regarding collecting
                those data points.
                 The Bureau is proposing in Sec. 1002.107(c)(1) that covered
                financial institutions maintain procedures to collect applicant-
                provided data at a time and in a manner that is reasonably designed to
                obtain a response. The Bureau's proposal also addresses what financial
                institutions should do if, despite having such procedures in place,
                they are unable to obtain certain data from an applicant. Pursuant to
                proposed Sec. 1002.107(b), financial institutions would be permitted
                to rely on statements made by an applicant (whether in writing or
                orally) or information provided by an applicant when collecting and
                reporting 1071 data, although for most data points if the financial
                institution verifies the information provided it must report the
                verified information. Proposed Sec. 1002.107(c)(2) would also permit
                financial institutions to reuse certain previously collected data in
                certain circumstances.
                 Firewall (Sec. 1002.108). The Bureau is proposing Sec. 1002.108
                to implement the requirement in section 1071 that certain data
                collected be shielded from underwriters and certain other persons; the
                Bureau refers to this as the ``firewall.'' Pursuant to proposed Sec.
                1002.108(b), an employee or officer of a financial institution or a
                financial institution's affiliate that is involved in making any
                determination concerning the application would be prohibited from
                accessing an applicant's responses to inquiries that the financial
                institution makes pursuant to section 1071 regarding whether the
                applicant is a minority-owned or women-owned business, and the
                ethnicity, race, and sex of the applicant's principal owners.
                 However, pursuant to proposed Sec. 1002.108(c), this prohibition
                would not apply to an employee or officer if the financial institution
                determines that it is not feasible to limit that employee's or
                officer's access to an applicant's
                [[Page 56381]]
                responses to the financial institution's inquiries regarding the
                applicant's protected demographic information, and the financial
                institution provides a notice to the applicant regarding that access.
                It would not be feasible to limit access if the financial institution
                determines that an employee or officer involved in making any
                determination concerning a covered application should have access to
                one or more applicants' responses to inquiries regarding the
                applicant's protected demographic information. The notice must be
                provided to each applicant whose information will be accessed or,
                alternatively, the financial institution could provide the notice to
                all applicants whose information could be accessed. The Bureau is
                proposing sample language that a financial institution could use in
                providing this notice.
                 Reporting data to the Bureau (Sec. 1002.109). The Bureau is
                proposing Sec. 1002.109 to address several aspects of financial
                institutions' obligations to report section 1071 data to the Bureau.
                First, the Bureau is proposing in Sec. 1002.109(a) that 1071 data be
                collected on a calendar year basis and reported to the Bureau on or
                before June 1 of the following year. The Bureau also addresses
                collection and reporting requirements of subsidiaries of financial
                institutions and collection and reporting requirements of financial
                institutions where multiple financial institutions are involved in a
                transaction in proposed Sec. 1002.109(a). Second, the Bureau lists in
                proposed Sec. 1002.109(b) the information that financial institutions
                would be required to provide about themselves when reporting 1071 data
                to the Bureau, including the financial institution's name, headquarters
                address, contact person, Federal prudential regulator, institutional
                identifiers, and parent entity information. Finally, the Bureau is
                proposing Sec. 1002.109(c) to address technical instructions for the
                submission of data to the Bureau, including information about the
                Filing Instructions Guide, which the Bureau anticipates later providing
                for the appropriate year.
                 Publication of 1071 data by the Bureau (Sec. 1002.110). The Bureau
                is proposing in Sec. 1002.110 to address several issues regarding the
                publication of 1071 data. The Bureau is proposing in Sec. 1002.110(a)
                that it shall make available to the public, on an annual basis and on
                the Bureau's website, the data submitted to it by financial
                institutions. The Bureau is proposing to make these data available
                subject to deletions or modifications made by the Bureau, at its
                discretion, if the Bureau determines that such deletions or
                modifications would advance a privacy interest. To determine whether
                and how the Bureau might use its discretion to modify or delete data
                prior to publication, the Bureau is proposing a ``balancing test'' that
                assesses the risks and benefits of public disclosure. The Bureau's
                proposed approach to the balancing test is discussed in detail in part
                VI below. Proposed Sec. 1002.110(b) would state that the Bureau may,
                at its discretion, compile and aggregate data submitted by financial
                institutions and may publish such compilations or aggregations.
                 Proposed Sec. 1002.110(c) would require a covered financial
                institution to publish on its website a statement that its 1071 data,
                as modified by the Bureau, are or will be available on the Bureau's
                website. Proposed Sec. 1002.110(d) would set forth when a covered
                financial institution shall make this statement available and how long
                the financial institution shall maintain the statement on its website.
                These requirements would satisfy financial institutions' statutory
                obligation to make data available to the public upon request.
                 Recordkeeping (Sec. 1002.111). The Bureau is proposing Sec.
                1002.111 to address several aspects of the recordkeeping requirements
                for 1071 data. First, the Bureau is proposing Sec. 1002.111(a) to
                require a covered financial institution to retain evidence of
                compliance with proposed subpart B, which includes a copy of its small
                business lending application register, for at least three years after
                the register is required to be submitted to the Bureau pursuant to
                proposed Sec. 1002.109. Second, the Bureau is proposing Sec.
                1002.111(b) to require a financial institution to maintain, separately
                from the rest of an application for credit and accompanying
                information, an applicant's responses to a financial institution's
                inquiries regarding the applicant's protected demographic information.
                Finally, the Bureau is proposing Sec. 1002.111(c) to require that, in
                compiling and maintaining its small business lending application
                register, a financial institution not include any personally
                identifiable information concerning any individual who is, or is
                connected with, an applicant.
                4. Other Provisions (Sec. Sec. 1002.112 Through 1002.114)
                 Enforcement (Sec. 1002.112). The Bureau is proposing Sec.
                1002.112 to address several issues related to the enforcement of
                proposed subpart B. First, the Bureau is proposing Sec. 1002.112(a) to
                state that a violation of section 1071 or proposed subpart B is subject
                to administrative sanctions and civil liability as provided in sections
                704 and 706 of ECOA. Second, the Bureau is proposing in Sec.
                1002.112(b) to provide that a bona fide error in compiling,
                maintaining, or reporting data with respect to a covered application is
                an error that was unintentional and occurred despite the maintenance of
                procedures reasonably adapted to avoid such an error, and that such an
                error is presumed not to be a violation of ECOA or proposed subpart B
                if the number of such errors does not exceed the thresholds set forth
                in proposed appendix H. Third, the Bureau is proposing in Sec.
                1002.112(c) to identify four safe harbors under which certain errors--
                specifically those regarding census tract, NAICS code, small business
                status, and application date--would not constitute violations of ECOA
                or Regulation B.
                 Severability (Sec. 1002.113). The Bureau is proposing in Sec.
                1002.113 to provide that the provisions of proposed subpart B are
                separate and severable from one another, and that if any provision is
                stayed or determined to be invalid, it is the Bureau's intent that the
                remaining provisions shall continue in effect.
                 Effective date, compliance date, and special transitional rules
                (Sec. 1002.114). The Bureau is proposing Sec. 1002.114 to address
                several issues related to the Bureau's eventual final rule to implement
                section 1071. First, the Bureau is proposing in Sec. 1002.114(a) that
                its final rule to implement section 1071 would become effective 90 days
                after publication in the Federal Register, but pursuant to proposed
                Sec. 1002.114(b) compliance with the final rule would not be required
                until approximately 18 months after publication in the Federal
                Register. Second, the Bureau is proposing in Sec. 1002.114(c) certain
                transitional provisions that would permit covered financial
                institutions to begin collecting protected applicants' demographic
                information beginning 12 months prior to the compliance date and would
                permit financial institutions to use a different time period to
                determine whether they will be covered by the rule as of the compliance
                date.
                D. High-Level and General Comments on the SBREFA Outline
                 During the SBREFA process, SERs provided feedback on nearly all
                aspects of the Bureau's proposals under consideration as set forth in
                the SBREFA Outline. Other stakeholders did likewise in their written
                feedback on the SBREFA Outline. That feedback
                [[Page 56382]]
                is discussed in the section-by-section analyses of the proposed rule
                below. SERs and other stakeholders also provided feedback of a more
                general nature on the Bureau's section 1071 rulemaking. That feedback
                is summarized here; the SBREFA Panel Report provides a more complete
                summary of the SBREFA process and comments provided by SERs.\271\
                ---------------------------------------------------------------------------
                 \271\ See generally SBREFA Panel Report.
                ---------------------------------------------------------------------------
                 Most SERs and stakeholders were generally supportive of the
                statutory purposes of section 1071.\272\ Several SERs as well as a
                range of other stakeholders--including community groups, CDFIs, several
                community banks, and a State consumer financial protection agency--were
                supportive of the Bureau's statutory mandate to promulgate a section
                1071 rule. Many stakeholders, including community groups, several CDFI
                banks, and a small community bank, expressly supported broad coverage
                of both financial institutions and products in the 1071 rulemaking. One
                community bank stakeholder stated that larger financial institutions
                should not be excluded; another community bank asserted that a 1071
                rule should cover credit unions, governmental entities, commercial
                finance firms, and alternative online lenders.
                ---------------------------------------------------------------------------
                 \272\ The SER feedback discussed herein can be found in the
                SBREFA Panel Report at 17-18.
                ---------------------------------------------------------------------------
                 Several trade association stakeholders supported a more limited
                approach to implementation of a 1071 rulemaking. A number of trade
                associations requested exemptions for the specific types of financial
                institutions they represented, including credit unions, vendor finance
                and dealer-related institutions, and community banks. One trade
                association argued that Federal credit union laws limited the extent to
                which credit unions could seek to expand their small business lending
                operations. Two trade association stakeholders suggested that the
                Bureau adopt a phased or staged approach to implementation, starting
                only with certain products and institutions. One trade association
                suggested that the Bureau adopt a high size-based exemption for
                institutions.
                 A number of SERs and stakeholders, including several CDFIs, a
                number of community groups and a community bank, expressed the view
                that data transparency in the small business lending market is critical
                to advance the goals of fair lending enforcement and access to credit
                for small businesses, especially those that are minority-owned and
                women-owned. One SER and several stakeholders, including two community
                groups and one small business trade association, stated that the
                limited data currently available show that the lending practices of
                many financial institutions exclude women-owned and minority-owned
                businesses, exacerbating a racial wealth gap, and that section 1071 has
                the opportunity to address such lending disparities, which are costly
                to businesses, lenders, and the economy as a whole. The SER also said
                that data transparency and fairness should be an advantage to smaller,
                local financial institutions, allowing them to better distinguish their
                value proposition compared to larger financial institutions or
                predatory lenders.\273\ A CDFI stakeholder and a community group
                stakeholder emphasized that 1071 data would be an important supplement
                to CRA and HMDA data to determine community development needs. Another
                community group stakeholder and a small business trade association
                emphasized the importance of supporting access to credit for women-
                owned and minority-owned small businesses. One community group argued
                that the availability of 1071 data would spur innovation in the small
                business lending market.
                ---------------------------------------------------------------------------
                 \273\ Id.
                ---------------------------------------------------------------------------
                 Several SERs and several community groups and CDFI stakeholders
                stated that the completion of a 1071 rulemaking was welcome, given the
                many years stakeholders have been waiting for these data. Several SERs
                and other stakeholders, including community groups and CDFIs, supported
                a 1071 rulemaking as necessary to better understand the small business
                lending market, as the COVID-19 pandemic highlighted how the most
                vulnerable small businesses can be disproportionately impacted by
                economic shocks. Several community groups and a small business trade
                association stakeholders argued that the response to the COVID-19
                pandemic, including the PPP program, exacerbated existing gender and
                racial disparities, and did not provide access to credit to excluded
                lower- and middle-income communities and women-owned or minority-owned
                small businesses. Two community bank trade associations noted the
                outsized importance of community banks and CDFIs in providing PPP loans
                to their local communities, including to minority-owned small
                businesses, and warned that an unintended consequence of a 1071
                rulemaking may be to impair this existing lending. One trade
                association suggested that the Bureau delay issuing any proposal until
                the economic forces driven by the COVID-19 pandemic have subsided and
                recovery is evident.
                 Other stakeholders expressed concerns about the uses of data coming
                from a 1071 rulemaking. One trade association suggested that the
                collection of data on race and gender would create the perception among
                customers that these factors played a role in credit decisions. One
                community bank stakeholder asserted that 1071 data should not be used
                in regulatory oversight or examinations of financial institutions, but
                rather to better understand the small lending market and help
                regulators support lending. Several trade associations expressed
                concerns that misleading conclusions could be drawn from data from a
                1071 rulemaking, and that small business lending was complex and
                varied.
                 SERs nearly uniformly suggested that the Bureau aim to draft simple
                regulations, and choose simpler options if possible, noting that more
                complex rules tend to make compliance more difficult and drive up
                compliance costs, which could potentially increase prices or reduce
                small businesses' access to credit. A number of stakeholders--including
                community banks, community groups, a small business trade association,
                and bank and credit union trade associations--similarly supported
                simple and clear regulations and requested that the Bureau avoid
                complex or ambiguous rules, which they asserted would make compliance
                more costly. One CDFI bank stakeholder asserted that existing
                ambiguities and conflicts in the law have caused financial institutions
                to avoid collecting the very data they would need to identify lending
                discrimination, and that mandating data collection and clarifying rules
                would be critical to addressing these concerns.
                 Many SERs and a community bank stakeholder requested clear written
                guidance and implementation support materials from the Bureau, such as
                small entity compliance guides, a ``help desk'' for questions, and
                sample disclosure language (translated into languages other than
                English for individuals with limited English proficiency). Several SERs
                also discussed the need for applicant-facing materials explaining what
                the section 1071 regulation is and why the financial institution must
                collect data. Relatedly, one SER requested that the Bureau educate and
                train currently unregulated financial institutions to help them
                implement the rule.
                 A number of SERs (representing financial institutions that operate
                primarily online as well as financial institutions that interact with
                small business applicants in-person) indicated their belief that
                financial institutions
                [[Page 56383]]
                with extensive online lending operations would be able to comply with
                an eventual 1071 rule more easily, more quickly, and at lower cost due
                to their greater degree of automation than financial institutions with
                primarily in-person and/or paper-based operations. SERs and several
                stakeholders (including a community bank trade association, a community
                group, and a community bank) urged the Bureau to align with other
                Federal data reporting regimes--such as HMDA, CRA, CDFI Fund, or SBA--
                if possible, and thought that financial institutions with experience
                complying with these other Federal data reporting regimes would have an
                easier time complying with an eventual 1071 rule than would financial
                institutions, including some SERs, with no such experience. One trade
                association suggested that any comparisons with HMDA were misplaced, as
                the small business lending market is more varied and complex than the
                market for residential mortgage lending.
                 Several SERs stated that a 1071 rule should take into account the
                different types of financial institutions operating in the small
                business lending market. One SER suggested that the Bureau had not
                focused enough attention on the impact of a 1071 rule on nondepository
                institutions, which they said play a vital role in providing essential
                credit to small businesses in the United States, many of which are
                women-owned and minority-owned. Another SER and two trade associations
                asserted that the data collected from credit unions, which are bound by
                their charters (pursuant to Federal and State laws and regulations) to
                serve a specific field of membership, would likely be incomparable with
                data from other financial institutions that are permitted to serve any
                kind of customer.
                 Many SERs supported broad coverage of both financial institutions
                and products, as reflected in section 1071's language covering any
                application to a financial institution for credit for a women-owned,
                minority-owned, or small business.
                 The SBREFA Panel recommended that the Bureau issue implementation
                and guidance materials (including a small entity compliance guide as
                required by the RFA, as well as other materials), specifically to
                assist small financial institutions in complying with the eventual 1071
                rule.\274\ The Panel also recommended that the Bureau consider
                providing sample disclosure language related to the collection of
                ethnicity, race, and sex of applicants.\275\
                ---------------------------------------------------------------------------
                 \274\ Id. at 43.
                 \275\ Id.
                ---------------------------------------------------------------------------
                 The Bureau agrees with the general comments made in favor of
                keeping the scope of the proposed rule broad. In general, the Bureau
                believes that broad coverage of institutions and products as requested
                by a number of SERs and stakeholders would result in the collection of
                more data and would be consistent with the statutory purposes of
                section 1071. The Bureau does not believe that the request made by
                several trade association stakeholders to take a more limited approach
                to scope--including the various limitations on the coverage of certain
                types of financial institutions and products--would be consistent with
                the statutory purposes of section 1071. The Bureau addresses these
                issues directly in the section-by-section analyses of proposed
                Sec. Sec. 1002.104 and 1002.105 below.
                 The Bureau agrees with the SERs and stakeholders that expressed the
                view that data transparency in the small business lending market is
                critical to advancing the statutory purposes of section 1071. The
                Bureau believes that the limited data that do exist, cited by one SER
                and several stakeholders, appear to support the existence of
                disparities in the small business lending markets, as identified in
                part II above. The Bureau agrees--as do other Federal regulators that
                the Bureau has consulted in developing this proposed rule--that 1071
                data would be an important supplementation to CRA and HMDA data in
                helping a variety of parties determine and address business and
                community development needs. The Bureau agrees with the SERs and
                stakeholders that identified specific ways that the publication of 1071
                data would advance this statutory purpose in helping the public
                identify business needs, including, as one SER suggested, creating data
                that would be useful to help smaller, local financial institutions
                distinguish their value proposition compared to other lenders, and
                could be used to spur innovation in the small business lending market.
                 Regarding the support of certain SERs and other stakeholders
                welcoming the completion of a 1071 rulemaking, the Bureau's views on
                this are best expressed in the section-by-section analyses of proposed
                Sec. Sec. 1002.113 and 1002.114 concerning effective date and
                compliance date. Regarding the data cited by SERs and other
                stakeholders concerning lending disparities in the PPP program during
                the COVID-19 pandemic, the Bureau believes that the availability of
                data on PPP lending further supports the importance of collecting and
                publishing 1071 data; it was only the existence of PPP lending data,
                despite its limitations, that enabled these stakeholders to make
                arguments regarding the state of fair lending and business and
                community development under PPP.
                 The Bureau appreciates the concerns expressed by some stakeholders
                concerning the uses of 1071 data. The Bureau believes that the firewall
                provision of proposed Sec. 1002.108, including the proposed notice
                provision, are intended to address the concern by one trade association
                stakeholder that the collection of ethnicity, race, and sex data may
                create the perception among customers that these factors play a role in
                credit decisions. The Bureau disagrees with the stakeholder that
                asserted that 1071 data should not be used in regulatory oversight or
                examinations. Such use is contemplated by ECOA section 704B(a)(2),
                which provides that the data are intended to facilitate the enforcement
                of fair lending laws. The Bureau does agree with the same stakeholder,
                however, that 1071 data should be used to help regulators better
                understand the small business lending markets and better support such
                lending. The Bureau does not disagree in the abstract with the
                assertions made by several trade associations that misleading
                conclusions could be drawn from 1071 data; the Bureau notes that these
                stakeholders did not cite any examples and that any source of data may
                be misinterpreted absent robust procedures and methodologies. The
                Bureau believes, given its experience with HMDA data, that such
                concerns are misplaced--overall, HMDA data have helped shed light on
                previously hidden issues and proven highly effective in accomplishing
                its congressionally mandated purposes.
                 The Bureau has attempted as much as possible to propose rules that
                are both simple and clear, as SERs and other stakeholders suggested.
                For instance, the Bureau is proposing a simple definition of small
                business in proposed Sec. 1002.106 below. While the Bureau has
                endeavored to avoid unnecessary ambiguity and complexity in its
                proposed rule, complexity in the proposed rule reflects the inherent
                complexity of the subject, including the variations and diversity in
                the small business lending market as well as the complications of
                collecting data to conduct fair lending analyses and identify business
                and community development needs.
                 Regarding the request for clear written guidance and implementation
                support materials, the Bureau intends to develop various compliance
                materials, as it does with most major rules. These materials will
                include a small entity compliance
                [[Page 56384]]
                guide that will provide regulatory implementation guidance, and a
                Filing Instructions Guide that will provide technical instructions for
                the submission of 1071 data to the Bureau. With regard to the comment
                that the Bureau should provide applicant-facing materials, the Bureau
                proposes in appendix E a sample data collection form that can be used
                to collect from applicants their minority-owned business status, women-
                owned business status, and the ethnicity, race, and sex of their
                principal owners, along with the related required disclosures.
                 The Bureau generally agrees with the observation of a number SERs
                that financial institutions with extensive online lending operations
                would likely find compliance with a section 1071 rule easier than those
                with primarily in-person operations. The Bureau sets out its
                preliminary assessment of the costs of the rule on financial
                institutions in parts VII and VIII below.
                 The Bureau has attempted, whenever possible, to align or conform
                its proposed rule with other Federal data reporting regimes, as several
                SERs and other stakeholders requested. The Bureau references and, where
                possible, aligns the proposed rule with specific Federal data reporting
                regimes, as explained in the section-by-section analyses below. The
                Bureau appreciates the comments made by some SERs and other
                stakeholders that there are different types of financial institutions
                in the small business lending market and that the differences between
                institutional types may complicate data analysis. The Bureau notes,
                however, that simply excluding certain types of institutions from 1071
                reporting requirements would be inconsistent with the statutory
                purposes of section 1071, and that it would be more congruent with
                section 1071 instead to collect information on financial institution
                type as set out in proposed Sec. 1002.109(b)(9), for the reasons set
                out below.
                E. Cross-Cutting Interpretive Issues
                1. The Bureau's Approach to Non-Small Women-Owned and Minority-Owned
                Businesses in This Rulemaking
                 The Bureau is proposing to require financial institutions to
                collect and report data regarding applications for credit for small
                businesses; the Bureau is not, however, proposing to require financial
                institutions to collect and report data with respect to applicants that
                are not small businesses. ECOA section 704B(b) states that ``in the
                case of any application to a financial institution for credit for [a]
                women-owned, minority-owned, or small business,'' the financial
                institution must ``inquire whether the business is a women-owned,
                minority-owned or small business . . . .'' For the reasons set forth
                below, the Bureau is proposing this approach as an interpretation of
                the statute pursuant to its authority under 704B(g)(1), and, in the
                alternative, pursuant to its authority under 704B(g)(2) to adopt
                exceptions to any requirement of section 1071 as the Bureau deems
                necessary or appropriate to carry out the purposes of section 1071 and
                its implied de minimis authority.
                 The Bureau explained in the SBREFA Outline that in light of the
                comprehensive coverage of women-owned and minority-owned businesses
                within the scope of small businesses (discussed in more detail below),
                it was considering proposing that the data collection and reporting
                requirements of its eventual 1071 rule would apply to any application
                to a financial institution for credit only for small businesses as
                defined under the eventual 1071 rule.\276\ The Bureau explained that it
                was concerned that a requirement to collect and report 1071 data on
                applications for women-owned and minority-owned businesses that are not
                small businesses could affect all aspects of financial institutions'
                commercial lending operations while resulting in limited information
                beyond what would already be collected and reported about women-owned
                and minority-owned small businesses. In addition, financing for large
                businesses can be much more varied and complex than are the products
                used for small business lending. Thus, under the approach the Bureau
                was considering proposing, financial institutions would collect and
                report lending data for all applicants that satisfy the Bureau's
                definition of a small business, including identifying women-owned and
                minority-owned businesses within that pool, but financial institutions
                would not be required to collect and report 1071 data for women-owned
                and minority-owned businesses that are not ``small.''
                ---------------------------------------------------------------------------
                 \276\ SBREFA Outline at 9.
                ---------------------------------------------------------------------------
                 In the SBREFA Outline, the Bureau noted that most existing
                businesses, including almost all women-owned and minority-owned
                businesses, are ``small business concerns'' as that term is currently
                defined by the SBA.\277\ Therefore, the Bureau posited that coverage of
                small businesses by this rule would necessarily include nearly all
                women-owned and minority-owned businesses. Based on the 2018 Annual
                Business Survey by the U.S. Census, the Bureau estimated that 5.72
                million employer firms--99.6 percent of all employer firms--are small
                (defined for the purposes of the survey as having fewer than 500
                employees). That same definition covers one million minority-owned
                employer firms (99.9 percent of all minority-owned firms) and 1.1
                million women-owned employer firms (99.9 percent of all women-owned
                firms).\278\ The Bureau estimated that, among non-small businesses,
                which are only 0.4 percent of all firms nationally, 10 percent of this
                small fraction are minority-owned firms and 13 percent are women-
                owned.\279\
                ---------------------------------------------------------------------------
                 \277\ See the section-by-section analysis of proposed Sec.
                1002.106 below for additional discussion regarding the definition of
                ``small business'' for purposes of this rulemaking.
                 \278\ SBREFA Outline at 9.
                 \279\ Id.
                ---------------------------------------------------------------------------
                 A number of SERs expressed a belief that covering just small
                business applications would supply adequate or nearly complete lending
                data for purposes of section 1071.\280\ However, other SERs stated that
                the Bureau's regulation should collect data regarding applications for
                credit for non-small minority-owned and women-owned businesses as well.
                One SER relayed first-hand observations in their community that larger
                minority-owned and women-owned businesses were excluded from full
                access to credit, and expressed an interest in the Bureau capturing and
                reporting that information. One SER observed that smaller financial
                institutions, or those that generally focus on small business lending,
                might find that collecting and reporting data for all business loan
                applications would be simpler than determining which applications would
                be within the scope of the eventual 1071 rule.
                ---------------------------------------------------------------------------
                 \280\ The SER feedback discussed in herein can be found in the
                SBREFA Panel Report at 18.
                ---------------------------------------------------------------------------
                 The SBREFA Panel recommended that the Bureau continue to explore
                whether the data collection and reporting requirements in its 1071 rule
                should be limited to any application to a financial institution for
                credit only for small businesses (as defined by the Bureau's
                regulation) or whether it should also extend to applications for women-
                owned and minority-owned businesses that are not small.\281\ The Panel
                also recommended that the Bureau seek comment on the costs to small
                financial institutions of collecting and reporting 1071 data regarding
                applications for credit for women-owned and minority-owned businesses
                [[Page 56385]]
                that are not small (as defined by the Bureau's regulation).\282\
                ---------------------------------------------------------------------------
                 \281\ Id. at 43.
                 \282\ Id.
                ---------------------------------------------------------------------------
                 Feedback from other stakeholders generally supported the Bureau's
                approach to limiting 1071 data collection to small businesses,
                including identifying women- and minority-owned businesses within that
                pool. A number of commenters expressed support for the Bureau's
                approach under consideration, arguing that requiring data collection
                for non-small women- and minority-owned businesses would increase
                compliance burden without significantly contributing to 1071's
                purposes. Some responses also stated that this approach was consistent
                with legislative intent, positing that Congress did not intend for
                financial institutions to collect 1071 data on large companies. A
                community group noted that its support for the Bureau's approach was
                conditional on the Bureau adopting a broad definition of small
                business, thus limiting the likelihood of missing significant women-
                and minority-owned business application data. A joint comment from a
                number of community groups urged the Bureau to monitor the market and
                to reevaluate this approach if later publications of the Annual
                Business Survey show that the number of non-small women- and minority-
                owned businesses exceed current estimates. Another joint comment from
                community groups did not support the Bureau's approach under
                consideration, urging the Bureau to consider instead covering non-small
                women- and minority-owned businesses in the data collection and arguing
                that it might be easier for financial institutions to collect data for
                all applicants, as opposed to developing systems for screening out
                applicants that are not covered. Two banks suggested that 1071 data
                collection should extend to all businesses; one was concerned about
                fair lending disparities, while the other remarked that large business
                applicants should not be relieved of the burden of having their data
                collected under 1071.
                 The Bureau believes that section 1071 is ambiguous with respect to
                its coverage of applications for credit for non-small women- or
                minority-owned businesses, and the Bureau therefore proposes to
                interpret this ambiguity pursuant to ECOA section 704B(g)(1). The
                Bureau acknowledges that the plain language of 704B(b) could be read to
                require financial institutions to collect information from all women-
                owned and minority-owned businesses, including those that are not small
                businesses. But based on a close consideration of the text, structure,
                and purpose of the statute, and the interactions between section 1071
                and other provisions of ECOA and Regulation B, the Bureau believes that
                the statute's coverage of, and Congress's intent with respect to, data
                regarding non-small businesses is ambiguous.
                 The Bureau interprets ECOA section 704B(b) and (b)(1) to require
                that financial institutions first determine whether an applicant is a
                small business within the scope of the rule's data collection before
                making the required inquiries that would otherwise be prohibited by
                existing Regulation B. There is a general prohibition in existing
                Regulation B (in Sec. 1002.5(b)) which states that a ``creditor shall
                not inquire about the race, color, religion, national origin, or sex of
                an applicant or any other person in connection with a credit
                transaction, except'' if expressly permitted to do so by law or
                regulation.
                 In the introductory language to ECOA section 704B(b), Congress
                instructed that the 1071 data collection regime applies only ``in the
                case of any application to a financial institution for credit for
                women-owned, minority-owned, or small business'' (emphasis added). The
                Bureau believes that ``in the case of'' indicates Congress's intent to
                limit application of section 1071 to these types of businesses, rather
                than requiring financial institutions to make 1071-related inquiries of
                all business applicants for credit.\283\ The next paragraph
                (704B(b)(1)) does not use the conditional phrase ``in the case of''
                used in 704B(b); rather, it instructs a financial institution to
                ``inquire.'' The Bureau believes that the instruction to ``inquire'' in
                704B(b)(1) is intended to provide the necessary exception to Regulation
                B's general prohibition against ``inquir[ing]'' as to protected
                demographic information in connection with a credit transaction.\284\
                Indeed, absent section 1071's lifting of the prohibition, generally, a
                financial institution could not determine, or even ask about, an
                applicant's women- or minority-owned status, because doing so would
                necessarily constitute ``inquir[ing] about the race, color, religion,
                national origin, or sex of an applicant'' in violation of existing
                Sec. 1002.5(b). The Bureau believes that Congress likely intended to
                ensure that financial institutions could determine whether an applicant
                is covered by the 1071 data collection without risking a violation of
                other provisions of ECOA and Regulation B.
                ---------------------------------------------------------------------------
                 \283\ Merriam-Webster defines ``case'' as meaning ``a set of
                circumstances or conditions,'' ``a situation requiring investigation
                or action (as by the police),'' or ``the object of investigation or
                consideration.''
                 \284\ As discussed in greater detail in the next section, the
                fact that the language of ECOA section 704B(b)(1) is designed to
                expressly permit inquiry into protected demographic information,
                which would otherwise be prohibited by existing Sec. 1002.5(b), is
                also evidenced by the statute's three provisions creating special
                protections for responses to the inquiry: 704B(b)(2) requires that
                responses to protected inquiries remain separate from the
                application and accompanying information; 704B(c) requires that
                applicants have a right to refuse to answer the protected inquiry;
                and 704B(d) requires that certain underwriters or other employees
                involved in making determinations on an application not have access
                to the responses to protected inquiries.
                ---------------------------------------------------------------------------
                 However, unlike with women- and minority-owned business status,
                there is no legal impediment to a financial institution's determining
                whether an applicant is a small business, and financial institutions
                can make that determination as a threshold matter without risking
                running afoul of ECOA and Regulation B. Therefore, the Bureau believes
                that the scope of the introductory ``in the case of'' language in ECOA
                section 704(b) is ambiguous as to coverage of non-small women- and
                minority-owned businesses. To resolve this ambiguity, the Bureau has
                applied its expertise to interpreting the language and structure of
                1071 within the context of the general prohibition on inquiring into
                protected demographic information in existing Sec. 1002.5(b), and
                concludes that ECOA section 704B(b)(1) is best read as only referring
                to questions about applicants' protected demographic information (i.e.,
                women- and minority-owned business status as well as the race, sex, and
                ethnicity of the principal owners of the business). The Bureau believes
                704B(b)'s more general ``in the case of'' language should be understood
                to indicate the conditions under which 1071 data collection should take
                place, and requires financial institutions to make a threshold
                determination that an applicant is a small business before proceeding
                with an inquiry into the applicant's protected demographic information.
                 The Bureau also notes that the collection of data on applications
                for non-small women- or minority-owned businesses would not carry out
                either of section 1071's stated purposes because the data would be of
                only limited usefulness for conducting the relevant analyses of non-
                small businesses. Such analyses would necessitate comparing data
                regarding non-small women-owned and minority-owned business applicants
                to data regarding non-small non-women-owned and non-minority-owned
                business applicants, in order to control for lending outcomes that
                result from differences in applicant size. But section 1071 does not
                require or otherwise address the collection of data for non-small
                business applicants that
                [[Page 56386]]
                are not women- or minority-owned. Therefore, the resulting data set
                will lack a control group, arguably the most meaningful comparator for
                any data on non-small women- or minority-owned businesses. It is
                unlikely that Congress intended, and the statute is reasonably read not
                to require, the collection of data that would be of limited
                utility.\285\
                ---------------------------------------------------------------------------
                 \285\ See, e.g., Pub. Citizen v. U.S. Dep't of Just., 491 U.S.
                440, 454 (1989) (``Where the literal reading of a statutory term
                would `compel an odd result,' Green v. Bock Laundry Machine Co., 490
                U.S. 504, 509 (1989), we must search for other evidence of
                congressional intent to lend the term its proper scope.'').
                ---------------------------------------------------------------------------
                 Finally, the Bureau notes that the title of section 1071 is ``Small
                Business Data Collection,'' and 1071 amends ECOA to add a new section
                titled ``Small Business Loan Data Collection.'' In the presence of
                ambiguity, these titles provide some additional evidence that Congress
                did not intend the statute to authorize the collection of data on
                businesses that are not small.\286\
                ---------------------------------------------------------------------------
                 \286\ Almendarez-Torres v. United States, 523 U.S. 224, 234
                (1998) (`` `[T]he title of a statute and the heading of a section'
                are `tools available for the resolution of a doubt' about the
                meaning of a statute.'') (quoting Bhd. of R.R. Trainmen v. Balt. &
                Ohio R.R., 331 U.S. 519, 529 (1947)).
                ---------------------------------------------------------------------------
                 For these reasons, the Bureau proposes to interpret ECOA section
                704B(b) to cover the collection only of data with respect to small
                businesses, including those that are women- and minority-owned.
                Likewise, as discussed immediately below in E.2 of this Overview to
                part V, the Bureau is proposing to clarify that the 704B(b)(1) inquiry,
                when applicable, pertains to an applicant's minority-owned business
                status and women-owned business status as well as the race, sex, and
                ethnicity of its principal owners. For the same reasons, the Bureau
                believes that not requiring the collection of data with respect to
                applications for non-small businesses would be necessary or appropriate
                to carry out the purposes of section 1071; therefore, in the
                alternative, the Bureau proposes to exercise its exception authority in
                704B(g)(2) to effect this outcome. Finally, because the Bureau believes
                that the collection of data on non-small women- and minority-owned
                businesses would ``yield a gain of trivial or no value,'' the Bureau
                proposes, in the alternative, to exercise its implied de minimis
                authority to create this exception.\287\
                ---------------------------------------------------------------------------
                 \287\ Waterkeeper All. v. EPA, 853 F.3d 527, 530 (D.C. Cir.
                2017) (quoting Pub. Citizen v. FTC, 869 F.2d 1541, 1556 (D.C. Cir.
                1989)); see Alabama Power Co. v. Costle, 636 F.2d 323, 360-61 (D.C.
                Cir. 1979).
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed approach to limiting the
                scope of data collection pursuant to subpart B to covered applications
                for small businesses, but not women- or minority-owned businesses that
                are not small. As recommended by the SBREFA Panel, the Bureau also
                seeks comment on the costs to small financial institutions of
                collecting and reporting 1071 data regarding applications for credit
                for women-owned and minority-owned businesses that are not small
                businesses as defined in proposed Sec. 1002.106(b). See the section-
                by-section analysis of proposed Sec. 1002.106(b) below, where the
                Bureau is seeking comment on the proposed definition of a small
                business.
                2. The Meaning of ``information requested pursuant to subsection (b)''
                 Four different provisions of section 1071 refer to or rely on
                ``information requested pursuant to subsection (b)'' or similar
                language. First, ECOA section 704B(b)(2) provides that financial
                institutions must ``maintain a record of the responses to such
                inquiry'' and keep those records separate from the application and
                information that accompanies it. Second, 704B(c) states that applicants
                for credit ``may refuse to provide any information requested pursuant
                to subsection (b).'' Third, 704B(d) requires financial institutions to
                limit the access of certain employees to ``information provided by the
                applicant pursuant to a request under subsection (b),'' with certain
                exceptions. Fourth, 704B(e) instructs financial institutions that
                ``information provided by any loan applicant pursuant to a request
                under subsection (b) . . . shall be itemized in order to clearly and
                conspicuously disclose'' data including the loan type and purpose,
                amount of credit applied for and approved, and gross annual revenue.
                 In light of these four disparate provisions, the Bureau believes
                that section 1071 is ambiguous with respect to the meaning of ``any
                information provided by the applicant pursuant to a request under
                subsection (b).'' \288\ On the one hand, ECOA section 704B(b)(1)
                directs financial institutions to inquire whether a business is ``a
                women-owned, minority-owned, or small business,'' so the phrase could
                be interpreted as referring only to those three data points. Section
                704B(e), however, indicates that the scope of 704B(b) could be much
                broader; it suggests that all of the information that financial
                institutions are required to compile and maintain--not simply an
                applicant's status as a women-owned, minority-owned, or small
                business--constitutes information provided by an applicant ``pursuant
                to a request under subsection (b).'' But as noted above, information
                deemed provided pursuant to subsection (b) is subject to the notable
                protections of separate recordkeeping under 704B(b)(2), a right to
                refuse under 704B(c), and the firewall under 704B(d). Applying these
                special protections to many of the data points in 704B(e), such as
                gross annual revenue or amount applied for, would be extremely
                difficult to implement, because this information is critical to
                financial institutions' ordinary operations in making credit decisions.
                Additionally, 704B(e) describes as ``provided by any loan applicant''
                under 704B(b) data points that plainly must come from the financial
                institution itself, such as application number and action taken,
                further suggesting that Congress viewed this term as encompassing more
                information than lies within the four corners of 704B(b)(1). Finally,
                as noted above, the circular structure of 704B(b) complicates the
                question of what constitutes information provided ``pursuant to a
                request under subsection (b).'' Read together, the introductory
                language in 704B(b) and (b)(1) direct financial institutions, ``in the
                case of'' a credit application ``for [1] women-owned, [2] minority-
                owned, or [3] small business,'' to ``inquire whether the business is a
                [1] women-owned, [2] minority-owned, or [3] small business.'' The
                Bureau believes that this circularity further demonstrates the
                ambiguity of the phrase ``pursuant to a request under subsection (b).''
                ---------------------------------------------------------------------------
                 \288\ The Bureau does not believe that the minor linguistic
                variations in these four provisions themselves have significance.
                ---------------------------------------------------------------------------
                 The Bureau believes that it is reasonable to resolve these
                ambiguities by giving different meanings to the phrase ``any
                information provided by the applicant pursuant to a request under
                subsection (b)'' (or similar) with respect to ECOA section 704B(e) as
                opposed to 704B(b)(2), (c), and (d).\289\ With respect to 704B(e), the
                Bureau interprets the phrase to refer to all the data points now
                articulated in proposed Sec. 1002.107(a). Section 704B(e) is the
                source of financial institutions' obligation to ``compile and
                maintain'' data that they must then submit to the
                [[Page 56387]]
                Bureau, so it would be reasonable to interpret this paragraph as
                referring to the complete data collection Congress devised in enacting
                section 1071.
                ---------------------------------------------------------------------------
                 \289\ While there is a presumption that a phrase appearing in
                multiple parts of a statute has the same meaning in each, ``this is
                no more than a presumption. It can be rebutted by evidence that
                Congress intended the words to be interpreted differently in each
                section, or to leave a gap for the agency to fill.'' Catskill
                Mountains Chapter of Trout Unlimited, Inc. v. EPA, 846 F.3d 492, 532
                (2d Cir. 2017) (citing Env't Def. v. Duke Energy Corp., 549 U.S.
                561, 575 (2007)). Here, the Bureau believes Congress indicated such
                an intention by using the same phrase in the substantially different
                contexts of providing special protections for sensitive demographic
                information on the one hand and ``itemiz[ing]'' all collected data
                on the other.
                ---------------------------------------------------------------------------
                 But with respect to the three statutory provisions creating special
                protections for certain information--the firewall in ECOA section
                704B(d), separate recordkeeping in 704B(b)(2), and the right to refuse
                in 704B(c)--the Bureau interprets the phrase to refer to the data
                points in proposed Sec. 1002.107(a)(18) (women-owned business status),
                (a)(19) (minority-owned business status), and (a)(20) (ethnicity, race,
                and sex of principal owners).\290\ Each of these data points requests
                sensitive demographic information that has no bearing on the
                creditworthiness of the applicant, about which existing Sec. 1002.5(b)
                would generally prohibit the financial institution from inquiring
                absent section 1071's mandate to collect and report that information,
                and with respect to which applicants are protected from discrimination.
                The Bureau accordingly believes that it would be reasonable to apply
                section 1071's special-protection provisions to apply to this
                information, regardless of whether the statutory authority to collect
                it originates in 704B(b)(1) (women-owned and minority-owned business
                status) or 704B(e)(2)(G) (race, sex, and ethnicity of principal
                owners). The Bureau similarly believes that it would have been
                unreasonable for Congress to have intended that these special
                protections would apply to any of the other data points now proposed in
                Sec. 1002.107(a), which the financial institution is permitted to
                request regardless of coverage under section 1071 which are not the
                subject of Federal antidiscrimination law, and many of which financial
                institutions currently use for underwriting purposes.
                ---------------------------------------------------------------------------
                 \290\ The Bureau's interpretations with respect to a separate
                data point for small business status are discussed in the next
                section.
                ---------------------------------------------------------------------------
                 The Bureau implements these interpretations of ``information
                requested pursuant to subsection (b)'' in several different section-by-
                section discussions. With respect to ECOA section 704B(e), the Bureau
                discusses its interpretation of the phrase in the section-by-section
                analysis of proposed Sec. 1002.107(a). The Bureau's interpretation of
                704B(d)'s firewall requirement is addressed at greater length in the
                section-by-section analysis of proposed Sec. 1002.108, and the
                Bureau's interpretation of the separate recordkeeping requirement in
                704B(b)(2) is addressed in the section-by-section analysis of proposed
                Sec. 1002.111(b). The right to refuse in 704B(c) is discussed in the
                section-by-section analyses of the data points that the Bureau proposes
                to be subject to the right to refuse: Proposed Sec. 1002.107(a)(18)
                (women-owned business status), (19) (minority-owned business status),
                and (20) (ethnicity, race, and sex of principal owners).
                3. No Collection of Small Business Status as a Data Point
                 The Bureau notes that neither of its interpretations of
                ``information requested pursuant to subsection (b)'' reference a
                specific data point for an applicant's status as a small business, nor
                is the Bureau otherwise including in proposed Sec. 1002.107(a) that
                financial institutions collect, maintain, or submit a data point whose
                sole function is to state whether the applicant is or is not a small
                business.
                 At SBREFA, the Bureau conveyed that it was considering proposing
                small business status as a separate data point. The Bureau also stated
                that it was considering not proposing to extend the right to refuse or
                firewall to a financial institution's specific inquiry regarding small
                business status; \291\ the Bureau did not address in the SBREFA Outline
                whether small business status would be subject to the separate
                recordkeeping requirement. In lieu of further details about the
                potential data point on small business status, the Bureau noted that it
                was considering proposing that collection and reporting of whether an
                applicant for credit is a small business be based on applicant-reported
                information, but that the precise nature of the data point would depend
                on the ultimate definition of small business.
                ---------------------------------------------------------------------------
                 \291\ SBREFA Outline at 25.
                ---------------------------------------------------------------------------
                 As discussed below in the section-by-section analysis of proposed
                Sec. 1002.106(b), the Bureau is now proposing a definition of small
                business that largely adopts the SBREFA Outline's First Alternative
                Approach with a threshold of $5 million. After considering the
                implications of this approach, the Bureau now believes that it would
                render redundant any requirement that financial institutions also
                collect a standalone data point whose sole purpose is to state whether
                an applicant is a small business, because the gross annual revenue data
                point wholly encompasses whether an applicant is a small business.
                Indeed, under the proposed definition of small business, when a
                financial institution asks an applicant its gross annual revenue, that
                question is functionally identical to asking, ``are you a small
                business?'' The Bureau believes that it would be a reasonable
                interpretation of ECOA section 704B(b)'s query as to small business
                status for that question to take the form of, ``what is your gross
                annual revenue?'' Furthermore, as discussed above with respect to the
                Bureau's approach to non-small women- and minority-owned businesses,
                the Bureau is interpreting financial institutions' data collection
                obligations as attaching only in the case of applications from small
                businesses; if a financial institution determines that an applicant is
                not a small business, none of the obligations under this rule would
                apply. As such, a standalone data point that serves only to designate
                whether a business qualifies as small for purposes of the rule would be
                redundant with the mere fact that the 1071 data collection occurs at
                all, as well as with the collection of gross annual revenue.
                 The Bureau acknowledges that the plain language of ECOA section
                704B(b) could be read to require financial institutions to ask
                applicants subject to the data collection the precise question, ``are
                you a small business?'' Upon further analysis, however, the Bureau
                believes that Congress's intended treatment of small business status as
                a standalone data point is ambiguous. As described in more detail above
                with respect to the rulemaking's coverage of women- and minority-owned
                businesses that are not small, 704B(b)'s introductory language and
                704B(b)(1) appear to require financial institutions to know the answer
                to whether an applicant is women-owned, minority-owned, or small before
                they make their inquiry; to resolve this ambiguity, the Bureau
                interprets 704B(b)'s introductory language and 704B(b)(1) to require
                that financial institutions first straightforwardly assess whether an
                applicant is a small business before proceeding to inquire into the
                applicant's protected demographic information that would otherwise be
                prohibited by existing Sec. 1002.5(b).
                 In sum, pursuant to its authority under ECOA section 704B(g)(1) to
                prescribe such rules as may be necessary to carry out, enforce, and
                compile data pursuant to section 1071, the Bureau interprets 704B(b)
                and (b)(1) to obviate the need for financial institutions to collect a
                standalone data point whose sole purpose is to note an applicant's
                small business status. For the same reasons, the Bureau believes that
                not requiring the collection of a separate data point on small business
                status would be necessary or appropriate to carry out the purposes of
                section 1071; therefore, in the alternative, the Bureau proposes to
                exercise its exception authority in 704B(g)(2) to effect this outcome.
                [[Page 56388]]
                Finally, because the Bureau believes that the collection of a
                standalone data point on small business status would ``yield a gain of
                trivial or no value,'' the Bureau proposes, in the alternative, to
                exercise its implied de minimis authority to create this
                exception.\292\
                ---------------------------------------------------------------------------
                 \292\ Waterkeeper All., 853 F.3d at 530 (quoting Pub. Citizen,
                869 F.2d at 1556); see Alabama Power, 636 F.2d at 360-61.
                ---------------------------------------------------------------------------
                 In light of the above, the Bureau seeks comment on whether a
                standalone data point solely dedicated to small business status might
                nonetheless be useful and, if so, how it might be implemented.
                F. Conforming Amendments to Existing Regulation B
                 As discussed above, the Bureau is proposing to implement its
                section 1071 rule in a new subpart B of Regulation B. The content of
                existing Regulation B would become subpart A of Regulation B. This
                change would not affect the current section numbering in Regulation B.
                The Bureau believes it is appropriate to make this rule a part of
                Regulation B, as section 1071 is a part of ECOA. Nonetheless, the
                Bureau seeks comment on whether it should instead codify its section
                1071 rule as a free-standing regulation with its own CFR part and, if
                so, why.
                 As noted above and as discussed in more detail below, the Bureau is
                proposing amendments to amend existing Sec. 1002.5(a)(4) and
                associated commentary to expressly permit voluntary collection of
                minority-owned business status, women-owned business status, and the
                race, sex, and ethnicity of applicants' principal owners in accordance
                with the requirements of subpart B. In addition, the Bureau anticipates
                revising certain references to the entire regulation (which use the
                terms ``regulation'' or ``part'') in existing Regulation B to instead
                refer specifically to subpart A. The Bureau does not intend to make any
                substantive changes with these revisions, but rather intends to
                maintain the status quo.
                Subpart A--General
                Section 1002.5 Rules Concerning Requests for Information
                5(a) General Rules
                5(a)(4) Other Permissible Collection of Information
                Background
                 ECOA prohibits creditors from discriminating against applicants,
                with respect to any aspect of a credit transaction, on the basis of--
                among other things--race, color, religion, national origin, sex or
                marital status, or age.\293\ It also states that making an inquiry
                under 15 U.S.C. 1691c-2 (that is, section 1071), in accordance with the
                requirements of that section, shall not constitute discrimination for
                purposes of ECOA.\294\ Regulation B, in existing Sec. 1002.5(b),
                generally prohibits a creditor from inquiring about protected
                demographic information in connection with a credit transaction unless
                otherwise required by Regulation B, ECOA, or other Federal law or
                regulation.\295\
                ---------------------------------------------------------------------------
                 \293\ 15 U.S.C. 1691(a).
                 \294\ 15 U.S.C. 1691(b)(5).
                 \295\ Existing Sec. 1002.5(a)(2).
                ---------------------------------------------------------------------------
                 In 2017, the Bureau amended Regulation B, adding Sec. 1002.5(a)(4)
                to allow creditors to collect ethnicity, race, and sex from mortgage
                applicants in certain cases where the creditor is not required to
                report under HMDA and Regulation C.\296\ As part of this rulemaking,
                the Bureau added Sec. 1002.5(a)(4) to expressly permit the collection
                of ethnicity, race, and sex information from mortgage applicants in
                certain cases where the creditor is not required to report under HMDA
                and Regulation C. For example, existing Sec. 1002.5(a)(4) expressly
                permits the collection of ethnicity, race, and sex information for
                certain transactions for which Regulation C permits optional reporting.
                However, nothing in existing Regulation B (or in ECOA) expressly
                permits voluntary collection and reporting of information regarding the
                ethnicity, race, and sex of applicants' principal owners, or whether
                the applicant is a minority-owned business or women-owned business,
                under section 1071.
                ---------------------------------------------------------------------------
                 \296\ Equal Credit Opportunity Act (Regulation B) Ethnicity and
                Race Information Collection, 82 FR 45680, 45684 (Oct. 2, 2017).
                ---------------------------------------------------------------------------
                SBREFA Proposal Under Consideration and Feedback Received
                 During the SBREFA process, some SERs, primarily small CDFIs and
                mission-oriented community banks, stated that they would be inclined to
                collect and report 1071 data to the Bureau even if not required to do
                so, such as if they fell under loan-volume thresholds. These SERs
                expressed an intent to report data even if not required to out of a
                belief in the importance and utility of 1071 data.
                Proposed Rule
                 The Bureau is proposing to amend existing Sec. 1002.5(a)(4) to add
                three exemptions (in proposed Sec. 1002.5(a)(4)(vii), (viii), and
                (ix)) that would permit certain creditors that are not covered
                financial institutions under the rule to collect small business
                applicants' protected demographic information under certain
                circumstances. The Bureau is also proposing to add comment 5(a)(2)-4
                and to revise existing comment 5(a)(4)-1 to provide guidance on these
                proposed exemptions.
                 Proposed Sec. 1002.5(a)(4)(vii) would provide that a creditor that
                was required to report small business lending data pursuant to proposed
                Sec. 1002.109 for any of the preceding five calendar years but is not
                currently a covered financial institution under proposed Sec.
                1002.105(b) may collect information pursuant to proposed subpart B for
                a covered application as defined in proposed Sec. 1002.103 regarding
                whether the applicant is a minority-owned business or a women-owned
                business, and the ethnicity, race, and sex of the applicant's principal
                owners if it complies with the requirements of proposed subpart B as
                otherwise required for covered financial institutions pursuant to
                proposed Sec. Sec. 1002.107, 1002.108, 1002.111, 1002.112, and
                1002.114 for that application. In short, proposed Sec.
                1002.5(a)(4)(vii) would permit a previously covered financial
                institution to collect such information for covered applications for up
                to five years after it fell below the loan-volume threshold of proposed
                Sec. 1002.105(b), provided that it does so in accordance with the
                relevant requirements of proposed subpart B.
                 The Bureau expects that some creditors that are no longer covered
                financial institutions and thus no longer required to report 1071 data
                in a given reporting year may prefer to continue to collect applicants'
                protected demographic information in the event they become a covered
                financial institution again, in order to maintain consistent compliance
                standards from year to year. As it did in a similar context for HMDA
                reporting,\297\ the Bureau believes that permitting such collection for
                five years provides an appropriate time frame under which a financial
                institution should be permitted to continue collecting the information
                without having to change its compliance processes. The Bureau believes
                that a five-year period is sufficient to help an institution discern
                whether it is likely to have to report 1071 data in the near future but
                not so long as to permit it to collect such information in a period too
                attenuated from previous 1071 reporting.
                ---------------------------------------------------------------------------
                 \297\ Existing Sec. 1002.5(a)(4)(iii).
                ---------------------------------------------------------------------------
                 Therefore, the Bureau believes that it is an appropriate use of its
                statutory authority under sections 703(a) \298\ and
                [[Page 56389]]
                704B(g)(1) of ECOA to permit creditors to collect the 1071 demographic
                information in the manner set out in proposed Sec. 1002.5(a)(4)(vii).
                The proposal would effectuate the purposes of and facilitate compliance
                with ECOA and is necessary to carry out, enforce, and compile data
                pursuant to section 1071 because it would permit creditors to collect
                information without interruption from year to year, thereby
                facilitating compliance with the 1071 rule's data collection
                requirements and improving the quality and reliability of the data
                collected. The Bureau also believes that this provision is narrowly
                tailored and would preserve and respect the general limitations in
                existing Sec. 1002.5(b) through (d).
                ---------------------------------------------------------------------------
                 \298\ 15 U.S.C. 1691b(a).
                ---------------------------------------------------------------------------
                 Proposed Sec. 1002.5(a)(4)(viii) would provide that a creditor
                that exceeded the loan-volume threshold in the first year of the two-
                year threshold period provided in proposed Sec. 1002.105(b) may, in
                the second year, collect information pursuant to proposed subpart B for
                a covered application as defined in proposed Sec. 1002.103 regarding
                whether the applicant is a minority-owned business or a women-owned
                business, and the ethnicity, race, and sex of the applicant's principal
                owners if it complies with the requirements of subpart B as otherwise
                required for covered financial institutions pursuant to proposed
                Sec. Sec. 1002.107, 1002.108, 1002.111, 1002.112, and 1002.114 for
                that application.
                 The Bureau believes that its proposal would benefit creditors in
                certain situations in which the creditor has not previously reported
                1071 data but expects to be covered in the following year and wishes to
                prepare for that future reporting obligation. For example, where a
                creditor surpasses the loan-volume threshold of proposed Sec.
                1002.105(b) for the first time in a given calendar year, it may wish to
                begin collecting applicants' protected demographic information for
                covered applications received in the next calendar year (second
                calendar year) so as to ensure its compliance systems are fully
                functional before it is required to collect and report information
                pursuant to proposed subpart B in the following calendar year (third
                calendar year).
                 The Bureau believes that it is an appropriate use of its statutory
                authority under sections 703(a) and 704B(g)(1) of ECOA to permit
                creditors to collect information under proposed Sec.
                1002.5(a)(4)(viii). A creditor likely would benefit from being able to
                collect applicants' protected demographic information with assurance of
                compliance with existing Sec. 1002.5 regardless of whether it actually
                becomes subject to proposed subpart B reporting at the end of the two-
                year threshold period. The proposal would effectuate the purposes of
                and facilitate compliance with ECOA and is necessary to carry out,
                enforce, and compile data pursuant to section 1071 because it would
                facilitate compliance with the 1071 rule's data collection requirements
                and improve the quality and reliability of the data collected by
                financial institutions that may be transitioning into being required to
                collect and report 1071 data.
                 Proposed Sec. 1002.5(a)(4)(ix) would state that a creditor that is
                not currently a covered financial institution under proposed Sec.
                1002.105(b), and is not otherwise a creditor to which proposed Sec.
                1002.5(a)(4)(vii) or (viii) applies, may collect information pursuant
                to proposed subpart B for a covered application as defined in proposed
                Sec. 1002.103 regarding whether an applicant for a covered credit
                transaction is a minority-owned business or a women-owned business, and
                the ethnicity, race, and sex of the applicant's principal owners if the
                creditor complies with the requirements of proposed subpart B as
                otherwise required for covered financial institutions pursuant to
                proposed Sec. Sec. 1002.107 through 1002.112 and 1002.114 for that
                application. The proposal would permit a financial institution that
                wishes to voluntarily report 1071 data to collect applicants' protected
                demographic information without running afoul of Regulation B. Unlike
                creditors subject to proposed Sec. 1002.5(a)(4)(vii) or (viii), a
                creditor seeking to voluntarily collect applicant's protected
                demographic information under proposed Sec. 1002.5(a)(4)(ix) would be
                required to report it to the Bureau.
                 The Bureau believes that permitting creditors to collect 1071
                demographic information pursuant to proposed Sec. 1002.5(a)(4)(vii) or
                (viii) would facilitate compliance and promote data quality in the
                event that creditors subject to those provisions later become covered
                financial institutions. For those creditors that wish to voluntarily
                report 1071 data, as well as others covered by proposed Sec.
                1002.5(a)(4)(ix) (where reporting is required when applicants'
                protected demographic information is collected), the reported data
                would be additional information that would further the intended
                purposes of the statute. An analysis of business and community
                development needs would benefit from the inclusion of voluntarily
                reported data from financial institutions below the reporting
                threshold. Such institutions more often serve sparsely populated rural,
                underserved communities or are member-owned organizations (such as
                credit unions). As some SERs suggested, the voluntary collection and
                reporting of 1071 data by such financial institutions may stem from a
                community development orientation and commitment to fair lending.
                Further, the reporting of such data would provide a more complete
                picture of total lending activity--and therefore enable a more complete
                analysis of fair lending risks as well as business and community
                development needs--especially given that larger financial institutions
                may be less likely to operate in sparsely populated, rural, and
                underserved communities, for the reasons set out in part II above. The
                Bureau is proposing Sec. 1002.5(a)(4)(ix) in response to feedback from
                some stakeholders that indicated they might want to collect and report
                1071 data even if they were not required to do so. The Bureau believes,
                for the reasons set out above, that it is an appropriate use of its
                general authority under sections 703(a) and 704B(g)(1) of ECOA to
                permit creditors to collect information under proposed Sec.
                1002.5(a)(4)(ix), as such collection would effectuate the purposes of
                and facilitate compliance with ECOA and is necessary to carry out,
                enforce, and compile data pursuant to section 1071. Further, the Bureau
                believes that permitting creditors to collect applicants' protected
                demographic information would result in the collection of additional
                information that could carry out section 1071's business and community
                development purpose.
                 Existing comment 5(a)(4)-1 currently addresses recordkeeping
                requirements for ethnicity, race, and sex information that is
                voluntarily collected for HMDA under the existing provisions of Sec.
                1002.5(a)(4). The Bureau is proposing to revise this comment by adding
                to it a parallel reference to proposed subpart B, along with a
                statement that the information collected pursuant to proposed subpart B
                must be retained pursuant to the requirements set forth in proposed
                Sec. 1002.111.
                 Proposed comment 5(a)(2)-4 would state that proposed subpart B of
                Regulation B generally requires creditors that are covered financial
                institutions as defined in proposed Sec. 1002.105(a) to collect and
                report information about the ethnicity, race, and sex of the principal
                owners of applicants for certain small business credit, as well as
                whether the applicant is minority-owned or women-owned as defined in
                proposed Sec. 1002.102(m) and (s), respectively. The Bureau is
                proposing this comment for parity with existing comment 5(a)(2)-2,
                which
                [[Page 56390]]
                addresses the requirement to collect and report information about the
                race, ethnicity, and sex of applicants under HMDA. Existing comment
                5(a)(2)-3 explains that persons such as loan brokers and correspondents
                do not violate ECOA or Regulation B if they collect information that
                they are otherwise prohibited from collecting, where the purpose of
                collecting the information is to provide it to a creditor that is
                subject to HMDA or another Federal or State statute or regulation
                requiring data collection. The Bureau believes that the reference to
                another Federal statute or regulation adequately encompasses section
                1071 and proposed subpart B, and thus it does not propose to amend this
                existing comment in order to make clear that loan brokers and other
                persons collecting applicants' protected demographic information on
                behalf of covered financial institutions are not violating ECOA or
                Regulation B by doing so.
                 The Bureau seeks comment on these three proposed exemptions to be
                added to existing Sec. 1002.5(a)(4), and associated commentary,
                including whether there are other specific situations that should be
                added to the list of exemptions in Sec. 1002.5(a)(4) to permit the
                collection of applicants' protected demographic information, and
                whether any similar modifications to other provisions are necessary. In
                particular, the Bureau seeks comment on whether it should add another
                exemption to Sec. 1002.5(a)(4) relating to proposed Sec.
                1002.114(c)(1), wherein the Bureau is proposing to permit financial
                institutions to collect, but would not require them to report,
                applicants' protected demographic information prior to the compliance
                date.
                 The Bureau also notes that, as discussed in the section-by-section
                analysis of proposed Sec. 1002.104(a) below, it seeks comment on
                whether it should permit financial institutions to voluntarily collect
                and report 1071 data on applications for products that the Bureau is
                not proposing to cover. If the Bureau were to permit such voluntary
                collection and reporting, the Bureau expects to add a provision similar
                to proposed Sec. 1002.5(a)(4)(ix) to address it.
                Subpart B--Small Business Lending Data Collection
                Section 1002.101 Authority, Purpose, and Scope
                 Proposed Sec. 1002.101 would set forth the authority, purpose, and
                scope for proposed subpart B. Specifically, it would provide that
                proposed subpart B is issued by the Bureau pursuant to section 704B of
                ECOA (15 U.S.C. 1691c-2). It would further state that, except as
                otherwise provided therein, proposed subpart B applies to covered
                financial institutions, as defined in proposed Sec. 1002.105(b), other
                than a person excluded from coverage of this part by section 1029 of
                the Dodd-Frank Act. It also would set out section 1071's two statutory
                purposes of facilitating fair lending enforcement and enabling the
                identification of business and community development needs and
                opportunities for women-owned, minority-owned, and small businesses.
                 The Bureau seeks comment on its proposed approach to this section,
                including whether any other information on the 1071 rule's authority,
                purpose, or scope should be addressed herein.
                Section 1002.102 Definitions
                 The Bureau is proposing a number of definitions for terms used in
                subpart B, in Sec. 1002.102.\299\ These definitions generally fall
                into several categories. First, some definitions in proposed Sec.
                1002.102 refer to terms defined elsewhere in proposed subpart B--
                specifically, the terms business, covered application, covered credit
                transaction, covered financial institution, financial institution, and
                small business are defined in proposed Sec. Sec. 1002.106(a),
                1002.103, 1002.104, 1002.105(b), 1002.105(a), and 1002.106(b),
                respectively. These terms are of particular importance in proposed
                subpart B, and the Bureau is proposing to define them in separate
                sections, rather than in proposed Sec. 1002.102, for ease of reading.
                ---------------------------------------------------------------------------
                 \299\ The Bureau notes that there are certain terms defined in
                proposed subpart B outside of proposed Sec. 1002.102. This occurs
                where a definition is relevant only to a particular section. For
                example, the firewall provisions in proposed Sec. 1002.108 use the
                phrases ``involved in making any determination concerning a covered
                application'' and ``should have access.'' Those phrases are defined
                in Sec. 1002.108(a). Those definitions are discussed in detail in
                the section-by-section analysis of the provisions in which they
                appear.
                ---------------------------------------------------------------------------
                 Second, some terms in proposed Sec. 1002.102 are defined by cross-
                referencing the definitions of terms defined in existing Regulation B--
                specifically, business credit, credit, and State are defined by
                reference to existing Sec. 1002.2(g), (j), and (aa), respectively.
                Similarly, several definitions refer to terms defined in other
                regulations--specifically, a portion of the affiliate definition refers
                to the SBA's regulation at 13 CFR 121.103, and dwelling refers to the
                definition in Regulation C Sec. 1003.2(f). These terms are each used
                in proposed subpart B, and the Bureau believes it is appropriate to
                incorporate them into the subpart B definitions in this manner.
                 Finally, the remaining terms are defined directly in proposed Sec.
                1002.102. These include applicant, closed-end credit transaction,
                minority individual, minority-owned business, open-end credit
                transaction, principal owner, small business lending application
                register, and women-owned business, as well as a portion of the
                definition of affiliate. Some of these definitions draw on definitions
                in existing Regulation B or elsewhere in Federal laws or regulations.
                 The Bureau believes that basing this proposal's definitions on
                previously defined terms (whether in Regulation B, Regulation C, or
                regulations promulgated by another agency), to the extent possible,
                would minimize regulatory uncertainty and facilitate compliance,
                particularly where the other regulations are likely to apply, in their
                own right, to the same transactions. However, as discussed further
                below, the Bureau is in certain instances proposing to deviate from the
                existing definitions for purposes of this proposal.
                 These definitions are each discussed in detail below. The Bureau is
                proposing these definitions pursuant to its authority under section
                704B(g)(1) to prescribe such rules and issue such guidance as may be
                necessary to carry out, enforce, and compile data pursuant to section
                1071. In addition, the Bureau is proposing certain of these definitions
                to implement particular definitions in section 1071 including the
                statutory definitions set out in 704B(h). Any other authorities that
                the Bureau is relying on to propose certain definitions are discussed
                in the section-by-section analysis of those specific definitions.
                 The Bureau seeks comment on its proposed approach to each of these
                definitions, as well as whether there are any other terms that the
                Bureau should define for purposes of proposed subpart B.
                102(a) Affiliate
                 Proposed Sec. 1002.102(a) would define ``affiliate'' based on
                whether the term is used to refer to a financial institution or to an
                applicant.
                 Proposed Sec. 1002.102(a) would define ``affiliate'' with respect
                to a financial institution as any company that controls, is controlled
                by, or is under common control with, another company, as set forth in
                the Bank Holding Company Act of 1956.\300\ Existing Regulation B does
                not define affiliate. This proposed definition
                [[Page 56391]]
                would provide a consistent approach with the Bureau's Regulation C,
                which applies the term to financial institutions, as defined in
                Regulation C, for certain reporting obligations.\301\ The Bureau
                believes that this definition would be appropriate to define an
                affiliate of a financial institution, and that it should provide
                sufficient clarity for financial institutions when determining
                responsibilities under proposed subpart B.
                ---------------------------------------------------------------------------
                 \300\ 12 U.S.C. 1841 et seq.
                 \301\ See Regulation C comment 4(a)(11)-3.
                ---------------------------------------------------------------------------
                 Proposed Sec. 1002.102(a) would define ``affiliate'' with respect
                to a business or an applicant as having the same meaning as described
                in 13 CFR 121.103, which is an SBA regulation titled ``How does SBA
                determine affiliation?'' This proposed definition would provide
                consistency with the Bureau's proposed approach to what constitutes a
                small business for purposes of section 1071, as discussed in the
                section-by-section analysis of proposed Sec. 1002.106(b) below. As
                discussed in the section-by-section analysis of proposed Sec.
                1002.106(b) below, the Bureau is proposing to define a small business
                by reference to the SBA's regulations (with the exception of an
                alternate size standard, as set forth in proposed Sec. 1002.106(b)).
                As discussed in the section-by-section analysis of proposed Sec.
                1002.107(a)(14), the Bureau is proposing to permit, but not require, a
                financial institution to report the gross annual revenue for the
                applicant in a manner that includes the revenue of affiliates as well.
                As discussed in the section-by-section analysis of proposed Sec.
                1002.107(a)(16), the Bureau is proposing that a financial institution,
                if asked, shall explain to the applicant that workers for affiliates of
                the applicant would only be counted if the financial institution were
                also collecting the affiliates' gross annual revenue. The Bureau is
                therefore proposing to define affiliate in subpart B for purposes of a
                business or an applicant by referring to the SBA's definition of
                affiliate.
                 The Bureau seeks comment on its proposed approach to this
                definition.
                102(b) Applicant
                 Proposed Sec. 1002.102(b) would define ``applicant'' to mean any
                person who requests or who has received an extension of business credit
                from a financial institution. The term ``applicant'' is undefined in
                section 1071. Proposed Sec. 1002.102(b) is based on the definition of
                applicant in existing Regulation B, though for consistency with other
                parts of this proposed rule, it adds a limitation that the credit be
                business credit and uses the term financial institution instead of
                creditor. It also omits the references to other persons who are or may
                become contractually liable regarding an extension of credit such as
                guarantors, sureties, endorsers, and similar parties. The Bureau is
                concerned that including other such persons could exceed the scope of
                the data collection anticipated by section 1071. Including them could
                also make the data collection more difficult as financial institutions
                might need to report data points (such as gross annual revenue, NAICS
                code, time in business, and others) regarding multiple persons in
                connection with a single application. Collecting such information on
                guarantors, sureties, endorsers, and similar parties would likely not
                support 1071's business and community development purpose. Thus, the
                Bureau believes it is appropriate to limit the definition of applicant
                in proposed subpart B to only those persons who request, or have
                received, an extension of business credit from a financial institution.
                 The Bureau seeks comment on its proposed approach to this
                definition.
                102(c) Business
                 Proposed Sec. 1002.102(c) would refer to proposed Sec.
                1002.106(a) for a definition of the term ``business.'' See the section-
                by-section analysis of proposed Sec. 1002.106(a) for a detailed
                discussion of that definition.
                102(d) Business Credit
                 Proposed Sec. 1002.102(d) would refer to existing Sec. 1002.2(g)
                for a definition of the term ``business credit.'' The term ``credit''
                is undefined in section 1071. Section 1071 does not use the term
                ``business credit,'' though it does define ``small business loan'' as a
                loan made to a small business. Existing Sec. 1002.2(g) defines
                ``business credit'' as ``referring to extensions of credit primarily
                for business or commercial (including agricultural) purposes, but
                excluding extensions of credit of the types described in Sec.
                1002.3(a) through (d).'' The Bureau believes it is appropriate to
                define business credit by reference to the existing definition in
                Regulation B. The Bureau's proposal uses the term business credit
                principally in defining a covered credit transaction in proposed Sec.
                1002.104(a).
                 As described in the section-by-section analysis of proposed Sec.
                1002.104(a) below, loans, lines of credit, credit cards, and MCAs
                (including such credit transactions for agricultural purposes and those
                that are also covered by HMDA) would all fall under the proposed
                definition for business credit.
                 The Bureau notes existing Sec. 1002.2(g) excludes public utilities
                credit, securities credit, incidental credit, and government credit
                (that is, extensions of credit made to governments or governmental
                subdivisions, agencies, or instrumentalities--not extensions of credit
                made by governments), as defined in existing Sec. 1002.3(a) through
                (d), from certain aspects of existing Regulation B.\302\ As described
                in the section-by-section analysis of proposed Sec. 1002.104(b) below,
                for the purpose of subpart B, the Bureau is proposing complete
                exclusions for public utilities credit, securities credit, and
                incidental credit from the definition of a covered credit transaction
                in proposed Sec. 1002.104(b). The Bureau is not proposing an exclusion
                for extensions of credit made to governments or governmental
                subdivisions, agencies, or instrumentalities, because governmental
                entities would not constitute small businesses under the proposed
                rule.\303\ Moreover, as described in the section-by-section analysis of
                proposed Sec. 1002.104(b) below, the Bureau believes it is appropriate
                to interpret section 1071 as not applying to factoring, leases,
                consumer-designated credit used for business purposes, or credit
                secured by certain investment properties.
                ---------------------------------------------------------------------------
                 \302\ As explained in existing comment 3-1, under Sec. 1002.3,
                procedural requirements of Regulation B do not apply to certain
                types of credit. The comment further states that all classes of
                transactions remain subject to Sec. 1002.4(a) (the general rule
                barring discrimination on a prohibited basis) and to any other
                provision not specifically excepted.
                 \303\ Government entities are not ``organized for profit'' and
                thus would not be a ``business concern'' under proposed Sec.
                1002.106(a).
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed approach to this
                definition.
                102(e) Closed-End Credit Transaction
                 Proposed Sec. 1002.102(e) states that a closed-end credit
                transaction means an extension of credit that is not an open-end credit
                transaction under proposed Sec. 1002.102(n). The Bureau's proposal
                specifies different requirements for collecting and reporting certain
                data points based on whether the application is for a closed-end credit
                transaction or an open-end credit transaction. See the section-by-
                section analysis of proposed Sec. 1002.102(n) for a discussion of what
                constitutes an open-end credit transaction.
                 The Bureau seeks comment on its proposed approach to this
                definition.
                102(f) Covered Application
                 Proposed Sec. 1002.102(f) would refer to proposed Sec. 1002.103
                for a definition of the term ``covered application.'' See the
                [[Page 56392]]
                section-by-section analysis of proposed Sec. 1002.103 for a detailed
                discussion of that definition.
                102(g) Covered Credit Transaction
                 Proposed Sec. 1002.102(g) would refer to proposed Sec. 1002.104
                for a definition of the term ``covered credit transaction.'' See the
                section-by-section analysis of proposed Sec. 1002.104 for a detailed
                discussion of that definition.
                102(h) Covered Financial Institution
                 Proposed Sec. 1002.102(h) would refer to proposed Sec.
                1002.105(b) for a definition of the term ``covered financial
                institution.'' See the section-by-section analysis of proposed Sec.
                1002.105(b) for a detailed discussion of that definition.
                102(i) Credit
                 Proposed Sec. 1002.102(i) would refer to existing Sec. 1002.2(j)
                for a definition of the term ``credit.'' The term ``credit'' is
                undefined in section 1071. Existing Sec. 1002.2(j), which largely
                follows the definition of credit in ECOA,\304\ defines ``credit'' to
                mean the right granted by a creditor to an applicant to defer payment
                of a debt, incur debt and defer its payment, or purchase property or
                services and defer payment therefor. The Bureau believes that referring
                to this existing definition of credit for purposes of subpart B would
                help to foster consistency with existing Regulation B. The term credit
                in proposed subpart B is used in the context of what constitutes a
                covered credit transaction--that is, whether the application is
                reportable under the section 1071 rule. See the section-by-section
                analysis of proposed Sec. 1002.104 below for more details.
                ---------------------------------------------------------------------------
                 \304\ See 15 U.S.C. 1691a. Existing Regulation B uses the term
                ``applicant'' instead of ``debtor.''
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed approach to this
                definition.
                102(j) Dwelling
                 Proposed Sec. 1002.102(j) would refer to Regulation C Sec.
                1003.2(f) for a definition of the term ``dwelling.'' That provision
                defines dwelling to mean a residential structure, whether or not
                attached to real property. The term includes but is not limited to a
                detached home, an individual condominium or cooperative unit, a
                manufactured home or other factory-built home, or a multifamily
                residential structure or community. Proposed comment 102(j)-1 would
                provide that Bureau interpretations that appear in supplement I to part
                1003 containing official commentary in connection with Sec. 1003.2(f)
                are generally applicable to the definition of a dwelling in proposed
                Sec. 1002.102(j). Proposed comment 102(j)-2 would clarify that the
                definition of dwelling under existing Sec. 1002.14(b)(2) applies to
                relevant provisions under existing Regulation B, and proposed Sec.
                1002.102(j) is not intended to repeal, abrogate, annul, impair, or
                interfere with any existing interpretations, orders, agreements,
                ordinances, rules, or regulations adopted or issued pursuant to
                existing Sec. 1002.14(b)(2).
                 The Bureau believes that adopting the Regulation C definition of
                dwelling would streamline reporting and minimize compliance risks for
                financial institutions that are also reporting covered credit
                transactions under HMDA and would simplify data analysis for HMDA-
                reportable transactions. As an alternative, the Bureau considered
                adopting the existing Regulation B definition of dwelling, which is
                similar to the Regulation C definition. The Bureau understands that the
                existing Regulation B definition of dwelling is primarily applied in
                the context of the ECOA Valuations Rule\305\ and would thus not
                streamline reporting and minimize compliance risks in the same way as
                would adopting the Regulation C definition, which is already being
                applied to data collection and reporting requirements. The existing
                Regulation B definition of dwelling is also not supported by the same
                level of clarifying commentary as the definition under Regulation C.
                The Bureau believes that proposed comment 102(j)-1 will address most if
                not all questions related to the definition of dwelling by
                incorporating the Bureau's official commentary related to Sec.
                1003.2(f). Proposed comment 102(j)-2 also seeks to avoid potential
                confusion by clarifying that proposed Sec. 1002.102(j) does not affect
                the status of existing Sec. 1002.14(b)(2), which defines the term
                ``dwelling'' for purposes of existing Regulation B.
                ---------------------------------------------------------------------------
                 \305\ See 12 CFR 1002.14.
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed approach to this
                definition.
                102(k) Financial Institution
                 Proposed Sec. 1002.102(l) would refer to proposed Sec.
                1002.105(a) for a definition of the term ``financial institution.'' See
                the section-by-section analysis of proposed Sec. 1002.105(a) for a
                detailed discussion of that definition.
                102(l) Minority Individual
                Background
                 ECOA section 704B(b)(1) requires a financial institution to ask
                whether an applicant is a minority-owned business. Additionally,
                704B(h)(5) uses the term ``minority individual'' when defining the term
                minority-owned business. Although 704B(h)(5) defines the term
                ``minority,'' section 1071 does not define the term ``minority
                individual.'' Section 704B(h)(4) defines the term ``minority'' as
                having the same meaning as in section 1204(c)(3) of the Financial
                Institutions Reform, Recovery, and Enforcement Act of 1989
                (FIRREA).\306\ That statute defines ``minority'' to mean any Black
                American, Native American, Hispanic American, or Asian American.\307\
                ---------------------------------------------------------------------------
                 \306\ Public Law 101-73, section 1204(c)(3), 103 Stat. 183, 521
                (1989) (12 U.S.C. 1811 note).
                 \307\ Id.
                ---------------------------------------------------------------------------
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated that it was considering
                proposing guidance that would clarify that a minority individual is a
                natural person who is Black or African American, Asian, American Indian
                or Alaska Native, Native Hawaiian or Other Pacific Islander, and/or
                Hispanic or Latino \308\ (i.e., would mirror the aggregate race and
                ethnicity categories in Regulation C).thnsp;\309\ The Bureau also
                stated it was considering proposing guidance clarifying that a multi-
                racial person would be considered a minority individual.
                ---------------------------------------------------------------------------
                 \308\ SBREFA Outline at 18-19.
                 \309\ Appendix B to 12 CFR part 1003.
                ---------------------------------------------------------------------------
                 Several SERs supported clarifying the meaning of minority
                individual using the aggregate categories for race and ethnicity in
                Regulation C.\310\ However, one SER suggested using the disaggregated
                categories in Regulation C, instead of the aggregate categories, for
                this purpose. Other stakeholders providing feedback on the SBREFA
                Outline generally supported using the aggregate categories when
                determining who is a minority individual for purposes of reporting
                whether a business is a minority-owned business.
                ---------------------------------------------------------------------------
                 \310\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 22.
                ---------------------------------------------------------------------------
                 The SBREFA Panel recommended clarifying that, consistent with the
                aggregate categories for race and ethnicity in Regulation C, a minority
                individual is a natural person who is Black or African American, Asian,
                American Indian or Alaska Native, Native Hawaiian or Other Pacific
                Islander, and/or Hispanic or Latino.\311\
                ---------------------------------------------------------------------------
                 \311\ Id. at 44.
                ---------------------------------------------------------------------------
                Proposed Rule
                 Consistent with the approach that the Bureau took during the SBREFA
                process, proposed Sec. 1002.102(1) would clarify that the term
                ``minority
                [[Page 56393]]
                individual'' means a natural person who is American Indian or Alaska
                Native, Asian, Black or African American, Native Hawaiian or Other
                Pacific Islander, and/or Hispanic or Latino. The Bureau believes that
                these categories represent contemporary, more specific delineations of
                the categories described in section 1204(c)(3) of FIRREA.\312\ Proposed
                comment 102(1)-2 would clarify that a multi-racial or multi-ethnic
                person would be a minority individual. Proposed comment 102(1)-1 would
                clarify that this definition would be used only when an applicant
                determines whether it is a minority-owned business pursuant to proposed
                Sec. Sec. 1002.102(m) and 1002.107(a)(18). Proposed comment 102(1)-3
                would clarify the relationship of the definition of minority individual
                to the disaggregated subcategories used to determine a principal
                owner's ethnicity and race. The Bureau's proposed approach is
                consistent with the SBREFA Panel's recommendation discussed above.
                ---------------------------------------------------------------------------
                 \312\ See, e.g., 80 FR 36356 (June 24, 2015) (NCUA interpretive
                ruling and policy statement implementing an identical FIRREA
                definition of minority using this same modern terminology).
                ---------------------------------------------------------------------------
                 The Bureau believes this clarified terminology, which uses the
                aggregate ethnicity and race categories set forth in existing
                Regulation B \313\ and Regulation C,\314\ would avoid the potentially
                confusing situation where an applicant is using one set of aggregate
                race and ethnicity categories when answering questions about the
                principal owners' race and ethnicity but is asked to use a different
                set of aggregate categories when indicating whether a business is a
                minority-owned business. It also avoids creating a situation where a
                financial institution is required to use different race and ethnicity
                categories when complying with different portions of Regulation B and,
                if applicable, Regulation C. Consistency among race and ethnicity data
                collection regimes may also allow for better coordination among data
                users when reviewing data across multiple data collection regimes.\315\
                ---------------------------------------------------------------------------
                 \313\ 12 CFR 1002.13(a)(1)(i).
                 \314\ Appendix B to 12 CFR part 1003.
                 \315\ For example, the OMB uses these same categories for the
                classification of Federal data on race and ethnicity. See Off. of
                Mgmt. & Budget, Revisions to the Standards for the Classification of
                Federal Data on Race and Ethnicity, 62 FR 58785 (Oct. 30, 1996).
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed approach to this
                definition, including its proposed clarification of the definition of
                minority individual, and requests comment on whether additional
                clarification is needed. Additionally, in section-by-section analysis
                of proposed Sec. 1002.107(a)(20), the Bureau is requesting comment
                regarding whether an additional category for Middle Eastern or North
                African should be added for purposes of responding to a financial
                institution's inquiry regarding a principal owner's ethnicity or race
                and, if so, how this category should be included and defined. The
                Bureau also seeks comment on whether the definition of minority
                individual should include a natural person who is Middle Eastern or
                North African, as well as whether the inclusion of a natural person who
                is Middle Eastern or North African in the definition of minority
                individual for purposes of proposed Sec. 1002.102(l) should be
                dependent on whether Middle Eastern or North African is added as an
                aggregate category for purposes of proposed Sec. 1002.107(a)(20).
                102(m) Minority-Owned Business
                Background
                 ECOA section 704B(b)(1) requires financial institutions to inquire
                whether applicants for credit are minority-owned businesses. For
                purposes of the financial institution's inquiry under 704B(b),
                704B(h)(5) defines a business as a minority-owned business if (A) more
                than 50 percent of the ownership or control is held by one or more
                minority individuals, and (B) more than 50 percent of the net profit or
                loss accrues to one or more minority individuals. Section 1071 does not
                expressly define the related terms of ``ownership'' or ``control,'' nor
                does it describe what it means for net profits or losses to accrue to
                an individual.
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated it was considering
                proposing use of the statutory definition of ``minority-owned
                business'' (as set forth above) with further clarification of the terms
                ``ownership'' and ``control.'' \316\ The Bureau considered proposing
                use of concepts set forth in the Financial Crimes Enforcement Network's
                (FinCEN) Customer Due Diligence (CDD) rule \317\ to clarify these
                terms.
                ---------------------------------------------------------------------------
                 \316\ SBREFA Outline at 18-19.
                 \317\ See 31 CFR 1010.230.
                ---------------------------------------------------------------------------
                 Some SERs expressed concerns with certain aspects of the statutory
                definition of minority-owned business, asserting that the definition
                could cause confusion or pose particular complexities.\318\ Several
                SERs and some other stakeholders providing feedback on the SBREFA
                Outline asked that the definition of minority-owned business be revised
                to align with the definition used by other agencies, such as the SBA
                and the CDFI Fund. These SERs and other commenters recommended that the
                Bureau use a ``50 percent or more'' threshold for ownership or control,
                instead of the ``more than 50 percent'' standard in the statutory
                definition. Conversely, two SERs and several other commenters supported
                using the statutory definition of minority-owned business, including
                the ``more than 50 percent'' portion of the definition.
                ---------------------------------------------------------------------------
                 \318\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 22.
                ---------------------------------------------------------------------------
                 A number of SERs recommended that the Bureau simplify the
                definition to ensure it is understandable to small business applicants
                and to thereby facilitate consistent data collection. SERs' suggestions
                included eliminating the portion of the definition that refers to
                accrual of net profits and losses, eliminating the portion of the
                definition that refers to control, and providing a simplified and
                standardized definition.
                 Several SERs supported using the concepts of ownership and control
                in FinCEN's CDD rule when defining minority-owned business; one SER
                said that doing so would be logical and efficient, while another said
                it would create regulatory consistency and ease compliance burden. One
                SER said that most credit unions are familiar with the CDD rule.
                Generally, other commenters supported use of the CDD concepts to
                clarify the terms ``ownership'' and ``control.'' They stated that small
                business applicants are familiar with the concepts in the CDD rule or
                that they appreciated the consistency with existing regulatory
                requirements. However, one trade association commenter requested that
                the Bureau provide simplified applicant-facing materials without
                clarifying the definition, and two other stakeholders suggested that
                applicants might not be familiar with the CDD rule or may not
                understand the CDD rule.
                 The SBREFA Panel recommended seeking comment on potential
                interpretations of the definition of minority-owned business to clarify
                the term and to ensure that small business applicants would be able to
                understand questions asking if they are minority-owned businesses.\319\
                ---------------------------------------------------------------------------
                 \319\ Id. at 44.
                ---------------------------------------------------------------------------
                Proposed Rule
                 Proposed Sec. 1002.102(m) would define a minority-owned business
                as a business for which more than 50 percent of its ownership or
                control is held by one or more minority individuals, and more than 50
                percent of its net profits or
                [[Page 56394]]
                losses accrue to one or more minority individuals. This definition is
                consistent with ECOA section 704B(h)(5) and the Bureau's proposal under
                consideration in the SBREFA Outline.
                 Proposed comment 102(m)-1 would explain that a business must
                satisfy both prongs of the definition to be a minority-owned business--
                that is, (A) more than 50 percent of the ownership or control is held
                by one or more minority individuals, and (B) more than 50 percent of
                the net profits or losses accrue to one or more minority individuals.
                 Proposed comment 102(m)-2 would clarify that the definition of
                minority-owned business is used only when an applicant determines if it
                is a minority-owned business for purposes of proposed Sec.
                1002.107(a)(18). A financial institution would provide the definition
                of minority-owned business when asking the applicant to provide
                minority-owned business status pursuant to proposed Sec.
                1002.107(a)(18), but a financial institution would not be permitted or
                required to make its own determination regarding whether an applicant
                is a minority-owned business for this purpose.
                 Proposed comment 102(m)-3 would further note that a financial
                institution would be permitted to assist an applicant when determining
                whether it is a minority-owned business but would not be required to do
                so, and could provide the applicant with the definitions of ownership,
                control, and accrual of net profits or losses set forth in proposed
                comments 102(m)-4 through -6. Additionally, for purposes of reporting
                an applicant's minority-owned business status, a financial institution
                would rely on the applicant's determinations of its ownership, control,
                and accrual of net profits and losses.
                 Consistent with the approach described during the SBREFA process,
                the Bureau is proposing to clarify ``ownership'' and ``control'' using
                concepts from the CDD rule. Proposed comment 102(m)-4 would clarify
                that a natural person owns a business if that natural person directly
                or indirectly, through any contract, arrangement, understanding,
                relationship or otherwise, has an equity interest in the business.
                Proposed comment 102(m)-4 would also provide examples of ownership and
                clarify that, where applicable, ownership would need to be traced or
                followed through corporate or other indirect ownership structures for
                purposes of proposed Sec. Sec. 1002.102(m) and 1002.107(a)(18).
                Proposed comment 102(m)-5 would clarify that a natural person controls
                a business if that natural person has significant responsibility to
                manage or direct the business, and would provide examples of natural
                persons who control a business. Proposed comment 102(m)-6 would clarify
                that a business's net profits and losses accrue to a natural person if
                that natural person receives the net profits or losses, is legally
                entitled or required to receive the net profits or losses, or is
                legally entitled or required to recognize the net profits or losses for
                tax purposes.
                 The Bureau believes many small business applicants already respond
                to questions about who owns and who controls a business entity when
                completing CDD forms or otherwise responding to questions related to
                the CDD rule and thus should be familiar with the concepts in the CDD
                rule. Because the CDD rule does not address the second prong of the
                definition in ECOA section 704B(h)(5) (regarding accrual of net profit
                or loss), the Bureau is proposing in Sec. 1002.102(m) that this prong
                of the definition be defined to mean that one or more minority
                individuals must receive or be legally entitled to receive the net
                profits or losses or that one or more minority individuals must be
                legally required to recognize the net profits and losses. However, the
                Bureau shares some SERs' concerns that the statutory definition of
                minority-owned business might, in some cases, be difficult for
                applicants to understand, which could in turn jeopardize the accuracy
                of reported data. Thus, consistent with the SBREFA Panel's
                recommendation, the Bureau seeks comment on the proposed definition of
                minority-owned business and possible alternatives that may clarify the
                term in order to help ensure that small business applicants can
                determine whether they are minority-owned businesses for purposes of
                section 1071 data collection.
                102(n) Open-End Credit Transaction
                 Proposed Sec. 1002.102(n) would state that open-end credit
                transaction means an open-end credit plan as defined in Regulation Z
                Sec. 1026.2(a)(20), but without regard to whether the credit is
                consumer credit, as defined in Sec. 1026.2(a)(12), is extended by a
                creditor, as defined in Sec. 1026.2(a)(17), or is extended to a
                consumer, as defined in Sec. 1026.2(a)(11). The term ``open-end credit
                transaction'' is undefined in section 1071. The Bureau's proposal
                specifies different rules for collecting and reporting certain data
                points based on whether the application is for a closed-end credit
                transaction or an open-end credit transaction. The Bureau believes its
                proposed definition is reasonable because it aligns with the definition
                of ``open-end credit transaction'' in Regulation Z Sec. 1026.2(a)(20).
                The Bureau further believes that such alignment will minimize confusion
                and facilitate compliance.
                 The Bureau seeks comment on its proposed approach to this
                definition.
                102(o) Principal Owner
                Background
                 ECOA section 704B(e) requires financial institutions to compile and
                maintain the ethnicity, race, and sex of an applicant's principal
                owners. However, section 1071 does not expressly define who is a
                principal owner of a business.
                SBREFA Proposal Under Consideration and Feedback
                 In the SBREFA Outline, the Bureau stated that it was considering
                proposing to define the term ``principal owner'' in a manner consistent
                with the CDD rule.\320\ Under a definition consistent with the CDD
                rule, an individual would be a principal owner if the individual
                directly or indirectly, through any contract, arrangement,
                understanding, relationship or otherwise, owns 25 percent or more of
                the equity interests of the business.
                ---------------------------------------------------------------------------
                 \320\ SBREFA Outline at 32.
                ---------------------------------------------------------------------------
                 Several SERs and other stakeholders providing feedback on the
                SBREFA Outline expressed familiarity with the CDD rule, and supported
                aligning with that rule's 25 percent ownership standard for defining a
                principal owner for the section 1071 rule.\321\ One SER said that
                aligning definitions with the CDD rule would be logical and efficient.
                Another SER supported use of the CDD rule's concepts in determining who
                was a principal owner. Other SERs and stakeholders said they currently
                collect this information for beneficial owners at or above 20 percent
                in order to comply with SBA or other requirements and suggested
                aligning with that standard instead.
                ---------------------------------------------------------------------------
                 \321\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 30.
                ---------------------------------------------------------------------------
                 The SBREFA Panel recommended that the Bureau propose aligning the
                definition of principal owner with concepts of ownership and control
                that exist in other Federal regulations with which financial
                institutions are already complying, to the extent possible.\322\
                ---------------------------------------------------------------------------
                 \322\ Id. at 46.
                ---------------------------------------------------------------------------
                Proposed Rule
                 Proposed Sec. 1002.102(o) would define principal owner in a manner
                that is, in
                [[Page 56395]]
                part, consistent with the CDD rule. Specifically, a natural person
                would be a principal owner if the natural person directly owns 25
                percent or more of the equity interests of the business. However, as
                proposed comment 102(o)-1 would note, a natural person would need to
                directly own an equity share of 25 percent or more in the business in
                order to be a principal owner. Due to the potential complications with
                collecting a principal owner's ethnicity, race, and sex information
                when a trust or entity is an owner, the Bureau is proposing that
                entities not be considered principal owners and indirect ownership by
                individuals likewise not be considered when determining if someone is a
                principal owner for purposes of collecting and reporting principal
                owners' ethnicity, race, and sex or the number of principal owners.
                Thus, when determining who is a principal owner, ownership would not be
                traced through multiple corporate structures to determine if a natural
                person owns 25 percent or more of the applicant's equity interests.
                Additionally, because only a natural person would be a principal owner
                for the 1071 rule, entities such trusts, partnerships, limited
                liability companies, and corporations, would not be principal owners.
                 Proposed comment 102(o)-2 would clarify that a financial
                institution would provide an applicant with the definition of principal
                owner when asking the applicant to provide the number of its principal
                owners pursuant to proposed Sec. 1002.107(a)(21) and the ethnicity,
                race, and sex of its principal owners pursuant to proposed Sec.
                1002.107(a)(20). If a financial institution meets in person with a
                natural person about a covered application, the financial institution
                may be required to determine if the natural person with whom it meets
                is a principal owner in order to collect and report the principal
                owner's ethnicity and race based on visual observation and/or surname.
                (See proposed comments 107(a)(20)-5 and -9.) Additionally, proposed
                comment 102(o)-2 would note that if an applicant does not provide the
                number of its principal owners in response to the financial
                institution's request pursuant to proposed Sec. 1002.107(a)(21), the
                financial institution may need to determine the number of the
                applicant's principal owners and report that information based on other
                documents or information. (See proposed comments 107(a)(21)-1 through -
                3.)
                 Consistent with its approach in the SBREFA Outline and with the
                SBREFA Panel's recommendation, the Bureau is proposing that the
                definition of principal owner align with the 25 percent ownership
                definition in the CDD rule. The Bureau believes that this standard,
                which aligns with another Federal regulation, is already broadly in use
                and is likely to be familiar to most financial institutions and
                applicants. Banks, credit unions, and certain other financial
                institutions must comply with the CDD rule. The Bureau believes
                applicants, as a general matter, are more likely to be familiar with
                CDD requirements than SBA or CDFI Fund requirements because they have
                to complete CDD forms before opening an initial account (i.e., loan or
                deposit account) at a bank or at certain other institutions. However,
                due to potential complications with collecting ethnicity, race, and sex
                information for principal owners, the Bureau is proposing that
                individuals that only indirectly own 25 percent or more of an
                applicant's equity interests, as well as entities and trusts, are not
                principal owners.
                 The Bureau notes that it is possible under its proposed approach
                that an applicant might not identify any principal owners as being
                women or minorities but nonetheless could be a women- and/or minority-
                owned business. This could occur, for example, if a white male owned 40
                percent of a business while three Asian women each owned 20 percent.
                Only the white male would be designated as a principal owner, but the
                business would be nonetheless both women-owned and minority-owned.
                While the Bureau acknowledges that some applicants could find this
                approach confusing, it is consistent with the statutory language in
                section 1071. To help mitigate against potential confusion, the Bureau
                has proposed that the questions regarding minority-owned business
                status and women-owned business status appear in the proposed sample
                data collection form before questions about the race, sex, and
                ethnicity of principal owners.
                 The Bureau seeks comment on this proposed definition of a principal
                owner, including the proposal not to include individuals that only
                indirectly own 25 percent or more of an applicant's equity interests as
                principal owners. The Bureau requests comment on whether additional
                clarification on any aspect of the proposed definition is needed.
                102(p) Small Business
                 Proposed Sec. 1002.102(p) would refer to proposed Sec.
                1002.106(b) for a definition of the term ``small business.'' See the
                section-by-section analysis of proposed Sec. 1002.106(b) for a
                detailed discussion of that definition.
                102(q) Small Business Lending Application Register
                 Proposed Sec. 1002.102(q) would define the term ``small business
                lending application register'' or ``register'' as the data reported, or
                required to be reported, annually pursuant to proposed Sec. 1002.109.
                The Bureau did not include a definition of small business lending
                application register in the SBREFA Outline, though it did address
                proposals under consideration for compiling, maintaining, and reporting
                1071 data to the Bureau.\323\ See the section-by-section analysis of
                proposed Sec. 1002.109 for a detailed discussion of the proposed
                rule's provisions addressing reporting data to the Bureau, including
                feedback received from SERs and other stakeholders on that subject. The
                Bureau's proposed definition refers only to the data that is reported,
                or required to be reported, annually; it does not refer to the data
                required to be collected and maintained (prior to reporting).\324\
                ---------------------------------------------------------------------------
                 \323\ SBREFA Outline at 39.
                 \324\ In contrast, the term ``Loan/Application Register'' in
                Regulation C Sec. 1003.2(k) refers to both the record of
                information required to be collected pursuant to Sec. 1003.4 as
                well as the record submitted annually or quarterly, as applicable,
                pursuant to Sec. 1003.5(a).
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed definition of ``small
                business lending application register'' or ``register'' in proposed
                Sec. 1002.102(q).
                102(r) State
                 Proposed Sec. 1002.102(r) would refer to existing Sec. 1002.2(aa)
                for a definition of the term ``State.'' Existing Sec. 1002.2(aa)
                defines the term as any State, the District of Columbia, the
                Commonwealth of Puerto Rico, or any territory or possession of the
                United States. The Bureau did not include a definition of State in the
                SBREFA Outline nor did it receive any feedback on the term from SERs.
                This proposed definition of State would be consistent with existing
                Regulation B and familiar to financial institutions.
                 The Bureau seeks comment on its proposed approach to this
                definition.
                102(s) Women-Owned Business
                Background
                 ECOA section 704B(b)(1) requires financial institutions to inquire
                whether applicants for credit are women-owned businesses. For purposes
                of the financial institution's inquiry under 704B(b), 704B(h)(5)
                defines a business as a women-owned business if (A) more than 50
                percent of the ownership or control is held by one or more women, and
                (B) more than 50 percent of the net profit or loss accrues to one or
                more women.
                [[Page 56396]]
                Section 1071 does not expressly define the related terms of
                ``ownership'' or ``control,'' nor does it describe what it means for
                net profits or losses to accrue to an individual.
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated that it was considering
                proposing use of the statutory definition of a ``women-owned business''
                (as set forth above) with further clarification of the terms
                ``ownership'' and ``control'' using concepts set forth in the CDD
                rule.\325\
                ---------------------------------------------------------------------------
                 \325\ SBREFA Outline at 18-19.
                ---------------------------------------------------------------------------
                 Some SERs expressed concerns with certain aspects of the statutory
                definition of women-owned business, asserting that the definition could
                cause confusion or pose particular complexities.\326\ Several SERs and
                some other stakeholders providing feedback on the SBREFA Outline asked
                that the definition of women-owned business be revised to align with
                the definition used by other agencies, such as the SBA and the CDFI
                Fund. Some SERs as well as some other commenters expressed concern that
                a business that is owned equally by a woman and a man would not be a
                ``women-owned business'' under the statutory definition of women-owned
                business because the woman would not own ``more than 50 percent'' of
                the business and the woman might not control more than 50 percent of
                the business. These SERs and other commenters recommended that the
                Bureau instead use a ``50 percent or more'' threshold for ownership or
                control as the standard. Conversely, two SERs and several other
                stakeholders supported using the statutory definition of women-owned
                business, including the ``more than 50 percent'' portion of the
                definition.
                ---------------------------------------------------------------------------
                 \326\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 22.
                ---------------------------------------------------------------------------
                 A number of SERs recommended that the Bureau simplify the
                definition to ensure it is understandable to small business applicants
                and to thereby facilitate consistent data collection. SERs' suggestions
                included eliminating the portion of the definition that refers to
                accrual of net profit and loss, eliminating the portion of the
                definition that refers to control, and providing a simplified and
                standardized definition.
                 Several SERs supported using the concepts of ownership and control
                in the CDD rule when defining women-owned business; one SER said that
                doing so would be logical and efficient, while another said it would
                create regulatory consistency and ease compliance burden. One SER said
                that most credit unions are familiar with the CDD rule. Generally,
                other commenters supported use of the CDD concepts to clarify the terms
                ``ownership'' and ``control.'' They stated that small business
                applicants are familiar with the concepts in the CDD rule or that they
                appreciated the consistency with existing regulatory requirements.
                However, one trade association commenter thought the Bureau should
                provide simplified applicant-facing materials without clarifying the
                definition, and two other stakeholders suggested that applicants might
                not be familiar with the CDD rule or may not understand the CDD rule.
                 The SBREFA Panel recommended seeking comment on potential
                interpretations of the definition of women-owned business to clarify
                the term and to ensure that small business applicants would be able to
                understand questions asking if they are a women-owned business.\327\
                ---------------------------------------------------------------------------
                 \327\ Id. at 44.
                ---------------------------------------------------------------------------
                Proposed Rule
                 Proposed Sec. 1002.102(s) would define a women-owned business as a
                business for which more than 50 percent of its ownership or control is
                held by one or more women, and more than 50 percent of its net profits
                or losses accrue to one or more women. This definition is consistent
                with ECOA section 704B(h)(6) and the Bureau's proposal under
                consideration in the SBREFA Outline.
                 Proposed comment 102(s)-1 would explain that a business must
                satisfy both prongs of the definition to be a women-owned business--
                that is, (A) more than 50 percent of the ownership or control is held
                by one or more women, and (B) more than 50 percent of the net profits
                or losses accrue to one or more women.
                 Proposed comment 102(s)-2 would clarify that the definition of
                women-owned business is used only when an applicant determines if it is
                a women-owned business for purposes of proposed Sec. 1002.107(a)(19).
                A financial institution would provide the definition of women-owned
                business when asking the applicant to provide women-owned business
                status pursuant to proposed Sec. 1002.107(a)(19), but a financial
                institution would not be permitted or required to make its own
                determination regarding whether an applicant is a women-owned business
                for this purpose.
                 Proposed comment 102(s)-3 would further note that a financial
                institution would be permitted to assist an applicant when determining
                whether it is a women-owned business but would not be required to do
                so, and could provide the applicant with the definitions of ownership,
                control, and accrual of net profits or losses set forth in proposed
                comments 102(s)-4 through -6. Additionally, for purposes of reporting
                an applicant's women-owned business status, a financial institution
                would rely on the applicant's determinations of its ownership, control,
                and accrual of net profits and losses.
                 Consistent with the approach during the SBREFA process, the Bureau
                is proposing to clarify ``ownership'' and ``control'' using concepts
                from the CDD rule. Proposed comment 102(s)-4 would clarify that a
                natural person owns a business if that natural person directly or
                indirectly, through any contract, arrangement, understanding,
                relationship or otherwise, has an equity interest in the business.
                Proposed comment 102(s)-4 would also provide examples of ownership and
                clarify that, where applicable, ownership would need to be traced or
                followed through corporate or other indirect ownership structures for
                purposes of proposed Sec. Sec. 1002.102(s) and 1002.107(a)(19).
                Proposed comment 102(s)-5 would clarify that a natural person controls
                a business if that natural person has significant responsibility to
                manage or direct the business and would provide examples of natural
                persons who control a business. Proposed comment 102(s)-6 would clarify
                that a business's net profits and losses accrue to a natural person if
                that natural person receives the net profits, is legally entitled or
                required to receive the net profits or losses, or is legally entitled
                or required to recognize the net profits or losses for tax purposes.
                 The Bureau believes many small business applicants already respond
                to questions about who owns and who controls a business entity when
                completing CDD forms or otherwise responding to questions related to
                the CDD rule and would be familiar with the concepts in the CDD rule.
                Because the CDD rule does not address the second prong of the
                definition in ECOA section 704B(h)(6) (regarding accrual of net profit
                or loss), the Bureau is proposing in comment 102(s)-4 that this prong
                of the definition be defined to mean that one or more women must
                receive or be legally entitled to receive the net profits or losses or
                that one or more women must be legally required to recognize the net
                profits or losses. However, the Bureau shares some SERs' concerns that
                the statutory definition of women-owned business might, in some cases,
                be difficult for applicants to
                [[Page 56397]]
                understand, which could in turn jeopardize the accuracy of reported
                data. Thus, consistent with the SBREFA Panel's recommendation, the
                Bureau seeks comment on the proposed definition of women-owned business
                and possible alternatives that may clarify the term in order to help
                ensure that small business applicants can determine whether they are a
                women-owned business for purposes of section 1071 data collection.
                Section 1002.103 Covered Applications
                 ECOA section 704B(b) requires that financial institutions collect,
                maintain, and report to the Bureau certain information regarding ``any
                application to a financial institution for credit.'' For covered
                financial institutions, the definition of ``application'' will trigger
                data collection and reporting obligations with respect to covered
                credit transactions. However, section 1071 does not expressly define
                ``application.''
                 The Bureau is proposing Sec. 1002.103 to define what is, and is
                not, a covered application for purposes of subpart B pursuant to its
                authority in ECOA section 704B(g)(1) to prescribe such rules and issue
                such guidance as may be necessary to carry out, enforce, and compile
                data pursuant to section 1071. Proposed Sec. 1002.103(a) would provide
                a general definition of the term ``covered application,'' followed by a
                list of the circumstances that are not covered applications in proposed
                Sec. 1002.103(b).
                103(a) Covered Application
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated it was considering
                defining an ``application'' largely consistent with the definition of
                that term in existing Sec. 1002.2(f)--i.e., ``an oral or written
                request for an extension of credit that is made in accordance with
                procedures used by a creditor for the type of credit requested.''\328\
                The Bureau considered possible alternative definitions of
                ``application,'' including defining the term by using the definition of
                the term ``completed application'' in existing Sec. 1002.2(f) (when
                ``a creditor has received all the information that the creditor
                regularly obtains and considers in evaluating applications for the
                amount and type of credit requested . . . ''). The Bureau also
                considered defining ``application'' as particular documents or specific
                data points that, if collected, would trigger a duty to collect and
                report data.
                ---------------------------------------------------------------------------
                 \328\ SBREFA Outline at 22-23.
                ---------------------------------------------------------------------------
                 SERs discussed their varied methods of defining what constitutes an
                ``application'' within their institutions.\329\ Many SERs define an
                application as the point when there is enough information to make a
                credit decision. Several SERs define an application as meeting the
                requirements of a checklist, stating that obtaining all the information
                and satisfying due diligence can take a long time. Other SERs define an
                application as the submission of specific data or documents, or
                obtaining sufficient information about the borrower to pull a credit
                report. One SER explained that their in-person application process is
                iterative, not readily definable, and unique for each applicant. The
                SER also explained that a single underwriting process could be used at
                their financial institution for multiple loans requested throughout the
                year.
                ---------------------------------------------------------------------------
                 \329\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 24.
                ---------------------------------------------------------------------------
                 Several SERs supported using the definition of ``application'' in
                existing Sec. 1002.2(f). One of these SERs emphasized the importance
                of capturing data that may indicate potential discouragement of
                minority-owned businesses, including discouragement that could occur in
                advance of an application being submitted for underwriting. Another SER
                stated that using the definition in existing Sec. 1002.2(f) would be
                helpful for training purposes, rather than creating a wholly new
                definition for purposes of implementing section 1071. Many SERs urged
                the Bureau in an eventual 1071 rule to define an application as a
                completed application, that is, at the point when there is sufficient
                information to render a credit decision. One SER opposed using the
                definition of ``completed application,'' explaining that it would be
                too restrictive and less aligned with the purposes of section 1071.
                Another SER opposed use of the definition of application in existing
                Sec. 1002.2(f), explaining that in a ``relationship lending'' model,
                each small business application is unique.
                 SERs expressed varying views on whether withdrawn and incomplete
                applications should be captured in the 1071 data. Some SERs felt
                incomplete applications should be captured in the 1071 data as a
                potential indicator of discouragement. One SER stated that small and
                unsophisticated businesses are more likely to leave an application
                incomplete. Another SER recommended not capturing incomplete
                applications, asserting that such data would not be informative or
                useful. Another SER expressed concern about whether incomplete or
                withdrawn applications would include sufficient data for reporting.
                 Other stakeholders also provided feedback on the definition of
                ``application.'' The overwhelming majority of commenters, including
                both community groups and industry representatives, supported use of
                the definition of an ``application'' in existing Sec. 1002.2(f).
                Community groups, CDFIs, and a SER noted that use of the definition
                would further the purposes of 1071 by capturing applicants dissuaded
                from completing an application, potentially due to unlawful
                discouragement or other discrimination. Commenters highlighted research
                that minority-owned and women-owned businesses are disproportionately
                discouraged from applying for credit and the frequency of
                discrimination during the pre-application stage. One commenter stated
                that the definition could better identify barriers to credit,
                consistent with the community development purpose of section 1071.
                Other commenters, including many industry commenters, stated that
                financial institutions are familiar with the definition in existing
                Sec. 1002.2(f), and so use of this definition would reduce burden by
                minimizing the need for additional training or different procedures.
                Several commenters also stated that using the definition in existing
                Sec. 1002.2(f) is appropriate given that section 1071 amends ECOA,
                which is implemented by existing Regulation B. One industry commenter
                also highlighted the flexibility provided by the definition in existing
                Sec. 1002.2(f).
                 Although supportive of using the definition in existing Sec.
                1002.2(f) for the 1071 rule, several industry commenters sought further
                clarification or illustrations of the definition given considerable
                variations in practices among financial institutions. One commenter
                suggested a safe harbor that allows a financial institution to define
                what constitutes an ``application.'' One industry trade representative
                expressed that many of its members have no formal ``application'' and
                so attempts to leverage existing definitions or stages to define an
                application would be unfamiliar to their members and could create an
                inflexible process.
                 Several industry commenters supported triggering section 1071 data
                collection and reporting based on the ``completed application''
                definition in existing Sec. 1002.2(f) and stated that the Bureau
                should not require data collection on withdrawn and incomplete
                applications. These commenters stated that using a
                [[Page 56398]]
                ``completed application'' definition would provide more complete and
                meaningful data, more uniformity across products and lenders, and
                conserve resources that would otherwise be required to gather missing
                data points on incomplete or withdrawn applications. One commenter
                stated that collection of data on incomplete applications would not
                further section 1071's purposes or reflect potential discrimination,
                but rather would merely represent borrower confusion in the application
                process. One commenter suggested using a defined set of criteria to
                define an ``application.''
                 Several SERs and other stakeholders also provided comments on
                applicant requests for more than one product at the same time. For
                example, in connection with the application/loan number data point
                (referred to in this proposal as the unique identifier data point), one
                SER stated that if an applicant requests more than one type of credit
                product, a separate application/loan number is assigned to each product
                request. In contrast, other SERs indicated they use a single
                application number even if multiple products are requested. Among other
                stakeholders, some commenters supported reporting separate applications
                in instances where the applicant requests multiple covered credit
                transactions at the same time, while others supported requiring
                reporting of only one application. One commenter suggested that the
                Bureau should accommodate both approaches. Another commenter remarked
                that if a business is applying for multiple products, the basic
                information is going to be the same, the only difference being that
                only one product is funded. This same commenter suggested that if these
                requests are reported as multiple applications, that will overinflate
                the data.
                 Relatedly, two SERs discussed the issue of multiple extensions of
                credit resulting from a single application. One of these SERs explained
                that such multiple extensions of credit are assigned separate
                application/loan numbers at their financial institution. The other SER
                suggested that reporting in this situation will be complex, and that
                combining the separate loans that could result into a single reporting
                line would be extremely difficult.
                 The SBREFA Panel recommended that, if the Bureau proposes using the
                Regulation B definition of the term ``application''\330\ for 1071 data
                collection, the Bureau consider clarifying when a completed
                application--i.e., an application sufficient to make a credit
                decision--falls within the proposed definition of the term
                ``application.'' \331\ The SBREFA Panel further recommended the Bureau
                seek comment on the benefits and costs of collecting 1071 data on
                incomplete or withdrawn applications.\332\ Finally, with respect to
                lines of credit, the SBREFA Panel recommended (in the context of the
                loan/credit type and loan/credit purpose data points) that the Bureau
                seek comment on how financial institutions currently handle increases
                in lines of credit and how best to require reporting of multiple lines
                of credit within the same account.\333\
                ---------------------------------------------------------------------------
                 \330\ 12 CFR 1002.2(f).
                 \331\ SBREFA Panel Report at 45.
                 \332\ Id.
                 \333\ Id.
                ---------------------------------------------------------------------------
                Proposed Rule
                 The Bureau is proposing to define a covered application in Sec.
                1002.103(a) as an oral or written request for a covered credit
                transaction that is made in accordance with procedures used by a
                financial institution for the type of credit requested. This proposed
                definition of ``covered application'' is consistent with the definition
                of ``application'' that the Bureau said it was considering proposing in
                the SBREFA Outline.\334\ As noted above, the term ``application'' is
                undefined in section 1071. The Bureau believes its proposed definition
                of the term is reasonable, particularly as it aligns with the
                definition of ``application'' in existing Sec. 1002.2(f). The Bureau
                is also proposing commentary to accompany this definition.
                Circumstances that are not covered applications are addressed in the
                section-by-section analysis of proposed Sec. 1002.103(b) below.
                Pursuant to ECOA section 704B(b)(1), an ``application'' triggering data
                collection and reporting obligations occurs without regard to whether
                such application is received in person, by mail, by telephone, by
                electronic mail or other form of electronic transmission, or by any
                other means.
                ---------------------------------------------------------------------------
                 \334\ SBREFA Outline at 22-23.
                ---------------------------------------------------------------------------
                 Several SERs and a majority of other commenters supported use of
                this definition, noting that it best aligns with the purposes of
                section 1071 and is familiar to creditors. The Bureau agrees with
                certain SERs and other commenters that incomplete and withdrawn
                applications--which would generally be captured under proposed Sec.
                1002.103(a)--are essential to the purposes of section 1071 as a tool to
                identify potential discrimination (including through discouragement)
                and to better understand the credit market. The definition of ``covered
                application'' in proposed Sec. 1002.103(a), which is similar to the
                definition of ``application'' in existing Sec. 1002.2(f), is also
                familiar to creditors and provides flexibility to accommodate different
                application processes described by the SERs (including written and oral
                applications; online and relationship lending models; and use of
                standard forms, checklists, and other minimum requirements).\335\
                Finally, the Bureau believes this approach strikes an appropriate
                balance by triggering 1071 collection and reporting requirements only
                after there is a request for credit (using procedures defined by the
                financial institution), but still early enough in the process to
                capture most incomplete, withdrawn, and denied applications.
                ---------------------------------------------------------------------------
                 \335\ Business creditors should be familiar with
                operationalizing this definition based on their experience providing
                adverse action notices under existing Regulation B, which can be
                triggered in relation to an incomplete application. See Sec.
                1002.9(a)(1) and (c) (requiring notice within 30 days after taking
                adverse action on an incomplete application or 30 days after
                receiving an incomplete application). Financial institutions may
                also be familiar with Regulation C's definition of ``application,''
                which aligns with existing Sec. 1002.2(f)'s definition of the term.
                See Sec. 1003.2(b) (generally defining an ``application'' as ``an
                oral or written request for a covered loan that is made in
                accordance with procedures used by a financial institution for the
                type of credit requested''); see also Regulation C comment 2(b)-1
                (noting that Bureau interpretations that appear in the official
                commentary to Regulation B are generally applicable to the
                definition of application under Regulation C).
                ---------------------------------------------------------------------------
                 The Bureau recognizes that the proposed definition of ``covered
                application'' in Sec. 1002.103(a), while flexible, would mean that
                1071 data collection and reporting may be triggered at different times
                for different financial institutions and different types of covered
                credit transactions. For example, for a financial institution that
                defines an application under its procedures as the submission of a
                standard form either online or in-person, a ``covered application''
                would be triggered when an applicant submits the form. In contrast,
                another financial institution may not use a standard form and instead
                define an application as a request for credit and authorization to pull
                a credit check on the business and principal owners. In that
                circumstance, a ``covered application'' under proposed Sec.
                1002.103(a) would not be triggered until that process is satisfied.
                Using the same example, if the financial institution orally collects
                certain information from a prospective applicant (such as gross annual
                revenue and business location) and discusses with the prospective
                applicant potential credit product options offered by the
                [[Page 56399]]
                financial institution, no ``covered application'' would be triggered
                until the prospective applicant indicates that it wants to proceed to
                apply for credit and authorizes the financial institution to pull a
                credit check. Similarly, if a prospective applicant merely expresses
                interest in obtaining credit--not yet focusing on any particular type
                of covered credit transaction and not submitting a ``covered
                application''--the interaction also would not be reportable. While the
                proposed definition of ``covered application'' does not provide a
                bright-line rule, the Bureau believes the proposed definition would be
                familiar to financial institutions and provide consistency with
                existing Regulation B and Regulation C.
                 During SBREFA, SERs asked the Bureau to clarify when an application
                sufficient to make a credit decision would align with an
                ``application'' triggering 1071 collection and reporting requirements.
                Accordingly, the Bureau notes that a ``covered application'' may align
                with the information necessary to make a credit decision or it may be
                possible to have a ``covered application'' before having information
                necessary to make a credit decision--it depends on each financial
                institution's own procedures. For example, suppose a financial
                institution defines an application under its procedures as the point
                when an applicant, or someone on the applicant's behalf, fills out
                certain key pieces of information on an application form. If the
                financial institution's process is to immediately transmit the
                application to underwriting for a decision once the form is submitted,
                1071 collection and reporting would likely be triggered at the same
                time there is sufficient information to make a credit decision. On the
                other hand, if the financial institution requires additional
                verification of documents and follow-up requests before submitting the
                loan file to underwriting, the financial institution would likely have
                a ``covered application'' before it has sufficient information to make
                a credit decision.
                 Proposed comment 103(a)-1 would underscore that a financial
                institution has latitude to establish its own application process or
                procedure and to decide the type and amount of information it will
                require from applicants. Proposed comment 103(a)-2 would explain that
                the term ``procedures'' refers to the actual practices followed by a
                financial institution as well as its stated application procedures, and
                provides an example. Because the definition of ``covered application''
                is based on a financial institution's actual practices, a financial
                institution should have little incentive to attempt to artificially
                define an ``application'' in its written procedures as occurring later
                in the process; for example, if a financial institution has near a 100
                percent approval rate because all ``applications'' have already been
                vetted earlier in the process, the financial institution's stated
                definition of an application likely does not reflect its actual
                practices. Proposed comment 103(a)-3 would provide that the commentary
                accompanying existing Sec. Sec. 1002.2(f) and 1002.9 is generally
                applicable to the proposed definition of ``covered application,''
                except as provided otherwise in proposed Sec. 1002.103(b).
                 Proposed comments 103(a)-4 through -6 would address how a financial
                institution reports multiple covered credit transaction requests at one
                time or a request for a credit transaction that results in the
                origination of multiple covered credit transactions. Proposed comment
                103(a)-4 would provide that if an applicant makes a request for two or
                more covered credit transactions at one time, the financial institution
                reports each request for a covered credit transaction as a separate
                covered application. The Bureau believes the proposed approach would
                further the purposes of section 1071 by better capturing demand for
                credit, including demand for different covered credit transactions at
                the same time. The Bureau also believes that the simplicity of this
                approach would reduce data reporting errors compared to potential
                alternatives, for example, alternatives in which the financial
                institution may sometimes report such requests as a single covered
                application or, in other circumstances, as multiple covered
                applications. Finally, the Bureau believes that concerns about
                duplicative information requests would be mitigated by permitting
                financial institutions to reuse certain previously collected data, as
                set forth in proposed Sec. 1002.107(c)(2). In response to SERs'
                feedback, proposed comment 103(a)-5 would address the circumstance
                where an initial request for a single covered credit transaction
                results in the origination of multiple covered credit transactions.
                Similarly, in response to the SBREFA Panel's recommendations, proposed
                comment 103(a)-6 would address requests for multiple lines of credit at
                one time, proposing that such requests would be reported based on the
                procedures used by the financial institution for the type of credit
                account.
                 Proposed comment 103(a)-7 would address how a financial institution
                would report applications where there is a change in whether the
                applicant is requesting a covered credit transaction. If the applicant
                initially requests a covered credit transaction, but during the
                application process is offered and accepts instead a product that is
                not reportable, the Bureau is proposing to designate this circumstance
                as not a covered application, due in part to concerns that reporting in
                this scenario could affect data quality. For example, reporting on
                product types that are not covered credit transactions (for example,
                leases) could raise data quality questions if there are not appropriate
                fields to capture the terms of those transactions. Despite these
                concerns, the Bureau is also considering whether capturing such
                transactions in the 1071 data could be useful to identifying potential
                steering or other forms of discrimination, therefore furthering the
                purposes of section 1071. As noted below, the Bureau seeks comment on
                whether to require full or limited reporting in these circumstances. If
                an applicant initially requests a product that is not a covered credit
                transaction, but during the application process decides to seek instead
                a product that is a covered credit transaction, the application is a
                covered application and must be reported.
                 The Bureau seeks comment on its proposed definition of a covered
                application in Sec. 1002.103(a) and associated commentary. The Bureau
                also seeks comment on the advantages and disadvantages of collecting
                data on incomplete or withdrawn applications, as well as how collection
                would or would not further the purposes of section 1071. In addition,
                the Bureau seeks comment on reporting of multiple lines of credit on a
                single credit account, including how financial institutions internally
                consider multiple lines of a credit on a single account and the
                Bureau's proposed approach in comment 103(a)-6.
                 As noted above, the Bureau also seeks comment on how a financial
                institution should report applications where there is a change in
                whether the request for credit involves a covered credit transaction.
                Specifically, the Bureau seeks comment on the advantages and
                disadvantages of requiring full or limited reporting where an applicant
                initially seeks a product that is a covered credit transaction, but
                ultimately is offered and accepts a product that is not reportable. For
                example, whether in those circumstances the financial institution
                should report limited data points related to the transaction (such as
                whether the applicant is a small business; whether the applicant is a
                women-owned business or a minority-owned business;
                [[Page 56400]]
                the principal owners' race, sex, and ethnicity; number of principal
                owners; gross annual revenue; and loan type reported as ``Non-
                reportable credit product'' or something similar). The Bureau is
                particularly interested in receiving comments on the utility of such
                data to identify potential steering or other forms of discrimination,
                the effect on data quality, and other factors related to the purposes
                of section 1071.
                Alternatives Considered
                 The Bureau considered several other options for defining
                ``application.'' First, the Bureau considered triggering 1071
                collection and reporting based on a ``completed application,'' which is
                defined in existing Sec. 1002.2(f) as an application in which the
                creditor has received ``all the information that the creditor regularly
                obtains and considers'' in evaluating similar products. The Bureau is
                not proposing to use the definition of ``completed application'' in
                existing Sec. 1002.2(f) for its definition of covered application in
                subpart B, as doing so would exclude incomplete applications and many
                withdrawn applications that may reflect demand for credit and potential
                discrimination during the application process. While some commenters
                noted that use of this definition would provide uniformity in the data
                across financial institutions and product types, the Bureau is
                concerned about the loss of data on incomplete and withdrawn
                applications. Although some commenters suggested that the ``completed
                application'' definition could result in more accurate and complete
                data because it is collected later in the application process, the
                Bureau believes that this benefit can largely be obtained under the
                current proposal by requiring financial institutions to report, where
                available, verified applicant-provided information, as set forth in
                proposed Sec. 1002.107(b). Although some SERs and other stakeholders
                urged the Bureau to define an application based on when there is
                sufficient information to render a credit decision, as pointed out by
                another SER, such a definition may not be as effective in furthering
                the purposes of 1071. For example, it would capture few to no
                incomplete applications and a smaller share of withdrawn applications.
                Moreover, as discussed above, in certain situations--depending on a
                financial institution's application procedures--the definition of a
                covered application in proposed Sec. 1002.103(a) may align with the
                point where there is enough information to render a credit decision.
                 The Bureau also considered defining ``covered application'' as a
                set of specific data points that, if collected, would trigger a duty to
                collect and report 1071 data. The Bureau is not proposing this approach
                for a few reasons. First, this approach would introduce another
                regulatory definition of ``application,'' \336\ which could cause
                confusion and hinder compliance. Second, this approach could require
                financial institutions to alter their existing practices, resulting in
                burden. Third, this approach could lead some financial institutions to
                intentionally delay the gathering of one or more data points until
                after a credit decision was made in order to avoid triggering 1071
                obligations. Last, this approach may be difficult to execute given that
                financial institutions use different data points in underwriting based
                on product type, lending model, exposure, and other factors.
                ---------------------------------------------------------------------------
                 \336\ Although certain regulations define an ``application'' as
                a set of specific data points (e.g., name, income, property address,
                estimated property value, etc.), many of the data points in those
                regulations are specific to the mortgage context and would not be
                applicable to small business lending. These regulations also do not
                relate to data collection. See, e.g., Regulation X Sec. 1024.2(b)
                and Regulation Z Sec. 1026.2(a)(3).
                ---------------------------------------------------------------------------
                103(b) Circumstances That Are Not Covered Applications
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated it was considering
                clarifying circumstances that would not be reportable under section
                1071, even if certain of those circumstances would otherwise be
                considered an ``application'' under existing Sec. 1002.2(f).
                Specifically, those circumstances were: (1) Inquiries/
                prequalifications; (2) reevaluation, extension, and renewal requests,
                except requests for additional credit amounts; and (3) solicitations
                and firm offers of credit.\337\
                ---------------------------------------------------------------------------
                 \337\ SBREFA Outline at 22-24.
                ---------------------------------------------------------------------------
                 Reevaluation, extension, or renewal requests on an existing
                business credit account, unless the request seeks additional credit
                amounts. Several SERs supported the Bureau's proposal under
                consideration to exclude renewals unless additional credit is
                requested; one SER also supported excluding solicitations.\338\ Several
                SERs urged the Bureau to exclude line increases as a distinct type of
                application, explaining that financial institutions may not require a
                new application for such requests and that underwriting a line increase
                request is substantively distinct from underwriting a request for new
                credit because a line increase extensively relies on past performance
                data and prior relationships. Due to these differences, one SER
                suggested that including line increases may skew 1071 data, causing
                misinterpretations. The SBREFA Panel recommended the Bureau seek
                comment on whether to include line increases as a separate reportable
                application.\339\ The SBREFA Panel also recommended that the Bureau
                seek comment on how financial institutions currently handle increases
                in lines of credit.\340\
                ---------------------------------------------------------------------------
                 \338\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 24-25.
                 \339\ Id. at 45-46.
                 \340\ Id.
                ---------------------------------------------------------------------------
                 A number of other industry stakeholders also supported the Bureau's
                proposal under consideration to exclude reevaluations, extensions, and
                renewal requests (except requests for additional credit amounts). The
                commenters stated that such collection would be duplicative since
                financial institutions would also be reporting data on the original
                application (perhaps in the same reporting year). The commenters also
                noted that extension requests are often short term and granted without
                a full application process, that requiring reporting could lead to
                fewer financial institutions offering extensions due to the added
                collection and reporting burden (particularly for open-ended credit),
                and that providing an exemption would be consistent with HMDA
                reporting. One commenter sought exclusion of rate adjustments.
                Community group commenters opposed exclusion of reevaluations,
                renewals, and extensions.
                 Several industry commenters opposed 1071 collection and reporting
                on reevaluations, extensions, or renewals that seek additional credit
                amounts. These commenters stated that 1071 collection and reporting
                should focus on data collected at the time of origination, that
                collecting data repeatedly from the same borrowers would add burden,
                and that collecting data for line increases would make it difficult for
                financial institutions to provide timely approvals. One commenter
                suggested only reporting on additional credit amounts if the original
                note is replaced. Other industry commenters--while not explicitly
                opposing such collection--suggested the Bureau further consider whether
                increases or renewals with additional credit amounts should be an
                ``application'' for purposes of the rule. The commenters noted that
                such increases/renewals are typically more streamlined than a standard
                application given the financial institution already has the applicant's
                information in its possession, and that the Bureau should carefully
                balance burden (which could
                [[Page 56401]]
                affect how such requests could be processed) with benefit (obtaining
                additional data on the same applicant). One industry representative
                supported collection on requests that include additional credit
                amounts. Another commenter sought clarification on what would be
                reported in such circumstances: The newly advanced funds or the entire
                outstanding amount.
                 Inquiries and prequalification requests. Several SERs urged the
                Bureau not to require reporting on prequalifications or inquiries.
                These SERs explained that they encounter a high number of inquiries
                from rate shoppers asking about qualification requirements and
                potential rates, many of which are abandoned or otherwise do not
                progress to a completed application.\341\ A significant number of other
                industry commenters also supported the Bureau's proposal under
                consideration to exclude inquiries and prequalifications. These
                commenters noted that such inquiries could include countless informal
                interactions that would be difficult to collect in a consistent manner
                and that may lead to misleading or erroneous data. The commenters also
                stated that collection would be duplicative and impose significant
                burden without countervailing benefits. Community group commenters
                expressed support for collecting data on inquiries and
                prequalifications to identify discrimination that occurs before an
                application is submitted.
                ---------------------------------------------------------------------------
                 \341\ Id. at 24-25.
                ---------------------------------------------------------------------------
                 Solicitations and firm offers of credit. A number of industry
                commenters supported exclusion of solicitations and firm offers of
                credit. One commenter noted that excluding such data would avoid
                duplicative steps and be consistent with the purposes of section 1071.
                Proposed Rule
                 Proposed Sec. 1002.103(b) would identify certain circumstances
                that are not covered applications--even if they otherwise would be
                considered an application under existing Sec. 1002.2(f). Specifically,
                the Bureau is proposing that a covered application does not include (1)
                reevaluation, extension, or renewal requests on an existing business
                credit account, unless the request seeks additional credit amounts; and
                (2) inquiries and prequalification requests. As discussed below,
                solicitations and firm offers of credit would also not be ``covered
                applications'' under the proposed definition. The Bureau is also
                proposing comments 103(b)-1 through -5 to provide additional guidance
                and examples of circumstances that do and do not trigger 1071
                collection and reporting as a covered application. For example,
                proposed comment 103(b)-4 clarifies that the term ``covered
                application'' does not include evaluations or reviews of existing
                accounts initiated by the financial institution.
                 Reevaluation, extension, or renewal requests on an existing
                business credit account, unless the request seeks additional credit
                amounts. The Bureau is proposing to exclude from the definition of a
                ``covered application'' requests by borrowers to modify the terms or
                duration of an existing extension of credit, other than (as explained
                below) requests for additional credit amounts. The Bureau believes that
                requests to modify the terms or duration of an existing extension of
                credit, which occur with high frequency in the small business lending
                space, may add complexity and burden for financial institutions, while
                potentially providing limited additional information relevant to the
                purposes of section 1071. Moreover, broadly including requests to
                modify the terms or duration of existing extensions of credit might
                affect the quality of the data absent additional flags to distinguish
                the transactions from new originations. The Bureau is also concerned
                about the impact of adding 1071 collection and reporting requirements
                to what are otherwise streamlined evaluations, particularly given the
                limited additional data that would be gained from such reporting. The
                Bureau also notes that Regulation C takes a similar approach by
                excluding reporting of loan modifications.\342\
                ---------------------------------------------------------------------------
                 \342\ See Regulation C comment 2(d)-2.
                ---------------------------------------------------------------------------
                 In contrast, the Bureau is not proposing to exclude requests for
                additional credit amounts (such as line increases or new money on
                existing facilities). That is, reporting would be required for requests
                for additional credit amounts. The Bureau believes that capturing
                requests for additional credit amounts will further the purposes of
                section 1071, particularly the community development purpose, as it
                would more accurately capture demand for credit. Although several SERs
                and other commenters opposed reporting on new credit amounts--due to
                the potentially streamlined nature of such reviews (which may differ
                from underwriting of new applications) and concerns about duplicative
                reporting--the Bureau believes these factors do not outweigh the
                potential community development benefits of reporting and collection.
                Moreover, the Bureau believes that concerns about duplicative reporting
                would be mitigated by proposed Sec. 1002.107(c)(2), which would permit
                a financial institution to reuse certain data points under certain
                circumstances. In addition, under proposed Sec. 1002.107(a)(7) and
                (8), when reporting a covered application that seeks additional credit
                amounts on an existing account, the financial institution would only
                report the additional credit amount sought (and approved or originated,
                as applicable), and not the entire credit amount extended. A request to
                withdraw additional credit amounts at or below a previously approved
                credit limit amount on an existing open-end line of credit would not be
                a covered application as the request falls within the terms of a
                previously approved covered credit agreement.
                 Inquiries and prequalification requests. Existing Regulation B
                recognizes that before a consumer or business requests credit in
                accordance with the procedures used by a creditor for the type of
                credit requested, a creditor may provide a prospective applicant with
                information about credit terms. Existing Regulation B comments 2(f)-3
                and 9-5 refer to these situations as inquiries and prequalification
                requests. Generally, an inquiry occurs when a consumer or business
                requests information about credit terms offered by a creditor; a
                prequalification request generally refers to a request by a consumer or
                business for a preliminary determination on whether the prospective
                applicant would likely qualify for credit under a creditor's standards
                or for what amount.\343\ Under existing Regulation B comments 2(f)-3
                and 9-5, an inquiry or prequalification request may become an
                ``application'' that triggers adverse action notification requirements
                if the creditor evaluates information about the consumer or business,
                decides to decline the request, and communicates this to the consumer
                or business; otherwise, such inquiries and prequalification requests
                are generally not considered applications under existing Regulation B.
                As explained in existing comment 2(f)-3,
                [[Page 56402]]
                whether the inquiry or prequalification request becomes an application
                depends on how the creditor responds to the consumer or business, not
                on what the consumer or business says or asks.
                ---------------------------------------------------------------------------
                 \343\ See also Regulation C comment 2(b)-2 (describing
                prequalification requests). In addition, a preapproval as described
                in existing comment 2(f)-5.i of Regulation B is an example of an
                application under existing Regulation B. Under that comment, a
                preapproval occurs when a creditor reviews a request under a program
                in which the creditor, after a comprehensive analysis of an
                applicant's creditworthiness, issues a written commitment valid for
                a designated period of time to extend a loan up to a specified
                amount. If a creditor's program does not provide for giving written
                commitments, requests for preapprovals are treated as
                prequalification requests.
                ---------------------------------------------------------------------------
                 Regulation C excludes all prequalification requests from HMDA
                reporting, even if the prequalification request becomes an application
                under existing Regulation B.\344\ Regulation C does not address
                reporting of inquiries more generally.
                ---------------------------------------------------------------------------
                 \344\ See Regulation C comment 2(b)-2.
                ---------------------------------------------------------------------------
                 The Bureau is proposing to exclude inquiries and prequalification
                requests as a ``covered application,'' even if the inquiry or
                prequalification request may become an ``application'' under existing
                Sec. 1002.2(f) that may trigger notification requirements. The Bureau
                agrees with SERs and other commenters that requiring data collection
                for all inquiries and prequalifications could create operational
                challenges given that such interactions may be voluminous and typically
                occur before a financial institution has the relevant data or processes
                in place for tracking requests for credit. The Bureau is likewise
                concerned that requiring the collection of 1071 data for these requests
                could pose data accuracy issues, given the often informal nature of
                these interactions, which may raise the risk of missing, unavailable,
                or erroneous data. In addition, reporting of inquiries and
                prequalifications could be duplicative if the applicant subsequently
                applies for credit in accordance with the procedures designated by the
                financial institution.
                 The Bureau also has concerns about requiring reporting of inquiries
                and prequalification requests only in situations that would otherwise
                be treated as an ``application'' under existing Regulation B--i.e.,
                when the financial institution evaluates information about the consumer
                or business, decides to decline the request, and communicates this to
                the consumer or business. The Bureau is concerned that the logistics of
                reporting an inquiry or prequalification only in certain
                circumstances--if the institution evaluates the information, declines
                the request, and communicates it to the business--would be
                operationally challenging for financial institutions and could lead to
                data distortion as only denials would be captured. In these
                circumstances, a financial institution may prefer reporting all
                inquiries and prequalifications, which could lead to some of the
                challenges identified above. The Bureau is also considering the market
                effects of requiring reporting only for certain inquiries and
                prequalification requests, including whether it would cause financial
                institutions to restrict such interactions or services.
                 The Bureau, however, remains concerned about potential
                discrimination that may occur in these early interactions with a
                financial institution. In particular, the Bureau is concerned about
                excluding data on inquiries and prequalification requests when the
                financial institution evaluates information about a business and
                declines the request, which may be useful for identifying potential
                prohibited discouragement of or discrimination against applicants or
                prospective applicants.
                 On balance, the Bureau believes it is appropriate to interpret
                ``application'' as used in section 1071 to exclude inquiries and
                prequalification requests given the considerations identified above,
                including the timing and often informal nature of such interactions,
                the operational challenges of implementing such a definition, and
                related concerns about the reliability of the data.
                 Although the Bureau is proposing to exclude inquiries and
                prequalification requests from the definition of ``covered
                application,'' the Bureau notes that the relevant analysis of whether
                an inquiry or prequalification request is reportable focuses on how the
                financial institution structures, processes, and responds to such
                requests, not what they are called. For example, if a financial
                institution has a formalized process to screen businesses requesting
                credit and deny those it considers ineligible, a request for credit
                that goes through that process may be a ``covered application,'' even
                if the financial institution labels the review a ``prequalification''
                request or an ``inquiry.''
                 The Bureau further notes that requests for credit that meet the
                proposed definition of ``covered application'' would be reportable,
                even if the application was preceded by an inquiry or prequalification
                request. For example, if a business initially seeks information about
                potential credit offerings, the financial institution responds, and
                then the business submits an application for a covered credit
                transaction following the financial institution's procedures, the
                application would be reportable. If, on the other hand, the business
                asks about potential credit offerings, but then chooses not to submit
                an application, there is no covered application.
                 Finally, the Bureau notes that inquiries and prequalification
                requests where the institution evaluates the information, declines the
                request, and communicates it to the business or consumer, are
                ``applications'' under existing Regulation B, and are thus subject to
                its requirements regarding ``applications,'' including its adverse
                action notification requirements and nondiscrimination provisions. In
                no way are the exclusions in proposed Sec. 1002.103(b) intended to
                repeal, abrogate, annul, impair, change, or interfere with the scope of
                the term application in existing Sec. 1002.2(f) as applicable to
                existing Regulation B.
                 Solicitations and firm offers of credit. Proposed comment 103(b)-4
                would clarify that the term covered application does not include
                solicitations and firm offers of credit; like other reviews or
                evaluations initiated by the financial institution, these
                communications do not involve an applicant requesting credit, and so
                are not ``covered applications.'' Excluding solicitations and firm
                offers of credit is also consistent with the language of ECOA section
                704B(b)(1), which provides that an application in response to a
                solicitation by a financial institution could be an application under
                section 1071, but the text is silent on solicitations without any
                applicant response. Thus, consistent with the statutory language, a
                solicitation or firm offer of credit may become a ``covered
                application'' under the proposed definition if an applicant responds to
                the solicitation or offer by requesting a covered credit transaction.
                 In conclusion and for the reasons identified above, the Bureau
                believes its proposed exclusion of inquiries and prequalification
                requests is reasonable. Similarly, the Bureau believes its proposed
                exclusion of reevaluation, extension, or renewal requests on an
                existing business credit account, unless the request seeks additional
                credit amounts, is a reasonable interpretation of an ``application'' as
                used in section 1071 for the reasons described above, including that
                the original extension of credit would be collected and reported and
                further reporting would yield limited additional data. The Bureau also
                believes its proposed treatment of solicitations and firm offers of
                credit is a reasonable interpretation of an ``application'' as used in
                section 1071, as discussed above.
                 The Bureau seeks comment on its proposed definition of a covered
                application in Sec. 1002.103(b) and associated commentary. The Bureau
                also seeks comment on whether instead to define a ``covered
                application,'' consistent with existing Regulation B, to include
                inquiries or prequalification requests where the financial institution
                evaluates information about the business, decides to decline the
                request,
                [[Page 56403]]
                and communicates this to the business. Related to this alternative
                approach, the Bureau further seeks comment on whether additional data
                fields may be necessary in order to distinguish prequalification
                requests and inquiries from other reported applications. In addition,
                if the Bureau were to require reporting of declined inquiries or
                prequalification requests (as described above), the Bureau seeks
                comment on whether financial institutions would want the option to
                report all prequalification requests and inquiries, to allow for a
                comparison with denials.
                 In addition, the Bureau seeks comment on whether, alternatively, to
                define a ``covered application'' consistent with Regulation C, which
                (as discussed above) does not require a financial institution to report
                prequalification requests, even if those requests may constitute
                applications under existing Regulation B for purposes of adverse action
                notices, but does not address reporting of inquiries more generally.
                Related to this alternative approach, the Bureau also seeks comment on
                whether greater clarity could be achieved by defining, for purposes of
                proposed subpart B only, inquiries as requests for information about
                loan terms that do not become applications under existing Regulation B,
                and prequalification requests as requests that may become applications
                under existing Regulation B. In addition, the Bureau also seeks comment
                on the frequency with which financial institutions accept
                prequalification requests (as described in Regulation C comment 2(b)-2,
                but with respect to prospective business applicants) and what data are
                collected in connection with such prequalification requests, as well as
                potential effects on the market if some or all prequalification
                requests were reportable under section 1071.
                 Consistent with the SBREFA Panel's recommendation, the Bureau also
                seeks comment on whether to include line increase requests as a
                ``covered application'' and information on how financial institutions
                currently process requests for a line of credit increase. In addition
                to line increases, the Bureau also seeks comment on financial
                institution practices related to other types of requests for additional
                credit amounts, and whether such requests should be captured in 1071
                data.
                 Lastly, the Bureau notes that Regulation C requires the reporting
                of assumptions for HMDA,\345\ but the Bureau does not have information
                on whether assumptions are similarly used in the small business lending
                context. The Bureau seeks comment on this issue, including how an
                assumption in small business lending might be structured (for example,
                whether it is typically a modification of an existing extension of
                credit or a new extension of credit), the frequency of assumptions in
                the small business lending context, and whether reporting of
                assumptions for small business lending would further the purposes of
                section 1071.
                ---------------------------------------------------------------------------
                 \345\ See Regulation C comment 2(j)-5 (discussing when
                assumptions should be reported as home purchase loans).
                ---------------------------------------------------------------------------
                Section 1002.104 Covered Credit Transactions and Excluded Transactions
                104(a) Covered Credit Transaction
                 ECOA section 704B(b) requires financial institutions to collect and
                report information regarding any application for ``credit'' made by
                women-owned, minority-owned, or small businesses. Although the term
                ``credit'' is not specifically defined in section 1071, ECOA defines
                ``credit'' as ``the right granted by a creditor to a debtor to defer
                payment of debt or to incur debts and defer its payment or to purchase
                property or services and defer payment therefor.'' \346\ As noted above
                in the section-by-section analysis of Sec. 1002.102(d), existing
                Regulation B further defines ``business credit'' as ``extensions of
                credit primarily for business or commercial (including agricultural)
                purposes,'' with some exclusions.\347\ As discussed in detail below,
                the Bureau is proposing to require that covered financial institutions
                report data for all applications for transactions that meet the
                definition of business credit unless otherwise excluded. Proposed Sec.
                1002.104(a) would define the term ``covered credit transaction'' as an
                extension of business credit that is not an excluded transaction under
                proposed Sec. 1002.104(b). Loans, lines of credit, credit cards, and
                MCAs (including such credit transactions for agricultural purposes and
                HMDA-reportable transactions) would all fall within the scope of this
                proposed rule, which would cover the majority of products that small
                businesses use to obtain financing.\348\ As such, the Bureau believes
                that the inclusion of these products in the Bureau's 1071 rule is
                important to fulfilling the purposes of section 1071. Pursuant to this
                approach, the Bureau notes that the products discussed below do not
                constitute an exhaustive list of covered credit transactions; other
                types of business credit not specifically described below would
                nevertheless constitute covered credit transactions unless excluded by
                proposed Sec. 1002.104(b).
                ---------------------------------------------------------------------------
                 \346\ 15 U.S.C. 1691a(d); see also Sec. 1002.2(j).
                 \347\ 12 CFR 1002.2(g).
                 \348\ See White Paper at 21-22.
                ---------------------------------------------------------------------------
                 Proposed Sec. 1002.104(b), in turn, would state that the
                requirements of subpart B do not apply to trade credit, public
                utilities credit, securities credit, and incidental credit. Associated
                commentary would make clear that the term ``covered credit
                transaction'' also does not cover factoring, leases, consumer-
                designated credit used for business purposes, or credit secured by
                certain investment properties.
                 For the reasons set forth below, the Bureau is proposing Sec.
                1002.104 pursuant to its authority under ECOA section 704B(g)(1) to
                prescribe such rules and issue such guidance as may be necessary to
                carry out, enforce, and compile data under section 1071.
                 In the SBREFA Outline, the Bureau stated that it was considering
                proposing that a covered product under section 1071 is one that meets
                the definition of ``credit'' under ECOA and is not otherwise excluded
                from collection and reporting requirements.\349\ Specifically, the
                Bureau stated that it was considering proposing that covered products
                under section 1071 would include term loans, lines of credit, and
                credit cards. The Bureau stated that term loans, lines of credit, and
                credit cards meet the definition of ``credit'' under ECOA and these
                products collectively make up the majority of business financing
                products used by small businesses and are an essential source of
                financing for such businesses.\350\ The Bureau also proffered in the
                SBREFA Outline that the inclusion of these products in the Bureau's
                1071 rule is important to fulfilling the purposes of section 1071.\351\
                The Bureau also stated in SBREFA Outline that it was considering
                proposing that the following products not be covered by the 1071 rule:
                consumer credit used for business purposes; leases; trade credit;
                factoring; and MCAs.\352\
                ---------------------------------------------------------------------------
                 \349\ SBREFA Outline at 19-20.
                 \350\ Id. at 20.
                 \351\ Id.
                 \352\ Id.
                ---------------------------------------------------------------------------
                 SERs and other stakeholders providing feedback on the SBREFA
                Outline generally supported the Bureau's proposal under consideration
                to include term loans, lines of credit, and credit cards as covered
                products under section 1071.\353\ Many stakeholders (including roughly
                half the SERs) urged the Bureau to pursue
                [[Page 56404]]
                expansive product coverage in order to adequately capture small
                businesses' experiences with obtaining financing, especially for women-
                owned and minority-owned small businesses. Many SERs and other
                stakeholders advocated for including MCAs within the scope of the
                eventual 1071 rule; some SERs and stakeholders also advocated for
                including factoring, and in some cases leases as well, in order to
                capture the full landscape of small business financing. Multiple
                stakeholders expressed concern that the exclusions under consideration
                for certain products (e.g., MCAs) would disproportionately burden
                traditional lenders who do not offer such products.
                ---------------------------------------------------------------------------
                 \353\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 22-23.
                ---------------------------------------------------------------------------
                 As discussed below, the Bureau proposes that the 1071 rule cover
                loans, lines of credit, credit cards, and MCAs. The Bureau also
                explains below that ``covered credit transaction'' would encompass
                agricultural-purpose credit and HMDA-reportable transactions.
                 Loans, lines of credit, and credit cards. As noted above,
                stakeholders generally presume and support the coverage of loans, lines
                of credit, and credit cards. These products are commonly offered to
                small business applicants (making up almost 60 percent of the aggregate
                dollar volume of various financial products used by small
                businesses).\354\ The Bureau is not proposing definitions for loans,
                lines of credit, and credit cards because the Bureau believes these
                products are generally and adequately covered by the proposed
                definition of ``credit'' in proposed Sec. 1002.102(i).\355\
                ---------------------------------------------------------------------------
                 \354\ See id. at 21 fig. 2.
                 \355\ As noted in the section-by-section analysis of proposed
                Sec. 1002.107(a)(5) below, the Bureau distinguishes between secured
                and unsecured loans and lines of credit when financial institutions
                report the type of credit product being applied for. The Bureau does
                not believe that this distinction has relevance to whether these
                products constitute ``credit.''
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed approach to covered credit
                transactions and particularly on whether it should define loans, lines
                of credit, and credit cards, and, if so, how.
                 Merchant cash advances. MCAs are a form of financing for small
                businesses that purport to be structured as a sale of potential future
                income. MCAs vary in form and substance, but under a typical MCA, a
                merchant receives a cash advance and promises to repay it plus some
                additional amount or multiple of the amount advanced (e.g., 1.2 or 1.5,
                the ``payback'' or ``factor'' ``rate''). The merchant promises to repay
                by either pledging a percentage of its future revenue, such as its
                daily credit and debit card receipts (the ``holdback percentage''), or
                agreeing to pay a fixed daily withdrawal amount to the MCA provider
                until the agreed upon payment amount is satisfied. MCA contracts often
                provide for repayment directly through the merchant's card processor
                and/or via ACH withdrawals from the merchant's bank account.\356\ MCAs
                constitute the primary product under an umbrella that the Bureau refers
                to as ``sales-based financing''; generally, transactions wherein a
                financial institution extends funds to a business and repayment is
                based on the business's anticipated sales, revenue, or invoices.\357\
                ---------------------------------------------------------------------------
                 \356\ This description is based on the Bureau's review of a
                sample of MCA contracts that the Bureau believes fairly represent
                typical MCA contracts in the market. The Bureau's review comports
                with observations made by industry and community groups regarding
                MCAs.
                 \357\ As stated below, the Bureau is not proposing to
                specifically define sales-based financing in the 1071 rule because
                the Bureau believes these products are covered by the proposed
                definition of ``credit'' in proposed Sec. 1002.102(i). New York and
                California laws have recently sought to define sales-based
                financing. New York law, for example, defines ``sales-based
                financing'' as ``a transaction that is repaid by the recipient to
                the provider, over time, as a percentage of sales or revenue, in
                which the payment amount may increase or decrease according to the
                volume of sales made or revenue received by the recipient.'' N.Y.
                Fin. Serv. 801(j). New York's definition of sales-based financing
                also encompasses a true-up mechanism where the financing is repaid
                as a fixed payment but provides for a reconciliation process that
                adjusts the payment to an amount that is a percentage of sales or
                revenue. Id. California law uses a similar definition. See 10 Cal.
                Code Reg. 2057(a)(22) (defining sales-based financing as ``a
                commercial financing transaction that is repaid by a recipient to
                the financer as a percentage of sales or income, in which the
                payment amount increases and decreases according to the volume of
                sales made or income received by the recipient'' and including ``a
                true[hyphen]up mechanism'').
                ---------------------------------------------------------------------------
                 The Bureau understands that the MCA market is generally dominated
                by nondepository lenders not subject to Federal safety and soundness
                supervision or reporting requirements. The Bureau also understands that
                MCA providers may not be required to obtain State lending licenses. As
                a result, information on MCA lending volume and practices is limited.
                The Bureau notes, however, that California recently enacted a law that
                brings providers of commercial financing options, including factoring
                and MCAs, into the California Financing Law (CFL), which will impose
                disclosure requirements.\358\ New York also enacted a law that would
                impose similar disclosure requirements upon certain New York commercial
                financing providers, including MCA providers.\359\
                ---------------------------------------------------------------------------
                 \358\ The new law does not go so far as to amend the CFL to
                require factors or MCA providers to be licensed, but it does impose
                first-in-the-nation disclosure requirements in connection with these
                products similar to those imposed under TILA. See Cal. S.B. 1235
                (Sept. 30, 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235. The law will be
                implemented through regulations, which have not been finalized yet.
                See State of Cal. Dep't of Bus. Oversight (DBO), Draft Regulations
                (July 26, 2019), https://dbo.ca.gov/wp-content/uploads/sites/296/2019/07/SB-1235-Draft-Regulations-7-26-19.pdf.
                 \359\ N.Y. S.B. S5470B (Dec. 23, 2020), https://legislation.nysenate.gov/pdf/bills/2019/S5470B.
                ---------------------------------------------------------------------------
                 Although the Bureau's 2017 White Paper estimated the MCA market
                constituted less than 1 percent of the aggregate dollar volume of
                various financial products used by small businesses in the U.S. in
                2014,\360\ the Bureau finds that more recent evidence suggests the
                industry may now be much larger. For example, the 2020 Federal Reserve
                Banks' survey of firms with 1-499 employees (``employer firms'') found
                that 8 percent of such businesses applied for and regularly used
                MCAs.\361\ Moreover, on August 18, 2019, the trade website deBanked
                reported that according to an investment bank's projections, ``the MCA
                industry will have more than doubled its small business funding to
                $19.2 billion by year-end 2019, up from $8.6 billion in 2014.'' \362\
                ---------------------------------------------------------------------------
                 \360\ See White Paper at 21 fig. 2, 22 fig. 3.
                 \361\ Fed. Reserve Banks, Small Business Credit Survey--2021
                Report on Employer Firms, at 24 (Feb. 3, 2021), https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2021/2021-sbcs-employer-firms-report (2021 Small Business Credit Survey).
                Starting in 2017, the Federal Reserve Banks began to gather specific
                data on MCAs for its annual reports on small business financing for
                employer firms--in the 2017 report, the survey found that 7 percent
                of such businesses applied for and regularly used MCAs. Fed. Reserve
                Banks, Small Business Credit Survey--2017 Report on Employer Firms,
                at 9 (Apr. 11, 2017), https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2018/sbcs-employer-firms-report.pdf (2017
                Small Business Credit Survey).
                 \362\ Paul Sweeney, Gold Rush: Merchant Cash Advances Are Still
                Hot, deBanked (Aug. 18, 2019), https://debanked.com/2019/08/gold-rush-merchant-cash-advances-are-still-hot/.
                ---------------------------------------------------------------------------
                 Based on stakeholder feedback and available data, the Bureau
                understands that MCAs are often used by merchants due to the speed and
                ease with which they can be obtained,\363\ particularly for merchants
                unable to obtain financing from more traditional sources.\364\
                According to the 2020 Federal Reserve Banks' report regarding firms
                owned by people of color (both small employer firms and non-employer
                firms), Black-owned firms, Hispanic-owned firms, and Asian-owned firms
                were more likely to have applied for MCAs (14 percent, 10 percent, and
                10 percent
                [[Page 56405]]
                respectively) than white-owned firms (7 percent).\365\ The Bureau
                believes that this report supports stakeholders' assertions that
                minority-owned businesses are more likely to use MCAs.
                ---------------------------------------------------------------------------
                 \363\ See 2021 Small Business Credit Survey at 26 (reporting
                that 84 percent of surveyed credit applicants were approved for an
                MCA, as compared to a 43 percent approval rate for personal loans).
                 \364\ See id. at 22 (noting that only 7 percent of ``high credit
                risk'' applicants obtained all the financing sought).
                 \365\ Small Business Credit Survey of Firms Owned by People of
                Color at 30.
                ---------------------------------------------------------------------------
                 The Bureau believes that the higher frequency of MCA use among
                minority-owned businesses coupled with reports of problematic provider
                practices lends credence to many stakeholders' claims that MCAs may
                raise fair lending concerns. The FTC released a Staff Perspective in
                February 2020 discussing its concerns with the MCA industry \366\ and
                noting the industry's tendency to ``cater to higher-risk businesses or
                owners with low credit scores--typically offering them higher-cost
                products.'' \367\ The FTC has also filed enforcement actions against
                MCA providers and their principals, in one case alleging that they
                misrepresented the terms of MCAs that they provided, and then used
                ``unfair collection practices, including sometimes threatening physical
                violence, to compel consumers to pay.'' \368\ The FTC recently obtained
                a settlement that requires an MCA provider to pay more than $9.8
                million to settle charges that it took money from businesses' bank
                accounts without permission and deceived them about the amount of
                financing business owners would receive and other features of its
                financing products.\369\ Moreover, the Bureau understands that the
                default rate amongst small businesses that use MCAs is relatively
                high--5 to 15 percent according to one estimate (compared with a 2
                percent default rate on SBA loans).\370\ The Bureau believes this high
                default rate may be explained by the fact that the typical MCA holdback
                percentage--10 to 20 percent of gross receipts or revenues--may be
                onerous for already cash-strapped small businesses.\371\ The Bureau
                also understands that it is not uncommon for small businesses that use
                MCAs to obtain new MCAs from other MCA providers (more than a quarter
                of such businesses, by one account); \372\ they also may use one MCA to
                pay off another. Firms that take on added debt loads in this way (a
                process known as ``stacking'') ``may not fully recognize the costs
                involved, which could potentially jeopardize the financial health of
                their businesses.'' \373\
                ---------------------------------------------------------------------------
                 \366\ Fed. Trade Comm'n, `Strictly Business' Forum, Staff
                Perspective, at 6-8 (Feb. 2020), https://www.ftc.gov/system/files/documents/reports/staff-perspective-paper-ftcs-strictly-business-forum/strictly_business_forum_staff_perspective.pdf.
                 \367\ See id. at 2.
                 \368\ Press Release, Fed. Trade Comm'n, New York-Based Finance
                Companies Deceived Small Businesses, Non-Profits and Seized Their
                Personal and Business Assets (June 10, 2020), https://www.ftc.gov/news-events/press-releases/2020/06/new-york-based-finance-companies-deceived-small-businesses. See also Press Release, Fed. Trade
                Comm'n, FTC Alleges Merchant Cash Advance Provider Overcharged Small
                Businesses Millions (Aug. 3, 2020), https://www.ftc.gov/news-events/press-releases/2020/08/ftc-alleges-merchant-cash-advance-provider-overcharged-small.
                 \369\ Press Release, Fed. Trade Comm'n, Cash Advance Firm to Pay
                $9.8M to Settle FTC Complaint It Overcharged Small Businesses (Apr.
                22, 2021), https://www.ftc.gov/news-events/press-releases/2021/04/cash-advance-firm-pay-98m-settle-ftc-complaint-it-overcharged.
                 \370\ Kevin Voigt, It's the Wild West Out There: NerdWallet
                Special Report, NerdWallet (Oct. 13, 2016), https://www.nerdwallet.com/blog/small-business-special-report-mca/.
                 \371\ See Bd. of Governors of the Fed. Reserve Sys., Browsing to
                Borrow: ``Mom & Pop'' Small Business Perspectives on Online Lenders,
                at 9 (June 2018), https://www.federalreserve.gov/publications/files/2018-small-business-lending.pdf (Board Small Business Perspectives)
                (noting that when asked ``about the toughest part of running their
                businesses, most participants cited the challenges of managing their
                cash flow''); id. at 5 (noting that ``[s]ome observers have argued
                that the owner's loss of control over cash flow puts some small
                businesses at risk''). The Bureau also notes that many MCA providers
                believe that they are not subject to State usury laws.
                 \372\ See Opportunity Fund, Unaffordable and Unsustainable: The
                New Business Lending, at 3 (May 2016), https://www.leg.state.nv.us/App/InterimCommittee/REL/Document/13129 (stating that ``[m]ore than
                a quarter of the businesses in our dataset had loans outstanding
                with multiple alternative lenders'').
                 \373\ Board Small Business Perspectives at 6.
                ---------------------------------------------------------------------------
                 As small businesses struggle with the COVID-19 pandemic, the Bureau
                is seeing more reports of MCA providers employing aggressive collection
                practices, such as ``pursuing legal claims against owners that freeze
                their bank accounts and . . . pressing their family members, neighbors,
                insurers, distributors--even their customers.'' \374\ Given the fact
                that 84 percent of the credit applicants surveyed by the Federal
                Reserve Banks were approved for an MCA \375\ and the fact that it
                appears significantly more difficult to obtain credit as a ``high
                credit risk'' applicant during the COVID-19 pandemic,\376\ the Bureau
                believes that vulnerable small businesses are increasingly seeking MCAs
                to support their pandemic recovery.
                ---------------------------------------------------------------------------
                 \374\ Gretchen Morgenson, FTC official: Legal `loan sharks' may
                be exploiting coronavirus to squeeze small businesses, NBC News
                (Apr. 3 2020), https://www.nbcnews.com/business/economy/ftc-official-legal-loan-sharks-may-be-exploiting-coronavirus-squeeze-n1173346.
                 \375\ See 2021 Small Business Credit Survey at 26.
                 \376\ Compare id. at 22 (noting that only 7 percent of ``high
                credit risk'' applicants obtained all the financing sought), with
                Fed. Reserve Banks, Small Business Credit Survey--2020 Report on
                Employer Firms, at 12 (Apr. 7, 2020), https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2020/2020-sbcs-employer-firms-report (reporting that 23 percent of ``high
                credit risk'' applicants obtained all the financing sought) (2020
                Small Business Credit Survey).
                ---------------------------------------------------------------------------
                 In its SBREFA Outline, the Bureau stated that it was considering
                proposing that MCAs not be a covered product under section 1071 since
                including them may add additional complexity or reporting burden given
                the unique structure of the transactions.\377\
                ---------------------------------------------------------------------------
                 \377\ SBREFA Outline at 22.
                ---------------------------------------------------------------------------
                 During and following the SBREFA Panel meetings, many SERs advocated
                for including MCAs within the scope of the 1071 rule due, in part, to
                their widespread use by small businesses in the same way as traditional
                loans. In response to the SBREFA Outline, many other stakeholders,
                including community groups and industry representatives, urged the
                inclusion of MCAs for one or more of the following reasons:
                 MCAs are widely used by small businesses and have a
                rapidly growing market share.
                 MCAs are often advertised as loans even though MCA
                providers have been strongly opposed to labeling their products as
                loans.
                 The complexity of MCAs is not a good reason to exclude
                them from coverage.
                 Minority-owned small businesses disproportionately use
                MCAs.
                 Excluding the largely unregulated MCA industry would
                create unequal regulatory burdens for entities that may compete for the
                same small business clients.
                 MCAs should be considered ``credit'' for the purposes of
                section 1071.
                 Small businesses do not distinguish these products from
                other forms of financing.
                 Some MCA providers engage in harmful practices and should
                be subject to oversight.
                 The Bureau observes that, throughout the development of the 1071
                rule, MCAs have been the focus of significant attention and a unique
                source of near-consensus among a diverse array of stakeholders--almost
                all of whom advocated for covering MCAs in the 1071 rule.\378\ The only
                commenters that have supported the exclusion of MCAs from the 1071 rule
                were MCA providers or trade associations representing MCA providers.
                These stakeholders argue that MCAs do not meet the definition of
                [[Page 56406]]
                credit under ECOA or State law and are instead much like traditional
                factoring arrangements, which are generally understood not to be
                credit.
                ---------------------------------------------------------------------------
                 \378\ For instance, of the substantive responses to the 2017
                RFI, comments authored or co-authored by dozens of stakeholders
                (including community and business groups, industry, and trade
                associations) expressed explicit support for requiring the reporting
                of MCAs (and additional letters expressed support for covering
                ``fintech'' or ``alternative online'' products more generally).
                ---------------------------------------------------------------------------
                 Potential coverage of MCAs under the 1071 rule has also drawn the
                attention of government entities seeking to regulate the industry. For
                example, in response to the SBREFA Outline, the California Department
                of Financial Protection and Innovation submitted a comment letter
                stating that ``nearly all the data points would be just as easy for an
                MCA company to report as any other financial institution.'' In
                addition, FTC staff submitted a comment letter in response to the
                Bureau's Request for Information on the Equal Credit Opportunity Act
                and Regulation B \379\ noting that the FTC has brought many actions
                protecting small businesses but that detecting illegal conduct in this
                space can be challenging, particularly with regard to MCAs. The FTC
                comment letter urges the Bureau to remind small business lenders that
                whether a particular law applies depends on actual facts and
                circumstances and not solely on how one party chooses to characterize
                the transaction. FTC staff also recommends the Bureau help small
                businesses through data collection, collecting complaints, and
                education.
                ---------------------------------------------------------------------------
                 \379\ 85 FR 46600 (Aug. 3, 2020).
                ---------------------------------------------------------------------------
                 Upon further consideration and in light of stakeholder feedback
                provided during the SBREFA process, the Bureau is proposing to cover
                MCAs as reportable under 1071. The Bureau believes that the statutory
                term ``credit'' in ECOA is ambiguous as to whether it covers sales-
                based financing products like MCAs, and existing Regulation B offers no
                further clarity except to note in commentary that factoring, as ``a
                purchase of accounts receivable,'' is not covered by ECOA or Regulation
                B.\380\ Based on its review of typical MCA arrangements and its
                expertise with respect to the nature of credit transactions, the Bureau
                believes that the better reading of the term ``credit'' is that it
                encompasses MCAs and other types of sales-based financing. As noted
                above, ECOA defines ``credit'' to mean ``the right granted by a
                creditor to a debtor to defer payment of debt or to incur debts and
                defer its payment or to purchase property or services and defer payment
                therefor.'' The Bureau is thus not proposing to specifically define
                MCAs or other sales-based financing in the 1071 rule because the Bureau
                believes these products are covered by the proposed definition of
                ``credit'' in Sec. 1002.102(i). Nor does the Bureau believe that MCAs
                should be excluded from the rule as a species of factoring (as defined
                in proposed comment 104(a)-2), because MCAs are not based on accounts
                receivable from ``goods that the recipient has supplied or services
                that the recipient has rendered.''
                ---------------------------------------------------------------------------
                 \380\ Existing comment 9(a)(3)-3.
                ---------------------------------------------------------------------------
                 As an initial matter, the Bureau believes that MCAs do not
                constitute factoring within the meaning of the existing commentary to
                Regulation B or the definition in proposed comment 104(b)-1, discussed
                in greater detail below. In factoring transactions, entities receiving
                financing sell their legal right to payment from a third party for
                goods supplied or services rendered, and that right exists at the time
                of the transaction itself; the provider of funds seeks payment directly
                from the third party, and the transaction between the recipient and the
                provider of funds is complete at the time of the sale. In other words,
                the recipient of the financing has no remaining payment obligation,
                meaning that no payment is deferred. In contrast, at the time of the
                advance in an MCA, the recipient of the financing has no existing
                rights to payment that it can transfer. The transaction thus
                constitutes only a promise by the ``seller'' to transfer funds to the
                ``buyer'' once they materialize at a later date. The Bureau believes
                that the ECOA definition of credit, by referring to the right to
                ``defer'' payments, necessarily invokes this temporal consideration.
                 Furthermore, the Bureau interprets ECOA's definition of credit as
                making dispositive whether one party has granted another the right to
                repay at some time subsequent to the initial transaction, without
                consideration of factors such as the existence of recourse or analysis
                of who bears the risk of loss. MCA providers grant such a right: They
                advance funds to small businesses and grant them the right to defer
                repayment by allowing them to repay over time. Additionally, as a
                practical matter, the Bureau understands that MCAs are underwritten and
                function like a typical loan (i.e., underwriting of the recipient of
                the funds; repayment that functionally comes from the recipient's own
                accounts rather than from a third party; repayment of the advance
                itself plus additional amounts akin to interest; and, at least for some
                subset of MCAs, repayment in regular intervals over a predictable
                period of time).
                 Finally, the Bureau believes that the inclusion of MCAs in the
                Bureau's 1071 rule is important to fulfilling both the fair lending and
                the business and community development purposes of section 1071.\381\
                The Bureau also believes that including MCAs would create a more level
                playing field across financial institutions that provide cash flow
                financing to small businesses as well as create a data set that better
                reflects demand for such financing by the smallest and most vulnerable
                businesses.
                ---------------------------------------------------------------------------
                 \381\ ECOA section 704B(a).
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed approach to covered credit
                transactions, and in particular, on whether it should define MCAs and/
                or other sales-based financing transactions, and if so, how.
                 Agricultural-purpose credit. In the SBREFA Outline, the Bureau did
                not expressly address credit used for agricultural purposes, although
                such credit is generally covered by the broad definition of credit
                under ECOA and agricultural businesses are included in section 1071's
                definition of small business.\382\ Based on questions from SERs about
                the Bureau's intended approach, however, the SBREFA Panel recommended
                that the Bureau address in the proposed rule whether it intends to
                cover agricultural loans in the eventual 1071 rule.\383\ Moreover, in a
                July 2019 report, the U.S. Government Accountability Office (GAO)
                discussed its finding that information on the amount and types of
                agricultural credit to socially disadvantaged farmers and ranchers
                (SDFRs) \384\ is limited, and suggested that the 1071 rulemaking may be
                a way to engage in ``additional data collection and reporting for
                nonmortgage loans.'' \385\
                ---------------------------------------------------------------------------
                 \382\ ECOA section 704B(h)(2) (defining a small business as
                having the same meaning as the term ``small business concern'' in
                section 3 of the Small Business Act (15 U.S.C. 632)''). Section
                704B(h)(2) defines small business by reference to the Small Business
                Act definition of a small business concern, which includes
                independently owned and operated ``enterprises that are engaged in
                the business of production of food and fiber, ranching and raising
                of livestock, aquaculture, and all other farming and agricultural
                related industries.'' 15 U.S.C. 632(a)(1).
                 \383\ SBREFA Panel Report at 44.
                 \384\ The U.S. Department of Agriculture (USDA) defines SDFRs as
                members of certain racial and ethnic minority groups and women.
                According to the GAO, USDA regulations further define SDFRs as
                belonging to the following groups: American Indians or Alaskan
                Natives, Asians, Blacks or African Americans, Native Hawaiians or
                other Pacific Islanders, Hispanics, and women. See Gov't
                Accountability Off., Agricultural Lending: Information on Credit and
                Outreach to Socially Disadvantaged Farmers and Ranchers is Limited,
                at 2 (2019), https://www.gao.gov/assets/710/700218.pdf (GAO Report).
                The Bureau notes that those five categories align with the Bureau's
                proposed categories used in the definition of ``minority
                individual'' in proposed Sec. 1002.102(l).
                 \385\ GAO Report at 16.
                ---------------------------------------------------------------------------
                [[Page 56407]]
                 According to the 2017 Census of Agriculture,\386\ there are about
                3.4 million farmers and ranchers (``producers'') working on 2 million
                farming and ranching operations (``farms'') in the United States. The
                U.S. Department of Agriculture (USDA) Economic Research Service found
                that family farms (where the majority of the business is owned by the
                operator and individuals related to the operator) of various types
                together accounted for nearly 98 percent of U.S. farms in 2019.\387\
                Small family farms (less than $350,000 in gross cash farm income
                (GCFI)) accounted for 90 percent of all U.S. farms and large-scale
                family farms ($1 million or more in GCFI) make up about 3 percent of
                farms but 44 percent of the value of production.\388\
                ---------------------------------------------------------------------------
                 \386\ The Census of Agriculture is conducted by the USDA every
                five years and provides a detailed picture of farms and the people
                who operate them. See generally U.S. Dep't of Agric., 2017 Census of
                Agriculture (Apr. 2019), https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_US/usv1.pdf.
                 \387\ Econ. Research Serv., U.S. Dep't of Agric., Farming and
                Farm Income (updated May 10, 2021), https://www.ers.usda.gov/data-products/ag-and-food-statistics-charting-the-essentials/farming-and-farm-income/.
                 \388\ Id.
                ---------------------------------------------------------------------------
                 According to the 2019 Annual Report of the Farm Credit
                Administration, most agricultural lending (approximately 83 percent) is
                done by either commercial banks or the Farm Credit System (FCS), a
                network of government-sponsored entities (GSEs) regulated by the Farm
                Credit Administration, an independent government agency.\389\ The
                USDA's Farm Service Agency accounts for a small share (3 percent) of
                agricultural credit through direct loans and guarantees of loans made
                by private lenders.\390\
                ---------------------------------------------------------------------------
                 \389\ Farm Credit Admin., 2019 Annual Report of the Farm Credit
                Administration, at 18 (2019), https://www.fca.gov/template-fca/about/2019AnnualReport.pdf.
                 \390\ Id.
                ---------------------------------------------------------------------------
                 The GAO found that, using 2015-2017 USDA survey data, SDFRs
                represented an estimated 17 percent of primary producers in the survey,
                but accounted for only an estimated 8 percent of total outstanding
                agricultural debt.\391\ Loans to purchase agricultural real estate
                accounted for most of SDFRs' outstanding debt (67 percent).\392\ Farms
                with minority or women primary producers \393\ are, on average, smaller
                and bring in less revenue than farms with a non-SDFR primary producer
                (i.e., a white male)--while SDFRs represented 30 percent of all farms,
                they operated 21 percent of total farm land and accounted for 13
                percent of the market value of agricultural products sold in 2017.\394\
                ---------------------------------------------------------------------------
                 \391\ GAO Report at 16. ``The primary producer is the individual
                on a farm who is responsible for the most decisions. Each farm has
                only one primary producer.'' Id. at 5.
                 \392\ Id. at 2.
                 \393\ ``Producers'' are individuals involved in farm decision-
                making. A single farm may have more than one producer.
                 \394\ See GAO Report at 7.
                ---------------------------------------------------------------------------
                 The share of minority representation in farming, particularly that
                of Black farmers, has declined sharply over the last 100 years.\395\
                The number of female producers has increased significantly over the
                last 100 years but remains relatively small compared to male farm
                producers.\396\ Based on the disposition of numerous lawsuits alleging
                discrimination against minority farmers,\397\ the Bureau believes that
                credit discrimination may play a role in this decline. The GAO cites
                SDFR advocacy groups, which have said some SDFRs face actual or
                perceived unfair treatment in lending or may be dissuaded from applying
                for credit because of past instances of alleged discrimination.\398\ In
                addition, the GAO cites SDFR advocacy groups, lending industry
                representatives, and Federal officials in stating that SDFRs are more
                likely to operate smaller, lower-revenue farms, have weaker credit
                histories, or lack clear title to their agricultural land, which can
                make it difficult for them to qualify for loans.\399\ The Bureau
                understands that determining the ``creditworthiness'' of a farmer is
                often a judgmental process in which lending decisions are de-
                centralized and involve weighing many discretionary factors, the Bureau
                believes that there are heightened fair lending risks in agricultural
                lending.
                ---------------------------------------------------------------------------
                 \395\ In 1910, approximately 893,370 Black farmers operated
                approximately 41.1 million acres of farmland, representing
                approximately 14 percent of farmers. U.S. Census Bureau, 1910
                Census: Volume 5 (Agriculture), Statistics of Farms, Classified by
                Race, Nativity, and Sex of Farmers, at 298 (1910), https://www2.census.gov/library/publications/decennial/1920/volume-5/06229676v5ch04.pdf. In 2017, of the country's 3.4 million total
                producers, only 45,508 of them (1.3 percent) are Black and they farm
                on only 4.1 million acres (0.5 percent of total farmland); by
                comparison, 95 percent of U.S. producers are white and own 94
                percent of farmland. U.S. Dep't of Agric., 2017 Census of
                Agriculture, at 62, 72 (Apr. 2019), https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_US/usv1.pdf.
                 \396\ In 1910, women farmers represented approximately 4 percent
                of farm workers. See U.S. Census Bureau, 1910 Census: Volume 5
                (Agriculture), Statistics of Farms, Classified by Race, Nativity,
                and Sex of Farmers, at 340 (1910), https://www2.census.gov/library/publications/decennial/1920/volume-5/06229676v5ch04.pdf. As of 2017,
                women account for approximately 36 percent of farmers. See U.S.
                Dep't of Agric., 2017 Census of Agriculture, at 62 (Apr. 2019),
                https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_US/usv1.pdf.
                 \397\ See, e.g., Order, In re Black Farmers Discrimination
                Litig., No. 08-mc-0511 (D.D.C. filed Aug. 8, 2008), https://blackfarmercase.com/Documents/2008.08.08%20-%20PLF%20Consolidation%20Order_0.pdf; Pigford v. Glickman, 206 F.3d
                1212 (D.C. Cir. 2000). See also Garcia v. Vilsack, 563 F.3d 519
                (D.C. Cir. 2009); Love v. Connor, 525 F. Supp. 2d 155 (D.D.C. 2007);
                Keepseagle v. Veneman, No. 99-CIV-03119, 2001 U.S. Dist. LEXIS 25220
                (D.D.C. Dec. 12, 2001).
                 \398\ GAO Report at introductory highlights. Additionally, the
                GAO cited these sources as noting that some SDFRs may not be fully
                aware of credit options and lending requirements, especially if they
                are recent immigrants or new to agriculture. Id.
                 \399\ Id.
                ---------------------------------------------------------------------------
                 In light of the above, the Bureau believes that covering
                agricultural credit in its 1071 rule is important for both of section
                1071's statutory purposes, and is not proposing to define covered
                credit in a way that would exclude agricultural credit from the rule.
                The Bureau seeks comment on the potential costs and complexities
                associated with covering such credit.
                 HMDA-reportable transactions. By adopting Regulation C's definition
                of dwelling and its commentary regarding investment properties, the
                Bureau seeks to ensure consistency and minimize compliance burdens for
                financial institutions that must also report credit transactions
                covered by HMDA (that is, HMDA-reportable transactions). Based on
                Bureau calculations using the 2019 HMDA data, the Bureau found that
                close to 2,000 lenders and around 530,000 applications indicated a
                ``business or commercial purpose'' and around 500,000 applications were
                used for an ``investment'' (as defined by the occupancy code) purpose.
                Of those applications, around 50,000 were for 5+ unit properties. The
                overall number of applications the Bureau expects to be reported
                annually under the proposed rule is around 26 million. Thus, the Bureau
                anticipates a relatively small but not insignificant overlap regarding
                real estate investment loans between HMDA and 1071.
                 The Bureau has considered excluding all transactions that were also
                reportable under HMDA, but believes such an exclusion would add
                complexity to data analysis. The Bureau understands that requiring
                lenders to find and delete from databases that supply their 1071
                submission only those transactions that also appear in HMDA may require
                a separate scrub of the data and create additional compliance burden,
                as well as compliance risk if HMDA-reportable transactions are not
                deleted from a 1071 submission. For example, if the Bureau were to
                exclude HMDA reportable transactions from 1071 and a small business
                wants to purchase a 5+ dwelling unit property (that the financial
                institution would need to know is HMDA reportable), the
                [[Page 56408]]
                financial institution would have to make sure it is not collecting
                protected demographic information on principal owners, even though that
                information must be collected for every other type of loan that same
                business might apply for. The Bureau also believes that it may not be
                possible to identify loans in the HMDA data that, but for this
                exclusion, would be reported under 1071 because the financial
                institution would need to know which HMDA applications are for small
                businesses versus large businesses. Moreover, excluding HMDA-reportable
                applications could mean that a financial institution that is below the
                HMDA reporting threshold would not report these loans at all.
                 Further, in addition to not being able to distinguish which
                applications are from small and not large businesses, the Bureau
                believes that excluding all transactions that were also reportable
                under HMDA may be at odds with the statutory purposes of section 1071.
                The following information will not be collected for applications only
                reported under HMDA: (1) The principal owner's race, sex, or ethnicity
                where the applicant is not a natural person; (2) minority-owned and
                women-owned business status; (3) gross annual revenue; and (4) other
                1071 data points such as pricing, NAICS code, and number of workers.
                The Bureau is concerned that not collecting this information would run
                contrary to section 1071's fair lending and business and community
                development purposes.
                 For applications that would be reported under both HMDA and 1071
                (generally, business credit secured by dwellings, with the exception of
                credit secured by 1-4 individual dwelling units that the applicant or
                one or more of the applicant's principal owners does not, or will not,
                occupy), the Bureau seeks comment on whether it should require such
                applications to be flagged as such when reported under subpart B. The
                Bureau believes that for data integrity and analysis purposes, it may
                be helpful to know if a loan is in both datasets and a dual reporting
                flag may help ensure any data analysis is not double-counting certain
                applications.
                104(b) Excluded Transactions
                 Proposed Sec. 1002.104(b) would provide that the requirements of
                subpart B do not apply to trade credit, public utilities credit,
                securities credit, and incidental credit. Proposed comments 104(b)-1
                and -2 would make clear that the term covered credit transaction also
                does not cover factoring and leases. The proposed treatment of each of
                these types of transactions is discussed in detail below. Proposed
                comments 104(b)-3 and -4 would clarify that the term covered credit
                transaction does not include consumer-designated credit or credit
                secured by certain investment properties because, as discussed in
                detail below, such transactions are not business credit. The Bureau
                also discusses its proposed treatment of extensions of credit made to
                governments or governmental subdivisions, agencies, or
                instrumentalities and certain purchases of covered credit transactions.
                Finally, the Bureau discusses its proposed exclusions for trade credit,
                public utilities credit, securities credit, and incidental credit.
                 The Bureau seeks comment on whether it should permit financial
                institutions to voluntarily collect applicants' protected demographic
                information (that is, the applicant's minority-owned business status
                and women-owned business status, and the ethnicity, race, and sex of
                the applicant's principal owners) for applications for some or all of
                the types of transactions that the Bureau is proposing not to cover,
                and to report those applications to the Bureau pursuant to proposed
                Sec. 1002.109.
                 Factoring. In traditional factoring arrangements, a business in
                need of financing sells all or a portion of its accounts receivable
                (existing but unpaid invoices) to another business, known as a
                ``factor.'' The factor then receives payments on the accounts
                receivable from the business's debtors or customers directly, and not
                from the business that had entered into the factoring transaction. If
                the business has sold only a portion of its invoices, then once the
                account debtors pay their invoices to the factor, the factor remits the
                remainder of the balance to the business after deducting a fee
                (specifically, a discount applied to the sold accounts receivable
                usually stated on a percentage basis).
                 The Bureau understands that like the market for MCAs, the factoring
                market is generally dominated by nondepository lenders not subject to
                Federal safety and soundness supervision or reporting requirements. The
                Bureau also understands that generally, factors may not be required to
                obtain State lending licenses. As a result, information on factoring
                volume and practices is limited. The Bureau notes, however, that the
                California and New York disclosure laws mentioned above cover
                factoring.\400\
                ---------------------------------------------------------------------------
                 \400\ See Cal. S.B. 1235 (Sept. 30, 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235; N.Y. S.B. S5470B (July
                23, 2020), https://legislation.nysenate.gov/pdf/bills/2019/S5470B.
                ---------------------------------------------------------------------------
                 The Bureau's 2017 White Paper estimated the factoring market as
                constituting around 8 percent of the number of accounts used by small
                businesses in the U.S. in 2014.\401\ Based on more recent evidence, the
                Bureau believes the industry has not significantly grown. For example,
                the 2017 and 2020 Federal Reserve Banks' surveys of firms with 1-499
                employees (``employer firms'') found that 4 percent of such businesses
                applied for and regularly used factoring.\402\ In the 2020 Small
                Business Credit Survey of Employer Firms, this figure dropped to 3
                percent of employer firms.\403\
                ---------------------------------------------------------------------------
                 \401\ White Paper at 21 fig. 2, 22 fig. 3.
                 \402\ 2020 Small Business Credit Survey; 2017 Small Business
                Credit Survey.
                 \403\ See 2021 Small Business Credit Survey at 24.
                ---------------------------------------------------------------------------
                 In the SBREFA Outline, the Bureau stated that it was considering
                excluding factoring from coverage under the 1071 rule.\404\ As a
                general matter, the Bureau received fewer comments from stakeholders
                regarding factoring compared to some other products, though some SERs
                did advocate for including factoring. Moreover, several stakeholders
                (representing both community group and industry perspectives) argued
                that factoring should be covered under section 1071: First, factoring
                is widely used by small businesses, particularly very small businesses,
                who are more likely to face heightened challenges accessing business
                credit; second, both New York and California have passed disclosure
                laws covering factoring and exclusion would potentially lead to a
                regulatory advantage for lenders offering higher-cost, less-transparent
                credit products.
                ---------------------------------------------------------------------------
                 \404\ SBREFA Outline at 22.
                ---------------------------------------------------------------------------
                 A community group commenter stated that the Bureau should require
                the reporting of these agreements regardless of whether there is a
                credit agreement incident to the factoring agreement under Regulation B
                (this concept is discussed in more detail below). A few commenters that
                supported the proposed exclusion under consideration of factoring did
                so on the basis that factoring is not ``credit'' under ECOA. Commenters
                did not raise fair lending concerns or concerns about predatory
                practices related to factoring.
                 An existing comment in Regulation B (comment 9(a)(3)-3) provides
                that ``[f]actoring refers to a purchase of accounts receivable, and
                thus is not subject to [ECOA or Regulation B].'' Existing Regulation B
                does not offer a definition for ``accounts receivable.'' However, if
                there is a ``credit extension incident to the factoring arrangement,''
                [[Page 56409]]
                Regulation B's notification rules \405\ apply, as do other relevant
                sections of ECOA and Regulation B.\406\ The Bureau understands that the
                Board's treatment of credit extensions incident to factoring
                arrangements--as a type of credit but one entitled to exemptions from
                certain requirements--was motivated by its reading of congressional
                intent related to the Women's Business Ownership Act of 1988,\407\
                which amended ECOA to extend notification and record retention
                requirements to business credit. In its proposed rule on this issue,
                the Board explained that it was treating credit extensions incident to
                factoring arrangements differently from other forms of business credit
                based on ``evidence of congressional intent that the amendments should
                not apply to . . . certain types of business credit (such as
                applications for trade credit and credit incident to factoring
                arrangements).'' \408\ Based on the Bureau's work to date and
                conversations with industry stakeholders, the Bureau understands that
                purported factoring arrangements may take various forms, including
                longer-term or revolving transactions that appear to have credit or
                credit-like features, and the Bureau believes that a subset of such
                arrangements may constitute credit incident to the factoring
                arrangement, particularly if they involve goods or services that have
                not been supplied or rendered.
                ---------------------------------------------------------------------------
                 \405\ See existing Sec. 1002.9(a)(3)(ii) (requiring a creditor
                to notify an applicant, within a reasonable time (as opposed to
                within 30 days for credit sought by consumers and businesses with
                gross revenues of $1 million or less in preceding fiscal year),
                orally or in writing, of the action taken).
                 \406\ Comment 9(a)(3)-3.
                 \407\ Public Law 100-533, 102 Stat. 2689 (1988).
                 \408\ 54 FR 29734, 29736 (July 14, 1989); see also 134 Cong.
                Rec. H9282-89 (daily ed. Oct 3, 1988) (explaining that the committee
                recognizes that some forms of commercial loan transactions and
                extensions of credit may ``require specialized rules,'' and that,
                for example, the committee believes that loans and credit extensions
                incidental to trade credit, factoring arrangements, and
                sophisticated asset-based loans should continue to be exempted from
                the record retention and automatic notification requirements).
                ---------------------------------------------------------------------------
                 The Bureau is proposing to not cover factoring under the 1071 rule.
                Modeled on the definitions set forth in the New York and California
                commercial financing disclosure laws,\409\ proposed comment 104(b)-1
                would provide that factoring is an accounts receivable purchase
                transaction between businesses that includes an agreement to purchase,
                transfer, or sell a legally enforceable claim for payment for goods
                that the recipient has supplied or services that the recipient has
                rendered but for which payment has not yet been made. Proposed comment
                104(b)-1 would also clarify that an extension of business credit
                incident to a factoring arrangement is a covered credit transaction and
                that a financial institution shall report such a transaction as an
                ``Other sales-based financing transaction'' under proposed Sec.
                1002.107(a)(5).
                ---------------------------------------------------------------------------
                 \409\ See Cal. S.B. 1235 (Sept. 30, 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235; N.Y. S.B. S5470B (July
                23, 2020), https://legislation.nysenate.gov/pdf/bills/2019/S5470B.
                ---------------------------------------------------------------------------
                 The Bureau believes that, as discussed with respect to MCAs above,
                a traditional factoring agreement, as described in proposed comment
                104(b)-1, is not credit under ECOA because the provider of the funds
                does not grant the recipient the right to defer payment. Instead, the
                provider of funds seeks payment directly from a third party, and the
                transaction between the recipient and the provider of funds is complete
                at the time of the sale. The Bureau also believes that treating
                factoring as credit under the 1071 rule could create inconsistencies
                and compliance concerns related to existing Regulation B, which
                currently states that factoring (as a purchase of accounts receivable)
                is not subject to ECOA. Moreover, while a few commenters did suggest
                covering factoring as part of a broader effort to adequately capture
                small businesses' experiences with obtaining financing, the Bureau
                notes that commenters did not raise particular fair lending concerns
                related to factoring. The Bureau is proposing a more detailed
                description of what constitutes factoring in proposed comment 104(b)-1
                because it is concerned that the existing Regulation B commentary
                regarding factoring may not provide sufficient clarity for purposes of
                collecting and reporting data under section 1071 as it does not offer a
                definition for ``accounts receivable.'' Proposed comment 104(b)-1 would
                state that it is not intended to repeal, abrogate, annul, impair, or
                interfere with any existing interpretations, orders, agreements,
                ordinances, rules, or regulations adopted or issued pursuant to
                existing comment 9(a)(3)-3.
                 The Bureau seeks comment on its proposed approach to factoring. The
                Bureau also seeks comment on how the subset of purported factoring
                arrangements that may in fact be credit (i.e., those that are revolving
                in nature or that cover anticipated receivables) should be reported
                under the 1071 rule. Specifically, the Bureau seeks comment on whether
                such arrangements should be reported as credit extensions incident to
                factoring (and thus reported ``other sales-based financing'') or as
                MCAs.
                 Leases. A leasing transaction generally refers to an agreement in
                which a lessor transfers the right of possession and use of a good or
                asset to a lessee in return for consideration.\410\ Under a ``true'' or
                ``operating'' lease, a lessee (the user) makes regular payments to a
                lessor (the owner) in exchange for the right to use an asset (such as
                equipment, buildings, motor vehicles, etc.).
                ---------------------------------------------------------------------------
                 \410\ See UCC Art. 2A-103(1)(j) (defining a ``lease'').
                ---------------------------------------------------------------------------
                 Leases are not expressly addressed in ECOA or Regulation B. The
                Bureau has never opined on whether ECOA and Regulation B apply to
                leases, and the Board made only one statement about the applicability
                of ECOA and Regulation B to leases, in the preamble to a final rule
                under ECOA. In that 1985 statement, the Board responded to the Ninth
                Circuit's opinion in Brothers v. First Leasing,\411\ which concluded
                that consumer leasing falls under ECOA.\412\ The Board stated that it
                believes that ``Congress did not intend the ECOA, which on its face
                applies only to credit transactions, to cover lease transactions unless
                the transaction results in a `credit sale' as defined in the Truth in
                Lending Act and Regulation Z.'' \413\ The Board then noted that it
                would continue to monitor leasing transactions and take further action
                as appropriate.\414\ The Bureau is unaware of any such further actions
                taken by the Board.
                ---------------------------------------------------------------------------
                 \411\ 724 F.2d 789 (9th Cir. 1984).
                 \412\ 50 FR 48018, 48020 (Nov. 20, 1985).
                 \413\ Id.
                 \414\ Id. Since then, courts have gone both ways on the issue.
                Compare Ferguson v. Park City Mobile Homes, No. 89-CIV-1909, 1989 WL
                111916, at *5 (N.D. Ill. Sept. 18, 1989) (leases are ``credit''
                under ECOA), with Laramore v. Ritchie Realty Mgmt. Co., 397 F.3d
                544, 547 (7th Cir. 2005) (leases are not ``credit'' under ECOA).
                ---------------------------------------------------------------------------
                 The Bureau understands that many financial institutions (such as
                equipment finance companies) offer both loans and leases to their small
                business customers and some financial institutions comply with
                Regulation B for their leases as well as their loans as a matter of
                course. Lessor stakeholders have told Bureau staff that from their
                perspective, as well as that of their customers, loans and leases are
                indistinguishable. The Bureau understands that this is particularly
                true of ``financial'' or ``capital'' leases, as defined under article
                2A of the UCC,\415\ which closely resemble (and according to some
                stakeholders, in some cases are indistinguishable from) term loans. The
                Bureau understands that financial leases
                [[Page 56410]]
                are treated like assets on buyers' balance sheets, whereas operating
                leases are treated as expenses that remain off the balance sheet. The
                Bureau understands that the ownership characteristics of a financial
                lease also resemble those of a loan--the financial lease term is the
                substantial economic life of the asset (as evidenced by a one dollar
                purchase option at the end of the lease term and/or lack of residual
                financial obligations at the end of the lease term) and the lessee
                claims both interest and depreciation on their taxes. The Bureau
                understands that for some financial institutions, reporting loans but
                not leases may require added cost and effort to separate them in
                databases. The Bureau also understands that because depository
                institutions currently report both loan and lease activity to other
                regulators in their Call Reports, they may prefer to maintain a
                consistent approach for section 1071.
                ---------------------------------------------------------------------------
                 \415\ The Bureau notes that the UCC separately defines a
                ``consumer lease.'' See UCC 2A-103(1)(e). The Bureau's analysis
                regarding leases does not apply to leases primarily for a personal,
                family, or household purpose.
                ---------------------------------------------------------------------------
                 In its SBREFA Outline, the Bureau stated that it was considering
                proposing that leases not be a covered product under section 1071
                unless the product is a credit sale.\416\ The Bureau stated that for
                purposes of section 1071, it was considering proposing a definition of
                ``credit sale'' similar to the Regulation Z definition of that term as
                a transaction in which the lessor is a creditor and the lessee (i)
                agrees to pay as compensation for use a sum substantially equivalent
                to, or in excess of, the total value of the property and services
                involved; and (ii) will become (or has the option to become), for no
                additional consideration or for nominal consideration, the owner of the
                property upon compliance with the agreement.\417\
                ---------------------------------------------------------------------------
                 \416\ SBREFA Outline at 21.
                 \417\ See Regulation Z Sec. 1026.2(16).
                ---------------------------------------------------------------------------
                 In response to the SBREFA Outline, several stakeholders argued that
                leases should be covered in an eventual 1071 rule, one noting that
                leasing products make up 13 percent of the small business financing
                market share in dollar terms. A few other stakeholders stated that
                leases should not be covered. For example, a trade association stated
                that (1) given the unique structure of the transactions, including
                leases would add unnecessary, additional complexity and reporting
                burdens, and that (2) unlike credit, in a lease, the lessee does not
                have an ownership interest in the leased property and that this
                difference could lead to data integrity issues.
                 The Bureau is proposing to not cover leases under the 1071 rule.
                Drawing from the UCC definition of ``lease,'' \418\ which was adopted
                by the New York and California commercial financing disclosure
                laws,\419\ proposed comment 104(b)-2 would provide that the term
                covered credit transaction does not cover leases, and that a lease, for
                purposes of proposed subpart B, is a transfer from one business to
                another of the right to possession and use of goods for a term, and for
                primarily business or commercial (including agricultural) purposes, in
                return for consideration. It would further state that a lease does not
                include a sale, including a sale on approval or a sale or return, or a
                transaction resulting in the retention or creation of a security
                interest.
                ---------------------------------------------------------------------------
                 \418\ UCC 2A-103(1)(j) (`` `Lease' means a transfer of the right
                to possession and use of goods for a term in return for
                consideration, but a sale, including a sale on approval or a sale or
                return, or retention or creation of a security interest is not a
                lease. Unless the context clearly indicates otherwise, the term
                includes a sublease.'').
                 \419\ See Cal. S.B. 1235 (Sept. 30, 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235; N.Y. S.B. S5470B (July
                23, 2020), https://legislation.nysenate.gov/pdf/bills/2019/S5470B.
                ---------------------------------------------------------------------------
                 The Bureau considered several other approaches to covering leasing,
                including referring to Regulation Z's definition of ``credit sale.''
                The Bureau understands that financial institutions focused on offering
                leases and loans for business purposes are generally not familiar with
                the Regulation Z definition of ``credit sale,'' given that Regulation Z
                applies only to consumer credit.\420\ The Bureau thus believes that
                referring to the Regulation Z definition of ``credit sale'' could
                create confusion and would not align with current industry practices.
                The Bureau understands that such financial institutions offering leases
                primarily for business or commercial (including agricultural) purposes
                are more accustomed to applying the UCC definitions of ``lease'' \421\
                and ``finance lease,'' \422\ and/or the generally accepted accounting
                principles (GAAP) rules issued by the Financial Accounting Standards
                Board (FASB) governing ``operating,'' ``capital,'' and ``finance''
                leases.\423\ The Bureau believes that drawing from the UCC definition
                of lease will lead to more consistency with financial institutions'
                current practices. Nearly all U.S. jurisdictions have adopted Article
                2A of the UCC,\424\ and the Bureau understands that virtually every
                form of lease used by major leasing companies provides that it is
                governed by the laws of one of the jurisdictions that has adopted
                Article 2A.
                ---------------------------------------------------------------------------
                 \420\ See Regulation Z Sec. 1026.2(a)(12) (defining ``consumer
                credit'' as ``credit offered or extended to a consumer primarily for
                personal, family, or household purposes'') and 1026.3(a)(1)
                (excluding extensions of credit ``primarily for a business,
                commercial or agricultural purpose'').
                 \421\ Id.
                 \422\ UCC 2A-103(1)(g).
                 \423\ See Fin. Acct. Standards Bd., Accounting Standards Update:
                Leases (Topic 842), No. 2016-02 (Feb. 2016), https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176167901010&acceptedDisclaimer=true.
                 \424\ See Ala. Code 7-2A-101 et seq.; Alaska Stat. 45.12.101 et
                seq.; Ariz. Rev. Stat. 47-2A101 et seq.; Ark. Code Ann. 4-2A-101 et
                seq.; Cal. Com. Code 10101 et seq.; Choctaw Tribal Code 26-2A-101 et
                seq.; Colo. Rev. Stat. 4-2.5-101 et seq.; Conn. Gen. Stat. 42a-2A-
                101 et seq.; DC Code 28:2A-101 et seq.; Del. Code Ann. tit. 6, 2A-
                101 et seq.; Fla. Stat. 680.1011 et seq.; Ga. Code Ann. 11-2A-101 et
                seq.; Haw. Rev. Stat. 490:2A-101 et seq.; Idaho Code 28-12-101 et
                seq.; 810 Ill. Comp. Stat. 5/2A-101 et seq.; Ind. Code 26-1-2.1-101
                et seq.; Iowa Code 554.13101 et seq.; Kan. Stat. Ann. 84-2a-101 et
                seq.; Ky. Rev. Stat. Ann. 355.2A-101 et seq.; Mass. Gen. Laws ch.
                106, 2A-101 et seq.; Md. Code Ann., Com. Law 2A-101 et seq.; Me.
                Stat. tit. 11, 2-1101 et seq.; Mich. Comp. Laws 440.2801 et seq.;
                Minn. Stat. 336.2A-101 et seq.; Miss. Code Ann. 75-2A-101 et seq.;
                Mo. Rev. Stat. 400.2A-101 et seq.; Mont. Code Ann. 30-2A-101 et
                seq.; N.C. Gen. Stat. 25-2A-101 et seq.; N.D. Cent. Code 41-02.1-01
                et seq.; N.H. Rev. Stat. Ann. 382-A:2A-101 et seq.; N.J. Stat. Ann.
                12A:2A-101 et seq.; N.M. Stat. Ann. 55-2A-101 et seq.; N.Y. UCC Law
                2-A-101 et seq.; Neb. Rev. Stat. UCC 2A-101 et seq.; Nev. Rev. Stat.
                104A.2101 et seq.; Ohio Rev. Code Ann. 1310.01 et seq.; Okla. Stat.
                tit. 12A, 2A-101 et seq.; Or. Rev. Stat. 72A.1010 et seq.; Pa. Cons.
                Stat. 2A101 et seq.; R.I. Gen. Laws 6A-2.1-101 et seq.; S.C. Code
                Ann. 36-2A-101 et seq.; S.D. Codified Laws 57A-2A-101 et seq.; Tenn.
                Code Ann. 47-2A-101 et seq.; Tex. Bus. & Com. Code Ann. 2A.101 et
                seq.; Utah Code Ann. 70A-2a-101 et seq.; V.I. Code Ann. tit. 11A,
                2A-101 et seq.; Va. Code Ann. 8.2A-101 et seq.; Vt. Stat. Ann. tit.
                9A, 2A-101 et seq.; W. Va. Code 46-2A-101 et seq.; Wash. Rev. Code
                62A.2A-101 et seq.; Wisc. Stat. 411.101 et seq.; Wyo. Stat. Ann.
                34.1-2.A-101 et seq.
                ---------------------------------------------------------------------------
                 Based on its review of business-purpose leases and its expertise
                with respect to the meaning of ``credit,'' the Bureau believes that the
                better reading of the term ``credit'' is that it does not encompass
                such leases. In the business-purpose context, the Bureau understands
                that in a true lease, the lessor retains title and will receive the
                property back after the conclusion of the lease term, without any
                expectation by either party that, for example, ownership of the
                property will be transferred or that payments made pursuant to the
                lease agreement constitute anything other than payments in exchange for
                the temporary use of the property. As a result, the Bureau does not
                believe that in the business-purpose context a true lease transaction
                involves the right to incur debt and defer its payment, defer payment
                of a debt, or defer payment for goods or services.
                 The Bureau is aware that there are other types of leases with
                characteristics that bear some resemblance to forms of credit like
                credit sales, such as a contemplated transfer of ownership at the end
                of the lease term. The Bureau is not proposing at this time to parse
                whether different types of leases might
                [[Page 56411]]
                constitute ``credit'' but notes that proposed comment 104(b)-2's
                definition of lease would not include a sale, including a sale on
                approval or a sale or return, or a transaction resulting in the
                retention or creation of a security interest. The Bureau seeks comment
                on whether there are types of leases, or leases with certain
                characteristics, that should be excluded from proposed comment 104(b)-2
                and thus treated as reportable under 1071. Based on the practical
                difficulty cited by some stakeholders of distinguishing leases from
                loans, the Bureau also seeks comment on whether financial institutions
                should be permitted to voluntarily report lease transactions.
                 Consumer-designated credit. In the SBREFA Outline, the Bureau
                stated that it was considering proposing that the 1071 rule not cover
                products designated by the creditor as consumer purpose products.\425\
                In response, several SERs asserted that consumer-designated credit is
                often an important source of financing for small businesses
                (particularly for women-owned and minority-owned small businesses, and
                sole proprietorships), and ideally should be included within the scope
                of the eventual 1071 rule. One SER stated that consumer-designated
                credit used for business purposes should be included in an eventual
                1071 rule if trends show increasing usage. However, these SERs
                acknowledged the potential complexity and burden of trying to identify
                the intended use of consumer-designated credit, such as whether a
                consumer's home equity line of credit will be used for a business
                purpose.
                ---------------------------------------------------------------------------
                 \425\ SBREFA Outline at 20-21.
                ---------------------------------------------------------------------------
                 Several SERs supported excluding consumer-designated credit. One
                SER asserted that including consumer credit would not support the
                purposes of section 1071. Another SER stated that including consumer-
                designated credit used for business purposes would double their cost of
                complying with an eventual 1071 rule. The SBREFA Panel recommended that
                the Bureau continue to explore the potential costs to financial
                institutions associated with reporting consumer-designated credit used
                for business purposes in the 1071 rule as well as the implications of
                including such credit in a small business lending data set.\426\ The
                Panel also recommended that the Bureau seek comment in the proposed
                rule on how best to define consumer-designated credit in the event the
                Bureau determines that an exclusion for such products is
                appropriate.\427\
                ---------------------------------------------------------------------------
                 \426\ SBREFA Panel Report at 44.
                 \427\ Id. at 45.
                ---------------------------------------------------------------------------
                 Many non-SER stakeholders supported the proposed exclusion under
                consideration of consumer-designated credit from section 1071 for one
                or more of the following reasons: First, that financial institutions
                should be able to rely on the applicant's stated purpose for the use of
                funds and institutions would not know, nor should they be expected to
                know, if a borrower instead starts or invests in a business using the
                proceeds of a personal loan. Second, that this approach would greatly
                simplify the regulatory effort necessary to define and identify
                business uses of consumer products. Third, that inclusion of consumer
                credit could vastly expand the scope of the data collected beyond
                usefulness and also greatly increase the costs of compliance.
                 One credit union trade association stakeholder stated that the
                Bureau should adopt a clearer definition of consumer-designated credit
                and that it should clarify that it will not challenge a credit union's
                judgment when designating a consumer or business purpose for credit.
                 The Bureau is proposing that the 1071 rule not cover products
                designated by the creditor as consumer purpose products (consumer-
                designated credit). Proposed comment 104(b)-3 would make clear that the
                term covered credit transaction does not include consumer-designated
                credit used for business purposes, because such transactions are not
                business credit. Proposed comment 104(b)-3 would provide that a
                transaction qualifies as consumer-designated credit if the financial
                institution offers or extends the credit primarily for personal,
                family, or household purposes. For example, an open-end credit account
                used for both personal and business purposes is not business credit for
                the purpose of proposed subpart B unless the financial institution
                designated or intended for the primary purpose of the account to be
                business-related.
                 The Bureau understands that some small business owners may use
                consumer-designated credit in order to finance their small businesses--
                such as taking out a home equity line of credit or charging business
                expenses on their personal credit cards. Nonetheless, the Bureau
                believes it is appropriate to interpret section 1071 as not applying to
                this type of credit. Most notably, ECOA section 704B(b) directs
                financial institutions to collect data in the case of an application
                ``for credit for women-owned, minority-owned, or small business''
                (emphasis added). The statute thus applies only to applications for
                credit for a business; at the time of an application for consumer-
                designated credit, however, the application is not for a business.
                Several policy reasons also support this approach. First, the Bureau is
                concerned about financial institutions' ability to consistently
                identify when consumer-designated credit is being used for business
                purposes. Inconsistent reporting across financial institutions could
                lead to data quality concerns. Credit sought by consumers for both
                personal and business purposes could be particularly difficult to
                separate into reportable and non-reportable portions. The Bureau
                believes the proposal to define business credit to exclude consumer-
                designated credit will simplify compliance by obviating the need for
                financial institutions to identify and distinguish business uses of
                consumer-purpose credit products. Second, not including consumer-
                designated credit used for business purposes within the scope of this
                rulemaking would make it clear that the applications reported will all
                be seeking credit to use for business purposes, which supports 1071's
                directive to collect and report data in the case of an application for
                credit for a business. Third, not covering consumer-designated credit
                used for business purposes would provide certainty to financial
                institutions that offer only consumer-designated credit that they would
                not be subject to this proposal's data collection and reporting
                requirements.
                 As recommended by the SBREFA Panel, the Bureau seeks comment on
                this proposed interpretation, including how the Bureau has defined the
                scope of consumer-designated credit. The Bureau also seeks comment on
                whether it should permit financial institutions to voluntarily report
                consumer-designated credit when they have reason to believe the credit
                might be used for business purposes.
                 Credit secured by certain investment properties. In the SBREFA
                Outline, the Bureau did not expressly discuss treatment of real estate-
                secured loans used for investment purposes. Based on questions from
                SERs about the Bureau's intended approach, however, the SBREFA Panel
                recommended that the Bureau address in the proposed rule whether it
                intends to cover real estate-secured investment loans in the 1071
                rule.\428\ One SER had asked that the Bureau clarify whether loans
                covering 1-4 family properties used for investment purposes are
                business loans under section 1071, and several SERs recommended that
                the Bureau cover real estate investment loans (for both non-owner
                occupied residential property
                [[Page 56412]]
                and commercial property) under section 1071. Several other SERs sought
                to distinguish certain types of real estate investment loans; one SER
                remarked, for example, that owning a single non-owner occupied
                residential property as an investment may be more of a ``hobby'' but
                owning multiple properties could be considered a business.
                ---------------------------------------------------------------------------
                 \428\ Id. at 44-45.
                ---------------------------------------------------------------------------
                 A number of other stakeholders suggested that the Bureau should
                exclude at least some real estate investment loans under section 1071.
                A few stakeholders stated that the Bureau should consider an exemption
                for loans that are reported under another regulatory framework, such as
                HMDA and/or CRA because the effort of collecting and reporting
                information regarding such real estate loans would not be worth the
                added burden given the availability of alternative data sources. A few
                stakeholders argued that Congress did not intend to include real estate
                investment loans within the scope of section 1071. One such stakeholder
                stated that this intention is evident because many of the proposed loan
                purpose categories reflect a desire to collect data regarding credit
                offered to businesses which offer a product or service. One stakeholder
                seeking exclusion of certain real estate loans explained that most
                commercial real estate loans are made to borrowers as investments and
                not for operating their business. A few stakeholders suggested that the
                Bureau should only treat as reportable loans secured by owner-occupied
                commercial real estate where the primary source of repayment is the
                cash flow from the ongoing business operations. One stakeholder noted
                that because commercial real estate loans made to investors are
                typically made to business entities with complex ownership structures,
                their inclusion under 1071 would create additional hurdles for lenders
                seeking to determine the principal owners.
                 Based on this feedback as well as its general knowledge regarding
                both consumer and commercial real estate lending, the Bureau
                understands that many financial institutions use their consumer
                mortgage lending channels to process credit applications secured by 1-4
                family residential property and used for investment purposes, while
                applications for credit secured by 5+ unit multifamily properties or
                rental portfolio loans secured by more than four 1-4 unit residential
                properties are generally processed through commercial mortgage lending
                channels. The Bureau also understands that loans made through consumer
                mortgage lending channels are often made pursuant to the guidelines of
                Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), and
                the Department of Veterans Affairs (VA), and are likely already
                reported under HMDA.
                 In light of the feedback received and the Panel's recommendation,
                the Bureau is proposing that the 1071 rule not cover credit secured by
                certain investment properties, because such credit may not always be
                primarily for business or commercial purposes. Specifically, proposed
                comment 104(b)-4 would explain that a covered credit transaction does
                not include an extension of credit that is secured by 1-4 individual
                dwelling units that the applicant or one or more of the applicant's
                principal owners does not, or will not, occupy. The Bureau is not
                proposing to exclude credit secured by owner-occupied dwellings; for
                example, those secured by a dwelling occupied by a business's sole
                proprietor/principal owner. The Bureau is thus proposing to exclude
                real estate investment loans only in certain limited circumstances
                (such as when credit is secured by non-owner occupied 1-4 dwelling
                units and not 5+ dwelling units). As discussed above in the section-by-
                section analysis of proposed Sec. 1002.102(j), the Bureau is proposing
                to define ``dwelling'' to have the same meaning as Regulation C Sec.
                1003.2(f). Similarly, proposed comment 104(b)-4, which would address
                what does and does not constitute an investment property, is modeled on
                Regulation C's comment 4(a)(6)-4.
                 The Bureau is proposing a definition of ``covered credit
                transaction'' that does not cover certain real estate investment loans
                in the scope of a ``covered credit transaction'' pursuant to its
                authority under ECOA section 704B(g)(1) to prescribe such rules and
                issue such guidance as may be necessary to carry out, enforce, and
                compile data under section 1071. The Bureau believes that its exclusion
                of credit secured by certain investment properties will better capture
                lending to true small businesses (as opposed to consumers seeking to
                diversify their investments) and will also better align with financial
                institution lending practices. The Bureau understands that it may not
                always be easy for financial institutions to distinguish between
                business-purpose real estate investment loans and consumer-purpose real
                estate investment loans; however, covering all such loans would likely
                include some percentage of consumer-purpose loans in the 1071 rule,
                which could be contrary to section 1071's business and community
                development purpose.
                 The Bureau seeks comment on its proposed approach for credit
                secured by certain investment properties, including whether it is
                appropriate to consider credit not to be business credit when it is
                secured by 1-4 individual dwelling units that the applicant or one or
                more of the applicant's principal owners does not, or will not, occupy;
                and, if not, whether a different number of dwelling units in the
                property securing the credit would be an appropriate way to make a
                distinction between business and consumer-designated credit. The Bureau
                also solicits comment on whether to permit financial institutions to
                voluntarily report real estate investment loan transactions that are
                secured by non-owner occupied 1-4 dwelling units.
                 Government credit. The existing definition of business credit in
                Sec. 1002.2(g) excludes public utilities credit, securities credit,
                incidental credit, and government credit (that is, extensions of credit
                made to governments or governmental subdivisions, agencies, or
                instrumentalities--not extensions of credit made by governments), as
                defined in existing Sec. 1002.3(a) through (d), from certain aspects
                of existing Regulation B.\429\ For the purpose of proposed subpart B,
                the Bureau is proposing complete exclusions for public utilities
                credit, securities credit, and incidental credit from the definition of
                a covered credit transaction in proposed Sec. 1002.104(b), as
                discussed below.
                ---------------------------------------------------------------------------
                 \429\ As explained in existing comment 3-1, under Sec. 1002.3,
                procedural requirements of Regulation B do not apply to certain
                types of credit. The comment further states that all classes of
                transactions remain subject to Sec. 1002.4(a) (the general rule
                barring discrimination on a prohibited basis) and to any other
                provision not specifically excepted.
                ---------------------------------------------------------------------------
                 However, the Bureau is not proposing to exclude government credit,
                as defined in existing Sec. 1002.3(d)(1) to mean ``extensions of
                credit made to governments or governmental subdivisions, agencies, or
                instrumentalities.'' The Bureau believes that an express exclusion for
                extensions of credit made to governments or governmental subdivisions,
                agencies, or instrumentalities is not necessary because such
                governmental entities would not constitute small businesses under the
                proposed rule.\430\ The Bureau seeks comment on its approach to
                government credit.
                ---------------------------------------------------------------------------
                 \430\ Government entities are not ``organized for profit'' and
                are thus not a ``business concern'' under proposed Sec.
                1002.106(a).
                ---------------------------------------------------------------------------
                 Certain purchases of covered credit transactions. In the SBREFA
                Outline, the Bureau did not expressly discuss treatment of loan
                purchases, but the Bureau sought feedback on any products that should
                or should not be covered by
                [[Page 56413]]
                the Bureau's eventual 1071 rule.\431\ Several SERs voiced support for
                generally aligning small business lending reporting requirements for
                financial institutions with the approach taken for HMDA reporting in
                the Bureau's Regulation C. One SER stressed that imposing section 1071
                requirements for loan buyers, who play an important role in assisting
                CDFIs but do not make credit decisions, might risk their continued
                participation. Feedback from other stakeholders was limited, although a
                few stakeholders suggested that the Bureau should generally exclude
                purchased loans. The Panel did not provide a specific recommendation on
                this topic.
                ---------------------------------------------------------------------------
                 \431\ SBREFA Outline at 19-20.
                ---------------------------------------------------------------------------
                 The Bureau believes that this feedback may be based in part on the
                requirements that apply to HMDA, where Regulation C requires financial
                institutions to report purchases of covered loans under HMDA.\432\ This
                requirement is based on statutory language that contemplates data
                collection for loan purchases.\433\ As discussed in the section-by-
                section analysis of proposed Sec. 1002.103, ECOA section 704B(b)
                requires that financial institutions collect, maintain, and report to
                the Bureau certain information regarding ``any application to a
                financial institution for credit.'' For covered financial institutions,
                the definition of ``application'' will trigger data collection and
                reporting obligations with respect to covered credit transactions.
                Under proposed subpart B, purchasing a loan does not, in itself,
                generate an obligation for a covered financial institution to report
                small business lending data. Rather, a reporting obligation may arise
                on the basis of making a final credit decision on an application. (See
                the section-by-section analysis of proposed Sec. 1002.109(a)(3) for
                additional information.) The Bureau also notes the corollary point that
                selling a covered loan would not, in itself, obviate an existing
                obligation of a covered financial institution to report small business
                lending data for that application, pursuant to proposed comment 107(a)-
                1.i.
                ---------------------------------------------------------------------------
                 \432\ See Regulation C Sec. 1003.4(a) (stating that a financial
                institution ``shall collect data regarding . . . covered loans that
                it purchases for each calendar year'').
                 \433\ See 12 U.S.C. 2803(a)(1) (stating that institutions
                ``shall compile and make available . . . the number and total dollar
                amount of mortgage loans which were (A) originated (or for which the
                institution received completed applications), or (B) purchased by
                that institution'').
                ---------------------------------------------------------------------------
                 Because under this proposal purchasing a loan does not, in itself,
                generate an obligation for a covered financial institution to report
                small business lending data regarding the underlying application, the
                Bureau is not proposing a specific exclusion for these purchases.
                 The Bureau seeks comment on its proposal not to expressly exclude
                the purchase of covered credit transactions in the proposed rule's
                regulatory text or commentary.
                 Certain purchases of covered credit transactions--pooled loans. In
                the SBREFA Outline, the Bureau did not expressly discuss treatment of
                pooled loan purchases, but the Bureau sought feedback on any products
                that should or should not be covered by the Bureau's eventual 1071
                rule.\434\ A CDFI SER that occasionally participates in pooled loan
                purchases recommended that the Bureau ensure that reporting obligations
                for such pooled loans are clear.
                ---------------------------------------------------------------------------
                 \434\ SBREFA Outline at 19-20.
                ---------------------------------------------------------------------------
                 The Panel did not provide a specific recommendation on this topic.
                The Bureau believes that this feedback may be based in part on the
                requirements that apply to HMDA, where Regulation C requires financial
                institutions to report purchases of covered loans under HMDA.\435\ This
                requirement is based on statutory language that contemplates data
                collection for loan purchases.\436\ However, Regulation C exempts from
                these general reporting requirements ``[t]he purchase of an interest in
                a pool of closed-end mortgage loans or open-end lines of credit'' \437\
                As discussed in the section-by-section analysis of proposed Sec.
                1002.103 above, ECOA section 704B(b) requires that financial
                institutions collect, maintain, and report to the Bureau certain
                information regarding ``any application to a financial institution for
                credit.'' For covered financial institutions, the definition of
                ``application'' (or, as used in this proposed rule, ``covered
                application'') will trigger data collection and reporting obligations
                with respect to covered credit transactions. Under this proposed
                subpart, the purchase of an interest in a pool of loans does not, in
                itself, generate an obligation for a covered financial institution to
                report small business lending data. There is thus no need to propose a
                similar exclusion in this proposed subpart.
                ---------------------------------------------------------------------------
                 \435\ See Regulation C Sec. 1003.4(a) (stating that a financial
                institution ``shall collect data regarding . . . covered loans that
                it purchases for each calendar year'').
                 \436\ See 12 U.S.C. 2803(a)(1) (stating that depository
                institutions ``shall compile and make available . . . the number and
                total dollar amount of mortgage loans which were (A) originated (or
                for which the institution received completed applications), or (B)
                purchased by that institution'').
                 \437\ 12 CFR 1003.3(c)(4).
                ---------------------------------------------------------------------------
                 The Bureau believes that requiring covered financial institutions
                to collect and maintain data related to the purchase of an interest in
                a pool of covered credit transactions would do little to further the
                purposes of section 1071. The Bureau generally believes that a pooled
                loan purchase would arise after a final credit decision on the relevant
                loans has already been made (e.g., after the loans were originated) and
                therefore the Bureau believes that the purchaser of an interest in a
                pool of loans would understand that there would be no section 1071
                obligation. Section 1071 would already capture the lending information
                of the loans in this pool, as the application for each origination in
                the pool would already be reported (assuming it was originated by a
                covered financial institution and otherwise satisfies the requirements
                of proposed subpart B). For clarity, however, the Bureau is stating
                here that no reporting obligations arise from purchasing an interest in
                a pool of covered credit transactions, including credit-backed
                securities or real estate investment conduits. The Bureau believes that
                this clarification, similar to Regulation C comment 3(c)(4)-1, will
                assist covered financial institutions in understanding the scope of
                their obligations.
                 The Bureau seeks comment on its proposal not to expressly exclude
                the purchase of an interest in a pool of covered credit transactions in
                the proposed rule's regulatory text or commentary.
                 Certain purchases of covered credit transactions--partial interests
                in a covered credit transaction. In the SBREFA Outline, the Bureau did
                not specifically solicit feedback on a financial institution's
                obligation to report the purchase of a partial interest in a covered
                credit transaction (such as through participation loans, where multiple
                financial institutions fund a single origination); however, the Bureau
                did receive some feedback on this issue. One SER noted that there was
                some uncertainty with respect to how the Bureau intended to treat loan
                participations. This SER urged the Bureau not to discourage smaller
                credit unions in rural markets, who the SER stated may be likely to
                take part in loan participations, from helping their communities. The
                Panel did not provide a specific recommendation on this topic. Several
                other stakeholders also requested that the Bureau exempt participation
                loans.
                 The Bureau believes that this feedback may be based in part on the
                requirements that apply to HMDA, where Regulation C requires financial
                institutions to report purchases of
                [[Page 56414]]
                covered loans under HMDA.\438\ This requirement is based on statutory
                language that contemplates data collection for loan purchases.\439\
                However, Regulation C exempts from these general reporting requirements
                ``[t]he purchase of a partial interest in a closed-end mortgage loan or
                open-end line of credit'' \440\ As discussed in the section-by-section
                analysis of proposed Sec. 1002.103 above, ECOA section 704B(b)
                requires that financial institutions collect, maintain, and report to
                the Bureau certain information regarding ``any application to a
                financial institution for credit.'' For covered financial institutions,
                the definition of ``application'' (or, as used in this proposed rule,
                ``covered application'') will trigger data collection and reporting
                obligations with respect to covered credit transactions. Under this
                subpart, a partial purchase of a loan does not, in itself, generate an
                obligation for a covered financial institution to report small business
                lending data. There is thus no need to propose a similar exclusion in
                this subpart.
                ---------------------------------------------------------------------------
                 \438\ See Regulation B Sec. 1003.4(a) (stating that a financial
                institution ``shall collect data regarding . . . covered loans that
                it purchases for each calendar year'').
                 \439\ See 12 U.S.C. 2803(a)(1) (stating that depository
                institutions ``shall compile and make available . . . the number and
                total dollar amount of mortgage loans which were (A) originated (or
                for which the institution received completed applications), or (B)
                purchased by that institution'').
                 \440\ 12 CFR 1003.3(c)(8).
                ---------------------------------------------------------------------------
                 The Bureau believes that this approach, combined with proposed
                Sec. 1002.109(a)(3), provides sufficient clarity for financial
                institutions that choose to take part in loan participations. For
                example, Financial Institution A receives an application for a covered
                credit transaction and approves the loan, and then Financial
                Institution A elects to organize a loan participation agreement where
                Financial Institutions B and C agree to purchase a partial interest.
                This is a covered credit transaction for Financial Institution A, but
                it is not a covered credit transaction for Financial Institutions B and
                C. The Bureau believes that this approach differs from how loan
                participations are reported by banks and savings associations under the
                CRA. That is, under the CRA, if the loan originated by Financial
                Institution A met the definition of a small business loan, then if any
                (or all) of the financial institutions were CRA loan reporters the
                loans may be reported under the CRA.\441\
                ---------------------------------------------------------------------------
                 \441\ See, e.g., 12 CFR 228.21(f) (stating that when assessing
                the record of a nonminority-owned and nonwomen-owned bank, the Board
                considers loan participation as a factor).
                ---------------------------------------------------------------------------
                 The Bureau believes that the purposes of section 1071 counsel
                towards the broad collection of small business lending by financial
                institutions. The Bureau is further unaware of any reason why data with
                respect to such lending should not be collected because more than one
                financial institution holds an interest in a covered product.
                Conversely, the Bureau does not believe that requiring reporting by
                each financial institution with a partial interest in a covered credit
                transaction would further section 1071's purposes, and is concerned
                that having a single loan reported by multiple financial institutions
                could compromise the quality of the section 1071 dataset. Read in
                conjunction with proposed Sec. 1002.109(a)(3), however, the Bureau
                believes that the covered credit transactions at issue here will
                nonetheless generally be reported by one covered financial institution,
                the financial institution that sold portions of the loan to other
                participants.
                 The Bureau seeks comment on its proposal not to expressly exclude
                the purchase of a partial interest in a covered credit transaction in
                the proposed rule's regulatory text or commentary. In particular, the
                Bureau solicits comment on how this proposed exclusion may differ from
                reporting obligations under the CRA, and if the Bureau adopted another
                approach, how overlapping reporters or data might be flagged to avoid
                double-counting certain information.
                 Trade credit. Under existing Regulation B, trade credit refers to a
                ``financing arrangement that involves a buyer and a seller--such as a
                supplier who finances the sale of equipment, supplies, or inventory; it
                does not apply to an extension of credit by a bank or other financial
                institution for the financing of such items.'' \442\ Thus, trade credit
                typically involves a transaction in which a seller allows a business to
                purchase its own goods without requiring immediate payment, and the
                seller is not otherwise in the financial services business. Businesses
                offering trade credit generally do so as a means to facilitate the sale
                of their own goods and not as a stand-alone financing product.
                ---------------------------------------------------------------------------
                 \442\ Comment 9(a)(3)-2.
                ---------------------------------------------------------------------------
                 Most of the notification requirements of existing Regulation B do
                not apply to trade credit transactions.\443\ In a typical trade credit
                transaction, the seller is not otherwise in the financial services
                business.\444\ The Bureau's White Paper estimated that trade credit
                represents approximately 21 percent of the aggregate dollar volume of
                various financial products used by small businesses.\445\ The Bureau
                understands that there are tens of thousands of merchants and
                wholesalers that extend credit to small businesses solely in connection
                with sale of goods and services by these trade creditors.
                ---------------------------------------------------------------------------
                 \443\ See Sec. 1002.9(a)(3)(ii).
                 \444\ See comment 9(a)(3)-2.
                 \445\ White Paper at 21 fig. 2.
                ---------------------------------------------------------------------------
                 In its SBREFA Outline, the Bureau stated that it was considering
                proposing that trade credit not be a covered product under section
                1071.\446\ The Bureau stated that trade credit can be offered by
                entities that are themselves very small businesses and that the Bureau
                was concerned that these entities, in particular, may incur large costs
                relative to their size to collect and report 1071 data in an accurate
                and consistent manner.\447\
                ---------------------------------------------------------------------------
                 \446\ SBREFA Outline at 21.
                 \447\ See id.
                ---------------------------------------------------------------------------
                 The Bureau only received a few comments regarding its proposal
                under consideration to exclude trade credit. A few stakeholders
                suggested that trade credit should be covered. One commenter noted that
                trade credit is used for a significant number of agricultural finance
                transactions (equipment financing and input financing for row crop
                farmers) and suggested that the Bureau should monitor this sector of
                the agricultural finance industry. A trade association stated that the
                exclusion of trade credit should apply not only to the seller of
                inventory and businesses facilitating the sale of inventory, but also
                its affiliates and facilitators because these entities generally
                provide financing only for the seller's products and not for competing
                or unrelated products. The trade association cautioned that the
                collection and publication of data, if applied to such an affiliate,
                could significantly impact the seller's ability to maintain trade
                secrets, as these data would provide competitors a comprehensive
                insight into the seller's distribution and wholesale strategies, and it
                would also create a substantial risk to the applicants themselves due
                to privacy concerns.
                 The Bureau is proposing to not cover trade credit in its 1071 rule.
                Proposed Sec. 1002.104(b)(1) would define trade credit as a financing
                arrangement wherein a business acquires goods or services from another
                business without making immediate payment to the business providing the
                goods or services. Proposed comment 104(b)(1)-1 would provide that an
                example of trade credit is one that involves a supplier that finances
                the sale of equipment,
                [[Page 56415]]
                supplies, or inventory. Proposed comment 104(b)(1)-1 would provide that
                an extension of business credit by a financial institution other than
                the supplier for the financing of such items is not trade credit.
                Proposed comment 104(b)(1)-2 would clarify that the definition of trade
                credit under existing comment 9(a)(3)-2 applies to relevant provisions
                under existing Regulation B, and that proposed Sec. 1002.104(b)(1) is
                not intended to repeal, abrogate, annul, impair, or interfere with any
                existing interpretations, orders, agreements, ordinances, rules, or
                regulations adopted or issued pursuant to existing comment 9(a)(3)-2.
                 The Bureau is proposing a definition of ``covered credit
                transaction'' that excludes trade credit pursuant to its authority
                under ECOA section 704B(g)(1) to prescribe such rules and issue such
                guidance as may be necessary to carry out, enforce, and compile data
                under section 1071. While trade credit constitutes ``credit'' within
                the meaning of proposed Sec. 1002.102(k), the Bureau believes that
                trade credit is categorically different from products like loans, lines
                of credit, credit cards, and MCAs and that there are several reasons to
                exclude it from coverage. Trade credit is not a general-use business
                lending product--that is, trade creditors generally extend credit as a
                means to facilitate the sale of their own goods, rather than offering
                it as a stand-alone financial product. The Bureau believes that while
                trade creditors might meet the definition in section 1071 of a
                financial institution, they are not financial services providers that
                manage compliance with regulatory requirements associated with making
                extensions of credit. The Bureau understands that trade credit can be
                offered by entities that are themselves very small businesses; the
                Bureau continues to be concerned that these entities, in particular,
                may incur large costs relative to their size to collect and report 1071
                data in an accurate and consistent manner.\448\ Taken together, the
                Bureau is concerned that requiring trade credit to be reported under
                proposed subpart B may lead to significant data quality issues. The
                Bureau is also concerned that the fixed costs of coming into compliance
                with its 1071 rule could lead these businesses to reduce or cease
                offering trade credit to their small business customers, which would
                run contrary to the community development purpose of section 1071.
                ---------------------------------------------------------------------------
                 \448\ See Leora Klapper et al., The Review of Financial Studies,
                Trade Credit Contracts, at 838-67 (vol. 25, issue 3, 2012), https://academic.oup.com/rfs/article/25/3/838/1616515, and Justin Murfin &
                Ken Njoroge, The Review of Financial Studies, The Implicit Costs of
                Trade Credit Borrowing by Large Firms, at 112-45 (vol. 28, issue 1,
                2015), https://academic.oup.com/rfs/article/28/1/112/1681329.
                ---------------------------------------------------------------------------
                 The Bureau notes that its proposed definition of trade credit in
                Sec. 1002.104(b)(1) is focused on the business providing the goods or
                services being financed. It thus does not extend to affiliates and
                facilitators of trade creditors that provide financing, even if only
                for the trade creditor's products and not for competing or unrelated
                products. Provided that they otherwise meet the definition of a covered
                financial institution in proposed Sec. 1002.105(b), such affiliates
                and facilitators must collect and report data under the 1071 rule. The
                Bureau believes that, unlike trade creditors themselves, such
                affiliates and facilitators offer stand-alone credit products in the
                same way as other financial institutions. As such, the Bureau does not
                have the same concerns about data quality or market exit by affiliates
                and facilitators that it does about trade creditors themselves.
                 The Bureau seeks comment on its proposal to exclude trade credit
                from the 1071 rule and on its proposed definition of trade credit.
                 Public utilities credit. As noted above, the existing definition of
                business credit in Sec. 1002.2(g) excludes public utilities credit,
                securities credit, incidental credit, and government credit, as defined
                in existing Sec. 1002.3(a) through (d), from certain procedural
                requirements of existing Regulation B. For the purpose of proposed
                subpart B, the Bureau is proposing complete exclusions for public
                utilities credit from the definition of a covered credit transaction in
                proposed Sec. 1002.104(b).
                 In the SBREFA Outline, the Bureau did not expressly discuss
                treatment of public utilities credit transactions. However, the Bureau
                sought feedback on any products that should or should not be covered by
                the Bureau's eventual 1071 rule, and did not receive any feedback
                specific to public utilities credit.
                 Proposed Sec. 1002.104(b)(2) would exclude public utilities
                credit, as defined in existing Sec. 1002.3(a)(1). Existing Sec.
                1002.3(a)(1) states that the term public utilities credit refers to
                extensions of credit that involve public utility services provided
                through pipe, wire, or other connected facilities, or radio or similar
                transmission (including extensions of such facilities), if the charges
                for service, delayed payment, and any discount for prompt payment are
                filed with or regulated by a government unit. Several existing
                Regulation B requirements do not apply to public utilities credit
                transactions.\449\ Existing comment 3(a)-1 explains that the definition
                applies only to credit for the purchase of a utility service, such as
                electricity, gas, or telephone service. Credit provided or offered by a
                public utility for some other purpose--such as for financing the
                purchase of a gas dryer, telephone equipment, or other durable goods,
                or for insultation or other home improvements--would not be excepted
                under proposed Sec. 1002.104(b)(2) but may be excepted if it
                constitutes trade credit under proposed Sec. 1002.104(b)(1), or in the
                case of financing for certain home improvements, for example, if it
                does not constitute an extension of business credit under proposed
                Sec. 1002.104(a). Existing comment 3(a)-2 states in part that a
                utility company is a creditor when it supplies utility service and
                bills the user after the service has been provided.
                ---------------------------------------------------------------------------
                 \449\ See Sec. 1002.3(a).
                ---------------------------------------------------------------------------
                 The Bureau is proposing a definition of ``covered credit
                transaction'' that excludes public utilities credit pursuant to its
                authority under ECOA section 704B(g)(1) to prescribe such rules and
                issue such guidance as may be necessary to carry out, enforce, and
                compile data under section 1071. The Bureau believes that excluding
                public utilities credit from the 1071 rule is reasonable for the same
                reasons as the Board enumerated when it adopted exemptions from certain
                procedural requirements under subpart A. Specifically, the Bureau is
                concerned that covering public utilities credit under 1071 could
                require ``substantial changes in the forms and procedures of public
                utilities companies. Costs associated with such changes would, in all
                likelihood, be passed along to [small business owners].'' \450\ The
                Bureau notes that many of the policies and procedures of public
                utilities companies are separately regulated at the State and Municipal
                levels by public service commissions, and at the Federal level by the
                Federal Energy Regulatory Commission. The Bureau also believes that
                public utilities credit is akin to trade credit and thus is proposing
                to exclude it from coverage under subpart B for the same reasons.
                ---------------------------------------------------------------------------
                 \450\ 40 FR 49298, 49305 (Oct. 22, 1975).
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposal to exclude public
                utilities credit.
                 Securities credit. As noted above, the existing definition of
                business credit in Sec. 1002.2(g) excludes public utilities credit,
                securities credit, incidental credit, and government credit, as defined
                in existing Sec. 1002.3(a) through
                [[Page 56416]]
                (d), from certain procedural requirements of existing Regulation B. For
                the purpose of proposed subpart B, the Bureau is proposing complete
                exclusions for securities credit from the definition of a covered
                credit transaction in proposed Sec. 1002.104(b).
                 In the SBREFA Outline, the Bureau did not expressly discuss
                treatment of securities credit transactions, but the Bureau sought
                feedback on any products that should or should not be covered by the
                Bureau's eventual 1071 rule. The Bureau did not receive any feedback
                specific to securities credit.
                 Proposed Sec. 1002.104(b)(3) would exclude securities credit, as
                defined in existing Sec. 1002.3(b)(1). Existing Sec. 1002.3(b)(1)
                states that the term securities credit refers to extensions of credit
                subject to regulation under section 7 of the Securities Exchange Act of
                1934 or extensions of credit by a broker or dealer subject to
                regulation as a broker or dealer under the Securities Exchange Act of
                1934. Several existing Regulation B requirements do not apply to
                securities credit transactions.\451\
                ---------------------------------------------------------------------------
                 \451\ See Sec. 1002.3(b).
                ---------------------------------------------------------------------------
                 The Bureau is proposing a definition of ``covered credit
                transaction'' that excludes securities credit pursuant to its authority
                under ECOA section 704B(g)(1) to prescribe such rules and issue such
                guidance as may be necessary to carry out, enforce, and compile data
                under section 1071. The Bureau is proposing to exclude securities
                credit to foster consistency with existing Regulation B.
                 The Bureau seeks comment on its proposal to exclude securities
                credit.
                 Incidental credit. As noted above, the existing definition of
                business credit in Sec. 1002.2(g) excludes public utilities credit,
                securities credit, incidental credit, and government credit, as defined
                in existing Sec. 1002.3(a) through (d), from certain procedural
                requirements of existing Regulation B. For the purpose of proposed
                subpart B, the Bureau is proposing complete exclusions for incidental
                credit from the definition of a covered credit transaction in proposed
                Sec. 1002.104(b).
                 In the SBREFA Outline, the Bureau did not expressly discuss
                treatment of incidental credit transactions, but the Bureau sought
                feedback on any products that should or should not be covered by the
                Bureau's eventual 1071 rule. The Bureau did not receive any feedback
                specific to incidental credit.
                 Proposed Sec. 1002.104(b)(4) would exclude incidental credit, as
                defined in existing Sec. 1002.3(c)(1), but without regard to whether
                the credit is consumer credit, as defined in existing Sec. 1002.2(h).
                Existing Sec. 1002.3(c)(1) states that incidental credit refers to
                extensions of consumer credit other than the types described in Sec.
                1002(a) and (b): (i) That are not made pursuant to the terms of a
                credit card account; (ii) that are not subject to a finance charge (as
                defined in Regulation Z Sec. 1026.4); and (iii) that are not payable
                by agreement in more than four installments. A number of existing
                Regulation B requirements do not apply to ``incidental credit''
                (referring to extensions of consumer credit).\452\ Existing comment
                3(c)-1 explains that if a service provider (such as a hospital, doctor,
                lawyer, or merchant) allows the client or customer to defer the payment
                of a bill, this deferral of debt is credit for purposes of the
                regulation, even though there is no finance charge and no agreement for
                payment in installments. Because of the exceptions provided by existing
                Sec. 1002.3, however, these particular credit extensions are excepted
                from compliance with certain procedural requirements as specified in
                Sec. 1002.3(c).
                ---------------------------------------------------------------------------
                 \452\ See Sec. 1002.3(c).
                ---------------------------------------------------------------------------
                 The Bureau is proposing a definition of ``covered credit
                transaction'' that excludes incidental credit pursuant to its authority
                under ECOA section 704B(g)(1) to prescribe such rules and issue such
                guidance as may be necessary to carry out, enforce, and compile data
                under section 1071. The Bureau believes that the Board's reasoning with
                respect to incidental credit's limited exception under existing
                Regulation B is equally applicable and relevant here. The Board sought
                to minimize burdens on businesses that ``permit their customers to
                defer payment of debt as a convenience and are not in the business of
                extending credit.'' \453\ The Board cited the example of doctors and
                dentists that permit their patients to defer payment of fees and who
                are extending credit as incidental to their principal activity of
                health care.\454\ The Board also noted that ``[s]mall neighborhood
                businesses such as drugstores and grocery stores frequently permit
                their customers to postpone payment on an informal basis not associated
                with a formal credit plan.'' \455\ The Bureau believes that incidental
                credit, as described above, is akin to trade credit and thus is
                proposing to exclude it from coverage under subpart B for the same
                reasons.
                ---------------------------------------------------------------------------
                 \453\ 40 FR 49298, 49304 (Oct. 22, 1975).
                 \454\ Id.
                 \455\ Id.
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposal to exclude incidental
                credit.
                Section 1002.105 Covered Financial Institutions and Exempt Institutions
                 ECOA section 704B(h)(1) defines the term ``financial institution''
                as ``any partnership, company, corporation, association (incorporated
                or unincorporated), trust, estate, cooperative organization, or other
                entity that engages in any financial activity.'' The Bureau is
                proposing to define a financial institution in Sec. 1002.105(a)
                consistent with that statutory language. The Bureau is proposing to
                define a covered financial institution in Sec. 1002.105(b) as a
                financial institution that originated at least 25 covered credit
                transactions from small businesses in each of the two preceding
                calendar years. Only those financial institutions that meet this loan-
                volume threshold in the definition of a covered financial institution
                would be required to collect and report small business lending data
                pursuant to proposed subpart B.
                 The Bureau's proposed definitions reflect the broad nature of the
                data collection specified in section 1071, while recognizing the risks
                that financial institutions with the lowest volume of small business
                lending might reduce or cease their small business lending activity
                because of the fixed costs of coming into compliance with this rule.
                 The Bureau is proposing Sec. 1002.105 to implement ECOA section
                704B(h)(1) and pursuant to its authority under 704B(g)(1) to prescribe
                such rules and issue such guidance as may be necessary to carry out,
                enforce, and compile data pursuant to section 1071. The Bureau is also
                proposing Sec. 1002.105(b) pursuant to its authority under 704B(g)(2)
                to conditionally or unconditionally exempt any financial institution or
                class of financial institutions from the statute's requirements, as the
                Bureau deems necessary or appropriate to carry out the purposes of
                section 1071. The Bureau is proposing these provisions and proposing to
                use its exemption authority under 704B(g)(2) for the reasons set forth
                below.
                105(a) Financial Institution
                Background
                 ECOA section 704B(h)(1) defines the term ``financial institution''
                as ``any partnership, company, corporation, association (incorporated
                or unincorporated), trust, estate, cooperative organization, or other
                entity that engages in any financial activity.''
                [[Page 56417]]
                SBREFA Proposals Under Consideration and Feedback Received
                 At SBREFA, the Bureau stated it was considering proposing a general
                definition of ``financial institution'' consistent with the section
                1071 definition.\456\ The Bureau noted that Regulation B, which
                implements ECOA, has not otherwise defined this term.
                ---------------------------------------------------------------------------
                 \456\ SBREFA Outline at 10.
                ---------------------------------------------------------------------------
                 SERs generally did not express concern regarding the general
                definition of a ``financial institution'' under consideration, although
                one SER expressed concern at the broad reach of what might be
                considered a financial activity.\457\ The SBREFA Panel did not provide
                any recommendations on the definition of a financial institution.
                Feedback on the definition of ``financial institution'' from other
                stakeholders was likewise nearly universally positive, with most
                opining that a definition that encompasses all small business lenders
                would be appropriate.
                ---------------------------------------------------------------------------
                 \457\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 18-20.
                ---------------------------------------------------------------------------
                Proposed Rule
                 Proposed Sec. 1002.105(a) would define a financial institution as
                any partnership, company, corporation, association (incorporated or
                unincorporated), trust, estate, cooperative organization, or other
                entity that engages in any financial activity. This proposed definition
                restates the statute and is the same definition that the Bureau stated
                it was considering proposing in the SBREFA Outline.\458\ The Bureau
                believes that this definition reflects the broad nature of small
                business lending data collection specified in section 1071. Under such
                a definition, the rule's data collection and reporting requirements
                would apply to a variety of entities that engage in small business
                lending, including depository institutions (i.e., banks, savings
                associations, and credit unions),\459\ online lenders, platform
                lenders, CDFIs, lenders involved in equipment and vehicle financing
                (captive financing companies and independent financing companies),
                commercial finance companies, governmental lending entities, and
                nonprofit, nondepository lenders.
                ---------------------------------------------------------------------------
                 \458\ SBREFA Outline at 10.
                 \459\ For purposes of this notice of proposed rulemaking, the
                Bureau is using the term depository institution to mean any bank or
                savings association defined by the Federal Deposit Insurance Act, 12
                U.S.C. 1813(c)(1), or credit union defined pursuant to the Federal
                Credit Union Act, as implemented by 12 CFR 700.2. The Bureau notes
                that the Dodd-Frank Act defines a depository institution to mean any
                bank or savings association defined by the Federal Deposit Insurance
                Act; there, that term does not encompass credit unions. 12 U.S.C.
                5301(18)(A), 1813(c)(1). To facilitate analysis and discussion, the
                Bureau is referring to banks and savings associations together with
                credit unions as depository institutions throughout this notice,
                unless otherwise specified.
                ---------------------------------------------------------------------------
                 As noted above, one SER expressed concern at the broad reach of
                this definition. But the broad scope of what may be considered a
                ``financial activity'' in the proposed definition of financial
                institution is not the principal determinative factor as to whether
                small business lending data collection and reporting is required; the
                proposed definition of a covered financial institution, the proposed
                definition of a covered application, and the proposed definition of a
                covered credit transaction, among others, all would impose limits on
                what entities could be subject to this proposed rule's data collection
                and reporting requirements.
                 Proposed comment 105(a)-1 would provide a non-exhaustive list of
                examples of entities that may fit within the definition of a financial
                institution. This proposed comment would make clear that nonprofit and
                governmental entities, governmental subdivisions, or governmental
                agencies, among others, who conduct financial activity fit within the
                definition of a financial institution. The definition of the term
                ``financial institution'' in ECOA section 704B(h)(1) includes the
                phrase ``or other entity.'' That term readily encompasses governments
                and government entities. Even if the term were ambiguous, the Bureau
                believes--based on its expertise and experience--that interpreting it
                to encompass governments and government entities would promote the
                purposes of section 1071. For example, the Bureau believes that it will
                be helpful to identify the business and community development needs of
                women-owned, minority-owned, and small businesses by collecting lending
                data from both a county-run assistance program for establishing new
                businesses and financial institutions that operate nationwide, like
                online lenders. The Bureau also believes that the terms ``companies''
                or ``corporations'' under the definition of ``person,'' on their face,
                cover all companies and corporations, including government-owned or -
                affiliated companies and corporations. And even if those terms were
                ambiguous, the Bureau believes--based on its expertise and experience--
                that interpreting them to cover government-owned or -companies and
                corporations would promote the purposes of section 1071. The Bureau
                emphasizes that the list of examples of entities in proposed comment
                105(a)-1 is not exhaustive and that other entities not specifically
                described would nonetheless fit within the definition of a financial
                institution under proposed Sec. 1002.105(a). For example, the Bureau
                believes that an organization offering insurance premium financing,
                where the organization provides short-term loans to businesses to pay
                for property and casualty insurance, is included within the definition
                of proposed Sec. 1002.105(a), even though this specific business model
                is not described in proposed comment 105(a)-1.
                 Proposed comment 105(a)-2 would refer to proposed Sec. 1002.101(a)
                to reiterate the statutory exclusion for motor vehicle dealers.
                 The Bureau seeks comment on this proposed definition of a financial
                institution, and generally requests comment on whether additional
                clarification is needed.
                105(b) Covered Financial Institution
                Background
                 The Bureau has received requests to adopt exemptions from section
                1071 collection and reporting requirements for financial institutions
                that do not frequently engage in small business lending. Reasons cited
                have included encouraging market entry, ensuring data quality, alleged
                lack of materiality of data from smaller lenders that rarely make small
                business loans, and lack of capacity by the lenders sufficient to
                justify small business lending as a line of business in light of the
                cost of complying with an eventual 1071 rule.
                SBREFA Proposals Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated that it was considering,
                in light of section 1071's statutory purposes, proposing to exempt
                financial institutions from any collection and reporting requirements
                based on either or both a size-based and/or activity-based threshold.
                In the SBREFA Outline, the Bureau set forth several alternative
                thresholds under consideration for such an exemption.\460\
                ---------------------------------------------------------------------------
                 \460\ SBREFA Outline at 11-13.
                ---------------------------------------------------------------------------
                 There was a diversity of perspectives with respect to the Bureau's
                approaches under consideration regarding potential exemptions.\461\
                While some SERs stressed the need for expansive lender coverage to
                fulfill section 1071's purposes, others suggested that such purposes
                could be fulfilled by the Bureau collecting and reporting data from
                only the largest lenders. SERs also offered varying opinions regarding
                the exemption metrics and thresholds under
                [[Page 56418]]
                consideration, with some SERs favoring activity-based exemptions and
                others preferring an asset-based approach. SERs uniformly supported
                clear, predictable collection and reporting exemption thresholds.
                ---------------------------------------------------------------------------
                 \461\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 18-20.
                ---------------------------------------------------------------------------
                 The SBREFA Panel recommended that the Bureau continue to explore
                whether either or both a size-based or activity-based test might be
                appropriate to determine whether a financial institution must collect
                and report 1071 data or should be exempt, given section 1071's
                statutory purposes.\462\ The SBREFA Panel also recommended that the
                Bureau continue to explore whether the fixed costs of coming into
                compliance with an eventual 1071 rule might cause certain financial
                institutions to reduce or cease lending to small businesses, as it
                considers the possible exemptions for financial institutions based on
                size and/or activity, along with any alternative approaches.\463\
                ---------------------------------------------------------------------------
                 \462\ Id. at 43.
                 \463\ Id.
                ---------------------------------------------------------------------------
                 Feedback from other stakeholders generally was in support of
                exempting certain financial institutions from 1071 collection and
                reporting obligations. Most feedback in support of pursuing exemptions
                focused on the potential burden of a new regulatory regime, with some
                stakeholders cautioning that collection and reporting obligations could
                lead to an increase in the cost of credit. A few stakeholders connected
                these potential costs with section 1071's purpose to identify community
                development needs and opportunities (chiefly arguing that costs might
                lead to higher costs of lending or lower lending volume), or otherwise
                expressed a general belief that some exemptions were consistent with
                statutory purposes. Several stakeholders, mostly community groups,
                urged caution with respect to the extent of any such exemptions,
                arguing that significant data limitations would run contrary to the
                general purposes of section 1071.
                 Activity-based exemption. In the SBREFA Outline, the Bureau stated
                that it was considering whether only financial institutions that engage
                in a certain amount of small business lending activity should be
                required to collect and report 1071 data.\464\ The Bureau explained
                that in light of 1071's potentially broad application to financial
                institutions, an activity-based test to determine reporting
                responsibility might be appropriate. In particular, the Bureau
                expressed concern that financial institutions with the lowest volume of
                small business lending might reduce or cease their small business
                lending activity because of the fixed costs of coming into compliance
                with an eventual 1071 rule. The Bureau stated that this result could be
                contrary to the community development purpose of section 1071.
                ---------------------------------------------------------------------------
                 \464\ SBREFA Outline at 12-13.
                ---------------------------------------------------------------------------
                 The Bureau specifically mentioned three possible activity-based
                threshold levels, each defined by a financial institution's annual
                number of small business loans originated or the financial
                institution's annual total dollar value of small business loans
                originated. (That is, if either measurement is exceeded, then the
                financial institution must collect and report 1071 data.) Those three
                possible activity-based threshold levels were: Originations of at least
                25 loans or $2.5 million (Option 1 Exemption Threshold); originations
                of at least 50 loans or $5 million (Option 2 Exemption Threshold); and
                originations of at least 100 loans or $10 million (Option 3 Exemption
                Threshold). These possible activity-based thresholds could be based on
                the financial institution's lending as of the end of the last calendar
                year, or the end of each of the last two calendar years. An activity-
                based exemption could apply to depository and nondepository
                institutions alike.
                 Some SERs advocated for an activity-based exemption. Several of
                these SERs preferred an annual 25-loan threshold (with at least one
                expressing support specifically for the Option 1 Exemption Threshold).
                One SER preferred the Option 2 Exemption Threshold, while another
                preferred the Bureau's Option 3 Exemption Threshold. Another SER
                recommended setting a threshold of more than 100 small business
                applications (rather than originations) for two consecutive years.
                These SERs emphasized a general need for thorough data reporting from a
                wide variety of lenders, and cautioned that in many smaller and rural
                markets, larger exemptions might result in little or no data collection
                given that many lenders in those markets make very few small business
                loans annually.
                 One SER suggested setting an activity-based threshold based on loan
                portfolio size rather than annual originations. Another SER suggested
                that the Bureau consider exempting certain financial institutions using
                a location test similar or identical to what is used for HMDA, which
                does not apply to institutions that do not have a home or branch office
                in a Metropolitan Statistical Area.
                 There was no uniformity in the feedback from other stakeholders
                with respect to an activity-based exemption and its potential level.
                Many commenters, including lenders, trade associations, and community
                groups, expressed support for the Option 1 Exemption Threshold,
                although most explicitly supported only the 25-loan threshold. On the
                other hand, a few comments advocated for versions of the Option 3
                Exemption Threshold and many comments urged the Bureau to adopt a
                threshold higher than the Option 3 Exemption Threshold. Commenters who
                advocated for higher thresholds consisted of lenders and trade
                associations.
                 Size-based exemption. In the SBREFA Outline, the Bureau stated that
                it was concerned that the smallest financial institutions might reduce
                or cease their small business lending activity because of the fixed
                costs of coming into compliance with an eventual 1071 rule, which could
                be contrary to the community development purpose of section 1071.\465\
                Specifically, the Bureau considered whether depository institutions
                with assets under a given threshold should be exempt from collecting
                and reporting small business lending data.
                ---------------------------------------------------------------------------
                 \465\ Id. at 11-12.
                ---------------------------------------------------------------------------
                 The Bureau stated that it was considering proposing to exempt
                depository institutions with assets under a given threshold from
                section 1071's data collection and reporting requirements. The Bureau
                postulated that this size-based approach could provide a
                straightforward exemption for very small depository institutions and
                avoid the need for those entities to measure or monitor their small
                business lending activity in order to determine whether they would be
                exempt from the Bureau's 1071 rule. In particular, the Bureau
                considered possible asset-based exemption threshold levels of $100
                million (Option A Exemption Level) and $200 million (Option B Exemption
                Level). For purposes of this exemption, the Bureau considered proposing
                that a depository institution measure assets as of the end of the last
                calendar year, or the end of both of the last two calendar years. The
                Bureau asked SERs whether there were alternative approaches to a size-
                based exemption that the Bureau should consider.
                 SERs did not suggest size-based exemptions other than an asset-
                based metric that would apply to depository institutions. A few SERs
                advocated that the Bureau should consider initially exempting lenders
                other than ``large'' financial institutions (which, one SER suggested,
                might be defined for depository institutions as those having more than
                $1 billion in assets). These SERs stated that this approach would
                capture the vast majority of small business loans while avoiding
                imposing
                [[Page 56419]]
                undue regulatory burden on smaller lenders, who might be less capable
                of absorbing such costs. They suggested that the Bureau might later
                consider whether to expand section 1071 data collection and reporting
                requirements to smaller financial institutions after first analyzing
                the available data. Several SERs cautioned that some financial
                institutions, particularly small nondepository lenders, might cease
                lending to small businesses if the eventual 1071 rule's one-time costs
                are too high.
                 One SER stated that a $200 million asset-based exemption would be
                helpful to small depository lenders, and others suggested that a
                threshold of $600 million was appropriate. Another SER countered,
                however, that they were unaware of data to support an asset-based
                exemption larger than $100 million. Some SERs expressly opposed an
                asset-based exemption; one SER cautioned that an exemption based solely
                on asset size would be inadvisable because many lenders do not hold
                their loans on their balance sheet. Another SER stated that adopting an
                asset-based exemption would risk excluding the collection of nearly all
                small business lending data in certain regions.
                 Input from other stakeholders was split. Many stakeholders
                supported a size-based exemption (typically an asset-based exemption),
                contending that small depository institutions faced substantial
                compliance costs and presented a lower likelihood of fair lending
                violations. Small depository institutions were also particularly
                concerned about data security issues. However, a number of other
                stakeholders counseled against a size-based exemption, arguing that
                exemptions should be based instead on lending activity, and that size-
                based exemptions risked under-reporting in important markets. In
                addition, some stakeholders noted that because there was no ready
                equivalent size-based measurement for nondepository institutions,
                including an asset-based exemption in the 1071 rule would put other
                small financial institutions at a cost disadvantage.
                 Combined exemption. The Bureau stated that it was exploring whether
                to combine the size- and activity-based approaches.\466\ Under a
                combined approach, a financial institution would be required to collect
                and report 1071 data if it exceeds either: (1) A given annual number of
                small business loans originated; or (2) annual total small business
                lending, measured in dollars. However, depository institutions with
                assets under a given asset threshold would be exempt from reporting,
                regardless of the number or dollar value of small business loans they
                originated during the relevant time period.
                ---------------------------------------------------------------------------
                 \466\ Id. at 13.
                ---------------------------------------------------------------------------
                 At least one SER supported a combined size-based and activity-based
                exemption. Some SERs also suggested other possible bases for setting
                exemption thresholds. For example, several SERs suggested that the
                Bureau focus on the number of small business loans that would be
                covered or excluded, rather than the number of financial institutions,
                in setting an exemption threshold. One SER suggested setting a
                threshold based on loan portfolio size rather than annual originations.
                As discussed above, another SER suggested that the Bureau consider
                exempting certain financial institutions using a location test similar
                or identical to what is used for HMDA, which does not apply to
                institutions that do not have a home or branch office in a Metropolitan
                Statistical Area.
                 Alternative exemptions. The Bureau did not express that it was
                considering other collection and reporting exemptions. However, the
                Bureau did request feedback on alternative approaches. In particular,
                the Bureau asked whether there were certain types of financial
                institutions, such as governmental lending entities or nonprofit
                nondepository lenders, that the Bureau should consider not including
                within 1071's data collection and reporting requirements.
                 One credit union SER requested that the Bureau exempt all credit
                unions from section 1071 data collection and reporting requirements,
                asserting that credit unions had not displayed what they characterized
                as a ``pattern of unfair lending.'' In contrast, another SER cautioned
                against providing exemptions for particular types of financial
                institutions, noting the risk of missing important lending data. A few
                SERs, particularly CDFIs, strongly preferred that all lenders,
                including nonprofit and government lenders, be subject to section 1071
                data collection and reporting requirements. One SER asserted that
                disparities exist in many forms of small business lending, including
                the SBA's 7(a) Loan Program, State lending programs, and funds
                distributed through the recent Coronavirus Aid, Relief, and Economic
                Security Act (CARES Act).\467\ Another SER stated that in certain parts
                of the country, such as the Midwest, Farm Credit System loans are
                available to small businesses, and thus Farm Credit institutions are in
                competition with other lenders and should be covered entities. One SER
                stated that the Bureau should consider exempting nondepository,
                nonprofit Native CDFIs because section 1071 data collection and
                reporting requirements might impose significant compliance costs and
                privacy concerns.\468\ The SBREFA Panel recommendations did not
                directly address this topic, although the Panel did recommend that the
                Bureau continue to consider alternative approaches to exemptions.\469\
                ---------------------------------------------------------------------------
                 \467\ Public Law 116-136, 134 Stat. 281 (2020).
                 \468\ Native CDFIs are organizations certified as community
                development financial institutions that primarily serve a Native
                Community and are therefore eligible for Financial Assistance and
                Technical Assistance awards provided by the Native American CDFI
                Assistance Program. CDFI Fund, Fostering Economic Self-Determination
                for Your Native Community, https://www.cdfifund.gov/sites/cdfi/files/documents/cdfi7205_fs_ni_updatedfeb20.pdf (last visited Aug.
                12, 2021).
                 \469\ SBREFA Panel Report at 43.
                ---------------------------------------------------------------------------
                 Feedback from other stakeholders included a variety of suggestions
                for other types of financial institutions that the Bureau should
                consider exempting. These suggestions were made by financial
                institutions (or their trade associations) to describe either
                themselves or portions of their membership. The Bureau received this
                feedback pertaining to CDFIs, credit unions, minority depository
                institutions, financial institutions in rural areas or low- and
                moderate-income areas, financial institutions that would themselves be
                small businesses under the rule, and motor vehicle dealers. Conversely,
                some stakeholders encouraged the Bureau not to provide any such
                categorical exemptions. One stakeholder also urged the Bureau not to
                exempt government or nonprofit lenders, arguing that they were an
                important element of achieving broad coverage in 1071 data.
                Proposed Rule--Activity-Based Exemption
                 Proposed Sec. 1002.105(b) would define a covered financial
                institution as a financial institution that originated at least 25
                covered credit transactions for small businesses in each of the two
                preceding calendar years. This proposed definition adopts the portion
                of the Option 1 Exemption Threshold based on number of originations
                discussed at SBREFA, using the two consecutive year approach that was
                also described at SBREFA. The Bureau believes this definition will
                facilitate compliance by describing which financial institutions are
                required to collect and report small business data. The Bureau is also
                proposing commentary to accompany proposed Sec. 1002.105(b). The
                Bureau's
                [[Page 56420]]
                rationale for proposing this exemption, and for not proposing any
                others, is discussed in detail below.
                 In general, the Bureau believes that fulfilling the purposes of
                section 1071 necessitates collecting small business lending data from
                all sizes and types of financial institutions (other than those with a
                low volume of lending activity), particularly given the variety of
                entities identified in ECOA section 704B(h)(1). The Bureau is proposing
                to exempt certain financial institutions from its small business
                lending data collection rule because it remains concerned that
                financial institutions with the lowest volume of small business lending
                might reduce or cease their small business lending activity due to the
                fixed costs of coming into compliance with the 1071 rule. A reduction
                in access to credit would run contrary to the community development
                purpose of section 1071. Section 1071 describes its community
                development purpose as ``enabl[ing] communities, governmental entities,
                and creditors to identify business and community development needs and
                opportunities of women-owned, minority-owned, and small businesses.''
                \470\ In the Bureau's view, such business and community development
                opportunities cannot be appropriately identified if the 1071 rule
                unduly eliminates those opportunities by reducing access to credit,
                which, as explained below, supports the Bureau's use of its exemption
                authority under 704B(g)(2) here. Feedback from SBREFA showed that a
                broad array of financial institutions, trade associations, community
                groups, and others share the Bureau's concern about the risk of
                reducing access to small business credit, particularly with respect to
                financial institutions that infrequently lend to small businesses.
                ---------------------------------------------------------------------------
                 \470\ ECOA section 704B(a).
                ---------------------------------------------------------------------------
                 The Bureau is proposing Sec. 1002.105(b) pursuant to its authority
                under ECOA section 704B(g)(1) to prescribe such rules and issue such
                guidance as may be necessary to carry out, enforce, and compile data
                pursuant to section 1071 and its authority under 704B(g)(2) to adopt
                exceptions to any requirement of section 1071 and, conditionally or
                unconditionally, exempt any financial institution or class of financial
                institutions from the requirements of section 1071, as the Bureau deems
                necessary or appropriate to carry out the purposes of section 1071.
                 The Bureau believes that an activity-based threshold would provide
                a simple basis for financial institutions that infrequently lend to
                small businesses to determine whether they have conducted sufficient
                lending activity as to be required to collect and report data under
                proposed subpart B. With respect to setting an activity-based
                threshold, feedback favored using only originations. SERs uniformly
                supported clear, predictable collection and reporting exemption
                thresholds. With respect to feedback from other stakeholders, nearly
                all of the comments that expressed support for the Option 1 Exemption
                Threshold provided support only for the 25-loan metric, and not the
                total lending metric (and several comments explicitly urged the Bureau
                not to adopt the $2.5 million lending threshold). The Bureau believes
                that furnishing a dual activity-based threshold, under which infrequent
                lenders must ascertain both measurements to determine whether reporting
                may be required, would cut against the goal of simplifying the rule as
                lenders would then have to track two metrics, not one. The Bureau
                believes that a dual threshold would create more regulatory complexity
                as, among other things, the resulting rule would have to address issues
                such as how lines of credit and credit cards are meant to be counted
                towards the dollar volume threshold. (For example, should the rule use
                the maximum amount that could be extended or something else, like an
                average of the amount actually outstanding? If the former, how should
                changes in the limit be treated?) In contrast, tracking total annual
                small business originations does not entail such complexity.
                 In particular, the Bureau believes that a primary advantage of an
                activity-based threshold--ease of compliance--would be undermined if
                the Bureau were to implement a complex, dual threshold eligibility
                test. The Bureau wishes to ensure that infrequent lenders are not
                incurring significant undue compliance costs, particularly while not
                reporting data. In general, tracking two thresholds is more complex
                than tracking one. And of these two thresholds, the Bureau believes
                that tracking total originations is simpler than tracking total
                lending. The Bureau believes it is also more likely that financial
                institutions are already tracking total originations. The Bureau
                believes that proposing an activity-based threshold that employs data
                already generally collected by financial institutions could mitigate
                the risk that section 1071, when implemented, would result in reduced
                access to credit.
                 The Bureau is thus proposing to set the loan-volume threshold at 25
                covered credit transactions from small businesses in each of the past
                two years. This proposal is based, in part, on feedback received at
                SBREFA. As mentioned above, several SERs recommended an annual 25-loan
                threshold and many comments, including those from lenders, trade
                associations, and community groups, expressed support for the Option 1
                Exemption Threshold, with most explicitly supporting just the 25-loan
                threshold and not total lending.
                 The Bureau continues to consider whether this loan-volume threshold
                should be set at a different level, such as 50 or 100 originations, as
                described in the SBREFA Outline.\471\ The Bureau notes that there was
                also substantial support for a much higher loan-volume threshold than
                25 originations. In addition to the SER feedback discussed above,
                several stakeholders advocated for 100 loans and many others advocated
                for an even higher threshold. However, at least to this point, the
                Bureau is not convinced, based on the feedback from SERs and other
                stakeholders, that higher thresholds would be more necessary or
                appropriate to carry out the purposes of section 1071. Rather, such
                advocacy focused either on concerns that lower thresholds would not
                exempt a particular financial institution or type of financial
                institution, such as community banks, or that higher thresholds would
                not substantially diminish overall data collection.
                ---------------------------------------------------------------------------
                 \471\ SBREFA Outline at 12.
                ---------------------------------------------------------------------------
                 Supporters of the 25-loan threshold and supporters of the 100-loan
                threshold each argued that such a threshold would be similar to that
                used in HMDA. The Bureau's 2015 HMDA Rule set the closed-end loan
                threshold
                [[Page 56421]]
                at 25 originated loans for each of the two preceding calendar
                years.\472\ However, in 2020, the Bureau increased the threshold to 100
                closed-end loans, effective the same year.\473\ The Bureau set the HMDA
                threshold pursuant to its authority to provide adjustments or
                exceptions that it judges as necessary and proper to effectuate the
                purposes of HMDA or to facilitate compliance with HMDA. In the present
                case, with respect to institutional coverage thresholds, the Bureau
                does not believe a direct comparison with HMDA is instructive because
                of differences in the relevant statutory authorities and between home
                mortgages and small business loans.
                ---------------------------------------------------------------------------
                 \472\ See 80 FR 66127 (Oct. 28, 2015). The Bureau also provided
                a higher threshold of 100 for open-end lines of credit. Id.
                 \473\ See 85 FR 28364 (May 12, 2020).
                ---------------------------------------------------------------------------
                 The Bureau also considered how its proposed threshold of 25 covered
                credit transactions for small businesses (and the other thresholds
                under consideration at SBREFA) might affect overall collection and
                reporting of 1071 data from banks and credit unions, based on data as
                of 2019. Table 1 below provides the Bureau's estimated share of
                depository institutions, estimated share of small business loans from
                those institutions (measured in total number of loans), and estimated
                share of small business credit from those institutions (measured in
                dollars) that would be covered by a loan-volume threshold of 25, 50, or
                100 small business loans. The Bureau estimates that a depository
                institution is covered for a particular loan-volume threshold as of
                2019 if the estimated number of originations for that institution
                exceeded the threshold in both 2017 and 2018. Given the limitations of
                the source data, the Bureau cautions that these estimates are not
                intended to provide a complete sense of the possible consequences of
                adopting each particular threshold. Nonetheless, the Bureau is
                providing estimates based on these data because it is the best
                information currently available to the Bureau. Moreover, the Bureau
                emphasizes that these estimates apply only to depository institutions.
                This information is based on FFIEC and Credit Union Call Reports, as
                well as Community Reinvestment Act submissions.\474\ Under these data
                collections, banks report small loans made to businesses and farms
                (regardless of the borrower's size). Credit unions report commercial
                loans over $50,000 made to members (also, regardless of the borrower's
                size). The Bureau is unable to determine the degree to which these data
                provide an adequate proxy for the applications from small businesses
                that would be subject to 1071 reporting. The methodologies and
                assumptions used to produce these estimates are further documented in
                part VII.D below and in more detail in its Supplemental estimation
                methodology for institutional coverage and market-level cost estimates
                in the small business lending data collection notice of proposed
                rulemaking released concurrently with this proposal.\475\
                ---------------------------------------------------------------------------
                 \474\ On the bank Call Report and in the Community Reinvestment
                Act data, for small bank and small farm loans, banks report on
                business loans with original amounts of $1 million or less and farm
                loans with original amounts of $500,000 or less. For lines of credit
                or loan commitments, banks report the size of the line of credit or
                commitment when it was most recently approved. Banks include loans
                guaranteed by the SBA and other government entities in their small
                loans to businesses. Banks do not report loans to nonprofit
                organizations in this category. Thus, these data collections would
                include loans made to purchase, for example, individual vehicles and
                pieces of equipment for the nation's largest businesses.
                 \475\ This document is available at https://www.consumerfinance.gov/data-research/research-reports/supplemental-estimation-methodologies-small-business-lending-data-collection-nprm/.
                [GRAPHIC] [TIFF OMITTED] TP08OC21.000
                [[Page 56422]]
                 Table 1 above shows that as the loan-volume threshold rises, the
                estimated share of depository institutions subject to section 1071
                decreases substantially. Likewise, the estimated share of small
                business loans and small business credit captured by the rule would
                also decrease, although those decreases are less pronounced. The Bureau
                has no information for nondepository institutions such that the Bureau
                could provide similar estimates for comment. The Bureau requests in
                response to this proposal such information and data that might bear on
                any activity-based exemption for nondepository
                institutions.476 477 478 
                ---------------------------------------------------------------------------
                 \476\ There were 10,525 depository institutions as of December
                31, 2019, including 112 credit unions that are not federally
                insured.
                 \477\ Based on FFIEC Call Report data, there were 5,177 banks
                and savings associations as of December 31, 2019.
                 \478\ Based on the 2019 NCUA Call Report data, there were 5,348
                credit unions as of December 31, 2019, including 112 credit unions
                that are not federally insured.
                ---------------------------------------------------------------------------
                 The Bureau notes that the above estimates represent small business
                lending data prior to the COVID-19 pandemic and ensuing policy
                responses. The Bureau is keenly aware that many financial institutions,
                including those that may not have historically participated actively in
                small business lending, served their communities by becoming
                participating lenders in the SBA's Paycheck Protection Program. This
                program ended on May 31, 2021. The Bureau expects that by the time its
                1071 rule is finalized and implemented, lending activity conducted
                pursuant to the SBA's Paycheck Protection Program will not be
                determinative of whether a given financial institution qualifies as a
                covered financial institution under the 1071 rule. The Bureau will
                continue to monitor the market and consider what other adjustments, if
                any, may be needed to ensure that, to the best of the Bureau's ability,
                the 1071 rulemaking is informed by up-to-date and accurate information
                about the small business lending market.
                 The Bureau seeks comment on its proposed 25 originations threshold
                incorporated into the definition of a covered financial institution.
                The Bureau also solicits comment on whether this threshold should
                alternatively be set at 50 or 100 covered credit transactions.
                 The Bureau is proposing to define a covered financial institution
                using a loan-volume threshold that must be achieved in each of the two
                preceding calendar years. SERs provided relatively little feedback
                directly on the measurement period, but broadly expressed a desire for
                clear, predictable collection and reporting thresholds. The Bureau
                received substantial feedback advocating for a two-year approach, but
                little feedback asking for a one-year threshold period. A few
                stakeholders also expressed interest in a measurement period longer
                than two years.
                 The Bureau acknowledges that a loan-volume threshold based on a
                two-year period could create some operational complexity for some
                financial institutions. To be sure that it was not a covered financial
                institution, a financial institution would need to maintain records
                sufficient to show total small business originations for both years of
                the threshold period. The Bureau believes that two years is not a
                prohibitively long time, although it is possible that infrequent
                lenders may have smaller staff or fewer resources to reliably track
                such information for 1071 purposes. The Bureau believes that a two-year
                threshold period is advisable to eliminate uncertainty surrounding data
                collection responsibilities. Under this proposal, a financial
                institution that may not frequently lend to small businesses, but that
                experiences an unusual and unexpectedly high lending volume in a single
                year would not be a covered financial institution. As discussed in part
                VII below, in order to comply with the Bureau's proposed 1071 rule, a
                financial institution may need to undertake substantial one-time costs
                that include operational changes, such as staff training, information
                technology changes, and develop policies and procedures. Therefore, the
                Bureau believes that it is appropriate to propose a two-year threshold
                period to provide more stability around reporting responsibilities.
                Regulations that implement HMDA and the Community Reinvestment Act
                provide similar periods to determine coverage.
                 The Bureau notes that employing a two-year approach would delay
                reporting for new, potentially active entrants. For example, under this
                proposal a large lender that enters the market and originates hundreds
                or even thousands of small business loans in its first two calendar
                years of lending would not report its covered applications. That is,
                under the Bureau's proposal, this financial institution would not be
                required to collect and report 1071 data on its covered applications
                for small businesses in those first two years, although the institution
                could choose to voluntarily collect and report data. The Bureau has
                concerns, however, about triggering data collection and reporting
                requirement based on lenders' estimates of their projected future
                volume.
                 The proposed two-year threshold period may pose other
                considerations for financial institutions that conduct small business
                lending activity near the proposed 25 small business originations
                threshold. See the section-by-section analysis of proposed Sec.
                1002.5(a)(4) above for a discussion of proposed Sec.
                1002.5(a)(4)(viii), which would allow a financial institution to
                collect ethnicity, race, and sex information pursuant to proposed
                subpart B for a covered application under certain circumstances during
                the second year of the threshold period. See the section-by-section
                analysis of proposed Sec. 1002.114(c) below for discussion of
                additional flexibility that the Bureau is proposing regarding measuring
                lending activity prior to the rule's compliance date.
                 The Bureau is proposing to set the activity-based threshold based
                on small business originations, rather than applications. The statutory
                language of 1071 generally applies to applications; however, the Bureau
                believes that using small business originations for purposes of
                defining a covered financial institution is the better approach. The
                Bureau expects that financial institutions track their small business
                application volumes in various ways, but whether an origination
                resulted is a clear and readily identifiable metric. The Bureau is
                concerned that attempting to use an exemption metric based on
                applications would impose new obligations on financial institutions
                solely for purposes of determining whether or not they are subject to
                this rule. As discussed above, the Bureau believes that proposing an
                activity-based threshold that employs data already generally collected
                by financial institutions could mitigate the risk that section 1071,
                when implemented, would result in reduced access to credit. In
                addition, even those financial institutions that track total
                applications now may not do so in a way that fully aligns with how the
                Bureau is proposing to define covered applications for purposes of
                proposed subpart B. Using originations is also consistent with the
                Bureau's Regulation C. In addition, the Bureau received limited
                feedback advocating for the use of applications to set the activity-
                based threshold.
                 Proposed comment 105(b)-1 would clarify the meaning of a preceding
                calendar year for purposes of the proposed activity-based exemption.
                See the section-by-section analysis of proposed Sec. 1002.114(c)(2)
                below for additional discussion regarding measuring lending activity
                prior to the rule's compliance date. Proposed
                [[Page 56423]]
                comment 105(b)-2 would emphasize that a financial institution qualifies
                as a covered financial institution based on total covered credit
                transactions originated for small businesses, rather than covered
                applications received from small businesses. Proposed comment 105(b)-3
                would explain that whether a financial institution is a covered
                financial institution depends on its particular small business lending
                activity in the two preceding calendar years, and that the obligations
                of a covered financial institution is an annual consideration for each
                year that data may be compiled and maintained under proposed Sec.
                1002.107(a).
                 The Bureau is proposing to clarify in Sec. 1002.105(b) that for
                purposes of defining a covered financial institution, if more than one
                financial institution was involved in the origination of a covered
                credit transaction, only the financial institution that made the final
                credit decision approving the application shall count the origination.
                The Bureau believes that providing this clarifying language would
                assist financial institutions in understanding which transactions count
                towards the loan-volume threshold. This approach is consistent with the
                Bureau's proposed Sec. 1002.109(a)(3).
                 Proposed comments 105(b)-4 and -5 would explain when a financial
                institution is a covered financial institution following a merger or
                acquisition. These proposed comments are largely consistent with the
                Bureau's approach to reporting obligations surrounding a merger under
                Regulation C,\479\ with modifications to reflect the nature of the
                small business lending market and to provide additional clarifications.
                ---------------------------------------------------------------------------
                 \479\ See Regulation C comments 2(g)-3 and -4.
                ---------------------------------------------------------------------------
                 Proposed comment 105(b)-6 would clarify that Regulation B
                (including proposed subpart B) generally does not apply to lending
                activities that occur outside the United States.
                 Finally, proposed comment 105(b)-7 would address financial
                institutions that do not qualify as covered financial institutions but
                may nonetheless wish to voluntarily collect and report small business
                lending data. This proposed comment would reiterate that proposed Sec.
                1002.5(a)(4)(vii) through (ix) permits a creditor that is not a covered
                financial institution under proposed Sec. 1002.105(b) to voluntarily
                collect and report information regarding covered applications in
                certain circumstances. If a creditor is voluntarily collecting
                applicants' protected demographic information for covered applications,
                it shall do so in compliance with proposed Sec. Sec. 1002.107,
                1002.108, 1002.111, 1002.112, and 1002.114 as though it were a covered
                financial institution. Proposed comment 105(b)-7 would further state
                that if a creditor is voluntarily reporting those covered applications
                to the Bureau, it shall do so in compliance with proposed Sec. Sec.
                1002.109 and 1002.110 as though it were a covered financial
                institution.
                 The Bureau seeks comment on its proposed definition of a covered
                financial institution, which uses a loan-volume threshold of 25 covered
                credit transactions from small businesses. The Bureau continues to
                consider whether this loan-volume threshold should be changed to a
                different threshold, such as 50 or 100 originations from small
                businesses, and seeks feedback and data related to any of these three
                potential thresholds. In addition, the Bureau seeks comment on whether
                an activity-based threshold should be based on the total number of
                small business applications, rather than originations. The Bureau also
                requests comment on whether additional clarification is needed for this
                proposed definition.
                Alternatives Considered--Size-Based Exemption and Combined Exemptions
                 The Bureau is not proposing to define a covered financial
                institution on the basis of the size of the financial institution, as
                measured by total assets for depository institutions or some other
                metric. Likewise, the Bureau is not proposing to define a covered
                financial institution with reference to the financial institution's
                size in combination with its small business lending activity.
                 For the reasons discussed above, the Bureau believes that proposing
                an exemption based on a financial institution's recent small business
                lending activity would be appropriate to carry out the purposes of
                section 1071. The Bureau believes that in comparison to a size-based
                exemption, an activity-based exemption is a more compelling basis for
                exempting certain financial institutions from coverage in light of
                section 1071's community development purpose. As previously stated, the
                Bureau is concerned that certain financial institutions might reduce or
                cease their small business lending activity because of the fixed costs
                of coming into compliance with this rule, and that a reduction in
                access to credit would run contrary to the community development
                purpose of section 1071. However, the Bureau is persuaded that small
                business lending activity holds a more direct relationship to a given
                financial institution's role in the small business lending market than
                a more general measurement of the financial institution's size as
                measured in total assets. Using a size-based metric would present a
                much rougher proxy for the risk that a financial institution may reduce
                or eliminate its small business lending activities as a result of the
                one-time costs of coming into compliance with this rule.
                 The Bureau also believes that proposing an activity-based exemption
                is a superior approach to proposing a size-based exemption because an
                exemption based on asset size would apply only to depository
                institutions. The Bureau is unaware of a similar size metric for
                nondepository institutions, and SERs and other stakeholders who
                provided feedback on the SBREFA Outline were not able to offer one. A
                size-based exemption approach might therefore risk distorting the
                collected data and create an uneven playing field. As noted above,
                other stakeholders explained that because there was no readily
                available equivalent size-based measurement for nondepository
                institutions, including an asset-based exemption might risk presenting
                a cost disadvantage for other small financial institutions. Moreover,
                exempting proportionately more depository institutions than
                nondepository institutions may present demographic data collection
                concerns. A recent small business credit survey revealed racial
                disparities in applications under the SBA's Paycheck Protection
                Program: the data showed white-owned firms were most likely to apply
                for a loan through a small bank (defined as under $10 billion in
                assets), while Black-owned firms were three times as likely as white-
                owned firms to apply for a loan through an online lender.\480\ The
                Bureau is concerned that collecting data under different standards for
                depository institutions versus nondepository institutions would run
                contrary to the purposes of section 1071 and undermine the utility of
                the data, as well as the purposes of the Bureau, which are, in part,
                ``to implement and, where applicable, enforce . . . consistently''
                Federal laws including ECOA.\481\
                ---------------------------------------------------------------------------
                 \480\ Small Business Credit Survey of Firms Owned by People of
                Color at 14.
                 \481\ 12 U.S.C. 5511(a).
                ---------------------------------------------------------------------------
                 The Bureau also considered whether proposing a size-based
                exemption, on the basis of total assets for depository institutions,
                would be appropriate in combination with the above-discussed activity-
                based exemption. The Bureau is not persuaded that proposing such an
                additional exemption would be necessary or appropriate to carry out the
                [[Page 56424]]
                purposes of section 1071. In particular, the Bureau considered two
                types of depository institutions that might be exempt by virtue of a
                size-based exemption:
                 An Active Small Depository Institution (ASDI), meaning any
                depository institution smaller than a particular asset size that lends
                at or above a given activity-based threshold, and
                 An Inactive Small Depository Institution (ISDI), meaning
                any depository institution smaller than a particular asset size that
                lends below a given activity-based threshold.
                 In examining the case for ASDIs and ISDIs, the Bureau believes that
                an additional, asset-based exemption may provide a slightly less costly
                means of ascertaining exemption status for a small number of ISDIs, but
                such an exemption would eliminate small business lending data from a
                moderate share of ASDIs that would otherwise provide valuable data in
                fulfilling both of section 1071's purposes.
                 Using the same data that were compiled for the activity-based
                exemption analysis, the Bureau estimates that under its proposed 25
                originations threshold approximately 6,300 to 6,500 depository
                institutions would not be covered financial institutions, and therefore
                would be exempt from collection and reporting. The Bureau further
                estimates that proposing an asset-based exemption of $200 million would
                result in approximately 1,300 to 1,500 additional depository
                institutions not reporting (all of which, by definition, are ASDIs),
                while 5,200 to 5,400 depository institutions would already have been
                exempt, but have a somewhat lower-cost method of ascertaining this
                information (e.g., ISDIs).\482\
                ---------------------------------------------------------------------------
                 \482\ For the purposes of this analysis, the Bureau assumes that
                the alternative proposal would have been that a depository
                institution would be required to report its small business lending
                activity for 2019 if it had more originations than the loan-volume
                threshold in 2017 and 2018 and had assets over the asset-based
                threshold on December 31, 2018. The Bureau further assumes that if
                two institutions merged in 2019 then the resulting institution would
                be required to report if the sum of the separate institutions'
                assets on December 31, 2018 exceeded the asset-based threshold. Of
                the 10,525 depository institutions that existed at the end of 2019,
                6,687 either didn't exist at the end of 2018 or had merger adjusted
                assets below $200 million.
                ---------------------------------------------------------------------------
                 Table 2 below indicates the estimated number of ASDIs that would
                report under various loan-volume thresholds, by asset size. As shown in
                Table 2, if the Bureau proposed an asset-based exemption of $100
                million in addition to the proposed activity-based exemption of 25
                originated covered credit transactions for small businesses, 500 to 592
                more depository institutions would not be covered financial
                institutions, although these institutions originated more than 25
                covered credit transactions for small businesses in each of the
                previous two years. Likewise, if the Bureau proposed an asset-based
                exemption of $200 million in addition to the proposed 25-originations
                activity-based exemption, 1,299 to 1,466 more depository institutions
                would not be covered financial institutions, although these
                institutions originated more than 25 covered credit transactions for
                small businesses in each of the previous two years.
                [GRAPHIC] [TIFF OMITTED] TP08OC21.001
                 Of the estimated 5,200 to 5,400 ISDIs, as defined by a 25
                originations threshold and $200 million asset threshold, about 4,200
                are credit unions and about 1,000 or 1,200 are banks. Furthermore, the
                vast majority of these ISDI credit unions (88 percent) had either no
                small business originations in 2017 and 2018 or fewer than 10 small
                business originations in 2017 and 2018 (97 percent).\483\ The Bureau
                believes that it is likely that these institutions would be able to
                determine that they do not meet a loan-volume threshold almost as
                easily as they can determine that they do not meet an asset-based
                threshold. Only 34 credit unions with assets below $200 million had
                between 10 and 25 small business originations in both 2017 and 2018.
                The Bureau estimates that as many as 1,200 banks and 34 credit unions
                would benefit from a simpler method of determining exemption status.
                However, as stated above, the Bureau believes that such cost savings
                likely would still be minimal.
                ---------------------------------------------------------------------------
                 \483\ However, it is possible that these credit unions have
                originated loans to small businesses with values below $50,000.
                Credit unions report commercial loans over $50,000 made to members
                (regardless of the borrower's size).
                ---------------------------------------------------------------------------
                 The Bureau therefore believes that providing an additional, asset-
                based exemption might provide a somewhat less costly means of
                ascertaining exemption status for some ISDIs, although this number may
                be relatively modest. However, the tradeoff of providing a simpler
                exemption for some depository institutions is that a $200 million
                asset-based exemption would increase the overall percent of exempt
                depository institutions by some 13 percentage points by also extending
                to ASDIs. The Bureau estimates that these ASDIs accounted for between
                171,000 and 226,000 originations in 2019, or about 2 percent of total
                covered originations under the 25 originations threshold. Exempting
                additional depository institutions by adding an asset-based exemption
                would curtail
                [[Page 56425]]
                both the volume of and possible variety of data, and the Bureau is
                concerned that exempting ASDIs would detract from the utility of 1071
                data in carrying out the purposes of section 1071 by removing important
                data from disclosure and review.
                 The Bureau also considered feedback from SERs and other
                stakeholders who suggested that the Bureau exempt lenders other than
                ``large'' financial institutions, such as depository institutions with
                more than $1 billion in assets, and then potentially extend the rule to
                smaller lenders at a later time. These SERs and stakeholders argued
                that this approach would capture the vast majority of small business
                loans while avoiding imposing undue regulatory burden on smaller
                lenders, who might be less capable of absorbing such costs. However,
                the Bureau is not currently persuaded that capturing lending data only
                from large financial institutions would be necessary or appropriate to
                carry out section 1071's statutory purposes.
                 Supporters of collecting data only from large depository
                institutions argue that such depository institutions may be more
                capable of absorbing compliance costs. However, the Bureau is concerned
                that data collection from only large depository institutions may not
                provide adequate data for community development purposes, as there may
                be demographic disparities among applications by the type (and size) of
                financial institution. Likewise, data collection from only large
                depository institutions would not allow the Bureau to conduct fair
                lending analyses for other types of financial institutions. In general,
                the Bureau believes that appropriately carrying out the purposes of
                section 1071 necessitates collecting small business lending data from
                all sizes and types of financial institutions (other than those with
                the lowest volume of lending activity), particularly given the variety
                of entities identified in section 704B(h)(1), discussed above. See the
                section-by-section analysis of proposed Sec. 1002.114 below, however,
                for further discussion of a possible tiered compliance date based on
                the size of the financial institution.
                 Therefore, for the reasons described above, Bureau is not proposing
                an asset-based exemption to the definition of a covered financial
                institution.
                Alternative Considered--Other Exemptions
                 The Bureau is not proposing to adopt alternative exemptions or
                exceptions to the definition of covered financial institution, other
                than the loan-volume threshold as described above.
                 As discussed above, the Bureau believes that, in light of the text
                and purposes of section 1071, the Bureau should generally adopt the
                posture that all manner of small business lenders should be subject to
                reporting. Feedback from SERs and others generally did not provide
                compelling policy reasons or legal arguments for exempting entire
                classes of financial institutions. Moreover, the Bureau believes that
                most policy arguments that were raised in this context are better
                addressed through potential activity-based considerations.
                 With respect to government lenders, the Bureau has not identified,
                nor did SERs or other stakeholders provide, policy or legal rationales
                for excluding government lenders from data collection. To the contrary,
                a few SERs, particularly CDFIs, strongly preferred that all lenders,
                including government entities, be subject to section 1071 data
                collection and reporting requirements; one stakeholder likewise urged
                the Bureau not to exempt government lenders. The Bureau believes that
                collecting information on small business lending by government entities
                furthers the purposes of section 1071. Moreover, the Bureau believes,
                as described above in the discussion of proposed comment 105(a)-1, that
                government entities are included within the phrase ``other entity'' in
                the ECOA section 704B(h)(1) definition of ``financial institution.''
                For example, the Bureau believes that it will be helpful to identify
                the business and community development needs of women-owned, minority-
                owned, and small businesses by collecting lending data from both an
                online lender and a county-run assistance program for establishing new
                businesses.
                 For the same reasons, the Bureau does not believe that exempting
                not-for-profit lenders from data collection is consistent with the
                purposes of section 1071. The Bureau believes that organizations exempt
                from taxation pursuant to 26 U.S.C. 501(c) play a crucial role in
                lending to small businesses, particularly those that are women- or
                minority-owned, in certain communities.
                 Those providing feedback generally argued for categorical
                exemptions because, they said, certain financial institutions (1) would
                encounter difficulty absorbing compliance costs; (2) are integral to a
                community's lending needs; and/or (3) employ business methods or offer
                products not conducive to data collection and reporting. With respect
                to compliance costs, the Bureau believes that directly considering a
                financial institution's activity is a more appropriate way to address
                this concern. With respect to a financial institution's lending
                importance for a community or region (such as low income or rural), the
                Bureau believes that such arguments emphasize the importance of
                collecting and analyzing such data to further the purposes of section
                1071 rather than justify an exemption. Finally, with respect to
                considering the particularities of certain business models, the Bureau
                is persuaded that it can most appropriately address such concerns by
                considering potentially modified reporting rules for particular
                business models and specific products. See the section-by-section
                analyses of proposed Sec. Sec. 1002.104(b) and 1002.109(a)(3). The
                Bureau is proposing comment 105(a)-1, discussed above, consistent with
                the considerations discussed here.
                 Therefore, for the reasons described above, the Bureau is not
                proposing to define a covered financial institution by providing
                alternative exemptions or exceptions. The Bureau seeks comment on this
                approach, including data or information that might bear upon any such
                alternative exemptions in light of section 1071's purposes.
                Section 1002.106 Business and Small Business
                 ECOA section 704B(h)(2) defines the term ``small business'' as
                having the same meaning as ``small business concern'' in section 3 of
                the Small Business Act.\484\ The Bureau is proposing to define a small
                business consistent with the statutory language. In particular, the
                Bureau is proposing to define a small business concern to have the same
                meaning as the term ``small business concern'' in 15 U.S.C. 632(a), as
                implemented by 13 CFR 121.101 through 121.107. Notwithstanding the size
                standards set forth in 13 CFR 121.201, for purposes of proposed subpart
                B, the Bureau is proposing that a business is a small business if and
                only if its gross annual revenue for its preceding fiscal year is $5
                million or less. The Bureau is seeking SBA approval for this alternate
                small business size standard pursuant to the Small Business Act.\485\
                ---------------------------------------------------------------------------
                 \484\ 15 U.S.C. 632.
                 \485\ 15 U.S.C. 632(a)(2)(C).
                ---------------------------------------------------------------------------
                 The Bureau believes it may be instructive for financial
                institutions to first consider whether an applicant may be a business
                under proposed Sec. 1002.106(a), and then to consider, if the
                applicant is a business, whether the business is small under Sec.
                1002.106(b). Furthermore, the Bureau believes that these proposed
                definitions implement the statutory language of section 1071
                [[Page 56426]]
                while reflecting the need for a wide variety of financial institutions
                to apply a simple, broad definition of a small business that would be
                practical across the many product types, application types, technology
                platforms, and applicants in the market.
                 For the reasons set forth below, the Bureau is proposing Sec.
                1002.106 to implement ECOA section 704B(h)(2) and pursuant to its
                authority under ECOA section 704B(g)(1) to prescribe such rules and
                issue such guidance as may be necessary to carry out, enforce, and
                compile data under section 1071.
                106(a) Business
                Background
                 ECOA section 704B(h)(2) defines the term ``small business'' as
                having the same meaning as ``small business concern'' in section 3 of
                the Small Business Act.\486\ The Small Business Act provides a general
                definition of a ``small business concern,'' authorizes SBA to establish
                detailed size standards for use by all agencies, and permits an agency
                to request SBA approval for a size standard specific to an agency's
                program. The SBA's regulations define a ``business concern'' as ``a
                business entity organized for profit, with a place of business located
                in the United States, and which operates primarily within the United
                States or which makes a significant contribution to the U.S. economy
                through payment of taxes or use of American products, materials or
                labor.'' \487\
                ---------------------------------------------------------------------------
                 \486\ 15 U.S.C. 632.
                 \487\ 13 CFR 121.105.
                ---------------------------------------------------------------------------
                SBREFA Proposals Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated it was considering
                proposing to define ``small business'' by cross-referencing the SBA's
                general definition of ``small business concern'' but adopting a
                simplified size standard for purposes of its section 1071 rule.\488\
                Thus, the Bureau explained that it was considering a proposal under
                which financial institutions would not be required to collect and
                report 1071 data for not-for-profit applicants, because they are not
                ``organized for profit'' and are thus not a ``business concern.'' The
                Bureau explained that a business concern may take a number of different
                legal forms, including a sole proprietorship, partnership, LLC,
                corporation, joint venture, trust, or cooperative.\489\ The Bureau
                explained that, because the definition is limited to American
                businesses, if the Bureau adopted this definition for purposes of 1071,
                loans to foreign companies would be outside the scope of 1071 data
                collection and reporting requirements.
                ---------------------------------------------------------------------------
                 \488\ SBREFA Outline at 14-18.
                 \489\ 13 CFR 121.105(b).
                ---------------------------------------------------------------------------
                 Feedback from stakeholders regarding the proposal under
                consideration focused primarily on how the Bureau might define a
                business size standard, addressed below.\490\ The Bureau did receive
                limited feedback, however, suggesting that the Bureau consider certain
                modifications or adjustments to the definition of a business concern,
                such as clarifying that the term does not include foreign-owned
                entities, certain trusts, and certain real estate holding companies.
                ---------------------------------------------------------------------------
                 \490\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 20-22.
                ---------------------------------------------------------------------------
                Proposed Rule
                 Proposed Sec. 1002.106(a) would define a business as having the
                same meaning as the term ``business concern or concern'' in 13 CFR
                121.105. This proposed definition is consistent with ECOA section
                704B(h)(2), which defines the term ``small business'' as having the
                same meaning as ``small business concern'' in section 3 of the Small
                Business Act.\491\ The SBA has issued 13 CFR 121.105, ``How does SBA
                define `business concern or concern,''' pursuant to the Small Business
                Act. The Bureau refers to the entirety of that section for additional
                information. In particular, the Bureau notes that this definition
                includes elements such as being ``a business entity organized for
                profit'' that has ``a place of business located in the United States''
                and ``operates primarily within the United States or . . . makes a
                significant contribution to the U.S. economy.'' \492\
                ---------------------------------------------------------------------------
                 \491\ 15 U.S.C. 632.
                 \492\ 13 CFR 121.105(a)(1).
                ---------------------------------------------------------------------------
                 The Bureau is not providing interpretations of this SBA regulation
                in proposed subpart B because the Bureau believes that existing SBA
                interpretations are responsive to the general questions posed at
                SBREFA.\493\
                ---------------------------------------------------------------------------
                 \493\ See, e.g., 13 CFR 121.105(b), which states that a business
                concern may be in the legal form of an individual proprietorship,
                partnership, limited liability company, corporation, joint venture,
                association, trust or cooperative, except that where the form is a
                joint venture there can be no more than 49 percent participation by
                foreign business entities in the joint venture. Thus, for example,
                financial institutions would not be required to collect and report
                data under proposed subpart B for not-for-profit applicants, because
                they are not ``organized for profit'' and are thus not a ``business
                concern.''
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on this proposed definition of a business,
                and generally seeks comment on whether additional clarification is
                needed.
                106(b) Small Business
                Background
                 Section 1071 data collection purposes, requirements, and potential
                impacts. A key component of the Bureau's fair lending work under the
                Dodd-Frank Act is to ensure fair, equitable, and nondiscriminatory
                access to credit for both individuals and their communities.\494\
                Section 1071 of the Dodd-Frank Act, which amended ECOA, requires
                financial institutions to collect and report to the Bureau data
                regarding applications for credit for women-owned, minority-owned, and
                small businesses. ECOA section 704B(h)(2) states that ``[t]he term
                `small business' has the same meaning as the term `small business
                concern' in section 3 of the Small Business Act (15 U.S.C. 632).''
                Section 1071 was adopted for the dual statutory purposes of
                facilitating fair lending enforcement and enabling communities,
                governmental entities, and creditors to identify business and community
                development needs and opportunities of women-owned, minority-owned, and
                small businesses.\495\
                ---------------------------------------------------------------------------
                 \494\ See 12 U.S.C. 5493(c)(2)(A).
                 \495\ ECOA section 704B(a).
                ---------------------------------------------------------------------------
                 As set forth in section 1071, the data that financial institutions
                would be required to collect and report to the Bureau include, among
                other things, the gross annual revenue of the business in the preceding
                fiscal year, the type and purpose of the loan, the census tract for the
                applicant's principal place of business, and the race, sex, and
                ethnicity of the principal owners of the business.\496\ ECOA section
                704B(f)(2)(C) further provides that information compiled and maintained
                under the statute shall be ``annually made available to the public
                generally by the Bureau, in such form and in such manner as is
                determined by the Bureau, by regulation.'' The Bureau believes that the
                collection and subsequent publication of robust and granular data
                pursuant to section 1071 regarding credit applications for small
                businesses, including those that are women- and minority-owned, will
                provide much-needed transparency to an otherwise opaque market and
                better ensure fair, equitable, and nondiscriminatory access to credit.
                ---------------------------------------------------------------------------
                 \496\ ECOA section 704B(e)(2).
                ---------------------------------------------------------------------------
                 The Bureau understands that access to fair, equitable, and
                nondiscriminatory credit is crucial to the success of small businesses.
                Small businesses--including women-owned and minority-owned small
                businesses--need access to credit to smooth out business cash flows
                [[Page 56427]]
                and to enable entrepreneurial investments that take advantage of, and
                sustain, opportunities for growth. The market these businesses turn to
                for credit is vast, varied, and complex. Overall, small businesses have
                many options when it comes to financing, including a wide range of
                products and providers. Yet market-wide data on credit to small
                businesses remains very limited, particularly with respect to
                applicants' protected demographic information at the core of section
                1071. The Bureau believes that a section 1071 rulemaking would provide
                data that could serve as a significant resource for financial
                institutions, community groups, policy makers, and small businesses.
                 SBA size standards. The Small Business Act permits the Small
                Business Administrator to prescribe detailed size standards by which a
                business concern may be categorized as a small business, which may be
                based on the number of employees, dollar volume of business, net worth,
                net income, a combination of these, or other appropriate factors.\497\
                ---------------------------------------------------------------------------
                 \497\ 15 U.S.C. 632(a)(2)(A) and (B).
                ---------------------------------------------------------------------------
                 As implemented by the SBA, these size standards generally hinge on
                average annual receipts or the average number of employees of the
                business concern and are customized industry-by-industry across 1,057
                6-digit NAICS codes. Specifically, the SBA typically uses two primary
                measures of business size for size standards purposes: (i) Average
                annual gross receipts \498\ for businesses in services, retail trade,
                agricultural, and construction industries, and (ii) average number of
                employees for businesses in all manufacturing, most mining and
                utilities industries, and some transportation, information and research
                and development industries. To measure business size, the SBA also uses
                financial assets for certain financial industries, and for the
                petroleum refining industry, it uses refining capacity and employees.
                The SBA's size standards are used to establish eligibility for a
                variety of Federal small business assistance programs, including for
                Federal government contracting and business development programs
                designed to assist small businesses in obtaining Federal contracts and
                for SBA's loan guarantee programs, which provide access to capital for
                small businesses that are unable to qualify for and receive
                conventional loans elsewhere. Under the Small Business Jobs Act of 2010
                (Small Business Act),\499\ the SBA is required to review all size
                standards no less frequently than once every five years.\500\ The Small
                Business Act further provides that no Federal agency may prescribe a
                size standard for categorizing a business concern as a small business
                concern unless certain conditions are met, including approval by the
                SBA's Administrator.\501\
                ---------------------------------------------------------------------------
                 \498\ The SBA recently changed its regulations on the
                calculation of average annual receipts for all of SBA's receipts-
                based size standards, and for other agencies' proposed receipts-
                based size standards, from a three-year averaging period to a five-
                year averaging period, outside of the SBA Business Loan and Disaster
                Loan Programs. 84 FR 66561 (Dec. 5, 2019).
                 \499\ Public Law 111-240, 124 Stat. 2504 (2010).
                 \500\ 15 U.S.C. 632 note.
                 \501\ 15 U.S.C. 632(a)(2)(C).
                ---------------------------------------------------------------------------
                 The SBA's rule governing its consideration of other agencies'
                requests for approval of alternate size standards requires that the
                agency seeking to adopt an alternate size standard consult in writing
                with the SBA's Division Chief for the Office of Size Standards in
                advance of issuing an NPRM containing the proposed alternate size
                standard.\502\ The Bureau has met this requirement. After issuing an
                NPRM, the agency must provide a copy of the published NPRM to the
                Division Chief for the Office of Size Standards, and the agency cannot
                adopt a final rule including its alternate size standard until the size
                standard has been approved by the SBA's Administrator.\503\
                ---------------------------------------------------------------------------
                 \502\ 13 CFR 121.903(a)(2).
                 \503\ 13 CFR 121.903(a)(5).
                ---------------------------------------------------------------------------
                 Market considerations. A wide variety of financial institutions,
                with varying levels of sophistication and experience, extend credit to
                small businesses. As proposed, section 1071 applies to abroad range of
                financial institutions. Banks and credit unions that serve a breadth of
                customers typically organize their commercial lending operations into
                segments based on a combination of risk, underwriting, product
                offering, and customer management factors that are appropriate to each
                segment. The three most frequent organizational groupings are retail/
                small business, middle market, and large corporate banking. Commercial
                customers are generally assigned based on their revenue potential and
                aggregate credit exposure, with smaller accounts assigned to the
                retail/small business banking area. The overwhelming preponderance of
                small businesses are generally found in the retail/small business
                banking group, which may also conduct consumer banking.
                 Today, the distinguishing characteristic that many larger financial
                institutions (principally banks with $10 billion or more in assets) use
                to assign small businesses into the retail/small business banking group
                is gross annual revenue. While cut-offs vary by financial institution,
                the most common demarcations categorize small/retail customers as those
                below $5 million, or up to $10 million, in gross annual revenue. The
                maximum amount of a retail/small business banking term loan or credit
                line is typically $5 million or less.
                 Financial institutions that do not conduct SBA lending generally do
                not collect or consider the number of employees of a small business
                applying for credit, but they often capture gross annual revenue
                information, including for regulatory compliance purposes.
                Specifically, retail/small business lenders routinely collect
                applicants' gross annual revenue information because notification
                requirements under existing Regulation B vary for business credit
                applicants depending on whether or not they ``had gross revenues of $1
                million or less in [their] preceding fiscal year.'' \504\ For a
                business applicant with gross annual revenues of $1 million or less, a
                creditor must provide a notification following an adverse action, such
                as a credit denial, that is generally similar to that provided to a
                consumer in both substance and timing.\505\ As a result, small business
                lenders often adopt compliance management systems similar to those
                found among consumer lenders.
                ---------------------------------------------------------------------------
                 \504\ 12 CFR 1002.9(a)(3)(i).
                 \505\ Id. The notification requirements for applicants with
                gross annual revenues in excess of $1 million are generally more
                flexible in substance and also do not impose a firm deadline for
                provision of a Regulation B notification. 12 CFR 1002.9(a)(3)(ii).
                ---------------------------------------------------------------------------
                 The Bureau believes it is important for a financial institution to
                be able to quickly determine at the beginning of the application
                process whether an applicant is a ``small business'' for purposes of
                the 1071 rule. Financial institutions generally cannot inquire about an
                applicant's protected demographic information (including the race, sex,
                and ethnicity of an applicant's principal owners) without being legally
                required to do so.\506\ As discussed in the Overview of this part V,
                this proposal will only require (and thus only permit) such inquiries
                for small businesses. While the Bureau is proposing to allow financial
                institutions flexibility in when they seek this protected demographic
                information, the Bureau believes that financial institutions generally
                have the best chance of obtaining it, and supporting the purposes of
                section 1071, if they ask for it in the earlier stages of the
                application process. As a result, a
                [[Page 56428]]
                financial institution may need to know, even before the application is
                initiated, which application path the applicant must follow--a 1071-
                governed or a non-1071-governed application path.
                ---------------------------------------------------------------------------
                 \506\ See 12 CFR 1002.5(a).
                ---------------------------------------------------------------------------
                 Early feedback. From very early on in its discussions with
                stakeholders regarding section 1071, the Bureau has received feedback
                focused primarily on how the Bureau might define a business size
                standard. For example, in response to the Bureau's 2017 RFI, many
                stakeholders expressed concern about the difficulties in determining
                the appropriate NAICS code for businesses and in applying the NAICS-
                based standards in determining whether a business loan applicant is a
                small business. Commenters who addressed the issue of a small business
                definition were universally in favor of the Bureau adopting something
                less complex than the SBA's size standards based on 6-digit NAICS
                codes. Commenters noted that the use of these standards is relatively
                complex and would introduce burdens for the 1071 rule with limited
                benefit. There was broad support in this particular context for a
                simpler definition of small business, particularly echoing the 2017
                RFI's mention of gross annual revenue as a threshold delineation
                defining a small business. In addition to revenue, number of employees,
                loan amount, total exposure of the business, or some combination of
                those factors were also mentioned as possible bases for alternate size
                standards. While community groups supported a simpler definition, some
                cautioned that whatever definition the Bureau chooses must cover most
                small businesses in order to comport with congressional intent.
                SBREFA Proposals Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated that it believed that
                using a simpler, more straightforward approach to the size standard
                aspect of the ``small business'' definition was a better approach for
                purposes of its 1071 rule.\507\ The Bureau further stated that such an
                approach would assist both financial institutions and applicants
                seeking to quickly understand whether a business is ``small'' and to
                employ a workable size standard for small business data collection
                without navigating the potential complexities of determining the
                appropriate 6-digit NAICS code, and then the relevant size standard
                based on that NAICS code, for each applicant.
                ---------------------------------------------------------------------------
                 \507\ SBREFA Outline at 16.
                ---------------------------------------------------------------------------
                 The Bureau stated in the SBREFA Outline that it was considering
                three alternative approaches to determining whether an applicant
                business is small.\508\ These three approaches, described in more
                detail below, would have used: (1) Only gross annual revenue (``SBREFA
                First Alternative Approach''); (2) either the number of employees or
                average annual receipts/gross annual revenue, depending on whether the
                business is engaged in either manufacturing/wholesale or services
                (``SBREFA Second Alternative Approach''); or (3) size standards across
                13 industry groups that correspond to 2-digit NAICS code industry
                groupings (``SBREFA Third Alternative Approach'').
                ---------------------------------------------------------------------------
                 \508\ Id.
                ---------------------------------------------------------------------------
                 Under the SBREFA First Alternative Approach, the Bureau considered
                proposing a size standard using the gross annual revenue of the
                applicant business in the prior year, with a potential ``small''
                threshold of $1 million or $5 million.
                 Under the SBREFA Second Alternative Approach, the Bureau considered
                proposing a size standard of a maximum of 500 employees for
                manufacturing and wholesale industries and a maximum of $8 million in
                gross annual revenue for all other industries. The Bureau selected 500
                employees as a potential threshold for manufacturing and wholesale
                industries because that figure is the most common of the SBA's
                employee-based size standards. The Bureau selected $8 million for all
                other industries because that figure is the most common size standard
                threshold for average annual receipts. The Bureau stated that it was
                considering using gross annual revenue, rather than the SBA's average
                annual receipts, for consistency with the 1071 statutorily required
                gross annual revenue data point.
                 Under the SBREFA Third Alternative Approach, the Bureau considered
                proposing a size standard using gross annual revenue or the number of
                employees based on a size standard in each of 13 2-digit NAICS code
                categories that applies to the largest number of firms within each 2-
                digit NAICS code category.\509\ Applying the SBA's 2019 size standards,
                the third alternative would result in eight different size standards
                across the 13 categories.
                ---------------------------------------------------------------------------
                 \509\ Specifically, under this approach, the Bureau first
                considered the total number of employer firms in each NAICS 6-digit
                industry, based on U.S. Census Bureau data. U.S. Census Bureau, 2017
                Statistics of U.S. Businesses (2017), https://www.census.gov/data/datasets/2017/econ/susb/2017-susb.html. Next, within each NAICS 2-
                digit industry, the Bureau determined how many unique size standards
                are applied within that 2-digit industry and the total number of
                employer firms to which each unique standard is applied. The
                simplified standard for each NAICS 2-digit industry is the one that
                applies to the largest number of firms within that industry.
                ---------------------------------------------------------------------------
                 The Bureau stated it was not planning to propose requiring that
                financial institutions verify information provided by applicants
                necessary for determining whether an applicant is small, regardless of
                the Bureau's approach to a small business size standard. Rather, the
                Bureau was considering proposing that a financial institution would
                generally report the information as provided by the applicant. However,
                if the financial institution verifies such information for its own
                purposes, it would report the verified information to the Bureau.
                 SERs generally preferred a simple small business definition and
                expressed concern that the SBA's approach to defining a small
                business--which bases classification on an applicant's 6-digit NAICS
                code--is relatively complex. The Bureau discusses the concerns with
                respect to the potential complexity of gathering NAICS codes in the
                section-by-section analysis of proposed Sec. 1002.107(a)(15) below,
                and the Bureau discusses the concerns with respect to the potential
                complexity using NAICS codes to determine small business status below.
                 Nearly all SERs expressed some familiarity with the SBA's small
                business definition. More than half the SERs currently gather an
                applicant's NAICS code as a routine part of the application process,
                because NAICS codes are used for SBA loans and for CDFI Fund reporting.
                One SER also uses this information for tracking the concentration of
                its loans across certain industries. Some SERs gather NAICS codes from
                applicants' tax documents or business credit reports and others rely on
                information provided directly by the applicants; these SERs emphasized
                the importance of permitting reliance on applicant self-reported data.
                 One SER remarked that it would be critical for the purposes of
                section 1071 to have sectoral industry information about applicants in
                some form, such as NAICS codes, in order to ensure meaningful data. The
                Bureau discusses the independent value of NAICS codes, and related
                comments from SERs regarding certain difficulties and challenges
                surrounding collecting NAICS codes from applicants, in the section-by-
                section analysis of proposed Sec. 1002.107(a)(15) below. Another SER
                expressly opposed using NAICS codes to determine whether an applicant
                is a small business for purposes of section 1071. A few SERs stated
                that they did not think it would be particularly costly to collect
                NAICS codes for all of their small business loans, and one SER
                described the SBA's classification
                [[Page 56429]]
                approach as precise and not very burdensome.
                 Some SERs supported the SBREFA First Alternative Approach for
                defining a small business, which would use an applicant's gross annual
                revenue with a potential ``small'' threshold of $1 million or $5
                million. Several SERs were supportive of this simple approach but
                thought the potential threshold should be higher. For most SERs, nearly
                all their small business customers had less than $5 million in gross
                annual revenue; most are under $1 million. Several SERs remarked that a
                $1 million gross annual revenue threshold would be too low, noting that
                it would exclude many businesses defined by SBA regulations as
                ``small''; some of these SERs said that a $5 million gross annual
                revenue threshold would be acceptable. Some SERs advocated for higher
                revenue thresholds, such as $8 million or $10 million. One SER
                cautioned that a small business definition based only on gross annual
                revenue would not account for regional variations in business size. One
                SER specifically suggested that the Bureau align its small business
                definition with the $1 million standard used by certain supervisory
                agencies for CRA reporting (which requires the reporting of loans in
                original amounts of $1 million or less to businesses and, if known,
                identification of whether the business's gross annual revenue is $1
                million or less). However, this SER also supported other versions of
                the SBREFA First Alternative Approach and SBREFA Second Alternative
                Approach if the Bureau did not adopt the CRA approach. Relatedly, there
                were some concerns about capturing revenue information from small
                businesses. Some SERs do not collect these data now, or do not do so
                across all lending products. SERs also expressed a concern that some
                applicants likely would not know their gross annual revenue as a
                precise dollar amount. See the section-by-section analysis of proposed
                Sec. 1002.107(a)(14) below for a discussion of the gross annual
                revenue data point.
                 Some SERs supported the Bureau's SBREFA Second Alternative
                Approach, which would distinguish between applicants in manufacturing
                and wholesale industries (500 employees) and all other industries ($8
                million in gross annual revenue). These SERs stated that while this
                approach was still relatively simple, it would nonetheless capture most
                relevant data. One SER noted a discrepancy between the thresholds,
                stating that a manufacturer with 500 employees would be much larger
                than a business with $8 million in gross annual revenue. Some SERs
                expressed concerns about how to collect data on the number of
                employees, particularly regarding how part-time and seasonal employees,
                and contractors, would be counted. One SER suggested that a small
                business be defined as having less than $10 million in annual revenue
                and 50 or fewer employees. Another SER emphasized the importance of
                including collection and reporting requirements for applicants with
                very few or no employees on payroll, stating that most minority-owned
                and women-owned small businesses have no employees. One SER opposed the
                SBREFA Second Alternative Approach, stating that it would be too
                complex and potentially confusing.
                 One SER also supported the SBREFA Third Alternative Approach as
                closest to the SBA approach, stating that it reflects the SBA's
                substantially different definitions of a small business across
                different industries. This SER stated that the SBREFA First and Second
                Alternative Approaches would exclude many SBA-qualified small
                businesses. Other SERs also stated that this 2-digit NAICS code
                alternative was significantly less complex and prone to less human
                error than the SBA definition using 6-digit NAICS codes. On the other
                hand, one SER stated that the SBREFA Third Alternative Approach would
                be the most costly and difficult to implement compared to the other two
                alternatives under consideration.
                 The SBREFA Panel recommended that the Bureau seek to adopt a
                definition of ``small business'' that is easy for small business
                applicants to understand and straightforward for financial institutions
                to implement, while still collecting comprehensive data regarding
                lending to small businesses.\510\ The SBREFA Panel also recommended
                that the Bureau continue to explore how information that small
                financial institutions may or may not currently collect from small
                business applicants (specifically, gross annual revenue, number of
                employees, and NAICS code) might inform the potential selection of an
                alternative for a ``small business'' size standard.\511\ The SBREFA
                Panel also recommended that the Bureau continue to explore ways to
                minimize burden on both the small financial institutions collecting
                NAICS code information as well as the small business applicants who
                need to provide it, for example the possibility of collecting the 2-
                digit NAICS code rather than the 6-digit code.\512\
                ---------------------------------------------------------------------------
                 \510\ SBREFA Panel Report at 44.
                 \511\ Id.
                 \512\ Id.
                ---------------------------------------------------------------------------
                 Feedback on the SBREFA materials from stakeholders other than SERs
                showed broad support for the Bureau pursuing a simplified version of
                the SBA small business definition, focusing chiefly on the size
                standard. A diverse array of stakeholders requested that the Bureau
                provide a simplified small business definition, including a wide
                variety of lenders, trade associations, and community groups. However,
                at least one commenter explicitly urged the Bureau to adopt the SBA
                definition. Reasons for supporting a simpler definition included that
                it might lower compliance costs (and therefore, the commenters noted,
                the cost of credit), it would obviate the need for financial
                institutions to understand or track the SBA size standards, and a more
                complex definition might impact data consistency or quality (either
                because financial institutions might incorrectly report data, or
                because the data itself might not lend itself to analysis). Several
                stakeholders voiced concern with respect to the SBA's detailed approach
                to categorizing the applicant's business, arguing that NAICS codes were
                developed for procurement, contained too many categories, and were not
                familiar to many financial institutions and applicants.
                 Stakeholders offered varying levels of support for the Bureau's
                proffered size standard alternatives, although in general there was
                more support for a standard using only gross annual revenue. Many
                stakeholders, including a variety of trade associations, supported the
                SBREFA First Alternative Approach; a few explicitly opposed it. Those
                voicing support generally preferred the simplicity of the approach;
                some stakeholders noted that a definition using gross annual revenue
                aligned with how lenders typically consider an applicant's size for
                other purposes. Stakeholders suggested that the Bureau select a
                specific revenue limit for small businesses including $500,000, $1
                million, $5 million, and $8 million. Some stakeholders expressing
                support for a $8 million revenue limit noted that it would better
                capture small businesses in wholesale and manufacturing, while allowing
                the Bureau to adopt a single, uniform standard. Stakeholders opposing
                the SBREFA First Alternative Approach generally expressed concern with
                using gross annual revenue, either citing concerns about its accuracy
                or because they said a uniform gross annual revenue standard would not
                account for regional variation among
                [[Page 56430]]
                businesses or reflect the SBA's general approach to distinguishing
                businesses by industry. One stakeholder generally expressed concern
                that the SBREFA First Alternative Approach might exclude too many small
                business applicants from the 1071 rule.
                 Several stakeholders, mostly community groups, supported the SBREFA
                Second Alternative Approach; several comments from industry opposed the
                approach. Those in support of the SBREFA Second Alternative Approach
                characterized it as providing a balance between simplicity and
                providing results more closely aligned with the more comprehensive SBA
                approach, which distinguishes businesses by industry. Some stakeholders
                expressed concern with respect to distinguishing the nature of the
                applicant's business (e.g., whether it was engaged in manufacturing or
                wholesale), and others thought that there may be difficulties
                accurately measuring the number of employees.
                 A few stakeholders supported the SBREFA Third Alternative Approach,
                while several explicitly opposed it. Supporters of the SBREFA Third
                Alternative Approach praised how closely the alternative aligned with
                the SBA's definition, while those in opposition criticized it as overly
                complex. In particular, those opposing this approach were concerned
                that it would still require financial institutions to have a close
                working knowledge of NAICS codes.
                 A few stakeholders advocated that the Bureau consider adopting a
                small business definition that incorporated loan size. Some of these
                stakeholders suggested that the Bureau consider aligning this
                definition with standards in the CRA. One stakeholder suggested that
                the Bureau define a small business as one with gross annual revenue of
                $1 million where the business has requested a loan of $1 million or
                less.
                Proposed Rule
                 Proposed Sec. 1002.106(b) would define a small business as having
                the same meaning as the term ``small business concern'' in 15 U.S.C.
                632(a), as implemented in 13 CFR 121.101 through 121.107. The Bureau
                believes that adopting existing statutory and regulatory small business
                definitions, which are widely understood and already the subject of
                notice and comment, is consistent with the purposes of section 1071 and
                will facilitate compliance. Proposed Sec. 1002.106(b) would further
                state that, notwithstanding the size standards set forth in 13 CFR
                121.201, for purposes of proposed subpart B, a business is a small
                business if and only if its gross annual revenue, as defined in
                proposed Sec. 1002.107(a)(14), for its preceding fiscal year is $5
                million or less. This proposed definition largely adopts the SBREFA
                First Alternative Approach with a threshold of $5 million. The Bureau
                believes this proposed definition implements the statutory language of
                section 1071 while reflecting a need for financial institutions to
                apply a simple, broad definition of a small business. The Bureau is
                seeking SBA approval for this alternate small business size standard
                pursuant to the Small Business Act.\513\
                ---------------------------------------------------------------------------
                 \513\ 15 U.S.C. 632(a)(2)(C).
                ---------------------------------------------------------------------------
                 Proposed comments 106(b)-1 and 106(b)-2 would clarify the
                obligations of covered financial institutions when new information may
                arise that could change the determination of whether an applicant is a
                small business, which in turn gives rise to requirements under proposed
                subpart B and/or prohibitions under existing Regulation B. The Bureau
                acknowledges that a financial institution's understanding of an
                applicant's gross annual revenue may change as the institution proceeds
                through underwriting. Proposed comment 106(b)-1 would explain that if a
                financial institution initially determines an applicant is a small
                business as defined in proposed Sec. 1002.106 based on available
                information and obtains data required by proposed Sec. 1002.107(a)(18)
                through (20), but the financial institution later concludes that the
                applicant is not a small business, the financial institution may
                process and retain the data without violating ECOA or this regulation
                if it meets the requirements of proposed Sec. 1002.112(c)(3). Proposed
                comment 106(b)-2 would explain that if a financial institution
                initially determines that the applicant is not a small business as
                defined in proposed Sec. 1002.106, but then later concludes the
                applicant is a small business, the financial institution shall endeavor
                to compile, maintain, and report the data required under proposed Sec.
                1002.107(a) in a manner that is reasonable under the circumstances.
                 Proposed comment 106(b)-3 would explain that a financial
                institution may rely on an applicant's representations regarding gross
                annual revenue (which may or may not include an affiliate's revenue)
                for purposes of determining small business status under Sec.
                1002.106(b).
                 For the reasons discussed above in the section-by-section analysis
                of proposed Sec. 1002.106(a), the Bureau is proposing to define a
                small business as having the same meaning as the term ``small business
                concern'' in 15 U.S.C. 632(a), as implemented in 13 CFR 121.101 through
                121.107. However, for reasons discussed in detail below, the Bureau is
                proposing that notwithstanding the size standards set forth in 13 CFR
                121.201, for purposes of subpart B, a business is a small business if
                and only if its gross annual revenue, as defined in proposed Sec.
                1002.107(a)(14), for its preceding fiscal year is $5 million or less.
                Generally, the Bureau believes that adopting this gross annual revenue
                standard from the SBREFA First Alternative Approach is consistent with
                the purposes of section 1071 and addresses the concerns that the Bureau
                has heard with respect to determining whether applicants are small
                businesses for purposes of complying with section 1071, particularly
                with respect to the concerns regarding determining the applicant's
                NAICS code, and the implications thereof. Due to concerns expressed by
                other stakeholders, which are described above, and upon its own further
                consideration as discussed in this section-by-section analysis under
                Alternatives Considered below, the Bureau is not proposing the $1
                million gross annual revenue standard from the SBREFA First Alternative
                Approach.
                 The Bureau seeks comment on this proposed definition of a small
                business, including the $5 million gross annual revenue size standard,
                as well as whether additional clarification is needed for any aspect of
                this proposed definition. The Bureau also seeks comment on whether
                another variation of the proposed size standard would better serve the
                purposes of section 1071, such as a lower revenue size standard or a
                higher one, potentially at the $8 million or $10 million level. The
                Bureau also seeks comment on whether, in addition to the above-
                described gross annual revenue-based size standard, a small business
                definition that also included any business that was furnished a loan
                pursuant to an SBA program (regardless of the applicant's gross annual
                revenue) would further the purposes of 1071.
                 Similarly, the Bureau seeks comment on whether the SBREFA Second
                Alternative Approach at $8 million gross annual revenue or 500
                employees (depending on the type of business) would align more closely
                with section 1071's purposes. Likewise, the Bureau seeks comment on
                whether a variation of the proposed size standard, such as using an
                applicant's average gross annual revenue averaged over two or five
                years, would better serve the purposes of section 1071. In addition,
                the Bureau seeks comment on defining
                [[Page 56431]]
                a small business consistent with the entirety of existing SBA
                regulations, including any advantages or disadvantages that using such
                a definition might pose specifically in the context of this rulemaking.
                Specifically, the Bureau seeks comment on how the proposed size
                standard would fit in with a financial institution's current lending or
                organization practices. If the financial institution is an SBA lender,
                the Bureau seeks comment on whether the proposed size standard would
                introduce additional difficulties or challenges.
                 In order to keep pace with changes to the SBA's own size standards
                and the potential impact of future inflation, the Bureau is considering
                whether it might update its proposed $5 million gross annual revenue
                size standard over time (perhaps at the end of a calendar year in order
                to allow financial institutions to use the same threshold consistently
                throughout the year). The Bureau seeks comment on how this should be
                done and the frequency at which it should occur.
                Alternatives Considered
                 Gross annual revenue of $1 million. Under the SBREFA First
                Alternative Approach, the Bureau considered proposing a size standard
                using the gross annual revenue of the applicant business in the prior
                year, with a potential ``small'' threshold of $1 million or $5
                million.\514\ However, upon further consideration, the Bureau is
                concerned that the $1 million threshold considered under the SBREFA
                First Alternative Approach likely would not satisfy the SBA's
                requirements for an alternative size standard across industries and
                would exclude too many businesses designated as small under the SBA's
                size standards.
                ---------------------------------------------------------------------------
                 \514\ SBREFA Outline at 16.
                ---------------------------------------------------------------------------
                 Loan size. The Bureau considered defining a small business based at
                least in part on loan size. For example, one SER suggested that the
                Bureau align its small business definition with the $1 million standard
                for revenue and loan size used by certain supervisory agencies for CRA
                reporting. The Bureau also considered that under the FFIEC Call Report
                collections, banks report small loans made to businesses and farms.
                Through the Credit Union Call Report, credit unions report commercial
                loans over $50,000 made to members.
                 The Bureau believes that such potential definitions do not bear a
                sufficient relationship to the size of the business or its operations.
                The above-mentioned Call Report data, for example, is reported
                regardless of the size of the business. Thus, such Call Reports would
                capture lending information regarding small loans furnished to
                businesses that may be dominant in their field. Likewise, under a
                definition similar to the CRA, application data for businesses with low
                revenue that may be applying for large loans would be excluded. The
                Bureau does not believe that adopting such an approach would further
                the purposes of section 1071. The Bureau also received some stakeholder
                feedback cautioning against using the CRA definition based on loan
                size, because such a definition would exclude substantial portions of
                small business lending.
                 Existing SBA size standards. As discussed above, the Bureau is
                seeking approval from the SBA to use a $5 million gross annual revenue
                alternative size standard in defining a ``small business'' for purposes
                of this rulemaking, as the Bureau does not believe the SBA's size
                standards are suitable for this data collection initiative and prefers
                to establish a more appropriate small business definition limited to
                the section 1071 rulemaking.
                 The Bureau believes that requiring application of existing SBA size
                standards for the section 1071 rule could result in many financial
                institutions having to undergo operational and/or compliance management
                system changes. The Bureau believes that it will reduce burden for
                financial institutions, particularly those without sophisticated
                compliance management systems or familiarity with SBA lending, to
                comply with a gross annual revenue size standard for the section 1071
                small business definition that better aligns with current lending
                practices.
                 If the Bureau were to adopt a small business definition using the
                existing SBA size standards that vary by industry based on 6-digit
                NAICS codes, financial institutions would only be able to request an
                applicant's protected demographic information further along in the
                application process, once they have obtained the multiple pieces of
                data that would be necessary to determine whether the applicant is
                small and, therefore, the 1071 process applies. The Bureau is concerned
                that this delay would make it more difficult for financial institutions
                to collect applicants' protected demographic information that is
                important to both of section 1071's statutory purposes. The Bureau is
                particularly concerned about financial institutions' ability to collect
                these data for applications that are withdrawn or closed for
                incompleteness early in the application process. These data collection
                considerations differ from those applicable to SBA lending programs,
                whereby a lender often cannot (and should not) make an accurate
                eligibility determination for an SBA loan until later in the
                application process, often after a loan has already been initially
                decisioned and after the lender has collected information related to
                size, time in business, and other data.
                 In order to allow financial institutions to quickly determine
                whether the section 1071 rule applies, the Bureau is seeking to
                minimize complexity for financial institutions in determining whether a
                covered application is reportable because the applicant business is a
                small business--a necessary determination for the 1071-based collection
                of any other information. The Bureau believes that the section 1071
                rule would benefit from a universal, easy-to-apply reporting trigger
                that does not need to be supported by additional documentation or
                research. Such a reporting trigger must be easily understood by small
                business owners who may be completing an application online, or by the
                tens of thousands of customer-facing personnel who take small business
                applications in an industry with a typical annual turnover rate of 10
                to 20 percent. The Bureau believes that a gross annual revenue
                reporting trigger will facilitate better compliance with 1071
                requirements because it aligns with current lending and organizational
                practices.
                 The Bureau is concerned that requiring financial institutions to
                rely on the SBA's existing size standards for purposes of the section
                1071 data collection and reporting requirements would pose risks to the
                efficient operation of small business lending. Based on the
                overwhelmingly consistent feedback the Bureau has received from
                stakeholders on this issue, the Bureau believes that using the SBA's
                existing size standards for the purposes of section 1071--wherein the
                financial institution must quickly determine the appropriate 6-digit
                NAICS code for businesses and then apply a variety of standards,
                including potentially gathering information to determine five years of
                the applicant's average annual receipts or employee information--would
                not align with current lending and organizational practices.
                Application of the existing size standards, at the beginning of the
                application process, could slow down the application process,
                particularly at institutions that are often able to render credit
                decisions in a matter of minutes; the Bureau is concerned that
                financial institutions may be compelled to raise the cost of credit or
                originate fewer
                [[Page 56432]]
                covered credit transactions as a result. Such an outcome could
                needlessly affect access to credit for small businesses. Eliminating
                credit opportunities or reducing access to credit to small businesses,
                including women-owned and minority-owned small businesses, in this way
                would conflict with the statutory purpose of section 1071 to ``enable
                communities, governmental entities, and creditors to identify business
                and community development needs and opportunities of women-owned,
                minority-owned, and small businesses.'' \515\
                ---------------------------------------------------------------------------
                 \515\ ECOA section 704B(a).
                ---------------------------------------------------------------------------
                 The Bureau expects that many financial institutions, for
                efficiency, will bifurcate their business credit application procedures
                based on an initial determination of whether the application will be
                subject to section 1071. The Bureau therefore believes that many
                financial institutions will not proceed with taking applicant
                information until the financial institution is able to determine that
                the applicant is small (in which case, section 1071 will require the
                financial institution to collect and report the applicant's protected
                demographic information) or that the applicant is not small (where ECOA
                generally prohibits the financial institution from collecting protected
                demographic information). If this process requires determining the
                correct NAICS code for the applicant, and in many cases, requesting
                five years of average annual receipts or employee information from the
                applicant, the Bureau believes that businesses seeking access to credit
                will encounter, at a minimum, otherwise avoidable delays in processing
                applications.
                 The Bureau believes that the $5 million gross annual revenue
                standard it is proposing is a more efficient and appropriate measure of
                applicant size for purposes of determining whether small business
                lending data collection is required pursuant to section 1071. The
                Bureau understands that the SBA generally bases business concern size
                standards on average annual receipts or the average number of employees
                of the business concern, as customized industry-by-industry across
                1,057 6-digit NAICS codes. The SBA typically uses two primary measures
                of business size for size standards purposes: (i) Average annual gross
                receipts \516\ for businesses in services, retail trade, agricultural,
                and construction industries, and (ii) average number of employees \517\
                for businesses in all manufacturing industries, most mining and
                utilities industries, and some transportation, information, and
                research and development industries.\518\ The Bureau understands that
                SBA's size standards are used to establish eligibility for a variety of
                Federal small business assistance programs, including for Federal
                government contracting and business development programs designed to
                assist small businesses in obtaining Federal contracts and for SBA's
                loan guarantee programs, which provide access to capital for small
                businesses that are unable to qualify for and receive conventional
                loans elsewhere. The Bureau notes that the size standard used under
                section 1071 would only be used to determine whether small business
                lending data collection is required pursuant to section 1071, and would
                have no bearing on eligibility for Federal small business assistance.
                Moreover, the Bureau believes it is far more likely that an applicant
                will be able to readily respond to a question regarding its gross
                annual revenue for the preceding fiscal year--something already
                contemplated by existing Regulation B for all business credit to
                determine whether notice requirements apply \519\--than offer the
                closest metric currently in use by SBA regulations, which is generally
                average annual receipts for the previous five fiscal years.\520\
                Furthermore, use of this gross annual revenue standard would be
                efficient, as a financial institution is statutorily required to
                collect and report gross annual revenue by ECOA section 704B(e)(2)(F).
                ---------------------------------------------------------------------------
                 \516\ The Bureau understands that the SBA recently changed its
                regulations on the calculation of average annual receipts for all of
                SBA's receipts-based size standards, and for other agencies'
                proposed receipts-based size standards, from a three-year averaging
                period to a five-year averaging period, outside of the SBA Business
                Loan and Disaster Loan Programs. 84 FR 66561 (Dec. 5, 2019).
                 \517\ Generally, the average number of employees of the business
                concern is used (including the employees of its domestic and foreign
                affiliates) based upon numbers of employees for each of the pay
                periods for the preceding completed 12 calendar months. See 13 CFR
                121.106(b)(1).
                 \518\ To measure business size, the SBA also uses financial
                assets for certain financial industries, and for the petroleum
                refining industry, it uses refining capacity and employees.
                 \519\ See 12 CFR 1002.9(a)(3).
                 \520\ 13 CFR 121.104(a) and (c).
                ---------------------------------------------------------------------------
                 The Bureau believes that section 1071 differs from other programs
                that may have been contemplated pursuant to the Small Business Act's
                provisions pertaining to the establishment of size standards. First and
                most notably, the rulemaking contemplated by section 1071 is not a
                ``program'' in the traditional sense of a procurement or other Federal
                assistance program; the rule would not confer a direct benefit or
                advantage to the small business applicant or financial institution in
                terms of contract, procurement, loan guaranty, or government backed
                debenture. Rather, financial institutions will be contributing
                information about credit applications for businesses identified as
                small under section 1071--information that will be valuable to the
                Bureau, financial institutions, policymakers, and other stakeholders,
                including small businesses. Second, unlike other such alternative size
                standard requests, the Bureau notes that a size standard under section
                1071 would apply to businesses across all sectors applying for
                financing, rather than a particular industry or sector. And third, the
                Bureau believes that arriving at a simplified size standard is an
                essential element to this ``program,'' as more complex approaches may
                limit opportunities for small businesses by reducing access to credit.
                 Section 1071 is also unique in that Congress specified that the
                data collection regime include a particular form of revenue for the
                businesses at issue. As discussed in the section-by-section analysis of
                proposed Sec. 1002.107(a)(14) below, section 1071 requires a financial
                institution to collect ``the gross annual revenue of the business in
                the last fiscal year of the women-owned, minority-owned, or small
                business loan applicant preceding the date of the application.'' \521\
                The Bureau considered whether under section 1071 a financial
                institution should have to apply two different revenue-based rules
                (first, one for determining whether the business is small under the
                existing SBA size standards and therefore section 1071 data must be
                collected and reported; and, second, if the business is small, another
                for reporting the business's gross annual revenue in the last fiscal
                year), or whether applying only one revenue-based rule for section 1071
                could be sufficient. The Bureau believes that requiring financial
                institutions to apply both would be unnecessarily confusing and
                burdensome, and would also increase potential for errors in data
                collection. The Bureau does not believe it is appropriate to use only
                average annual receipts, given the language of section 1071. Moreover,
                as discussed below, section 1071 amends ECOA, which already
                incorporates gross annual revenue as implemented under existing
                Regulation B.
                ---------------------------------------------------------------------------
                 \521\ Id.
                ---------------------------------------------------------------------------
                 ECOA section 704B(e)(2)(G) requires a financial institution to
                collect and report the race, sex, and ethnicity of the principal owners
                of the business. Existing Regulation B generally prohibits a creditor
                from inquiring about
                [[Page 56433]]
                such protected demographic information in connection with a credit
                transaction unless otherwise required by Regulation B, ECOA, or other
                State or Federal law, regulation, order, or agreement.\522\ Thus, in
                order to avoid potential liability under ECOA and existing Regulation
                B, a financial institution must accurately determine that a business
                credit application is subject to section 1071 before inquiring about
                the applicant's protected demographic information. The Bureau does not
                believe the SBA's existing size standards allow for the quick and
                accurate determination of small business status required for this 1071
                data collection initiative. Specifically, the Bureau does not believe
                this determination can be quickly and accurately made if, as required
                under the SBA's existing size standards, the financial institution must
                determine the appropriate NAICS code for the business and then apply
                the NAICS-based size standards to determine whether a business loan
                applicant is a small business.
                ---------------------------------------------------------------------------
                 \522\ Existing Sec. 1002.5(a)(2). ECOA states that it is not
                discrimination for a financial institution to inquire about women-
                owned or minority-owned business status, or the race, sex, and
                ethnicity of principal owners pursuant to section 1071. 15 U.S.C.
                1691(b)(5).
                ---------------------------------------------------------------------------
                 As discussed above, SERs and other stakeholders have expressed
                concern to the Bureau about the difficulties in determining the
                appropriate NAICS code for businesses and in applying the NAICS-based
                size standards. They generally preferred a simple small business
                definition and expressed concern that the SBA's approach to defining a
                small business--which bases classification on an applicant's 6-digit
                NAICS code--is relatively complex in this context. The Bureau believes
                that removing a NAICS-based small business determination as a step in
                determining small business status will both facilitate compliance and
                better achieve the purposes of section 1071. The Bureau understands
                that one reason that SERs and others expressed a strong desire for a
                simple approach to determining whether an applicant is small is that
                this initial determination may drive the application process. To comply
                with section 1071 requirements, financial institutions may use a
                different application process, or different or additional application
                materials, with applicants for business credit that are small
                businesses than they do with applicants that are not small businesses.
                Thus, quickly and accurately determining whether an applicant is a
                small business at the outset of the application process may be a
                crucial step, one that financial institutions would benefit from being
                able to seamlessly accomplish. Considering the requirements and
                prohibitions in ECOA with respect to protected demographic information,
                the Bureau understands the import that financial institutions have
                placed on both the speed and accuracy of this determination.
                 As discussed in the section-by-section analysis of proposed Sec.
                1002.107(a)(15) below, the Bureau believes that NAICS codes possess
                considerable value for section 1071's fair lending purpose as well as
                its business and community development purpose beyond being necessary
                for determining whether an applicant is a small business under the
                SBA's size standards. The Bureau is therefore proposing that financial
                institutions be required to collect and report NAICS codes as one of
                the data fields for applications subject to section 1071. However, the
                Bureau believes that gathering NAICS code information at some point
                during the application process, while still the subject of some concern
                for financial institutions, is a different consideration from requiring
                NAICS information as a necessary step to beginning an application (and
                correctly determining which type of application to initiate).
                 The Bureau also believes that this simplified alternative size
                standard will provide largely consistent reporting results, as compared
                to adopting the full SBA size standards. The Bureau used data from the
                U.S. Census's 2012 Statistics of U.S. Businesses (SUSB) and the U.S.
                Department of Agriculture's 2012 Census of Agriculture to analyze how
                each of the Bureau's contemplated alternative approaches would change
                the number of businesses defined as ``small'' relative to the SBA
                definition.\523\ If all NAICS classifications and size assessments
                could be done correctly, applying the SBA's full 6-digit NAICS code-
                based size standards would result in complete coverage of small
                businesses as defined by the SBA--all applications by small businesses
                would be reported (other than those made to financial institutions that
                qualify for an exemption) and no applications made by non-small
                businesses would be reported. The Bureau estimates that 270,000
                businesses that would be small under the SBA's existing size standards
                (out of 7.2 million small employer businesses and farms) would not be
                covered by the Bureau's proposed $5 million gross revenue standard. The
                Bureau further estimates that the Bureau's proposed rule would cover
                some 77,000 businesses that would not be small under the SBA size
                standards. The Bureau believes that such variation with respect to the
                SBA's current size standards is an appropriate trade-off for the
                reasons described herein.
                ---------------------------------------------------------------------------
                 \523\ The 2012 SUSB is the most recent Census product to have
                categories of revenue and employees granular enough to conduct this
                analysis. The Bureau constructed the 2012 equivalents of the second
                and third alternatives due to the vintage of the SUSB data available
                and used the SBA's 2012 size standards for the analysis. The 2012
                SUSB only covers employer firms or businesses with at least one
                employee.
                ---------------------------------------------------------------------------
                 The Bureau notes, however, that a $5 million gross annual revenue
                alternative size standard would affect some industries more than
                others. That is, applications for small businesses would be reported to
                the Bureau less from some industries than others. In general, there
                will be a larger proportion of businesses whose applications would not
                be reported in industries with a higher revenue-based size standard.
                The industries most affected by this are the retail trade and
                construction industries. Other industries that would be
                disproportionately affected may include manufacturing, wholesale trade,
                health care and social assistance, and professional, scientific, and
                technical services. The Bureau received little public feedback with
                respect to such concerns, although the Bureau seeks comment with
                respect to any potential effects on particular subsets of applicants
                that may be disproportionately included or excluded on the basis of a
                gross annual revenue standard (such as those subject to employee-based
                size standards), particularly in light of section 1071's purposes.
                 The Bureau also believes that a simplified size standard will be
                important for financial institutions that may not frequently engage in
                small business lending in determining whether they are covered under
                the 1071 rule. As discussed in the section-by-section analysis of
                proposed Sec. 1002.105(b), the Bureau is proposing to mandate section
                1071 small business lending data collection only from those financial
                institutions that originated at least 25 covered credit transactions
                from small businesses in each of the two preceding calendar years.
                Those financial institutions that do not frequently lend to small
                businesses will be seeking to track precisely how many covered credit
                transactions for small businesses they have originated. The Bureau
                believes that it is important to empower financial institutions to
                quickly ascertain whether a covered credit transaction was furnished to
                a small business, such that infrequent lenders can continue to monitor
                [[Page 56434]]
                whether section 1071 compliance is required.
                 Average gross annual revenue. The Bureau considered proposing an
                approach that would use an average gross annual revenue calculated over
                an averaging or ``lookback'' period instead of using the gross annual
                revenue for the preceding fiscal year. This alternative approach would
                be similar to the SBA approach of using a five-year annual receipts
                average. The Bureau understands that the SBA expects the five-year
                average to: (i) Enable some mid-size businesses currently categorized
                above their corresponding size standards to gain or regain small
                business status and thereby qualify for participation in Federal
                assistance intended for small businesses, and (ii) allow some advanced
                and larger small businesses close to their size thresholds to lengthen
                their small business status for a longer period and thereby continue
                their participation in Federal small business programs.\524\ However,
                because the 1071 rule is not connected to eligibility for participation
                in any Federal programs for small business loans, grants, procurement,
                or otherwise, the Bureau believes that allowing financial institutions
                to consider applicants' gross annual revenue for the preceding fiscal
                year is sufficient for 1071 purposes. The Bureau also notes that using
                gross annual revenue for the preceding fiscal year is consistent with
                the notification requirements of existing Regulation B and the Bureau's
                approach in proposed Sec. 1002.107(a)(14) regarding the gross annual
                revenue data point. The Bureau believes that using this measure instead
                of an average will better align with current lending practices and will
                simplify determinations regarding 1071 reporting status.
                ---------------------------------------------------------------------------
                 \524\ See 84 FR 66561, 66562 (Dec. 5, 2019).
                ---------------------------------------------------------------------------
                Section 1002.107 Compilation of Reportable Data
                107(a) Data Format and Itemization
                Background
                 ECOA section 704B(e) requires financial institutions to ``compile
                and maintain'' records of information provided by applicants ``pursuant
                to a request under subsection (b),'' and requires them to ``itemiz[e]''
                such information to ``clearly and conspicuously disclose'' a number of
                data points; \525\ the Bureau refers to these as statutory data points.
                Section 704B(e)(2)(H) provides the Bureau with authority to require
                ``any additional data that the Bureau determines would aid in
                fulfilling the purposes of [section 1071]''; the Bureau refers to data
                points adopted under this authority as discretionary data points. The
                stated statutory purposes of 1071 are twofold: (1) To facilitate
                enforcement of fair lending laws; and (2) to enable communities,
                governmental entities, and creditors to identify business and community
                development needs and opportunities of women-owned, minority-owned, and
                small businesses.\526\ The Bureau notes that ``discretionary'' in this
                context means discretionary for the Bureau to adopt, not discretionary
                for financial institutions to comply with.
                ---------------------------------------------------------------------------
                 \525\ As discussed in greater detail above in E.2 of the
                Overview to this part V, the Bureau interprets the phrase ``pursuant
                to a request under subsection (b)'' in section 1071 as referring to
                all of the data points contemplated by ECOA section 704B(e), not
                merely whether the applicant is a minority-owned, women-owned, or
                small business.
                 \526\ ECOA section 704B(a).
                ---------------------------------------------------------------------------
                 The 1071 data collected and reported by financial institutions
                would generally be made available to the public unless the Bureau
                decides to delete or modify certain data to advance a privacy
                interest.\527\ As discussed below in part VI, the Bureau is proposing
                to use a balancing test to determine what data should be deleted or
                modified, but does not intend to apply the balancing test until
                financial institutions have reported at least a full year of 1071 data
                to the Bureau. The Bureau notes that the utility of 1071 data to
                particular groups of data users will depend on the specific data
                collected and the form, manner, and extent to which the Bureau makes
                such data available to the public.
                ---------------------------------------------------------------------------
                 \527\ ECOA section 704B(e)(4), (f).
                ---------------------------------------------------------------------------
                 The users of data from the Bureau's proposed 1071 rule could
                include the Bureau itself; other Federal agencies including the
                prudential banking regulators; Congress; State and local governments;
                community, consumer, and civil rights groups; researchers and
                academics; financial institutions; small businesses; and small business
                trade organizations. The comprehensive data that would be collected
                under the Bureau's rule is not available elsewhere, though some
                aggregate information for some loans to businesses--but not
                applications--exists in other sources. For example, there are several
                datasets on loans to businesses by depository institutions. The FFIEC
                Call Report data provide information on banks' and savings
                associations' total outstanding number and amount of loans to
                businesses for loans under $1 million and farms for loans under
                $500,000. The CRA requires banks and savings associations with assets
                over a specified threshold ($1.322 billion as of 2021) to report data
                on loans to businesses with origination amounts of $1 million or less
                and loans to farms with origination amounts of $500,000 or less. NCUA
                Call Reports include information on credit unions' outstanding and
                originated commercial loans to members over $50,000. Though the Bureau
                and other agencies with supervisory jurisdiction can currently
                approximate some 1071 data through requests during examinations of
                individual institutions, the agencies would only have access to data
                from a relatively small number of such institutions at any one time and
                the data obtained would not be uniform among institutions. The
                availability of uniform 1071 data across different types of financial
                institutions should significantly improve agencies' ability to focus
                limited supervisory resources on institutions with higher fair lending
                risk. Section 1071 data may also provide insight into how well the
                market is meeting the credit needs of small businesses in general, as
                well as women- and minority-owned small businesses in particular, and
                could potentially be used to identify market opportunities.
                 The Bureau has received feedback relevant to the 1071 rulemaking
                from a variety of sources, including through the SBREFA process as well
                as the Bureau's 1071 Symposium and the 2017 RFI on small business
                lending. This feedback addressed, among other things, the potential
                inclusion of discretionary data points in the 1071 rulemaking, which is
                discussed further below. By discussing these potential discretionary
                data points under consideration in the SBREFA Outline, the Bureau
                obtained helpful feedback on costs and benefits from the SERs and other
                stakeholders to inform the Bureau's decision-making for purposes of
                this NPRM.
                SBREFA Proposals Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau explained its understanding of
                the data points enumerated in section 1071.\528\ The Outline noted that
                ECOA section 704B(b) requires financial institutions to inquire whether
                an applicant for credit is a women-owned, minority-owned, or small
                business. In addition, the statute states that the information compiled
                and maintained by a financial institution under section 704B(e)(1)
                shall be itemized in order to clearly and conspicuously disclose a
                number of particular items that are enumerated in the statute. In the
                Outline, the Bureau
                [[Page 56435]]
                stated that it was considering proposing to require all of these data
                points.\529\
                ---------------------------------------------------------------------------
                 \528\ SBREFA Outline at 24.
                 \529\ Id. at 24-36.
                ---------------------------------------------------------------------------
                 The Bureau also discussed in the SBREFA Outline its proposals under
                consideration regarding data points adopted pursuant to its
                discretionary data points authority under ECOA section
                704B(e)(2)(H).\530\ The Bureau explained that it was considering
                proposing to require that financial institutions report discretionary
                data points regarding pricing, time in business, NAICS code, and number
                of employees.
                ---------------------------------------------------------------------------
                 \530\ Id. at 33.
                ---------------------------------------------------------------------------
                 SERs provided feedback on nearly all aspects of the data points
                under consideration, including certain feedback applicable to all data
                points.\531\ Regarding data points generally, most SERs requested that
                the Bureau make the collection and reporting of data points as simple
                as possible. Two SERs stated that collecting and reporting the
                statutory data points would not pose any issues because they collect
                them now. A number of SERs urged the Bureau to require collection and
                reporting of a number of data points based only on information as
                provided by the applicant. One SER stated that the Bureau should be
                aware that, as with HMDA reporting, the cost of collecting and
                reporting the data points will include expensive data quality scrubs in
                order to avoid negative examination findings. Another SER stated that
                it will be challenging to standardize the data so reporting can be
                automated, and that this will likely require significant training and a
                tremendous amount of human intervention.
                ---------------------------------------------------------------------------
                 \531\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 25-30.
                ---------------------------------------------------------------------------
                 Furthermore, some SERs expressed concern about asking applicants to
                provide certain information (in particular the race, sex, and ethnicity
                of principal owners), as they believed that applicants would feel
                uncomfortable providing, or even being asked about, that information,
                and that if applicants are denied credit they might feel it was because
                of the protected demographic information they provided. One SER stated
                that the collection of 1071 data could seem like an intrusion of
                privacy by the financial institution, particularly to minority
                borrowers. The SER stated that prospective applicants may decide to
                seek financing elsewhere. Another SER stated that some prospective
                applicants' distrust of the Federal government (and concern over how
                1071 data might be used) might adversely impact their ability to lend
                to the communities they serve. Other SERs that currently collect this
                information (for example, because they are CDFIs or SBA lenders)
                indicated that they generally do not have difficulty collecting
                demographic information from borrowers.
                 Several SERs suggested that the Bureau develop a system to assist
                in the collection of applicants' protected demographic information, and
                possibly other applicant-provided 1071 data, that would avoid the need
                for financial institutions to request and store sensitive information
                about applicants. One SER suggested that this system could also permit
                applicants to input their addresses for geocoding.
                 SERs also provided detailed feedback on the discretionary data
                points that the Bureau was considering. One SER stated that the cost of
                collecting and reporting the discretionary data points under
                consideration would be significant, and another SER stated that the
                Bureau should include as few data points as possible to avoid
                unnecessary costs. Another SER stated that the Bureau should finalize a
                rule with just the statutorily required data points and avoid adding
                any discretionary data points. That SER suggested that if the Bureau
                does include discretionary data points, the Bureau could consider
                providing an exemption from discretionary data point collecting and
                reporting for certain small 1071 reporters, similar to the partial data
                point exemption approach taken under HMDA.\532\
                ---------------------------------------------------------------------------
                 \532\ See Regulation C Sec. 1003.3(d).
                ---------------------------------------------------------------------------
                 Other SERs favored the inclusion of some or all of the
                discretionary data points. Two SERs stated their support for the
                inclusion of all four discretionary data points under consideration.
                One of these SERs suggested that the Bureau also collect information
                regarding the way the application was taken (in person, by phone, or
                online) in order to monitor possible discouragement of applicants. The
                other SER suggested that the Bureau also collect credit score
                information.
                 Stakeholders commenting on the statutory data points and data
                points in general largely echoed the SERs' concerns. Industry
                commenters suggested that the method of collection be as clear and
                simple as possible, that the cost burden be taken into account, and
                that the Bureau not require verification of applicant-provided
                information. Community groups largely supported the Bureau's proposals
                under consideration for the statutory data points, and emphasized the
                importance of the new 1071 data collection regime.
                 A large majority of industry stakeholders commenting on the SBREFA
                Outline opposed the collection of any discretionary data points,
                stating that including them would be overly burdensome and unnecessary.
                Industry commenters argued that the 1071 rule would be very burdensome
                in any case, requiring new software and onerously different business
                processes, and adding data points would only increase that burden. Some
                commenters stated that collecting and reporting the discretionary data
                points would increase compliance obligations and costs, and likely
                impact credit costs and availability for small business customers. Some
                commenters were concerned about the discretionary data points being
                made public without contextual information, potentially leading to
                damaging misinterpretations. One stakeholder stated that unnecessary
                discretionary data points would add to the already significant privacy
                concerns of financial institutions and borrowers. Several commenters
                suggested that the Bureau consider an incremental approach to expanding
                the data collection in the future should the statutory fields not be
                sufficient to accomplish the original intent of 1071. Several other
                stakeholders suggested that if the Bureau includes discretionary data
                points, it should provide an exemption from reporting them for smaller
                financial institutions.
                 Community groups and several community development lenders
                supported mandatory reporting of the discretionary data points under
                consideration, saying that they would help achieve section 1071's
                purposes. One stakeholder stated that the discretionary data points
                under consideration relate to underwriting decisions and must be
                accounted for so credit providers cannot--as they said HMDA reporters
                have done for years--hide behind data not collected as justification
                for their lending disparities. A community development lender supported
                the collection of the discretionary data points, but suggested that the
                Bureau not collect number of employees. Some stakeholders suggested
                additional discretionary data points.
                 Regarding data points in general, the SBREFA Panel recommended that
                the Bureau consider proposing in the NPRM that applicant-provided data
                points be self-reported by the applicant only, without an obligation
                for the financial institution to verify the information
                [[Page 56436]]
                provided by the applicant.\533\ Regarding the discretionary data
                points, the SBREFA Panel recommended that if time in business, number
                of employees, and NAICS code become part of the proposal, the Bureau
                continue to explore ways to minimize the burden to small financial
                institutions of collecting and reporting such data; and with respect to
                NAICS code specifically, the burden on small business applicants who
                need to provide the information.\534\ As to pricing, the Panel
                recommended that if this data point becomes part of the proposal, the
                Bureau seek comment on potential methods for avoiding
                misinterpretations of disparities.\535\
                ---------------------------------------------------------------------------
                 \533\ SBREFA Panel Report at 46.
                 \534\ Id.
                 \535\ Id.
                ---------------------------------------------------------------------------
                Proposed Rule
                 The Bureau is proposing to adopt the statutory data points largely
                consistent with its proposals under consideration at SBREFA, but with
                certain changes as discussed in the section-by-section analyses of the
                individual data points below. Consistent with its approach under
                consideration in the SBREFA Outline,\536\ the Bureau is proposing
                discretionary data points relating to pricing, time in business, NAICS
                code, and number of workers. In addition, based on feedback from SERs
                and other stakeholders and in the course of developing the proposed
                rule, the Bureau identified several additional data points that it
                believes would be important to the quality and completeness of the 1071
                data collected and would aid significantly in furthering the purposes
                of section 1071. The proposed rule would adopt additional discretionary
                data points regarding application method, application recipient, denial
                reasons, and number of principal owners. In addition, the Bureau is
                relying on ECOA section 704B(e)(2)(H), as well as its authority under
                704B(g)(1), to make certain clarifications to the statutory data
                points. These data points are all discussed in detail in the section-
                by-section analyses of proposed Sec. 1002.107(a)(1) through (21)
                below.
                ---------------------------------------------------------------------------
                 \536\ SBREFA Outline at 34-35.
                ---------------------------------------------------------------------------
                 The Bureau continues to believe that discretionary data points for
                pricing, time in business, NAICS code, and number of workers would
                serve the purposes of 1071, improve the utility of the data for
                stakeholders, and potentially reduce the occurrence of
                misinterpretations or incorrect conclusions based on analysis of an
                otherwise more limited data set. The Bureau also believes that
                discretionary data points for application method, application
                recipient, denial reasons, and number of principal owners would help to
                achieve these goals more effectively.
                 In proposing these discretionary data points, the Bureau considered
                the additional operational complexity and potential reputational harm
                that collecting and reporting discretionary data points could impose on
                financial institutions. The Bureau has sought to respond to industry
                concerns regarding discretionary data points by proposing a limited
                number of discretionary data points that would offer the highest value
                in light of 1071's statutory purposes. For this reason, the Bureau is
                not proposing certain additional discretionary data points suggested by
                SERs and other stakeholders such as credit score or applicant's
                business structure (see the discussion below). In addition, the Bureau
                has not chosen to take an incremental approach to adding data points,
                as one stakeholder suggested, or permitting collecting and reporting of
                discretionary data points to be phased in over time. The Bureau
                believes the information from the proposed discretionary data points
                would further section 1071's purposes for the reasons stated above, and
                should be collected and reported as soon as possible. In addition, data
                from these discretionary data points would be an important part of the
                privacy balancing test analysis that would be conducted after the first
                year of 1071 data is received.\537\ The Bureau will consider industry
                concerns about potential reputational harm that collecting and
                reporting discretionary data points could impose on financial
                institutions when it conducts the privacy balancing test analysis.
                ---------------------------------------------------------------------------
                 \537\ See part VI below.
                ---------------------------------------------------------------------------
                 In regard to the specific method by which a financial institution
                would collect the 1071 data points, the proposed rule would require a
                covered financial institution to compile and maintain data regarding
                covered applications from small businesses, and require that the data
                be compiled in the manner prescribed for each data point and as
                explained in associated Official Interpretations (included in this
                proposed rule) and the Filing Instructions Guide (FIG) that the Bureau
                anticipates later providing on a yearly basis. The proposed rule would
                then explain that the data compiled shall include the items described
                in proposed Sec. 1002.107(a)(1) through (21). The Official
                Interpretations, sometimes referred to as official comments or official
                commentary, provide important guidance on compliance with the
                regulation and are discussed in this preamble in relation to each data
                point as well as other regulatory provisions. The FIG would provide
                instructions on the operational methods for compiling and reporting
                data, including which codes to report for different required
                information. The FIG would be updated yearly, as is the FIG that is
                used with HMDA compilation and reporting.\538\
                ---------------------------------------------------------------------------
                 \538\ See generally Fed. Fin. Insts. Examination Council, The
                Home Mortgage Disclosure Act, https://ffiec.cfpb.gov/ (last visited
                July 28, 2021).
                ---------------------------------------------------------------------------
                 The Bureau notes that some of the details contained in the proposed
                regulatory text and commentary may also be appropriate for inclusion in
                the FIG, and it anticipates that it may choose to relocate some such
                details to the FIG when issuing the final rule. For example, proposed
                Sec. 1002.107(a)(1) addresses the unique identifier data point. A
                portion of proposed comment 107(a)(1)-1 would explain that the unique
                identifier must not exceed 45 characters, and may only include standard
                numerical and/or alphabetical characters and cannot include dashes,
                other special characters, or characters with diacritics. At the final
                rule stage, the Bureau might consider removing those details from the
                commentary and addressing them instead in the FIG, in order to preserve
                flexibility in how the submission platform is ultimately designed and
                implemented.
                 Proposed comment 107(a)-1 would provide general guidance on
                complying with Sec. 1002.107(a), and would explain that: (i) A covered
                financial institution reports the data even if the credit originated
                pursuant to the reported application was subsequently sold by the
                institution; (ii) a covered financial institution annually reports data
                for covered applications for which final action was taken in the
                previous calendar year; and (iii) a financial institution reports data
                for a covered application on its small business lending application
                register for the calendar year during which final action was taken on
                the application, even if the institution received the application in a
                previous calendar year. The Bureau believes that these operational
                instructions would clarify a financial institution's collection and
                reporting requirements and so facilitate compliance. The Bureau also
                believes that these instructions would help to ensure the accuracy and
                consistency of the data collected and reported.
                 The Bureau crafted the proposed rule in consideration of the
                concerns and input of the SERs and other stakeholders. First, the
                proposed rule would generally not require a financial
                [[Page 56437]]
                institution to verify applicant-provided information, as discussed more
                fully in the section-by-section analysis of proposed Sec. 1002.107(b)
                below, and has limited the discretionary data points to those that the
                Bureau believes would be most useful for the purposes of section 1071.
                In addition, the Bureau has considered the costs, including data
                quality scrubs, automation and training, that would be imposed by the
                collection and reporting of the statutory and discretionary data
                points; these are discussed in detail in part VII below. The Bureau has
                attempted to craft the collection and reporting requirements to be as
                clear and operationally manageable as possible, and requests comment on
                potential methods for increasing clarity and manageability.
                 In regard to concerns from SERs and other stakeholders about being
                required to collect applicants' protected demographic information for
                purposes of section 1071, the Bureau notes that several SERs reported
                collecting this kind of information currently (because they are CDFIs,
                or because they are participating in certain SBA or similar loan
                guarantee programs). In addition, the Bureau crafted the proposed rule
                to provide flexibility for financial institutions in the collection and
                reporting of this information. The Bureau is also not proposing an
                exemption for small financial institutions from reporting the
                discretionary data points, as suggested by some SERs and commenters. As
                explained in the section-by-section analysis of proposed Sec.
                1002.105(b) above, certain institutions with limited small business
                loan originations would be exempt from 1071 collection and reporting
                obligations. Furthermore, the Bureau is concerned that the usefulness
                of the data collected would be reduced if the data set is incomplete
                for some financial institutions. Finally, the Bureau is not proposing
                at this time to establish a Federal collection system for protected
                demographic or other information for use with 1071 reporting that would
                avoid the need for financial institutions to request and store this
                information about applicants, as suggested by several SERs.
                 The Bureau seeks comment on its proposed approach to the collection
                and reporting of the 1071 data points, including the specific requests
                for input above and in the section-by-section analysis of each of the
                proposed data points below.
                Proposed Rule--Other Discretionary Data Points Considered But Not
                Proposed
                 As mentioned above, SERs and other stakeholders suggested some
                additional data points for the Bureau's consideration, and the Bureau
                considered others in the development of this proposed rule. Because of
                the operational complexities likely to be posed by each of these
                potential data points, as well as the reasons explained below, the
                Bureau has chosen not to propose to include any of the following data
                points in the 1071 rule. Nonetheless, the Bureau seeks comment on
                whether the following potential data points or any others would further
                the purposes of section 1071 and thus should be considered for
                inclusion in the final rule.
                 Type of business/entity structure (sole proprietorship, C-
                corp, LLC, partnership, etc.). This information could be useful in
                providing context to the race, sex, and ethnicity data regarding
                applicants' principal owners. However, the Bureau believes that
                collecting the number of principal owners, as proposed in Sec.
                1002.107(a)(21), would better serve this purpose.
                 Credit score. Collecting credit score and other credit
                information could be particularly useful for the fair lending purpose
                of section 1071. However, because of the different types of scores and
                different situations in which a financial institution would or would
                not access scores, the Bureau believes that this data point could be
                quite complicated and involve complex sub-fields, which could pose
                operational difficulties for financial institutions in collecting and
                reporting this information. These complexities could also make it
                difficult for data users to understand and interpret credit score data.
                 Credit reporting information, including whether credit
                information was accessed. This data point could also be complicated and
                involve complex sub-fields, making it difficult for financial
                institutions to collect and report. As with credit score, these
                complexities could also make it difficult for data users to understand
                and interpret these data. In addition, it is not clear that this
                information would be useful without also collecting credit score.
                 Percentage ownership of each principal owner and
                percentage ownership by women and by minorities. This information could
                be useful in providing context to the ethnicity, race, and sex data
                regarding applicants' principal owners. However, the Bureau is
                concerned that requesting this type of percentage data could be
                confusing to applicants and could result in inconsistent responses
                across applicants and institutions. The Bureau believes that collecting
                the number of principal owners, as proposed in Sec. 1002.107(a)(21),
                would better serve this same purpose.
                 Whether the applicant has an existing relationship with
                the financial institution and the nature of that relationship. This
                information could provide additional context for a financial
                institution's credit decision, and thus could be useful for both of
                section 1071's statutory purposes. However, the Bureau believes that
                the usefulness of the data collected may not justify the additional
                operational complexity of identifying and tracking such relationships
                for reporting.
                 Customer number, and/or unique (but anonymous)
                identification number for applicants or associated persons for tracking
                of multiple applications. This information could be useful to track
                multiple applications by a single small business within a particular
                financial institution, whether submitted at one time or over the course
                of the year. However, the Bureau believes that the potential
                difficulties posed by requiring the reporting of this information--
                particularly for applications that have been withdrawn or abandoned--
                would not be warranted in light of the utility of the data.
                107(a)(1) Unique Identifier
                Background
                 ECOA section 704B(e)(2)(A) requires financial institutions to
                collect and report ``the number of the application . . . .'' Regulation
                C includes a similar reporting requirement for a universal loan
                identifier (ULI),\539\ though some insured credit unions and
                depositories whose lending activity falls below applicable thresholds
                are partially exempt and only need to report a non-universal loan
                identifier (NULI).\540\ Both the ULI and the NULI use only alphanumeric
                characters, and do not allow use of identifying information about the
                applicant or borrower in the identifier. The ULI is ``unique'' in the
                national HMDA reporting market because it uses a unique legal entity
                identifier (LEI) for the reporting institution and then the identifier
                is required to be unique within that
                [[Page 56438]]
                institution.\541\ The ULI must be no more than 45 characters and the
                NULI must be no more than 22 characters.\542\
                ---------------------------------------------------------------------------
                 \539\ 12 CFR 1003.4(a)(1)(i).
                 \540\ 12 CFR 1003.3(d)(5).
                 \541\ 12 CFR 1003.4(a)(1)(i)(A), (B)(2). The NULI is only
                required to be unique within the annual loan/application register in
                which the covered loan or application is included. 12 CFR
                1003.3(d)(5)(ii).
                 \542\ The ULI length limit is included in the Bureau's yearly
                Filing Instructions Guide. See Bureau of Consumer Fin. Prot., Filing
                instructions guide for HMDA Data collected in 2021 (2021), https://s3.amazonaws.com/cfpb-hmda-public/prod/help/2021-hmda-fig.pdf. The
                limit for the NULI is in Regulation C Sec. 1003.3(d)(5).
                ---------------------------------------------------------------------------
                SBREFA Proposals Under Consideration and Feedback Received
                 The Bureau stated in the SBREFA Outline that it was considering
                proposing that financial institutions report an alphanumeric
                application or loan number of no more than 45 characters that is
                unique, within the financial institution, to the referenced extension
                (or requested extension) of credit and that remains uniform through the
                application and origination stages of the process.\543\ The financial
                institution would assign this number to an application, and the number
                would be reported as the application number if the credit applied for
                was not originated. The same number would be reported as the loan
                number if the credit applied for was originated. The application/loan
                number would not include any identifying information about the
                applicant. The Bureau stated that it was considering proposing a
                structure for the method of assigning and reporting the application/
                loan number under section 1071 to follow HMDA/Regulation C formatting
                and other requirements, which might reduce initial software development
                costs.
                ---------------------------------------------------------------------------
                 \543\ SBREFA Outline at 26.
                ---------------------------------------------------------------------------
                 SERs reported varied practices with respect to assigning
                application and loan numbers.\544\ Some SERs stated they do not assign
                application numbers; some of those SERs indicated, however, that they
                do assign loan numbers at or before origination. Two SERs reported
                tracking applications and loans using an identification number assigned
                to the customer. One SER expressed concern about reporting actual loan
                numbers to the Bureau due to potential identity theft, and requested
                that the Bureau permit financial institutions to generate a new
                application/loan number specifically for 1071 reporting purposes. One
                SER stated that if an applicant requests more than one type of credit
                product, a separate application/loan number is assigned to each product
                request, while other SERs indicated they use a single application
                number even if multiple products are requested.
                ---------------------------------------------------------------------------
                 \544\ SBREFA Panel Report at 26-27.
                ---------------------------------------------------------------------------
                 The SBREFA Panel recommended that in the NPRM the Bureau consider
                proposing to permit financial institutions to report ``dummy''
                application/loan numbers assigned specifically for 1071 reporting
                purposes, rather than the numbers they use internally.\545\
                ---------------------------------------------------------------------------
                 \545\ Id. at 45.
                ---------------------------------------------------------------------------
                 Feedback from other stakeholders echoed many of the SERs' concerns,
                making clear that many lenders do not assign numbers at the application
                stage and others assign them at various points in the process. One
                commenter explained that being required to assign an application number
                early would disrupt its procedures. Another commenter stated that the
                Bureau should provide flexibility in this data point to account for the
                wide range of practices.
                Proposed Rule
                 The Bureau is proposing to require that financial institutions
                report an alphanumeric identifier starting with the LEI of the
                financial institution. This unique alphanumeric identifier would be
                required to be unique within the financial institution to the specific
                covered application, and would be required to be usable to identify and
                retrieve the specific file corresponding to the application for or
                extension of credit. The Bureau is also proposing commentary with
                additional details, as discussed below.
                 This proposed unique identifier requirement closely follows the
                SBREFA Outline approach for this data point, with certain adjustments
                and clarifications. First, the Bureau has chosen to propose the more
                precise term of ``unique identifier,'' instead of ``application/loan
                number,'' which was the term used in the SBREFA Outline. In addition,
                the Bureau had stated that its approach in the SBREFA Outline would
                follow Regulation C formatting and other requirements, but did not
                explicitly discuss the use of ``dummy'' numbers, as is done with
                HMDA.\546\ For clarity, the Bureau is including language in proposed
                comment 107(a)(1)-1 that would explain that the identifier does not
                have to be the number that the financial institution uses for the
                application internally. Proposed comment 107(a)(1)-1 would also provide
                the formatting requirements for the unique identifier. The Bureau is
                proposing an identifier of 45 characters or fewer, as is currently
                required for HMDA.
                ---------------------------------------------------------------------------
                 \546\ SBREFA Outline at 26.
                ---------------------------------------------------------------------------
                 The Bureau notes that the SBREFA Outline language could be read to
                suggest that the financial institution must assign a number to an
                application and then keep that number uniform throughout its subsequent
                processing of the application; this is not what was intended. The
                Bureau is making clear in the proposal that the unique identifier would
                not need to stay ``uniform'' throughout the application and subsequent
                processing. Proposed comment 107(a)(1)-1 would explain that the
                financial institution may assign the unique identifier at any time
                prior to reporting the application. Proposed comment 107(a)(1)-1 would
                also explain that refinancings or applications for refinancing must be
                assigned a different identifier than the transaction that is being
                refinanced.
                 Proposed comment 107(a)(1)-2 would make clear that the unique
                identifier must not include any directly identifying information
                regarding the applicant or persons (natural or legal) associated with
                the applicant. The Bureau is aware that internal identification numbers
                assigned by the financial institution to the application or applicant
                could be considered directly or indirectly identifying information, and
                requests comment on this issue. The Bureau also notes that, as
                discussed in part VI.C.6.i, due to privacy risks the Bureau is
                proposing to not publish the unique identifier data field in unmodified
                form; the Bureau is seeking comment on potential modifications to or
                deletion of this data field in the published application-level 1071
                data.
                 Proposed comment 107(a)(1)-2 would also cross-reference proposed
                Sec. 1002.111(c) and related commentary, which prohibit any personally
                identifiable information concerning any individual who is, or is
                connected with, an applicant, in records retained under proposed Sec.
                1002.111.
                 As stated above, the Bureau is proposing to require that the unique
                identifier begin with the financial institution's LEI; this requirement
                was not stated in the SBREFA Outline. Pursuant to proposed Sec.
                1002.109(b)(1)(vi), any covered financial institution that does not
                currently use an LEI would be required to obtain and maintain an LEI in
                order to identify itself when reporting the 1071 data. Including the
                financial institution's LEI in the unique identifiers that it assigns
                to its applications should not cause extra operational difficulty once
                the programming to do so has been
                [[Page 56439]]
                implemented. The Bureau believes that including the LEI will increase
                the specificity and usefulness of the identifier and the record it
                identifies. Although a ``check digit'' is required for the HMDA ULI,
                the Bureau is not proposing to require its use in the 1071 unique
                identifier. The Bureau believes that, based on its current expectations
                for a 1071 reporting platform, a check digit would be unnecessary.
                 The Bureau's proposal is intended to avoid the potential problems
                identified by SERs during the SBREFA process. The method proposed would
                accommodate different institutions' numbering systems because the
                unique identifier can be created separately from that internal system.
                The Bureau's proposed approach would also alleviate the identity theft
                concerns raised with respect to reporting actual loan numbers, though
                the Bureau is unlikely to release the unique identifier data reported
                to the Bureau publicly in any case. In regard to the issue of requests
                by the same applicant for more than one credit product at the same
                time, the Bureau proposes to treat those as separate applications. See
                the section-by-section analysis of proposed Sec. 1002.103 above.
                 The Bureau seeks comment on its proposed approach to the unique
                identifier data point. In addition, the Bureau requests comment on the
                use of the LEI in the unique identifier and the possible use of a check
                digit.
                107(a)(2) Application Date
                Background
                 ECOA section 704B(e)(2)(A) requires financial institutions to
                collect and report the ``date on which the application was received.''
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated it was considering
                proposing that financial institutions report the application date using
                either (i) the date shown on a paper or electronic application form; or
                (ii) the day on which a credit request becomes an ``application.''
                \547\ The Bureau considered proposing that application date be reported
                with a day, month, and year. The Bureau also considered proposing that
                financial institutions have a grace period of several days on either
                side of the date reported to reduce the compliance burden of
                pinpointing an exact date on which an application was received.
                ---------------------------------------------------------------------------
                 \547\ Id.
                ---------------------------------------------------------------------------
                 Most SERs stated that application date would not be difficult to
                report, though some suggested different triggers for the reporting of
                application date.\548\ This feedback overlapped with feedback on the
                definition of an application. Several SERs suggested the date an
                application is completed and submitted for underwriting review should
                be the triggering date. Several other SERs expressed support for
                reporting the date based on when a credit memorandum is generated. One
                SER suggested that each financial institution be permitted to develop
                its own process for reporting application date, so long as it is done
                consistently. Another SER expressed concern with reporting application
                date as a general matter, explaining that a date is not currently
                recorded in their system as a matter of practice. Instead of
                application date, that SER suggested that financial institutions report
                the date they make a decision on the loan. Several SERs were strongly
                in favor of the Bureau providing a grace period of several days on
                either side of the date reported to reduce compliance burden.
                ---------------------------------------------------------------------------
                 \548\ SBREFA Panel Report at 27.
                ---------------------------------------------------------------------------
                 Other stakeholders to comment on this data point were generally in
                favor of the proposal under consideration, and particularly the grace
                period, which they expressed would reduce the compliance burden of
                pinpointing an exact date. One stakeholder suggested a 7-day grace
                period. One financial institution suggested that application date be
                assigned up through and including at closing in order to accommodate
                financing requests outside normal business hours.
                 The SBREFA Panel recommended that the Bureau seek comment on how
                best to define ``application date'' in light of how it decides to
                propose defining an ``application.'' \549\
                ---------------------------------------------------------------------------
                 \549\ Id. at 45.
                ---------------------------------------------------------------------------
                Proposed Rule
                 The Bureau is proposing to require reporting of application date in
                Sec. 1002.107(a)(2) as the date the covered application was received
                by the financial institution or the date on a paper or electronic
                application form. Proposed Sec. 1002.107(a)(2) is consistent with the
                Bureau's proposal under consideration in the SBREFA Outline, with
                revised language for clarity. Proposed comments 107(a)(2)-1 and -2
                would clarify the need for a financial institution to take a consistent
                approach when reporting application date, and provide guidance on how
                to report application date for indirect applications. In light of SER
                and other stakeholder feedback \550\ supportive of permitting a grace
                period for reporting the date of application, the Bureau is proposing a
                safe harbor in Sec. 1002.112(c)(4), which would provide that a
                financial institution does not violate proposed subpart B if it reports
                on its small business lending application register an application date
                that is within three calendar days of the actual application date
                pursuant to proposed Sec. 1002.107(a)(2).
                ---------------------------------------------------------------------------
                 \550\ SER feedback primarily directed at how to define an
                application under section 1071, rather than the date reported for
                that application, are discussed in connection with the section-by-
                section analysis of proposed Sec. 1002.103(a) above.
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed approach to collecting
                application date in Sec. 1002.107(a)(2) and associated commentary. As
                recommended by the SBREFA Panel, the Bureau also seeks comment on how
                best to define this data point in light of the Bureau's proposed
                definition of ``covered application'' in Sec. 1002.103.
                107(a)(3) Application Method
                 ECOA section 704B(e)(2)(H) authorizes the Bureau to require
                financial institutions to compile and maintain ``any additional data
                that the Bureau determines would aid in fulfilling the purposes of
                [section 1071].'' The Bureau believes that application method data will
                aid in fulfilling the purposes of section 1071, as explained below.
                 The Bureau did not address the method of application as a potential
                data point under consideration in the SBREFA Outline. However, during
                the SBREFA process, one CDFI SER suggested collecting information
                regarding the way an application was taken (in person, by phone, or
                online) in order to monitor for possible discouragement of
                applicants.\551\ Relatedly, several SERs that took applications for
                credit primarily or entirely online asserted that such channels were
                less likely to result in discrimination and more likely to increase
                access to credit to women-owned and minority-owned small businesses.
                ---------------------------------------------------------------------------
                 \551\ SBREFA Panel Report at 30.
                ---------------------------------------------------------------------------
                 In light of this feedback during the SBREFA process, pursuant to
                its authority under ECOA section 704B(e)(2)(H), and for the reasons set
                forth below, the Bureau is proposing to require financial institutions
                to collect and report application method. Proposed Sec. 1002.107(a)(3)
                would define this data point as the means by which the applicant
                submitted the covered application directly or indirectly to the
                financial institution. The Bureau is also proposing commentary to
                accompany proposed Sec. 1002.107(a)(3).
                [[Page 56440]]
                 The Bureau believes that data on application method would improve
                the market's understanding of how applicants apply for credit which, in
                turn, would facilitate fair lending enforcement, including helping
                determine whether certain application methods are more or less likely
                to be associated with violations of fair lending laws. This proposed
                data field would also permit comparisons across financial institutions
                for a given application method. In addition, data on application method
                supports 1071's statutory purposes by assisting with an understanding
                of the business and community development needs of a particular
                geographic region. For instance, application method may help users of
                1071 data analyze the extent to which financial institutions may be
                providing access to credit online or by telephone in ``credit deserts''
                where financial institutions do not have branch operations.
                 The Bureau also believes that collecting data on application method
                will aid in analysis of multiple 1071 data points collected and
                reported by financial institutions, including the ethnicity, race, and
                sex of applicants' principal owners. First, these data will assist the
                Bureau and other data users in identifying whether applicants are more
                or less likely to provide this (and other) 1071 information in
                different application channels. This information may also assist in
                determining whether a financial institution has procedures to collect
                applicant-provided data at a time and in a manner that is reasonably
                designed to obtain a response, as would be required by proposed Sec.
                1002.107(c)(1).
                 Finally, data on application method would assist in analyzing data
                reported under, and assessing compliance with, proposed Sec.
                1002.107(a)(20), which requires financial institutions to collect
                principal owners' ethnicity and race via visual observation or surname
                in certain circumstances. Having application method reporting will
                allow the Bureau and other data users to determine, for example, which
                applications could be subject to data collection via visual observation
                or surname (because the financial institution met with the applicant in
                person) and, together with information reported under proposed Sec.
                1002.107(a)(20), which of those applications did and did not have
                information collected that way.
                 Proposed comment 107(a)(3)-1 would clarify that a financial
                institution complies with proposed Sec. 1002.107(a)(3) by reporting
                the means by which the applicant submitted the application from one of
                the following options: in-person, telephone, online, or mail. Proposed
                comment 107(a)(3)-1 would explain how financial institutions are to
                choose which application method to report, including via a ``waterfall
                approach'' when they have contact with an applicant in multiple ways.
                 Proposed comment 107(a)(3)-1.i would provide that an financial
                institution reports the application method as ``in-person'' if the
                financial institution, or another party acting on the financial
                institution's behalf, meets with the applicant in person (for example,
                in a branch office, at the applicant's place of business, or via
                electronic media with a video component). Proposed comment 107(a)(3)-
                1.ii would provide that a financial institution reports the application
                method as ``telephone'' if the financial institution, or another party
                acting on the financial institution's behalf, did not meet with the
                applicant in person as described in proposed comment 1002.107(a)(3)-1.i
                but communicated with the applicant by telephone or via electronic
                media without a video component.
                 Proposed comment 107(a)(3)-1.iii would provide that a financial
                institution reports the application method as ``online'' if it, or
                another party acting on the financial institution's behalf, did not
                meet with the applicant in person and did not communicate with the
                applicant by telephone as described in proposed comments
                1002.107(a)(3)-1.i and ii but communicated with the applicant through
                an online application, electronic mail, text message, and/or some other
                form of online communication. Proposed comment 107(a)(3)-1.iv would
                provide that a financial institution reports the application method as
                ``mail'' if the financial institution, or another party acting on the
                financial institution's behalf, did not meet with the applicant in
                person and did not communicate with the applicant by telephone, as
                described in proposed comments 1002.107(a)(3)-1.i and ii, but
                communicated with the applicant in writing via United States mail,
                courier or overnight service, or hand-delivery (including hand-delivery
                of documents via an overnight drop box or at a teller window).
                 Proposed comment 107(a)(3)-2 would provide guidance on what
                application method a financial institution would report for
                interactions with applicants both online and by mail. In short, a
                financial institution would report application method based on the
                method by which it, or another party acting on its behalf, requested
                the ethnicity, race, and sex of the applicant's principal owners
                pursuant to proposed Sec. 1002.107(a)(20). Proposed comment 107(a)(3)-
                2 also would provide separate examples of when the application method
                should be reported as ``online'' and ``mail.''
                 The Bureau seeks comment on its proposed approach to this data
                point.
                107(a)(4) Application Recipient
                 ECOA section 704B(e)(2)(H) authorizes the Bureau to require
                financial institutions to compile and maintain ``any additional data
                that the Bureau determines would aid in fulfilling the purposes of
                [section 1071].'' Although the Bureau did not address application
                recipient as a potential data point under consideration in the SBREFA
                Outline, the Bureau believes that application recipient data would aid
                in fulfilling the purposes of section 1071, as explained below.
                 Financial institutions employ a wide variety of lending models in
                extending credit to small businesses. During the SBREFA process, the
                Bureau explored section 1071's requirement to collect and report
                certain data for any ``application to a financial institution for
                credit,'' which could be read as applying to more than one financial
                institution when an intermediary provides the application to another
                financial institution that takes final action on the application.\552\
                See the section-by-section analysis of proposed Sec. 1002.109(a)(3)
                below for a discussion of proposed reporting obligations where multiple
                financial institutions are involved in a covered credit transaction.
                Financial institutions, of course, may receive applications for credit
                directly from small businesses--depending on the institution,
                applications may be submitted online, by telephone, by mail, or in
                person at a branch location, the applicant's place of business, or some
                other place. In addition, some financial institutions may receive
                applications routed to them through third parties, such as brokers or
                vehicle or equipment dealers. Some financial institutions issue credit
                cards branded for particular retailers, for which applications are
                taken in person at the retailer's store locations. Some brokers and
                dealers may send applications to a single financial institution, while
                others may send them to multiple financial institutions at the same
                time. In these types of application scenarios involving third parties,
                the financial institution may not directly interact with the
                [[Page 56441]]
                applicant at all during the application process.
                ---------------------------------------------------------------------------
                 \552\ ECOA section 704B(b).
                ---------------------------------------------------------------------------
                 In the SBREFA Outline, the Bureau noted the wide array of small
                business lending models operating today. The Bureau noted that certain
                section 1071 requirements might apply to intermediaries in the
                application chain.\553\ As discussed in the section-by-section analysis
                of proposed Sec. 1002.109(a)(3) below, several SERs voiced support for
                aligning reporting requirements for financial institutions that are not
                the lender of record with the approach taken for HMDA reporting in the
                Bureau's Regulation C. The Bureau did not receive feedback from SERs on
                whether data concerning the existence of intermediaries should be
                collected. Other stakeholders did urge the Bureau, however, to provide
                clear rules for lenders that work with partners, including when lenders
                should, and need not, collect 1071 data. Stakeholders also urged the
                Bureau to provide clear rules that would work for a broad array of
                business models, including lenders working with partners and agents.
                ---------------------------------------------------------------------------
                 \553\ SBREFA Outline at 13.
                ---------------------------------------------------------------------------
                 The Bureau believes that information regarding how an application
                is received would enhance small business lending data and further the
                purposes of section 1071. Pursuant to its authority under ECOA section
                704B(e)(2)H), the Bureau is thus proposing Sec. 1002.107(a)(4), which
                would require financial institutions to collect and report the
                application recipient, meaning whether the applicant submitted the
                covered application directly to the financial institution or its
                affiliate, or whether the applicant submitted the covered application
                indirectly to the financial institution via a third party. Proposed
                comment 107(a)(4)-1 would clarify that if a financial institution is
                reporting actions taken by its agent consistent with proposed comment
                109(a)(3)-3, then the agent is considered the financial institution for
                the purposes of proposed Sec. 1002.107(a)(4).
                 The Bureau believes that collecting data on application recipient,
                in combination with application method, as discussed above, would
                improve the market's understanding of how small businesses interact
                with financial institutions when applying for credit which, in turn,
                would facilitate fair lending analysis, including identifying risks in
                small business lending. Information about application method and
                whether the application was submitted directly or indirectly also would
                promote the community and business development purposes of the statute
                by improving the public's understanding of the structure of small
                business lending originations across the market, the methods by which
                credit is originated for particular groups or underserved markets, and
                trends over time (for example, to the extent applicant preferences
                shift from in-person to online interactions). It will also be helpful
                for the Bureau and data users to know the relationship between the
                covered financial institution and the applicant in the context of
                certain other collected and reported data.
                 The Bureau also believes that collecting and reporting information
                on the application recipient may facilitate fair lending analysis
                because particular business models may provide more or less reliable
                information with respect to the ethnicity, race, and sex of the
                principal owners of the applicant. In addition, the Bureau believes
                that collecting and reporting information on the application recipient
                may assist with an understanding of the business and community
                development needs of an area or applicant. For instance, the proposed
                collection of application recipient may help users of 1071 data
                understand whether financial institutions making credit decisions are
                directly interacting with the applicant and/or generally operate in the
                same community as the applicant. Finally, the Bureau expects that
                financial institutions know and track how they receive applications for
                credit from small businesses and thus does not believe that this data
                point should be difficult for financial institutions to collect and
                report.
                 The Bureau seeks comment on its proposed approach to this data
                point.
                107(a)(5) Credit Type
                Background
                 Section 1071 requires financial institutions to collect and report
                ``the type and purpose of the loan or other credit being applied for.''
                \554\ (The credit purpose data point is addressed in proposed Sec.
                1002.107(a)(6).) For HMDA reporting, Regulation C requires numerous
                data points that indicate the type of credit applied for or originated:
                the type of guarantees used; lien order; loan term; the presence of
                nontraditional contract terms including balloon, interest only, and
                negative amortization payments; variable rate information; open-end
                status; and reverse mortgage status.\555\ Section 1071 provides no
                additional information or details regarding what aspects of credit type
                should be collected and reported.
                ---------------------------------------------------------------------------
                 \554\ ECOA section 704B(e)(2)(B).
                 \555\ Regulation C Sec. 1003.4(a)(2), (14), (25), (27), (28),
                (37), and (38).
                ---------------------------------------------------------------------------
                SBREFA Proposals Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated it was considering
                proposing that financial institutions report the loan/credit type data
                point via three sub-components: (1) Type of Loan Product (chosen from a
                specified list); (2) Type of Guarantee (chosen from a specified list);
                and (3) Loan Term (in months, or using ``Not Applicable'' for products
                that do not have a loan term and for applications that did not specify
                a loan term). The SBREFA Outline included lists of types of loan
                product and types of guarantees.\556\
                ---------------------------------------------------------------------------
                 \556\ SBREFA Outline at 26-27.
                ---------------------------------------------------------------------------
                 The Bureau explained in the SBREFA Outline that a separate category
                for the presence of a guarantee was included in recognition of the fact
                that a guaranteed loan is often made as a counteroffer for either a
                requested loan by the applicant or because the applicant does not
                qualify for a conventional loan.\557\ Having guarantee status captured
                as a feature of loan type therefore would provide useful information.
                The Bureau also noted that some borrowers specifically request a
                government guaranteed loan program and/or receive a loan from a
                financial institution that only participates in such a program.\558\
                ---------------------------------------------------------------------------
                 \557\ Id.
                 \558\ Id.
                ---------------------------------------------------------------------------
                 For reporting when an application requests more than one type of
                loan product, the Bureau stated in the SBREFA Outline that it was
                considering whether to propose that (1) financial institutions choose
                up to three items from the subcomponent lists for the Loan Type data
                point if there is only one application and multiple products/
                guarantees/terms were asked for; or (2) financial institutions report
                separate applications/originations for each loan type requested or
                originated. The Bureau explained that financial institutions would be
                able to choose more than one guarantee for originated or approved but
                not accepted credit. For loan product and loan term, however, financial
                institutions would report only one of each subcomponent on originated
                credit or credit approved but not accepted.\559\
                ---------------------------------------------------------------------------
                 \559\ Id. at 27.
                ---------------------------------------------------------------------------
                 A number of SERs requested certain products be added to the
                ``product type'' list; this feedback generally aligned with feedback
                regarding product coverage (see the section-by-section analysis of
                proposed Sec. 1002.104 above). Two SERs suggested that line increases
                should be
                [[Page 56442]]
                excluded. Some SERs requested that the Bureau permit multiple types of
                guarantees to be selected for a single application, and one SER
                suggested that FHA guarantees be added to the guarantee list. One SER
                explained that government guarantees and personal guarantees are
                different--the government guarantee being a credit enhancement and a
                personal guarantee being a form of collateral.
                 The SBREFA Panel recommended that the Bureau consider modifying the
                product type and guarantee lists in accordance with the various
                suggestions made by SERs. The Panel also recommended that the Bureau
                seek comment on how financial institutions currently handle increases
                in lines of credit and how best to require reporting of this data point
                for multiple lines of credit within the same account.\560\
                ---------------------------------------------------------------------------
                 \560\ SBREFA Panel Report at 45.
                ---------------------------------------------------------------------------
                 The Bureau also received feedback from other stakeholders regarding
                this data point. A community group commenter stated that the three data
                fields making up this data point are appropriate choices because each
                is necessary separately and in combination to help determine whether
                lenders are responding to the needs for credit by offering affordable
                and sustainable products to traditionally underserved small businesses.
                Commenters requesting that additional products be covered by the rule,
                such as MCAs, likewise said those products would need to be added to
                the loan product list. Another commenter stated that the Bureau should
                also expand the number of guarantees that a financial institution can
                select because creditors will sometimes stack four or five guarantees
                on a single loan product.
                 One commenter stated that the ``type and purpose of the financing''
                are fluid in the application process, and the Bureau should make it
                clear that high-level, general, or categorical information is
                sufficient for these data points. Other commenters appreciated the
                inclusion of ``other,'' ``unknown,'' and ``other/unknown'' in the field
                lists to facilitate compliance. One commenter asked that the Bureau
                provide clear guidance on how this data point should be reported, and
                another stated that reporting this data point should not be costly if
                it is defined simply and left unchanged.
                 Treatment of multiple products requested at the same time.
                Regarding how a single request for multiple loan/credit products should
                be reported, some commenters supported reporting separate applications
                while others supported requiring reporting as a single application. One
                commenter suggested that the Bureau should accommodate both approaches.
                Another commenter remarked that if a business is applying for multiple
                products, the basic information is going to be the same, the only
                difference would be which product is funded. This same commenter
                suggested that if multiple applications are reported, that will
                overinflate the data points as the business does not have three
                separate applications, but only one application for different products.
                This commenter further pointed out that there are instances where a
                business is only applying for a loan but ends up liking the terms of a
                line of credit, and asked whether that change in decision would become
                a new application.
                Proposed Rule
                 The Bureau is proposing in Sec. 1002.107(a)(5) to require that
                financial institutions collect and report the following information
                regarding the type of credit applied for or originated: (i) The credit
                product; (ii) The type or types of guarantees that were obtained for an
                extension of credit, or that would have been obtained if the covered
                credit transaction were originated; and (iii) The length of the loan
                term, in months, if applicable. These aspects of credit type are
                discussed in turn below. This proposal is consistent with the approach
                presented in the SBREFA Outline, and would require the financial
                institution to choose the credit product and guarantee(s) from a
                specified list. (These lists are provided in the commentary
                accompanying proposed Sec. 1002.107(a)(5).) The lists include choices
                for ``Other'' and ``Not provided by applicant and otherwise
                undetermined,'' as appropriate, to facilitate compliance. Based on the
                feedback from SERs and other stakeholders, and consistent with the
                SBREFA Panel's recommendation to consider modifying the product type
                and guarantee lists in accordance with the suggestions made by SERs,
                the Bureau has updated the lists to reflect additional credit products
                and types of guarantees. The Bureau is also proposing to use the term
                ``credit type'' for this data point, rather than the SBREFA Outline
                term ``loan/credit type,'' for clarity and consistency with terminology
                used elsewhere in the proposal.
                 The Bureau believes that it is reasonable to interpret the
                statutory term ``credit type'' to comprise the proposed three data
                fields, because they are critical to understanding the nature of small
                business credit applied for and provided, as explained below. For the
                reasons discussed herein, the Bureau believes that the subcategories of
                credit product (including collateral), guarantee type, and loan term
                would aid in fulfilling the purposes of section 1071. Financial
                institutions generally have all of the information required for this
                data point when they process applications (and the reporting regime
                would be sufficiently flexible when they do not), so the Bureau does
                not believe there is anything in this approach that would impose
                particular operational difficulty. Additionally, the Bureau believes it
                is reasonable to interpret type of credit ``applied for'' to include
                the type of credit actually originated when an application results in
                an extension of credit.
                 The Bureau seeks comment on its proposed approach to the credit
                type data point, including the lists of products and guarantees
                proposed and the other specific requests for input below.
                 Credit product. The first data field the Bureau is proposing to
                include in the credit type data point is the credit product (i.e., a
                commonly understood category of small business lending like term loans
                or lines of credit) which the Bureau considers to be an integral part
                of the statutory requirement to collect credit type. The Bureau
                believes information about the various products sought by applicants
                would further the purposes of section 1071 by demonstrating, for
                example, how small businesses of different sizes or in different
                sectors choose to pursue, or ultimately access, different forms of
                credit.
                 The Bureau distinguishes between secured and unsecured term loans
                and lines of credit in its list of credit products because it believes
                that whether a term loan or line of credit is collateralized can have
                such a significant effect on things like approval rates and pricing
                that secured and unsecured products fundamentally differ in kind. For
                this reason, the Bureau believes that including information on the use
                of collateral in the credit product data field will help data users to
                avoid inaccurate interpretations of 1071 data. The Bureau believes that
                whether a loan is secured or unsecured will be part of an application
                or loan file and, as a result, should not be operationally difficult to
                report once a financial institution's 1071 compliance system is set up.
                 Proposed comment 107(a)(5)-1 would present the instructions for
                collecting and reporting credit product and the proposed list of credit
                products from which financial institutions would select. Proposed
                comment 107(a)(5)-1 would explain that a financial
                [[Page 56443]]
                institution complies with Sec. 1002.107(a)(5)(i) by selecting the
                credit product requested from the list provided in the comment. It
                would also explain that if an applicant requests more than one credit
                product, the financial institution reports each credit product
                requested as a separate application.
                 The issue of how to collect and report multiple products applied
                for at the same time affects several data points, but is most salient
                for credit type. The Bureau believes that requiring a separate
                application to be reported for each credit product requested would
                yield more complete and useful data, and that a financial institution
                should not experience operational difficulties in copying the relevant
                information, identical for most data points, to separate lines in the
                small business lending application register. This issue is discussed
                more fully in the section-by-section analysis of proposed Sec.
                1002.103(a), which also addresses the Bureau's proposed approach to
                multiple lines of credit within the same account.
                 The Bureau intends the list of credit products provided in proposed
                comment 107(a)(5)-1 to align with the most common types of credit
                products in small business lending. As explained above, the list for
                credit product included in the SBREFA Outline has been amended based on
                SER and stakeholder input, as well as other considerations.
                Specifically, ``Merchant cash advance'' and ``Other sales-based
                financing transaction'' have been added to the list to correspond with
                their inclusion as covered credit transactions under proposed Sec.
                1002.104. See the section-by-section analysis of proposed Sec.
                1002.104 above for a more complete discussion of products covered by
                and excluded from the Bureau's proposal. Proposed comment 107(a)(5)-6
                would explain when ``other sales-based financing transaction'' is used
                for reporting.
                 Proposed comment 107(a)(5)-1 would also explain that if the credit
                product for an application does not appear on the list of products
                provided, the financial institution selects ``other'' as the credit
                product and reports the specific product via free-form text. The Bureau
                believes that allowing financial institutions to choose ``other'' when
                the credit product for the application does not appear on the provided
                list would facilitate compliance. In addition, collecting this
                information on ``other'' credit products would assist the Bureau in
                monitoring product trends and key developments in the small business
                lending market, which the Bureau could use to inform any future
                iterations of the list.
                 Proposed comment 107(a)(5)-2 would explain that, pursuant to
                proposed Sec. 1002.107(c)(1), a financial institution is required to
                maintain procedures reasonably designed to collect applicant-provided
                data, which includes credit product. However, if a financial
                institution is nonetheless unable to collect or otherwise determine
                credit product information because the applicant does not indicate what
                credit product it seeks and the application is denied, withdrawn, or
                closed for incompleteness before a credit product is identified, the
                proposed comment would explain that the financial institution reports
                that the credit product is ``not provided by applicant and otherwise
                undetermined.'' This option is similar to the ``unknown'' response
                under consideration during SBREFA, but has been revised to more
                accurately reflect the situations in which the response would be
                appropriate. The Bureau believes that permitting use of this response
                would facilitate compliance and enhance the quality of data collected.
                As discussed above, commenting stakeholders supported the flexibility
                afforded by this kind of response.
                 Proposed comment 107(a)(5)-3 would explain how a financial
                institution reports a transaction that involves a counteroffer. The
                comment would state that if a financial institution presents a
                counteroffer for a different credit product than the product the
                applicant had initially requested, and the applicant does not agree to
                proceed with the counteroffer, a financial institution reports the
                application for the original credit product as denied pursuant to
                proposed Sec. 1002.107(a)(9). If the applicant agrees to proceed with
                consideration of the financial institution's counteroffer, the
                financial institution reports the disposition of the application based
                on the credit product that was offered, and does not report the
                original credit product applied for. The Bureau believes that, in the
                complex circumstances created by counteroffers, the meaning of the type
                of credit ``applied for'' is ambiguous, and it is reasonable to
                interpret the credit product ``applied for'' to mean the credit product
                considered via the applicant's response to the counteroffer. For a
                discussion of the Bureau's proposed treatment of counteroffers more
                generally, see the section-by-section analysis of proposed Sec.
                1002.107(a)(9) below.
                 The Bureau notes that, under its proposal, line increases would be
                reportable so that the small business lending market can be tracked
                accurately. See the section-by-section analysis of proposed Sec.
                1002.103(a) above for additional details. However, the Bureau is not
                proposing that line increases be included as a separate item in the
                credit product list.
                 The Bureau seeks comment on its proposed approach to this data
                field, including the appropriateness and usefulness of the products
                included in the list, whether there are other products that should be
                added, and the proposed treatment of counteroffers. The Bureau also
                seeks comment on how financial institutions currently handle increases
                in lines of credit and whether a line increase should be considered a
                credit product, and on whether an overdraft line of credit should be
                considered a product separate from a line of credit and thus added to
                the product list.
                 Type of guarantee. The second data field the Bureau is proposing to
                include in the credit type data point is guarantee. The Bureau
                considers the guarantee obtained for an extension of credit to be part
                of the credit ``type'' because it is fundamental to the nature of the
                transaction in that it meaningfully impacts terms such as interest
                rates, such that guarantee information could help to explain potential
                disparities in outcomes and reduce inaccurate conclusions, aiding in
                fulfilling the fair lending purpose of section 1071. Indeed, in common
                parlance, small business credit transactions are often referred to
                using the name of the guarantee (e.g., ``a 7(a) loan,'' referring to
                the SBA 7(a) guarantee). Because various types of guarantees are
                available for different credit products, the Bureau believes that
                guarantee type should constitute a separate data field within the
                credit type data point, so that data users can conduct separate
                analyses with respect to credit product and guarantees, and to avoid
                excessive complexity in the credit product data field. Information on
                the distribution of government loan guarantees (such as those provided
                in SBA programs) across different geographic areas and applicant groups
                should allow a better understanding of how those programs function on
                the ground, aiding in fulfilling the business and community development
                purpose of section 1071. As with collateral, information on guarantees
                is generally a part of an application or loan file and should not be
                operationally difficult to report once a financial institution's 1071
                compliance system is set up.
                 Proposed comment 107(a)(5)-4 would present the instructions for
                collecting and reporting type of guarantee and the proposed list of
                guarantees from which financial institutions would select.
                [[Page 56444]]
                Proposed comment 107(a)(5)-4 would explain that a financial institution
                complies with Sec. 1002.107(a)(5)(ii) by selecting the type or types
                of guarantee(s) obtained for an originated covered credit transaction,
                or that would have been obtained if the covered credit transaction were
                originated, from the list provided in the comment.
                 The Bureau intends the list of guarantee types provided in proposed
                comment 107(a)(5)-4 to align with the most common types of guarantees
                used in small business lending. As explained above, the list for
                guarantee type included in the SBREFA Outline has been amended based on
                SER and stakeholder input. Specifically, ``FHA insurance'' and ``Bureau
                of Indian Affairs guarantee,'' which the Bureau believes are often used
                with small business credit, have been added.
                 Proposed comment 107(a)(5)-4 would also explain that the financial
                institution may select, if applicable, up to a maximum of five
                guarantees for a single application or transaction. In the SBREFA
                Outline, the Bureau stated that it was considering allowing financial
                institutions to report more than one guarantee for an application or
                originated credit.\561\ The Bureau understands that small business
                credit may have more than one guarantee, such as an SBA guarantee and a
                personal guarantee, and believes that more complete information can be
                collected by requiring as many as five to be reported.
                ---------------------------------------------------------------------------
                 \561\ SBREFA Outline at 27.
                ---------------------------------------------------------------------------
                 Proposed comment 107(a)(5)-4 would also explain that if the type of
                guarantee for an application or originated transaction does not appear
                on the list of guarantees provided, the financial institution selects
                ``other guarantee,'' and reports the type of guarantee as free-form
                text. As with credit product, the Bureau believes that allowing
                financial institutions to choose ``other'' when a guarantee for the
                application does not appear on the provided list will facilitate
                compliance. In addition, collecting this information on ``other''
                guarantee types would assist the Bureau in monitoring trends in usage
                of other types of guarantees and key developments in the small business
                lending market, which the Bureau could use to inform any future
                iterations of the list.
                 Finally, proposed comment 107(a)(5)-4 would provide that if no
                guarantee is obtained or would have been obtained if the covered credit
                transaction were originated, the financial institution selects ``no
                guarantee.'' Because a small business credit transaction does not
                always involve use of a guarantee, the Bureau is not proposing to
                include ``not provided by applicant and otherwise undetermined'' as an
                option. If no guarantee is identified for an application, the financial
                institution would report ``no guarantee.''
                 In regard to the distinction one SER made between government and
                personal guarantees, the Bureau notes that the proposed rule would
                identify them as separate options within the data field, thereby
                allowing data users to analyze them independently.
                 The Bureau seeks comment on its proposed approach to this data
                field, including the appropriateness and usefulness of the items
                listed, and whether there are other guarantees that should be added.
                The Bureau also seeks comment on whether five is the appropriate upper
                limit for reporting guarantees.
                 Loan term. The third data field the Bureau is proposing to include
                in the credit type data point is the loan term. As with the consumer
                lending market, the pricing and sustainability of closed-end credit
                transactions for small businesses are associated with term length, and
                without awareness of the term of the loan, data users will have less of
                an understanding of the types of credit being made available to
                applicants. Credit with a one-month term may differ not just in degree
                but in kind from credit with a 60-month term. The Bureau thus believes
                that the length of the loan term is a fundamental attribute of the type
                of credit that applicants are seeking such that it should be treated as
                a separate data field within credit type. As with other elements of the
                credit type data point, loan term information would allow data users to
                reduce inaccurate conclusions or misinterpretations of the 1071 data,
                aiding in fulfilling both the fair lending and business and community
                development purposes of section 1071. Likewise, the loan term will be
                part of the application or loan file and should not be operationally
                difficult to report once a financial institution's 1071 compliance
                system is set up.
                 Proposed comment 107(a)(5)-5 would present the instructions for
                collecting and reporting loan term. Specifically, it would explain that
                a financial institution complies with proposed Sec.
                1002.107(a)(5)(iii) by reporting the number of months in the loan term
                for the covered credit transaction, and that the loan term is the
                number of months after which the legal obligation will mature or
                terminate. The comment would further explain how to measure the loan
                term and the possible use of rounding.
                 Proposed comment 107(a)(5)-5 would also make clear that if a credit
                product, such as a credit card, does not have a loan term, the
                financial institution reports loan term as ``not applicable.'' The
                financial institution also reports ``not applicable'' if the
                application is denied, withdrawn, or determined to be incomplete before
                a loan term has been identified. The Bureau believes that permitting
                the use of ``not applicable'' in these situations would facilitate
                compliance and aid in the collection of appropriate data. The Bureau
                believes that the proposed regulatory text and commentary described
                above would alleviate many of the concerns of the SERs and other
                commenting stakeholders regarding the credit type data point. The
                credit product and guarantee type lists have been updated using their
                input and continued Bureau consideration. Multiple types of guarantees
                would be permitted by the proposal, and FHA guarantees have been added
                to the list.
                 The Bureau believes the statutory term ``type . . . of the loan''
                to be ambiguous, and reasonably interprets the term to include the
                credit product, any guarantee obtained, and the term of a closed-end
                loan because an accurate and useful record of the ``type'' of loan or
                credit would include those data fields. In the alternative, ECOA
                section 704B(e)(2)(H) authorizes the Bureau to require inclusion of
                ``any additional data that the Bureau determines would aid in
                fulfilling the purposes of [section 1071],'' and for the reasons
                discussed above, the Bureau has also determined that the subcategories
                of credit product (including collateral), guarantee type, and loan term
                would aid in fulfilling those purposes.
                 The Bureau seeks comment on its proposed approach to this data
                field.
                107(a)(6) Credit Purpose
                Background
                 Section 1071 requires financial institutions to collect and report
                ``the type and purpose of the loan or other credit being applied for.''
                \562\ (The credit type data point is addressed in proposed Sec.
                1002.107(a)(5).)
                ---------------------------------------------------------------------------
                 \562\ ECOA section 704B(e)(2)(B).
                ---------------------------------------------------------------------------
                SBREFA Proposals Under Consideration and Feedback Received
                 The Bureau stated in the SBREFA Outline that it was considering
                proposing that financial institutions report the loan/credit purpose
                data point by choosing one or more purposes from a specified list. In
                addition to several specific business purposes, the list included
                choices for ``Other'' or
                [[Page 56445]]
                ``Unknown'' to facilitate compliance. The Bureau also explained that it
                was considering proposing that financial institutions be allowed to
                choose up to three purposes when the applicant indicates more than one
                purpose.\563\
                ---------------------------------------------------------------------------
                 \563\ SBREFA Outline at 28.
                ---------------------------------------------------------------------------
                 Some SERs stated that they collect information on loan/credit
                purpose, although the information they collect may be different from
                that in the loan/credit purpose list in the SBREFA Outline.\564\ One
                SER did, however, suggest that the Bureau's purposes list was similar
                to their list. Some SERs made suggestions of additional loan/credit
                purposes to add to the list, including for inventory loans,
                agricultural loans, and contract financing. One SER requested that the
                Bureau clarify whether this data point is intended to capture the
                purpose of the loan or the type of collateral. Another SER recommended
                combining the categories of motor vehicle finance and equipment
                finance, explaining that certain financing can span both categories
                (such as for a truck and a trailer as a combined purchase). One of the
                SERs expressed concern about possible confusion regarding credit with
                multiple purposes, and another SER suggested that the Bureau provide
                clear instructions on this data point. Another SER suggested that the
                Bureau explain how a line of credit should be reported if there can be
                multiple lines for different purposes all within the same account.
                ---------------------------------------------------------------------------
                 \564\ SBREFA Panel Report at 27.
                ---------------------------------------------------------------------------
                 The SBREFA Panel recommended that the Bureau consider modifying the
                loan/credit purpose lists in accordance with the various suggestions
                made by SERs.\565\
                ---------------------------------------------------------------------------
                 \565\ Id. at 45.
                ---------------------------------------------------------------------------
                 Like the SERs, the other stakeholders who provided feedback on the
                SBREFA Outline stated that they often collect loan purpose information
                from applicants, but that the specific loan purposes they use differ
                somewhat from those listed in the SBREFA Outline. Stakeholders
                supported the inclusion of ``other'' and ``unknown'' in the list of
                purposes, and one suggested that the Bureau add ``Not Applicable'' for
                products, such as credit cards, that do not have a specific purpose. As
                with the SERs, these stakeholders requested clarifications and several
                changes to the loan purposes list. One commenter stated that financial
                institutions should not have to present the entire list to applicants
                where a loan product's terms do not allow the loan to be used for one
                or more of the specified purposes. That same commenter suggested that
                financial institutions should be allowed to include additional purposes
                not on the list, and in the instance an applicant selects an additional
                purpose, the financial institution would include it as ``other'' unless
                the selected purpose squarely fits within, or is a subset of, a purpose
                specified on the Bureau's list.
                Proposed Rule
                 The Bureau is proposing in Sec. 1002.107(a)(6) to require that
                financial institutions collect and report the purpose or purposes of
                the credit applied for or originated. The Bureau's proposed approach
                aligns with the SBREFA Outline approach, with certain adjustments.
                First, the Bureau is proposing to use the term ``credit purpose'' for
                this data point, rather than ``loan/credit purpose,'' for clarity and
                consistency with terminology used elsewhere in the proposal. In
                addition, the proposal would provide a more complete description of the
                purposes listed, which would clarify the relation between the purpose
                of the credit and the form of collateral used. The proposal also
                reflects other changes to the list of purposes presented in the SBREFA
                Outline, as explained below.
                 Proposed comment 107(a)(6)-1 would present instructions for
                collecting and reporting credit purpose and would provide the proposed
                list of credit purposes from which financial institutions would select.
                 The proposed list is similar to the list in the SBREFA Outline
                although, consistent with the SBREFA Panel's recommendation, the Bureau
                has made adjustments based on SERs' suggestions, as well as those of
                other stakeholders and its own further consideration. First, the items
                on the SBREFA list that described types of collateral, such as
                commercial real estate, have been updated to more clearly reflect that
                the financial institution is collecting and reporting the purpose of
                the loan, and not the form of collateral, though the form of collateral
                may be referred to in describing that purpose. In addition, the listed
                purposes involving real estate now differentiate between dwelling and
                non-dwelling real estate. The Bureau believes that this distinction
                would help in collecting more precise and useful data. To facilitate
                compliance the Bureau is also proposing to add ``not applicable'' to
                the purposes list for use when an application is for a credit product
                that generally has indeterminate or numerous potential purposes, such
                as a credit card. Proposed comment 107(a)(6)-5 would also explain the
                use of ``not applicable'' as a response. In addition to the changes
                described above, the proposed list of purposes also reflects small
                nonsubstantive edits for clarity.
                 Proposed comment 107(a)(6)-2 would explain that if the applicant
                indicates or the financial institution is otherwise aware of more than
                one purpose for the credit applied for or originated, the financial
                institution would report those purposes, up to a maximum of three,
                using the list provided, in any order it chooses. Since an applicant
                may have more than one purpose for a credit transaction, the Bureau
                believes it is appropriate to require collection and reporting of more
                than one credit purpose for this data point in that situation. The
                Bureau believes that having financial institutions report up to three
                purposes would provide useful and substantive data. The Bureau also
                believes that allowing financial institutions discretion as to the
                order of the purposes would facilitate compliance.
                 Proposed comment 107(a)(6)-3 would explain that if a purpose of the
                covered credit transaction does not appear on the list of purposes
                provided, the financial institution reports ``other'' as the credit
                purpose and reports the purpose as free-form text. The Bureau believes
                that allowing financial institutions to choose ``other'' when a credit
                purpose for the application does not appear on the provided list would
                facilitate compliance. In addition, collecting this information on
                ``other'' credit purposes would assist the Bureau in monitoring trends
                in this area and key developments in the small business lending market,
                which the Bureau could use to inform any future iterations of the list.
                For efficiency and to facilitate compliance, proposed comment
                107(a)(6)-3 would also explain that if the application has more than
                one ``other'' purpose, the financial institution chooses the most
                significant ``other'' purpose, in its discretion, and reports that
                ``other'' purpose. The comment would then explain that a financial
                institution reports a maximum of three credit purposes, including any
                ``other'' purpose reported.
                 Proposed comment 107(a)(6)-4 would explain that, pursuant to
                proposed Sec. 1002.107(c)(1), a financial institution shall maintain
                procedures reasonably designed to collect applicant-provided
                information, which includes credit purpose. However, if a financial
                institution is nonetheless unable to collect or determine credit
                purpose information, the financial institution would report that the
                credit purpose is ``not provided by applicant and otherwise
                undetermined.'' The Bureau believes that permitting use of this
                response would facilitate compliance
                [[Page 56446]]
                and enhance the quality of data collected.
                 In order to facilitate compliance, the Bureau is also proposing
                comments 107(a)(6)-6 and -7. Proposed comment 107(a)(6)-6 would clarify
                that, as explained in proposed comment 104(b)-4, subpart B does not
                apply to an extension of credit that is secured by 1-4 individual
                dwelling units that the applicant or one or more of the applicant's
                principal owners does not, or will not, occupy. Proposed comment
                107(a)(6)-7 would clarify the collection and reporting obligations of
                financial institutions with respect to the credit purpose data point,
                explaining that the financial institution would be permitted, but not
                required, to present the list of credit purposes provided in comment
                107(a)(6)-1 to the applicant. Proposed comment 107(a)(6)-7 would
                further explain that the financial institution would also be permitted
                to ask about purposes not included on the list provided in proposed
                comment 107(a)(6)-1. Finally, proposed comment 107(a)(6)-7 would
                clarify that if an applicant chooses a purpose or purposes that are
                similar to purposes on the list provided, but uses different language,
                the financial institution would report the purpose or purposes from the
                list provided. The Bureau believes that minimizing use of free-form
                text here would improve the usefulness of the data collected and
                facilitate compliance.
                 The Bureau believes that, with the modifications discussed above,
                the list of credit purposes provided in proposed comment 107(a)(6)-1
                appropriately aligns with the purposes of credit sought in the small
                business credit market. As explained above, the Bureau has clarified
                the distinction between the purpose of the credit and the collateral
                involved, as one SER suggested. In addition, the Bureau believes that
                the explanations and instructions in the proposed commentary
                accompanying Sec. 1002.107(a)(6) should reduce any confusion as to how
                a financial institution would comply when an application involves
                multiple purposes, and in other situations. In regard to the SER
                comment about multiple lines of credit for different purposes within
                the same account, see the discussion of ``covered application'' in the
                section-by-section analysis of proposed Sec. 1002.103(a) above.
                 The Bureau seeks comment on its proposed approach to the credit
                purpose data point. In addition, the Bureau seeks comment on whether
                there are any purposes that should be added to or modified on its
                proposed list including, in particular, on the potential usefulness of
                including ``agricultural credit'' and ``overdraft line of credit'' in
                the credit purposes list. Finally, the Bureau requests comment on
                whether further explanations or instructions with respect to this data
                point would facilitate compliance.
                107(a)(7) Amount Applied For
                Background
                 Section 1071 requires financial institutions to collect and report
                ``the amount of the credit or credit limit applied for, and the amount
                of the credit transaction or the credit limit approved.'' \566\
                ---------------------------------------------------------------------------
                 \566\ ECOA section 704B(e)(2)(C).
                ---------------------------------------------------------------------------
                 The Bureau notes that for HMDA, Regulation C Sec. 1003.4(a)(7)
                requires reporting of ``the amount of the covered loan or the amount
                applied for, as applicable,'' which requires reporting of the amount
                applied for only when the credit is not originated. Because section
                1071 uses the conjunction ``and'' rather than ``or,'' the Bureau reads
                section 1071 to require collection and reporting of the amount applied
                for regardless of whether the application is ultimately approved or
                originated. (The amount approved or originated data point is addressed
                in proposed Sec. 1002.107(a)(8).)
                SBREFA Proposals Under Consideration and Feedback Received
                 The Bureau stated in the SBREFA Outline that it was considering
                requiring financial institutions to report the amount applied for data
                point using the initial amount of credit or credit limit requested by
                the applicant at the application stage, or later in the process but
                prior to the financial institution's evaluation of the credit
                request.\567\ The Bureau further explained in the SBREFA Outline that
                this method would not require reporting of amounts discussed before an
                application is made to a financial institution, but would capture the
                initial amount requested at the application stage or later, and would
                reflect the amount of the request that was evaluated by the financial
                institution in making a credit decision. In addition, if the applicant
                did not request a particular amount, but the financial institution
                underwrote the application as being for a specific amount, the
                financial institution would report the amount considered for
                underwriting. If the particular product applied for would not involve a
                specific amount requested or underwritten, the financial institution
                would report ``Not Applicable'' for this data point. Finally, the
                Bureau suggested in the SBREFA Outline \568\ that when an applicant
                responds to a ``firm offer'' that specifies an amount, which may occur
                in conjunction with a pre-approved credit solicitation, the amount
                applied for would generally be the amount of the firm offer.
                ---------------------------------------------------------------------------
                 \567\ SBREFA Outline at 28-29.
                 \568\ Id.
                ---------------------------------------------------------------------------
                 Because of the relationship between the amount applied for and the
                amount approved or originated data points, the following summary of SER
                feedback includes input on both.\569\ One SER articulated the
                importance of capturing data on both the amount applied for and the
                amount approved, stating that both data points were necessary to
                identify potentially discriminatory practices, such as discouragement,
                in the lending process. Another SER explained that the amount applied
                for could change during the iterative application process, particularly
                with a business that may not have previously had a banking relationship
                with the financial institution, but that the amount generally stayed
                consistent through underwriting. Other SERs asserted that differences
                between the amounts requested and approved were frequent, for a variety
                of reasons. One SER stated that they notify applicants of a preliminary
                offered amount, which often changes after documentation and
                underwriting. One example offered was that disparities between the
                amount applicants applied for and the amount the lenders approved may
                be attributable to collateral being assessed at a different value than
                the amount the applicants initially requested. Some SERs also remarked
                that differences in these amounts were often attributable to financial
                institutions acting as counselors or advisors to small businesses,
                including start-ups, and going back and forth until arriving at an
                amount that is appropriate given the customer's needs.
                ---------------------------------------------------------------------------
                 \569\ See SBREFA Panel Report at 27-28.
                ---------------------------------------------------------------------------
                 One SER (who supported reporting the amount initially applied for
                and the amount approved) strongly opposed reporting counteroffers,
                stating that negotiation is quite prevalent in small business lending.
                Another SER suggested that the Bureau use ranges for reporting the
                amount applied for, rather than specific numbers, and that the Bureau
                allow a financial institution to report ``not applicable'' if an
                applicant does not specify an amount requested. A SER also suggested
                there could be other potential complexities in capturing data on credit
                amount/limit the applicant applied for and credit amount/limit the
                lender approved, such as simultaneous or grouped financings involving
                multiple products, different sub-limits for each product or loan, and
                [[Page 56447]]
                a general credit limit for an entire facility. SERs asked that these
                data points be captured in a manner that took these complexities into
                account.
                 The SBREFA Panel recommended that the Bureau seek comment on
                potential methods for avoiding misinterpretations of disparities
                between the credit amount/limit applied for and the credit amount/limit
                approved.\570\
                ---------------------------------------------------------------------------
                 \570\ Id.
                ---------------------------------------------------------------------------
                 The Bureau also received feedback from other stakeholders regarding
                this data point. Industry stakeholders providing feedback on the SBREFA
                Outline emphasized that arriving at an applied for amount is a complex,
                iterative process and that the reporting requirement should be
                flexible. One stakeholder suggested that the Bureau propose to require
                reporting of the amount of the request that was evaluated by the
                financial institution in making the credit decision. That stakeholder
                echoed the comments of others when it explained that the amount of
                credit requested can change a great deal in formulating an application.
                The stakeholder further explained that some borrowers request a
                specific amount immediately, others may not arrive at a number until
                after two or three sessions, and still others may float multiple
                numbers during several conversations, trying to gauge a loan officer's
                reaction. Another stakeholder commented that an applicant's stated
                credit desires can be arbitrary and that comparing the initial amount
                requested against the amount approved could be misleading and is not a
                reliable measure of the health or efficacy of small business lending.
                Other stakeholders stated that an applicant will often or usually state
                a specific amount early on, but that the amount will usually change
                during the process for various appropriate reasons. One stakeholder
                explained that small business loans generally are not a quick affair
                and require substantial review by and interaction between the lender
                and borrower, and business credit that it is uncommon for a small
                business applicant's requested credit amount to stay the same from
                application to underwriting. One trade association stated that many
                small businesses will request a much higher loan amount than what is
                ultimately approved after evaluation of collateral, particularly in
                transactions involving real estate or equipment, and that for start-ups
                and sole proprietorships a lack of sophistication can also lead to
                initial requests being unrealistic. That trade association further
                explained that in these cases, the financial institution will work with
                the applicant to arrive at a more reasonable amount, which could take
                place over a period of weeks or months. The trade association then
                recommended that the Bureau allow reporting of an amount that is
                determined at a later stage than the first request. Finally, another
                industry stakeholder requested that the Bureau propose to allow
                reporting of the applied for amount using ranges of numbers, stating
                that applicants often request credit this way.
                 A community group stakeholder stated that the Bureau should require
                financial institutions to report the initial amount requested at the
                time of application, explaining that the amount of credit requested is
                important for the purposes of section 1071, which it described as
                including enforcing fair lending laws and assessing whether credit
                needs are met.
                 Two stakeholders supported the use of ``not applicable'' when the
                credit product does not have a specific amount or limit, and another
                stakeholder said that no ``applied for'' credit limit should be
                required for open-end products. Two other stakeholders requested that
                the Bureau allow the use of ``not applicable'' whenever an applicant
                does not request a specific amount.
                Proposed Rule
                 The Bureau is proposing in Sec. 1002.107(a)(7) to require that a
                financial institution collect and report ``the initial amount of credit
                or the initial credit limit requested by the applicant.'' Proposed
                comment 107(a)(7)-1 would explain that a financial institution is not
                required to report credit amounts or limits discussed before an
                application is made, but must capture the amount initially requested at
                the application stage or later. In addition, proposed comment
                107(a)(7)-1 would state that if the applicant does not request a
                specific amount, but the financial institution underwrites the
                application for a specific amount, the financial institution reports
                the amount considered for underwriting as the amount applied for.
                Finally, proposed comment 107(a)(7)-1 would instruct that if the
                applicant requests an amount as a range of numbers, the financial
                institution reports the midpoint of that range.
                 The Bureau is aware that there could be complexity in pinpointing
                the specific initial amount requested by an applicant in the fluid
                process of a small business credit application, which the Bureau
                acknowledges could make this data point difficult for financial
                institutions to collect and report. Nonetheless, the statute requires
                that the amount applied for be reported, and that information could be
                important for both of section 1071's statutory purposes. The Bureau
                believes that its proposed regulatory text and commentary, described
                above, would provide a flexible compliance regime for this data point
                that would accommodate different business practices. A financial
                institution would not be required to report amounts discussed before
                the application is made, which would accommodate preliminary informal
                interactions. In addition, the proposed comment's instruction on how to
                report this data point when the applicant requests a range of numbers
                would facilitate compliance in that situation and yield data that would
                be comparable to the other data collected for this data point (i.e.,
                specific numbers and not ranges of numbers). The Bureau believes that
                more precise information will be more useful and should not create
                extra difficulty for financial institutions to collect.
                 Furthermore, proposed comment 107(a)(7)-1 would address the method
                for reporting when no initial amount is requested by the applicant--
                that is, the financial institution reports the amount considered for
                underwriting as the amount applied for. The Bureau believes that this
                method would aid compliance and yield appropriate data by avoiding the
                need to report a preliminary number when a financial institution's
                business practices do not result in there being such a number to
                report. The Bureau understands that a specific amount is often not
                required by many financial institutions for products such as credit
                cards, as the financial institution assigns the credit limit as part of
                the credit evaluation process.
                 The SER and stakeholder feedback from SBREFA suggest that mandating
                reporting of an amount applied for in all cases could impose undue
                compliance burden and complicate Regulation B compliance for entities
                that do not, for certain products, currently require that the borrower
                request a specific credit amount or credit limit as part of the
                financial institution's application process. In light of the
                complexities and concerns described by the SERs and other stakeholders,
                and the Bureau's understanding that sometimes there is no amount
                underwritten to, the Bureau believes that the amount applied for data
                point should avoid interfering with this arrangement by allowing use of
                ``not applicable'' in certain instances. Thus, proposed comment
                107(a)(7)-2 would explain that if the particular product applied for
                does not involve a
                [[Page 56448]]
                specific amount requested or underwritten, the financial institution
                reports that the requirement is ``not applicable.''
                 In addition to situations in which no amount applied for is
                requested by the financial institution or underwritten to and the
                amount applied for would be ``not applicable,'' as described above, the
                Bureau understands that there may be situations where the financial
                institution requests an amount applied for but the applicant
                nonetheless does not provide one. To address this situation, proposed
                comment 107(a)(7)-2 would explain that, in compliance with proposed
                Sec. 1002.107(c)(1), a financial institution shall maintain procedures
                reasonably designed to collect applicant-provided information, which
                includes the credit amount initially requested by the applicant.
                However, if a financial institution is nonetheless unable to collect or
                otherwise determine the amount initially requested, the financial
                institution reports that the amount applied for is ``not provided by
                applicant and otherwise undetermined.'' The Bureau believes that
                providing the reporting flexibilities in proposed comment 107(a)(7)-2,
                along with the proposed reporting of the amount presented for
                underwriting when appropriate, would facilitate compliance by
                accommodating different business practices and would also allow for
                collection of useful data.
                 Proposed comment 107(a)(7)-3 would provide instructions for
                reporting the amount applied for in regard to firm offers. ``Firm
                offers'' involve solicitations to small businesses when they have been
                pre-approved for a term loan, line of credit, or credit card.\571\
                Proposed comment 107(a)(7)-3 would explain that when an applicant
                responds to a ``firm offer'' that specifies an amount or limit, which
                may occur in conjunction with a pre-approved credit solicitation, the
                financial institution reports the amount applied for as the amount of
                the firm offer, unless the applicant requests a different amount. If
                the firm offer does not specify an amount or limit and the applicant
                does not request a specific amount, the amount applied for is the
                amount underwritten by the financial institution. The Bureau believes
                that when the applicant knows the amount of the pre-approval before
                responding, that figure could appropriately be considered as the amount
                applied for. The Bureau understands that financial institutions often
                provide an amount in such solicitations. But if no amount appears in
                the pre-approved solicitation, the Bureau considers that an applicant
                responding to the firm offer has not requested a specific amount, and
                reporting of the amount underwritten would be appropriate. The Bureau's
                proposal follows the SBREFA Outline's approach under consideration for
                handling firm offers, and the SERs and other stakeholders did not
                object to this method. The Bureau seeks comment, however, on whether it
                should handle reporting of the amount applied for in connection with
                firm offers in a different manner than as set forth in this proposed
                comment, such as by requiring reporting of ``not applicable'' in
                situations where the firm offer does not specify an amount or limit and
                the applicant does not request one.
                ---------------------------------------------------------------------------
                 \571\ See 15 U.S.C. 1681a(l); see also Regulation B comment
                12(b)(7)-1 (describing offers of credit).
                ---------------------------------------------------------------------------
                 Proposed comment 107(a)(7)-4 would explain that when reporting a
                covered application that seeks additional credit amounts on an existing
                account, the financial institution reports only the additional credit
                amount sought, and not any previous amounts sought or extended. The
                Bureau believes that this comment would facilitate compliance by
                providing clear guidance on reporting in this situation, and that
                avoiding double reporting of previous amounts would result in more
                appropriate and useful data. The Bureau notes that a request to
                withdraw additional credit amounts at or below a previously approved
                credit limit amount on an existing open-end line of credit would not be
                a covered application, and so proposed comment 107(a)(7)-4 would not
                apply to such a situation.
                 The Bureau believes that the proposed regulatory text and
                commentary described above would alleviate many of the concerns of the
                SERs and other stakeholders providing feedback on the SBREFA Outline.
                The Bureau notes that the proposal would accommodate different business
                practices and the often fluid nature of amounts applied for in small
                business lending. In regard to concerns about disparities between the
                amount applied for and the amount approved or originated, section 1071
                requires the collection and reporting of the amount applied for, which
                is important for both of section 1071's statutory purposes.
                 The Bureau seeks comment on its proposed approach to the amount
                applied for data point. The Bureau also requests comment on how best to
                require reporting of amount applied for in situations involving
                multiple products or credit lines under a single credit limit. The
                Bureau also requests comment on potential methods for avoiding
                misinterpretations of disparities between the amount applied for and
                the amount approved or originated. Finally, the Bureau requests comment
                on its proposed approach to reporting when a range of numbers is
                requested.
                107(a)(8) Amount Approved or Originated
                Background
                 Section 1071 requires financial institutions to collect and report
                ``the amount of the credit or credit limit applied for, and the amount
                of the credit transaction or the credit limit approved.'' \572\ (The
                amount applied for data point is addressed in proposed Sec.
                1002.107(a)(7).) As explained in the section-by-section analysis of
                proposed Sec. 1002.107(a)(7) above, the Bureau reads section 1071 to
                require collection and reporting of the amount or limit applied for as
                well as the amount of the credit transaction or credit limit approved.
                ---------------------------------------------------------------------------
                 \572\ ECOA section 704B(e)(2)(C).
                ---------------------------------------------------------------------------
                SBREFA Proposals Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau explained that it was considering
                proposing that financial institutions report (1) the amount of the
                originated loan for a closed-end origination; (2) the amount approved
                for a closed-end loan application that is approved but not accepted;
                and (3) the amount of the credit limit approved for open-end products
                (regardless of whether the open-end product is originated or approved
                but not accepted).\573\ In light of the potential meaning of the
                statutory language, the Bureau explained that it was considering
                proposing different standards for closed-end and open-end products. In
                addition, the financial institution would report ``Not Applicable'' for
                this data point for applications that are denied, closed for
                incompleteness, or withdrawn by the applicant before a credit decision
                is made.
                ---------------------------------------------------------------------------
                 \573\ SBREFA Outline at 23.
                ---------------------------------------------------------------------------
                 The relevant SBREFA Panel Report section summarized feedback on
                both the amount applied for and the amount approved data points. For
                ease of reading, the Bureau has included the discussion of both above
                in the section-by-section analysis of proposed Sec. 1002.107(a)(7).
                The following summary focuses more on the amount approved or originated
                data point. One SER articulated the importance of capturing data on
                both the amount applied for and the amount approved, stating that both
                data points were necessary to identify practices, such as
                [[Page 56449]]
                discouragement, in the lending process. Other SERs asserted that
                differences between the amounts requested and approved were frequent,
                for a variety of reasons. One SER stated that they notify applicants of
                a preliminary offered amount, which often changes after documentation
                and underwriting. One example offered was that disparities between the
                amount applicants applied for and the amount the lenders approved may
                be attributable to collateral being assessed at a different value than
                the amount the applicants initially requested.
                 One SER (who supported reporting the amount initially applied for
                and the amount approved) strongly opposed reporting counteroffers,
                stating that negotiation is quite prevalent in small business
                lending.\574\ Another SER also suggested there could be other potential
                complexities in capturing data on credit amount/limit the applicant
                applied for and credit amount/limit the lender approved, such as
                simultaneous or grouped financings involving multiple products,
                different sub-limits for each product or loan, and a general credit
                limit for an entire facility. SERs asked that these data points be
                captured in a manner that took these complexities into account.
                ---------------------------------------------------------------------------
                 \574\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 27-28.
                ---------------------------------------------------------------------------
                 As noted in the feedback summary above, the SBREFA Panel
                recommendation addressed both the amount applied for and the amount
                approved data points. The Panel recommended that the Bureau seek
                comment on potential methods for avoiding misinterpretations of
                disparities between the credit amount/limit applied for and the credit
                amount/limit approved.\575\
                ---------------------------------------------------------------------------
                 \575\ Id. at 46.
                ---------------------------------------------------------------------------
                 Few of the stakeholders who provided written feedback on the SBREFA
                Outline objected to the reporting method under consideration for amount
                approved/originated. One commenter asked that this data point be
                reported using ranges of numbers rather than specific amounts, in order
                for it to be uniform with the method it suggested for the amount
                applied for data point. Other commenters pointed out possible confusion
                as to the definitions of closed-end and open-end credit. In addition,
                commenters stated that sometimes applicants are provided more than one
                approval amount, and one commenter suggested that in such cases the
                Bureau should require reporting of the highest approval amount when the
                credit is approved but not accepted.
                Proposed Rule
                 The Bureau is proposing in Sec. 1002.107(a)(8) that the amount
                approved or originated data point be collected and reported as follows:
                (i) For an application for a closed-end credit transaction that is
                approved but not accepted, the financial institution collects and
                reports the amount approved by the financial institution; (ii) for a
                closed-end credit transaction that is originated, the financial
                institution collects and reports the amount of credit originated; and
                (iii) for an application for an open-end credit transaction that is
                originated or approved but not accepted, the financial institution
                collects and reports the amount of the credit limit approved.
                 The Bureau's proposal follows the SBREFA Outline approach for this
                data point, with certain adjustments and clarifications. First, for
                clarity the proposed rule refers to this data point as ``amount
                approved or originated.'' In addition, the Bureau is proposing comment
                107(a)(8)-2 to explain that when a financial institution presents
                multiple approval amounts from which the applicant may choose, and the
                credit is approved but not accepted, the financial institution reports
                the highest amount approved. The Bureau believes that reporting the
                highest amount approved when credit is approved but not accepted, as
                addressed in this proposed comment, would most accurately reflect the
                amount of credit that was made available to the applicant in this
                situation.
                 Proposed comment 107(a)(8)-1 would provide general instructions for
                the amount approved or originated data point, explaining that a
                financial institution would comply with proposed Sec. 1002.107(a)(8)
                by reporting the amount approved or originated for credit that is
                originated or approved but not accepted. For applications that the
                financial institution, pursuant to proposed Sec. 1002.107(a)(9),
                reports as denied, withdrawn by the applicant, or incomplete, the
                financial institution would report that the amount approved or
                originated is ``not applicable.'' The Bureau believes that these
                instructions and providing for reporting of ``not applicable'' in
                certain circumstances will facilitate compliance for this data point
                and elicit accurate and appropriate data.
                 Proposed comments 107(a)(8)-3 and -4 would provide specific
                instructions for identifying and reporting the amount approved or
                originated for closed-end transactions, including refinancings. The
                Bureau believes that the instructions provided would facilitate
                compliance and elicit accurate and useful data.
                 Proposed comment 107(a)(8)-5 would provide instructions regarding
                counteroffers and the amount approved or originated data point,
                explaining that if an applicant agrees to proceed with consideration of
                a counteroffer for an amount or limit different from the amount for
                which the applicant applied, and the covered credit transaction is
                approved and originated, the financial institution reports the amount
                granted. Proposed comment 107(a)(8)-5 would further explain that if an
                applicant does not agree to proceed with consideration of a
                counteroffer or fails to respond, the institution reports the action
                taken on the application as denied and reports ``not applicable'' for
                the amount approved or originated. The proposed comment would then
                provide a reference to proposed comment 107(a)(9)-2, which discusses
                the action taken data point in relation to counteroffers. For a more
                complete discussion of how the proposed rule would treat reporting
                obligations for applications involving counteroffers, see the section-
                by-section analysis of proposed Sec. 1002.107(a)(9) below (action
                taken).
                 Most of the SER feedback on the amount approved or originated data
                point focused on its relation to the amount applied for data point.
                That issue is discussed in the section-by-section analysis of proposed
                Sec. 1002.107(a)(7) above (amount applied for). One SER also expressed
                concern about reporting counteroffers in relation to the amount
                approved or originated data point. The Bureau believes that, as
                explained above, proposed comment 107(a)(8)-5 provides an appropriate
                and manageable method for reporting amount approved or originated in
                counteroffer situations. Other stakeholders asked that the Bureau take
                into account the complexity of multiple product or account situations.
                The Bureau has done so in relation to its treatment of covered
                applications, discussed in the section-by-section analysis of proposed
                Sec. 1002.103(a) above. In regard to the comment concerning confusion
                between closed-end and open-end credit, the Bureau is proposing to
                define these terms clearly in the regulatory text at proposed Sec.
                1002.102(e) and (n). As for the suggestion that the amount approved or
                originated data point be reported using ranges of numbers (for
                consistency with its request to report the amount applied for data
                point using ranges), the Bureau is not proposing to have financial
                institutions report the amount applied for using ranges of numbers,
                though it
                [[Page 56450]]
                does seek comment on this possibility in the section-by-section
                analysis of proposed Sec. 1002.107(a)(7) above.
                 The Bureau reads the statutory language ``the amount of the credit
                transaction or the credit limit approved'' to require the amount of the
                credit limit approved to be reported for open-end applications, and the
                amount of the credit transaction to be reported for closed-end
                applications. The Bureau believes the phrase ``the amount of the credit
                transaction or the credit limit approved'' to be ambiguous in regard to
                closed-end transactions because the most common meaning of the word
                ``transaction'' in the context for closed-end credit transactions would
                be an originated loan. Thus, the Bureau reasonably interprets the
                statute as requiring reporting of the amount originated for closed-end
                credit transactions. In the alternative, section 1071 authorizes the
                Bureau to include any ``additional data that the Bureau determines
                would aid in fulfilling the purposes of [section 1071].'' The Bureau
                has determined that for closed-end credit transactions that are
                originated, reporting of the amount originated would aid in fulfilling
                the enforcement of fair lending laws, by indicating the credit that had
                been provided to different types of applicants in actual transactions.
                The Bureau has also determined that reporting of the amount originated
                for closed-end credit transactions would aid in fulfilling the business
                and community development purpose of section 1071 by providing a more
                complete and accurate picture of the credit actually being provided to
                different businesses and communities. In addition, in the alternative,
                the Bureau believes that it is appropriate to use its exception
                authority under ECOA section 704B(g)(2) to require the amount
                originated, rather than the amount approved, for originated closed-end
                credit transactions, because collecting data on the amount approved
                instead of the amount originated for a closed-end transaction would
                compromise the utility and quality of the data being reported, thus
                inhibiting the fair lending and business and community development
                purposes of section 1071.
                 Similarly, the Bureau has determined that for closed-end credit
                that is approved but not accepted, the amount approved would aid in
                fulfilling the purposes of section 1071. Primarily, reporting of the
                amount approved for closed-end credit would aid in fulfilling the
                enforcement of fair lending laws, by indicating the credit that had
                been offered to different types of applicants when the transaction does
                not close and there is no amount originated to report. Reporting of the
                amount approved for closed-end credit would also aid in fulfilling the
                business and community development purpose of section 1071 by providing
                a more complete picture of the credit being offered to different
                businesses and communities.
                 The Bureau seeks comment on its proposed approach to the amount
                approved or originated data point, including on the specific requests
                for input above. As recommended by the SBREFA Panel and explained in
                the section-by-section analysis of proposed Sec. 1002.107(a)(7) above,
                the Bureau requests comment on potential methods for avoiding
                misinterpretations of disparities between the credit amount or limit
                applied for and the credit amount or limit originated or approved and
                on the possible use of ranges of numbers for reporting the amount
                applied for and amount approved or originated data points. In addition,
                the Bureau requests comment on whether it would be useful and
                appropriate to require reporting of the amount approved as well as the
                amount originated for originated closed-end credit transactions.
                107(a)(9) Action Taken
                Background
                 ECOA section 704B(e)(2)(D) requires financial institutions to
                report the ``type of action taken'' on an application.
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated it was considering
                proposing five categories for reporting ``action taken'': Loan
                originated, application approved but not accepted, application denied,
                incomplete application (closed or denied), and application withdrawn by
                the applicant.\576\
                ---------------------------------------------------------------------------
                 \576\ SBREFA Outline at 29-30.
                ---------------------------------------------------------------------------
                 Action taken categories in general. Most SERs were supportive of
                the action taken categories under consideration.\577\ Several SERs
                stated that the categories align with information they currently
                collect. One SER explained that a single application could pass through
                all of these stages and expressed concern that identifying the right
                category to report may be subjective and questioned by examiners or
                auditors after the fact. Another SER asked for additional clarity on
                the difference between denied applications and incomplete applications.
                This SER also suggested adding a category for lenders to indicate if an
                applicant is rate shopping. The SBREFA Panel recommended that the
                Bureau further clarify the circumstances in which each of the action
                taken categories should be used.\578\
                ---------------------------------------------------------------------------
                 \577\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 28-29.
                 \578\ Id. at 46.
                ---------------------------------------------------------------------------
                 Of the other stakeholders that provided feedback on this issue,
                several supported the action taken codes set forth in the SBREFA
                Outline. One industry commenter stated that the data point would
                generally not be difficult or expensive to report and two commenters
                reported currently tracking some similar (though not identical) fields.
                One community group commenter underscored the importance of collecting
                action taken codes (including approvals and denials) in order to track
                demand for credit and identify potential discrimination. The commenter
                also noted current available data (Community Reinvestment Act data and
                surveys) on small business lending provides limited information on
                supply and demand. The commenter stated that capturing incomplete and
                withdrawn applications was important as it may reflect discouragement
                or discriminatory treatment, and that the approved but not accepted
                category could reflect less favorable pricing or loan terms. Two
                industry commenters suggested the Bureau further simplify the action
                taken categories by eliminating the approved but not accepted and
                incomplete categories, and including only originated, abandoned, and
                denied categories. One stakeholder suggested adding a field for other
                circumstances, such as rate shopping. Several community group
                commenters suggested the action taken categories be expanded to include
                all the HMDA action taken categories.
                 Treatment of counteroffers. In response to a question in the SBREFA
                Outline about whether counteroffers should be separately identified in
                the 1071 data set, several SERs discussed the frequency of
                counteroffers in small business lending and the potential utility of
                capturing counteroffers in 1071 data. One SER expressed concern with
                reporting each adjustment in the application process because, they
                said, not all counteroffers are memorialized in writing. In the context
                of discussions on the amount approved data point, a SER strongly
                opposed reporting counteroffers, stating that negotiation is quite
                prevalent in small business lending. The SBREFA Panel recommended the
                Bureau seek comment on whether to capture counteroffers in 1071 data,
                and if so, the best method for doing so.\579\
                ---------------------------------------------------------------------------
                 \579\ Id.
                ---------------------------------------------------------------------------
                 Other stakeholders also commented on counteroffers. Several
                industry
                [[Page 56451]]
                commenters stated that counteroffers should not be reported. The
                commenters noted that there are often multiple rounds of back-and-forth
                communications in small business lending, that capturing counteroffers
                is unnecessary as the information is practically captured in the loan
                decision and other 1071 data (such as loan amount approved), and that
                counteroffers are not necessary to show the availability of credit. If
                reported, several industry commenters suggested use of a data flag to
                simplify reporting, avoid reporting of potentially numerous
                counteroffers in a single application, and avoid the additional costs
                for financial institutions to conduct edits and validity checks on each
                separate counteroffer. Another industry representative also urged that
                if counteroffers are reported, they should be considered a single
                application. No community groups commented on this topic.
                Proposed Rule
                 The Bureau is proposing in Sec. 1002.107(a)(9) to require
                reporting of the action taken by the financial institution on the
                covered application, reported as originated, approved but not accepted,
                denied, withdrawn by the applicant, or incomplete. As discussed above,
                most SERs and other stakeholders were generally supportive of these
                categories. In addition, the Bureau is proposing to categorize all
                incomplete applications as a single category of ``incomplete''; while
                this proposed approach is not consistent with Regulation C comments
                4(a)(8)(i)-4 and -6, the Bureau is concerned about potential errors in
                the data if financial institutions report incomplete denials separate
                from notices of incompleteness. There may also be some benefit for fair
                lending analysis to reserve the denied category solely for credit-
                related denials, rather than denials that are based on incompleteness.
                As noted below, the Bureau seeks comment on reporting the
                ``incomplete'' action taken category.
                 In response to commenter suggestions, the Bureau considered
                removing or combining several action taken categories. For example, the
                Bureau considered eliminating the approved but not accepted category;
                however, because the Bureau believes data collected under this category
                would reflect demand for credit, the Bureau is retaining this category
                in its proposal. The Bureau also considered removing the category of
                incomplete applications. However, because the Bureau believes capturing
                data on incomplete applications is essential to identifying potential
                discrimination and discouragement during the application process, the
                Bureau is retaining this action taken category as well. Finally, the
                Bureau considered combining the incomplete and withdrawn categories,
                since both actions reflect an applicant's inability or affirmative
                decision not to proceed with the request for credit. However, the
                Bureau is retaining incomplete and withdrawn as separate categories, as
                a high incidence of incomplete applications could signal an issue with
                the level of assistance provided by the financial institution (for
                example, not providing reasonable support or assistance to ensure an
                applicant satisfies all credit conditions; or providing more support to
                some applicants than others). As noted below, the Bureau seeks comment
                on this issue.
                 The Bureau is not proposing additional action taken categories
                beyond what was considered in the SBREFA Outline. Although some
                commenters suggested the Bureau expand the action taken codes to those
                currently used in Regulation C (including preapprovals or purchased
                loans), the Bureau does not believe those additional fields would be
                appropriate or necessary in the context of section 1071 given the
                diversity of processes and other complexities in the small business
                lending space and because section 1071, unlike HMDA, does not expressly
                reference loan purchases.
                 The Bureau also considered, but is not proposing, adding an action
                taken category or flag for counteroffers. As noted by certain SERs and
                other commenters, it would be potentially infeasible to capture all of
                the proposed 1071 data fields for every back-and-forth counteroffer
                with an applicant, and attempting to do so would likely lead to
                confusion and data errors. The Bureau also agrees with commenter
                feedback that, even without a counteroffer flag or field, the proposed
                section 1071 data fields would capture many of the terms of accepted
                counteroffers (such as pricing, guarantee, etc.), as well as the amount
                initially requested by the applicant. Thus, the Bureau believes the
                addition of a counteroffer flag or field would provide limited useful
                information beyond what would be captured under the current proposal.
                Moreover, while a counteroffer flag or field might be useful as a
                screening tool for potential discrimination (for example, if women-
                owned businesses or minority-owned businesses are provided
                counteroffers or denied at a higher rate than male- or non-Hispanic
                white-owned businesses), a flag alone would lack any specificity to
                provide further fair lending analysis.
                 Following the SBREFA Panel's recommendation and feedback from other
                stakeholders, proposed comment 107(a)(9)-1 would provide additional
                clarity on when a financial institution should select each of the
                proposed action taken codes. The financial institution identifies the
                applicable action taken code based on final action taken on the covered
                application.
                 Proposed comment 107(a)(9)-2 would provide instructions for
                reporting action taken on covered applications that involve a
                counteroffer, along with examples. The Bureau's proposed treatment of
                counteroffers aligns with how counteroffers are treated under existing
                Sec. 1002.9 notification procedures. Specifically, proposed comment
                107(a)(9)-2 would state that if a financial institution makes a
                counteroffer to grant credit on terms other than those originally
                requested by the applicant and the applicant declines to proceed with
                the counteroffer or fails to respond, the institution reports the
                action taken as a denial on the original terms requested by the
                applicant. If the applicant agrees to proceed with consideration of the
                financial institution's counteroffer, the financial institution reports
                the action taken as the disposition of the application based on the
                terms of the counteroffer. This proposed approach to reporting
                counteroffers also aligns with how they are reported under Regulation
                C.\580\
                ---------------------------------------------------------------------------
                 \580\ Regulation C comment 4(a)(8)(i)-9.
                ---------------------------------------------------------------------------
                 Proposed comment 107(a)(9)-3 would discuss reporting action taken
                for rescinded transactions. Proposed comment 107(a)(9)-4 would clarify
                that a financial institution reports covered applications on its small
                business lending application register for the year in which final
                action is taken. Finally, proposed comment 107(a)(9)-5 would provide
                guidance for reporting action taken if a financial institution issues
                an approval that is subject to the applicant meeting certain
                conditions.
                 The Bureau seeks comment on proposed Sec. 1002.107(a)(9) that
                would require reporting of action taken and the associated commentary.
                The Bureau also specifically seeks comment on whether the ``withdrawn
                by applicant'' category should be merged with the ``incomplete''
                category for purposes of reporting action taken. The Bureau seeks
                comment as well on whether the Bureau's proposal to categorize all
                incomplete applications as a single category of ``incomplete'' (closed
                or denied) should instead be reported consistent with the approach in
                [[Page 56452]]
                Regulation C, which provides separate categories for denials (including
                on the basis of incompleteness) and files closed for incompleteness (if
                the financial institution sent a written notice of incompleteness). In
                addition, the Bureau seeks comment on whether counteroffers that are
                not accepted, such as a credit offer for a lower credit amount than
                requested, should be reported as ``approved but not accepted'' rather
                than ``denied,'' in order to reflect the availability of credit. As
                recommended by the SBREFA Panel, the Bureau also seeks comment on
                whether to specifically capture counteroffers in section 1071 data, and
                if so, whether to use a counteroffer flag in the data or some other
                method.
                107(a)(10) Action Taken Date
                 In addition to requiring financial institutions to collect and
                report the type of action they take on an application, as discussed in
                the section-by-section analysis of proposed Sec. 1002.107(a)(9) above,
                ECOA section 704B(e)(2)(D) requires financial institutions to collect
                and report the ``date of such action.''
                 In the SBREFA Outline, the Bureau indicated that it was considering
                proposing that the action taken date be reported with a day, month, and
                year, and requested feedback on potential challenges financial
                institutions may have in identifying such date for each of the action
                taken categories.\581\ The Bureau received limited comments on this
                data point during the SBREFA process.\582\ One SER suggested that the
                Bureau provide a grace period of several days before and after the
                action taken date. Another SER recommended that the date assigned as
                the action taken date be to the best of the financial institution's
                knowledge or belief given the uncertainty in assigning a particular
                date. The Bureau received similar feedback from other stakeholders. Two
                industry stakeholders suggested that a grace period or tolerance be
                provided to ease compliance burden, similar to the tolerance under
                consideration for the ``application date'' data point. One stakeholder
                recommended that the action taken date for approved and denied loans be
                the exact date such actions occurred.
                ---------------------------------------------------------------------------
                 \581\ SBREFA Outline at 30.
                 \582\ SBEFA Panel Report at 28-29.
                ---------------------------------------------------------------------------
                 Proposed Sec. 1002.107(a)(10) would require action taken date to
                be reported as the date of the action taken by the financial
                institution. Proposed comments 107(a)(10)-1 through -5 would provide
                additional details on how to report the action taken date for each of
                the action taken categories in proposed Sec. 1002.107(a)(9). For
                example, proposed comment 107(a)(10)-1 would explain that for denied
                applications, the financial institution reports either the date the
                application was denied or the date the denial notice was sent to the
                applicant.
                 The Bureau notes that its proposed approach for this data point
                largely mirrors the Regulation C approach for action taken date in
                Sec. 1003.4(a)(8)(ii) and related commentary, with modifications to
                align with the action taken categories in proposed Sec.
                1002.107(a)(9). Regarding the request from a SER and other stakeholders
                to adopt a grace period for the action taken date data point, the
                Bureau believes that a grace period or tolerance to report the action
                taken date would not be necessary, in light of the flexibility already
                provided in proposed comments 107(a)(10)-1 through -5. Further, the
                Bureau believes that financial institutions generally already have
                policies and procedures in place to capture the date an action is taken
                in the normal course of their business operations.
                 Proposed comment 107(a)(10)-4 would explain that for covered credit
                transactions that are originated, a financial institution generally
                reports the closing or account opening date. That proposed comment also
                states that if the disbursement of funds takes place on a date later
                than the closing or account opening date, the institution may,
                alternatively, use the date of initial disbursement.
                 The Bureau seeks comment on its proposed approach to the action
                taken date data point.
                 In addition, for originated transactions, the Bureau is considering
                whether the date the application was approved should be captured in
                addition to, or instead of, the date of closing or account opening. The
                Bureau is also considering whether the date of closing or account
                opening should be reported separately from the date of disbursement of
                funds (for term loans) or funds availability (for lines of credit).
                Having these dates reported separately would permit the Bureau and
                other data users to determine the length of time elapsed between when
                an application is approved, when the closing occurred or the account
                was opened, and when the applicant actually received the loan funds or
                access to funds. Specifically, the Bureau is concerned that a lengthy
                gap between the loan approval date and the date the funds are made
                available to applicants could have adverse effects particularly on
                certain types of small businesses. For example, in agricultural lending
                where planting and harvesting seasons fall within certain time frames,
                if loan proceeds are not provided within a certain period of time after
                the financial institution receives and approves an application, the
                loan proceeds may no longer be of maximum value to the applicant. The
                Bureau seeks comment on whether it should adopt data points to capture
                application approval date and/or the date funds are disbursed or made
                available.
                107(a)(11) Denial Reasons
                Background
                 ECOA section 704B(e)(2)(H) authorizes the Bureau to require
                financial institutions to compile and maintain ``any additional data
                that the Bureau determines would aid in fulfilling the purposes of
                [section 1071].'' In addition to requiring financial institutions to
                collect and report the action taken date for denied applications, as
                discussed in the section-by-section analysis of proposed Sec.
                1002.107(a)(10) above, the Bureau is proposing to require financial
                institutions to collect and report the principal reason or reasons an
                application was denied. The Bureau believes that collection of denial
                reason information would aid in fulfilling the purposes of section
                1071, as explained below.
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, as part of its discussion regarding the
                action taken data point, the Bureau requested feedback on whether
                financial institutions would prefer to report denial reasons to help
                explain the decision on an application, and if so, whether reporting
                denial reasons should be mandatory or optional.\583\
                ---------------------------------------------------------------------------
                 \583\ SBREFA Outline at 29-30.
                ---------------------------------------------------------------------------
                 When asked whether they would prefer reporting denial reasons to
                help explain the decision on an application, some SERs expressed
                concern about reporting denial reasons.\584\ These SERs asserted that
                requiring lenders to report reasons for denial could add more burden
                than benefit, may not be useful given the number of possible reasons
                for a denial, might not shed light on the actual reasons for a denial,
                may be difficult to standardize for uniform reporting, would require
                additional processes to ensure accurate reporting, and may present
                heightened privacy concerns. One SER expressed a preference to report
                denial reasons.
                ---------------------------------------------------------------------------
                 \584\ SBREFA Panel Report at 28-29.
                ---------------------------------------------------------------------------
                 Feedback received from other stakeholders was mixed. Stakeholders
                [[Page 56453]]
                opposing reporting denial reasons expressed concerns about the privacy
                of applicants' information if such data were released to the public.
                For example, they asserted that if denial reasons were released to the
                public, such information would make it easy to identify applicants from
                small communities and expose an applicant's sensitive business
                information like insufficient cashflow. One stakeholder mentioned that
                denial reasons may encompass multiple reasons and would therefore be
                burdensome to collect and store.
                 Stakeholders in favor of optional (rather than mandatory) reporting
                of denial reasons asserted that reporting this information would be
                unnecessary and burdensome and may further push small and mid-size
                financial institutions out of small business lending, and suggested
                that, if included in the rule, reporting not be made mandatory (that
                is, financial institutions would be permitted but not required to
                report such information, at the financial institution's discretion).
                One stakeholder suggested that rural community banks under $1 billion
                be exempted from reporting denial reasons due to data privacy concerns.
                 Finally, stakeholders in favor of mandatory reporting of denial
                reasons asserted that such data provide regulators and the public with
                important--and currently unavailable--data necessary to uncover fair
                lending issues and identify underwriting factors that need to be
                addressed. They stressed that the collection of denial data (via the
                action taken data point) accompanied by robust denial reasons will
                provide small business applicants with useful and actionable
                information. In addition, commenters noted that these data will help
                identify barriers to credit for small businesses and provide deeper
                insight into the reasons why credit is denied. The SBREFA Panel did not
                make any recommendations related to denial reasons.
                Proposed Rule
                 Proposed Sec. 1002.107(a)(11) would require reporting of the
                principal reason or reasons the financial institution denied the
                covered application. Proposed comment 107(a)(11)-1 would explain that a
                financial institution complies with proposed Sec. 1002.107(a)(11) by
                reporting the principal reason or reasons it denied the application,
                indicating up to four reasons. The financial institution reports only
                the principal reason or reasons it denied the application, even if
                there are fewer than four reasons. The proposed comment provides an
                example to illustrate. The proposed comment would also state that
                reasons reported must accurately describe the principal reason or
                reasons the financial institution denied the application. Finally, the
                proposed comment provides a list of denial reasons from which financial
                institutions would select the principal reason or reasons for denying a
                covered application.
                 Proposed comment 107(a)(11)-1 also explains that a financial
                institution reports the denial reason as ``other'' where none of the
                enumerated denial reasons adequately describe the principal reason or
                reasons it denied the application, and the institution reports the
                denial reason or reasons as free-form text. The Bureau believes that
                allowing financial institutions to choose ``other'' in this situation
                would facilitate compliance. In addition, collecting information on
                ``other'' denials would assist the Bureau in monitoring trends in this
                area and key developments in the small business lending market, which
                the Bureau could use to inform any future iterations of the list.
                 Proposed comment 107(a)(11)-2 would clarify that a financial
                institution complies with proposed Sec. 1002.107(a)(11) by reporting
                that the requirement is not applicable if the action taken on the
                application, pursuant to proposed Sec. 1002.107(a)(9), is not a
                denial, and provides an example.
                 The Bureau notes that its proposed approach for this data point
                largely mirrors the Regulation C approach for denial reasons in Sec.
                1003.4(a)(16) and related commentary, with modifications to align with
                the reasons applications are denied in the small business lending
                (rather than residential mortgage lending) context.
                 Pursuant to its authority under ECOA section 704B(e)(2)(H), the
                Bureau believes that data regarding denial reasons would further the
                purposes of section 1071 by allowing data users to better understand
                the rationale behind denial decisions, help identify potential fair
                lending concerns, and provide financial institutions with data to
                evaluate their business underwriting criteria and address potential
                gaps as needed. In addition, robust data on application denial reasons
                across applicants, financial institutions, products, and communities
                could help target limited resources and assistance to applicants and
                communities, thus furthering section 1071's community development
                purpose. With respect to fair lending compliance, denial reasons data
                would help data users analyze potential denial disparities.
                 With regard to the potential additional compliance burdens SERs and
                other commenters referenced, the Bureau believes that, as a practical
                matter, most financial institutions are already documenting the
                principal reason or reasons for the denial in an adverse action notice,
                or should be prepared to do so if requested.\585\ However, the Bureau
                recognizes that if a financial institution is not currently covered by
                existing adverse action notice requirements under Regulation B, it may
                face greater challenges in reporting this information than financial
                institutions that currently provide adverse action notifications. The
                concerns raised by SERs and other stakeholders regarding the privacy
                implications of denial reasons are addressed in part VI.C.viii below.
                ---------------------------------------------------------------------------
                 \585\ Existing Sec. 1002.9(a)(3) requires creditors to provide
                the specific reasons for action taken or to notify business credit
                applicants of their right to request the reasons for denying an
                application or taking other adverse action.
                ---------------------------------------------------------------------------
                 The Bureau also believes that exempting certain financial
                institutions from the requirement to report denial reasons, or
                permitting financial institutions to report denial reasons voluntarily,
                would not be appropriate given the need for consistent and meaningful
                data to further the purposes of section 1071. In addition, the Bureau
                considered gaps in the existing small business lending data and notes
                that available survey data are often not representative across the
                industry, does not provide timely information, and does not cover all
                entities involved in small business lending.\586\ The Bureau notes that
                the 2015 HMDA Final Rule added mandatory reporting of denial reasons to
                Regulation C because the Bureau recognized that the collection of
                denial reason data could facilitate more efficient and less burdensome
                fair lending examinations.\587\
                ---------------------------------------------------------------------------
                 \586\ See 2020 Small Business Credit Survey. The survey provides
                baseline data on the financing and credit positions of small firms
                in 2020. It delivers information on small business financing needs,
                decisions, and outcomes to policymakers, lenders, and service
                providers. However, the survey is not representative because it
                surveys only employer firms (with less than 500 employees) and is
                subject to the firms' self-reporting. Also, only aggregate denial
                reasons are provided, and further breakdowns are unavailable. In
                addition, the survey provides a very limited list of denial reasons
                to survey respondents that may not correspond to denial reasons from
                financial institutions. See also Fed. Deposit Ins. Corp., Small
                Business Lending Survey (2018), https://www.fdic.gov/bank/historical/sbls/section5.pdf.
                 \587\ See 80 FR 66127, 66204-05 (Oct. 28, 2015).
                ---------------------------------------------------------------------------
                 Finally, the Bureau is aware that certain stakeholders are
                concerned that reporting denial reason data may result in fair lending
                actions against financial institutions for potential discriminatory
                [[Page 56454]]
                disparities. The Bureau, however, believes that including denial
                reasons in 1071 data might actually reduce this risk, as it would allow
                financial institutions to point to potentially legitimate reasons for
                disparities.
                 The Bureau seeks comment on its proposed approach to this data
                point, including regarding whether the denial reason categories listed
                and explained in proposed comment 107(a)(11)-1 sufficiently cover the
                common credit denial reasons in the small business lending industry. If
                not, the Bureau seeks input on other denial reason categories to
                consider including in the proposed list of denial reasons. The Bureau
                also requests further comment on the potential utility of denial reason
                data as well as on the potential burdens to industry in reporting
                denial reasons, in light of the denial reason categories it is
                proposing and the data's ability to aid in fulfilling the purposes of
                section 1071.
                107(a)(12) Pricing Information
                Background
                 ECOA section 704B(e)(2)(H) authorizes the Bureau to require
                financial institutions to compile and maintain ``any additional data
                that the Bureau determines would aid in fulfilling the purposes of
                [section 1071].'' The Bureau believes that pricing data would serve to
                further both the fair lending purpose and the business and community
                development purpose of 1071. The majority of small businesses are run
                by a single owner without extensive financial experience or expert
                staff to navigate the commercial credit marketplace, which lacks many
                of the Federal protections found in consumer lending.\588\ Heightened
                risks to fair lending and small business development may arise from
                different pricing for the same products and the selective marketing of
                higher-priced or even predatory and unsustainable products. Because
                price-setting is integral to the functioning of any market, any
                analysis of the small business lending market--including to enforce
                fair lending laws or identify community and business development
                opportunities--would be less meaningful without this information.
                ---------------------------------------------------------------------------
                 \588\ For example, TILA's standardized disclosure requirements
                and limits on linking compensation to loan terms, including pricing,
                do not apply to business loans. See, e.g., 15 U.S.C. 1639b,
                Regulation Z Sec. 1026.36 (TILA's prohibition on basing loan
                originator compensation on loan terms).
                ---------------------------------------------------------------------------
                 Research conducted for the Department of Commerce has found that
                minority-owned businesses tend to pay higher interest rates on business
                loans than those that are not minority-owned,\589\ and a recent report
                by the Federal Reserve Bank of Atlanta found that minority-owned firms
                more frequently applied for potentially higher-cost credit products,
                and were also more likely to report challenges in applying for credit
                such as being offered high interest rates.\590\ In addition, research
                conducted for the SBA has found that Black- and Hispanic-owned
                businesses were less likely to have business bank loans and more likely
                to use more expensive credit card financing.\591\ The 2020 Small
                Business Credit Survey by a collaboration of Federal Reserve Banks
                found that small business applicants to nonbank lenders, such as online
                lenders and finance companies, were more likely to report high interest
                rates or unfavorable terms than applicants to depository
                institutions.\592\ To the extent that the recovery from the COVID-19
                pandemic and resulting economic crisis is still ongoing when the
                Bureau's final 1071 rule becomes effective, and in regard to economic
                emergencies affecting small business access to credit that may occur in
                the future, tracking pricing in this segment of the market is
                particularly important.
                ---------------------------------------------------------------------------
                 \589\ U.S. Dep't of Com., Minority Business Development Agency,
                Disparities in Capital Access between Minority and Non-Minority-
                Owned Businesses: The Troubling Reality of Capital Limitations Faced
                by MBEs, at 3, 5, 21, 36-37 (2010), https://archive.mbda.gov/page/executive-summary-disparities-capital-access-between-minority-and-non-minority-businesses.html.
                 \590\ Fed. Reserve Bank of Atlanta, Report on Minority Owned
                Firms: Small Business Credit Survey (Dec. 2019), https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2019/20191211-ced-minority-owned-firms-report.pdf.
                 \591\ Alicia Robb, Financing Patterns and Credit Market
                Experiences: A Comparison by Race and Ethnicity for U.S. Employer
                Firms, at 47 (2018) (prepared for Off. of Advocacy, Small Bus.
                Admin.), https://www.sba.gov/sites/default/files/Financing_Patterns_and_Credit_Market_Experiences_report.pdf.
                 \592\ However, the survey noted that online lenders tended to
                receive applications with lower credit scores so applicant risk
                could play a role in higher interest rates for nonbank lenders. See
                2020 Small Business Credit Survey at 15.
                ---------------------------------------------------------------------------
                 The Bureau believes pricing data are important because the
                statutory data points alone offer (1) limited insight into underwriting
                disparities and (2) no insight into predatory prices or pricing
                disparities. For example, they might show that a particular market
                segment is expanding and apparently filling an important need, but this
                could actually be an area with predatory conduct. Pricing information
                would allow the Bureau and others to understand the situation more
                accurately. Data collection without pricing information could have the
                unintended consequence of incentivizing irresponsible lending, as
                providers seeking to increase representation of underserved groups
                could be encouraged to adopt high-cost models of lending.
                 Without information on pricing, data users would be unable to
                screen for fair lending pricing risks, and regulators would be less
                able to focus their enforcement and supervision resources appropriately
                on situations of greater possibility for questionable activities. In
                addition, if potential discriminatory conduct is monitored effectively
                in regard to loan approvals, but not in regard to pricing, industry
                compliance systems may focus solely on approvals and denials and ignore
                potential pricing disparities. Having pricing data available under 1071
                would also increase transparency and help demonstrate to lenders where
                business opportunities exist to offer credit to underserved markets. In
                addition, it could demonstrate to small businesses the availability of
                more affordable credit.
                SBREFA Proposal Under Consideration and Feedback Received
                 At SBREFA, the Bureau stated that it was considering proposing to
                include pricing of originated credit and credit that is approved but
                not accepted as a discretionary data point because it could further the
                fair lending purpose of section 1071 by enhancing the ability to
                effectively and efficiently enforce fair lending laws. In addition, the
                Bureau stated that pricing data could add value in promoting market
                transparency and new product development opportunities, thus furthering
                the business and community development purpose of section 1071. The
                Bureau also stated that a pricing data point could be reported on the
                basis of annual percentage rate (APR), total cost of credit (TCC),
                interest rate and total fees, or some other pricing metric. The SBREFA
                Panel recommended that, if pricing were to be part of this proposal,
                the Bureau seek comment on potential methods for avoiding
                misinterpretations of disparities in pricing data.\593\
                ---------------------------------------------------------------------------
                 \593\ SBREFA Panel Report at 47.
                ---------------------------------------------------------------------------
                 During the SBREFA process, SERs provided various comments on the
                inclusion of pricing data in the rule.\594\ Feedback relevant to a
                specific pricing data point is discussed in the section-by-section
                analysis of proposed Sec. 1002.107(a)(12)(i) through (vi) below.
                Immediately below, the Bureau
                [[Page 56455]]
                addresses feedback relevant to reporting pricing information in
                general.
                ---------------------------------------------------------------------------
                 \594\ Id. at 31-32.
                ---------------------------------------------------------------------------
                 Some SERs urged the Bureau to require submission of a pricing
                metric, stating, for example, that pricing data are essential to
                understanding the operation of the market and the nature of credit
                extended. Some SERs supported use of APR as a pricing metric, including
                several who stated that they currently calculate APR. One SER (a CDFI)
                stated that they disclose APR to applicants now, and that if they are
                able to easily collect and report this data point without additional
                cost and burden, other FIs should be able to do the same. Several SERs
                supported the use of APR to enable comparisons of pricing across
                various small business lending products, and suggested the Bureau look
                to State-mandated and Truth in Lending Act APR disclosures for guidance
                on methodologies. One SER supported the use of APR as the metric if
                lenders and not the Bureau did the calculation. Another SER suggested
                the Bureau collect detailed pricing information, including APR, but
                ``hold harmless'' the reporting financial institutions to ensure the
                accuracy of the data. Conversely, at least two SERs opposed using APR
                as a pricing metric; one cited the burden associated with making that
                calculation and the other said pricing information based on APR would
                be confusing to small business owners. Several SERs supported reporting
                pricing information as interest rate and fees. Two SERs preferred using
                TCC. One SER suggested that the Bureau consider allowing financial
                institutions to choose which pricing metric they prefer to report.
                 A large majority of industry stakeholders opposed inclusion of any
                discretionary data points, and they were particularly concerned about a
                pricing data point. Several stakeholders stated that a pricing data
                point would be complex and costly to implement across various product
                types. One stakeholder was concerned about contracts that bundle
                services with credit, stating that pricing data would not capture the
                true economics of the transaction. Several stakeholders were worried
                about reputational risk because pricing could be publicly reported
                without contextual information such as the nature of the collateral,
                credit scores, size of down payment, compensating deposit balances,
                bundled services, etc., that would explain the pricing variations. One
                commenter opposed including pricing data, but said that if the Bureau
                chose to do so it should also allow voluntary submission of some of
                this contextual information. One stakeholder stated that pricing of
                commercial loans is often complex and cannot be adequately analyzed
                with the limited factors proposed, which may lead to erroneous
                conclusions and have severe negative impacts on the financial industry
                from regulatory and reputational risk standpoints. A community bank
                stakeholder commented that community banks price risk on a case-by-case
                basis and asserted that if this ability to price risk appropriately is
                restricted by uninformed fair lending guidelines, the Bureau risks
                removing a large number of community banks from existence. The bank
                went on to opine that this could further reduce the ability of
                thousands of small businesses to access credit. Another bank stated
                that pricing data alone would provide an incomplete picture that could
                be easily distorted to suit the political agenda of the user. That bank
                was also concerned about disparate impact analysis or similar tools
                being used because this could be unfair to the bank or its borrowers
                considering the small data set that the reported data of this small
                bank represents. Another stakeholder summed up these industry concerns,
                stating that pricing is simply too varied across the spectrum of the
                industry to include in the 1071 process without sowing confusion among
                lenders, borrowers, and the general public, stifling lending activity,
                and introducing numerous unintended consequences.
                 Several SERs, along with industry stakeholders, were concerned
                about the Bureau potentially making public pricing data and felt that
                this choice could be costly and challenging to carry out. They further
                asserted that bad outcomes could result from unjustified fair lending
                concerns, such as distortions to the market through interference with
                risk-based pricing. Many SERs, along with other industry stakeholders,
                noted that pricing is complex, often unique to the applicant's
                situation, and may involve extra services bundled with the loan.
                Without adequate context, therefore, pricing data could lead to
                inaccurate interpretations of the collected data and unfair
                reputational damage. One SER stated that the market for small business
                credit is price competitive and accordingly pricing information is
                unnecessary for section 1071. Another SER said that pricing for some
                products may reflect more than just the cost of the loan and may be
                high relative to other credit products if the covered financial
                institution is a supportive lender working with less established or
                higher credit risk applicants over a period of time. Similarly, the
                SBREFA Panel Report recommended that the Bureau seek comment in the
                proposed rule on potential methods for avoiding misinterpretations of
                disparities in pricing.\595\
                ---------------------------------------------------------------------------
                 \595\ Id. at 47.
                ---------------------------------------------------------------------------
                 Community groups, as well as some community development lenders,
                strongly favored inclusion of discretionary data points in general, and
                were particularly interested in having pricing data reported to help
                achieve 1071's purposes. One stakeholder stated that pricing
                information is a critical fair lending tool and would allow regulators,
                advocates, and industry to conduct fair lending reviews and monitor the
                market for emerging high-cost products. That commenter also stated that
                the eventual inclusion of pricing data in HMDA has been critical in
                identifying disparate pricing among protected classes. Another
                stakeholder suggested that a data collection regime designed to further
                fair lending enforcement cannot ignore information about whether high-
                cost lenders are targeting business owners of color or women-owned
                businesses, or if lenders are charging more to their female borrowers
                or customers of color. One community group stated that without pricing
                data lenders flooding neighborhoods of color with high-cost loans would
                be seen as adequately serving otherwise underserved markets. Another
                commenter stated that MCAs have extremely high effective APRs, and
                added that if section 1071 data collection indicates that access to
                capital is improving but is blind to whether that capital is provided
                at 30 percent APR or 300 percent APR, Congress's intent will not be
                accomplished.
                 Regarding 1071's business and community development purpose
                specifically, one stakeholder stated that merely by providing price
                transparency the Bureau could encourage the development of successful
                lending models because policymakers, community organizations,
                investors, banks seeking partnerships, and others would be able to see,
                for the first time, which business models are successful at reaching
                minority-owned, women-owned, and other underserved small businesses.
                That commenter went on to state that transparency would also attract
                investment capital and partnerships into models that work, and could
                lead to a market-based model and a pro-innovation approach to
                regulation.
                 One community development lender that supported inclusion of a
                pricing data point encouraged the Bureau to identify one consistent
                pricing metric
                [[Page 56456]]
                that financial institutions must report on and added that because this
                could create reporting challenges, especially for smaller institutions,
                the Bureau should ensure there is clear guidance and consistency on the
                pricing data point. Of the pricing metrics asked about in the SBREFA
                Outline, a majority of the community groups and community development
                lenders who supported inclusion of a pricing data point preferred use
                of APR, though some suggested the Bureau also require reporting of rate
                and fees with the APR, as well as rate spread as reported under HMDA.
                One community development lender stated that APR is the only
                established metric that enables informed comparisons of the cost of
                capital over time and between products of different dollar amounts and
                term lengths. That lender went on to state that APR is the metric that
                people know and expect, because it is the legally required standard for
                mortgages, auto loans, credit cards, student loans and personal loans,
                including short-term loans. The lender further explained that small
                businesses seeking financing from CDFIs or mission-based lenders are
                informed about their true cost of capital through an APR disclosure,
                and if it can easily collect and report this data point without
                additional burdens and costs, other small business lenders should be
                able to. Some commenters who favored APR suggested that the Bureau
                start with the recent disclosure methods adopted in California and New
                York, and that the Bureau use those methods for pricing of MCAs and
                factoring specifically.
                 Industry stakeholders stated that APR would be complicated and
                costly to implement, and that if it is used the Bureau should provide
                clear guidance, with one stakeholder suggesting the Bureau follow the
                Regulation Z method, which sets out instructions for calculating APR.
                Another stakeholder stated that for some products, such as inventory
                financing, APR would be meaningless. Some industry stakeholders
                suggested the Bureau use other metrics--one requested TCC, another
                requested rate and fees, and a third asked that the Bureau allow
                reporting of a single fixed fee as an option.
                 Finally, some SERs and industry stakeholders also expressed
                privacy-related concerns regarding public disclosure of pricing
                information. The Bureau addresses these comments in part VI below
                regarding privacy considerations involving publication of the 1071
                data.
                Proposed Rule
                 The Bureau is proposing, in Sec. 1002.107(a)(12), to require
                financial institutions to report certain pricing information for
                covered credit transactions. Specifically, proposed Sec.
                1002.107(a)(12)(i)(A) would require financial institutions to report
                the interest rate that is or would be applicable to the covered credit
                transaction; proposed Sec. 1002.107(a)(12)(ii) would require financial
                institutions to report the total origination charges for a covered
                credit transaction; proposed Sec. 1002.107(a)(12)(iii) would require
                financial institutions to report the broker fees for a covered credit
                transaction; proposed Sec. 1002.107(a)(12)(iv) would require financial
                institutions to report the total amount of all non-interest charges
                that are scheduled to be imposed over the first annual period of the
                covered credit transaction; proposed Sec. 1002.107(a)(12)(v) would
                require financial institutions to report, for an MCA or other sales-
                based financing transactions, the difference between the amount
                advanced and the amount to be repaid; and proposed Sec.
                1002.107(a)(12)(vi) would require financial institutions to report
                information about any prepayment penalties applicable to the covered
                credit transaction.
                 Proposed comment 107(a)(12)-1 would clarify that, for applications
                that the financial institution reports as denied, withdrawn by the
                applicant, or incomplete, the financial institution reports pricing
                information as ``not applicable.'' Proposed Sec. 1002.107(a)(12) would
                apply only to credit transactions that either have been originated or
                have been approved by the financial institution but not accepted by the
                applicant. The Bureau believes that pricing information is generally
                available for these transactions because the financial institution
                would generally have to determine the price to approve (or originate)
                the transaction. But other applications--like those that are denied,
                withdrawn by the applicant, or incomplete--would likely have terminated
                too early in the application process for pricing information to be
                generally available.
                 The Bureau is proposing to require financial institutions to report
                pricing data generally as interest rate and fees rather than APR, TCC,
                or another single pricing metric that attempts to combine multiple
                aspects of the cost of credit. The Bureau believes that interest rate
                and fees provide greater utility to data users than the formula-based
                pricing metrics described above, which will aid in fulfilling the
                purposes of section 1071. Separately enumerating the interest rate and
                certain general categories of fees will allow 1071 data users to more
                precisely analyze the components of a credit transaction's price. For
                example, 1071 data users could identify potentially discriminatory
                price disparities within upfront fees charged to borrowers at
                origination that may not be visible in a single pricing metric.
                Similarly, information about which components of a transaction's price
                may be relatively more expensive would allow users to better identify
                business and community development initiatives because they would be
                able to target their initiative at the particular component, such as
                the interest rate, that appears to be most responsible for the
                relatively high price of the transaction.
                 The diversity of products in the commercial lending space may also
                undermine the utility of APR or other single pricing metrics. Many
                MCAs, for example, lack either a defined term or a periodic payment
                amount. Thus, financial institutions would have to estimate these terms
                to calculate an APR.
                 The Bureau also believes that the interest rate and fees may be
                less burdensome for financial institutions to report than other single
                pricing metrics. These alternative pricing metrics involve complex
                calculations that may be difficult for financial institutions to
                perform accurately. And, as noted above, certain types of commercial
                financing would require financial institutions to assume or estimate
                parts of the pricing formula, further increasing complexity. The
                interest rate and fees, in contrast, are typically listed in the credit
                contract for a particular transaction.
                 The Bureau acknowledges that some financial institutions currently
                calculate APR for commercial financing transactions, or will do so in
                the future, either as a best practice or to comply with State
                disclosure laws. In developing the pricing data points in proposed
                Sec. 1002.107(a)(12), the Bureau has reviewed definitions and concepts
                found in Regulation Z, such as the definition of ``finance charge'' in
                Sec. 1026.4. Regulation Z also forms the basis for many parts of State
                commercial financing disclosure laws. The Bureau does not intend to
                achieve a wholesale incorporation of Sec. 1026.4 into proposed Sec.
                1002.107(a)(12), with interpretations of one regulation necessarily
                controlling the meaning of the other regulation. In fact, as discussed
                below, in many places perfect alignment between proposed
                [[Page 56457]]
                Sec. 1002.107(a)(12) and Regulation Z would not be feasible or
                desirable. But proposed Sec. 1002.107(a)(12) adopts many concepts from
                Regulation Z. The Bureau believes that this similarity may limit burden
                for financial institutions that are calculating APR for other purposes.
                 Regarding State commercial financing disclosures, the Bureau
                understands that the disclosures under development in New York and
                California \596\ rely upon Regulation Z definitions, such as the
                finance charge. These States have not fully implemented their
                disclosures at the time of this notice and may change their standards
                in the future. In addition, other States might adopt new commercial
                financing disclosures with different definitions and methodologies. The
                Bureau will continue to monitor regulatory developments in the small
                business lending market, and seeks comment on ways to reduce burden on
                financial institutions with respect to overlaps or conflicts between
                State law disclosure requirements and the Bureau's proposal.
                ---------------------------------------------------------------------------
                 \596\ Cal. S.B. 1235 (Sept. 30, 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235; 2020 N.Y. Sess. Laws
                ch. 369. The New York and California commercial financing disclosure
                laws are discussed in more detail below in relevant provisions.
                ---------------------------------------------------------------------------
                 As a general matter, the Bureau believes that 1071 data can provide
                value to users without reflecting every factor that influences pricing.
                For comparison, HMDA data have a long history of utility for fair
                lending purposes even though they alone generally do not offer proof of
                compliance with fair lending laws.\597\ This proposed rule includes
                several important factors that influence pricing, such as the credit
                product, the type of guarantee, and the credit purpose. These data
                points will help users avoid improper comparisons when examining the
                1071 data. The Bureau seeks comment on its proposed approach to this
                data point, as well as regarding additional information that could help
                reduce misinterpretations of disparities in pricing, including
                modifications to the pricing information in proposed Sec.
                1002.107(a)(12). For example, the Bureau seeks comment on whether more
                information about the nature of the collateral securing the loan is
                necessary to understanding pricing data, such as total origination
                charges, applicable to a particular transaction.
                ---------------------------------------------------------------------------
                 \597\ For example, the FFIEC cautions users of HMDA data that
                ``HMDA data are generally not used alone to determine whether a
                lender is complying with fair lending laws.'' Bureau of Consumer
                Fin. Prot., FFIEC Announces Availability of 2020 Data on Mortgage
                Lending (2021), https://www.consumerfinance.gov/about-us/newsroom/ffiec-announces-availability-of-2020-data-on-mortgage-lending/; see
                also Bureau of Consumer Fin, Prot., Data Point: 2019 Mortgage Market
                Activity and Trends, at 36 (2020), https://files.consumerfinance.gov/f/documents/cfpb_2019-mortgage-market-activity-trends_report.pdf (explaining that when examiners for the
                Federal banking agencies evaluate an institution's fair lending
                risk, they analyze HMDA price data, loan application outcomes, and
                explanatory factors, in conjunction with other information and risk
                factors, which can be drawn directly from loan files or electronic
                records maintained by lenders, in accordance with the Interagency
                Fair Lending Examination Procedures).
                ---------------------------------------------------------------------------
                Proposed Rule--107(a)(12)(i) Interest Rate
                 Proposed Sec. 1002.107(a)(12)(i)(A) would require financial
                institutions to report the interest rate that is or would be applicable
                to the covered credit transaction. If the interest rate is adjustable,
                proposed Sec. 1002.107(a)(12)(i)(B) would require the submission of
                the margin, index value, and index name that is or would be applicable
                to the covered credit transaction at origination.\598\
                ---------------------------------------------------------------------------
                 \598\ It should be noted that not all covered credit
                transactions include an interest rate. Proposed Sec.
                1002.107(a)(12)(v) would apply to certain covered credit
                transactions that do not include an interest rate. The discussion of
                proposed Sec. 1002.107(a)(12)(iv) below also addresses other
                covered credit transactions that may not include an interest rate.
                ---------------------------------------------------------------------------
                 Proposed comment 107(a)(12)(i)-1 would clarify that if a covered
                credit transaction includes an initial period with an introductory
                interest rate, after which the interest rate adjusts, a financial
                institution complies by reporting information about the interest rate
                applicable after the introductory period. Proposed comment
                107(a)(12)(i)-2 would explain that a financial institution reports the
                interest rate applicable to the amount of credit approved or originated
                reported in proposed Sec. 1002.107(a)(8) if a covered credit
                transaction includes multiple interest rates applicable to different
                credit features. Lastly, proposed comment 107(a)(12)(i)-3 lists a
                number of indices to report and directs that if the index used does not
                appear on the list of indices provided, the financial institution
                reports ``other'' and provides the name of the index via free-form
                text. The Bureau believes that allowing financial institutions to
                choose ``other'' when an index that does not appear on the provided
                list is used would facilitate compliance. In addition, collecting this
                information on ``other'' indices 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.
                 The Bureau is proposing to collect the interest rate on the covered
                credit transaction because this information furthers both the fair
                lending purpose and the business and community development purpose of
                section 1071 by allowing regulators, advocates, and industry to conduct
                fair lending reviews and monitor the market for emerging high-cost
                products. In addition, the availability of this pricing metric would
                provide pricing transparency and could encourage the development of
                successful lending models because policymakers, community
                organizations, investors, banks seeking partnerships, and others would
                be able to see which business models are successful at reaching
                minority-owned, women-owned, and other underserved small businesses.
                 As discussed above, research has found that minority-owned
                businesses tend to obtain, or be offered, higher interest rates on
                business credit. The collection of interest rate (along with fees) will
                allow the Bureau, other government agencies, and other data users to
                have insight into the existing market, monitor the market for
                potentially troubling trends, and conduct fair lending analyses that
                adequately take into account this important metric.
                 As discussed above, during the SBREFA process, several SERs
                supported the use of APR as a pricing metric. The Bureau notes that
                certain-State level commercial lending disclosures, notably California
                and New York, require the disclosure of APR.\599\ Because the interest
                rate must be known to calculate APR, the Bureau believes that proposed
                Sec. 1002.107(a)(12)(i) may impose little burden on financial
                institutions that already include the interest rate on such disclosures
                required by State law, as well as on the contract between the financial
                institution and the applicant.
                ---------------------------------------------------------------------------
                 \599\ Cal. S.B. 1235 (Sept. 30, 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235; 2020 N.Y. Sess. Laws
                ch. 369.
                ---------------------------------------------------------------------------
                 Proposed Sec. 1002.107(a)(12)(i)(B) would provide that, for
                adjustable interest rates based upon an index, a financial institution
                must report the margin, index value, and index name that is or would be
                applicable to the covered credit transaction at origination. Just as
                the disclosure of the interest rate for fixed rate transactions will
                allow data users to ascertain the interest rate applicable to the
                covered credit transaction throughout its cycle, the Bureau believes
                that these three elements will allow data users to do the same for
                adjustable rate transactions based upon an index and improve the
                [[Page 56458]]
                utility of such data. Proposed comment 107(a)(12)(i)-4 would clarify
                that a financial institution complies with proposed Sec.
                1002.107(a)(12)(i)(B) by reporting the index value at the time the
                application is approved by the financial institution. The Bureau seeks
                comment on whether the index value should be reported based on a
                different time period or if at the time of approval is the most
                appropriate measure.
                 The Bureau seeks comment on proposed Sec. 1002.107(a)(12)(i) and
                its commentary, including whether a different measure of pricing would
                provide more accurate data, whether additional information about
                pricing (for example, amortization type or adjustment frequency) would
                provide beneficial data to help ascertain fair lending risk and further
                the business and community development purpose of section 1071, and
                whether there are additional indices that should be included in the
                list from which financial institutions choose to report the applicable
                index on adjustable rate transactions.
                 The Bureau also seeks comment on whether there may be covered
                credit transactions where the interest rate may change after
                origination based on factors such as if the borrower maintains an
                account at the financial institution or if some other condition is met,
                and if so, whether additional commentary would be helpful to provide
                more guidance on which rate to report in that circumstance.
                Proposed Rule--107(a)(12)(ii) Total Origination Charges
                 Proposed Sec. 1002.107(a)(12)(ii) would require financial
                institutions to report the total origination charges for a covered
                credit transaction. Total origination charges are the total amount of
                all charges payable directly or indirectly by the applicant and imposed
                directly or indirectly by the financial institution at or before
                origination as an incident to or a condition of the extension of
                credit, expressed in dollars.
                 Proposed comment 107(a)(12)(ii)-1 would clarify that charges
                imposed uniformly in cash and credit transactions are not reportable.
                Proposed comment 107(a)(12)(ii)-2 would provide guidance on reporting
                charges imposed by third parties. Proposed comment 107(a)(12)(ii)-3
                would clarify that broker fees are included in the total origination
                charges.\600\ Proposed comment 107(a)(12)(ii)-4 would provide guidance
                on reporting charges for other products or services paid at or before
                origination. And proposed comment 107(a)(12)(ii)-5 would list examples
                of reportable charges.
                ---------------------------------------------------------------------------
                 \600\ For more information on broker fees, see the section-by-
                section analysis of proposed Sec. 1002.107(a)(12)(iii) below.
                ---------------------------------------------------------------------------
                 The Bureau understands that financial institutions charge a variety
                of fees when originating credit for small business applicants. For
                example, financial institutions may charge fees for processing an
                application, for underwriting, for filing a UCC-1 statement, for
                obtaining an appraisal, for obtaining a guarantee through a Federal
                agency program, and for other activities related to origination.
                Depending on the financial institution and the credit product, similar
                fees may take different names. One financial institution may describe a
                charge as an origination fee, while another describes a similar charge
                as an underwriting or documentation fee. Proposed Sec.
                1002.107(a)(12)(ii) would provide information about the total amount of
                all upfront fees charged for originating and extending credit,
                regardless of how such fees are denominated.
                 Information about the total origination charges would benefit 1071
                data users by giving them relatively granular pricing data. Much of the
                research on access to credit in the small business lending environment
                has lacked information about upfront fees,\601\ or has used less
                granular pricing metrics.\602\ Proposed Sec. 1002.107(a)(12)(ii) would
                enable users to examine the contribution upfront costs make to the
                price of credit in the small business lending market. For example,
                users could analyze pricing disparities specifically in upfront costs
                charged to borrowers or borrowers in certain communities. Users could
                also look at total origination charges to better understand the
                relationship between the elements of credit pricing such as by
                examining the trade-offs between the interest rate and the upfront
                charges. Empowering users to engage in this level of analysis would aid
                in fulfilling the fair lending and business and community development
                purposes of the statute.
                ---------------------------------------------------------------------------
                 \601\ See, e.g., Minority Bus. Dev. Agency, U.S. Dep't of Com.,
                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.
                 \602\ See, e.g., Opportunity Fund, Unaffordable and
                Unsustainable: The New Business Lending on Main Street (2016),
                https://aofund.org/news/unaffordable-and-unsustainable-new-business-lending/ (analyzing 150 alternative loans (i.e., from nondepository
                lenders or marketplaces, generally obtained online) to small
                businesses and finding an average APR of 94 percent).
                ---------------------------------------------------------------------------
                 In developing the total origination charges data point, the Bureau
                considered definitions and concepts in existing regulations. In
                particular, Regulation Z Sec. 1026.4 contains a measure of the cost of
                credit: The finance charge. Regulation Z Sec. 1026.4 defines the
                finance charge as ``any charge payable directly or indirectly by the
                consumer and imposed directly or indirectly by the creditor as an
                incident to or a condition of the extension of credit.'' The finance
                charge appears in numerous regulatory provisions governing consumer
                financial services, such as disclosures to borrowers in certain
                mortgage transactions,\603\ and calculation of the APR.\604\
                ---------------------------------------------------------------------------
                 \603\ See Regulation Z Sec. 1026.38(o)(2).
                 \604\ See appendix J to Regulation Z.
                ---------------------------------------------------------------------------
                 Proposed Sec. 1002.107(a)(12)(ii)'s description of total
                origination charges is similar to Regulation Z's definition of the
                finance charge. As with the finance charge, proposed Sec.
                1002.107(a)(12)(ii) would exclude charges imposed uniformly in cash and
                credit transactions.\605\ Proposed Sec. 1002.107(a)(12)(ii) would use
                a similar test for including fees and amounts charged by someone other
                than the financial institution.\606\ And proposed Sec.
                1002.107(a)(12)(ii) adopts the same approach toward including broker
                fees in the total origination charges that Regulation Z takes toward
                including mortgage broker fees in the finance charge.\607\ With respect
                to charges for other products or services that the applicant pays at or
                before origination, proposed comment 107(a)(12)(ii)-4 would explain
                that such charges are included in the total origination charges only if
                the financial institution requires the purchase of such other product
                or service. Regulation Z does not adopt a uniform approach to services
                bundled with the credit transaction. But charges or premiums for credit
                insurance or debt cancellation coverage are included in the finance
                charge if the creditor requires the purchase of such additional
                services.\608\
                ---------------------------------------------------------------------------
                 \605\ Compare proposed comment 107(a)(12)(ii)-1, with Regulation
                Z comment 4(a)-1.
                 \606\ Compare proposed comment 107(a)(12)(ii)-2, with Regulation
                Z Sec. 1026.4(a)(1).
                 \607\ Compare proposed comment 107(a)(12)(ii)-3, with Regulation
                Z Sec. 1026.4(a)(3).
                 \608\ Regulation Z Sec. 1026.4(d)(1) and (3).
                ---------------------------------------------------------------------------
                 Proposed Sec. 1002.107(a)(12)(ii), however, differs in important
                ways from Regulation Z's definition of the finance charge. First,
                proposed Sec. 1002.107(a)(12)(ii) is narrower than the finance charge.
                The finance charge includes certain credit costs that are
                [[Page 56459]]
                imposed after a financial institution originates a transaction, such as
                interest and time-price differential.\609\ Proposed Sec.
                1002.107(a)(12)(ii), on the other hand, is limited to charges at or
                before origination, because other proposed pricing data points, such as
                the interest rate and initial annual charges, capture information about
                the cost of credit over the life of the transaction. Second, within its
                scope, proposed Sec. 1002.107(a)(12)(ii) is more comprehensive than
                the finance charge. The finance charge excludes many upfront costs of
                obtaining credit. For example, the finance charge excludes application
                fees charged to all applicants for credit, and numerous fees in
                transactions secured by real property.\610\ Proposed Sec.
                1002.107(a)(12)(ii) contains no similar exclusions. The Bureau believes
                that many of the upfront fees omitted from the finance charge, such as
                application fees, are typical of small business credit transactions,
                and therefore including such charges helps data users to understand
                pricing in the small business lending market. Additionally, a measure
                of origination charges with numerous exclusions may encourage financial
                institutions to shift costs to the excluded fees, where they would be
                hidden from users of the 1071 data. Finally, proposed Sec.
                1002.107(a)(12)(ii) is simpler than the Regulation Z definition of
                finance charge, which the Bureau believes may improve the likelihood
                that the information is accurately reported.
                ---------------------------------------------------------------------------
                 \609\ Id. Sec. 1026.4(b)(1).
                 \610\ Id. Sec. 1026.4(c)(1) (application fees) and (7) (real-
                estate related fees).
                ---------------------------------------------------------------------------
                 As discussed above, during the SBREFA process, some SERs supported
                use of APR as a pricing metric, including several who stated that they
                currently calculate APR. 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. Of the
                pricing metrics asked about in the SBREFA Outline, a majority of the
                community groups and community development lenders who supported
                inclusion of a pricing data point preferred use of APR, though some
                suggested the Bureau also require submission of rate and fees with the
                APR, as well as rate spread as reported under HMDA. Some commenters who
                favored APR suggested that the Bureau start with the recent disclosure
                methods adopted in California and New York, and that the Bureau use
                those methods for pricing of MCAs and factoring specifically. As
                discussed above, the Bureau is proposing to require financial
                institutions generally to report interest rate and fees, rather than
                APR. But in developing proposed Sec. 1002.107(a)(12)(ii)'s definition
                of total origination charges, the Bureau has adapted certain language
                and concepts from Regulation Z's definition of the finance charge.
                Because the finance charge must be known to calculate APR, including
                the APR that would be disclosed under California and New York law,\611\
                the Bureau believes that proposed Sec. 1002.107(a)(12)(ii) may impose
                less burden on financial institutions and improve the likelihood that
                the information is accurately reported as compared to a measure of
                total origination charges that had no similarity to the finance charge.
                ---------------------------------------------------------------------------
                 \611\ The New York and California disclosure laws currently add
                various costs to the Regulation Z finance charge depending on the
                credit product. See Cal. Dep't of Fin. Prot. & Innovation, Proposed
                Commercial Financing Disclosures (S.B. 1235) (Apr. 7, 2021), https://dfpi.ca.gov/wp-content/uploads/sites/337/2021/04/2021-04-07-SB-1235-With-Redlines-FINAL-for-Publication.pdf; 2020 N.Y. Sess. Laws
                ch. 369, 801(e).
                ---------------------------------------------------------------------------
                 For the reasons given above, proposed Sec. 1002.107(a)(12)(ii)
                would require financial institutions to report the total amount of all
                charges payable directly or indirectly by the applicant and imposed
                directly or indirectly by the financial institution at or before
                origination as an incident to or a condition of the extension of
                credit, expressed in dollars. Proposed Sec. 1002.107(a)(12)(ii) would
                apply to credit transactions that either have been originated or have
                been approved by the financial institution but not accepted by the
                applicant. The Bureau seeks comment on proposed Sec.
                1002.107(a)(12)(ii) and its commentary. For example, the Bureau seeks
                comment on whether concepts and guidance adapted from Regulation Z,
                such as proposed comment 107(a)(12)(ii)-1 on comparable cash
                transactions, are applicable in the small business lending context such
                that they should be incorporated as drafted. The Bureau also seeks
                comment on whether to enumerate certain types of charges separately in
                the 1071 data, and whether to include or exclude certain types of
                charges in the total origination charges.
                Proposed Rule--107(a)(12)(iii) Broker Fees
                 Proposed Sec. 1002.107(a)(12)(iii) would require financial
                institutions to report the broker fees for a covered credit
                transaction. Broker fees are the total amount of all charges included
                in the total reportable origination charges that are fees paid by the
                applicant directly to a broker or to the financial institution for
                delivery to a broker, expressed in dollars.
                 Proposed comment 107(a)(12)(iii)-1 would provide an example of
                reporting different types of broker fees. Proposed comment
                107(a)(12)(iii)-2 would clarify that financial institutions would use a
                ``best information readily available'' standard regarding fees paid
                directly to a broker by an applicant.
                 The Bureau believes that small business loan brokers are an
                important part of the small business lending market, and may feature
                more prominently in certain financing arrangements, such as MCAs. The
                existence of brokers creates opportunities for potential practices that
                inflate the cost of small business credit. For example, compensation
                that is tied to the terms of a loan may encourage brokers to steer
                applicants to financial institutions offering less favorable terms.
                Because of the potential risks involved in multi-party business
                arrangements, the FFIEC's Interagency Fair Lending Examination
                Procedures emphasize the importance of understanding the role that
                brokers play in a financial institution's lending process.\612\ These
                risks may be heightened in the small business lending market because
                applicants lack the substantive protections afforded to consumer credit
                applicants, such as the prohibition on basing loan originator
                compensation on the terms of a transaction.\613\
                ---------------------------------------------------------------------------
                 \612\ Fed. Fin. Insts. Examination Council, Interagency Fair
                Lending Examination Procedures, at 3 (2009), https://www.ffiec.gov/PDF/fairlend.pdf (instructing examiners to consider an institution's
                organization of its credit decision-making process, including
                identification of the delegation of separate lending authorities and
                the extent to which discretion in pricing or setting credit terms
                and conditions is delegated to various levels of managers,
                employees, or independent brokers or dealers and an institution's
                loan officer or broker compensation program).
                 \613\ Regulation Z Sec. 1026.36 (implementing TILA's
                prohibition on basing loan originator compensation on loan terms).
                ---------------------------------------------------------------------------
                 Accordingly, proposed Sec. 1002.107(a)(12)(iii) would provide
                information about the broker fees associated with a transaction.
                Although broker fees are included in proposed Sec.
                1002.107(a)(12)(iii)'s definition of total origination charges,
                separately enumerating the total broker fees would allow users to
                better understand the role that brokers play in the price of small
                business credit. For example, users could analyze whether broker fees
                specifically appear to be creating fair lending risk or higher prices
                for certain
                [[Page 56460]]
                communities. Empowering users to engage in this level of analysis would
                aid in fulfilling the fair lending and business and community
                development purposes of the statute.
                 The Bureau believes, however, that financial institutions may have
                difficulty reporting broker fees that an applicant pays directly to a
                broker. Proposed comment 107(a)(12)(iii)-2 would clarify that a
                financial institution would rely on the best information readily
                available to the financial institution at the time final action is
                taken. Information readily available could include, for example,
                information provided by an applicant or broker that the financial
                institution reasonably believes regarding the amount of fees paid by
                the applicant directly to the broker. The ``best information readily
                available'' standard is used in reporting certain HMDA data under
                Regulation C,\614\ and the Bureau believes it may also be appropriate
                for reporting fees paid directly to a broker by an applicant.
                ---------------------------------------------------------------------------
                 \614\ See Regulation C comments 4(a)(31)-4 and 4(a)(32)-5.
                ---------------------------------------------------------------------------
                 For the reasons given above, proposed Sec. 1002.107(a)(12)(iii)
                would require financial institutions to report the total amount of all
                charges included in proposed Sec. 1002.107(a)(12)(ii) that are fees
                paid by the applicant directly to a broker or to the financial
                institution for delivery to a broker, expressed in dollars. Proposed
                Sec. 1002.107(a)(12)(iii) would apply to credit transactions that
                either have been originated or have been approved by the financial
                institution but not accepted by the applicant. The Bureau seeks comment
                on proposed Sec. 1002.107(a)(12)(iii) and its commentary, including on
                the knowledge that financial institutions might have about direct
                broker fees and the challenges of reporting such information.
                Proposed Rule--107(a)(12)(iv) Initial Annual Charges
                 Proposed Sec. 1002.107(a)(12)(iv) would require financial
                institutions to report the total amount of all non-interest charges
                that are scheduled to be imposed over the first annual period of the
                covered credit transaction, expressed in dollars.
                 Proposed comment 107(a)(12)(iv)-1 would provide an example of how
                to calculate the amount to report. Proposed comment 107(a)(12)(iv)-2
                would highlight that a financial institution should exclude interest
                expenses from the initial annual charges reported. Proposed comment
                107(a)(12)(iv)-3 would note that a financial institution should not
                include any charges for events that are avoidable by the applicant,
                including for example, charges for late payment, for exceeding a credit
                limit, for delinquency or default, or for paying items that overdraw an
                account. Proposed comment 107(a)(12)(iv)-4 would provide examples of
                initial annual charges that may be scheduled to be imposed during the
                initial annual period, including monthly fees, annual fees, and other
                similar charges. Finally, proposed comment 107(a)(12)(iv)-5 would
                clarify that a financial institution complies with the provision by
                reporting as the default the highest amount for a charge scheduled to
                be imposed, and provides an example of how to calculate the amount
                reported when the scheduled fee to be imposed may be reduced based upon
                a specified occurrence.
                 The Bureau understands that there are a variety of ways that small
                business loans may be structured. This could include whether there is
                an interest rate imposed on the transaction, whether there are finance
                charges, and whether there are a myriad of other fees that may be
                scheduled to be paid or are contingent upon some occurrence. In
                addition, the Bureau understands from its market monitoring activity
                that covered credit transactions may include scheduled fees that
                encompass a substantial part of the cost of the covered credit product,
                and without knowledge of those fees, the cost of the credit would be
                misleading. The Bureau believes that proposed Sec. 1002.107(a)(12)(iv)
                would enable data users to have a more accurate understanding of the
                cost of the covered credit transaction than if the data lacked
                information about scheduled fees.
                 As noted above, the Bureau believes that there may be small
                business loans that do not include an interest rate, but do include a
                monthly finance charge that is imposed on the covered credit
                transaction.\615\ If the financial institution were only required to
                report the interest rate on these types of transactions, the true cost
                of credit would be wholly inaccurate because the monthly finance charge
                would not be reported. In addition, small business loans, like consumer
                loans, may include a number of other fees, such as annual fees and
                other similar charges. The information collected and reported under
                proposed Sec. 1002.107(a)(12)(iv) would allow data users to have a
                more complete picture of the cost of the covered credit transaction and
                promote market transparency, thus furthering the business and community
                development purpose of section 1071. In addition, this pricing data
                could further the fair lending purpose of section 1071 as it could
                enhance the ability to effectively and efficiently enforce fair lending
                laws.
                ---------------------------------------------------------------------------
                 \615\ Proposed comment 107(a)(12)(iv)-2 would clarify that
                financial institutions should not report the interest scheduled to
                be imposed in the first year under proposed Sec.
                1002.107(a)(12)(iv).
                ---------------------------------------------------------------------------
                 Proposed Sec. 1002.107(a)(12)(iv) would provide that a financial
                institution only report charges scheduled to be imposed over the first
                annual period of the covered credit transaction. The Bureau believes
                that by only requiring scheduled charges to be reported (rather than
                the submission of all potential charges, some of which could be
                speculative), the data reported will be more accurate than if a
                financial institution had to make an educated guess as to what charges
                will be imposed over the first annual period. Proposed Sec.
                1002.107(a)(12)(iv) would not require a financial institution to
                itemize the charges reported thereunder. The Bureau believes that
                requiring charges to be itemized could add a considerable amount of
                complexity for financial institutions in collecting and reporting the
                initial annual charges, given the range of fees that could be charged
                and the variations in how they might be imposed. The Bureau seeks
                comment on the likelihood that FIs would schedule charges in the second
                year of a covered credit transaction and beyond specifically in an
                effort to avoid reporting the charges for purposes of 1071.
                 A financial institution complies with proposed Sec.
                1002.107(a)(12)(iv) by not including charges for events that are
                avoidable by the applicant; this restriction is explained more fully in
                proposed comment 107(a)(12)(iv)-3, which would provide examples of
                types of avoidable charges. As noted above, the Bureau believes that
                the accuracy of the data reported is enhanced by only including charges
                that are scheduled to be imposed and not including potential charges
                that are contingent upon an action (or inaction) by the borrower. The
                Bureau also believes that only requiring financial institutions to
                report such charges for the first year, and not the life of the loan,
                will minimize any burden associated with reporting the data. This
                information should be included in the contract and, at most, would
                require a simple calculation to arrive at the total charges for the
                initial annual period. An example of how to calculate the initial
                annual charges for the first annual period is found in proposed comment
                107(a)(12)(iv)-1. The Bureau also seeks comment on how it should treat
                situations where the applicant has
                [[Page 56461]]
                informed the financial institution that it expects to regularly incur
                ``avoidable charges,'' for example where an applicant intends to pay
                late each month, such that a late fee, which would otherwise be an
                avoidable charge and not reportable under this provision, is in effect
                no longer contingent. Specifically, the Bureau seeks comment on whether
                such charges should be reported as a scheduled charge.
                 Proposed comment 107(a)(12)(iv)-5 would provide additional
                explanation about what amount to report when the financial institution
                provides a discount on the charge if certain conditions are met. The
                Bureau understands that some financial institutions may provide a
                discount on specific charges when certain conditions are met. For
                example, a financial institution may provide a discount on a monthly
                charge if the borrower maintains a checking account at the financial
                institution. In such a circumstance, proposed Sec. 1002.107(a)(12)(iv)
                would require the financial institution to report the non-discounted
                amount to maintain consistency across the data that is reported by all
                financial institutions.
                 The collection of initial annual charges was not discussed during
                the SBREFA process. However, during that process several SERs remarked
                that pricing is complex and often unique to the applicant's situation,
                and may involve extra services bundled with the loan, and without
                adequate context pricing data could lead to inaccurate interpretations
                and reputational damage to financial institutions. The Bureau believes
                that the submission of initial annual charge data will help to decrease
                the likelihood of inaccurate interpretations and provide additional
                context by giving a more complete picture of the pricing of each
                covered credit transaction.
                 For the reasons given above, proposed Sec. 1002.107(a)(12)(iv)
                would require submission of the total amount of all non-interest
                charges that are scheduled to be imposed over the first annual period
                of the covered credit transaction, expressed in dollars. The Bureau
                seeks comment on proposed Sec. 1002.17(a)(12)(iv) and its commentary,
                including whether to include or exclude certain types of charges as
                reportable under initial annual charges.
                Proposed Rule--107(a)(12)(v) Additional Cost for Merchant Cash Advances
                or Other Sales-Based Financing
                 Proposed Sec. 1002.107(a)(12)(v) would require financial
                institutions to report additional cost data for MCAs or other sales-
                based financing transactions. Specifically, this cost is the difference
                between the amount advanced and the amount to be repaid, expressed in
                dollars. Proposed comment 107(a)(12)(v)-1 would provide an example of
                the difference between the amount advanced and the amount to be repaid
                for an MCA.
                 As discussed above, the Bureau is proposing several data points to
                provide information on pricing in the small business lending market.
                These pricing data points would provide information about the interest
                rate and fees applicable to a covered credit transaction. Some types of
                commercial financing, however, contain pricing terms that are difficult
                to reflect in data points about a transaction's interest rate and fees.
                For example, under a typical MCA, a merchant receives a cash advance
                and promises to repay it (plus some additional amount) to the MCA
                provider. MCA providers generally do not provide an interest rate, and
                while they may charge fees at origination or during the first year, the
                majority of an MCA's cost comes from the additional amount repaid by
                the merchant on top of the cash advance. This additional amount may be
                expressed as a multiple of the amount advanced in the form of a factor
                rate or percentage, or it may be derived by comparing the total payback
                amount to the amount actually advanced. This additional amount is
                typically not characterized as interest, so it would not be reported
                under proposed Sec. 1002.107(a)(12)(i). Nor is this additional amount
                characterized as a fee charged at origination or scheduled to be
                imposed during the first year after the transaction, so it would not be
                reported under proposed Sec. 1002.107(a)(12)(ii) or (iv). Without an
                additional pricing data point to capture this additional amount due,
                users attempting to analyze MCA pricing for fair lending or business
                and community development purposes would miss most of the cost of
                credit associated with these transactions. Therefore, the inclusion of
                this data point would aid in fulfilling the fair lending and business
                and community development purposes of the statute.
                 At the same time, the Bureau believes that information about the
                additional amount repaid by the merchant would impose relatively low
                burden on financial institutions. A typical MCA contract lists the
                amount of future revenue purchased and the purchase price. A financial
                institution could determine the additional amount repaid by computing
                the difference between these two numbers.
                 For the reasons discussed above, proposed Sec. 1002.107(a)(12)(v)
                would require financial institutions to report, for an MCA or other
                sales-based financing transaction, the difference between the amount
                advanced and the amount to be repaid, expressed in dollars. Proposed
                Sec. 1002.107(a)(12)(v) would apply to credit transactions that either
                have been originated or have been approved by the financial institution
                but not accepted by the applicant. The Bureau seeks comment on proposed
                Sec. 1002.107(a)(12)(v) and proposed comment 107(a)(12)(v)-1,
                including whether to require additional pricing information for MCAs,
                and whether MCAs could be structured in ways that evade the proposed
                reporting requirement, such as by omitting or making variable the
                amount to be repaid.
                Proposed Rule--107(a)(12)(vi) Prepayment Penalties
                 Proposed Sec. 1002.107(a)(12)(vi)(A) would require financial
                institutions to report whether the financial institution could have
                included a prepayment penalty under the policies and procedures
                applicable to the covered credit transaction. Proposed Sec.
                1002.107(a)(12)(vi)(B) would require financial institutions to report
                whether the terms of the covered credit transaction include a charge
                imposed for paying all or part of the transaction's principal before
                the date on which the principal is due. Proposed comment
                107(a)(12)(vi)-1 would provide additional information on how to
                determine whether the applicable policies and procedures allow a
                financial institution to include prepayment penalties in the loan
                agreement.
                 The Bureau understands, through its market monitoring function,
                that small business loan contracts may include prepayment penalties and
                the penalties can be sizable and structured as a percent of the
                remaining outstanding balance. The Bureau also understands that there
                may be concern among stakeholders, including community groups, that
                certain small business applicants may be steered toward loans
                containing prepayment penalty terms. The collection of data regarding
                which contracts contain a prepayment penalty and whether a prepayment
                penalty could have been imposed on specific contract types allows the
                data to be analyzed for fair lending purposes to see if certain groups
                may be steered into contracts containing prepayment penalties. Assuming
                that prepayment penalty data would be part of the publicly available
                data, from a market competition standpoint, financial institutions may
                want to know how
                [[Page 56462]]
                frequently their competitors are utilizing prepayment penalties. Thus,
                these data could help further the business and community development
                purpose of section 1071 by promoting market transparency and new
                product development opportunities.
                 Proposed Sec. 1002.107(a)(12)(vi)(A) would require financial
                institutions to report whether the financial institution could have
                included a prepayment penalty under the policies and procedures
                applicable to the covered credit transaction, while proposed Sec.
                1002.107(a)(12)(vi)(B) would require financial institutions to report
                whether the terms of the covered credit transaction actually include a
                prepayment penalty term. The provisions would allow data users to
                determine what percentage of covered credit transactions could contain
                a prepayment penalty term, what percentage of such transactions
                actually contain the term, and, together with other data points, the
                demographic profile of borrowers whose contracts do and do not include
                the term. The Bureau believes the two provisions work together to allow
                data users to better determine whether certain borrowers are being
                steered towards covered credit transactions containing prepayment
                penalty terms.
                 Proposed comment 107(a)(12)(vi)-1 would elaborate on the
                requirement to report whether financial institutions could have
                included a prepayment penalty in the covered credit transaction to
                clarify that the applicable policies and procedures are those that the
                financial institutions follows when evaluating applications for the
                specific credit type and credit purpose requested. The Bureau believes
                this provision will ensure that similar credit products are being
                analyzed together and minimize the possibility that potential fair
                lending risk is incorrectly identified.
                 For the reasons given above, proposed Sec. 1002.107(a)(12)(vi)(A)
                would require financial institutions to report whether the financial
                institution could have included a prepayment penalty under the policies
                and procedures applicable to the covered credit transaction. Proposed
                Sec. 1002.107(a)(12)(vi)(B) would require financial institutions to
                report whether the terms of the covered credit transaction include a
                charge imposed for paying all or part of the transaction's principal
                before the date on which the principal is due.
                 The Bureau seeks comment on proposed Sec. 1002.107(a)(12)(vi) and
                its commentary, including whether to enumerate other types of
                contingent charges separately in the 1071 data to more accurately
                reflect the cost of covered credit transactions. The Bureau also seeks
                comment on whether there are alternative data that would provide
                similar insight into whether certain borrowers are being steered into
                covered credit transactions containing prepayment penalty terms or
                other similar contingent terms.
                107(a)(13) Census Tract
                Background
                 Section 1071 requires financial institutions to collect and report
                ``the census tract in which is located the principal place of business
                of the . . . applicant.'' \616\ This provision is similar to Regulation
                C, which requires reporting of the census tract in certain
                circumstances if the property securing the loan (or proposed to secure
                the loan, if the transaction was not originated) is in a county with a
                population of more than 30,000.\617\ Under Regulation C, the financial
                institution generally finds the census tract by geocoding using the
                address of the property. Geocoding is the process of using a particular
                property address to locate its geographical coordinates and the
                corresponding census tract.
                ---------------------------------------------------------------------------
                 \616\ ECOA section 704B(e)(2)(E).
                 \617\ Regulation C Sec. 1003.4(a)(9)(ii)(C). Regulation C also
                requires reporting of the property address for all applications.
                ---------------------------------------------------------------------------
                 CRA reporting of business loans by depository institutions also
                requires reporting of census tract. The Bureau understands that CRA
                allows reporting of a census tract based on the address or location
                where the proceeds of the credit will be principally applied.\618\
                ---------------------------------------------------------------------------
                 \618\ See 2015 FFIEC CRA Guide at 16.
                ---------------------------------------------------------------------------
                SBREFA Proposals Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau explained that it was considering
                proposing that financial institutions report a census tract based on an
                address collected in the application, or during review or origination
                of the loan.\619\ The financial institution would use the address where
                the loan proceeds will principally be applied, if that address is known
                to the financial institution, which the Bureau believes would be more
                useful to carry out the community development and fair lending purposes
                of section 1071. For example, if a financial institution makes a loan
                to a small business to buy or improve commercial real estate, the
                location of the real estate is more relevant to section 1071's
                statutory purposes than the location of the main office. If the
                financial institution does not possess that information, the financial
                institution would use the location of the small business borrower's
                main office or headquarters. If that, too, is unknown, the financial
                institution could use another business address associated with the
                application. The financial institution would also report which of these
                address types it is using, unless that information is unknown: (1) The
                address where the loan proceeds will principally be applied; or (2) the
                location of the small business borrower's main office or headquarters;
                or (3) some other business address, including those for which the
                financial institution is unsure about the nature of the address.
                ---------------------------------------------------------------------------
                 \619\ SBREFA Outline at 30-31.
                ---------------------------------------------------------------------------
                 In response to the SBREFA Outline, SERs explained that they
                generally capture the main office address of small business applicants,
                which for sole proprietors is frequently a home address; the address
                where the loan proceeds will be used is typically captured for
                commercial real estate transactions.\620\ Some of the SERs stated that
                they do not know the proceeds address, and one suggested that for
                simplicity the Bureau should use the business address only.
                ---------------------------------------------------------------------------
                 \620\ SBREFA Panel Report at 29.
                ---------------------------------------------------------------------------
                 A number of SERs explained that they have experience geocoding
                addresses to obtain census tract information--such as for CDFI Fund
                reporting, voluntary CRA reporting, or for reporting mortgage loans
                under HMDA--though some did not. Some SERs suggested that a requirement
                to report a geocoded census tract for financial institutions that do
                not do so now would impose costs on the financial institution and
                possibly the borrower. One SER stated that few nondepository
                institutions collect or are even familiar with census tract data. One
                SER recommended following the format used for CRA reporting of census
                tract information, rather than the slightly different format used under
                HMDA. Another SER suggested that the Bureau provide simple instructions
                for reporting census tract and employ less burdensome geocoding
                requirements than exist for HMDA. Several SERs explained that they use
                a free service available through the FFIEC to convert addresses they
                receive from applicants to census tract data. A few SERs suggested that
                the Bureau should provide or support a Federal government-sponsored
                system for the secure batch processing of address data to convert to
                census tract information that could be used to satisfy geocoding
                requirements across multiple reporting regimes including 1071.
                [[Page 56463]]
                 The SBREFA Panel recommended that the Bureau seek comment on the
                feasibility and ease of using existing Federal services to geocode
                addresses in order to determine census tract for 1071 reporting
                purposes (such as what is offered by the FFIEC for use in reporting
                HMDA data).\621\
                ---------------------------------------------------------------------------
                 \621\ Id. at 46.
                ---------------------------------------------------------------------------
                 Stakeholders commenting on the SBREFA Outline explained that
                financial institutions do not currently collect census tract
                information unless they need to report it as a CDFI, or for CRA or
                HMDA. Some commenters stated that they use the free FFIEC tool for
                geocoding, though one commenter pointed out that this service does not
                allow batch processing. One commenter requested that financial
                institutions be given a safe harbor if the tool used provides an
                incorrect coding. The comments, like the SER feedback, did not suggest
                a problem with the waterfall approach in the SBREFA Outline. There were
                concerns about proceeds locations not having addresses, and proceeds
                addresses being unknown to the financial institution, but the waterfall
                would allow them to simply use another address. One commenter stated
                that not requiring a specific type of address would help avoid
                burdening financial institutions. Another commenter stated that it had
                no reason to ask applicants about the proceeds address, and one
                requested that the Bureau make clear that a financial institution has
                no obligation to ask about the proceeds or headquarters address if it
                does not do so now. Several commenters stated that allowing use of the
                proceeds address was helpful, and would further section 1071's purposes
                and reduce burden by allowing use of the same data as reported under
                CRA. Two commenters stated that the Bureau should align this data point
                with the CRA, and one of these, a community development organization,
                stated that the CRA method for reporting census tract was easier than
                the HMDA method. This commenter provided statistical evidence
                suggesting that the CRA method also yielded more complete data than the
                HMDA method.
                Proposed Rule
                 The Bureau is proposing Sec. 1002.107(a)(13) to require financial
                institutions to collect and report the census tract data point using a
                ``waterfall'' approach, which closely aligns with the Bureau's proposal
                under consideration in the SBREFA Outline. The proposed rule would
                require a financial institution to collect and report the census tract
                in which is located: (i) The address or location where the proceeds of
                the credit applied for or originated will be or would have been
                principally applied; or (ii) If the information in (i) is unknown, the
                address or location of the main office or headquarters of the
                applicant; or (iii) If the information in both (i) and (ii) is unknown,
                another address or location associated with the applicant. In addition,
                the proposed rule would require that the financial institution also
                indicate which one of the three types of addresses or locations listed
                in (i), (ii), or (iii) the census tract is based on. Although the
                proposed rule does not specifically require it, the Bureau assumes that
                financial institutions or their vendors would generally use a geocoding
                tool to convert the appropriate address to a census tract number.
                 The Bureau believes that its proposed reporting method for the
                census tract data point leverages existing industry information
                collection practices and would result in useful information to further
                section 1071's purposes while avoiding imposing much additional burden
                on financial institutions. The waterfall method in the proposed
                regulation would achieve these goals by allowing a financial
                institution to report an address it already has, with no further
                investigation; allowing a financial institution to avoid further
                investigation when it is unsure about the nature of the address
                reported; and allowing CRA reporters to report the same address for
                1071 as they do for CRA; \622\ while also increasing the likelihood of
                the proceeds address being reported. The Bureau considers the census
                tract of the proceeds address to be particularly useful for both the
                fair lending and business and community development purposes of 1071.
                ---------------------------------------------------------------------------
                 \622\ As explained above, the Bureau understands that CRA allows
                reporting of a census tract based on the address or location where
                the proceeds of the credit will be principally applied. The Bureau
                also believes that CRA reporting on this data point is reasonably
                flexible, and a financial institution would be able to coordinate
                the two compliance regimes to report the same census tract.
                ---------------------------------------------------------------------------
                 First, the proposed approach would require a financial institution
                to report the census tract of the proceeds address if it is available,
                but would not require a financial institution to ask about it
                specifically. Financial institutions would be able to apply the
                waterfall approach to the addresses they are currently collecting; they
                would not be required to specifically ask for the proceeds or
                headquarters addresses. In addition, the proposed method would allow a
                financial institution to report that it is unsure about the nature of
                the address if it has no information as to the nature or function of
                the business address it possesses. This provision should address
                potential concerns about reporters spending time on complex, fact-
                specific questions and unintentionally misreporting this data point
                when financial institution staff have to determine what kind of address
                they are reporting based on insufficient information. The Bureau
                believes that this option would be particularly helpful if the
                application were denied or withdrawn early in the application process
                before the nature of any address provided by the applicant is clear.
                 Proposed comment 107(a)(13)-1 would provide general instructions on
                using the waterfall reporting method, with examples for guidance. The
                Bureau believes that this comment would facilitate compliance and seeks
                comment on whether any additional instructions or examples would be
                useful.
                 Proposed comment 107(a)(13)-2 would explain that a financial
                institution complies with proposed Sec. 1002.107(a)(13) by identifying
                the appropriate address or location and the type of that address or
                location in good faith, using appropriate information from the
                applicant's credit file or otherwise known by the financial
                institution. The comment would also make clear that a financial
                institution is not required to investigate beyond its standard
                procedures as to the nature of the addresses or locations it collects.
                The Bureau believes that this guidance strikes the right balance by
                allowing flexibility in reporting, and also requiring appropriate good
                faith compliance in exercising that flexibility, thereby yielding
                quality data.
                 Proposed comment 107(a)(13)-3 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 at least one address or location for an
                applicant for census tract reporting. However, the comment would
                further explain that if a financial institution is nonetheless unable
                to collect or otherwise determine any address or location for an
                application, the financial institution reports that the census tract
                information is ``not provided by applicant and otherwise
                undetermined.'' Based on the Bureau's understanding of how financial
                institutions currently define an application under their internal
                procedures, the Bureau believes it is highly unlikely that a financial
                institution would not obtain some type of address for the applicant.
                [[Page 56464]]
                Nonetheless, the Bureau is proposing to permit financial institutions
                to report this data point using the ``not provided by applicant and
                otherwise undetermined'' response in order to facilitate compliance in
                those rare instances when the financial institution does not have the
                data requested. The reference in the comment to proposed Sec.
                1002.107(c)(1) would make clear, however, that a financial institution
                must maintain procedures reasonably designed to collect at least one
                address. As with the previous comment, the Bureau believes that this
                comment would strike the right balance by facilitating compliance and
                also emphasizing the requirement to collect appropriate data.
                 The Bureau is proposing a safe harbor in Sec. 1002.112(c)(1),
                which would state that an incorrect entry for census tract is not a
                violation of ECOA or subpart B if the financial institution obtained
                the census tract by correctly using a geocoding tool provided by the
                FFIEC or the Bureau. Proposed comment 107(a)(13)-4 would cross-
                reference that provision.\623\ See the section-by-section analysis of
                proposed Sec. 1002.112(c)(1) below for additional discussion of this
                safe harbor.
                ---------------------------------------------------------------------------
                 \623\ Proposed comment 112(c)(1)-1 would explain that ``this
                safe harbor provision does not extend to a financial institution's
                failure to provide the correct census tract number for a covered
                application on its small business lending application register, as
                required by Sec. 1002.107(a)(13), because the FFIEC or Bureau
                geocoding tool did not return a census tract for the address
                provided by the financial institution. In addition, this safe harbor
                provision does not extend to a census tract error that results from
                a financial institution entering an inaccurate address into the
                FFIEC or Bureau geocoding tool.''
                ---------------------------------------------------------------------------
                 The Bureau notes that section 1071's description of the census
                tract data point refers to the census tract for the applicant's
                ``principal place of business.'' \624\ The Bureau considers the
                waterfall approach in proposed Sec. 1002.107(a)(13) to be a reasonable
                interpretation of the undefined statutory term ``principal place of
                business,'' which the Bureau understands not to have a standard
                definition, and thus believes to be ambiguous. First, the Bureau
                believes that the address or location of the main office or
                headquarters of the applicant fits easily into one of the common
                meanings of ``principal place of business.'' In addition, the Bureau
                expects that, generally, the address where the loan proceeds will be
                applied will also be the main office or headquarters address.\625\ The
                primary exception to this principle would be in the case of credit
                intended for purchase, construction/, or refinancing of real estate;
                under these circumstances, the Bureau reasonably interprets the term
                ``principal place of business'' to mean, in essence, the principal
                location for business activities relating to the extension of credit at
                issue. Although ``another address or location associated with the
                applicant'' may not always be the principal place of business of the
                applicant, the Bureau considers this information to be the financial
                institution's best option for reporting data on the principal place of
                business when the nature of a location is unknown.
                ---------------------------------------------------------------------------
                 \624\ ECOA section 704B(e)(2)(E).
                 \625\ According to U.S. Census 2017 SUSB data, there are
                5,976,761 firms with fewer than 500 employees (which will be used,
                for this purpose, as a rough proxy for a ``small business''); those
                firms collectively have 6,512,802 establishments (i.e., locations).
                This means that, at most, approximately 9 percent of firms with
                fewer than 500 employees could have more than one location. See U.S.
                Census Bureau, 2017 SUSB Annual Datasets by Establishment Industry,
                https://www.census.gov/programs-surveys/susb/data/tables.html (last
                visited Aug. 27, 2021). According to the U.S. Census Bureau's Non-
                employer Statistics, there are 25,701,671 non-employer firms
                (regardless of revenue size). Non-employer firms account for fewer
                than 4 percent of all sales, though, and the vast majority are sole
                proprietorships. While not impossible, the Bureau believes it is
                very unlikely that non-employer firms would have more than one
                location. See U.S. Census Bureau, All Sectors: Nonemployer
                Statistics by Legal Form of Organization and Receipts Size Class for
                the U.S., States, and Selected Geographies: 2017 (2017), https://data.census.gov/cedsci/table?q=NONEMP2017.NS1700NONEMP&tid=NONEMP2017.NS1700NONEMP&hidePreview=true.
                ---------------------------------------------------------------------------
                 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 requiring reporting of the proceeds address would aid in
                fulfilling both the fair lending and business and community development
                purposes of section 1071 by providing more useful information on the
                location of the credit activity for fair lending analysis and
                understanding where the business and community development is
                occurring. Requiring reporting of another address or location
                associated with the applicant when both the proceeds address and the
                main office or headquarters address are not available would provide
                location data when otherwise none would be present, thus also aiding in
                fulfilling both the fair lending and business and community development
                purposes of section 1071 by providing more useful information on the
                location of the lending for fair lending analysis and understanding
                where the business and community development is likely occurring. In
                addition, requiring data on the nature of the address reported would
                aid in fulfilling both the fair lending and business and community
                development purposes of section 1071 by facilitating accurate analyses
                of the data reported. Also, in the alternative, the Bureau believes it
                would be appropriate to use its exception authority under 704B(g)(2) to
                provide that financial institutions would not report the ``main office
                or headquarters address'' in certain situations because the Bureau
                believes that the proceeds address and ``another address or location
                associated with the applicant'' would carry out the purposes of section
                1071 more appropriately than requiring the main office or headquarters
                address in every situation.
                 As discussed above, some SERs explained that they generally collect
                the main office address of the small business, which for sole
                proprietorships will often be a home address, and are generally not
                aware of the proceeds address. The Bureau's proposed waterfall approach
                accommodates this situation by allowing financial institutions to
                report census tract using the address that they have. In regard to
                SERs' concerns about the potential burden of geocoding addresses to
                obtain census tract, the Bureau notes that there does not appear to be
                a viable alternative to collecting and reporting the statutorily
                required census tract data without geocoding. While several SERs are
                already geocoding applicants' addresses, some SERs were concerned about
                the burden associated with geocoding for HMDA and one expressed a
                preference for the CRA method of geocoding, as did several other
                stakeholders. Accordingly, the Bureau seeks comment on the difference
                between geocoding for HMDA and for CRA, and any specific advantages or
                disadvantages associated with geocoding under either method. In regard
                to a Federal government tool capable of batch processing for geocoding
                of addresses, the Bureau is considering the utility of such a tool. The
                Bureau notes that the proposed rule would provide a safe harbor for use
                of such a Bureau tool, if created, as well as for the currently
                existing FFIEC tool. As the SBREFA Panel recommended, the Bureau seeks
                comment on the feasibility and ease of using existing Federal services
                to geocode addresses in order to determine census tract for 1071
                reporting purposes (such as what is offered by the FFIEC for use in
                reporting HMDA data).
                 The Bureau seeks comment on its proposed approach to the census
                tract data point. In addition to the specific requests for input above,
                the Bureau notes that the waterfall method is intended to allow CRA
                reporters to
                [[Page 56465]]
                provide the same data for both reporting regimes, but requests comment
                on whether the proposed method would achieve this goal and, if not,
                whether and how this data point should be further coordinated with CRA.
                107(a)(14) Gross Annual Revenue
                Background
                 Section 1071 requires financial institutions to collect and report
                ``the gross annual revenue of the business in the last fiscal year of
                the . . . applicant preceding the date of the application.'' \626\
                ---------------------------------------------------------------------------
                 \626\ ECOA section 704B(e)(2)(F).
                ---------------------------------------------------------------------------
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated that it was considering
                proposing that financial institutions report the gross annual revenue
                of the applicant during its last fiscal year.\627\ The Bureau stated
                that if a financial institution verifies gross annual revenue and bases
                its credit decision on that amount, the financial institution would
                report the verified amount. If the financial institution does not
                verify gross annual revenue, it would report the amount provided by the
                applicant.
                ---------------------------------------------------------------------------
                 \627\ SBREFA Outline at 31.
                ---------------------------------------------------------------------------
                 Many SERs indicated that they collect gross annual revenue
                information, although they differed in how much they seek to verify
                this information.\628\ Several SERs requested clarification regarding
                how gross annual revenue would be reported for startups and other young
                businesses. A few SERs stated that they do not capture gross annual
                revenue at all or collect it only in limited circumstances. One of
                these SERs stated that collecting gross annual revenue would be
                challenging; others suggested they could likely estimate gross annual
                revenue based on information they do collect.
                ---------------------------------------------------------------------------
                 \628\ SBREFA Panel Report at 29.
                ---------------------------------------------------------------------------
                 Several SERs explained that they collect gross annual revenue using
                different methods and forms of verification for different types of
                credit. SERs advocated for allowing gross annual revenue to be reported
                as provided by the applicant, without an obligation for the financial
                institution to verify that information. A few SERs suggested that
                applicants often cannot provide accurate gross annual revenue
                information, although one SER suggested that in its experience
                applicants are generally able to provide reasonable estimates of gross
                annual revenue. Several SERs preferred reporting ranges rather than
                precise values. Several SERs also remarked that most businesses take
                advantage of tax filing extensions and thus typically do not have
                complete financial information for the prior year until many months
                later, and asked how that situation should be addressed when requesting
                applicants' gross annual revenue for the prior fiscal year.
                 The SBREFA Panel recommended that, in light of SER feedback
                supporting the Bureau's proposal under consideration to not require
                financial institutions to verify gross annual revenue information, the
                Bureau proceed with that approach in the proposal. The SBREFA Panel
                also recommended that the Bureau explore the timing of tax and revenue
                reporting and seek comment in the proposal on how that timing can best
                be coordinated with the collection and reporting of this data
                point.\629\
                ---------------------------------------------------------------------------
                 \629\ Id. at 46.
                ---------------------------------------------------------------------------
                 The Bureau also received feedback from other stakeholders. Although
                one stakeholder commented that gross annual revenue is a consistent
                measure, simple to define, and easily computed, other stakeholders were
                concerned about the complexity and difficulty of reporting a
                specifically defined revenue number. One stakeholder stated that gross
                annual revenue was difficult to precisely define given differences in
                accounting and tax practices both across and within business
                subsectors. Two commenters suggested that reporting this data point
                would be complicated by the question of whether a business uses cash
                flow or accrual accounting. Other stakeholders requested the reporting
                of revenue ranges rather than specific values, and one of these
                commenters suggested that reporting a specific number may discourage
                some borrowers from applying. Another stakeholder explained that
                sometimes an application is denied or withdrawn before the revenue
                information is collected. One stakeholder stated that allowing
                flexibility in the collection and reporting of this data point would be
                very important.
                 With regard to whether the revenue of affiliates is included in the
                gross annual revenue they collect and whether that information is used
                for underwriting purposes, stakeholders reported that some collect this
                information and some do not, depending on the application and specific
                product. One commenter stated that it does not collect such information
                unless the affiliate will be liable on the loan. Two stakeholders
                stated that the Bureau must require inclusion of affiliate revenue to
                make sure that a given business truly is small.
                 Many stakeholders stated that they generally verify the income
                information using profit and loss statements, taxes, bank statements,
                and ``third-party technology solutions.'' Some stated that they do not
                verify revenue information for specific products, such as credit cards,
                and that sometimes it is difficult to verify the revenue of a
                particular applicant, as tax information can be complex or dated.
                Stakeholders overwhelmingly supported the Bureau's proposal under
                consideration not to require verification of revenue, and one
                stakeholder objected to requiring the reporting of verified information
                even when the lender has verified the revenue.
                 Stakeholders also expressed concern about collecting gross annual
                revenue for start-ups and very small businesses that might not have
                useable or clear information. One stakeholder explained that its
                members may obtain and rely on applicant bank statements for a
                specified time period, and so should be permitted to extrapolate annual
                revenue based on partially reported revenue.
                Proposed Rule
                 Proposed Sec. 1002.107(a)(14) would require reporting of the gross
                annual revenue of the applicant for its preceding full fiscal year
                prior to when the information is collected. The Bureau is proposing to
                require reporting of a specific value for gross annual revenue--rather
                than a range, for which some SERs and stakeholders expressed a
                preference--to simplify the reporting of gross annual revenue
                information for financial institutions and because it believes that a
                precise value would be more useful for 1071 data users, including the
                Bureau.
                 Consistent with the SBREFA Panel's recommendation and feedback from
                SERs and other stakeholders, proposed comment 107(a)(14)-1 would
                clarify that a financial institution need not verify gross annual
                revenue information provided by the applicant to comply with proposed
                Sec. 1002.107(a)(14). The proposed comment would explain that the
                financial institution may rely on statements of or information provided
                by the applicant in collecting and reporting gross annual revenue. The
                proposed comment would also state, however, that if the financial
                institution verifies the gross annual revenue provided by the applicant
                it must report the verified information. The Bureau believes that a
                requirement to verify gross annual revenue could be operationally
                difficult for many financial institutions, particularly in situations
                in which the financial institution does not collect gross annual
                [[Page 56466]]
                revenue currently. The Bureau also does not believe, at this time, that
                such a requirement is necessary in fulfilling either of section 1071's
                statutory purposes. However, the Bureau does believe that reporting
                verified revenue when the financial institution already possesses that
                information would not be operationally difficult, and would enhance the
                accuracy of the information collected.
                 Proposed comment 107(a)(14)-1 would also provide specific language
                that a financial institution could use to ask about an applicant's
                gross annual revenue and would explain that a financial institution
                could rely on the applicant's answer. The Bureau believes this language
                would facilitate compliance for financial institutions that currently
                do not collect gross annual revenue, collect it only in limited
                circumstances, or would otherwise find its collection challenging, as
                some SERs and other stakeholders suggested.
                 Overall, the Bureau believes that this approach in proposed comment
                107(a)(14)-1--clarifying that a financial institution need not verify
                applicant-provided gross annual revenue information, and providing
                language that a financial institution may use to ask for such
                information--should reduce the complexity and difficulty of collecting
                gross annual revenue information that some SERs and stakeholders
                expressed concern about.
                 The Bureau believes that situations could arise in which the
                financial institution has identified that an applicant is a small
                business for the purposes of proposed Sec. 1002.106(b) through, for
                example, an initial screening question asking whether the applicant's
                gross annual revenue is below $5 million, but then the specific gross
                annual revenue amount could not be collected. Therefore, the Bureau is
                proposing comment 107(a)(14)-2, which would first clarify that pursuant
                to proposed Sec. 1002.107(c)(1), a financial institution shall
                maintain procedures reasonably designed to collect applicant-provided
                information, including the gross annual revenue of the applicant. The
                proposed comment would then state that if a financial institution is
                nonetheless unable to collect or determine the specific gross annual
                revenue of the applicant, the financial institution reports that the
                gross annual revenue is ``not provided by applicant and otherwise
                undetermined.'' The Bureau believes that permitting this reporting
                flexibility would reduce the complexity and difficulty of reporting
                gross annual revenue information, particularly when an application has
                been denied or withdrawn early in the process and the gross annual
                revenue could not be collected.
                 Proposed comment 107(a)(14)-3 would clarify that a financial
                institution is permitted, but not required, to report the gross annual
                revenue for the applicant that includes the revenue of affiliates as
                well. The proposed comment would state that, for example, if the
                financial institution does not normally collect information on
                affiliate revenue, the financial institution reports only the
                applicant's revenue and does not include the revenue of any affiliates
                when it has not collected that information. The Bureau believes that
                permitting, but not requiring, a financial institution to include the
                revenue of affiliates will carry out the purposes of section 1071 while
                reducing undue burden on financial institutions in collecting gross
                annual revenue information. Proposed comment 107(a)(14)-3 would
                conclude by explaining that in determining whether the applicant is a
                small business under proposed Sec. 1002.106(b), a financial
                institution may rely on an applicant's representations regarding gross
                annual revenue, which may or may not include affiliates' revenue. The
                Bureau notes that proposed comment 106(b)-3 would follow the same
                approach to affiliate revenue for purposes of determining whether an
                applicant is a small business under proposed Sec. 1002.106(b). The
                Bureau believes that this operational equivalence between proposed
                Sec. 1002.107(a)(14) and proposed Sec. 1002.106(b) would facilitate
                compliance and enhance the consistency of 1071 data.
                 As mentioned above, some SERs suggested they might be able to
                estimate gross annual revenue using information that they now collect,
                and one stakeholder suggested that it could extrapolate annual revenue
                based on partially reported revenue. The Bureau does not currently
                believe that estimation or extrapolation would be likely to result in
                sufficiently accurate data for reporting under proposed Sec.
                1002.107(a)(14). For example, a seasonal business's bank statements for
                its busy season would likely yield an inflated gross annual revenue
                when extrapolated to a full year. In addition, the Bureau believes that
                the language presented in proposed comment 107(a)(14)-1 would provide a
                manageable method for collecting full gross annual revenue when a
                financial institution does not do so now. Nonetheless, the Bureau seeks
                comment on whether financial institutions should be permitted to
                estimate or extrapolate gross annual revenue from partially reported
                revenue or other information, and how such estimation or extrapolation
                would be carried out. The Bureau also notes that estimation or
                extrapolation of gross annual revenue is sufficient for the purposes of
                determining small business status under proposed Sec. 1002.106(b),
                subject to the requirement under proposed comment 107(a)(14)-1 that a
                financial institution must report verified gross annual revenue
                information if available.
                 The Bureau seeks comment on its proposed approach to the gross
                annual revenue data point, as well as the specific requests for comment
                above. As the SBREFA Panel recommended, the Bureau also seeks comment
                on how the timing of tax and revenue reporting can best be coordinated
                with the collection and reporting of gross annual revenue. In addition,
                the Bureau seeks comment on the effect of cash flow versus accrual
                accounting on reporting of gross annual revenue.
                107(a)(15) NAICS Code
                 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 is proposing in Sec. 1002.107(a)(15) to
                require that financial institutions collect and report an applicant's
                6-digit NAICS code. The Bureau believes that 6-digit NAICS code data
                would aid in fulfilling the purposes of section 1071, as explained
                below.
                 As described above, the SBA customizes its size standards on an
                industry-by-industry basis using 1,057 6-digit NAICS codes. The first
                two digits of a NAICS code broadly capture the industry sector of a
                business. The third digit captures the industry's subsector, the fourth
                captures the industry group, the fifth captures the industry code, and
                the sixth captures the national industry. The NAICS code thus becomes
                more specific as digits increase and the 6-digit code is the most
                specific. In its SBREFA Outline, the Bureau stated that it was
                considering proposing that financial institutions collect and report
                NAICS code as an important metric for fair lending analysis (allowing
                separation of dissimilar types of businesses to limit
                misinterpretations of the data) and assessing community development
                impacts (allowing better measurement of community development
                impact).\630\
                ---------------------------------------------------------------------------
                 \630\ SBREFA Outline at 35.
                ---------------------------------------------------------------------------
                 As described in detail in the section-by-section analysis of
                proposed Sec. 1002.106(b) above, SERs and other
                [[Page 56467]]
                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.\631\ In addition, several SERs stated that correctly
                classifying an applicant's NAICS code can be difficult, as the business
                may change over time, codes may have overlapping definitions, small
                businesses often do not know their NAICS code or may operate in
                multiple NAICS sectors, and classifications may be prone to human
                error. Another SER noted that NAICS codes classifications could be
                subject to change based on SBA rulemaking, and thus financial
                institutions would need to track such developments. Other SERs stated
                that the 2-digit NAICS code is significantly less complex and prone to
                less human error than the SBA definition using 6-digit NAICS codes.
                ---------------------------------------------------------------------------
                 \631\ SBREFA Panel Report at 31.
                ---------------------------------------------------------------------------
                 The SBREFA Panel 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-NAICS code rather than the 6-digit code.\632\
                ---------------------------------------------------------------------------
                 \632\ Id. at 46.
                ---------------------------------------------------------------------------
                 Proposed Sec. 1002.107(a)(15) would require financial institutions
                to collect and report a 6-digit NAICS code appropriate for the
                applicant's business. Proposed comment 107(a)(15)-1 would provide
                general background on NAICS codes and would state that a financial
                institution complies with proposed Sec. 1002.107(a)(15) if it uses the
                NAICS codes in effect on January 1 of the calendar year covered by the
                small business lending application register that it is reporting.
                Proposed comment 107(a)(15)-2 would clarify that, when a financial
                institution is unable to collect or determine the applicant's NAICS
                code, it reports that the NAICS code is ``not provided by applicant and
                otherwise undetermined.''
                 The Bureau is also proposing that financial institutions be
                permitted to rely on NAICS codes obtained from the applicant or certain
                other sources, without having to verify that information itself.
                Specifically, proposed comment 107(a)(15)-3 would clarify that,
                consistent with proposed Sec. 1002.107(b), a financial institution may
                rely on applicable applicant information or statements when compiling
                and reporting the NAICS code and would provide an example of an
                applicant providing a financial institution with the applicant's tax
                return that includes the applicant's reported NAICS code. Proposed
                comment 107(a)(15)-4 would provide that a financial institution may
                rely on a NAICS code obtained through the financial institution's use
                of business information products, such as company profiles or business
                credit reports, which provide the applicant's NAICS code.
                 The Bureau believes that NAICS codes would considerably aid in
                fulfilling both section 1071's fair lending purpose and its business
                and community development purpose, even if having NAICS code is not
                necessary for determining whether an applicant is a small business
                under the Bureau's proposed alternative size standard. The Bureau
                believes that capturing 6-digit NAICS codes in the 1071 data would
                facilitate enforcement of fair lending laws. For example, financial
                institutions often designate certain industries as high-risk, such as
                industries that have high rates of businesses leaving the market or
                that deal primarily in cash transactions. The 6-digit NAICS codes would
                help ensure that users are comparing applicants with similar profiles,
                thereby controlling for factors that might provide non-discriminatory
                explanations for disparities in credit and pricing decisions. Moreover,
                NAICS codes would be useful for identifying business and community
                development needs and opportunities of small businesses, which may
                differ widely based on industry, even controlling for other factors.
                For example, 6-digit NAICS codes would help data users identify
                industries where small businesses face challenges accessing credit and
                understand how small businesses in different industries use credit.
                Furthermore, disclosing NAICS codes would provide for consistency and
                compatibility with other public datasets related to small business
                lending activity, which generally use NAICS codes. This ability to
                synthesize 1071 data with other datasets would help the public use the
                data in ways that advance both the business and community development
                and fair lending purposes of section 1071.
                 The Bureau believes that collecting the full 6-digit NAICS code (as
                opposed to the 2-digit sector code) would better enable the Bureau and
                other stakeholders to drill down and identify whether disparities arise
                at a sector level or more specifically at a U.S. National Industry
                level and would also enable the collection of better information on the
                specific types of businesses that are accessing, or struggling to
                access, credit. For example, a wide variety of businesses, including
                those providing car washes, footwear and leather goods repair, and nail
                salons, all fall under the 2-digit sector code 81: Other Services
                (except Public Administration). Without 6-digit NAICS codes, all of
                these business types would be combined into one analysis, potentially
                masking different characteristics and different outcomes across these
                business types.
                 The Bureau recognizes that, under its proposal, all financial
                institutions subject to reporting would need to gain familiarity with
                the NAICS code system, refer to NAICS classifications for all relevant
                applications, and report NAICS codes to the Bureau. To address
                commenter concerns related to the complexity of determining a correct
                NAICS code, the Bureau is proposing (1) a safe harbor to indicate that
                an incorrect NAICS code entry is not a violation of subpart B if the
                first two digits of the NAICS code are correct and the financial
                institution maintains procedures reasonably adapted to correctly
                identify the subsequent four digits (see proposed Sec.
                1002.112(c)(2)); (2) permitting a financial institution to rely on
                applicable applicant information or statements when compiling and
                reporting the NAICS code (see proposed comment 107(a)(15)-3); and (3)
                permitting a financial institution to rely on a NAICS code obtained
                through the financial institution's use of business information
                products, such as company profiles, business credit reports, or NAICS
                identification tools (see proposed comment 107(a)(15)-4). The proposed
                NAICS-specific safe harbor would be available to financial institutions
                in addition to the general bona fide error exemption under proposed
                Sec. 1002.112(b). See the section-by-section analysis of proposed
                Sec. 1002.112(c)(2) below for a detailed discussion of the proposed
                safe harbor.
                 The Bureau seeks comment on its proposal to collect 6-digit NAICS
                codes together with the safe harbor described in proposed Sec.
                1002.112(c)(2). The Bureau also seeks comment on whether requiring a 3-
                digit NAICS code with no safe harbor would be a better alternative.
                107(a)(16) Number of Workers
                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 data providing the number of
                persons
                [[Page 56468]]
                working for a small business applicant would aid in fulfilling the
                business and community development purpose of section 1071. These data
                would allow users to better understand the job maintenance and creation
                that small business credit is associated with and help track that
                aspect of business and community development.
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated that it was considering
                proposing that financial institutions collect and report the number of
                employees of the applicant. The Bureau stated that it was considering
                proposing that if the financial institution verifies the number of
                employees provided by the applicant, the financial institution would
                report the verified number. On the other hand, if the financial
                institution does not verify the number of employees, it would report
                the number provided by the applicant.
                 Many SERs indicated that they do not collect number of
                employees.\633\ One of these SERs stated that they do not support the
                inclusion of this data point in an eventual 1071 rule, although they
                could collect this information. Several SERs suggested that there could
                be particular complexities in accurately capturing this information,
                particularly regarding how part-time and seasonal employees and
                contractors should be counted. Some SERs stated that they collect
                number of employees but do not verify that information.
                ---------------------------------------------------------------------------
                 \633\ Id. at 31.
                ---------------------------------------------------------------------------
                 The SBREFA Panel recommended (with respect to both the time in
                business and number of employees data points), that if these data
                points become part of the proposal, the Bureau continue to explore ways
                to minimize the burden to small financial institutions of collecting
                and reporting these data points.\634\
                ---------------------------------------------------------------------------
                 \634\ Id. at 46.
                ---------------------------------------------------------------------------
                 A large majority of industry stakeholders commenting on the SBREFA
                Outline opposed the inclusion of any of the discretionary data points,
                including number of employees. One trade association stated that this
                data point would frustrate small business applicants, particularly if
                they have to apply full-time employee calculation formulas. Several
                stakeholders discussed the difficulty of defining a number of employees
                data point, suggesting that complex rules would be necessary for how to
                count part-time and seasonal employees, as well as contractors. Another
                commenter suggested that verifying this information would be extremely
                difficult. Industry commenters also explained that most financial
                institutions do not collect this information now, and several pointed
                out that these data are not useful for evaluating credit risk. Another
                stated that number of employees is not a meaningful figure across
                industries, given the use of contractors and part-time employees. One
                commenter pointed out that the many sole proprietorships and non-
                employee firms mean that this number will often be zero. One financial
                institution stated that it does collect this information now, but does
                not verify it.
                 Community groups were strongly in favor of including a number of
                employees data point. One group stated that the number of employees
                data would help provide a greater understanding of microbusinesses,
                typically defined in terms ranging from less than five to ten
                employees, one or more of whom is the owner. Another suggested that the
                Bureau collect the total number of employees and number of owners
                separately, which it said would avoid the problem found in PPP data
                where owners mistakenly reported themselves as employees. This same
                commenter stated that user testing and guidance would be necessary to
                ensure that the number of employees is reported accurately and
                consistently. However, one community development fund that supported
                the collection of the other discretionary data points opposed
                collection of the number of employees. This stakeholder stated that
                there is little research support for direct job creation/retention as
                the primary impact of small business assistance, and that the scholarly
                consensus suggests the economic impacts of small firms are related to
                their capacity to improve local entrepreneurial networks and create
                ecosystems that are desired and sought out by bigger firms. The
                commenter then stated that by having covered financial institutions
                report on job counts, the Bureau would be implicitly reinforcing the
                inaccurate notion that employment is a key dimension of small business
                assistance.
                Proposed Rule
                 Proposed Sec. 1002.107(a)(16) would require financial institutions
                to report the number of non-owners working for the applicant. Although
                some SERs and other stakeholders questioned the usefulness of
                employment data for 1071's purposes, the Bureau continues to believe
                that this information would be particularly helpful in fulfilling the
                business and community development purpose of section 1071. Information
                on the number of workers should help data users assess community
                development impacts by allowing better understanding of the number of
                jobs affected. In addition, in order to avoid mistaken over-reporting
                of workers, the proposed regulation would make clear that only non-
                owners would be reported as workers.
                 Proposed comment 107(a)(16)-1 would discuss the collection of the
                number of workers. As discussed above, several SERs and other
                stakeholders suggested that there could be particular complexities in
                accurately capturing this information, particularly regarding how part-
                time and seasonal workers and contractors should be counted. To help
                alleviate these concerns, the proposed comment would state that in
                collecting the number of workers from an applicant, the financial
                institution would explain that full-time, part-time, and seasonal
                workers, as well as contractors who work primarily for the applicant,
                would be counted as workers, but principal owners of the business would
                not. If asked, the financial institution would explain that volunteers
                would not be counted as workers. This treatment of part-time, seasonal,
                contract, and volunteer workers would follow the SBA's method for
                counting employees,\635\ with minor simplifications. The Bureau
                believes that this guidance would allow financial institutions that
                originate SBA-guaranteed loans to use the same number of workers data
                for both the loan guarantee program and 1071 reporting. The Bureau
                seeks comment on whether further modifications to the number of workers
                data point are needed to facilitate this operational simplification.
                ---------------------------------------------------------------------------
                 \635\ See 13 CFR 121.106(a).
                ---------------------------------------------------------------------------
                 Proposed comment 107(a)(16)-1 would also explain 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 believes that this coordination between these two data
                points would facilitate compliance and yield more consistent data.
                 The proposed comment would further explain that the financial
                institution may rely on statements of or information provided by the
                applicant in collecting and reporting number of workers, but if the
                financial institution verifies the number of workers provided by the
                applicant, it must report the verified information. This guidance would
                address the concerns raised about the difficulty of verification. The
                Bureau believes that allowing financial institutions to rely on
                applicant-
                [[Page 56469]]
                provided information will sufficiently safeguard accuracy such that the
                resulting data will aid in fulfilling the purposes of 1071. However,
                the Bureau also believes that reporting the verified number of workers
                when the financial institution already possesses that information would
                not be operationally difficult, and would enhance the accuracy of the
                information collected.
                 Finally, proposed comment 107(a)(16)-1 would also provide sample
                language that a financial institution could use to ask about the number
                of workers, if it does not collect the number of workers by another
                method. The Bureau understands that, as discussed above, financial
                institutions engaged in SBA lending are already collecting employee
                information to apply the SBA's size standards. However, SBA lending
                represents only a small percentage of the small business credit market.
                Given the difficulty for financial institutions in potentially
                requesting this information of all applicants, the Bureau provides the
                sample language in the proposed comment, which implements the
                simplified version of the SBA definition presented earlier in the
                proposed comment. The Bureau believes that permitting use of the model
                question would facilitate compliance. The Bureau seeks comment on this
                method of collection, and on the specific language proposed.
                 Proposed comment 107(a)(16)-2 would first clarify that a financial
                institution shall maintain procedures reasonably designed to collect
                applicant-provided information, including the number of workers of the
                applicant. The proposed comment would then state that if a financial
                institution is nonetheless unable to collect or determine the number of
                workers of the applicant, the financial institution reports that the
                number of workers is ``not provided by applicant and otherwise
                undetermined.'' The Bureau believes that this approach would reduce the
                burden on financial institutions that are unable to collect or
                determine the number of workers of the applicant, particularly when an
                application is denied or withdrawn early in the application process.
                 The Bureau seeks comment on its proposed approach to the number of
                workers data point, as well as on the specific requests for comment
                above. The Bureau also seeks comment on whether financial institutions
                collect information about the number of workers from applicants using
                definitions other than the SBA's, and how the collection of this data
                point could best be integrated with those collections of information.
                107(a)(17) Time in Business
                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 data providing the time in
                business of a small business applicant would aid in fulfilling both the
                business and community development and fair lending purposes of section
                1071, as explained below.
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated that it was considering
                proposing to include as a discretionary data point time in business of
                the applicant (as of the date of application), expressed in years, or
                months if less than one year.\636\ The Bureau stated that time-in-
                business information could help explain differences in underwriting
                risk among small business applicants and thus avoid misinterpretation
                of the section 1071 dataset by distinguishing potentially riskier new
                businesses from less risky established businesses. Time-in-business
                information could also provide a better measurement of community
                development effects, in terms of number of start-ups or other
                relatively new businesses seeking and obtaining financing. The Bureau
                stated that a financial institution may choose to verify the time in
                business provided by an applicant as part of its normal course of
                business. If the financial institution does not verify the time in
                business provided by the applicant, the financial institution would
                report the time in business provided by the applicant. If the financial
                institution does verify the time in business provided by the applicant,
                it would report the verified information.
                ---------------------------------------------------------------------------
                 \636\ SBREFA Outline at 34-35.
                ---------------------------------------------------------------------------
                 Many SERs currently collect time-in-business information,
                explaining that time-in-business information is valuable for measuring
                risk in underwriting.\637\ However, some SERs collect this information
                on their application forms or keep it as part of a general narrative in
                a credit memorandum about the application, but do not retain it as a
                specific data field in their systems. Some SERs capture time-in-
                business information by recording the year, or month/day/year, of
                incorporation; others capture it as the number of years the applicant
                has been in business. One SER stated that they do not support the
                inclusion of time in business as a data point in the NPRM, although
                they could collect this information.
                ---------------------------------------------------------------------------
                 \637\ SBREFA Panel Report at 31.
                ---------------------------------------------------------------------------
                 Several SERs stated that they use State incorporation filings to
                determine or verify time in business. Some SERs explained that they
                view a business as a start-up if it has been in business either less
                than two or less than three years. For one SER, time in business is
                relevant for the specific line of business for which financing is
                sought, rather than the length of time the applicant has been in some
                business generally. Another SER suggested that the Bureau use ranges
                for time-in-business reporting, similar to a suggested method for
                collecting and reporting gross annual revenue.
                 The SBREFA Panel recommended (with respect to both the time in
                business and number of employees data points), that if these data
                points become part of the proposal, the Bureau continue to explore ways
                to minimize the burden to small financial institutions of collecting
                and reporting these data points.\638\
                ---------------------------------------------------------------------------
                 \638\ Id. at 46.
                ---------------------------------------------------------------------------
                 Community group stakeholders supported the inclusion of the time-
                in-business data point, stating that start-ups and younger businesses
                often face challenges accessing credit, and having time-in-business
                data would be especially critical to exploring gender and racial
                disparities and fostering equitable access to affordable loan capital.
                Two industry stakeholders supported inclusion, stating that time in
                business is a key underwriting factor and could explain credit
                disparities. One community group stakeholder agreed, stating that time
                in business and other discretionary data points 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 large majority of industry stakeholders opposed all discretionary
                data points, including time in business. One industry stakeholder
                focused specifically on the time-in-business data point, stating that
                there are too many variables in the data point to be easily and clearly
                defined for collection. That stakeholder provided examples of
                complications in collection of the data point, such as (1) the time the
                entity has existed or existed under the current ownership, (2) how much
                experience the owners have had in this business or closely related
                fields, (3) if the
                [[Page 56470]]
                experience is in closely related fields how close must they be, (4)
                whether the entity has history but is being purchased using loan funds
                by ownership with little experience, and (5) whether industry should
                report how long the existing management structure has been in place. It
                then requested that the Bureau drop this data point or make the options
                very simple.
                 Industry stakeholders reported different ways that they currently
                collect and use time-in-business information. Stakeholders report that
                the information is not universally collected and may be collected using
                different formats, even within a single institution. A trade
                association suggested that reporting time in business should be
                optional. One stakeholder said that it verifies the data using
                Secretary of State or other third-party information, and that an
                applicant that does not meet the time-in-business requirement for a
                product may be automatically rejected. Two other stakeholders stated
                that they focus on the overall experience of the ownership or
                management, rather than the age of the business.
                Proposed Rule
                 Proposed Sec. 1002.107(a)(17) would require a financial
                institution to collect and report the time the applicant has been in
                business, described in whole years, as relied on or collected by the
                financial institution. Proposed Sec. 1002.107(a)(17) would require the
                data be reported in whole years, rather than ranges of time, as
                suggested by a SER and a stakeholder, because a financial institution
                would have a definite number of years if it collects this information,
                and the Bureau believes that would make the data more granular and
                useful.
                 The Bureau continues to believe that time in business would likely
                advance both statutory purposes of 1071. Research illustrates, and
                commenters have emphasized, the role that start-ups and new businesses
                play in the business ecosystem and in promoting important community
                development aims, such as creating new jobs.\639\ Financial
                institutions often have special credit policies regarding start-ups and
                other young businesses, including whether the institution will extend
                credit to start-ups at all, the type(s) of credit products start-ups
                and new businesses can apply for, and the amount of credit for which
                they can be approved. Studies generally show that start-ups experience
                greater difficulty in accessing credit,\640\ and one community group
                stakeholder made the same point. In addition, one study suggested that
                Black- and Hispanic-owned firms are under-represented in terms of firms
                that have external financing, have lower levels of liquidity in their
                early years, and have higher rates of exiting the market within the
                first three years.\641\ In regard to the facilitation of fair lending
                analyses, time-in-business data would provide a useful control in fair
                lending analyses to identify similarly situated applicants and
                eliminate some false positives, while also allowing monitoring of
                potential disparate treatment of minority- and women-owned start-ups
                and relatively new businesses. In addition, many SERs reported that
                time-in-business information is valuable for measuring risk in
                underwriting, and they did not limit this observation to start-ups and
                new businesses. The Bureau also believes that collecting time-in-
                business information generally, rather than in the first few years,
                would provide useful data for understanding the relative maturity of
                small businesses in different communities.
                ---------------------------------------------------------------------------
                 \639\ See, e.g., Small Bus. Admin., 2018 Small Business
                Profiles, at 1-2 (2018), https://www.sba.gov/advocacy/2018-small-business-profiles-states-and-territories?utm_medium=email&utm_source=govdelivery; John
                Haltiwanger et al., Who Creates Jobs? Small versus Large versus
                Young, The Review of Economics and Statistics, 95(2), at 347-61
                (2013), https://direct.mit.edu/rest/article/95/2/347/58100/Who-Creates-Jobs-Small-versus-Large-versus-Young.
                 \640\ For example, a Federal Reserve Bank of New York report,
                based on data from the 2016 Small Business Credit Surveys that
                included information from 12 Federal Reserve Banks, provides
                statistics on how start-ups are less likely to receive credit as
                compared to mature businesses, even with comparable credit scores.
                See Fed. Reserve Bank of N.Y., Small Business Credit Survey: Report
                on Start-up Firms, at iv (2017), https://www.newyorkfed.org/medialibrary/media/smallbusiness/2016/SBCS-Report-StartupFirms-2016.pdf.
                 \641\ J.P. Morgan Chase, Small Business Owner Race, Liquidity
                and Survival (July 2020), https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/institute/pdf/institute-small-business-owner-race-report.pdf.
                ---------------------------------------------------------------------------
                 The Bureau believes that time-in-business data would benefit data
                users, including financial institutions, policymakers, and communities.
                Such data would allow data users to better identify the proportion of
                small businesses seeking credit that are start-ups or relatively new
                businesses, the type(s) of credit that is offered and provided to
                start-ups and newer businesses, the geographic makeup of those
                businesses, the types of financial institutions that are reaching such
                businesses, and where communities might focus business development
                efforts. The data may also aid policymakers in addressing issues
                impacting the growth of small start-ups. The data, particularly as to
                unmet demand, could help interested financial institutions identify
                lending opportunities to reach more start-ups and new businesses,
                promoting both business and community development.
                 In addition, as some of the stakeholders suggested, the Bureau
                believes that the inclusion of time-in-business data could help
                mitigate the concerns of data misrepresentation. For example, data
                indicating that a small business applicant is a start-up with little
                experience or financial history could provide a legitimate business
                explanation for why the financial institution denied the application or
                approved it for less credit than was applied for. Therefore, time-in-
                business data may help to explain the credit decision made by a
                financial institution, which may address any concerns of data
                misrepresentation.
                 The Bureau is not proposing to make this data field optional, as
                suggested by a trade association. The Bureau is concerned that, if it
                were to do so, very little data would be reported.
                 As explained above, the SBREFA Panel recommended that the Bureau
                explore ways to minimize the burden on small financial institutions of
                collecting and reporting the time-in-business data point. SERs and
                industry stakeholders reported different ways that they currently
                collect and use time-in-business information, reporting that the
                information is not universally collected and may be collected using
                different formats, even within a single institution. The Bureau
                believes that by allowing financial institutions to report the time in
                business that they relied on in making their credit decisions, the
                burden on the financial institution (of any size) could be reduced,
                while the resulting information would still aid in fulfilling the
                purposes of section 1071. Although industry commenters overwhelmingly
                expressed concern about the burden associated with any discretionary
                data points as a general matter, the Bureau believes that time-in-
                business information can be made relatively easy for financial
                institutions to collect if the Bureau leverages the methods currently
                in use by individual financial institutions. As the SERs and
                stakeholders explained, many or possibly most financial institutions
                already collect time-in-business information for underwriting purposes
                or to determine general eligibility, though the format and specific
                information collected vary by institution \642\ and may relate to owner
                [[Page 56471]]
                or management experience rather than business longevity. Therefore, the
                Bureau is proposing that financial institutions that collect time-in-
                business information be required to report the time in business that
                they relied on (or would have relied on, for applications that were
                withdrawn prior to a credit decision) in making the credit decision. If
                the financial institution collects time-in-business information that
                reflects owner or management experience rather than business longevity,
                the financial institution would report time in business using the
                number it collects and relies on reflecting owner or management
                experience. If the financial institution relies on verified
                information, it reports the verified information. If it does not verify
                the information, it reports the unverified information. Requiring
                reporting of time in business ``relied on'' should avoid requiring
                financial institutions that collect some version of this information to
                change their practices or add extra procedures to collect the Bureau's
                version of time in business. In addition, the Bureau believes that
                collecting the actual information used by the financial institution to
                evaluate the application would aid fair lending analysis. Furthermore,
                the Bureau does not believe that the variations among the data
                collected by individual institutions would interfere with the business
                and community development purpose of 1071, because the information
                would still be useful in identifying new ownership, management, and
                businesses that may face credit challenges.
                ---------------------------------------------------------------------------
                 \642\ Of a limited sample of application forms the Bureau
                reviewed from a variety of types of financial institutions, a
                majority of forms contained some type of time-in-business field.
                When the Bureau looked at lenders that have undergone a small
                business fair lending exam from the Bureau, a few (but not the
                majority) maintained data on time in business in their existing
                systems. Examples of time-in-business reference points include time
                of formation or registration, time under current ownership, and
                history of financial records, recorded as either month and year or
                just year.
                ---------------------------------------------------------------------------
                 In addition to providing some financial institutions with the
                ability to avoid duplicative information gathering by simply reporting
                the time in business relied on, the proposed data point would also
                facilitate compliance for financial institutions that do not currently
                collect or rely on time-in-business information by allowing them to use
                the specific question provided in proposed comment 107(a)(17)-4, as
                explained below. The Bureau believes that permitting these two proposed
                methods for collection and reporting should accommodate different
                institutional practices and reduce operational difficulty for financial
                institutions in reporting this data point.
                 In order to clarify the potential use of the two methods (relied on
                or collected) of reporting for the time-in-business data point,
                proposed comment 107(a)(17)-1 would provide guidance on how to report
                using either method. The proposed comment would explain that,
                regardless of which method is used, the financial institution must
                report the time in business in whole years, or indicate if a business
                has not begun operating yet, or has been in operation for less than a
                year. The Bureau believes that this reporting format would inform data
                users of the maturity of the applicant businesses and signal which are
                start-ups.
                 Proposed comment 107(a)(17)-1 would further explain that when the
                financial institution relies on an applicant's time in business as part
                of a credit decision, it reports the time in business relied on in
                making the credit decision. However, the comment would further explain
                that proposed Sec. 1002.107(a)(17) would not require the financial
                institution to rely on an applicant's time in business in making a
                credit decision. The Bureau believes that this guidance would make
                clear that the requirement to collect and report applicants' time in
                business would not change the financial institution's internal business
                practices. A financial institution would only be required to report the
                time in business relied on in making the credit decision if the
                financial institution actually does rely on an applicant's time in
                business in making its credit decision.
                 Proposed comment 107(a)(17)-1 would also explain that the financial
                institution may rely on statements or information provided by the
                applicant in collecting and reporting time in business; however,
                pursuant to proposed Sec. 1002.107(b), if the financial institution
                verifies the time in business provided by the applicant, it must report
                the verified information. This guidance would apply whether the
                financial institution relies on the time in business in making its
                credit decision or not, although the Bureau believes that verification
                would be very uncommon when the financial institution is not relying on
                the information. The Bureau believes that allowing financial
                institutions to rely on applicant-provided information will
                sufficiently safeguard accuracy such that the resulting data will aid
                in fulfilling the purposes of 1071. However, the Bureau also believes
                that reporting the verified time in business when the financial
                institution already possesses that information would not be
                operationally difficult, and would enhance the accuracy of the
                information collected and ensure that it was the information that the
                financial institution relied on in making the credit decision.
                 Proposed comment 107(a)(17)-2 would provide instructions on how to
                report the time in business relied on in making the credit decision.
                The proposed comment would state that when a financial institution
                evaluates an applicant's time in business as part of a credit decision,
                it reports the time in business relied on in making the credit
                decision. For example, the proposed comment would further explain, if
                the financial institution relies on the number of years of experience
                the applicant's owners have in the current line of business, the
                financial institution reports that number of years as the time in
                business. Similarly, if the financial institution relies on the number
                of years that the applicant has existed, the financial institution
                reports the number of years that the applicant has existed as the time
                in business. Proposed comment 107(a)(17)-2 would then conclude by
                stating that a financial institution reports the length of business
                existence or experience duration that it relies on in making its credit
                decision, and is not required to adopt any particular definition of
                time in business. The Bureau believes that this proposed comment would
                provide useful guidance on how a financial institution complies with
                Sec. 1002.107(a)(17) when it relies on time in business and would help
                such financial institutions avoid unnecessary compliance difficulties
                by reporting information that they already possess.
                 Proposed comment 107(a)(17)-3 would state that a financial
                institution relies on an applicant's time in business in making a
                credit decision if the time in business was a factor in the credit
                decision, even if it was not a dispositive factor. The comment would
                provide the example that if the time in business is one of multiple
                factors in the financial institution's credit decision, the financial
                institution has relied on the time in business even if the financial
                institution denies the application because one or more underwriting
                requirements other than the time in business are not satisfied. The
                Bureau believes that this guidance would help financial institutions to
                understand how to comply correctly with proposed Sec. 1002.107(a)(17).
                 Proposed comment 107(a)(17)-4 would clarify that if the financial
                institution does not rely on time in business in considering an
                application, pursuant to proposed Sec. 1002.107(c)(1) it shall still
                maintain procedures reasonably designed to collect applicant-provided
                information, which
                [[Page 56472]]
                includes the applicant's time in business. The proposed comment would
                explain that in collecting time in business from an applicant, the
                financial institution complies with proposed Sec. 1002.107(a)(17) by
                asking for the number of years that the applicant has been operating
                the business it operates now. The proposed comment would further
                explain that when the applicant has multiple owners with different
                numbers of years operating that business, the financial institution
                collects and reports the greatest number of years of any owner. As
                discussed above, the Bureau believes that providing this clear
                instruction on how to collect the time in business when a financial
                institution does not do so now would avoid the potential complications
                and difficulties described by the SERs and industry stakeholders in
                collecting this data point. In addition, the Bureau notes that, as
                would be made clear in proposed comment 107(a)(17)-1, a financial
                institution would not need to verify an applicant's response to the
                inquiry. Proposed comment 107(a)(17)-4 would then conclude by making
                clear that the financial institution does not need to comply with the
                instruction if it collects and relies on the time in business by
                another method in making the credit decision.
                 Proposed comment 107(a)(17)-5 would explain that pursuant to
                proposed Sec. 1002.107(c)(1) a financial institution shall maintain
                reasonable procedures to collect information provided by the applicant,
                which includes the time in business of the applicant, but if the
                financial institution is unable to collect or determine the time in
                business of the applicant, the financial institution reports that the
                time in business is ``not provided by applicant and otherwise
                undetermined.'' The Bureau believes that permitting use of this
                response would facilitate compliance, particularly in situations in
                which the application is denied or withdrawn early in the application
                process.
                 The Bureau seeks comment on its proposed approach to this data
                point. The Bureau also seeks comment on whether time-in-business
                information may be less relevant or collectable for certain products or
                situations (such as retailer-branded credit cards acquired at point of
                sale) and whether reporting ``not applicable'' should be allowed in
                those instances. In addition, the Bureau seeks comment on whether there
                should be an upper limit on time in business--for example, to allow
                reporting of ``over 20 years'' for any applicant of that duration,
                rather than requiring reporting of a specific number of years.
                107(a)(18) Minority-Owned Business Status
                Background
                 ECOA section 704B(b) requires financial institutions to inquire
                whether applicants for credit are minority-owned businesses and to
                maintain a record of the responses to that inquiry separate from the
                applications and accompanying information. Section 704B(c) provides
                that applicants for credit may refuse to provide information requested
                pursuant to 704B(b). The Bureau is proposing Sec. 1002.107(a)(18) to
                address how a financial institution would collect and report an
                applicant's minority-owned business status.
                SBREFA Proposal Under Consideration and Feedback
                 In the SBREFA Outline, the Bureau stated that it was considering
                proposing that financial institutions be permitted to collect and
                report minority-owned business status solely based on applicant self-
                reporting and that the Bureau was not considering requiring reporting
                based on visual observation and/or surname.\643\ The Bureau also stated
                that it was considering proposing that the right to refuse under ECOA
                section 704B(c) apply to the financial institution's specific inquiries
                regarding minority-owned business status as well as women-owned status
                and the principal owners' race, sex, and ethnicity
                ---------------------------------------------------------------------------
                 \643\ SBREFA Outline at 25-26.
                ---------------------------------------------------------------------------
                 Several SERs supported this approach and urged the Bureau to
                require collection and reporting of minority-owned business status
                based only on the information the applicant provides (i.e., self-
                reporting).\644\ SERs also expressed concerns about the difficulties
                and costs that may be associated with collecting minority-owned
                business status on some basis other than applicant self-reporting. For
                example, although many SERs indicated that they review some ownership
                information about applicants in order to obtain guarantees or for other
                reasons, most of those SERs said that they do not review the accrual of
                net profits and losses and some said that they do not review
                information related to who controls an applicant. One SER said that
                determining ownership is relatively straightforward, but the issue of
                control can be subjective. One SER said that it would not be able to
                determine who controlled an applicant and that an applicant would need
                to self-report that information. Another SER noted that some small
                business applicants do not have simple ownership structures. A
                different SER stated that some financial institutions do not meet in
                person with all of the owners of small business applicants.
                ---------------------------------------------------------------------------
                 \644\ SBREFA Panel Report at 26.
                ---------------------------------------------------------------------------
                 Other industry stakeholders providing feedback on the SBREFA
                Outline also supported collection and reporting of minority-owned
                business status based only on applicant self-reporting and noted
                several challenges with reporting this data point based on visual
                observation and/or surname. Some industry commenters stated that it
                would not be possible to report minority-owned business status based on
                visual observation and/or surname in at least some circumstances.
                Others expressed concerns about the cost and time required to do so.
                One industry commenter noted that the tracking of ownership and other
                information needed to report based on visual observation and/or surname
                would be laborious. Another commenter noted that some financial
                institutions do not obtain the information necessary to make the
                determinations that would underlie a visual observation requirement
                (i.e., information about ownership, control, etc.). One commenter
                specifically noted that the statute only requires financial
                institutions to ``inquire'' about minority-owned business status.
                Conversely, a community group opposed reporting based only on applicant
                self-reporting.
                 Some commenters stated that financial institutions should not be
                required to collect or report this information at all, or that they
                should not be required to collect or report it in certain situations,
                such as when a trust or other entity owns or controls an applicant.
                 Some SERs and a few other commenters said that the Bureau should
                create a tool or otherwise arrange for applicants to self-report, at
                least, demographic information (namely, minority-owned business status
                and women-owned business status as well as the ethnicity, race, and sex
                of principal owners) directly to the Bureau or to a third-party that
                maintains a database of such information.
                 Some SERs were concerned that, if notified of their right to
                refuse, applicants may not provide protected demographic information,
                thus limiting the usefulness of 1071 data. One SER and several other
                commenters similarly agreed with the Bureau's proposal under
                consideration to limit the right to refuse to applicants' protected
                demographic information only. However, three commenters opined that the
                Bureau's approach was too limited and that the right to refuse should
                apply to small business status as well as other data
                [[Page 56473]]
                points. Several SERs requested that the Bureau provide sample language
                for use in any disclosure and collection forms in which an applicant's
                right to refuse is stated, so that applicants understand why lenders
                are requesting protected demographic information and how the
                information will be used. Two SERs asked that the Bureau provide sample
                language in English as well as in other languages, such as Spanish.
                 The SBREFA Panel recommended that the Bureau consider creating
                sample data collection forms that, to the extent possible, simply and
                clearly explain the information being requested for purposes of this
                data point. The SBREFA Panel recommended that the Bureau consider
                developing sample disclosure language that financial institutions may
                use to provide some context as to why applicants are being asked to
                provide protected demographic information, in order to encourage
                applicants to respond. It also said that the Bureau should additionally
                consider providing these sample data collection forms in other
                languages, such as Spanish.\645\
                ---------------------------------------------------------------------------
                 \645\ Id. at 45.
                ---------------------------------------------------------------------------
                Proposed Rule
                 Consistent with its approach during the SBREFA process, proposed
                Sec. 1002.107(a)(18) would require financial institutions to collect
                and report whether an applicant is a minority-owned business. Proposed
                Sec. 1002.107(a)(18) would also require financial institutions to
                collect and report whether minority-owned business status is being
                reported based on previously collected data pursuant to proposed Sec.
                1002.107(c)(2). It would also require that when the financial
                institution requests minority-owned business status from an applicant,
                the financial institution inform the applicant that the financial
                institution cannot discriminate on the basis of the applicant's
                minority-owned business status, or on whether the applicant provides
                this information. Finally, proposed Sec. 1002.107(a)(18) would refer
                to proposed appendix F for additional details regarding how financial
                institutions are required to collect and report minority-owned business
                status. Proposed appendix F would include a requirement that a
                financial institution inform an applicant that the applicant is not
                required to respond to the financial institution's questions regarding
                the applicant's minority-owned business status and women-owned business
                status, and a prohibition on financial institutions requiring
                applicants to provide this information.\646\ Consistent with the SBREFA
                Panel's recommendation, proposed appendix E, which is a sample data
                collection form, would include a question about minority-owned business
                status and related information to assist applicants with responding to
                the question.\647\
                ---------------------------------------------------------------------------
                 \646\ Proposed appendix G would include a similar requirement to
                notify applicants that they are not required to provide information
                regarding principal owners' ethnicity, race, and sex and a similar
                prohibition on financial institutions requiring that applicants
                provide such information.
                 \647\ The Bureau seeks additional comment regarding foreign
                language forms and notices in the section-by-section analysis of
                proposed appendix E below.
                ---------------------------------------------------------------------------
                 Proposed comment 107(a)(18)-1 would clarify that a financial
                institution would be required to ask an applicant if it is a minority-
                owned business for each covered application unless the financial
                institution is permitted to report minority-owned business status based
                on previously collected data. Additionally, the financial institution
                would be required to permit an applicant to refuse to answer the
                financial institution's inquiry and to inform the applicant that it is
                not required to provide the information. The financial institution
                would report the applicant's response, its refusal to answer the
                inquiry (such as when the applicant indicates that it does not wish to
                provide the requested information), or its failure to respond (such as
                when the applicant fails to submit a data collection form) to the
                inquiry. See proposed appendix F for additional instructions on how the
                Bureau proposes that financial institutions collect and report
                minority-owned business status.
                 Proposed comment 107(a)(18)-2 would explain that a financial
                institution must inform the applicant that the financial institution
                cannot discriminate on the basis of an applicant's minority-owned
                business status or on whether the applicant provides the information.
                It would also clarify that a financial institution may combine this
                non-discrimination notice regarding minority-owned business status with
                the similar non-discrimination notices that a financial institution is
                required to provide when requesting women-owned business status and a
                principal owner's ethnicity, race, and sex if a financial institution
                requests minority-owned business status, women-owned business status,
                and/or a principal owner's ethnicity, race, and sex in the same data
                collection form or at the same time.
                 Proposed comment 107(a)(18)-3 would explain how, pursuant to
                proposed Sec. 1002.111(b), financial institutions must record an
                applicant's response regarding minority-owned business status pursuant
                to proposed Sec. 1002.107(a)(18) separate from the application and
                accompanying information. This proposed comment would also provide
                examples of how responses could be recorded separately from the
                application and accompanying information.
                 Proposed comment 107(a)(18)-4 would state that pursuant to proposed
                Sec. 1002.107(c)(1), a financial institution shall maintain procedures
                reasonably designed to collect applicant-provided information, which
                includes the applicant's minority-owned business status. However, if a
                financial institution does not receive a response to its inquiry, the
                financial institution would report that the applicant's minority-owned
                business status is ``not provided by applicant.''
                 Proposed comment 107(a)(18)-5 would state that notwithstanding
                proposed Sec. 1002.107(b) (regarding verification of applicant-
                provided information), a financial institution would report the
                applicant's response, its refusal to answer the inquiry, or its failure
                to respond to the inquiry pursuant to proposed Sec. 1002.107(a)(18),
                even if the financial institution verifies or otherwise obtains an
                applicant's minority-owned business status for other purposes.
                Moreover, as proposed in the instructions in appendix F, a financial
                institution would not be required or permitted to verify the
                applicant's response to the financial institution's inquiry pursuant to
                proposed Sec. 1002.107(a)(18) regarding minority-owned business
                status.
                 Proposed comment 107(a)(18)-6 would clarify that a financial
                institution does not report minority-owned business status based on
                visual observation, surname, or any basis other than the applicant's
                response to the inquiry that the financial institution makes to satisfy
                Sec. 1002.107(a)(18) or, if the financial institution is permitted to
                report based on previously collected data, on the basis of the
                applicant's response to the inquiry that the financial institution
                previously made to satisfy Sec. 1002.107(a)(18).
                 Proposed comment 107(a)(18)-7 would clarify that a financial
                institution may report minority-owned business status based on
                previously collected data if the financial institution is permitted to
                do so pursuant to proposed Sec. 1002.107(c)(2) and its commentary.
                 Consistent with its approach during the SBREFA process, the Bureau
                is not proposing that financial institutions collect or report
                minority-owned
                [[Page 56474]]
                business status based on visual observation, surname, or any method
                other than an applicant-provided response to a specific inquiry asked
                for purposes of proposed Sec. 1002.107(a)(18). Similarly, the Bureau
                is not proposing that financial institutions be permitted or required
                to verify an applicant's response. Although the Bureau is proposing
                that financial institutions collect and report a principal owner's
                ethnicity and race based on visual observation and/or surname in
                certain circumstances, the Bureau believes that there would be
                additional complexities and difficulties with attempting to collect and
                report minority-owned business status based on visual observation and/
                or surname. Some of these additional difficulties arise because the
                financial institution may need to determine who controls the applicant
                as well as who owns the applicant and who realizes the net profits and
                losses. Other difficulties arise from the fact that the financial
                institution would need to know how each natural person it meets with in
                person fits into the ownership structure of the applicant as well as
                its control and profit structures. For example, it would not be
                sufficient to know whether a natural person is an owner. The financial
                institution also would need to know what percentage of the ownership
                interest and control the natural person held and, if that ownership was
                not more than 50 percent, the institution would need to know who owned
                and controlled the remainder of the applicant. An additional
                complication, specific to this data point, arises when the financial
                institution is not able to visually observe absent owners. In these
                cases, the financial institution may not be able to determine if the
                business is a minority-owned business. Thus, even if a financial
                institution has an in-person meeting with one or more natural persons
                associated with an applicant, it may be difficult or impossible for the
                financial institution to determine if an applicant is a minority-owned
                business.
                 The Bureau seeks comment on its proposed approach to this data
                point, including the proposed methods of collecting and reporting the
                data. The Bureau also requests comment on whether additional
                clarification regarding any aspect of this data point is needed. In
                particular, the Bureau seeks comment on whether applicants are likely
                to have difficulty understanding and determining the information they
                are being asked to provide and, if so, how the Bureau may mitigate such
                difficulties.
                107(a)(19) Women-Owned Business Status
                Background
                 ECOA section 704B(b) requires financial institutions to inquire
                whether applicants for credit are women-owned businesses and to
                maintain a record of the responses to that inquiry separate from the
                applications and accompanying information. Section 704B(c) provides
                that applicants for credit may refuse to provide information requested
                pursuant to 704B(b). The Bureau is proposing Sec. 1002.107(a)(19) to
                address how a financial institution would collect and report an
                applicant's women-owned business status.
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated that it was considering
                proposing that financial institutions be permitted to collect and
                report women-owned business status solely based on applicant self-
                reporting and that the Bureau was not considering requiring reporting
                based on visual observation and/or surname.\648\ The Bureau also stated
                that it was considering proposing that the right to refuse under ECOA
                section 704B(c) apply to the financial institution's specific inquiries
                regarding minority-owned business status as well as women-owned status
                and the principal owners' race, sex, and ethnicity.
                ---------------------------------------------------------------------------
                 \648\ SBREFA Outline at 25-26.
                ---------------------------------------------------------------------------
                 As with collecting and reporting minority-owned business status,
                several SERs supported this approach and urged the Bureau to require
                collection and reporting of women-owned business status based only on
                the information the applicant provides (i.e., self-reporting).\649\
                SERs also expressed concerns about the difficulties and costs that may
                be associated with collecting women-owned business status on some basis
                other than applicant self-reporting. For example, although many SERs
                indicated that they review some ownership information about applicants
                in order to obtain guarantees or for other reasons, most of those SERs
                said that they do not review the accrual of net profits and losses and
                some said that they do not review information related to who controls
                an applicant. One SER said that determining ownership is relatively
                straightforward, but the issue of control can be subjective. One SER
                said that it would not be able to determine who controlled an applicant
                and that an applicant would need to self-report that information.
                Another SER noted that some small business applicants do not have
                simple ownership structures. A different SER stated that some financial
                institutions do not meet in person with all of the owners of small
                business applicants.
                ---------------------------------------------------------------------------
                 \649\ SBREFA Panel Report at 26.
                ---------------------------------------------------------------------------
                 As with collecting and reporting minority-owned business status,
                other industry stakeholders providing feedback on the SBREFA Outline
                also supported collection and reporting of women-owned business status
                based only on applicant self-reporting and noted several challenges
                with reporting this data point based on visual observation and/or
                surname. Some industry commenters stated that it would not be possible
                to report women-owned business status based on visual observation and/
                or surname in, at least, some circumstances. Others expressed concerns
                about the cost and time required to do so. One industry commenter noted
                that the tracking of ownership and other information needed to report
                based on visual observation and/or surname would be laborious. Another
                commenter noted that some financial institutions do not obtain the
                information necessary to make the determinations that would underlie a
                visual observation requirement (i.e., information about ownership,
                control, etc.). One commenter specifically noted that the statute only
                requires financial institutions to ``inquire'' about women-owned
                business status. Conversely, a community group opposed reporting based
                only on applicant self-reporting.
                 Some commenters stated that financial institutions should not be
                required to collect or report this information at all, or that they
                should not be required to collect or report it in certain situations,
                such as when a trust or other entity owns or controls an applicant.
                 Some SERs and a few other commenters said that the Bureau should
                create a tool or otherwise arrange for applicants to self-report, at
                least, demographic information (namely women-owned business status and
                minority-owned business status as well as the ethnicity, race, and sex
                of principal owners) directly to the Bureau or to a third-party that
                maintains a database of such information.
                 Some SERs were concerned that, if notified of their right to
                refuse, applicants may not provide protected demographic information,
                thus limiting the usefulness of 1071 data. One SER and several other
                commenters similarly agreed with the Bureau's proposal under
                consideration to limit the right to refuse to applicants' protected
                demographic information only. However, three
                [[Page 56475]]
                commenters opined that the Bureau's approach was too limited and that
                the right to refuse should apply to small business status as well as
                other data points. Several SERs requested that the Bureau provide
                sample language for use in any disclosure and collection forms in which
                an applicant's right to refuse is stated, so that applicants understand
                why lenders are requesting protected demographic information and how
                the information will be used. Two SERs asked that the Bureau provide
                sample language in English as well as in other languages, such as
                Spanish.
                 The SBREFA Panel recommended that the Bureau consider creating
                sample data collection forms that, to the extent possible, simply and
                clearly explain the information being requested for purposes of this
                data point.\650\ The SBREFA Panel recommended that the Bureau consider
                developing sample disclosure language that financial institutions may
                use to provide some context as to why applicants are being asked to
                provide protected demographic information, in order to encourage
                applicants to respond.\651\ It also recommended that the Bureau should
                consider providing these sample data collection forms in other
                languages, such as Spanish.\652\
                ---------------------------------------------------------------------------
                 \650\ Id. at 45.
                 \651\ Id.
                 \652\ Id.
                ---------------------------------------------------------------------------
                Proposed Rule
                 Consistent with its approach during the SBREFA process, proposed
                Sec. 1002.107(a)(19) would require financial institutions to collect
                and report whether an applicant is a women-owned business. Proposed
                Sec. 1002.107(a)(19) would also require financial institutions to
                collect and report whether women-owned business status is being
                reported based on previously collected data pursuant to proposed Sec.
                1002.107(c)(2). It would also require that when the financial
                institution requests women-owned business status from an applicant, the
                financial institution inform the applicant that the financial
                institution cannot discriminate on the basis of the applicant's women-
                owned business status, or on whether the applicant provides this
                information. Finally, proposed Sec. 1002.107(a)(19) would refer to
                proposed appendix F for additional details regarding how financial
                institutions are required to collect and report women-owned business
                status. Proposed appendix F would include a requirement that a
                financial institution inform an applicant that the applicant is not
                required to respond to the financial institution's questions regarding
                the applicant's women-owned business status and minority-owned business
                status, and a prohibition on financial institutions requiring
                applicants to provide this information. Consistent with the SBREFA
                Panel's recommendation, proposed appendix E, which is a sample data
                collection form, would include a question about women-owned business
                status and related information to assist applicants with responding to
                the question.
                 Proposed comment 107(a)(19)-1 would clarify that a financial
                institution would be required to ask an applicant if it is a women-
                owned business for each covered application unless the financial
                institution is permitted to report women-owned business status based on
                previously collected data. Additionally, the financial institution
                would be required to permit an applicant to refuse to answer the
                financial institution's inquiry and to inform the applicant that it is
                not required to provide the information. The financial institution
                would report the applicant's response, its refusal to answer the
                inquiry (such as when the applicant indicates that it does not wish to
                provide the requested information), or its failure to respond (such as
                when the applicant fails to submit a data collection form) to the
                inquiry. See proposed appendix F for additional instructions on how the
                Bureau proposes that financial institutions collect and report women-
                owned business status.
                 Proposed comment 107(a)(19)-2 would explain that a financial
                institution must inform the applicant that the financial institution
                cannot discriminate on the basis of an applicant's women-owned business
                status or on whether the applicant provides the information. It would
                also clarify that a financial institution may combine this non-
                discrimination notice regarding women-owned business status with the
                similar non-discrimination notices that a financial institution is
                required to provide when requesting minority-owned business status and
                a principal owner's ethnicity, race, and sex if a financial institution
                requests minority-owned business status, women-owned business status,
                and/or a principal owner's ethnicity, race, and sex in the same data
                collection form or at the same time.
                 Proposed comment 107(a)(19)-3 would explain how, pursuant to
                proposed Sec. 1002.111(b), financial institutions must record an
                applicant's response regarding women-owned business status pursuant to
                proposed Sec. 1002.107(a)(19) separate from the application and
                accompanying information. This proposed comment would also provide
                examples of how responses could be recorded separately from the
                application and accompanying information.
                 Proposed comment 107(a)(19)-4 would state that pursuant to proposed
                Sec. 1002.107(c)(1), a financial institution shall maintain procedures
                reasonably designed to collect applicant-provided information, which
                includes the applicant's women-owned business status. However, if a
                financial institution does not receive a response, the financial
                institution would report that the applicant's women-owned business
                status is ``not provided by applicant.''
                 Proposed comment 107(a)(19)-5 would state that notwithstanding
                proposed Sec. 1002.107(b) (regarding verification of applicant-
                provided information), a financial institution would report the
                applicant's response, its refusal to answer the inquiry, or its failure
                to respond to the inquiry pursuant to proposed Sec. 1002.107(a)(19),
                even if the financial institution verifies or otherwise obtains an
                applicant's women-owned business status for other purposes. Moreover,
                as proposed in the instructions in appendix F, a financial institution
                would not be required or permitted to verify the applicant's response
                to the financial institution's inquiry pursuant to proposed Sec.
                1002.107(a)(19) regarding women-owned business status. Thus, for
                example, under the principle articulated in proposed comment
                107(a)(19)-5, a financial institution could not second guess an
                applicant's decision to determine whether it is a women-owned business
                for purposes of proposed Sec. 1002.107(a)(19) based on the gender
                identity of the principal owners. The Bureau seeks comment on whether
                it would be useful to expressly codify this application of the
                principle in the commentary.
                 Proposed comment 107(a)(19)-6 would clarify that a financial
                institution does not report women-owned business status based on visual
                observation, surname, or any basis other than the applicant's response
                to the inquiry that the financial institution makes to satisfy proposed
                Sec. 1002.107(a)(19) or, if the financial institution is permitted to
                report based on previously collected data, on the basis of the
                applicant's response to the inquiry that the financial institution
                previously made to satisfy proposed Sec. 1002.107(a)(19).
                 Proposed comment 107(a)(19)-7 would clarify that a financial
                institution may report women-owned business status based on previously
                collected
                [[Page 56476]]
                data if the financial institution is permitted to do so pursuant to
                proposed Sec. 1002.107(c)(2) and its commentary.
                 Consistent with its approach during the SBREFA process, the Bureau
                is not proposing that financial institutions collect or report women-
                owned business status based on visual observation, surname, or any
                method other than an applicant-provided response to a specific inquiry
                asked for purposes of proposed Sec. 1002.107(a)(19). Similarly, the
                Bureau is not proposing that financial institutions be permitted or
                required to verify an applicant's response. Although the Bureau is
                proposing that financial institutions collect and report a principal
                owner's ethnicity and race based on visual observation and/or surname
                in certain circumstances, the Bureau believes that there would be
                additional complexities and difficulties with attempting to collect and
                report women-owned business status based on visual observation and/or
                surname. Some of these additional difficulties arise because the
                financial institution may need to determine who controls the applicant
                as well as who owns the applicant and who realizes the net profits and
                losses. Other difficulties arise from the fact that the financial
                institution would need to know how each natural person it meets with in
                person fits into the ownership structure of the applicant as well as
                its control and profit structures. For example, it would not be
                sufficient to know whether a natural person is an owner. The financial
                institution also would need to know what percentage of the ownership
                interest and control the natural person held and, if that ownership was
                not more than 50 percent, the institution would need to know who owned
                and controlled the remainder of the applicant. An additional
                complication, specific to this data point, arises when the financial
                institution is not able to visually observe absent owners. In these
                cases, the financial institution may not be able to determine if the
                business is a women-owned business. Thus, even if a financial
                institution has an in-person meeting with one or more natural persons
                associated with an applicant, it may be difficult or impossible for the
                financial institution to determine if an applicant is a women-owned
                business.
                 The Bureau seeks comment on its proposed approach to this data
                point, including the proposed methods of collecting and reporting the
                data. The Bureau also requests comment on whether additional
                clarification regarding any aspect of this data point is needed. In
                particular, the Bureau seeks comment on whether applicants are likely
                to have difficulty understanding and determining the information they
                are being asked to provide and, if so, how the Bureau may mitigate such
                difficulties.
                107(a)(20) Ethnicity, Race, and Sex of Principal Owners
                Background
                 ECOA section 704B(e)(2)(G) requires financial institutions to
                compile and maintain certain information, including the race, sex, and
                ethnicity of an applicant's principal owners. However, section 1071
                does not set out what categories should be used when collecting and
                reporting this information. The Bureau is proposing Sec.
                1002.107(a)(20) to address how a financial institution would collect
                and report the ethnicity, race, and sex of an applicant's principal
                owners. See the section-by-section analysis of proposed Sec.
                1002.102(o) above for a discussion of the definition of a principal
                owner.
                SBREFA Proposal Under Consideration and Feedback
                 In the SBREFA Outline, the Bureau stated that it was considering
                proposing that financial institutions use the aggregate race, sex, and
                ethnicity categories from Regulation C when requesting that applicants
                provide race, sex, and ethnicity information of principal owners.\653\
                ---------------------------------------------------------------------------
                 \653\ SBREFA Outline at 32.
                ---------------------------------------------------------------------------
                 SERs were generally supportive of aligning the race, sex, and
                ethnicity categories used for reporting demographic information about
                principal owners in 1071 with the aggregate categories used in
                Regulation C for HMDA.\654\ However, one SER stated that the Bureau
                should consider revisiting the use of male and female as categories for
                sex because gender is not binary. Additionally, some other
                stakeholders, including community groups and a trade association, were
                opposed to using the HMDA aggregate categories for reporting race and
                ethnicity. Generally, these commenters opposed the use of the aggregate
                categories because, they said, those categories could mask
                discrimination and do not provide sufficient detail or context. These
                commenters generally supported use of the HMDA disaggregated
                subcategories for reporting a principal owner's race and ethnicity.
                ---------------------------------------------------------------------------
                 \654\ SBREFA Panel Report at 29-30.
                ---------------------------------------------------------------------------
                 Additionally, in the SBREFA Outline, the Bureau stated that it was
                considering proposing that the collection and reporting of a principal
                owner's race, sex, and ethnicity be based solely on applicant self-
                reporting. The Bureau stated in the SBREFA Outline that it anticipated
                that requiring reporting based on visual observation and/or surname
                could create unwarranted compliance burdens in the context of small
                business lending, although the Bureau sought feedback on the potential
                challenges, costs, and benefits of implementing such a requirement. The
                Bureau also stated in the SBREFA Outline that it was considering
                developing a sample data collection form to assist industry in
                collecting this information and to communicate an applicant's right to
                refuse to provide such information.\655\
                ---------------------------------------------------------------------------
                 \655\ SBREFA Outline at 32.
                ---------------------------------------------------------------------------
                 SERs generally supported applicants' self-reporting of principal
                owners' race, sex, and ethnicity and strongly preferred that financial
                institutions not be required to report based on visual observation and/
                or surname. Some SERs said financial institutions should not be
                required to ``guess'' the race, sex, and ethnicity of principal owners,
                remarking, among other things, that doing so is both extremely
                difficult and ineffective, and that collecting demographic information
                based on visual observation makes staff uncomfortable. Another SER said
                that reporting demographic information based on visual observation and/
                or surname is likely to introduce both error and bias to the process.
                One SER stated that financial institutions do not always meet with all
                principal owners of a business in person and that financial
                institutions occasionally meet with a manager or officer who might not
                be a principal owner. Conversely, another SER stated that when relying
                on applicants to self-report demographic information, there are higher
                rates of non-FEFF responses in the business lending context compared to
                consumer residential lending. This SER suggested that the Bureau will
                need to account for this disparity.
                 Other industry and trade association stakeholders that commented on
                the SBREFA Outline also generally supported applicants' self-reporting
                of principal owners' race, sex, and ethnicity and strongly preferred
                that financial institutions not be required to report this information
                based on visual observation and/or surname. Some of these commenters
                noted that some financial institutions might not know who a business's
                principal owners are, might not collect the information necessary to
                determine who they are, or might not meet in person with principal
                owners. Others asserted that reporting
                [[Page 56477]]
                based on visual observation and/or surname increases the cost and time
                to process a small business loan, may result in inaccurate data, and
                may create awkward situations or customer disputes. One trade
                association argued that the statute only requires financial
                institutions to ``inquire'' about a principal owner's race, sex, and
                ethnicity. However, two community groups stated that financial
                institutions should be permitted or required to report based on visual
                observation and/or surname when an applicant does not provide the
                information, and a CDFI stated that financial institutions should be
                required to report race, sex, and ethnicity based on visual observation
                and/or surname only when an applicant does not provide the information
                and does not refuse to provide the information.
                 Two industry commenters suggested that the Bureau create a tool or
                otherwise arrange for applicants to self-report, at least, demographic
                information (namely minority-owned business status and women-owned
                business status as well as the race, sex, and ethnicity of principal
                owners) directly to the Bureau or to a third-party that maintains a
                database of such information.
                 Some SERs were concerned that, if notified of their right to
                refuse, applicants may not provide protected demographic information,
                thus limiting the usefulness of 1071 data. One SER and several other
                commenters similarly agreed with the Bureau's proposal under
                consideration to limit the right to refuse to applicants' protected
                demographic information only. However, three commenters opined that the
                Bureau's approach was too limited and that the right to refuse should
                apply to small business status as well as other data points. Several
                SERs requested that the Bureau provide sample language for use in any
                disclosure and collection forms in which an applicant's right to refuse
                is stated, so that applicants understand why lenders are requesting
                protected demographic information and how the information will be used.
                Two SERs asked that the Bureau provide sample language in English as
                well as in other languages, such as Spanish.
                 One trade association requested that reporting of a principal
                owner's race, sex, and ethnicity not be required in certain situations,
                such as when a principal owner is a trust or another entity.
                 Some SERs and other commenters requested that the Bureau develop a
                form to assist financial institutions with collecting the race, sex,
                and ethnicity of principal owners. One SER suggested developing a
                sample data collection form similar to the one used for HMDA data
                collection and including the same disclosures. One commenter noted that
                the use of a model form may increase the uniformity and consistency of
                reporting such demographic information. Another commenter suggested
                that any model form should include an explanation of why the financial
                institution is requesting the information and a statement of the
                applicant's right to refuse to provide the information.\656\
                ---------------------------------------------------------------------------
                 \656\ For additional information related to SBREFA feedback on
                the right to refuse, see the section-by-section analyses of proposed
                Sec. 1002.107(a)(18) and (19) above.
                ---------------------------------------------------------------------------
                 The SBREFA Panel recommended that, in order to assist both small
                financial institutions and small business applicants, the Bureau
                consider creating sample data collection forms that, to the extent
                possible, simply and clearly explain the information being requested
                for purposes of this data point. The Panel also recommended that the
                Bureau additionally consider providing such sample data collection
                forms in other languages, such as Spanish.\657\
                ---------------------------------------------------------------------------
                 \657\ SBREFA Panel Report at 46.
                ---------------------------------------------------------------------------
                Proposed Rule
                 Proposed Sec. 1002.107(a)(20) would require financial institutions
                to collect and report the ethnicity, race, and sex \658\ of the
                applicant's principal owners as well as whether this information is
                being reported based on previously collected data pursuant to proposed
                Sec. 1002.107(c)(2). It would also require financial institutions to
                report whether the ethnicity and race are being reported by the
                financial institution on the basis of visual observation or surname.
                Proposed Sec. 1002.107(a)(20) would require financial institutions to
                collect and report ethnicity, race, and sex data as prescribed in
                proposed appendix G. Proposed appendix G would include a requirement
                that a financial institution inform an applicant that the applicant is
                not required to respond to the financial institution's questions
                regarding its principal owners' ethnicity, race or sex and would also
                include a prohibition on financial institutions requiring applicants to
                provide this information. Proposed Sec. 1002.107(a)(20) would also
                require that when the financial institution requests ethnicity, race,
                and sex information from an applicant, the financial institution inform
                the applicant that the financial institution cannot discriminate on the
                basis of a principal owner's ethnicity, race, or sex, or on whether the
                applicant provides this information. Consistent with the SBREFA Panel's
                recommendation, the Bureau is proposing a sample data collection form
                that financial institutions could use to collect ethnicity, race, and
                sex information. See proposed appendix E.
                ---------------------------------------------------------------------------
                 \658\ While ECOA section 704B(e)(2)(G) uses ``race, sex, and
                ethnicity,'' the Bureau has reordered them to ``ethnicity, race, and
                sex'' for purposes of this proposal, so that they appear
                alphabetically and for consistency with how they appear in
                Regulation C.
                ---------------------------------------------------------------------------
                Proposed Rule--Collecting Ethnicity, Race, and Sex, In General
                 Proposed comment 107(a)(20)-1 would clarify how a financial
                institution collects ethnicity, race, and sex information. It would
                state that unless a financial institution is permitted to report
                ethnicity, race, and sex information based on previously collected data
                pursuant to proposed Sec. 1002.107(c)(2), a financial institution must
                ask an applicant to report its principal owners' ethnicity, race, and
                sex for each covered application and that the financial institution
                must permit an applicant to refuse to answer the financial
                institution's inquiry. It would require financial institutions to
                inform the applicant that it is not required to provide the
                information. Proposed comment 107(a)(20)-1 would further clarify that
                the financial institution must report the applicant's responses, its
                refusal to answer the inquiries, or its failure to respond to the
                inquiries, and explain that in certain situations, discussed in
                proposed comments 107(a)(20)-7 and -8 and in appendix G, a financial
                institution may also be required to report one or more principal
                owners' ethnicity and race (but not sex) based on visual observation
                and/or surname. Proposed comment 107(a)(20)-1 would cross-reference
                proposed appendix G for additional instructions.
                 Proposed comment 107(a)(20)-2 would explain that a financial
                institution must inform the applicant that the financial institution
                shall not discriminate on the basis of a principal owner's ethnicity,
                race, or sex or on whether the applicant provides that information. It
                would also clarify that a financial institution may combine this non-
                discrimination notice with the similar non-discrimination notices that
                a financial institution would be required to provide when requesting
                minority-owned business status and women-owned business status if a
                financial institution requests minority-owned business status, women-
                owned business status, and/or a principal owner's ethnicity, race, and
                sex in the same data collection form or at the same time.
                [[Page 56478]]
                 Proposed comment 107(a)(20)-3 would explain how, pursuant to
                proposed Sec. 1002.111(b), financial institutions must record
                applicants' responses regarding a principal owner's ethnicity, race,
                and sex pursuant to Sec. 1002.107(a)(20) separate from the application
                and accompanying information. This proposed comment would also provide
                examples of how responses could be recorded separately from the
                application and accompanying information.
                 Proposed comment 107(a)(20)-4 would clarify that a financial
                institution would be required to maintain procedures reasonably
                designed to collect applicant-provided information, including the
                ethnicity, race, and sex of an applicant's principal owners pursuant to
                proposed Sec. 1002.107(c)(1). However, if a financial institution is
                nonetheless unable to collect the principal owners' ethnicity, race, or
                sex from the applicant and if the financial institution is not required
                to report the principal owners' ethnicity and race based on visual
                observation and/or surname, the financial institution would report that
                the principal owner's ethnicity, race, or sex (as applicable) is ``not
                provided by applicant.''
                 Proposed comment 107(a)(20)-12 would clarify that a financial
                institution would neither be required nor permitted to verify the
                ethnicity, race, or sex information that the applicant provides for
                purposes of proposed Sec. 1002.107(a)(20), even if the financial
                institution verifies or otherwise obtains the ethnicity, race, or sex
                of the applicant's principal owners for other purposes. Thus, for
                example, under the principle articulated in proposed comment
                107(a)(20)-12, a financial institution could not second guess an
                applicant's decision to provide sex information for the applicant's
                principal owners for purposes of Sec. 1002.107(a)(20) based on the
                gender identity of the principal owners. The Bureau solicits comment on
                whether it would be useful to expressly codify this application of the
                principle in the commentary.
                 Additionally, the proposed comment would explain that, if an
                applicant refuses to respond to the inquiry pursuant to proposed Sec.
                1002.107(a)(20) or fails to respond to this inquiry, the financial
                institution would report that the applicant declined to provide the
                information or did not respond to the inquiry (as applicable), unless
                the financial institution is required to report ethnicity and race
                based on visual observation and/or surname. Finally, the proposed
                comment would explain that the financial institution does not report
                ethnicity, race, or sex pursuant to proposed Sec. 1002.107(a)(20)
                based on information that the financial institution collects for other
                purposes.
                 Proposed comment 107(a)(20)-5 would explain that generally an
                applicant determines its principal owners and decides whether to
                provide information about principal owners. It would further state
                that, nonetheless, a financial institution may be required to report
                ethnicity and race information based on visual observation and/or
                surname and may need to determine if a natural person with whom the
                financial institution meets in person is a principal owner. It would
                explain how a financial institution determines who is a principal owner
                in the event that the financial institution may be required to report
                ethnicity and race information based on visual observation and/or
                surname. It would also provide examples of how the financial
                institution can make that determination and note that the financial
                institution is not required to verify any responses regarding whether a
                natural person is a principal owner.
                 The Bureau seeks comment on these general aspects of collecting and
                reporting principal owners' ethnicity, race, and sex, including
                comments on the challenges that financial institutions may have
                implementing them.
                Proposed Rule--Collecting Ethnicity and Race Using Aggregate Categories
                and Disaggregated Subcategories
                 The Bureau is proposing that financial institutions request
                principal owners' ethnicity and race using both aggregate categories as
                well as disaggregated subcategories.
                 With respect to ethnicity data collection, the Bureau is proposing
                to use the same aggregate categories (i.e., Hispanic or Latino and Not
                Hispanic or Latino) and disaggregated subcategories as are used in
                Regulation C. With respect to race data collection, the Bureau is
                proposing to use the same aggregate categories as are used in
                Regulation C: American Indian or Alaska Native; Asian; Black or African
                American; Native Hawaiian or Other Pacific Islander; and White.
                Regulation C also has disaggregated subcategories for the Asian race
                category and the Native Hawaiian or Other Pacific Islander race
                category. In addition, with respect to the American Indian or Alaska
                Native race category, Regulation C invites an applicant to provide the
                name of a principal or enrolled tribe. Similar to HMDA, the Bureau is
                proposing to invite an applicant to provide the name of a principal or
                enrolled tribe for each principal owner with respect to the Indian or
                Alaska Native race category and to adopt the disaggregated
                subcategories used in HMDA for the Asian race category and the Native
                Hawaiian and Other Pacific Islander race category. In addition, the
                Bureau is proposing to add disaggregated subcategories for the Black or
                African American race category, which are not used when collecting data
                pursuant to Regulation C.
                 OMB has issued standards for the classification of Federal data on
                ethnicity and race.\659\ OMB's government-wide standards provide a
                minimum standard for maintaining, collecting, and presenting data on
                race and ethnicity for all Federal reporting purposes. These standards
                have been developed to provide ``a common language for uniformity and
                comparability in the collection and use of data on race and ethnicity
                by Federal agencies.'' \660\[thinsp]The OMB standards provide the
                following minimum categories for data on ethnicity and race: Two
                minimum ethnicity categories (Hispanic or Latino; Not Hispanic or
                Latino) and five minimum race categories (American Indian or Alaska
                Native; Asian; Black or African American; Native Hawaiian or Other
                Pacific Islander; and White). The aggregate categories for ethnicity
                and race in Regulation C, which the Bureau is proposing to use in
                subpart B, conform to the OMB standards.
                ---------------------------------------------------------------------------
                 \659\ Off. of Mgmt. & Budget, Revisions to the Standards for the
                Classification of Federal Data on Race and Ethnicity, 62 FR 58782,
                58782-90 (Oct. 30, 1997) (OMB Federal Data Standards on Race and
                Ethnicity).
                 \660\ See id.
                ---------------------------------------------------------------------------
                 In addition to the minimum data categories for ethnicity and race,
                the OMB Federal Data Standards on Race and Ethnicity provide additional
                key principles. First, self-identification is the preferred means of
                obtaining information about an individual's ethnicity and race, except
                in instances where observer identification is more practical.\661\
                Second, the collection of greater detail is encouraged as long as any
                collection that uses more detail is organized in such a way that the
                additional detail can be aggregated into the minimum aggregate
                categories for data on ethnicity and race. More detailed reporting,
                which can be aggregated to the minimum categories, may be used at the
                agencies' discretion. Lastly, Federal agencies must produce as much
                detailed information on ethnicity and race as possible; however,
                Federal agencies shall not present data on detailed categories if doing
                so would
                [[Page 56479]]
                compromise data quality or confidentiality standards.\662\
                ---------------------------------------------------------------------------
                 \661\ See id.
                 \662\ See id.
                ---------------------------------------------------------------------------
                 Although OMB received comments requesting the creation of a
                separate Arab or Middle Eastern ethnicity category prior to the
                adoption of the OMB Federal Data Standards on Race and Ethnicity in
                1997, OMB accepted the Interagency Committee's recommendation not to
                include one in the 1997 minimum standards for reporting of Federal data
                on race and ethnicity. OMB noted that while it was adopting the
                Interagency Committee's recommendation, it believed additional research
                was needed to determine the best way to improve data on this population
                group.\663\
                ---------------------------------------------------------------------------
                 \663\ 62 FR 58782 (Oct. 30, 1997).
                ---------------------------------------------------------------------------
                 In 2017, OMB requested comment on the Federal Interagency Working
                Group for Research on Race and Ethnicity's (Working Group's) proposals
                to update the OMB Federal Data Standards on Race and Ethnicity.\664\
                The Working Group proposed adding a Middle Eastern or North African
                classification to the Federal Data Standards on Race and Ethnicity and
                to issue specific guidelines for the collection of detailed data for
                American Indian or Alaska Native, Asian, Black or African American,
                Hispanic or Latino, Native Hawaiian or Other Pacific Islander, and
                White groups.\665\ The Working Group also considered whether race and
                ethnicity should be collected using separate questions versus a
                combined question.
                ---------------------------------------------------------------------------
                 \664\ 82 FR 12242 (Mar. 1, 2017).
                 \665\ See OMB Federal Data Standards on Race and Ethnicity.
                ---------------------------------------------------------------------------
                 In considering what to propose that financial institutions collect
                and report with respect to the ethnicity and race of the applicant's
                principal owners, the Bureau believes it is also important to consider
                the data standards that the U.S. Census Bureau (Census Bureau) uses in
                the Decennial Census. The definition of Hispanic or Latino origin used
                in the 2010 and 2020 Census questionnaire refers to a person of Cuban,
                Mexican, Puerto Rican, South or Central American, or other Spanish
                culture or origin regardless of race.\666\ The 2010 and 2020 Census
                disaggregated the Hispanic or Latino ethnicity into four categories
                (Mexican, Mexican American, or Chicano; Puerto Rican; Cuban; and
                Another Hispanic, Latino or Spanish origin) and included an area where
                respondents could provide (i.e., write in) a specific Hispanic, Latino,
                or Spanish origin group as additional information.\667\
                ---------------------------------------------------------------------------
                 \666\ See U.S. Census Bureau, 2010 Official Questionnaire,
                https://www.census.gov/history/pdf/2010questionnaire.pdf (2010
                Census Official Questionnaire), and U.S. Census Bureau, 2020
                Official Questionnaire, https://www2.census.gov/programs-surveys/decennial/2020/technical-documentation/questionnaires-and-instructions/questionnaires/2020-informational-questionnaire.pdf
                (2020 Census Official Questionnaire).
                 \667\ See 2010 Census Official Questionnaire and 2020 Census
                Official Questionnaire.
                ---------------------------------------------------------------------------
                 The 2010 and 2020 Census questionnaires listed three of OMB's five
                aggregate race categories (American Indian or Alaska Native; Black or
                African American; and White). Although the questionnaires do not list
                the aggregate race categories for Asian or for Native Hawaiian or Other
                Pacific Islander, they do list the related disaggregated subcategories
                for the Asian race category (i.e., Asian Indian, Chinese, Filipino,
                Japanese, Korean, Vietnamese, Other Asian), and for the Native Hawaiian
                and Other Pacific Islander race category (i.e., Native Hawaiian,
                Chamorro,\668\ Samoan, Other Pacific Islander). These questionnaires
                also included three areas where respondents could write in a specific
                race: A specific Other Asian race, a specific Other Pacific Islander
                race, or the name of an enrolled or principal tribe in the American
                Indian or Alaska Native category.\669\ Additionally, the 2020 Census
                allowed respondents to write in a specific origin for the White
                category and for the Black or African American category. For
                respondents who did not identify with any of the five minimum OMB race
                categories, the Census Bureau included a sixth race category--Some
                Other Race--on the 2010 and 2020 Census questionnaires. Respondents
                could also select one or more race categories and write-in
                options.\670\
                ---------------------------------------------------------------------------
                 \668\ The questionnaire for the 2010 Census included ``Guamanian
                or Chamorro,'' but the questionnaire for the 2020 Census included
                only ``Chamorro.''
                 \669\ See 2010 Census Official Questionnaire and 2020 Census
                Official Questionnaire.
                 \670\ See id.
                ---------------------------------------------------------------------------
                 On February 28, 2017, the Census Bureau released its 2015 National
                Content Test: Race and Ethnicity Analysis Report. The National Content
                Test (NCT) provided the U.S. Census Bureau with empirical research to
                contribute to the planning for the content of the 2020 Census' race/
                ethnicity questions. The report presented findings to the Census Bureau
                Director and executive staff on research conducted to assess optimal
                design elements that could be used in question(s) on race and
                ethnicity. It noted that Americans view ``race'' and ``ethnicity''
                differently than in decades past and that a growing number of people
                find the current race and ethnicity categories confusing, or they wish
                to see their own specific group reflected on the Census questionnaire.
                The NCT's research found that there have been a growing number of
                people who do not identify with any of the official OMB race
                categories, and that an increasing number of respondents have been
                racially classified as ``Some Other Race.'' This was primarily because
                of reporting by Hispanics who did not identify with any of the OMB race
                categories, but it also noted that segments of other populations, such
                as Afro-Caribbean and Middle Eastern or North African populations, did
                not identify with any of the OMB race categories.\671\ The 2015
                National Content Test: Race and Ethnicity Analysis Report concluded
                that optimal design elements that may increase reporting, decrease item
                non-response, and improve data accuracy and reliability include: (1) A
                combined race and ethnicity question with detailed checkbox options;
                (2) a separate ``Middle Eastern or North African'' response category;
                and (3) instructions to ``Mark all that apply'' or ``Select all that
                apply'' (instead of ``Mark [X] one or more boxes'').\672\
                ---------------------------------------------------------------------------
                 \671\ U.S. Census Bureau, 2015 National Content Test: Race and
                Ethnicity Analysis Report, Executive Summary, at ix (Feb. 28, 2017),
                https://www2.census.gov/programs-surveys/decennial/2020/program-management/final-analysis-reports/2015nct-race-ethnicity-analysis.pdf.
                 \672\ Id. at 83-85.
                ---------------------------------------------------------------------------
                 As discussed above, the Census Bureau did not ultimately
                incorporate these design elements into the questionnaire for the 2020
                Decennial Census. Instead, the questionnaire continued to ask about
                ethnicity and race in two separate questions. While the questionnaire
                did not provide detailed check box options for the White race category
                or for the Black or African American race category, the questionnaire
                did add write-in options and noted examples. For White, it noted
                examples of German, Irish, English, Italian, Lebanese, and Egyptian.
                For Black or African American, it noted examples of African American,
                Jamaican, Haitian, Nigerian, Ethiopian, and Somali.\673\ Nonetheless,
                as discussed below, the Bureau is requesting comment on whether the
                approach and design elements set forth in the 2015 National Content
                Test: Race and Ethnicity Report Analysis (whether in whole or in part)
                would improve data collection that otherwise furthers section 1071's
                purposes, improve self-identification of race and ethnicity by
                applicants and response rates, or impose
                [[Page 56480]]
                burdens on financial institutions collecting and reporting this
                information.
                ---------------------------------------------------------------------------
                 \673\ See 2020 Census Official Questionnaire.
                ---------------------------------------------------------------------------
                 Consistent with its approach during the SBREFA process, the Bureau
                is proposing that financial institutions must permit applicants to
                provide a principal owner's ethnicity and race using the aggregate
                categories used for HMDA data collection. The Bureau also believes that
                aligning the aggregate ethnicity and race categories for 1071 data
                collection with the HMDA data collection will promote consistency and
                may reduce potential confusion for applicants, financial institutions,
                and other users of the data. As noted above, the feedback received on
                the SBREFA Outline generally showed that SERs and commenters favored
                such consistency.
                 However, the Bureau is also proposing that applicants must be
                permitted to provide a principal owner's ethnicity and race using the
                disaggregated subcategories used in HMDA data collection. With respect
                to ethnicity data collection, the Bureau is proposing that applicants
                must be permitted to provide a principal owner's ethnicity using the
                disaggregated subcategories used in HMDA data collection. For race data
                collection, the Bureau is proposing that applicants must be permitted
                to provide a principal owner's race using the disaggregated
                subcategories for the Asian race category and the Native Hawaiian or
                Other Pacific Islander race category. Unlike HMDA, the Bureau is also
                proposing that applicants must be permitted to provide a principal
                owner's race using disaggregated subcategories for the Black or African
                American race category. Lastly, similar to HMDA, the Bureau is
                proposing to invite an applicant to provide the name of a principal or
                enrolled tribe for each principal owner with respect to the American
                Indian or Alaska Native race category.
                 This portion of proposed Sec. 1002.107(a)(20) differs from the
                Bureau's SBREFA approach. The Bureau is proposing use of disaggregated
                subcategories for 1071 data collection, in part, for consistency with
                existing HMDA reporting requirements. Moreover, based on feedback
                received during the SBREFA process from SERs and other stakeholders,
                the Bureau believes that collection and reporting using disaggregated
                subcategories could be beneficial when attempting to identify potential
                discrimination or business and community development needs in
                particular communities. While the Bureau recognizes that disaggregated
                data may not be useful in analyzing potential discrimination where
                financial institutions do not have a sufficient number of applicants or
                borrowers within particular subgroups to permit reliable assessments of
                whether unlawful discrimination may have occurred, disaggregated data
                on ethnicity and race may help identify potentially discriminatory
                lending patterns in situations in which the numbers are sufficient to
                permit such fair lending assessments. Additionally, as suggested in the
                2015 National Content Test: Race and Ethnicity Report Analysis, the use
                of disaggregated subcategories may increase response rates.
                 Nonetheless, the Bureau acknowledges the concerns that some SERs
                and other stakeholders raised regarding the collection and reporting of
                disaggregated data. In particular, the Bureau understands that
                including the disaggregated subcategories for four principal owners may
                make data collection more difficult in certain situations, such as for
                applications taken solely by telephone or for paper applications taken
                at retail locations. Given these concerns, the Bureau seeks comment on
                whether an accommodation should be made for certain application
                scenarios, for example by permitting financial institutions to collect
                ethnicity and race information using only the aggregate categories or
                to permit financial institutions to collect ethnicity, race, and sex
                information on only one principal owner in those scenarios.
                Additionally, the Bureau notes that FinCEN's CDD rule excludes from
                certain of its requirements point-of-sale transactions for the purchase
                of retail goods or services up to a limit of $50,000.\674\ For the
                reasons discussed in more detail in the section-by-section analysis of
                proposed Sec. 1002.107(c)(1) below, the Bureau is not proposing to
                take this approach for the 1071 rule given the different purposes and
                requirements of the CDD rule (as well as FinCEN's related customer
                identification program (CIP) rule) \675\ and section 1071. Nonetheless,
                the Bureau seeks comment on whether covered applications taken at
                retail locations, such as credit cards and lines of credit with a
                credit limit under a specified amount (such as $50,000), should be
                excepted from some or all of the requirement to obtain principal
                owners' ethnicity, race, and sex information. For example, should
                financial institutions only be required to ask about principal owners'
                sex along with aggregate race and ethnicity categories (but not
                disaggregated subcategories), or to ask about only one principal
                owner's ethnicity, race, and sex for such applications?
                ---------------------------------------------------------------------------
                 \674\ 31 CFR 1010.230(h)(1)(i). The CDD exclusion for certain
                POS transactions is based on the ``very low risk posed by opening
                such accounts at [a] brick and mortar store.'' Fin. Crimes Enf't
                Network, U.S. Dep't of Treasury, Guidance: Frequently Asked
                Questions Regarding Customer Due Diligence Requirements for
                Financial Institutions, at Q 29 (Apr. 3, 2018), https://www.fincen.gov/sites/default/files/2018-04/FinCEN_Guidance_CDD_FAQ_FINAL_508_2.pdf.
                 \675\ FinCEN's CIP rule does not include a point of sale
                exclusion. While the rule permits verification of customer identity
                information within a reasonable time after an account is opened, the
                collection of required customer information must occur prior to
                account opening. See 31 CFR 1020.220(a)(2)(i)(A) and (ii). For
                credit card accounts, a bank may obtain identifying information
                about a customer from a third-party source prior to extending credit
                to the customer. 31 CFR 1020.220(a)(2)(i)(C).
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed use of the HMDA aggregate
                categories, the HMDA disaggregated subcategories (including the ability
                to provide additional information if an applicant indicates that a
                principal owner is Other Hispanic or Latino, Other Asian, or Other
                Pacific Islander), and the addition of disaggregated subcategories for
                the Black or African American category. Additionally, the Bureau seeks
                comment regarding whether it would be helpful or appropriate to provide
                additional clarification or to pursue a different approach regarding
                the ability of a principal owner to identify as Other Hispanic or
                Latino, Other Asian, or Other Pacific Islander or to provide additional
                information if a principal owner is Other Hispanic or Latino, Other
                Asian, or Other Pacific Islander. The Bureau also seeks comment on
                whether any additional or different categories or subcategories should
                be used for 1071 data collection, and whether the collection and
                reporting of race and ethnicity should be combined into a single
                question for purposes of 1071 data collection and reporting. The Bureau
                further seeks comment on whether an additional category for Middle
                Eastern or North African should be added and, if so, how this category
                should be included and defined. In addition, the Bureau seeks comment
                on whether disaggregated subcategories should be added for the
                aggregate White category, and if so, what disaggregated subcategories
                should be added and whether the applicant should be permitted to write
                in or otherwise provide other disaggregated subcategories or additional
                information. The Bureau seeks comment on whether the approach and
                design elements set forth in the 2015 National Content Test: Race and
                Ethnicity Report Analysis
                [[Page 56481]]
                would improve data collection or otherwise further section 1071's
                purposes, as well as whether it would pose any particular burdens or
                challenges for financial institutions collecting and reporting this
                information. Finally, the Bureau seeks comment on whether, similar to
                data collection pursuant to Regulation C, financial institutions should
                be limited to reporting a specified number of aggregate categories and
                disaggregated subcategories and, if so, whether such a limitation
                should be described in the sample data collection form.
                 Proposed comment 107(a)(20)-6 would explain that applicants must be
                permitted to provide a principal owner's ethnicity using aggregate
                categories and disaggregated subcategories and would also list the
                aggregate categories and disaggregated subcategories that applicants
                must be permitted to use. Proposed comment 107(a)(20)-6 would also
                explain that applicants must be permitted to select one, both, or none
                of the aggregate categories and as many disaggregated subcategories as
                the applicant chooses, even if the applicant does not select the
                corresponding aggregate category. Proposed comment 107(a)(20)-6 would
                state that, if an applicant provides ethnicity information for a
                principal owner, the financial institution reports all of the aggregate
                categories and disaggregated subcategories provided by the applicant,
                and it would provide an example. The proposed comment would state that
                a financial institution must also permit the applicant to refuse to
                provide ethnicity information for one or more principal owners and
                explain how a financial institution reports ethnicity information if an
                applicant declines to provide the information or fails to respond.
                Finally, the proposed comment would explain how a financial institution
                reports ethnicity information if an applicant has fewer than four
                principal owners, and it would provide an example.
                 Proposed comment 107(a)(20)-7 would explain that applicants must be
                permitted to provide a principal owner's race using aggregate
                categories and disaggregated subcategories and would also list the
                aggregate categories and disaggregated subcategories that applicants
                must be permitted to use. Proposed comment 107(a)(20)-7 would also
                explain that applicants must be permitted to select one, more than one,
                or none of the aggregate categories and as many disaggregated
                subcategories as the applicant chooses, even if the applicant does not
                select the corresponding aggregate category. Proposed comment
                107(a)(20)-7 would explain that, if an applicant provides race
                information for a principal owner, the financial institution reports
                all of the aggregate categories and disaggregated subcategories
                provided by the applicant, and it would provide an example. The
                proposed comment would state that a financial institution must also
                permit the applicant to refuse to provide race information for one or
                more principal owners and explains how a financial institution reports
                race information if an applicant declines to provide the information or
                fails to respond. Finally, the proposed comment would explain how a
                financial institution reports race information if an applicant has
                fewer than four principal owners, and it would provide an example.
                Proposed Rule--Collecting Sex
                 Federal, State, and local government agencies have been moving to
                providing options for designating sex beyond the binary options of male
                or female. At the Federal level, for example, the Department of State
                has announced that it is planning to offer the option of a new gender
                marker for non-binary, intersex, and gender non-conforming persons. It
                will be available for passports and Consular Reports of Birth Abroad as
                an alternative to male or female.\676\ The Food and Drug Administration
                includes the gender options female, male, intersex, transgender, and
                ``prefer not to disclose'' on certain patient forms.\677\ A number of
                States and the District of Columbia, as well as some local governments,
                offer an alternative sex or gender designation to male and female
                (e.g., ``X'') on government-issued documents and forms such as drivers'
                licenses and identification cards, and in some cases birth
                certificates.\678\
                ---------------------------------------------------------------------------
                 \676\ See U.S. Dep't of State, Proposing Changes to the
                Department's Policies on Gender on U.S. Passports and Consular
                Reports of Birth Abroad (June 30, 2021), https://www.state.gov/proposing-changes-to-the-departments-policies-on-gender-on-u-s-passports-and-consular-reports-of-birth-abroad/ abroad/.
                 \677\ See Food & Drug Admin., MedWatch forms FDA 3500 and 3500A
                (Sept. 12, 2018) (approved under OMB No. 0910-0291), https://www.fda.gov/media/76299/download and https://www.fda.gov/media/69876/download.
                 \678\ See, e.g., Cal. S.B. 179, Gender identity: female, male or
                nonbinary (Oct. 16, 2017), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB179; State of California
                Dep't of Motor Vehicles, Driver's License or ID Card Updates,
                https://www.dmv.ca.gov/portal/driver-licenses-identification-cards/updating-information-on-your-driver-license-or-identification-dl-id-card/ (last visited July 23, 2021); Colo. Dep't of Revenue, Change
                of Sex Designation, https://drive.google.com/file/d/1PeYZd7U43ar6Flg8lFAT1Etg1EPdLVUy/view; State of Connecticut Dep't
                of Motor Vehicles, Gender Designation on a License or Identification
                Card, https://portal.ct.gov/-/media/DMV/20/29/B-385.pdf; District of
                Columbia Dep't of Motor Vehicles, Procedure For Establishing or
                Changing Gender Designation on a Driver License or Identification
                Card (June 13, 2017), https://dmv.dc.gov/sites/default/files/dc/sites/dmv/publication/attachments/DC%20DMV%20Form%20Gender%20Self-Designation%20English.pdf, DC Driver License or Identification Card
                Application (Jan. 2019), https://dmv.dc.gov/sites/default/files/dc/sites/dmv/publication/attachments/DMV%20BOE%20Application_2-25-19.pdf; Maine Bureau of Motor Vehicles, Gender Designation Form
                (Nov. 4, 2019), https://www1.maine.gov/sos/bmv/forms/GENDER%20DESIGNATION%20FORM.pdf; State of Nevada Dep't of Motor
                Vehicles, Name Changes, https://dmvnv.com/namechange.htm; State of
                New Jersey Dep't of Health, Off. of Vital Statistics and Registry,
                Request Form and Attestation (REG-L2) to Amend Sex Designation to
                Reflect Gender Identity on a Birth Certificate--Adult (Feb. 2019),
                https://www.nj.gov/health/forms/reg-l2_1.pdf; 2019 N.J. Sess. Law
                Serv. ch. 271; New Mexico Motor Vehicle Div., Request for Sex
                Designation Change, http://realfile.tax.newmexico.gov/mvd10237.pdf;
                New Mexico Dep't of Health, Request to Change Gender Designation on
                a Birth Certificate (Oct. 2019), https://www.nmhealth.org/publication/view/form/5429/; Virginia Dep't of Motor Vehicles,
                Driver's License and Identification Card Application (July 1, 2021),
                https://www.dmv.virginia.gov/webdoc/pdf/dl1p.pdf; Washington State
                Dep't of Licensing, Change of Gender Designation (Nov. 2019),
                https://www.dol.wa.gov/forms/520043.pdf; New York City Dep't of
                Homeless Services, Off. of Policy, Procedures and Training,
                Transgender, Non-binary, and Intersex Clients (July 15, 2019),
                https://www1.nyc.gov/assets/dhs/downloads/pdf/dhs_policy_on_serving_transgender_non_binary_and_intersex_clients.pdf
                .
                ---------------------------------------------------------------------------
                 The Supreme Court's opinion last year in Bostock v. Clayton County
                concluded that sex discrimination encompasses sexual orientation
                discrimination and gender identity discrimination, and that these forms
                of discrimination necessarily involve consideration of sex.\679\ It
                reached this conclusion in the context of Title VII of the Civil Rights
                Act of 1964, as amended,\680\ which prohibits sex discrimination in
                employment.\681\ Following the issuance of the Supreme Court's opinion
                and building on a 2016 letter the Bureau sent to an advocacy
                organization,\682\ the Bureau issued an interpretive rule clarifying
                that ECOA's and Regulation B's prohibition on discrimination based on
                sex protects against discrimination based on sexual orientation, gender
                identity, actual or perceived nonconformity with sex based or gender-
                based stereotypes, and the sex of people associated with the
                applicant.\683\ Other Federal agencies have similarly clarified that
                other statutes that protect against
                [[Page 56482]]
                discrimination based on sex protect against discrimination based on
                sexual orientation and gender identity.\684\
                ---------------------------------------------------------------------------
                 \679\ See Bostock, 140 S. Ct. 1731.
                 \680\ 42 U.S.C. 2000e et seq.
                 \681\ Bostock, 140 S. Ct. 1731.
                 \682\ See Letter from Bureau of Consumer Fin. Prot., to Serv. &
                Advocacy for GLBT Elders (SAGE) (Aug. 30, 2016), https://files.consumerfinance.gov/f/documents/cfpb_sage-response-letter_2021-02.pdf.
                 \683\ 86 FR 14363 (Mar. 16, 2021).
                 \684\ See, e.g., 86 FR 32637 (June 22, 2021) (Department of
                Education interpreting Title IX of the Education Amendments of
                1972); 86 FR 27984 (May 25, 2021) (Department of Health and Human
                Services interpreting section 1557 of the Affordable Care Act);
                Memorandum from Jeanine M. Worden, Acting Assistant Secretary for
                Fair Housing and Equal Opportunity, 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 (Department of Housing and Urban Development
                interpreting the Fair Housing Act).
                ---------------------------------------------------------------------------
                 Some other Federal agencies have also begun to re-consider how they
                collect information on sex by including questions about sexual
                orientation and gender identity as part of questions about sex. For
                example, the Census Bureau released the Household Pulse Survey,\685\
                which asked questions about sex assigned at birth, current gender
                identity, and sexual orientation. Specifically, the Household Pulse
                Survey includes the following three questions:
                ---------------------------------------------------------------------------
                 \685\ U.S. Census Bureau, Phase 3.2 Household Pulse Survey
                (undated), http://www2.census.gov/programs-surveys/demo/technical-documentation/hhp/Phase_3.2_Household_Pulse_Survey_FINAL_ENGLISH.pdf.
                 1. What sex were you assigned at birth, on your original birth
                certificate? (A respondent could provide a response of male or
                female.)
                 2. Do you currently describe yourself as male, female or
                transgender? (A respondent also could provide a response of ``none
                of these.'')
                 3. Which of the following best represents how you think of
                yourself?
                 In response to the third question, a respondent would select
                from the following responses: (1) Gay or lesbian; (2) Straight, that
                is not gay or lesbian; (3) Bisexual; (4) Something else; or (5) I
                don't know.
                 Other Federal agencies and initiatives have encouraged sexual
                orientation and gender identity data collection in health care
                settings.\686\
                ---------------------------------------------------------------------------
                 \686\ See, e.g., Off. of Disease Prevention & Health Promotion,
                Healthy People (2020), https://www.healthypeople.gov/2020/topics-objectives/topic/lesbian-gay-bisexual-and-transgender-health; Off.
                of the Nat'l Coordinator of Health Info. Tech., 2021
                Interoperability Standards Advisory (2021), https://www.healthit.gov/isa/sites/isa/files/inline-files/2021-ISA-Reference-Edition.pdf; Ctrs. for Disease Control & Prevention,
                Collecting Sexual Orientation and Gender Identity Information (Apr.
                1, 2020), https://www.cdc.gov/hiv/clinicians/transforming-health/health-care-providers/collecting-sexual-orientation.html.
                 Additionally, on April 1, 2021, the Department of Health and
                Human Services' Administration for Community Living (ACL) published
                a notice of its submission of a revised National Survey of Older
                Americans Act Participants for OMB review and clearance. ACL
                proposed to revise the existing survey to add a new rotating module
                on COVID-19. In response to an earlier notice related to the survey,
                ACL received a comment asking it to include survey response options
                that include ``transgender'' or ``other'' with a write-in option. In
                response to comments it received on an earlier notice, ACL indicated
                that it was supporting an ad hoc panel that would be reviewing
                measures and methodological issues related to measuring sex as a
                non-binary construct, gender identity, and sexual orientation. ACL
                indicated that it expected the panel to produce a consensus report
                in December 2021, and that ACL anticipated using the report as a
                basis for testing new survey questions. 86 FR 17153 (Apr. 1, 2021).
                ---------------------------------------------------------------------------
                 In light of the Bureau's recent ECOA interpretive rule, the
                continued evolution of categories used for sex data collection purposes
                at the Federal, State, and local government levels, and feedback on the
                SBREFA Outline, the Bureau is proposing to collect information about
                sex for purposes of section 1071 more expansively than was under
                consideration in the SBREFA Outline. Specifically, the Bureau is
                proposing adding an option for ``I prefer to self-describe'' (with the
                ability of the applicant to write in or otherwise provide additional
                information) for the principal owner's sex to accompany the existing
                ``male,'' ``female,'' and ``I do not wish to provide this information''
                options currently used on the HMDA sample data collection form.
                 Proposed comment 107(a)(20)-8 would explain that an applicant must
                be permitted to provide a principal owner's sex using one or more of
                the following categories: Male, Female, and/or that the principal owner
                prefers to self-describe their sex. It would further explain that, if
                an applicant indicates that a principal owner prefers to self-describe
                their sex, the financial institution would be required to permit the
                applicant to provide additional information about the principal owner's
                sex. The financial institution would report to the Bureau the
                additional information provided by the applicant as free-form text.
                 Proposed comment 107(a)(20)-8 would state that a financial
                institution must permit an applicant to select as many categories as
                the applicant chooses and that the financial institution reports the
                category or categories selected by the applicant, including any
                additional information provided by the applicant, or reports that the
                applicant refused to provide the information or failed to respond. It
                would clarify that a financial institution is not permitted to report
                sex based on visual observation, surname, or any basis other than the
                applicant-provided information. Finally, proposed comment 107(a)(20)-8
                would explain how a financial institution would report sex if an
                applicant has fewer than four principal owners, provide an example, and
                direct financial institutions to proposed appendix G for additional
                information on collecting and reporting a principal owner's sex.
                 The Bureau seeks comment on its proposed approach to requesting
                information about a principal owner's sex, including the opportunity
                for self-identification (by allowing the applicant to write in or
                otherwise provide additional information). The Bureau also seeks
                comment on whether the sample data collection form should list examples
                from which the applicant could choose when a principal owner self-
                identifies and an applicant writes in or otherwise provides additional
                information about the principal owner's sex, such as ``intersex,''
                ``non-binary,'' or ``transgender.'' The Bureau also seeks comment on
                whether, alternatively, sex should be collected solely via the ``I
                prefer to self-describe'' option (with the ability to write in or
                otherwise provide additional information)--that is, without male and
                female being listed as options. The Bureau also seeks comment on
                whether applicants should be restricted from designating more than one
                category for a principal owner's sex (e.g., from selecting both
                ``Female'' and ``I prefer to self-describe'').
                 The Bureau also seeks comment on whether financial institutions
                should be required to ask separate questions regarding sex, sexual
                orientation, and gender identity and, if so, what categories should be
                offered for use in responding to each question. For example, the Bureau
                requests comment on whether the sample data collection form should
                include the three questions and related responses (described above)
                from the Pulse Household Survey questionnaire, or a check box for
                ``Principal owner identifies as LGBTQ+'' with an accompanying space for
                providing additional information. The Bureau also seeks comment on
                whether it should adopt a data point to collect an applicant's lesbian,
                gay, bisexual, transgender, or queer plus (LGBTQ+)-owned business
                status, similar to the way it is proposing to collect minority-owned
                business status and women-owned business status as discussed in the
                section-by-section analysis of proposed Sec. 1002.107(a)(18) and (19)
                above. The Bureau also seeks comment on whether including such
                questions would improve data collection or otherwise further section
                1071's purposes, as well as whether it would pose any particular
                burdens or challenges for industry.
                 In addition, to ensure that a financial institution's
                representation of nondiscrimination on the basis of sex information
                provided by the applicant is consistent with the protections afforded
                under ECOA and Regulation B, the Bureau seeks comment on whether
                ambiguity exists for any responses that
                [[Page 56483]]
                an applicant might reasonably use to self-describe a principal owner's
                sex for purposes of section 1071 (for example, intersex status) and if
                clarification may be needed.
                 Finally, the Bureau also requests information on Federal, State,
                and local government initiatives, as well as private sector
                initiatives, involving the use of sex categories other than male and
                female and the inclusion of questions regarding sexual orientation and
                gender identity in demographic information.
                Proposed Rule--Collecting Ethnicity and Race via Visual Observation or
                Surname in Certain Circumstances
                 The Bureau is proposing that financial institutions be required to
                collect and report at least one principal owner's ethnicity and race
                based on visual observation and/or surname in certain circumstances.
                Specifically, a financial institution would be required to report at
                least one principal owner's ethnicity and race based on visual
                observation and/or surname if the financial institution meets in person
                with one or more of the applicant's principal owners and the applicant
                does not provide ethnicity, race, or sex information for at least one
                principal owner in response to the financial institution's inquiry
                pursuant to proposed Sec. 1002.107(a)(20).
                 Although the Bureau indicated in the SBREFA Outline that it was not
                considering proposing that financial institutions report a principal
                owner's race, sex, and ethnicity based on visual observation and/or
                surname, the Bureau asked SERs to provide feedback about the potential
                challenges, costs, and benefits of implementing such a requirement for
                applicants who do not self-report the information. The Bureau also
                asked SERs to provide feedback about how those potential challenges and
                costs would change if reporting based on visual observation and/or
                surname was required only if the applicant is a sole proprietor but not
                if the applicant is an entity. Although many SERs and commenters
                opposed reporting ethnicity, race, or sex on the basis of visual
                observation and/or surname, some other commenters said that financial
                institutions should be required to report based on visual observation
                and/or surname in certain circumstances. Additionally, one SER
                specifically noted that the Bureau would need to account for lower
                self-reporting rates than are achieved for HMDA reporting. Consistent
                with this feedback, the Bureau notes that demographic response rates in
                the SBA's Paycheck Protection Program (PPP) data are much lower when
                compared to ethnicity, race, and sex response rates in HMDA data.\687\
                For instance, roughly 71 percent of respondents in the PPP data did not
                provide a response for race, compared to only 14.7 percent in the HMDA
                data. Roughly 66 percent of respondents in the PPP data did not provide
                a response for ethnicity, compared to only 14.3 percent in the HMDA
                data.\688\
                ---------------------------------------------------------------------------
                 \687\ Small Bus. Admin., Paycheck Protection Program Weekly
                Reports 2021, Version 11, at 9 (effective Apr. 5, 2021), https://www.sba.gov/sites/default/files/2021-04/PPP_Report_Public_210404-508.pdf. PPP data was taken from 2021 loans for which the collection
                form for principal owner demographics was included on the PPP
                application itself and, for most of that time, was featured on the
                first page of the application.
                 \688\ Id.
                ---------------------------------------------------------------------------
                 Without a visual observation and/or surname collection requirement,
                the Bureau believes that meaningful analysis of the 1071 principal
                owner race and ethnicity data could be difficult, significantly
                undermining section 1071's fair lending purpose. Comprehensive and
                accurate collection and reporting of data is also vital to section
                1071's business and community development purpose. Historically, one
                challenge under HMDA has been the reluctance of some applicants to
                voluntarily provide requested demographic information, such as race and
                ethnicity. The requirement in Regulation C to collect race, sex, and
                ethnicity on the basis of visual observation or surname is an important
                tool to address that challenge, and the Bureau believes that the
                requirement has resulted in more robust response rates in the HMDA
                data. The Bureau has considered the feedback in response to the SBREFA
                Outline and this related information and has determined that not
                proposing a requirement to report based on visual observation and/or
                surname could diminish the utility of the 1071 data.
                 Accordingly, the Bureau has determined that the appropriate
                approach to further section 1071's purposes is to propose to require
                that financial institutions collect at least one principal owner's race
                and ethnicity (but not sex) on the basis of visual observation and/or
                surname when the applicant does not provide ethnicity, race or sex
                information for at least one principal owner and the financial
                institution meets in person with one or more principal owners. In other
                words, a financial institution would not be required to collect race
                and ethnicity via visual observation and/or surname if the applicant
                provides any demographic information regarding any principal owner. The
                Bureau is concerned that, for applicants with multiple principal
                owners, the financial institution may not be able to determine whether
                the applicant has provided the demographic information, for example the
                sex, of the principal owner who meets in person with the financial
                institution or for another principal owner. The Bureau seeks comment on
                this proposed approach. The Bureau also seeks comment on whether a
                financial institution should be required to collect a principal owner's
                ethnicity and/or race via visual observation and/or surname if the
                applicant has only one principal owner, the applicant does not provide
                the principal owner's information, and the financial institution meets
                in person with the principal owner. In this situation, the financial
                institution would be able to ``match'' any demographic information that
                the applicant provides with the correct the principal owner because
                there is only one principal owner.
                 Proposed comment 107(a)(20)-9 would explain that a financial
                institution is required to report ethnicity and race (but not sex)
                based on visual observation and/or surname in certain circumstances.
                The proposed comment would explain that if a financial institution
                meets in person with one or more of an applicant's principal owners and
                the applicant does not provide ethnicity, race, or sex information for
                at least one principal owner, the financial institution must report at
                least one principal owner's ethnicity and race (but not sex) based on
                visual observation, surname, or a combination of both visual
                observation and surname. It would further explain that a financial
                institution is not required to report based on visual observation and/
                or surname if the principal owner only meets in person with a third
                party through whom the applicant is submitting an application to the
                financial institution and would provide an example.
                 Proposed comment 107(a)(20)-10 would clarify that a financial
                institution meets with a principal owner in person if an employee or
                officer of the financial institution or one of its affiliates has a
                meeting or discussion with the applicant's principal owner about an
                application and can visually observe the principal owner. The proposed
                comment would also provide examples of situations where the financial
                institution meets in person with a principal owner and where it does
                not. The Bureau requests comment on this approach and whether
                additional or different examples are necessary.
                 Proposed comment 107(a)(20)-11 would clarify that a financial
                institution
                [[Page 56484]]
                uses only aggregate categories when reporting ethnicity and race based
                on visual observation and/or surname and would direct financial
                institutions to proposed appendix G for additional information on
                collecting and reporting ethnicity and race based on visual observation
                and/or surname. However, the Bureau requests comment on whether
                financial institutions should be permitted, but not required, to use
                the disaggregated subcategories (in addition to the required aggregate
                categories) when reporting race and ethnicity based on visual
                observation and/or surname.
                 In addition to the specific matters identified above, the Bureau
                seeks comment on its proposed approach to this data point, the proposed
                methods of collecting and reporting the data, and requests comment on
                whether additional clarification regarding any aspect of this data
                point is needed.
                107(a)(21) Number of Principal Owners
                 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 collection of the number of
                principal owners of an applicant would aid in fulfilling the purposes
                of section 1071, as explained below.
                 The Bureau did not address the number of principal owners as a
                potential data point under consideration in the SBREFA Outline,
                although it did seek feedback on several questions related to the
                number of applicants' principal owners.\689\ To facilitate collection
                of the ethnicity, race, and sex of applicants' principal owners
                pursuant to proposed Sec. 1002.107(a)(20), the Bureau is proposing
                that financial institutions collect and report the number of an
                applicant's principal owners.
                ---------------------------------------------------------------------------
                 \689\ SBREFA Outline at 32-33.
                ---------------------------------------------------------------------------
                 Section 1071 uses the term ``principal owner'' but does not define
                it. Proposed Sec. 1002.102(o) would define a principal owner as a
                natural person who directly owns 25 percent or more of the equity
                interests of a business. Thus, under this proposed definition, it is
                possible that an applicant would have no principal owners or between
                one and four principal owners.
                 As explained in proposed comment 107(a)(21)-1, a financial
                institution would be able to collect an applicant's number of principal
                owners by requesting the number of principal owners from the applicant
                or by determining the number of principal owners from information
                provided by the applicant or that the financial institution otherwise
                obtains. If the financial institution asks the applicant to provide the
                number of its principal owners pursuant to proposed Sec.
                1002.107(a)(21), the financial institution must provide the definition
                of principal owner set forth in proposed Sec. 1002.102(o). If
                permitted pursuant to proposed Sec. 1002.107(c)(2), a financial
                institution could report an applicant's number of principal owners
                based on previously collected data.
                 The Bureau believes that an applicant is likely to know how many
                principal owners it has and should not have significant difficulties or
                objections to providing this basic piece of information. Moreover, the
                Bureau understands that financial institutions are already obtaining
                information about principal owners. Further, this additional
                information would aid in fulfilling the purposes of section 1071 as it
                may provide necessary context for other data points. For example, if an
                applicant reports the ethnicity, race, and sex for one principal owner,
                having the total number of principal owners would permit the Bureau and
                other data users to know whether that owner's demographics represents
                the demographics of the entirety of the applicant's principal ownership
                or merely one quarter of it. This information would help data users in
                fulfilling both the fair lending and business and community development
                purposes of section 1071.
                 Proposed comment 107(a)(21)-2 would clarify the relationship
                between the proposed requirement to collect and report the number of
                principal owners in proposed Sec. 1002.107(a)(21) with the proposed
                requirement to report verified information in proposed Sec.
                1002.107(b). The proposed comment would state that the financial
                institution may rely on an applicant's statements in collecting and
                reporting the number of the applicant's principal owners. The financial
                institution would not be required to verify the number of principal
                owners provided by the applicant, but if the financial institution
                verifies the number of principal owners, then the financial institution
                would be required to report the verified number of principal owners.
                 Proposed comment 107(a)(21)-3 would state that pursuant to proposed
                Sec. 1002.107(c)(1), a financial institution is required to maintain
                procedures reasonably designed to collect applicant-provided
                information, which includes the applicant's number of principal owners.
                However, if a financial institution is nonetheless unable to collect or
                determine the number of principal owners of the applicant, the
                financial institution would report that the number of principal owners
                is ``not provided by applicant and otherwise undetermined.''
                 The Bureau seeks comment on its proposed approach to this data
                point. The Bureau also seeks comment on whether the Bureau should
                instead, or additionally, require collection and reporting of similar
                information about owners (rather than principal owners). For example,
                should the Bureau require that financial institutions collect and
                report the number of owners that an applicant has that are not natural
                persons, in order to obtain a more complete picture of the applicant's
                ownership structure?
                107(b) Verification of Applicant-Provided Information
                 ECOA section 704B(e)(1) provides that ``[e]ach financial
                institution shall compile and maintain, in accordance with regulations
                of the Bureau, a record of the information provided by any loan
                applicant pursuant to a request under [section 704B(b)].'' \690\
                Section 1071 does not impose any requirement for a financial
                institution to verify the information provided by an applicant.
                ---------------------------------------------------------------------------
                 \690\ ECOA section 704B(e)(1).
                ---------------------------------------------------------------------------
                 In the SBREFA Outline, the Bureau did not include a general
                statement about the issue of verification of applicant-provided data
                points. For certain data points such as time in business, however, the
                Outline did explain that the Bureau was considering proposing that if
                the financial institution did not verify the information provided by
                the applicant, the financial institution would report the information
                provided by the applicant. If the financial institution did verify the
                information provided by the applicant, the Outline explained that the
                financial institution would report the verified information. The
                Outline did not state that the Bureau was considering proposing that a
                financial institution would be required to verify any of the applicant-
                provided data points.
                 As explained in the section-by-section analysis of proposed Sec.
                1002.107(a) above, 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.\691\ No SERs stated that they
                thought verification should be generally required. The industry
                stakeholders who commented on this issue asked that the Bureau not
                require
                [[Page 56485]]
                verification of applicant-provided information. The Bureau did not
                receive any comments on this issue from community group stakeholders.
                ---------------------------------------------------------------------------
                 \691\ SBREFA Panel Report at 26.
                ---------------------------------------------------------------------------
                 The Bureau is proposing in Sec. 1002.107(b) that unless otherwise
                provided in subpart B, the financial institution would be able to rely
                on statements of the applicant when compiling data unless it verifies
                the information provided, in which case it would be required to collect
                and report the verified information. Proposed comment 107(b)-1 would
                explain that a financial institution may rely on statements made by an
                applicant (whether made in writing or orally) or information provided
                by an applicant when compiling and reporting data pursuant to the 1071
                rule for applicant-provided data; the financial institution would not
                be required to verify those statements. Proposed comment 107(b)-1 would
                further explain, however, that if the financial institution does verify
                applicant statements for its own business purposes, such as statements
                relating to gross annual revenue or time in business, the financial
                institution would report the verified information. The comment would go
                on to explain that, depending on the circumstances and the financial
                institution's procedures, certain applicant-provided data could be
                collected without a specific request from the applicant. For example,
                gross annual revenue could be collected from tax return documents. In
                addition, the proposed comment would make clear that applicant-provided
                data are the data that are or could be provided by the applicant,
                including those in proposed Sec. 1002.107(a)(5) through (7), and (13)
                through (21). Finally, proposed comment 107(b)-1 would provide a cross
                reference to proposed comment 107(c)(2)-3, which would discuss the
                possible reuse of certain previously collected data.
                 The Bureau believes that requiring verification of applicant-
                provided data points would greatly increase the operational burden of
                the 1071 rule, and that relying on applicant-provided data would ensure
                sufficient accuracy to carry out the purposes of section 1071. As
                discussed above, section 1071 does not speak to verification; rather it
                refers only to compiling and maintaining a record of certain
                information provided by an applicant. However, the Bureau believes that
                requiring financial institutions to collect and report (for the 1071
                rule) information that they have already verified would not add
                operational difficulty, and would enhance the accuracy and usefulness
                of the data, thereby furthering the purposes of section 1071. The
                Bureau is implementing this requirement pursuant to its authority under
                ECOA section 704B(g)(1) to prescribe rules in order to carry out,
                enforce, and compile data pursuant to section 1071, and as an
                interpretation of the statutory phrase ``compile and maintain'' in ECOA
                section 704B(e)(1). In the Bureau's view, the verification that the
                financial institution chooses to carry out is part of compiling and
                maintaining the information provided by the applicant, and this
                requirement will improve the quality and usefulness of the resulting
                1071 data set.
                 As discussed above, many SERs and other stakeholders opposed the
                inclusion of a verification requirement, and the Bureau has taken their
                input into account when crafting this proposed provision.
                 The Bureau seeks comment on its proposed approach to verification
                of the 1071 data points, including the specific guidance that would be
                presented in comment 107(b)-1. The Bureau also seeks comment on whether
                financial institutions should be required to indicate whether
                particular data points being reported have been verified or not.
                107(c) Time and Manner of Collection
                107(c)(1) In General
                Background
                 Although the definition of ``application'' triggers a financial
                institution's duty to collect 1071 data, the application definition
                does not necessarily govern when that data must be collected. The
                language and structure of section 1071--which applies to
                ``applications'' from ``applicants''--indicates that the data must be
                collected sometime during the application process, but does not provide
                further detail.\692\
                ---------------------------------------------------------------------------
                 \692\ See, e.g., ECOA section 704B(b) (``[I]n the case of any
                application to a financial institution . . . .'') and 704B(c) (``Any
                applicant . . . may refuse to provide any information requested . .
                . .'') (emphases added)).
                ---------------------------------------------------------------------------
                 Financial institutions have expressed concern about when applicant-
                provided data must be collected, and particularly the timing of
                collecting applicants' protected demographic information (that is,
                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, pursuant to proposed Sec. 1002.107(a)(18) through (20)).
                Collecting this protected demographic information from applicants for
                purposes of section 1071 has been a particular concern for financial
                institutions, as financial institutions currently are generally
                prohibited from collecting such information except in narrow
                circumstances.\693\ As such, its required collection under section 1071
                will be a departure from current practice for most financial
                institutions.
                ---------------------------------------------------------------------------
                 \693\ See Sec. 1002.5(b).
                ---------------------------------------------------------------------------
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated that it was not currently
                considering specifying a particular time period in which financial
                institutions must seek to collect 1071 data from applicants.\694\ It
                also conveyed that it was seeking to provide financial institutions
                discretion and flexibility to time their 1071 data collection at a
                point during the application process that works best for their
                processes and relationships with applicants and to avoid unnecessary
                costs, while still fulfilling section 1071's purposes. The Bureau also
                noted that it had considered possible alternatives of requiring
                financial institutions to collect 1071 data within or by a specified
                time period, such as simultaneous with the triggering of an
                ``application,'' before obtaining a ``completed application,'' or
                before notifying the applicant of action taken.
                ---------------------------------------------------------------------------
                 \694\ SBREFA Outline at 35-36.
                ---------------------------------------------------------------------------
                 Most SERs that addressed the issue of timing for data collection
                indicated that they plan to collect 1071 data, and particularly
                applicants' protected demographic information (as would be required
                under proposed Sec. 1002.107(a)(18) through (20)), early in the
                application process and likely at the time an application is initially
                being submitted.\695\ These SERs felt that the longer they wait to
                request 1071 data, the more difficult or infeasible it will be to
                gather the information from applicants. Another SER urged the Bureau to
                give financial institutions flexibility to explore optimal timing for
                collection of 1071-required protected demographic information in order
                to maximize the response rate without discouraging applicants from
                pursuing the application. This SER suggested that protected demographic
                information should be collected during the application process, but
                before the application is considered complete. The SBREFA Panel
                recommended that the Bureau seek comment on whether it is necessary to
                specify a time period specifically for the collection of 1071-required
                protected demographic information, and if so, what would be the best
                period to designate.\696\
                ---------------------------------------------------------------------------
                 \695\ SBREFA Panel Report at 32.
                 \696\ Id. at 47.
                ---------------------------------------------------------------------------
                [[Page 56486]]
                 Nearly all industry stakeholders to comment on this issue supported
                the Bureau not specifying a time period, and instead giving financial
                institutions discretion to set their own optimal timing for the
                collection of applicant-provided 1071 data. The commenters noted that
                given the variety of products, financial institutions, and business
                models in small business lending, a one-size-fits-all approach would be
                unworkable and could disrupt financial institutions' processes. Some
                commenters also highlighted the complexity of small business lending
                applications and stated that flexible collection would provide greater
                simplicity, reduce burden, and allow for more accurate reporting,
                particularly where not all the data points are available at the time of
                collection. A few commenters sought flexibility due to concerns that if
                protected demographic information is collected early on in the process,
                an applicant would believe that information would be used to
                discriminate against them. One commenter suggested looking at FinCEN's
                customer due diligence rule, which allows for information collection at
                the time of closing. Although industry commenters generally favored
                flexibility, several stated they would likely collect 1071 data as
                early as possible in order to ensure data quality and collection. One
                stakeholder stated that applicant-provided data would be impossible to
                get if an application is withdrawn, incomplete, or denied before the
                required data are requested. Another industry commenter suggested the
                Bureau allow flexibility, but provide a safe harbor for financial
                institutions that collect applicant-provided data points on or with the
                application.
                 Many of the commenters seeking flexibility stated that point-of-
                sale (POS) applications would be particularly problematic with a rigid
                timing requirement. POS applications include those private label credit
                cards or other products offered through retailers in which the
                financial institution itself does not interact with the applicant at
                the time of application. POS applications are taken in a variety of
                different settings and locations, such as at the checkout line, online,
                or at customer service desks. Commenters urged that they would need
                additional flexibility for a POS application to request 1071 data, such
                as at some point reasonably following application submission.
                Commenters cited concerns about the accuracy and completeness of data
                collected in a POS application: Interactions are with retailer's
                employees who may not be able to answer questions about the data
                collection, interactions often take place in a public place (which may
                lead to erroneous answers or refusals to answer), and the person
                submitting a POS application may not have relevant knowledge to respond
                to the 1071-required questions, leading to delayed or abandoned
                applications. Commenters also expressed concern that reporting of POS
                applications would reflect the retailer's lending footprint, not the
                financial institution's, and so lead to incorrect assumptions about the
                financial institution's lending.
                 A number of stakeholders, including community groups and several
                financial institutions, urged the Bureau to specify a time period for
                the collection of 1071 data, stating that failure to do so would
                undermine the accuracy of the data. The commenters stated that complete
                flexibility would result in inconsistent and unreliable data since
                financial institutions would be collecting the data at different stages
                of the application process. The commenters stated that financial
                institutions that wait to collect the data would have difficulty
                obtaining applicant-provided information if the application was
                withdrawn, incomplete, or denied. The commenters also noted that
                discrimination is likely to occur in the early stages of the
                application process, and would not be captured if financial
                institutions are permitted to delay data collection. One commenter
                stated that requiring collection at the time of application could also
                promote non-discriminatory treatment as it would impress upon lenders
                and applicants the need for fair treatment. An industry commenter
                stated that not specifying a time period may lead to financial
                institution regulatory paralysis or confusion about when to collect
                1071 data from applicants.
                 Among commenters that recommended a specific time period for
                collection, many suggested collecting applicant-provided data at the
                time of an application or otherwise ``upfront.'' One commenter noted
                that 1071-required data could be built into the application itself. On
                the other hand, several commenters suggested 1071 data should be
                collected any time before an application is considered complete or, one
                commenter suggested, when financial institutions know that 1071
                collection will be required. The commenters stated that this would be
                the time period during which applicants are most likely to voluntarily
                provide the data, would ensure comparable data across lenders, and
                would still provide financial institutions flexibility to account for
                various application processes. One commenter suggested testing and
                focus groups to determine optimal timing. Otherwise, the commenter
                suggested 1071 data be collected before a financial institution
                disburses funds to the applicant.
                Proposed Rule
                 The Bureau is proposing Sec. 1002.107(c)(1), which would require a
                covered financial institution to maintain procedures to collect
                applicant-provided data under proposed Sec. 1002.107(a) at a time and
                in a manner that is reasonably designed to obtain a response. The
                Bureau agrees with SERs and other stakeholders about the benefits of
                providing a flexible approach concerning when applicant-provided data
                must be collected during the application process. As noted by some
                commenters, given the variety of application processes in the small
                business lending space, requiring 1071 data collection to occur within
                a narrow window may affect data quality and disrupt financial
                institution practices. On the other hand, the Bureau believes that
                safeguards are necessary to ensure that financial institutions are not
                evading or delaying their obligation to collect 1071 data in a manner
                that detrimentally affects response rates. In light of these
                considerations, the Bureau is proposing an approach that would maintain
                flexibility, but require a financial institution to maintain procedures
                to collect applicant-provided data at a time and in a manner that is
                reasonably designed to obtain a response. This proposal thus implements
                the flexible approach under consideration in the SBREFA Outline, though
                with additional safeguards.
                 Proposed comments 107(c)(1)-1 and -2 would clarify the meaning of
                financial institution ``procedures'' and reiterate a financial
                institution's latitude to establish procedures concerning the timing
                and manner that it collects applicant-provided data, provided that
                those procedures are reasonably designed to collect the applicant-
                provided data in proposed Sec. 1002.107(a).
                 Proposed comment 107(c)(1)-3 would clarify what constitutes
                ``applicant-provided data'' in proposed Sec. 1002.107(c)(1). The
                proposed comment would also clarify that applicant-provided data does
                not include data that is generated or supplied only by the financial
                institution. The Bureau believes this clarification would address
                commenter concerns that certain data points collected early in the
                process may not be as accurate (or available) as data available at a
                later time--for example,
                [[Page 56487]]
                information on action taken is only available late in the application
                process.
                 Proposed comment 107(c)(1)-4 would provide additional guidance on
                financial institutions' procedures that are reasonably designed to
                obtain a response. As noted in proposed comment 107(c)(1)-4, a
                financial institution would assess on a periodic basis whether its
                procedures are reasonably designed. One way a financial institution may
                be able to assess whether its procedures are reasonably designed would
                be, once 1071 data are made publicly available, to compare its response
                rate with similarly situated financial institutions (for example, those
                that offer similar products, use a similar lending model, or are of a
                similar size).\697\ The Bureau also anticipates that the response rate
                will differ depending on the data point: Some applicant-provided data
                points (for example, time in business) may have a higher response rate
                than other applicant-provided data points (such as a principal owner's
                race, sex, and ethnicity). The key is for a financial institution to
                assess on a periodic basis whether its procedures are reasonably
                designed to obtain a response.
                ---------------------------------------------------------------------------
                 \697\ As discussed in greater detail in part VI below, the
                Bureau is proposing not to determine what data to include in the
                public application-level 1071 data until after it receives at least
                one full year of 1071 data reported by financial institutions.
                Following the compliance date of the final rule, the Bureau proposes
                to issue a policy statement setting forth its intended modifications
                and deletions to the public application-level 1071 data. Of course,
                the Bureau acknowledges that the availability and robustness of a
                peer analysis would also depend on the extent to which 1071 data are
                made publicly available.
                ---------------------------------------------------------------------------
                 Proposed comments 107(c)(1)-5 and -6 would provide examples of
                procedures that generally are and are not reasonably designed to obtain
                a response. Although the inquiry requires a fact-based determination,
                the Bureau believes providing examples and further guidance of
                practices that likely are and are not reasonably designed to obtain a
                response would facilitate compliance and promote best practices. For
                example, the Bureau believes that, as a general matter, once there is a
                ``covered application,'' the earlier a financial institution seeks to
                collect applicant-provided information, the greater the likelihood of
                obtaining an applicant response (particularly for covered applications
                that are later withdrawn or left incomplete). Thus, the Bureau believes
                that, as a general matter, a procedure reasonably designed to obtain a
                response is one in which a financial institution requests applicant-
                provided data at the time of a covered application. For example, it
                could request these data in connection with a written application form,
                provided any collection form requesting applicants' protected
                demographic information pursuant to proposed Sec. 1002.107(a)(18)
                through (20) is separate from the application form and other documents
                used to collect other information related to the application, as would
                be required by proposed Sec. 1002.111(b). Collecting applicant-
                provided data after a covered application is submitted--for example,
                while the application is being completed through the submission of
                additional documents and verifications--may be reasonably designed to
                obtain a response depending on the particular financial institution's
                procedures, with earlier collections more likely to be reasonably
                designed. The Bureau believes providing such compliance examples would
                incentivize early collection and be consistent with the practice many
                SERs and other industry commenters indicated they planned to follow in
                any event. While some commenters stated that an applicant may be
                reluctant to respond to early collection due to concerns that the
                information may be used to discriminate against them, the Bureau
                believes those concerns can be addressed through the use of a data
                collection form (such as the sample collection form in proposed
                appendix E) that would explain to applicants the reason the information
                is being collected. Moreover, the Bureau notes that financial
                institutions regularly collect data required by HMDA and Regulation C
                at the time of application without significant issue and that the
                sample data collection form in Regulation C similarly provides an
                explanation to applicants as to the reason protected demographic
                information is being collected.
                 Conversely, the Bureau believes that, as a general matter, it is
                unlikely that small business applicants will respond to data requests
                that occur simultaneous with or after notifying an applicant of action
                taken on the covered application. Depending on the particular facts,
                however, these procedures may be reasonably designed to obtain a
                response; for example, if the financial institution has evidence or a
                reason to believe that under its procedures the response rate would be
                similar to or better than other alternatives. Although a fact-based
                determination, proposed comment 107(c)(1)-6 would clarify that such
                procedures would generally not be considered ``reasonably designed.''
                 Proposed comment 107(c)(1)-7 would explain that a financial
                institution reports updated applicant-provided data if it obtains more
                current data during the application process. Proposed comment
                107(c)(1)-8 would provide guidance in the event a financial institution
                changes its determination regarding an applicant's status as a small
                business.
                 Many industry commenters discussed the need for additional
                flexibility specifically for POS applications. The Bureau understands
                that many (though not all) POS applications, particularly those for
                smaller credit amounts or to purchase particular goods in a store, are
                often submitted on-site at POS and decisioned in real time. Under
                proposed Sec. 1002.107(c)(1) and associated commentary, the Bureau
                anticipates that most financial institutions would generally collect
                applicant-provided 1071 data at POS, and not at some later time after
                the credit request has been decisioned and the applicant has left the
                store, as suggested by some commenters. Despite the comments on this
                issue, the Bureau is not proposing a different approach for collecting
                applicant-provided data specifically for POS applications. Commenters
                raised concerns about retail employees seeking to collect 1071 required
                data in a public setting. However, the Bureau believes that financial
                institutions can develop procedures to accommodate collection in this
                setting, including (as discussed above) by using the sample collection
                form developed by the Bureau. The Bureau also does not believe that any
                specialized knowledge is necessary to collect 1071 data, and so
                believes that retail employees can collect the information. Although it
                is possible that the accuracy of the data collected in POS applications
                may be more prone to errors, as some commenters allege, the Bureau
                believes that having such data, even with decreased accuracy, would be
                preferable to not having any applicant-provided data for such
                applications.\698\
                ---------------------------------------------------------------------------
                 \698\ In order to help identify such transactions, the Bureau is
                proposing to collect information about the application recipient.
                See proposed Sec. 1002.107(a)(4).
                ---------------------------------------------------------------------------
                 Several industry commenters suggested the Bureau look to FinCEN's
                customer due diligence (CDD) rule, which excludes from certain of its
                requirements POS transactions to provide credit products solely for the
                purchase of retail goods/services up to a limit of $50,000.\699\ The
                Bureau is not proposing to take this approach given the different
                purposes and requirements of the CDD rule and section 1071. The purpose
                of the CDD rule is to improve financial transparency and prevent
                criminals and terrorists from misusing companies to disguise their
                illicit activities and launder their ill-gotten
                [[Page 56488]]
                gains.\700\ Under the CDD rule, covered financial institutions must
                identify and verify the identity of natural persons (known as
                beneficial owners) of legal entity customers who own, control, and
                profit from companies when those companies open accounts.\701\ The CDD
                exclusion for certain POS transactions is based on the ``very low risk
                posed by opening such accounts at [a] brick and mortar store.'' \702\
                While the CDD rule (and the customer identification program (CIP) rule
                \703\) focus on accounts (including certain originated loans),
                obtaining data on denials is essential to 1071's purposes. Moreover,
                unlike the CDD and CIP rules, which require covered financial
                institutions to collect certain essential information, section 1071
                only requires that financial institutions seek to collect applicants'
                protected demographic information, and permits applicants to refuse to
                provide that information. Given these key differences, the Bureau is
                not proposing to follow the CIP and CDD rules concerning timing of
                collection or the exclusion of certain POS applications.
                ---------------------------------------------------------------------------
                 \699\ 31 CFR 1010.230(h)(1)(i).
                 \700\ See FinCEN, Information on Complying with the Customer Due
                Diligence (CDD) Final Rule, https://www.fincen.gov/resources/statutes-and-regulations/cdd-final-rule (last visited Aug. 6, 2021).
                 \701\ Id.
                 \702\ FinCEN, Guidance, at Q 29 (Apr. 3, 2018), https://www.fincen.gov/sites/default/files/2018-04/FinCEN_Guidance_CDD_FAQ_FINAL_508_2.pdf.
                 \703\ FinCEN's CIP rule does not include a point of sale
                exclusion. While the rule permits verification of the identity of
                the customer within a reasonable time after the account is opened,
                the collection of required customer information must occur prior to
                account opening. See 31 CFR 1020.220(a)(2)(i)(A) and (ii).
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on proposed Sec. 1002.107(c)(1) and
                associated commentary. As recommended by the SBREFA Panel, the Bureau
                seeks comment on whether it is necessary to specify a time period
                specifically for the collection of protected 1071 demographic
                information, and if so, what time period the Bureau should designate.
                The Bureau also seeks comment on the examples set forth in proposed
                comments 107(c)(1)-5 and -6, and whether it would be useful to provide
                additional examples of procedures that are and that are not reasonably
                designed to obtain a response. In addition, the Bureau seeks comment on
                its proposed approach for POS applications, including its proposal that
                would not make any particular exceptions for the timing and manner of
                1071 data collection for POS applications.
                107(c)(2) Previously Collected Data
                 In the SBREFA Outline, the Bureau emphasized that it was seeking to
                provide financial institutions with discretion and flexibility in the
                timing of 1071 data collection, in light of considerations including
                their relationships with applicants and the need to avoid unnecessary
                costs.\704\ The Bureau did not specifically discuss whether a financial
                institution could meet its 1071 obligations on a covered application by
                reusing certain data it had previously collected from the same
                applicant. In response to the Bureau's proposal under consideration
                concerning timing of collection of certain 1071 data, however, a
                commenter suggested financial institutions provide annual certification
                of 1071 data where there is an ongoing customer relationship. The
                commenter noted that the data are unlikely to change within a year,
                there may be multiple transactions during that time, and it would avoid
                financial institutions and applicants having to provide the information
                during the application process, saving time and expense.
                ---------------------------------------------------------------------------
                 \704\ SBREFA Outline at 35-36.
                ---------------------------------------------------------------------------
                 The Bureau is proposing Sec. 1002.107(c)(2), which would permit,
                but not require, a financial institution to reuse previously collected
                data to satisfy proposed Sec. 1002.107(a)(13) through (21) if the data
                were collected within the same calendar year as the current covered
                application and the financial institution has no reason to believe the
                data are inaccurate. The Bureau believes that, absent a reason to
                suspect otherwise, recently collected 1071 data are likely to be
                reliable. Additionally, the Bureau believes that a flexible approach
                giving financial institutions discretion to reuse these data is
                consistent with the approach the Bureau proposed at SBREFA. Although
                proposed Sec. 1002.107(c)(2) would apply to certain data collected
                within the same calendar year, nothing prevents a financial institution
                from confirming with the applicant whether information collected more
                than a year ago from the applicant remains accurate.
                 Proposed comment 107(c)(2)-1 would provide an example of how
                certain previously collected data can be reused by a financial
                institution. Proposed comment 107(c)(2)-2 would identify the particular
                data that can be reused. The comment would also clarify that other data
                required by proposed Sec. 1002.107(a) could not be reused, as those
                data points are specific and unique to each covered application.
                Proposed comment 107(c)(2)-3 would clarify instances where data have
                not been ``previously collected'' and so cannot be reused under
                proposed Sec. 1002.107(c)(2).
                 Proposed comment 107(c)(2)-4 would provide guidance on when
                information is considered collected in the same calendar year, and so
                may be reused by a financial institution in certain circumstances. In
                particular, the proposed comment discusses applications that span more
                than one calendar year.
                 Proposed comment 107(c)(2)-5 would provide clarity and an example
                of when a financial institution has reason to believe data may be
                inaccurate, and so cannot be reused for a subsequent covered
                application. Finally, proposed comments 107(c)(2)-6 and -7 would
                provide guidance on when data regarding minority-owned business status,
                women-owned business status, and data on the principal owners'
                ethnicity, race, and sex may be reused by a financial institution in a
                subsequent covered application.
                 The Bureau seeks comment on Sec. 1002.107(c)(2) and associated
                commentary. The Bureau also seeks comment on whether a period of one
                calendar year to reuse certain previously collected data is appropriate
                or whether it should be extended to a longer period (such as two or
                three years). In addition, the Bureau seeks comment on whether
                financial institutions should be required to notify applicants that
                information they provide (including, in particular, minority-owned
                business status, women-owned business status, and the principal owners'
                ethnicity, race, and sex) could be reused for subsequent applications.
                Section 1002.108 Firewall
                Background
                 ECOA section 704B(d) generally restricts the access of certain
                individuals at a financial institution or its affiliates to certain
                information provided by an applicant pursuant to section 1071. The
                Bureau calls this requirement in 704B(d) a ``firewall.'' More
                specifically, 704B(d)(1) states that ``[w]here feasible,'' underwriters
                and other officers and employees of a financial institution or its
                affiliates ``involved in making any determination concerning an
                application for credit'' cannot have access to any information provided
                by the applicant pursuant to a request under 704B(b). That is, the
                statute limits access not only by underwriters and persons making an
                underwriting decision but also by anyone else involved in making any
                determination concerning an application. However, it does not expressly
                define the term ``feasible'' or provide clarification regarding what it
                means to be involved in making any
                [[Page 56489]]
                determination concerning an application for credit.
                 Additionally, under ECOA section 704B(d)(2), if the financial
                institution determines that an underwriter, employee, or officer
                involved in making a determination ``should have access'' to any
                information provided by the applicant pursuant to a request under
                704B(b), the financial institution must provide a notice to the
                applicant of the underwriter's access to such information, along with
                notice that the financial institution may not discriminate on the basis
                of such information. Section 704B(d)(2) does not expressly define or
                describe when an underwriter, employee, or officer ``should have
                access,'' nor does it explain the relationship, if any, between when a
                financial institution determines that an individual ``should have
                access'' under 704B(d)(2) and whether it is ``feasible'' to implement
                and maintain a firewall under 704B(d)(1).
                 The Bureau believes that ECOA section 704B(d) contains significant
                ambiguities with respect to how financial institutions, in practical
                terms, should determine how to implement a firewall to limit
                underwriters', employees', and officers' access to the information
                provided by applicants pursuant to section 704B(b). Indeed, based on
                feedback from SERs and other commenters, the Bureau believes that in
                many instances financial institutions that find it not ``feasible'' to
                implement and maintain a firewall will be the same institutions
                determining that relevant individuals ``should have access'' to the
                information provided by an applicant pursuant to 704B(b). The Bureau
                further believes that reading these two provisions in isolation from
                each other would result in significant confusion and challenges,
                particularly for smaller financial institutions.
                 Accordingly, the Bureau believes that section 1071's firewall
                requirement is best implemented by reading the ``should have access''
                language in ECOA section 704B(d)(2) in conjunction with the
                ``feasibility'' language in 704B(d)(1). In 704B(d)(1), if it is
                feasible to implement and maintain a firewall, then underwriters, other
                employees, and officers shall not have access to the information
                subject to the firewall; but it is not feasible to implement and
                maintain a firewall if an underwriter, other employee, or officer
                subject to the firewall should have access to that information. If it
                is not feasible to implement and maintain a firewall, then that
                underwriter, other employee, or officer who should have access is
                permitted to have access so long as the financial institution provides
                a notice to the applicant.
                 As discussed in greater detail above in E.2 of the Overview to this
                part V, the Bureau also 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).'' 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)
                is much broader. It 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, the amount of
                credit applied for and approved, and gross annual revenue, among
                others. In other words, 704B(e) designates 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--as information provided by an applicant ``pursuant to a
                request under subsection (b).'' But information deemed provided
                pursuant to 704B(b) is subject not only to the firewall under 704B(d)
                but also to a right to refuse under 704B(c) and separate recordkeeping
                requirements under 704B(b)(2). Applying these special protections to
                many of the data points in 704B(e), such as an applicant's gross annual
                revenue or the amount applied for, would be extremely difficult to
                implement because this information is critical to financial
                institutions' ordinary operations in making credit decisions.
                 In order to resolve these ambiguities, the Bureau believes that the
                best reading of the statute is to give different meanings to the phrase
                ``any information provided by the applicant pursuant to a request under
                subsection (b)'' with respect to ECOA section 704B(e) as opposed to
                704B(b)(2), (c), and (d). As relevant here, with respect to the
                firewall in ECOA section 704B(d), the Bureau interprets the phrase to
                refer to the data points in proposed Sec. 1002.107(a)(18) (minority-
                owned business status) and proposed Sec. 1002.107(a)(19) (women-owned
                business status), as well as proposed Sec. 1002.107(a)(20) (ethnicity,
                race, and sex of principal owners). Each of these data points require
                financial institutions to request demographic information that has no
                bearing on the creditworthiness of the applicant. Moreover, a financial
                institution could not inquire about this demographic information absent
                section 1071's mandate to collect and report the information, and ECOA
                prohibits a financial institution from discriminating against an
                applicant on the basis of the information. The Bureau accordingly
                believes that the best effectuation of congressional intent is to apply
                section 1071's special-protection provisions to apply to this
                demographic information, regardless of whether the statutory authority
                to collect it originates in 704B(b)(1) (women-owned business status and
                minority-owned business status) or 704B(e)(2)(G) (race, sex, and
                ethnicity of principal owners). The Bureau similarly believes that
                Congress did not intend these special protections to apply to any of
                the other data points 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.\705\
                ---------------------------------------------------------------------------
                 \705\ As explained in the Overview to this part V, the Bureau is
                not proposing to require financial institutions to maintain and
                report a data point on small business status.
                ---------------------------------------------------------------------------
                 The Bureau is proposing Sec. 1002.108 to implement ECOA section
                704B(d) and, pursuant to its authority in 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.
                SBREFA Proposal Under Consideration and Feedback
                 Information subject to the firewall. In the SBREFA Outline, the
                Bureau stated that it was considering proposing that financial
                institutions need only limit access under ECOA section 704B(d) to an
                applicant's responses to the financial institution's specific inquiries
                regarding women-owned and minority-owned business status and the
                ethnicity, race, and sex of principal owners, but not to an applicant's
                small business status.\706\ As discussed below, many SERs and other
                commenters suggested that restricting access to protected demographic
                information obtained to comply with section 1071 (i.e., minority-owned
                business status, women-owned business status, and the principal owners'
                ethnicity, race, and sex) would be difficult for their institutions.
                Although these SERs and other commenters generally did not comment on
                the scope of information that the Bureau considered proposing be
                subject to the firewall (other than to say
                [[Page 56490]]
                that liming access would be difficult), one commenter said that small
                business status should not be subject to the firewall and another
                commenter said that it should.
                ---------------------------------------------------------------------------
                 \706\ SBREFA Outline at 36-37.
                ---------------------------------------------------------------------------
                 The SBREFA Panel recommended that the Bureau propose clear guidance
                on what information is subject to the firewall requirement.\707\
                ---------------------------------------------------------------------------
                 \707\ SBREFA Panel Report at 47.
                ---------------------------------------------------------------------------
                 Feasibility of maintaining a firewall. In the SBREFA Outline, the
                Bureau also stated that it was considering how it might apply the
                feasibility standard in ECOA section 704B(d)(1) and asked several
                questions related to this standard.\708\ Several SERs that take in-
                person or paper applications or that have very limited commercial
                lending staff stated that it would be costly or impossible for them to
                restrict access to applicants' protected demographic information by
                underwriters and other persons involved in making determinations
                concerning applications from small businesses.\709\ In contrast,
                several SERs that operate entirely online said that it would be
                relatively easy for them to restrict access to applicants' protected
                demographic information. Another SER said that it could restrict access
                to protected demographic information for applications received online
                (though not for paper applications), but that it would necessitate an
                overhaul of its online system.
                ---------------------------------------------------------------------------
                 \708\ SBREFA Outline at 36-37.
                 \709\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 33-34.
                ---------------------------------------------------------------------------
                 Many other stakeholders providing feedback on the SBREFA Outline
                said that it would not be possible to limit access to applicants'
                protected demographic information or that attempting to do so would be
                costly and time consuming. Some other commenters suggested that
                implementing and maintaining a firewall would be impossible for all
                financial institutions or certain categories of financial institutions
                (i.e., smaller financial institutions, community banks, credit unions).
                Generally, these commenters requested exemptions from the firewall
                requirement for either all financial institutions or specific
                categories of financial institutions. Generally, commenters were
                concerned about the costs associated with hiring additional staff,
                outsourcing additional functions, or making system changes to implement
                and maintain the firewall. However, some commenters indicated that
                financial institutions should not be required to change their existing
                application or other processes to maintain a firewall and noted that
                underwriters and officers who gather information from small business
                applicants also make determinations regarding such applications.
                Commenters noted that implementing a firewall would necessitate more
                points of contact between employees of the financial institution and an
                applicant and would require financial institutions to reassign job
                duties and retrain existing employees.
                 Importantly, many comments from SERs and others seemed to reflect
                confusion about the intended scope of the firewall. For example, some
                SERs and other commenters seemed to think that the firewall would
                prohibit employees who were generally aware of an applicant's business
                status or of a principal owner's ethnicity, race, and sex, such as due
                to participation in outside organizations or activities, from making
                any determinations regarding applications. One commenter remarked that
                it would be impossible to comply with the firewall requirement if a
                financial institution required a principal owner to provide a driver's
                license. Additionally, some SERs and other commenters requested
                guidance on the scope and applicability of the firewall, indicating
                that the SBREFA Outline was not sufficiently clear regarding the
                firewall's scope.
                 The SBREFA Panel recommended that the Bureau propose a clear
                feasibility standard that takes into account the costs of establishing
                and maintaining a firewall to limit access by underwriters and other
                persons.\710\
                ---------------------------------------------------------------------------
                 \710\ Id. at 47.
                ---------------------------------------------------------------------------
                 Providing a notice in lieu of the firewall. In the SBREFA Outline,
                the Bureau also stated that it was considering proposing to interpret
                ECOA section 704B(d)(2) to permit financial institutions to give
                underwriters, employees, and officers access to applicants' responses
                regarding women-owned business status, minority-owned business status
                and the principal owners' race, sex, and ethnicity when the financial
                institution determines that such access is needed for the underwriter,
                employee, or officer to perform usual and regularly assigned job
                duties.\711\ In such circumstances, the financial institution would
                need to comply with the statutory requirement to provide a notice in
                lieu of limiting access. The Bureau also stated in the SBREFA Outline
                that the financial institution could provide the notice to all small
                business applicants or the specific applicant or applicants whose
                information will or may be accessed. The Bureau also stated that it was
                considering developing sample disclosure language that financial
                institutions could use when providing the notice under 704B(d)(2) and
                that the notice under 704B(d)(2) need not include language regarding
                small business status.
                ---------------------------------------------------------------------------
                 \711\ SBREFA Outline at 36-37.
                ---------------------------------------------------------------------------
                 SERs and other stakeholders generally were supportive of providing
                a notice to applicants in lieu of restricting access to applicants'
                protected demographic information obtained for purposes of the 1071
                rule. Several stated that it should be permissible to provide a
                disclosure or notice to meet the firewall requirement, and others
                stated that a financial institution should be permitted to provide a
                notice to meet the firewall requirement if the financial institution
                itself determines that establishing and maintaining a firewall was not
                feasible. However, one industry commenter stated that financial
                institutions should not be required to provide a notice to comply with
                the firewall requirement, and one SER said that use of the notice
                should be optional. This SER suggested that requiring the use of a
                notice may cause confusion for the applicant and have the unintended
                consequence of causing unfounded claims of discrimination if the
                application is denied. One SER cautioned that many people do not read
                notices and disclosures, and another SER suggested that financial
                institutions would not want to provide a notice because the loan
                process already involves too much paperwork.
                 Several SERs and several other stakeholders indicated a preference
                for providing a notice to all applicants, not just those specific
                applicants whose protected demographic information was likely to be
                accessed by underwriters and others making decisions regarding
                applications.
                 Several stakeholders supported a model notice. One SER as well as
                two other commenters asked that, if the Bureau provided sample language
                or a model notice, that the Bureau provide it in English as well as in
                other languages, such as Spanish. SERs and other stakeholders suggested
                a variety of statements that they thought should or should not be
                included in sample language or a model notice. They also provided a
                variety of suggestions on combining the notice with other documents,
                such as the application, sample data collection form, or with other
                required notices and disclosures.
                 One SER requested that the Bureau clarify when a financial
                institution would be permitted to provide a notice in lieu of
                restricting access to
                [[Page 56491]]
                applicants' protected demographic information. Some stakeholders
                requested additional guidance on the timing and methods for providing a
                notice.
                 The SBREFA Panel recommended that the Bureau propose to permit
                financial institutions to provide a notice to applicants instead of
                restricting access to applicants' protected demographic information if
                it is not feasible for the financial institution to restrict such
                access.\712\
                ---------------------------------------------------------------------------
                 \712\ SBREFA Panel Report at 47.
                ---------------------------------------------------------------------------
                Proposed Rule
                 The Bureau is proposing Sec. 1002.108 to implement the firewall
                provisions in ECOA section 704B(d). Proposed Sec. 1002.108(a) would
                provide certain relevant definitions, proposed Sec. 1002.108(b) would
                state the general prohibition on access to applicants' protected
                demographic information by certain persons, proposed Sec. 1002.108(c)
                would explain the exception to that prohibition, and proposed Sec.
                1002.108(d) would provide language for the notice necessary in order to
                qualify for the exception. The Bureau is also proposing commentary. The
                Bureau's proposed approach to Sec. 1002.108 is consistent with its
                approach under consideration during the SBREFA process. The Bureau's
                general rationale for how it reads the firewall provisions are set
                forth in this section-by-section analysis of proposed Sec. 1002.108
                above, under Background.
                 Proposed Sec. 1002.108(b) would state that, unless the exception
                under proposed Sec. 1002.108(c) applies, an employee or officer of a
                covered financial institution or a covered financial institution's
                affiliate shall not have access to an applicant's responses to
                inquiries that the financial institution makes pursuant to this subpart
                regarding whether the applicant is a minority-owned business under
                proposed Sec. 1002.107(a)(18) or a women-owned business under proposed
                Sec. 1002.107(a)(19), and regarding the ethnicity, race, and sex of
                the applicant's principal owners under proposed Sec. 1002.107(20), if
                that employee or officer is involved in making any determination
                concerning that applicant's covered application.
                 Consistent with the SBREFA Panel's recommendation, proposed comment
                108(b)-1 would clarify the information that is subject to the
                prohibition on access (i.e., the firewall) and provide examples. First,
                proposed comment 108(b)-1 would clarify that the prohibition in
                proposed Sec. 1002.108(b) would apply only to an applicant's responses
                to the inquiries that the covered financial institution makes to
                satisfy Sec. 1002.107(a)(18) through (20) and provide examples.
                Second, proposed comment 108(b)-1 would clarify that the prohibition in
                proposed Sec. 1002.108(b) does not apply to ethnicity or race
                information about principal owners that the financial institution
                collects via visual observation or surname, or to an applicant's
                responses to inquiries regarding minority-owned or women-owned business
                status, or principal owners' ethnicity, race, or sex, made for other
                purposes and provide an example. It would also clarify that the
                prohibition does not apply if an employee or officer generally knows
                that an applicant is a minority-owned business or women-owned business,
                or knows the ethnicity, race, or sex of any of the applicant's
                principal owners due to activities unrelated to the inquiries made to
                satisfy the financial institution's obligations under subpart B, as
                well as provide an example.
                 In response to SBREFA feedback requesting additional clarification
                and guidance on who would be subject to the firewall, proposed comment
                108(b)-2 would clarify the scope of persons subject to the prohibition
                and provide examples.
                 Additionally, the Bureau is proposing to define the phrase
                ``involved in making any determination concerning a covered
                application.'' Proposed Sec. 1002.108(a)(1) would define this phrase
                to mean participating in a decision regarding the evaluation of a
                covered application, including the creditworthiness of an applicant for
                a covered credit transaction. Thus, an employee or officer who
                participates in such decision would be subject to the prohibition in
                proposed Sec. 1002.108(b), and thus could not have access to an
                applicant's responses to the covered financial institution's inquiries
                under proposed Sec. 1002.107(a)(18) through (20) with regard to that
                covered application, unless the exception in proposed Sec. 1002.108(c)
                applies.
                 Proposed comment 108(a)-1 would provide additional clarification
                regarding when an employee or officer is ``involved in making any
                determination concerning a covered application.'' In particular, it
                would clarify that an employee or officer is involved in making a
                determination concerning a covered application if the employee or
                officer makes, or otherwise participates in, a decision regarding the
                evaluation of a covered application or the creditworthiness of an
                applicant for a covered credit transaction. Proposed comment 108(a)-1
                would note that this group of employees and officers includes, but is
                not limited to, employees and officers who serve as underwriters.\713\
                Additionally, it would explain that the decision that the employee or
                officer makes or participates in must be about a specific covered
                application. An employee or officer would not be involved in making a
                determination concerning a covered application if the employee or
                officer is involved in making a decision that affects covered
                applications generally, the employee or officer interacts with small
                businesses prior to them becoming applicants or submitting a covered
                application, or the employee or officer makes or participates in a
                decision after the financial institution has taken final action on the
                application, such as decisions about servicing or collecting a covered
                credit transaction.
                ---------------------------------------------------------------------------
                 \713\ While ECOA section 704B(d) refers to underwriters and
                other officers and employees of a financial institution, or any
                affiliate of a financial institution, who are involved in making any
                determination concerning an application, the Bureau has clarified
                that underwriters are one classification or category of employees
                and officers who are involved in making a determination concerning
                an application. The Bureau has not separately listed underwriters as
                subject to the firewall because doing so is unnecessary given their
                inclusion in the larger group of employees and officers who are
                involved in making any determination concerning an application.
                ---------------------------------------------------------------------------
                 Consistent with the SBREFA Panel's recommendation, proposed Sec.
                1002.108(c) would state that the prohibition in proposed Sec.
                1002.108(b) shall not apply to an employee or officer if a financial
                institution determines that it is not feasible to limit that employee's
                or officer's access to one or more of an applicant's responses to the
                financial institution's inquiries under Sec. 1002.107(a)(18) through
                (20) and the financial institution provides the notice required under
                proposed Sec. 1002.108(d) to the applicant. Proposed Sec. 1002.108(c)
                would further state that it is not feasible to limit access as required
                pursuant to proposed Sec. 1002.108(b) 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 the financial institution's
                inquiries under proposed Sec. 1002.107(a)(18) through (20).
                 Proposed comment 108(c)-1 would clarify that a financial
                institution is not required to limit the access of a particular
                employee or officer who is involved in making determinations concerning
                covered applications if the financial institution determines that the
                particular employee or officer should have access to the information
                collected
                [[Page 56492]]
                pursuant to proposed Sec. 1002.107(a)(18) through (20) and the
                financial institution provides the notice required by proposed Sec.
                1002.108(d). It would explain that a financial institution can
                determine that several employees and officers should have access or
                that all of a group of similarly situated employees or officers should
                have access, but that a financial institution cannot permit all
                employees and officers to have access simply because it has determined
                that one or more employees or officers should have access. It would
                also provide an example.
                 Proposed Sec. 1002.108(a)(2) would define the phrase ``should have
                access'' to mean that an employee or officer may need to collect, see,
                consider, refer to, or otherwise use the information to perform that
                employee's or officer's assigned job duties. Proposed comment 108(a)-2
                would explain that a financial institution may determine that an
                employee or officer should have access for purposes of proposed Sec.
                1002.108 if that employee or officer is assigned one or more job duties
                that may require the employee or officer to collect (based on visual
                observation, surname, or otherwise), see, consider, refer to, or use
                information otherwise subject to the prohibition in proposed Sec.
                1002.108(b). The employee or officer would not have to be required to
                collect, see, consider, refer to or use such information or to actually
                collect, see, consider, refer to or use such information. It would be
                sufficient if the employee or officer might need to do so to perform
                the employee's or officer's assigned job duties. This approach is
                similar to the approach under consideration during the SBREFA process,
                though in response to feedback received, the proposed definition would
                not require that the assigned job duties be usually or regularly
                assigned. Thus, an employee or officer would not be subject to the
                prohibition if the financial institution determines that the employee
                or officer might need to see, consider, refer to, or otherwise use the
                information an applicant provided pursuant to proposed Sec.
                1002.17(a)(18) through (20) to perform the employee's or officer's
                assigned job duties, and the financial institution provides the
                required notice to the applicant. Proposed comment 108(a)-2 would
                include an example of when a financial institution would be able to
                determine that an officer should have access and would state that, if a
                financial institution determines that an employee or officer who is
                involved in making any determination concerning a covered application
                should have access for purposes of Sec. 1002.108, the financial
                institution is responsible for ensuring that the employee or officer
                only accesses and uses the protected information for lawful purposes.
                Additionally, proposed comment 108(a)-2 would explain that a financial
                institution may determine that all employees or officers with the same
                job description or assigned duties should have access for purposes of
                Sec. 1002.108 and provide an example.
                 Proposed Sec. 1002.108(d) would describe the notice that a
                financial institution is required to provide to satisfy the exception
                in proposed Sec. 1002.108(c). Proposed Sec. 1002.108(d) would state
                that, in order to satisfy the exception set forth in proposed Sec.
                1002.108(c), a financial institution shall provide a notice to each
                applicant whose responses will be accessed, informing the applicant
                that one or more employees or officers involved in making
                determinations concerning the covered application may have access to
                the applicant's responses to the financial institution's inquiries
                regarding whether the applicant is a minority-owned business or a
                women-owned business, and regarding the ethnicity, race, and sex of the
                applicant's principal owners. Proposed Sec. 1002.108(d) would also
                state that the financial institution shall provide this notice when
                making the inquiries required under Sec. 1002.107(a)(18) through (20)
                and together with the notices required pursuant to Sec.
                1002.107(a)(18) through (20).
                 Proposed comment 108(d)-1 would explain that if a financial
                institution determines that one or more employees or officers should
                have access pursuant to proposed Sec. 1002.108(c), then the financial
                institution must provide the required notice to, at a minimum, the
                applicant or applicants whose responses will be accessed by an employee
                or officer involved in making determinations regarding the applicant's
                or applicants' covered applications. It would also clarify that, as an
                alternative, the financial institution could provide the required
                notice to a larger group of applicants, including all applicants, if it
                determines that one or more officers or employees should have access.
                 Proposed comment 108(d)-2 would describe the content of the
                required notice. It would state that the notice must inform the
                applicant that one or more employees and officers involved in making
                determinations regarding the applicant's covered application may have
                access to the applicant's responses regarding the applicant's minority-
                owned business status, its women-owned business status, and its
                principal owners' ethnicity, race, and sex. Proposed comment 108(d)-2
                would note that the financial institution may, but is not required to,
                provide the notice on its data collection form. Additionally, proposed
                comment 108(d)-2 would include language for the required notice. A
                financial institution would be required to use the language set forth
                in proposed comment 108(d)-2 or substantially similar language when
                providing the notice.
                 Comment 108(d)-3 would explain that if a financial institution is
                providing the notice required by proposed Sec. 1002.108(d) orally, it
                must provide the notice prior to asking the applicant if it is a
                minority-owned business or women-owned business and prior to asking for
                a principal owner's ethnicity, race, or sex. It would further explain
                that, if the notice required by proposed Sec. 1002.108(d) is provided
                on the same paper or electronic data collection form as the inquiries
                about minority-owned business status, women-owned business status, and
                the principal owners' ethnicity, race, or sex, the financial
                institution would be required to provide the notice at the top of the
                form. If the notice required by proposed Sec. 1002.108(d) is provided
                in an electronic or paper document that is separate from the data
                collection form, the financial institution would be required to provide
                the notice at the same time as the data collection form or prior to
                providing the data collection form. Additionally, proposed comment
                108(d)-3 would clarify that the notice required pursuant to proposed
                Sec. 1002.108(d) must be provided with the non-discrimination notices
                required pursuant to proposed Sec. 1002.107(a)(18) through (20) and
                would reference proposed appendix E for an example.
                 The Bureau believes that its proposed approach reflects the
                feedback from most SERs and commenters who preferred to be able to give
                a notice and did not want to hire additional staff or change processes.
                While some commenters did not want to provide a notice, section 1071
                requires that a financial institution provide a specific notice to an
                applicant if the financial institution determines that an employee or
                officer should have access to information otherwise subject to the
                firewall requirement. As an alternative to providing a notice, a
                financial institution could take the steps necessary to establish and
                maintain a firewall.
                 The Bureau seeks comment on its proposed approach to the firewall
                requirement and whether a different approach might result in a better
                policy outcome. The Bureau also seeks
                [[Page 56493]]
                comment on the scope of the proposed firewall and the exception. The
                Bureau specifically seeks comment on whether the firewall should apply
                to information about principal owners' ethnicity and race that is
                obtained via visual observation and/or surname. Finally, the Bureau
                generally requests comment on whether additional clarification is
                needed regarding the firewall requirement.
                Section 1002.109 Reporting of Data to the Bureau
                 Proposed Sec. 1002.109 would address several aspects of financial
                institutions' obligations to report 1071 data to the Bureau. First,
                proposed Sec. 1002.109(a) would require 1071 data to be collected on a
                calendar year basis and reported to the Bureau by June 1 of the
                following year, and would address several related issues. Second,
                proposed Sec. 1002.109(b) would detail the information that financial
                institutions must provide about themselves when reporting 1071 data to
                the Bureau. Finally, proposed Sec. 1002.109(c) would address technical
                instructions for submitting data to the Bureau.
                 The Bureau is proposing Sec. 1002.109 to implement ECOA section
                704B(f)(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. 1002.109(b) pursuant to 704B(e)(2)(H), which requires
                financial institutions to compile and maintain as part of their 1071
                data any additional data that the Bureau determines would aid in
                fulfilling the purposes of section 1071.
                109(a) Reporting to the Bureau
                109(a)(1) Annual Reporting
                Background
                 ECOA section 704B(f)(1) provides that ``[t]he data required to be
                compiled and maintained under [section 1071] by any financial
                institution shall be submitted annually to the Bureau.''
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated it was considering
                proposing that financial institutions collect 1071 data on a calendar
                year basis, and that financial institutions report 1071 data to the
                Bureau by a specified time after the end of each calendar year.\714\
                ---------------------------------------------------------------------------
                 \714\ SBREFA Outline at 39-40.
                ---------------------------------------------------------------------------
                 SERs and other stakeholders responded to various aspects of the
                Bureau's proposals under consideration in the SBREFA Outline on
                reporting 1071 data to the Bureau, including reporting frequency,
                reporting period, and submission date.\715\
                ---------------------------------------------------------------------------
                 \715\ The SER feedback in this section-by-section analysis can
                be found in the SBREFA Panel Report at 34.
                ---------------------------------------------------------------------------
                 Regarding reporting frequency, stakeholder comments were split. One
                SER suggested that data reporting be done on a calendar year basis, to
                avoid half-year measurements. Some other stakeholders--including
                several industry and trade association stakeholders, and a community
                group--also supported reporting no more or less frequently than once a
                year. Other stakeholders supported reporting on a more frequent basis
                than annually. In that latter group, another SER requested ongoing data
                reporting, arguing that more frequent reporting is less burdensome by
                permitting financial institutions to submit data as applications are
                received or loans are made. Three stakeholders (a community group, a
                think tank, and a community development lender trade association) also
                supported reporting more frequently than annually, especially for
                larger financial institutions, arguing that technology enables near
                real-time reporting.
                 Regarding the reporting period and submission date, several trade
                associations supported collecting data on a calendar year basis. A
                community group suggested an alternative to calendar-year reporting,
                specifically a one-year collection period starting on July 1 and ending
                on June 30 the next year. The group argued that this alternative
                schedule would help financial institutions avoid overlapping
                obligations with the calendar year data collection schedule for HMDA. A
                SER cautioned against aligning the annual reporting dates for section
                1071 with the reporting dates for HMDA, noting that reporting for both
                regimes at the same time could strain resources; other stakeholders
                echoed this view. Other stakeholders requested that the Bureau
                coordinate reporting dates with other Federal agencies, including those
                responsible for collecting data from CDFI Fund participants and banks
                subject to CRA reporting.
                 Regarding reporting 1071 data to the Bureau, several SERs noted
                that they already report much of the data that a 1071 rule would seem
                likely to require to the Treasury Department's CDFI Fund. One SER
                requested that the Bureau coordinate with the CDFI Fund on consistency
                of definitions, types of data collection, and timing of reporting, and
                that the agencies should consider streamlining reporting requirements
                through data sharing.
                 The SBREFA Panel recommended, regarding this issue as well as other
                recordkeeping and reporting issues addressed in the SBREFA Outline,
                that the Bureau seek comment on these aspects of a 1071 rule, and how
                best to implement them in a manner that minimizes cost and burden to
                small financial institutions.\716\
                ---------------------------------------------------------------------------
                 \716\ Id. at 47.
                ---------------------------------------------------------------------------
                Proposed Rule
                 The Bureau is proposing, in Sec. 1002.109(a)(1)(i), to require
                that by June 1 following the calendar year for which data are collected
                and maintained as required by proposed Sec. 1002.107, a covered
                financial institution shall submit its small business lending
                application register in the format prescribed by the Bureau. This
                approach to reporting frequency and reporting period is consistent with
                both the annual submission schedule specified in the statute as well as
                with the approach under consideration at SBREFA.
                 Regarding reporting frequency, while several stakeholders and one
                SER advocated for more frequent reporting (especially via application
                programming interface (API)), annual reporting is consistent with what
                ECOA section 704B(f)(1) provides and with HMDA for most filers.\717\
                The Bureau is concerned that requiring more frequent reporting for 1071
                data could be unduly onerous for financial institutions, especially
                small financial institutions and those with lower application volumes.
                ---------------------------------------------------------------------------
                 \717\ Some financial institutions with over 60,000 covered loans
                and applications must file HMDA data on a quarterly basis. 12 CFR
                1003.5(a)(ii).
                ---------------------------------------------------------------------------
                 Further, the Bureau is not proposing that financial institutions
                (small or otherwise) be permitted to submit their 1071 data on a real-
                time basis. The Bureau believes that this would add complexity to the
                Bureau reporting system. The Bureau is concerned that this approach
                could result in financial institutions treating the Bureau as their
                official recordkeeping system for their 1071 data. Financial
                institutions that were required to update or correct their data as a
                result of an audit, examination, or compliance review would need to
                make such changes within the Bureau's system, requiring the Bureau to
                develop an infrastructure that not only accepts real-time submissions,
                but also real-time corrections to prior real-time submissions.
                Nonetheless, the Bureau is continuing to explore ways it might
                facilitate or streamline reporting, particularly for small financial
                [[Page 56494]]
                institutions. See the section-by-section analysis of proposed Sec.
                1002.109(c) below for additional information.
                 Regarding the reporting period, the Bureau believes there are
                advantages to having data collected and reported on a calendar year
                basis. Calendar year reporting may facilitate other aspects of the rule
                that depend on data that is typically recorded on a calendar year
                basis. For instance, other parts of the rule look to annual data, such
                as proposed Sec. 1002.105(b), which would use a financial
                institution's loan volumes over the prior two calendar years to
                determine coverage. Further, the Bureau understands that financial
                institutions would generally prefer to have such data collections occur
                on a calendar year basis because such an approach would be generally
                consistent with their operations. The Bureau is concerned that
                requiring an annual reporting period other than the calendar year--such
                as July 1 to June 30--could result in additional challenges for
                financial institutions in complying with the rule, which could in turn
                make errors in collecting and reporting data to the Bureau more likely.
                 As discussed in more detail below in the section-by-section
                analysis of proposed Sec. 1002.114(b) below, the Bureau is considering
                whether to require or permit the initial collection of data under the
                eventual 1071 rule to begin, following an appropriate implementation
                period, at some point during the year rather than on January 1. For
                example, if the compliance date were on July 1, 2024, the Bureau would
                permit or require all financial institutions to collect and report data
                pursuant to proposed Sec. 1002.109(a) for the period July 1 to
                December 31, 2024. After this initial partial collection year,
                financial institutions would collect data on a calendar year basis.
                 Regarding the proposed submission date, several stakeholders
                (including community groups) requested a March 1 submission deadline on
                the grounds that financial institutions comply with a March 1 deadline
                for HMDA despite its relative complexity compared to 1071. The Bureau
                is proposing a June 1 submission deadline to give additional time for
                the compliance staff of financial institutions to dedicate time and
                resources focused on preparing a small business lending application
                register, after meeting other reporting obligations with earlier
                deadlines, such as under HMDA or CRA. This may be especially important
                for smaller financial institutions that will rely on the same staff to
                comply with other data reporting regimes and this 1071 rule.
                 Proposed Sec. 1002.109(a)(1)(ii) would require that an authorized
                representative of the covered financial institution with knowledge of
                the data submitted certify to the accuracy and completeness of data
                submitted pursuant to proposed Sec. 1005.109(a). A similar provision
                exists in Regulation C (Sec. 1003.5(a)(i)), and the Bureau believes it
                would be appropriate to adopt it here as well. Based on the Bureau's
                experience with HMDA and Regulation C, the Bureau believes that having
                a specific person responsible for certifying to the accuracy and
                completeness of data is likely to lead to financial institutions
                providing better quality data.
                 Proposed Sec. 1002.109(a)(1)(iii) would clarify that when the last
                day for submission of data prescribed under proposed Sec.
                1002.109(a)(1) falls on a date that is not a business day, a submission
                is considered timely if it is submitted no later than the next business
                day.
                 The Bureau seeks comment on its proposed approach to the aspects of
                reporting addressed in proposed Sec. 1002.109(a), including that the
                reporting frequency be annual, that the reporting period be the
                calendar year, and that the submission date be June 1 of the next
                calendar year. In particular, the Bureau seeks comment with respect to
                proposed Sec. 1002.109(a)(1)(i) on whether requiring the submission of
                small business lending application registers by June 1 might give rise
                to complications for any persons or entities relying on data from the
                registers for other purposes, such as Federal regulators scheduling
                examinations.
                109(a)(2) Reporting by Subsidiaries
                 ECOA section 704B(f)(1) states that ``any'' financial institution
                obligated to report 1071 data to the Bureau must do so annually; the
                statute does not expressly address financial institutions that are
                themselves subsidiaries of other financial institutions. In the SBREFA
                Outline, the Bureau did not address this issue for section 1071
                reporting.
                 Proposed Sec. 1002.109(a)(2) would state that a covered financial
                institution that is a subsidiary of another covered financial
                institution shall complete a separate small business lending
                application register. The subsidiary shall submit its small business
                lending application register, directly or through its parent, to the
                Bureau. Proposed comment 109(a)(2)-1 would explain that a covered
                financial institution is considered a subsidiary of another covered
                financial institution for purposes of reporting data pursuant to
                proposed Sec. 1002.109 if more than 50 percent of the ownership or
                control of the first covered financial institution is held by the
                second covered financial institution. This proposed provision mirrors
                one that exists for HMDA reporting under Regulation C in Sec.
                1003.5(a)(2). The Bureau believes that this proposed provision would
                help facilitate compliance with the 1071 rule by permitting parent
                financial institutions to coordinate the reporting of all their
                subsidiaries' small business lending data together.
                 The Bureau seeks comment on this aspect of its proposal.
                Additionally, the Bureau seeks comment on proposed Sec. 1002.109(a)(2)
                in light of proposed Sec. 1002.105(b), which 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. The Bureau seeks comment on whether
                this provision may risk creating ambiguity with respect to compliance
                and whether additional safeguards may be required to dissuade financial
                institutions from creating subsidiaries for the sole purpose of
                avoiding the collection and reporting or section 1071 data. The Bureau
                also seeks comment on all other aspects of this proposal.
                109(a)(3) Reporting Obligations Where Multiple Financial Institutions
                Are Involved in a Covered Credit Transaction
                 Section 1071's requirement to collect and report data for any
                ``application to a financial institution for credit'' could be read as
                applying to more than one financial institution when an intermediary
                provides the application to another institution that takes final action
                on the application. It might also apply in cases where one application
                is simultaneously sent to multiple financial institutions. This broad
                reading may serve a useful function, such as comprehensive reporting by
                all financial institutions involved in a small business lending
                transaction, but could also generate duplicative compliance costs for
                financial institutions and potentially detract from the quality of
                reported 1071 data, increasing the risk that certain applications are
                reported multiple times.
                 At SBREFA, in considering ECOA section 704B(f)(1), the Bureau
                stated that it was considering proposing that in the situation where
                more than one party is involved on the lender side of a single small
                business loan or application, section 1071's data collection and
                reporting requirements would be limited in the same manner as in
                [[Page 56495]]
                Regulation C. For HMDA, Regulation C provides (in Sec. 1003.4(a) and
                comment 4(a)-3) that if more than one financial institution was
                involved in the origination of a covered loan, the financial
                institution that made the final credit decision approving the
                application before closing or account opening shall report the covered
                loan as an origination. If there was an origination, then the financial
                institution making the final credit decision approving the application
                would be responsible for reporting (even if the financial institution
                used credit standards set by another party). If more than one financial
                institution approved a loan, and the loan was purchased after closing
                by one of the financial institutions approving the loan, the purchaser
                (such as an assignee) would report the loan. If there was no
                origination and multiple financial institutions received the same
                application, then any financial institution that made a credit decision
                would be responsible for reporting (even if other financial institution
                also reported on the same potential non-originated application).
                 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. 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. Another CDFI SER
                explained that the institution occasionally participates in pooled loan
                purchases and recommended that the Bureau ensure that reporting
                obligations for such pooled loans are clear.\718\ Other SERs expressed
                concern in adopting the Bureau's approach in Regulation C, noting the
                differences between small business and residential loan products, and
                advocated for simpler approaches. The SBREFA Panel did not provide a
                relevant recommendation.
                ---------------------------------------------------------------------------
                 \718\ See the section-by-section analysis of proposed Sec.
                1002.104(b) above for further discussion of the proposed treatment
                of pooled loans.
                ---------------------------------------------------------------------------
                 Comments from other stakeholders included several voicing support
                for a HMDA-like approach, praising the Bureau's consistent approach and
                interest in limiting duplicative information. However, several comments
                advocated against the HMDA approach, generally by proffering other
                ideas rather than criticizing the rules or outcomes of the HMDA
                approach. Alternative suggestions varied, but included suggesting that
                data collection and reporting should be required only for the company
                most closely interacting with the loan applicant; if a financial
                institution receives a covered application, then the application should
                be subject to reporting, regardless of outcome; the financial
                institution that funded (or would have funded) the loan should be
                required to collect and report; and the financial institution that
                conducts the underwriting and determines whether the small business
                credit applicant qualifies for credit using its underwriting criteria
                should be required to report and collect.
                 Proposed Sec. 1002.109(a)(3) would provide that only one covered
                financial institution shall report each covered credit transaction as
                an origination, and that if more than one financial institution was
                involved in an origination, the financial institution that made the
                final credit decision approving the application shall report the loan
                as an origination, if the financial institution is a covered financial
                institution.
                 Proposed Sec. 1002.109(a)(3) would further provide that if there
                was no origination, then any covered financial institution that made a
                credit decision shall report the application. The Bureau is aware that
                under certain lending models as they operate today, financial
                institutions may not always be aware of whether another financial
                institution originated a credit transaction. The Bureau believes that
                information on whether there was an origination should generally be
                available, or that lending models can be adjusted to provide this
                information at low cost. For example, if an applicant applies to
                Financial Institutions A and B, and then withdraws an application with
                Financial Institution A, then Financial Institution A should be able to
                ascertain whether the applicant obtained credit from Financial
                Institution B.
                 Proposed comment 109(a)(3)-1 would provide general guidance on how
                to report originations and applications involving more than one
                institution. In short, if more than one financial institution was
                involved in the origination of a covered credit transaction, the
                financial institution that made the final credit decision approving the
                application shall report the covered credit transaction as an
                origination. Proposed comment 109(a)(3)-2 would offer examples
                illustrating how a financial institution should report a particular
                application or originated covered credit transaction. Proposed comment
                109(a)(3)-3 would explain that if a covered financial institution made
                a credit decision on a covered application through the actions of an
                agent, the financial institution reports the application, and provides
                an example. State law determines whether one party is the agent of
                another. While these proposed comments assume that all of the parties
                are covered financial institutions, the same principles and examples
                would apply if any of the parties is not a covered financial
                institution.
                 The Bureau seeks comment on this aspect of its proposal. In
                particular, the Bureau seeks comment with respect to proposed Sec.
                1002.109(a)(3) on whether, particularly in the case of applications
                that a financial institution is treating as withdrawn or denied, the
                financial institution can ascertain if a covered credit transaction was
                originated by another financial institution without logistical
                difficulty or significant compliance cost.
                109(b) Financial Institution Identifying Information
                 Beginning in 1989, Regulation C required financial institutions
                reporting HMDA data to use a discrete transmittal sheet to provide
                information on themselves separate from the loan/application registers
                used to submit HMDA data.\719\ The 2015 HMDA final rule replaced the
                transmittal sheet requirement with Regulation C Sec. 1003.5(a)(3),
                which requires that a financial institution reporting HMDA data to
                provide with its submission (i) its name; (ii) the calendar year the
                data submission covers; (iii) the name and contact information of a
                person who may be contacted with questions about the institution's
                submission; (iv) its appropriate Federal agency; (v) the total number
                of entries contained in the submission; (vi) its Federal Taxpayer
                Identification Number; and (vii) its Legal Entity Identifier
                (LEI).\720\ The Bureau and FFIEC publish information on financial
                institutions that report HMDA data in the HMDA Reporter Panel, which
                includes the required submission information, provided by financial
                institutions under Sec. 1003.5(a)(3), as well as other data derived
                from this information.\721\
                ---------------------------------------------------------------------------
                 \719\ See 54 FR 51356, 51361 (Dec. 15, 1989) (requiring
                financial institutions to use the transmittal sheet and loan/
                application register in appendix A).
                 \720\ 80 FR 66128, 66526 (Oct. 28, 2015) (deleting appendix A
                and relocating its substantive requirements to Sec. 1003.5(a)(3)).
                 \721\ See Fed. Fin. Insts. Examination Council, HMDA Reporter
                Panel, https://www.ffiec.gov/hmdarawdata/FORMATS/HMDAReporterPanel.pdf (last visited July 27, 2021).
                ---------------------------------------------------------------------------
                 The Bureau is proposing to collect information regarding financial
                institutions that report 1071 data, similar to the information required
                [[Page 56496]]
                under Regulation C. Specifically, proposed Sec. 1002.109(b) would
                require that a financial institution provide the following information
                about itself as part of its submission: (1) Its name; (2) its
                headquarters address; (3) the name and business contact information of
                a person who may be contacted with questions about the financial
                institution's submission; (4) its Federal prudential regulator, if
                applicable; (5) its Federal Taxpayer Identification Number; (6) its
                LEI; (7) its Research, Statistics, Supervision, and Discount
                identification (RSSD ID) number, if applicable; (8) its parent
                institution information, if applicable (including the name, LEI, and
                RSSD ID number of its immediate parent entity and top-holding parent
                entity, if applicable); (9) the type of financial institution, chosen
                from a list provided; and (10) whether the financial institution is
                voluntarily reporting 1071 data.
                 As discussed below, the Bureau believes it would be appropriate to
                require each of these pieces of information regarding financial
                institutions reporting 1071 data. As a practical matter, the Bureau
                expects that this information might be provided by a financial
                institution when it initially sets up an account with the Bureau's 1071
                data submission platform to allow it to file 1071 data as required by
                the rule. Thus, this information might exist in the Bureau's 1071 data
                submission system and be updated by the financial institution as
                needed.
                 As described in detail below, the Bureau believes that detailed
                information on the financial institutions reporting 1071 data is
                necessary to carry out, enforce, and compile data under section 1071,
                pursuant to ECOA section 704B(f)(1) and (g)(1), and would aid in
                fulfilling the purposes of section 1071, pursuant to 704B(e)(2)(H). To
                analyze 1071 data, the Bureau and other potential users of the data
                would need information on the financial institutions that are taking
                covered applications and making covered credit transactions. Fair
                lending analysis is based on a review of the decisions financial
                institutions make on applications. Similarly, an analysis of the
                business and community development needs of a given community is based
                on understanding the volume and geography of the lending activities of
                specific financial institutions.
                 With the possible exception of the LEI (in proposed Sec.
                1002.109(b)(6) and (8)(ii) and (v)) in certain circumstances, the
                Bureau believes that financial institutions already have all the
                information that would be required of them under proposed Sec.
                1002.109(b), and that being required to provide this information to the
                Bureau should not pose any particular difficulties or costs on
                financial institutions.
                 The Bureau seeks comment on its approach to collecting information
                on financial institutions, including each of the items listed in
                proposed Sec. 1002.109(b)(1) through (10) as well as whether the
                Bureau should require the reporting of any other information on
                financial institutions. Additional requests for comment specific to
                certain pieces of information are included below.
                Paragraph 109(b)(1)
                 During the SBREFA process, in the context of discussing privacy,
                some stakeholders expressed an aversion to the collection and
                publication of information on financial institutions. Some
                stakeholders, including SERs and some larger entities, commented that
                the Bureau should not publish the names of financial institutions
                reporting 1071 data, asserting that those financial institutions would
                face reputational risks. Some stakeholders even appeared to suggest
                that the Bureau not collect the names of financial institutions at all.
                 Proposed Sec. 1002.109(b)(1) would require a financial institution
                to provide its name. Regulation C (Sec. 1003.5(a)(2)(i)) requires
                financial institutions to provide their names on their transmittal
                sheets when filing HMDA data, and the Bureau believes that a similar
                requirement would be appropriate here.
                 The Bureau believes that collecting a financial institution's name
                (as well as all the other identifying information in proposed Sec.
                1002.109(b)) is necessary to carry out, enforce, and compile data under
                section 1071, and would aid in fulfilling the purposes of section 1071.
                For both of section 1071's statutory purposes, the identity of the
                financial institution taking covered applications and originating
                covered credit transactions is critical. Without knowing the financial
                institution's name, fair lending enforcement would not be possible.
                Analyzing business and community development needs is much improved
                when it is possible to identify which financial institutions are
                operating in specific geographic areas.
                 There are additional practical considerations. Examinations for
                compliance with section 1071 would be difficult, if not impossible,
                without the name of the financial institution associated with a
                specific small business lending application register. Further, it would
                be difficult for the Bureau to administer a website for 1071 data
                submissions without creating logins assigned to specific financial
                institutions. Finally, the Bureau is proposing in Sec. 1002.110(c)
                that financial institutions' statutory obligation to make 1071 data
                available to any member of the public, upon request, pursuant to ECOA
                section 704B(f)(2)(B) would be satisfied by the institutions' directing
                the public to the Bureau's website for this information. Without the
                financial institution's name (and other relevant identifying
                information), proposed Sec. 1002.110(c) would not satisfy this
                statutory requirement.
                Paragraph 109(b)(2)
                 Proposed Sec. 1002.109(b)(2) would require a financial institution
                to provide the physical address of its headquarters location. The
                headquarters address of a financial institution would provide
                geographic information that would aid in fulfilling the statutory
                purposes of section 1071, including, for instance, analyses of the
                connection between a financial institution's location and the business
                and community development needs where it operates. It will also help
                identify and differentiate financial institutions, particularly
                nondepository financial institutions, that have similar names.
                Paragraph 109(b)(3)
                 Proposed Sec. 1002.109(b)(3) would require a financial institution
                to provide the name and business contact information of a person who
                may be contacted with questions about the financial institution's 1071
                data submission. Regulation C includes a similar requirement in Sec.
                1003.5(a)(3)(iii), and the Bureau believes it would be appropriate to
                require such information here. In general, the Bureau has found, from
                its experience with HMDA and Regulation C, that requiring the name and
                business contact information of a person who may be contacted with
                questions generally facilitates communication in the event that follow-
                up on a submission is required.
                Paragraph 109(b)(4)
                 Proposed Sec. 1002.109(b)(4) would require a financial institution
                that is a depository institution to provide the name of its Federal
                prudential regulator, if applicable. Proposed comment 109(b)(4)-1 would
                explain how to determine which Federal prudential regulator (i.e., the
                OCC, the FDIC, the Board, or the NCUA) a financial institution should
                report. Proposed comment 109(b)(4)-2 would provide guidance on when a
                financial institution must report a new Federal prudential regulator,
                for instance, in the event of a merger or a change of charter.
                [[Page 56497]]
                 Regulation C includes a similar provision in Sec.
                1003.5(a)(3)(iv), requiring financial institutions to identify the
                appropriate Federal agency. In the Regulation C context, the purpose of
                this requirement is to identify the agency to which a financial
                institution must report its HMDA data--often the financial
                institution's Federal prudential regulator for depository institutions,
                and other agencies for nondepository institutions.\722\ Here, the
                Bureau believes a requirement to report a financial institution's
                Federal prudential regulator would be appropriate for different
                reasons. The reporting of a financial institution's Federal prudential
                regulator may enable analysts to more easily identify other information
                about a financial institution that its Federal prudential regulator may
                make publicly available, such as Call Report data; further, such
                additional data may be used to perform analyses of the characteristics
                of financial institution's 1071 data by regulator. Nondepository
                institutions generally do not have Federal prudential regulators and
                would not report one under this proposed requirement.
                ---------------------------------------------------------------------------
                 \722\ 12 U.S.C. 2803(h).
                ---------------------------------------------------------------------------
                Paragraph 109(b)(5)
                 Proposed Sec. 1002.109(b)(5) would require a financial institution
                to provide its Federal Taxpayer Identification Number (TIN). Proposed
                comment 109(b)(5)-1 would explain when a financial institution should
                report a new Federal TIN in the event that it obtains a new Federal TIN
                (for instance, because the financial institution merges with another
                financial institution and adopts the Federal TIN of the other financial
                institution).
                 Regulation C Sec. 1003.5(a)(3)(iv) requires financial institutions
                to report Federal TIN with their HMDA submissions, and the Bureau
                believes such a requirement would be appropriate here as well. A
                financial institution's Federal TIN may be used to identify other
                publicly available information on a financial institution, and combine
                that data with a financial institution's 1071 register to enhance the
                types of analysis that can be conducted to further the two statutory
                purposes of section 1071.
                Paragraph 109(b)(6)
                 Proposed Sec. 1002.109(b)(6) would require a financial institution
                to provide its LEI. Proposed comment 109(b)(6)-1 would explain what an
                LEI is and would make clear that financial institutions that do not
                currently have an LEI must obtain one, and that financial institutions
                have an ongoing obligation to maintain an LEI in order to satisfy
                proposed Sec. 1002.109(b)(6).
                 An LEI is a unique, 20-digit identifier issued by an entity
                endorsed or otherwise governed by the Global LEI Foundation. Regulation
                C requires financial institutions to obtain and use an LEI, which
                facilitates the analysis of HMDA data and aids in the recognition of
                patterns by more precisely identifying financial institutions and
                affiliated companies.\723\ The LEI also helps financial institutions
                that report HMDA data generate the universal loan identifier used to
                identify application or application-level records in Regulation C.
                Similarly, in the 1071 context, a financial institution's LEI would
                also likely facilitate analyses of 1071 data,\724\ by helping the
                Bureau and other stakeholders better understand a financial
                institution's corporate structure. The Bureau would also require, in
                proposed Sec. 1002.107(a)(1), financial institutions to use their LEIs
                to create unique identifiers for covered applications. The Bureau
                believes this, in turn, would result in more sophisticated and useful
                analyses of the financial institution's 1071 data.
                ---------------------------------------------------------------------------
                 \723\ 80 FR 66128, 66248 (Oct. 28, 2015) (noting that, despite
                the cost, the Bureau believed that the benefit of all HMDA reporters
                using an LEI justified the associated costs by improving the ability
                to identify financial institution reporting the data and link it to
                its corporate family).
                 \724\ Id. (``By facilitating identification, this requirement
                will help data users achieve HMDA's objectives of identifying
                whether financial institutions are serving the housing needs of
                their communities, as well as identifying possible discriminatory
                lending patterns.'').
                ---------------------------------------------------------------------------
                Paragraph 109(b)(7)
                 Proposed Sec. 1002.109(b)(7) would require a financial institution
                to report its RSSD ID number, if applicable. An RSSD ID is a unique
                identifying number assigned to institutions, including main offices and
                branches, by the Federal Reserve System. All depository institutions
                know and regularly report their RSSD ID numbers on FFIEC regulatory
                forms. RSSD ID would help users of the 1071 data to link the data for a
                particular financial institution to other regulatory data, including
                the connections between a particular financial institution with others.
                The Bureau believes that this additional information would result in
                more sophisticated and useful analyses of the financial institution's
                1071 data.
                 Proposed comment 109(b)(7)-1 would explain what a RSSD ID number is
                and how financial institutions that have one might find it. Financial
                institutions that do not have RSSD IDs, typically nondepository
                institutions, would not be required to obtain them, and would report
                ``not applicable'' in that field.
                Paragraph 109(b)(8)
                 Proposed Sec. 1002.109(b)(8) would require a financial institution
                to provide certain information on its parent entities, if applicable.
                This information would include the name, the LEI (if available), and
                the RSSD ID (if available) of the financial institution's immediate
                parent entity and the financial institution's top-holding parent
                entity.
                 Proposed comments 109(b)(8)-1 and -2 would provide guidance on how
                to identify a financial institution's immediate parent entity and a
                financial institution's top-holding parent entity. Proposed comment
                109(b)(8)-3 would explain that a financial institution would report its
                parent entities' LEIs if they have them, but that no parent entity
                would be required to obtain an LEI if it did not already have one.
                Proposed comment 109(b)(8)-4 would likewise explain that a financial
                institution would report its parent entities' RSSD ID numbers if they
                had them.
                 The Bureau believes that the collection of information on a
                financial institution's structure would further both of the statutory
                purposes of section 1071. Data on a financial institution's
                organizational structure that is self-reported would be more accurate
                than generating such information from publicly available sources.\725\
                ---------------------------------------------------------------------------
                 \725\ Currently, the Bureau, on behalf of the FFIEC and HUD,
                generates and publishes information on filers including parent
                company and top holder information. See Fed. Fin. Insts. Examination
                Council, Public Panel--Data Fields with Values and Definitions,
                https://ffiec.cfpb.gov/documentation/2021/panel-data-fields/ (last
                visited July 27, 2021).
                 From 1989 to 1998, Regulation C required financial institutions
                to report their parent entity information on transmittal sheets. 54
                FR 51356, 51361, 51368 (Dec. 15, 1989) (adding the transmittal sheet
                requirement, including parent institution information, to appendix A
                to Regulation C); 63 FR 52140, 52141 (Sept. 30, 1998) (stating that
                the Board believed that the availability of information from the
                FFIEC website makes the continuation of the requirement for parent
                company information on the transmittal sheet unnecessary). In 2002,
                Regulation C again required financial institutions to report parent
                information on transmittal sheets on the grounds that data users
                asserted the importance of having the parent institution information
                associated with the HMDA data itself, rather than in a separate
                database provided by the National Information Center. 67 FR 7221,
                7232 (Feb. 15, 2002).
                 In the 2014 HMDA NPRM, the Bureau proposed to continue requiring
                that financial institutions identify their parent companies. The
                Bureau stated that because information about parent companies was
                not yet available through the LEI, the Bureau believed it was
                necessary to maintain this requirement to ensure that financial
                institutions' submissions can be linked with those of their
                corporate parents. 79 FR 51731, 51861 (Aug. 29, 2014). However,
                required reporting of parent company information stopped under the
                2015 HMDA final rule on the grounds that once the LEI is fully
                implemented, parent entity information was expected to become
                available. 80 FR 66128, 66248 (Oct. 28, 2015) (citing Fin. Stability
                Bd., LEI Implementation Grp., Fourth Progress Notes on the Global
                LEI Initiative, at 4 (Dec. 11, 2012), http://www.financialstabilityboard.org/wp-content/uploads/r_121211.pdf?page_moved=1)(noting that the LEI Implementation Group
                is developing proposals for additional reference data on the direct
                and ultimate parent(s) of legal entities and on relationship data
                more generally). However, the Bureau has subsequently encountered
                difficulties using LEI to obtain parent company information, and
                thus is proposing here to require that it be provided directly by
                financial institutions.
                ---------------------------------------------------------------------------
                [[Page 56498]]
                 Better structural information would, for instance, improve the
                accuracy of peer analyses, which would facilitate fair lending
                enforcement. Further analyzing trends over time would be useful for
                identifying institutions that may give rise to fair lending risk. Given
                structural changes to institutions over time, information that enables
                the identification of institutions consistently and accurately over
                time is important to this trend analysis.
                 In addition, the Bureau believes that information on a financial
                institution's structure would advance the business and community
                development purpose of section 1071 by facilitating the analysis of
                whether and how corporate structure impacts how a financial institution
                provides access to credit to small businesses. In particular, this
                structural information could be used to understand how regulation in
                one part of a corporate structure impacts unregulated entities within
                the same corporate group.
                 Proposed Sec. 1002.109(b)(8) would result in more accurate and
                comprehensive corporate structure information by requiring financial
                institutions to provide not only the name of one parent entity, but the
                immediate parent entity of the financial institution as well as the
                top-holding parent of the financial institution (for some financial
                institutions, this would be a bank holding company). For the reasons
                set out in the section-by-section analyses of proposed Sec.
                1002.109(b)(6) and (7), the reporting of LEI and RSSD ID of parent
                entities would improve the ability of regulators and other stakeholders
                to map out more precisely and fully the often complex networks of a
                financial institution's corporate structure. This more detailed and
                accurate structural data, in turn, may be used to perform more
                sophisticated and useful analyses of the financial institution's 1071
                data. In addition, this information will help the Bureau confirm
                whether data are appropriately being reported by financial institutions
                on behalf of their subsidiaries pursuant to proposed Sec.
                1002.109(a)(2).
                 With respect to proposed Sec. 1002.109(b)(8), the Bureau seeks
                comment on whether it should require any other parent entity
                information to be provided by financial institutions reporting 1071
                data.
                Paragraph 109(b)(9)
                 Proposed Sec. 1002.109(b)(9) would require a financial institution
                to report the type of financial institution it is, selecting the
                applicable type or types of institution from a list in proposed comment
                109(b)(9)-1. The comment would also explain that a financial
                institution shall select all applicable types. The list provided in the
                proposed comment includes: (i) Bank or savings association, (ii)
                minority depository institution, (iii) credit union, (iv) nondepository
                institution, (v) CDFI, (vi) other nonprofit financial institution,
                (vii) Farm Credit System institution, (viii) government lender, (ix)
                commercial finance company, (x) equipment finance company, (xi)
                industrial loan company, (xii) fintech, and (xiii) other. Proposed
                comment 109(b)(9)-2 would explain that a financial institution reports
                the type of financial institution as ``other'' where none of the
                enumerated types of financial institution appropriately describe the
                applicable type of financial institution, and the institution reports
                the type of financial institution as free-form text.
                 The Bureau believes that information regarding the type of
                financial institution reporting 1071 data would greatly assist in the
                analysis conducted by the Bureau and other users of 1071 data.
                Information providing further details on types of financial
                institutions would help advance the statutory purposes of section 1071;
                fair lending analysts might use this information on the financial
                institution type (for instance, depository institution compared to
                nondepository institutions) as a control variable for their analyses.
                The inclusion of this information may also assist in an assessment of
                the business and community development needs of an area as it may
                provide analysts a means of determining what types of financial
                institutions serve certain geographic areas.
                 In addition, the Bureau believes that this information, combined
                with the parent entity information required by proposed Sec.
                1002.109(b)(8), would offer more accurate and granular data on
                nondepository institutions within the same corporate group as
                depository institutions. Currently, the National Information Center
                database, which contains information on the structure of corporate
                groups that contain banks and other financial institutions, provides
                little information on nondepository institutions. As set out in the
                section-by-section analysis of proposed Sec. 1002.109(b)(8) above,
                information on corporate structure that financial institutions self-
                report could fill in reporting gaps, including more specific
                information on financial institution types.
                 With respect to proposed Sec. 1002.109(b)(9), the Bureau seeks
                comment on whether it should consider removing, modifying, or adding
                any types of financial institutions to the list in proposed comment
                109(b)(9)-1, including in order to manage unique privacy interests
                (such as, for example, whether a category for captive finance companies
                that lend to applicants that share the same branding should be included
                on the list). The Bureau further seeks comment on whether it should
                consider defining any of the types of financial institutions in the
                proposed list, in particular whether and how to define the term
                ``fintech.''
                Paragraph 109(b)(10)
                 Proposed Sec. 1002.109(b)(10) would require a financial
                institution to indicate whether it is not a covered financial
                institution under proposed Sec. 1002.105(a) and is thus voluntarily
                reporting covered applications.
                 The Bureau believes it is important to be able to specifically
                identify these institutions' transactions in the data set. If reporting
                were restricted to only financial institutions required to report, the
                1071 data would accurately reflect the overall population of financial
                institutions subject to 1071. However, institutions that do not meet
                the rule's loan-volume thresholds in proposed Sec. 1002.105(b) may
                choose to voluntarily report 1071 data pursuant to proposed Sec.
                1002.5(a)(4)(vii) through (ix). Those institutions that voluntarily
                report data may not be representative of all potential voluntary
                reporters and may differ from required reporters. Without a specific
                designation, it may not be possible to distinguish an institution
                voluntarily reporting data after a single year of exceeding the loan-
                volume threshold from an institution reporting because it has already
                exceeded the loan-volume threshold in two consecutive years. The Bureau
                believes that users of 1071 data would benefit from being able to use
                this information as a control variable, resulting in better fair
                lending as well as business and community development analyses, to
                account for certain differences that may exist as between required and
                voluntary reporters.
                [[Page 56499]]
                109(c) Procedures for the Submission of Data to the Bureau
                 ECOA section 704B(g)(1) authorizes the Bureau to prescribe rules
                and issue such guidance as may be necessary to carry out, enforce, and
                compile data pursuant to section 1071. Section 704B(g)(3) provides for
                the Bureau to issue guidance to facilitate compliance with the
                requirements of section 1071.
                 The SBREFA Panel recommended that the Bureau seek comment on the
                recordkeeping and reporting issues addressed in the SBREFA
                Outline,\726\ including how best to implement them in a manner that
                minimizes cost and burden to small financial institutions. The Panel
                also recommended that the Bureau explore ways to streamline reporting
                for small financial institutions.
                ---------------------------------------------------------------------------
                 \726\ SBREFA Panel Report at 47.
                ---------------------------------------------------------------------------
                 Proposed Sec. 1002.109(c) would direct financial institutions to a
                publicly available website containing the Bureau's Filing Instructions
                Guide, which would set out technical instructions for the submission of
                data to the Bureau pursuant to proposed Sec. 1002.109. Regulation C
                Sec. 1003.5(a)(5) contains a comparable provision, which directs users
                to a Bureau website that sets out instructions for the submission of
                HMDA data, and the Bureau believes a similar approach would be
                appropriate here.
                 The Bureau intends to develop a system to receive, process, and
                publish the data collected pursuant to section 1071 and proposed
                subpart B. In doing so, the Bureau will benefit from what it learned in
                its multiyear effort in developing the HMDA Platform, through which
                entities file data as required under HMDA and Regulation C. The HMDA
                Platform satisfies regulatory requirements with an entirely web-based,
                open source system,\727\ using a container-based microservices approach
                \728\ and modern cloud architectures. It was designed to be
                continuously improved to incorporate evolving technologies and better
                serve HMDA data users.\729\ Publication of the HMDA data is designed to
                meet user needs and includes, for example, a Data Browser to filter and
                download datasets and explore the data using an interactive map. As it
                did in developing the HMDA Platform, the Bureau's work in developing
                the section 1071 data submission system will focus on satisfying all
                legal requirements, promoting data accuracy, and reducing burden. Also
                as with HMDA, the Bureau anticipates providing a Filing Instructions
                Guide and related materials for financial institutions.
                ---------------------------------------------------------------------------
                 \727\ See GitHub, CFPB/HMDA Platform, https://github.com/cfpb/hmda-platform (last visited July 22, 2021).
                 \728\ See DockerHub, HMDA, https://hub.docker.com/u/hmda (last
                visited July 22, 2021).
                 \729\ On March 22-26, 2021, the Bureau hosted a HMDA Virtual
                Tech Sprint to explore other potential innovations related to HMDA
                data submission and publication. See https://www.consumerfinance.gov/rules-policy/innovation/cfpb-tech-sprints/home-mortgage-disclosure-act-tech-sprint/.
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on this aspect of the proposal, including
                the provision of technical instructions for data submission via a
                Bureau website and how best to implement the provisions of this section
                in a manner that minimizes cost and burden particularly to small
                financial institutions while implementing all statutory obligations.
                The Bureau also seeks comment on ways it could streamline reporting for
                small financial institutions.
                Other Reporting Issues
                 Regulation C Sec. 1003.5(a)(1)(i) provides that a financial
                institution shall submit its annual loan/application register in
                electronic format to the appropriate Federal agency. Regulation C does
                not provide for the submission of HMDA data by unaffiliated third
                parties directly on behalf of financial institutions in the way that a
                parent institution may submit HMDA data on behalf of its subsidiary
                under Sec. 1003.5(a)(2) and comment 5(a)-3. The Bureau understands
                from financial institutions that report HMDA data to the Bureau that
                most institutions use third party software vendors in some way to help
                them prepare or submit their loan/application registers to the Bureau.
                 The Bureau seeks comment on whether it should permit third parties
                (such as financial software vendors) to submit to the Bureau a small
                business lending application register on behalf of a financial
                institution, including whether financial institutions should be
                required to designate third parties authorized to submit registers on
                their behalf.
                Section 1002.110 Publication of Data
                 Proposed Sec. 1002.110 would address several issues surrounding
                publication of section 1071 data. First, proposed Sec. 1002.110(a)
                would address annual publication of application-level data on the
                Bureau's website, subject to deletions or modifications based on the
                Bureau's consideration of privacy interests. Second, 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 as the Bureau deems appropriate.
                Third, 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. Finally, proposed Sec. 1002.110(d) would provide when a
                covered financial institution shall make the notice required by
                proposed Sec. 1002.110(c) available to the public and how long it
                shall maintain the notice on its website.
                 The Bureau is proposing Sec. 1002.110 to implement ECOA section
                704B(f)(2)(B) and (C), which require the Bureau to adopt regulations
                addressing the form and manner that 1071 data are made available to the
                public, 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. 1002.110(b) pursuant to 704B(f)(3), which permits the
                Bureau, at its discretion, to compile and aggregate 1071 data, and to
                publish such aggregate data.
                110(a) Publication of Small Business Lending Application Registers and
                Associated Financial Institution Information
                 ECOA section 704B(f)(2)(C) requires that the Bureau annually make
                the 1071 data it receives from financial institutions available to the
                public in a such form and in such manner as the Bureau determines by
                regulation. The Bureau addressed this issue in the SBREFA Outline as
                part of its discussion regarding privacy considerations; \730\ SER and
                other stakeholder comments regarding privacy issues are addressed in
                part VI below. Proposed Sec. 1002.110(a) would state that the Bureau
                shall make available to the public generally the data reported to it by
                financial institutions pursuant to proposed Sec. 1002.109, subject to
                deletions or modifications made by the Bureau, at its discretion, if
                the Bureau determines that the deletion or modification of the data
                would advance a privacy interest. (The Bureau is proposing to make such
                determinations using a balancing test, as discussed in detail in part
                VI below.) The Bureau shall make such data available on an annual
                basis, by publishing it on the Bureau's website.
                ---------------------------------------------------------------------------
                 \730\ SBREFA Outline at 40-41.
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed approach to implementing
                ECOA section 704B(f)(2)(C).
                [[Page 56500]]
                110(b) Publication of Aggregate Data
                 ECOA section 704B(f)(3) provides that the Bureau may, at its
                discretion ``compile and aggregate data collected under this section
                for its own use'' and ``make public such compilations of aggregate
                data.'' The Bureau did not address this issue at SBREFA.
                 Proposed Sec. 1002.110(b) would state that the Bureau may, at its
                discretion, compile and aggregate data submitted by financial
                institutions pursuant to proposed Sec. 1002.109, and make any
                compilations or aggregations of such data publicly available as the
                Bureau deems appropriate. The Bureau believes that publication of
                certain such compilations and aggregations may provide useful data to
                the public to supplement the Bureau's publication of application-level
                data pursuant to proposed Sec. 1002.110(a). This is especially true of
                application-level data fields that the Bureau may choose, using its
                proposed balancing test (described in parts VI.C.1 and .2 below) to
                modify or delete before publication pursuant to proposed Sec.
                1002.110(a).
                 The Bureau seeks comment on this aspect of its proposal.
                110(c) Statement of Financial Institution's Small Business Lending Data
                Available on the Bureau's Website and 110(d) Availability of Statements
                Background
                 ECOA section 704B(f)(2)(B) requires that the data compiled and
                maintained by financial institutions shall be ``made available to any
                member of the public, upon request, in the form required under
                regulations prescribed by the Bureau.''
                SBREFA Proposal Under Consideration and Feedback Received
                 The Bureau stated in the SBREFA Outline that it was considering
                proposing an approach in which financial institutions could satisfy
                this requirement by referring the public to the Bureau's website where
                1071 data would be available.\731\ Under this approach, the 1071 data
                would be available with any modifications or deletions required based
                on the Bureau's application of the balancing test described in part VI
                below. The Bureau also stated that it considered requiring financial
                institutions to make their own data available to the public directly,
                upon request. However, the Bureau was concerned that this approach
                could involve greater burden for financial institutions, lead to
                privacy risks resulting from errors by individual financial
                institutions implementing any modifications or deletions required by
                the Bureau, and be less efficient overall.
                ---------------------------------------------------------------------------
                 \731\ Id. at 41-42.
                ---------------------------------------------------------------------------
                 One SER and several industry stakeholders expressed strong support
                for the Bureau's proposal under consideration that the public be
                directed to access 1071 data via the Bureau's website, rather than
                requiring financial institutions to provide the data themselves upon
                request.\732\ These stakeholders expressed concern that a requirement
                that financial institutions themselves provide 1071 data to the public
                upon request would be burdensome, adding complexity to the process,
                making errors more likely, and giving rise to data privacy risks. One
                community group asserted that the Bureau should require financial
                institutions to provide 1071 data within 30 days of a request from the
                public and, absent this, that the Bureau should make application-level
                1071 data available to the public quarterly rather than annually.
                ---------------------------------------------------------------------------
                 \732\ SBREFA Panel Report at 34.
                ---------------------------------------------------------------------------
                 The SBREFA Panel recommended, regarding this issue as well as other
                recordkeeping and reporting issues addressed in the SBREFA Outline,
                that the Bureau seek comment on these aspects of a 1071 rule, and how
                best to implement them in a manner that minimizes cost and burden to
                small financial institutions.\733\
                ---------------------------------------------------------------------------
                 \733\ Id. at 47.
                ---------------------------------------------------------------------------
                Proposed Rule
                 Proposed Sec. 1002.110(c) would require that a covered financial
                institution make available to the public on its website, or otherwise
                upon request, a statement that the covered financial institution's
                small business lending application register, as modified by the Bureau
                pursuant to proposed Sec. 1002.110(a), is or will be available on the
                Bureau's website. The Bureau is proposing this approach, which is
                consistent with its approach under consideration at SBREFA, for the
                reasons discussed above, including that this approach would reduce
                potential burdens on financial institutions associated with publishing
                modified data, would reduce privacy risks resulting from errors by
                individual financial institutions implementing any modifications or
                deletions required by the Bureau, and would be more efficient overall.
                Regulation C (Sec. 1003.5(c)(1)) implements a similar statutory
                requirement regarding the form of data reporting and requires financial
                institutions to direct any public requests for HMDA data they receive
                to the Bureau; \734\ the Bureau believes that a similar provision would
                be appropriate here to maintain continuity across reporting regimes,
                and because the Bureau believes that this provision would help ensure
                consistent implementation of any modification or deletion decisions
                that the Bureau determines would advance a privacy interest.
                ---------------------------------------------------------------------------
                 \734\ 12 U.S.C. 2803(j)(1).
                ---------------------------------------------------------------------------
                 Proposed Sec. 1002.110(c) would also state that a financial
                institution shall use language provided by the Bureau, or substantially
                similar language, to satisfy this requirement to provide a statement.
                Proposed comment 110(c)-1 would provide model language that financial
                institutions can use to comply with proposed Sec. 1002.110(c).
                Proposed comment 110(c)-2 would provide guidance to financial
                institutions that do not have websites.
                 Proposed Sec. 1002.110(d) would provide that a covered financial
                institution shall make the notice required by proposed Sec.
                1002.110(c) available to the public on its website when it submits a
                small business lending application register to the Bureau pursuant to
                proposed Sec. 1002.110(a), and shall maintain the notice for as long
                as it has an obligation to retain its small business lending
                application registers pursuant to proposed Sec. 1002.111(a).
                 The Bureau seeks comment on its proposed approach to implementing
                ECOA section 704B(f)(3), including how best to implement proposed Sec.
                1002.110(c) and (d) in a manner that minimizes cost and burden
                particularly on small financial institutions while implementing all
                statutory obligations.
                Section 1002.111 Recordkeeping
                 Proposed Sec. 1002.111 would address several aspects of the
                recordkeeping requirements for 1071 data. First, proposed Sec.
                1002.111(a) would require a covered financial institution to retain
                evidence of its compliance with this section, which includes a copy of
                its small business lending application register, for at least three
                years after submitting the register pursuant to proposed Sec.
                1002.109. Second, proposed Sec. 1002.111(b) would require a financial
                institution to maintain, separately from the rest of the application
                and accompanying information, an applicant's responses to a financial
                institution's inquiries required by ECOA section 704B(b)(1) (i.e.,
                whether the applicant is a minority-owned business or a women-owned
                business, and regarding the ethnicity, race, and sex of the applicant's
                principal owners). Finally, proposed Sec. 1002.111(c) would require
                that, in compiling and maintaining any records under
                [[Page 56501]]
                proposed Sec. Sec. 1002.107 and 1002.111(b), or reporting data
                pursuant to proposed Sec. 1002.109, a financial institution shall not
                include personally identifiable information concerning any individual
                who is, or is connected with, an applicant.
                 The Bureau is proposing Sec. 1002.111 to implement ECOA section
                704B(f)(2)(A), which requires financial institutions to compile and
                maintain 1071 data for at least three years; 704B(b)(2), which requires
                financial institutions to maintain a record of the responses to the
                inquiry required by 704B(b)(1), separate from the application and
                accompanying information; and 704B(e)(3), which provides that in
                compiling and maintaining 1071 data, a financial institution may not
                include personally identifiable information concerning an individual
                who is, or is connected with, an applicant. The Bureau is also
                proposing Sec. 1002.111 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.
                111(a) Record Retention
                 ECOA section 704B(f)(2)(A) requires that information compiled and
                maintained under section 1071 be retained for not less than three years
                after the date of preparation. In the SBREFA Outline, the Bureau stated
                that it was considering proposing that a financial institution retain
                its 1071 data for at least three years after they are submitted to the
                Bureau.\735\ The Bureau received little feedback on this issue; a few
                stakeholders opined that the three-year retention period was
                acceptable.
                ---------------------------------------------------------------------------
                 \735\ SBREFA Outline at 39.
                ---------------------------------------------------------------------------
                 The SBREFA Panel recommended, regarding this issue as well as other
                recordkeeping and reporting issues addressed in the SBREFA Outline,
                that the Bureau seek comment on these aspects of a 1071 rule, and how
                best to implement them in a manner that minimizes cost and burden to
                small financial institutions.\736\
                ---------------------------------------------------------------------------
                 \736\ SBREFA Panel Report at 47.
                ---------------------------------------------------------------------------
                 Proposed Sec. 1002.111(a) would require that a financial
                institution retain a copy of its small business lending application
                register for three years after the register is submitted to the Bureau
                pursuant to proposed Sec. 1002.109. This proposed approach is
                consistent with the approach that the Bureau considered proposing at
                SBREFA. By way of comparison, under Regulation C, financial
                institutions must retain the loan/application registers that they
                submit to the Bureau for three years.\737\ This reflects the
                requirement in HMDA itself that a LAR be retained for three years after
                it is made available.\738\
                ---------------------------------------------------------------------------
                 \737\ Regulation C Sec. 1003.5(a)(1).
                 \738\ 12 U.S.C. 2803(j)(6).
                ---------------------------------------------------------------------------
                 Proposed comment 111(a)-1 would provide examples of what evidence
                of compliance with the proposed provision is likely to include.
                Proposed comment 111(a)-2 would require that a creditor that is
                voluntarily, under Sec. 1002.5(a)(4)(vii) and (viii), collecting
                information pursuant to subpart B but is not required to report that
                data to the Bureau, complies with proposed Sec. 1002.111(a) by
                retaining evidence of compliance with subpart B for at least three
                years after June 1 of the year following the year that data was
                collected.
                 The Bureau seeks comment on its proposed approach to implementing
                ECOA section 704B(f)(2)(A), including how best to implement proposed
                Sec. 1002.111(a) in a manner that minimizes cost and burden
                particularly on small financial institutions while implementing all
                statutory obligations.
                111(b) Certain Information Kept Separate From the Rest of the
                Application
                 ECOA section 704B(b)(2) requires financial institutions to maintain
                a record of the ``responses to [the] inquiry'' required by 704B(b)(1)
                separate from the application and accompanying information. As
                discussed below and consistent with the approach set forth in E.2 of
                the Overview to this part V, the Bureau proposes to interpret the term
                ``responses to such inquiry'' in 704B(b)(2) to be the applicant's
                responses to inquiries regarding protected demographic information--
                that is, 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.
                 In the SBREFA Outline, the Bureau discussed this statutory
                provision but did not present a proposal under consideration to address
                it. Some SERs quoted this statutory language in written feedback, but
                none provided feedback on the particular issue of keeping certain
                information separate from the rest of the application. One trade
                association stakeholder noted that, under HMDA and Regulation C, banks
                are permitted to inquire about and collect required data points (which
                include information such as the ethnicity, race, and sex of applicants'
                principal owners) on and with the application. This stakeholder urged
                the Bureau to permit the same for 1071, and further requested a safe
                harbor for a bank that inquires and collects required data points on or
                with an application.
                 The SBREFA Panel recommended, regarding this issue as well as other
                recordkeeping and reporting issues addressed in the SBREFA Outline,
                that the Bureau seek comment on this aspect of a 1071 rule, and how
                best to implement it in a manner that minimizes cost and burden to
                small financial institutions.\739\
                ---------------------------------------------------------------------------
                 \739\ SBREFA Panel Report at 47-48.
                ---------------------------------------------------------------------------
                 Proposed Sec. 1002.111(b) would state that a financial institution
                shall maintain, separately from the rest of the application and
                accompanying information, an applicant's responses to the financial
                institution's inquiries to collect data pursuant to proposed subpart B
                regarding whether an applicant for a covered credit transaction is a
                minority-owned business under proposed Sec. 1002.107(a)(18) or a
                women-owned business under proposed Sec. 1002.107(a)(19), and
                regarding the ethnicity, race, and sex of the applicant's principal
                owners under proposed Sec. 1002.107(a)(20).
                 Proposed comment 111(b)-1 would explain that a financial
                institution may satisfy this requirement by keeping an applicant's
                responses to the financial institution's request pursuant to proposed
                Sec. 1002.107(a)(18) through (20) in a file or document that is
                discrete or distinct from the application and its accompanying
                information. For example, such information could be collected on a
                piece of paper that is separate from the rest of the application form.
                In order to satisfy the requirement in proposed Sec. 1002.111(b), an
                applicant's responses to the financial institution's request pursuant
                to proposed Sec. 1002.107(a)(18) through (20) need not be maintained
                in a separate electronic system, nor need they be removed from the
                physical files containing the application. However, the financial
                institution may nonetheless need to keep this information in a
                different electronic or physical file in order to satisfy the
                requirements of proposed Sec. 1002.108.
                 As discussed in detail above in E.2 in the Overview of this part V,
                the Bureau believes the best reading of the statutory provisions that
                mention the inquiry made under ECOA section 704B(b)(1)--in 704B(b)(2)
                as well as in 704B(c) regarding the right to refuse and 704B(d)
                regarding the firewall--is that they refer to applicants' responses to
                the inquiries regarding minority-owned and women-owned business status
                in proposed
                [[Page 56502]]
                Sec. 1002.107(a)(18) and (19), and regarding the ethnicity, race, and
                sex of applicants' principal owners in proposed Sec. 1002.107(a)(20).
                Each of these three data points require financial institutions to
                request demographic information that has no bearing on the
                creditworthiness of the applicant. Moreover, a financial institution
                could not inquire about this demographic information absent section
                1071's mandate to collect and report the information, and ECOA
                prohibits a financial institution from discriminating against an
                applicant on the basis of the information. The Bureau accordingly
                believes that the best effectuation of congressional intent is to apply
                section 1071's special-protection provisions to apply to this
                demographic information, regardless of whether the statutory authority
                to collect it originates in 704B(b)(1) (women-owned business status and
                minority-owned business status) or 704B(e)(2)(G) (race, sex, and
                ethnicity of principal owners). The Bureau similarly believes that
                Congress did not intend these special protections to apply to any of
                the other applicant-provided data points 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.
                 With respect to the stakeholder's request that the section 1071
                rule mirror HMDA's approach to collection of ethnicity, race, and sex
                data, the Bureau notes that there is no requirement in HMDA that is
                comparable to ECOA section 704B(b)(2)'s requirement that certain
                information be kept separate from the application and accompanying
                information; Regulation C thus anticipates that the demographic
                information required under HMDA can be collected as part of the
                application.\740\ The Bureau recognizes from stakeholder comments
                identified in the section-by-section analysis of proposed Sec.
                1002.107(c)(1) above that there may be potential difficulties in
                satisfying the proposed requirements regarding the time and manner of
                collecting applicant-provided data while not being able to ask for that
                information on the application itself. Proposed comment 111(b)-1 is
                intended to clarify, and facilitate compliance with, the statutory
                directive that financial institutions must keep certain information
                separate from the credit application.
                ---------------------------------------------------------------------------
                 \740\ See 80 FR 66128, 66192-93 (Oct. 28, 2015).
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its proposed approach to implementing
                ECOA section 704B(b)(2), including how best to implement proposed Sec.
                1002.111(b) in a manner that minimizes cost and burden, particularly on
                small financial institutions, while implementing all statutory
                obligations. The Bureau also seeks comment on whether, for financial
                institutions that determine that underwriters or other persons should
                have access to applicants' demographic information pursuant to proposed
                Sec. 1002.108(b), it should likewise waive the requirement in proposed
                Sec. 1002.111(b) to keep that information separate from the
                application and accompanying information.
                111(c) Limitation on Personally Identifiable Information Retained Under
                This Section
                Background
                 ECOA section 704B(e)(3) provides that in compiling and maintaining
                any record of information under section 1071, a financial institution
                may not include in such record the name, specific address (other than
                the census tract), telephone number, electronic mail address, or any
                other personally identifiable information (PII) concerning any
                individual who is, or is connected with, an applicant.
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated it was considering
                proposing a prohibition on including certain PII about any individuals
                associated with small business applicants in the small business lending
                application register a financial institution is required to compile,
                maintain, and report to the Bureau (other than the information
                specifically required to be collected and reported pursuant to section
                1071, such as the ethnicity, race, and sex of principal owners). The
                Bureau also stated that this prohibition would not apply to PII
                collected by financial institutions outside of their specific 1071 data
                records.\741\
                ---------------------------------------------------------------------------
                 \741\ SBREFA Outline at 39.
                ---------------------------------------------------------------------------
                 SERs and other stakeholders offered limited feedback on this
                issue.\742\ One SER requested clarification on this statutory
                provision, specifically asking whether financial institutions were
                permitted to keep PII in their own loan-level records. A trade
                association supported a ban on including PII in the 1071 data. Another
                stated that the Bureau should issue a clarifying provision for
                excluding PII in compiling and maintaining any record of information
                from the different stages in the process (e.g., bank systems,
                regulatory submission file). Two community group stakeholders supported
                a prohibition on including personally identifiable information in 1071
                data to reduce potential privacy concerns surrounding release of 1071
                data.
                ---------------------------------------------------------------------------
                 \742\ SBREFA Panel Report at 34.
                ---------------------------------------------------------------------------
                 Some stakeholders expressed concern regarding a different issue
                related to data privacy. Federal and State laws protect the financial
                and data privacy of individuals, typically by imposing obligations on
                financial institutions to provide their customers notice and an
                opportunity to opt out in advance of the disclosure of their nonpublic
                personal information to unaffiliated third parties.\743\ Several
                industry stakeholders expressed concern that reporting 1071 data to the
                Bureau may cause them to violate other data privacy laws, including
                State data privacy laws.
                ---------------------------------------------------------------------------
                 \743\ See, e.g., Gramm-Leach-Bliley Act, 15 U.S.C. 6801 et seq.;
                Regulation P, 12 CFR part 1016.
                ---------------------------------------------------------------------------
                 The SBREFA Panel recommended, regarding this issue as well as other
                recordkeeping and reporting issues addressed in the Outline, that the
                Bureau seek comment on these aspects of a 1071 rule, and how best to
                implement them in a manner that minimizes cost and burden to small
                financial institutions.\744\
                ---------------------------------------------------------------------------
                 \744\ SBREFA Panel Report at 47.
                ---------------------------------------------------------------------------
                Proposed Rule
                 The Bureau is proposing in Sec. 1002.111(c) that in compiling and
                maintaining any records under proposed Sec. 1002.107 or Sec.
                1002.111(b), or reporting data pursuant to proposed Sec. 1002.109, a
                financial institution shall not include any name, specific address,
                telephone number, email address, or any PII concerning any individual
                who is, or is connected with, an applicant, other than as required
                pursuant to proposed Sec. 1002.107 or Sec. 1002.111(b). The
                prohibition on the inclusion of PII in ECOA section 704B(e)(3), which
                covers the ``compiling and maintaining any record of information,''
                implicates proposed Sec. Sec. 1002.107, 1002.109, and 1002.111, which
                together would address the compilation, maintenance, and reporting of
                1071 data by financial institutions.
                 Proposed comment 111(c)-1 would clarify that the prohibition in
                proposed Sec. 1002.111(c) applies to data compiled and maintained
                pursuant to Sec. 1002.107, data in the small business lending
                application register submitted by the financial institution to the
                Bureau under proposed Sec. 1002.109, the version of the
                [[Page 56503]]
                register that the financial institution maintains under proposed Sec.
                1002.111(a), and the separate record of certain information created
                pursuant to proposed Sec. 1002.111(b).
                 Proposed comment 111(c)-2 would address the types of information
                (including PII) that a financial institution is prohibited from
                including in the data it compiles and maintains pursuant to proposed
                Sec. 1002.107, in its records under proposed Sec. 1002.111(b), or in
                data reported to the Bureau under proposed Sec. 1002.109. The examples
                of types of PII identified in proposed comment 111(c)-2 are
                illustrative and not exhaustive.
                 Proposed comment 111(c)-3 would clarify that the prohibition in
                proposed Sec. 1002.111(c) does not extend to the application or any
                other records that the financial institution maintains. This comment is
                intended to address the request by a SER and another stakeholder that
                the Bureau clarify that this prohibition does not extend more broadly
                to a financial institution's application or loan-related files.
                 Proposed comment 111(c)-4 would clarify that the prohibition in
                proposed Sec. 1002.111(c) does not bar financial institutions from
                providing to the Bureau, pursuant to proposed Sec. 1002.109(b)(3), the
                name and business contact information of the person who may be
                contacted with questions about the financial institution's submission.
                 The Bureau seeks comment on its proposed approach to implementing
                ECOA section 704B(e)(3), including how best to implement this
                requirement in a manner that minimizes cost and burden, particularly on
                small financial institutions, while implementing all statutory
                obligations. Regarding comments by stakeholders that reporting 1071
                data to the Bureau could give rise to a potential conflict with the
                data protection and privacy laws prohibiting the disclosure of
                nonpublic personal information to unaffiliated third parties, the
                Bureau notes that such laws typically provide an exemption for
                disclosures made pursuant to Federal and State law.\745\ The Bureau
                seeks comment on whether the requirements in this proposed rule could
                conflict with other data privacy or data protection laws, and whether
                the Bureau might need to use its preemption authority under ECOA,\746\
                Regulation B,\747\ and/or section 1041(a)(1) of the Dodd-Frank Act to
                ensure that financial institutions do not violate State law in
                reporting 1071 data to the Bureau. The Bureau also seeks comment on
                whether it should include a provision to preempt any State data privacy
                or data protection laws that would prohibit the collection,
                maintenance, and reporting to the Bureau of 1071 data.
                ---------------------------------------------------------------------------
                 \745\ See, e.g., Gramm-Leach-Bliley Act section 502(e)(8), 15
                U.S.C. 6802(e)(8), and Regulation P Sec. 1016.15(a)(7)(i) (stating
                that the limitations on disclosing nonpublic personal information to
                unaffiliated third parties do not apply if the information is
                disclosed to comply with Federal, State, or local laws, rules and
                other applicable legal requirements); California Consumer Privacy
                Act, Cal. Civ. Code 1798.145(a)(1) (noting that the obligations
                imposed on businesses by CCPA ``shall not restrict a business'
                ability to . . . comply with federal, state, or local laws'').
                 \746\ 15 U.S.C. 1691d(f).
                 \747\ Existing Sec. 1002.11.
                ---------------------------------------------------------------------------
                Section 1002.112 Enforcement
                 Proposed Sec. 1002.112 would address several issues related to the
                enforcement of violations of the requirements of proposed subpart B.
                First, proposed Sec. 1002.112(a) would state that a violation of
                section 1071 or subpart B of Regulation B is subject to administrative
                sanctions and civil liability as provided in sections 704 and 706 of
                ECOA. Second, proposed Sec. 1002.112(b) would 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. This proposed provision also addresses the maintenance of
                procedures reasonably adapted to avoid such errors. Third, proposed
                Sec. 1002.112(c) would identify four safe harbors under which certain
                errors--namely, certain types of incorrect entries for census tract,
                NAICS code, small business status, and application date--would not
                constitute violations of ECOA or Regulation B.
                 The Bureau is proposing Sec. 1002.112 to implement sections 704
                and 706 of ECOA, 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 pursuant to its authority under 704B(g)(2) to adopt exceptions
                to any requirement of section 1071 and to 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.
                112(a) Administrative Enforcement and Civil Liability
                 A violation of section 1071 is subject to the enforcement
                provisions of ECOA, of which section 1071 is a part. ECOA contains
                administrative enforcement provisions in section 704,\748\ and it
                provides for civil liability in section 706.\749\ The enforcement
                provisions in existing Regulation B (Sec. 1002.16(a)(1) and (2))
                cross-reference and paraphrase these administrative enforcement and
                civil liability provisions of ECOA.
                ---------------------------------------------------------------------------
                 \748\ 15 U.S.C. 1691c.
                 \749\ 15 U.S.C. 1691e.
                ---------------------------------------------------------------------------
                 Proposed Sec. 1002.112(a) would provide that a violation of
                section 1071 or subpart B of Regulation B is subject to administrative
                sanctions and civil liability as provided in sections 704 and 706 of
                ECOA, where applicable. Regarding stakeholder concerns about private
                litigants bringing actions for non-compliance, the Bureau believes that
                its administrative enforcement mechanisms would be appropriate and
                adequate to address most instances of non-compliance by financial
                institutions that report 1071 data to the Bureau, based on its
                experience with Regulation C and HMDA. The Bureau believes that
                proposed Sec. 1002.112(b) addresses the concerns raised by
                stakeholders that requested that penalties for non-compliance not be
                assessed in the first year that 1071 data is collected, given the
                likelihood of unintentional errors as covered financial institutions
                learn how to implement this rule.
                 The Bureau seeks comment on its proposed approach to administrative
                enforcement and civil liability.
                112(b) Bona Fide Errors
                SBREFA Proposal Under Consideration and Feedback Received
                 During the SBREFA process, SERs and other industry stakeholders
                expressed concern about private litigants suing them for non-compliance
                with the 1071 rule.\750\ In addition, several SERs requested that the
                Bureau not assess penalties for the first year of 1071 data collection
                and reporting, as it did following the 2015 HMDA final rule; prior to
                the compliance date for that rule, the Bureau issued a policy statement
                announcing it would not seek penalties for errors for the first
                calendar year (2018) of data collected under the amended Regulation
                C.\751\ Stakeholders
                [[Page 56504]]
                asked the Bureau to emulate that approach for 1071. Other stakeholders
                expressed concern about the potential consequences of committing what
                they viewed as technical or inadvertent errors in collecting or
                reporting 1071 data. One financial institution stakeholder suggested
                that the 1071 rule adopt or emulate the good faith error provisions set
                out in Regulation C, including Sec. 1003.6(b)(1), which provides that
                an error in compiling or recording data for a covered loan or
                application is not a violation of HMDA or Regulation C if the error was
                unintentional and occurred despite the maintenance of procedures
                reasonably adapted to avoid such an error. Stakeholders also referred
                to the existing error-related exemptions in ECOA and Regulation B.\752\
                ECOA's civil liability provision states that creditors will not be
                liable for acts done or omitted in good faith in conformity with any
                official rule, regulation, or interpretation thereof by the
                Bureau.\753\
                ---------------------------------------------------------------------------
                 \750\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 34-36.
                 \751\ Bureau of Consumer Fin. Prot., CFPB Issues Public
                Statement On Home Mortgage Disclosure Act Compliance (Dec. 21,
                2017), https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-public-statement-home-mortgage-disclosure-act-compliance/
                (noting that the Bureau did not intend to require data resubmission
                unless data errors were material, or assess penalties with respect
                to errors for HMDA data collected in 2018 and reported in 2019).
                 \752\ See, e.g., Sec. 1002.16(c).
                 \753\ 15 U.S.C. 1691e(e).
                ---------------------------------------------------------------------------
                Proposed Rule
                 Proposed Sec. 1002.112(b) would 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. A
                bona fide error is not a violation of ECOA or subpart B. A financial
                institution is presumed to maintain procedures reasonably adapted to
                avoid errors with respect to a given data field if the number of errors
                found in a random sample of the financial institution's submission for
                the data field does not equal or exceed a threshold specified by the
                Bureau for this purpose in proposed appendix H. However, an error is
                not a bona fide error if either there is a reasonable basis to believe
                the error was intentional or there is other evidence that the financial
                institution did not maintain procedures reasonably adapted to avoid
                such errors.
                 The Bureau believes that a similar approach to Regulation C,
                modified and combined with the approach taken by Federal agencies in
                HMDA examinations, would be appropriate here. Regulation C Sec.
                1003.6(b)(1) provides that an error in compiling or recording data for
                a covered loan or application is not a violation of HMDA or Regulation
                C if the error was unintentional and occurred despite the maintenance
                of procedures reasonably adapted to avoid such an error. In an
                examination of a financial institution for compliance with Regulation
                C, a financial institution may make a certain number of unintentional
                errors in a testing sample of applications for a given data field in
                the institution's loan/application register (LAR), the HMDA analog to
                the small business lending application register, before it must
                resubmit its LAR. These tolerance thresholds are based on the number of
                loans or applications in a LAR as set out in the HMDA tolerances table
                in the FFIEC's Interagency HMDA examination procedures.\754\
                ---------------------------------------------------------------------------
                 \754\ Fed. Fin. Insts. Examination Council, Interagency
                Examination Procedures: HMDA (Apr. 2019), https://files.consumerfinance.gov/f/documents/cfpb_supervision-and-examination-manual_hmda-exam-procedures_2019-04.pdf.
                ---------------------------------------------------------------------------
                 For instance, as described in the HMDA tolerances table, a bank
                that submitted 45 applications is subject to a threshold of three
                inadvertent errors per data field based on the review of a random
                sample of 30 applications in the bank's LAR; a bank that submitted
                45,000 applications would be subject to a threshold of four inadvertent
                errors per data field based on a sample of 79 applications. The
                tolerances thresholds, as a percentage of the random sample of
                applications reviewed, become more stringent as the number of total
                applications rises.
                 The Bureau would provide a similar table of thresholds in proposed
                appendix H and incorporate it in the bona fide error provision as set
                out in proposed Sec. 1002.112(b). Under this proposed provision and
                the table of thresholds in proposed appendix H, financial institutions
                that report a number of errors equal to or below the applicable
                thresholds are presumed to have in place procedures reasonably adapted
                to avoid errors; those that report a number of errors above the
                applicable thresholds are not presumed to have in place procedures
                reasonably adapted to avoid errors. The Bureau believes that this
                approach would be broadly consistent with the approach it has taken for
                HMDA.\755\ The Bureau also believes that this approach would address
                the concerns expressed by stakeholders regarding liability for some
                data reporting errors, especially in the earlier years of reporting, as
                processes are first being implemented. Moreover, the Bureau believes
                that this provision will help to ensure the accuracy of the data
                submitted by requiring the maintenance of appropriate procedures; at
                the same time, this provision will prevent financial institutions from
                being subjected to liability for some difficult-to-avoid errors that
                could drive those institutions from the small-business lending market.
                Therefore, the Bureau believes this provision is necessary to carry
                out, enforce, and compile data pursuant to section 1071, as well as
                necessary or appropriate to carrying out section 1071's purposes.
                ---------------------------------------------------------------------------
                 \755\ Home Mortgage Disclosure (Regulation C), 80 FR 66128,
                66269 (Oct. 28, 2015).
                ---------------------------------------------------------------------------
                 Proposed comment 112(b)-1 would explain that a financial
                institution is presumed to maintain procedures reasonably adapted to
                avoid errors with respect to a given data field if the number of errors
                found in a random sample of the financial institution's submission for
                the data field does not equal or exceed a threshold specified by the
                Bureau for this purpose. Proposed comment 112(b)-1 would also explain
                that the Bureau's thresholds appear in column C of the table in
                proposed appendix H, and that the size of the random sample shall
                depend on the size of the financial institution's small business
                lending application register, as shown in column A of the table in
                appendix H.
                 Proposed comment 112(b)-2 would provide that, for purposes of
                determining bona fide errors under Sec. 1002.112(b), the term ``data
                field'' generally refers to individual fields, but that, with respect
                to information on the ethnicity or race of an applicant or borrower, or
                co-applicant or co-borrower, a data field group may consist of more
                than one field. If one or more of the fields within an ethnicity or
                race field group have errors, they count as one (and only one) error
                for that data field group.
                 Proposed comment 112(b)-3 would provide that an error that meets
                the criteria for one of the four safe harbor provisions in proposed
                Sec. 1002.112(c) would not be counted as an error for purposes of
                determining whether a financial institution has exceeded the error
                threshold for a given data field.
                 The Bureau seeks comment on its proposed approach to bona fide
                errors, including whether the tolerance levels in proposed appendix H
                are appropriate.
                112(c) Safe Harbors
                 Proposed Sec. 1002.112(c) would establish four safe harbor
                provisions, providing that certain types of errors would not constitute
                violations of ECOA or Regulation B. Proposed Sec. 1002.112(c)(1) would
                provide a safe harbor for an incorrect entry for census tract obtained
                by correct use of a geocoding tool provided by the FFIEC or the Bureau.
                Proposed Sec. 1002.112(c)(2) would provide a safe harbor for an
                incorrect NAICS code determined by a financial institution under
                certain circumstances. Proposed
                [[Page 56505]]
                Sec. 1002.112(c)(3) would provide a safe harbor for the collection of
                applicants' protected demographic information pursuant to proposed
                Sec. 1002.107(a)(18) through (20) after an initially erroneous
                determination that an applicant is a small business. Proposed Sec.
                1002.112(c)(4) would provide a safe harbor for the reporting of an
                application date that is within three calendar days of the actual
                application date.
                 As described in further detail below, the Bureau is proposing the
                four safe harbors established in proposed Sec. 1002.112(c) pursuant to
                its authority under ECOA and as amended by section 1071. Section 703 of
                ECOA provides the Bureau the authority to prescribe regulations to
                carry out the purposes of ECOA, including such adjustments and
                exceptions for any class of transactions 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. Section 704B(g)(1) provides that the
                Bureau shall prescribe such rules as may be necessary to carry out,
                enforce, and compile data pursuant to section 1071. Section 704B(g)(2)
                authorizes the Bureau to adopt exceptions to any requirement of section
                1071 and to 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.
                112(c)(1) Incorrect Entry for Census Tract
                 The Bureau received feedback on the SBREFA Outline,\756\ concerning
                a provision in Regulation C providing for a good faith error exemption
                in inadvertently selecting the wrong census tract for a property. In
                response, the Bureau is proposing Sec. 1002.112(c)(1), which would
                provide that an incorrect entry for census tract is not a violation of
                ECOA or this subpart if the financial institution obtained the census
                tract by correctly using a geocoding tool provided by the FFIEC or the
                Bureau. Regulation C Sec. 1003.6(b)(2) contains a similar provision,
                and the Bureau believes a similar approach would be appropriate here.
                Especially in light of the years that financial institutions have
                already been relying on the FFIEC geocoding tool in the HMDA context,
                the Bureau believes financial institutions would be justified in
                expecting not to be held liable for reporting erroneous information
                provided by the FFIEC or Bureau. Additionally, the Bureau believes that
                this proposed safe harbor will ultimately improve the accuracy of the
                data submitted by encouraging the use of reliable FFIEC geocoding
                tools, and preventing financial institutions from being subjected to
                liability for some difficult-to-avoid errors that could drive those
                institutions either to eschew these useful tools or exit the small
                business lending market. Therefore, the Bureau believes this provision
                is necessary to carry out, enforce, or compile data pursuant to section
                1071, and necessary or appropriate to carry out section 1071's
                purposes.
                ---------------------------------------------------------------------------
                 \756\ SBREFA Outline at 41-42.
                ---------------------------------------------------------------------------
                 Proposed comment 112(c)(1)-1 would explain that the safe harbor
                provision under proposed Sec. 1002.112(c)(1) would not extend to a
                financial institution's failure to provide the correct census tract
                number for a covered application on its small business lending
                application register, as required by proposed Sec. 1002.107(a)(13),
                because the FFIEC or Bureau geocoding tool did not return a census
                tract for the address provided by the financial institution. In
                addition, proposed comment 112(c)(1)-1 would explain that this safe
                harbor provision would not extend to a census tract error that results
                from a financial institution entering an inaccurate address into the
                FFIEC or Bureau geocoding tool.
                 The Bureau seeks comment on its proposed approach to this safe
                harbor.
                112(c)(2) Incorrect Entry for NAICS Code
                 As discussed in the section-by-section analysis of proposed Sec.
                1002.107(a)(15) above, the Bureau is proposing to require financial
                institutions to collect an applicant's 6-digit NAICS code. A financial
                institution would be permitted to rely on an applicant's
                representations or on other information regarding its NAICS code as
                described in proposed comments 107(a)(15)-3 and -4. Proposed Sec.
                1002.112(c)(2) would apply when a financial institution does not rely
                on such information, but instead the financial institution identifies
                the NAICS code for an applicant and the identified NAICS code is
                incorrect. Specifically, proposed Sec. 1002.112(c)(2) would provide
                that the incorrect entry for that institution-identified NAICS code is
                not a violation of subpart B, provided that the first two digits of the
                NAICS code are correct and the financial institution maintains
                procedures reasonably adapted to correctly identify the subsequent four
                digits.
                 The Bureau is proposing this safe harbor pursuant to its statutory
                authority under section 704B(g)(1) and (2). This safe harbor would
                address comments from several stakeholders who stated that correctly
                classifying an applicant's NAICS code can be difficult, as the business
                may change over time, codes may have overlapping definitions, small
                businesses often do not know their NAICS code, and classifications may
                be prone to human error. The Bureau believes that this proposed safe
                harbor would also alleviate concerns about NAICS codes classifications
                being subject to change based on SBA rulemaking (in situations where
                the SBA does not change the 2-digit sector code). The Bureau believes
                that this proposed safe harbor will help to ensure the accuracy of the
                data submitted by requiring the maintenance of appropriate procedures
                and requiring that the most crucial first two digits be correct in
                every instance; at the same time, the proposed safe harbor will prevent
                financial institutions from being subjected to liability for some
                difficult-to-avoid errors. Therefore, the Bureau believes this
                provision is necessary and appropriate to carry out section 1071 and
                its purposes.
                 The Bureau seeks comment on its proposed approach to this safe
                harbor. As discussed in the section-by-section analysis of proposed
                Sec. 1002.107(a)(15) above, the Bureau seeks comment on its proposal
                to collect 6-digit NAICS codes with the safe harbor described in
                proposed Sec. 1002.112(c)(2). The Bureau also seeks comment on whether
                requiring a 3-digit NAICS code with no safe harbor would be a better
                alternative.
                112(c)(3) Incorrect Determination of Small Business Status
                 Proposed Sec. 1002.112(c)(3) would provide that a financial
                institution that initially determines that an applicant is a small
                business, as defined in proposed Sec. 1002.106(b), but then later
                concludes the applicant is not a small business, does not violate ECOA
                or Regulation B if it collected information pursuant to subpart B
                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. Proposed Sec.
                1002.112(c)(3) would further provide that a financial institution
                seeking to avail itself of this safe harbor shall comply with the
                requirements of subpart B as otherwise required pursuant to proposed
                Sec. Sec. 1002.107, 1002.108, and 1002.111 with respect to the
                collected information.
                 The Bureau is proposing this safe harbor pursuant to its authority
                under
                [[Page 56506]]
                section 703(a) of ECOA, which allows the Bureau to provide for certain
                exceptions to Regulation B ``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.'' The Bureau believes the proposed safe harbor is
                needed to address situations where the financial institution initially
                determines that an applicant is a small business and believes it is
                required under the 1071 rule to collect protected demographic
                information, but later concludes that the applicant is not a small
                business when it, for example, obtains updated gross annual revenue
                information. In such situations, the financial institution may be
                uncertain about whether it ``may obtain information required by a
                regulation'' under existing Sec. 1002.5(a)(2), which could deter
                financial institutions from complying with the 1071 rule. The Bureau
                believes that this safe harbor would facilitate compliance with ECOA by
                eliminating a situation in which financial institutions might be
                deterred from appropriately collecting applicants' protected
                demographic information due to the possibility that their understanding
                of an applicant's small business status might change during the course
                of the application process.
                 Proposed Sec. 1002.112(c)(3) would make it clear that a financial
                institution does not violate the existing Regulation B general
                prohibition against inquiring about the race, national origin, or sex
                of an applicant as long as the financial institution complies with the
                requirements of the subpart B, including the requirements set forth in
                proposed Sec. Sec. 1002.107, 1002.108, and 1002.111 with respect to
                the collected information. Proposed comment 106(b)-1 would clarify that
                the financial institution does not report the application on its small
                business lending application register pursuant to Sec. 1002.109.
                 The Bureau seeks comment on its proposed approach to this safe
                harbor.
                112(c)(4) Incorrect Application Date
                 Proposed Sec. 1002.107(a)(2) would require financial institutions
                to report application date. In the SBREFA Outline, the Bureau stated
                that it was considering proposing providing financial institutions 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.\757\ As discussed in the section-by-section
                analysis of proposed Sec. 1002.107(a)(2) above, several SERs and other
                stakeholders were strongly in favor of the Bureau providing such a
                grace period to reduce compliance burden.
                ---------------------------------------------------------------------------
                 \757\ Id. at 26.
                ---------------------------------------------------------------------------
                 In light of SER and other stakeholder feedback, proposed Sec.
                1002.112(c)(4) 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). The Bureau believes that this proposed provision will
                ensure the level of accuracy needed for the resulting data to be useful
                in carrying out section 1071's purposes and minimize the risk that
                financial institutions will be held liable for difficult-to-avoid
                errors, which might otherwise affect their participation in the small
                business lending market. Therefore, the Bureau believes this provision
                is necessary and appropriate to carry out section 1071 and its
                purposes. The Bureau seeks comment on its proposed approach to this
                safe harbor.
                Section 1002.113 Severability
                 Proposed Sec. 1002.113 would provide that the provisions of
                subpart B are separate and severable from one another, and that if any
                provision is stayed or determined to be invalid, the remaining
                provisions shall continue in effect.
                 This is a standard severability clause of the kind that is included
                in many regulations to clearly express agency intent about the course
                that is preferred if such events were to occur.
                Section 1002.114 Effective Date, Compliance Date, and Special
                Transitional Rules
                 Proposed Sec. 1002.114 would address when the proposed rule would
                be effective and when financial institutions would be required to
                comply with the rule, as well as how financial institutions could
                choose to comply with the rule during this transitional period.
                Proposed Sec. 1002.114(a) would state that this small business lending
                data collection rule would become effective 90 days after the final
                rule is published in the Federal Register. Proposed Sec. 1002.114(b)
                would provide that compliance with the rule would not be required until
                approximately 18 months after the final rule is published in the
                Federal Register. Proposed Sec. 1002.114(c)(1) would permit covered
                financial institutions to begin collecting information pursuant to
                proposed Sec. 1002.107(a)(18) through (20) beginning 12 months prior
                to the compliance date. Proposed Sec. 1002.114(c)(2) would permit a
                financial institution to use a different time period to determine
                whether it is a covered financial institution under proposed Sec.
                1002.105(b) as of the compliance date.
                 The Bureau is proposing Sec. 1002.114 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. The Bureau is also proposing Sec.
                1002.114(c) pursuant to its authority under section 703(a) of ECOA to
                prescribe regulations to carry out the purposes of ECOA and provide
                exceptions as in the judgment of the Bureau are necessary or proper to
                effectuate the purposes of or facilitate or substantiate compliance
                with ECOA.
                114(a) Effective Date and 114(b) Compliance Date
                Background
                 Section 1071 does not specify an implementation period, though
                pursuant to ECOA section 704B(f)(1), financial institutions must report
                1071 data to the Bureau on an annual basis. In the SBREFA Outline, the
                Bureau noted that it sought to ensure that financial institutions have
                sufficient time to implement the 1071 rule, and stated that it was
                considering proposing that financial institutions have approximately
                two calendar years for implementation.\758\
                ---------------------------------------------------------------------------
                 \758\ Id. at 42.
                ---------------------------------------------------------------------------
                SBREFA Proposal Under Consideration and Feedback Received
                 SER and stakeholder feedback regarding the two-year period for
                implementation under consideration was mixed.\759\ Some found the two-
                year period to be adequate, some requested more time, and a few urged
                for less. Some provided related feedback about adopting a grace period
                for data errors in the first year(s) after the 1071 rule becomes
                effective.
                ---------------------------------------------------------------------------
                 \759\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 36-37.
                ---------------------------------------------------------------------------
                 A number of stakeholders agreed that two years was sufficient time
                to implement a 1071 rule. SERs generally supported a two-year
                implementation period. Several SERs with completely online operations
                felt that two years was sufficient time to implement the eventual 1071
                rule; some estimated that they could do it in less time. A large number
                of industry stakeholders (including national and regional trade
                [[Page 56507]]
                associations, community banks, fintech lenders, and others) accepted a
                two-year implementation period as adequate or said that two years was
                the minimum amount of time needed to implement 1071 (though some of
                these stakeholders also requested more time, as discussed below). A few
                qualified their statements, however, as dependent on the Bureau not
                adopting additional data points beyond those discussed in the SBREFA
                Outline or not making further changes to the rule once it is finalized.
                 A number of other stakeholders argued that two years was inadequate
                time to implement a 1071 rule. Some other SERs that do not have
                primarily online operations and do not have experience with other
                Federal data reporting regimes such as HMDA said it would be hard to
                project how long implementation would take, but that it could
                potentially take three years or more. One SER said that two years would
                not be enough as currently there are no data collection vendors for
                1071 compliance. Another SER said clear and concise definitions were
                important and expressed frustration that definitive answers to
                compliance-related questions (whether from the Bureau or third-party
                vendors) can be hard to come by, which could stymie implementation
                efforts. One SER suggested that it was overly optimistic for other SERs
                (mostly CDFIs) to say they would be able to implement 1071 quickly.
                 Some of the industry stakeholders mentioned above requested more
                time, up to three years, and suggested that two years was the bare
                minimum they required to implement a 1071 rule, given the need to
                create new systems, policies and procedures, to change their products
                as needed, and to train personnel in compliance. One large bank trade
                association stakeholder requested three years coupled with a two-year
                grace period.
                 Several trade associations representing community banks and credit
                unions asserted that two years was inadequate for smaller financial
                institutions that had no experience with HMDA or similar reporting
                regimes. These commenters suggested tiered implementation, with larger
                financial institutions (or HMDA reporters) reporting earlier and
                smaller financial institutions later. Similarly, two smaller trade
                associations asserted that smaller and mission-based lenders should
                have up to three years to implement 1071.
                 A number of stakeholders argued that two years was too much time to
                implement a 1071 rule. Several community group stakeholders opposed a
                two-year implementation period as too long and instead supported a one-
                year period. These groups opposed a longer implementation period on the
                grounds that ten years have elapsed since Dodd-Frank Act was passed and
                the need for data to analyze disparities in small business lending is
                urgent. A State-level trade association suggested a one-year period for
                larger financial institutions and a longer period for smaller financial
                institutions.
                 Some stakeholders requested a grace period associated with the
                first year of implementation. A few SERs suggested that the Bureau
                adopt a grace period of some kind during which financial institutions
                would not be penalized for erring in trying to comply with a 1071
                regulation. This grace period would be akin to the first year in which
                the 2015 revisions to Regulation C were effective, when examinations
                were used to troubleshoot and perfect data reporting rather than
                penalize reporters. Two other industry stakeholders similarly requested
                a safe harbor for any data collection errors for the first one or two
                years following the rule's effective date.
                 The SBREFA Panel recommended that the Bureau seek comment on the
                sufficiency of a two-year implementation period, and in particular what
                aspects of a 1071 rule might require more or less time to
                implement.\760\ The Panel further recommended that the Bureau seek
                comment on ways to facilitate implementation for small financial
                institutions, particularly those that have had no experience with any
                kind of Federal data reporting regime.
                ---------------------------------------------------------------------------
                 \760\ Id. at 48.
                ---------------------------------------------------------------------------
                Proposed Rule
                 The Bureau is proposing in Sec. 1002.114(a) that its small
                business lending data collection rule become effective 90 days after
                the final rule is published in the Federal Register. At that time, the
                rule would become part of the Code of Federal Regulations; this would
                permit financial institutions to avail themselves of the special
                transitional rule in proposed Sec. 1002.114(c)(2), discussed below.
                However, pursuant to proposed Sec. 1002.114(b), compliance with the
                final rule would not be required until approximately 18 months after
                the final rule is published in the Federal Register.
                 The Bureau's proposed approach is a compromise between the two-year
                implementation period under consideration at SBREFA that a slight
                majority of stakeholders found acceptable and the shorter one-year
                implementation period requested by certain stakeholders. The Bureau
                believes that the statutory purposes of section 1071 are better served
                by an earlier compliance date that would, in turn, result in earlier
                publication of data by the Bureau. The Bureau acknowledges the
                preference of various SERs and other stakeholders for a compliance
                period of two or more years to comply. The Bureau notes, however, that
                some SERs and other industry stakeholders said that they could be ready
                in less than two years. The Bureau agrees with the stakeholders that
                asserted that a shorter implementation period is preferable given the
                length of time that has elapsed since the passage of section 1071 of
                the Dodd-Frank Act.
                 The Bureau notes that it does not anticipate setting the compliance
                date at exactly 18 months following publication of the final rule in
                the Federal Register. Rather, the Bureau expects to specify a date
                certain for a compliance date, which it anticipates will be
                approximately 18 months after the final rule is published. Thus, for
                example, if the Bureau published the final rule in June 2023, the
                Bureau would set the compliance date at January 1, 2025.
                 If the final rule were published early or late in the year, because
                proposed Sec. 1002.114(b) would require compliance approximately 18
                months after publication of the final rule, the compliance date would
                be set in mid-year. For instance, if the final rule were published in
                the Federal Register in March 2023, the compliance date would be in
                September 2024. Based on this possibility, the Bureau is considering
                whether to permit or require financial institutions to collect data on
                a partial year basis in the remainder of the first year following the
                compliance date, as the section-by-section analysis of proposed Sec.
                1002.109(a)(1) addresses. For example, if the compliance date were July
                1, 2024, the Bureau would permit or require all financial institutions
                to collect and report data pursuant to proposed Sec. 1002.109(a) for
                the period July 1 to December 31, 2024, and financial institutions
                would report that data by June 1, 2025 (pursuant to proposed Sec.
                1002.109(a)(1)(i)). After 2024, financial institutions would comply
                with proposed Sec. 1002.109(a), which requires the collection of 1071
                data on a calendar year basis.
                 The Bureau believes that permitting or requiring a partial year
                collection in the initial year of compliance would further the purposes
                of section 1071 by expediting the collection and, potentially, the
                publication of data to be used to further the fair lending and
                community development purposes of the statute.
                [[Page 56508]]
                 The Bureau seeks comment on its proposed effective date of 90 days
                following publication of an eventual final rule and its proposed
                compliance date of approximately 18 months after the publication of its
                final rule to implement section 1071. In particular, the Bureau seeks
                comment on which aspects of the Bureau's proposed rule might require
                more or less time to implement, and ways in which the Bureau could
                facilitate implementation for small financial institutions, especially
                those that have had no experience with other Federal data reporting
                regimes. The Bureau further seeks comment on two alternatives: (a)
                Whether the Bureau should adopt a compliance date of two years after
                the publication of the final rule; and (b) whether the Bureau should
                adopt different compliance dates based on the size of a financial
                institution (e.g., one year for large financial institutions, two years
                for smaller institutions).
                114(c) Special Transitional Rules
                 The Bureau is proposing two transitional rules in Sec. 1002.114(c)
                to facilitate the compliance of financial institutions with subpart B.
                Proposed Sec. 1002.114(c)(1) would permit covered financial
                institutions to collect information regarding applicants' minority-
                owned business status, women-owned business status, and the race, sex,
                and ethnicity of applicants' principal owners under proposed Sec.
                1002.107(a)(18) through (20) beginning 12 months prior to the
                compliance date. Proposed Sec. 1002.114(c)(2) would provide that to
                determine if it is a covered financial institution as of the compliance
                date, a financial institution is permitted to use its originations of
                covered credit transactions for small businesses in the second and
                third preceding calendar years (rather than its originations in the two
                immediately preceding calendar years).
                 The Bureau believes that these transitional rules are necessary to
                carry out, enforce, and compile data pursuant to section 1071, will
                carry out the purposes of ECOA, and are necessary or proper to
                effectuate the purposes of ECOA and facilitate or substantiate
                compliance therewith.
                114(c)(1) Collection of Information Prior to the Compliance Date
                 Proposed Sec. 1002.114(c)(1) would provide that a financial
                institution that will be a covered financial institution as of the
                compliance date in proposed Sec. 1002.114(b) is permitted, but not
                required, to collect information regarding whether an applicant for a
                covered credit transaction is a minority-owned business under proposed
                Sec. 1002.107(a)(18), a women-owned business under proposed Sec.
                1002.107(a)(19), and the ethnicity, race, and sex of the applicant's
                principal owners under proposed Sec. 1002.107(a)(20) beginning 12
                months prior to the compliance date. A financial institution collecting
                such information pursuant to proposed Sec. 1002.114(c)(1) must do so
                in accordance with the requirements set out in proposed Sec. Sec.
                1002.107(18) through (20) and 1002.108. The Bureau believes that this
                provision would give financial institutions time to test their
                procedures and systems for compiling and maintaining this information
                in advance of actually being required to collect and subsequently
                report it to the Bureau. Under this proposed provision, financial
                institutions would have time to adjust any procedures or systems that
                may result in the inaccurate compilation or maintenance of applicants'
                protected demographic information, the collection of which is required
                by section 1071 but otherwise generally prohibited under ECOA and
                Regulation B. (Financial institutions could of course collect the other
                information that would be required by this proposed rule at any time,
                without needing express permission in Regulation B to do so.) The
                Bureau believes that this provision would facilitate compliance and
                improve the quality and accuracy of the 1071 data reported to the
                Bureau and therefore is necessary to carry out, enforce, and compile
                data pursuant to section 1071, and will carry out the purposes of ECOA,
                and is necessary or proper to effectuate the purposes of ECOA and
                facilitate or substantiate compliance therewith.
                 The Bureau seeks comment on the approach in this proposal.
                114(c)(2) Determining Whether a Financial Institution is a Covered
                Financial Institution for Purposes of This Subpart
                 Proposed Sec. 1002.114(c)(2) would provide that for purposes of
                determining whether a financial institution is a covered financial
                institution under proposed Sec. 1002.105(b) as of the compliance date
                specified in proposed Sec. 1002.114(b), a financial institution would
                be permitted, but not required, to use its originations of covered
                credit transactions for small businesses in the second and third
                preceding calendar years (rather than its originations in the two
                immediately preceding calendar years). The Bureau believes that this
                proposed provision would provide greater clarity and certainty to
                financial institutions as to whether or not they would be covered
                financial institutions as of the compliance date. This may be
                particularly important for those financial institutions that originate
                a volume of covered credit transactions close to the threshold under
                proposed Sec. 1002.105(b). The Bureau believes this provision is
                necessary to carry out, enforce, and compile data pursuant to section
                1071.
                 The Bureau seeks comment on the approach in this proposal.
                Appendix E to Part 1002--Sample Form for Collecting Certain Applicant-
                Provided Data Under Subpart B
                Background
                 ECOA section 704B(b) requires financial institutions to inquire
                whether applicants are women-owned businesses, minority-owned
                businesses, or small businesses, and to maintain a record of the
                responses to that inquiry separate from the applications and
                accompanying information.
                 Additionally, ECOA section 704B(e) requires financial institutions
                to compile, maintain, and report certain information, including the
                ethnicity, race, and sex of an applicant's principal owners. Section
                1071 does not set out what categories should be used when collecting
                and reporting this information.
                 ECOA section 704B(c) provides that applicants for credit may refuse
                to provide information requested pursuant to 704B(b), including
                minority-owned and women-owned business status.
                 Under ECOA section 704B(d)(2), if a financial institution
                determines that an underwriter, employee, or officer involved in making
                a determination ``should have access'' to any information provided by
                the applicant pursuant to a request under section 704B(b), the
                financial institution must provide a notice 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.
                SBREFA Proposal Under Consideration and Feedback Received
                 In the SBREFA Outline, the Bureau stated that it was considering
                developing a sample data collection form to assist industry in
                collecting the principal owners' ethnicity, race, and sex and to
                communicate an applicant's right to refuse to provide such information.
                The Bureau stated in the SBREFA Outline that this sample data
                collection form would also include the definition of principal owner
                and clarify that it is possible, depending on the factual
                circumstances, that no one will
                [[Page 56509]]
                be identified as a principal owner.\761\ It also stated that the Bureau
                was considering proposing simplified applicant-facing materials to aid
                industry in collecting minority-owned business status and women-owned
                business status. Specifically, for these applicant-facing materials and
                industry clarifications, the Bureau stated in the SBREFA Outline that
                it was considering proposing the following definitions: (1)
                ``Ownership'' to mean directly or indirectly having an equity interest
                in a business (i.e., directly or indirectly, through any contract,
                arrangement, understanding, relationship, or otherwise, owning an
                equity interest in the business); (2) ``control'' of a business to
                mirror the CDD rule, where it means having significant responsibility
                to control, manage, or direct a business; and (3) the ``accrual of net
                profit or loss'' with reference to generally accepted accounting
                practices and any applicable Internal Revenue Service standards.\762\
                Finally, the Bureau stated in the SBREFA Outline that it was
                considering developing model disclosures that financial institutions
                could use when providing the notice under ECOA section 704B(d)(2).\763\
                ---------------------------------------------------------------------------
                 \761\ SBREFA Outline at 32.
                 \762\ Id. at 19.
                 \763\ Id. at 38.
                ---------------------------------------------------------------------------
                 Some SERs requested that the Bureau develop a uniform collection
                form to assist financial institutions with the collection of reporting
                of minority-owned business status, women-owned business status, and the
                race, sex, and ethnicity of principal owners. One SER suggested
                developing a sample data collection form similar to the one used for
                HMDA data collection and including the same disclosures. One commenter
                noted that the use of a model form may increase the uniformity and
                consistency of reporting demographic information. Another commenter
                suggested that any model form should include an explanation of why the
                financial institution is requesting the information and a statement of
                the applicant's right to refuse to provide the information.
                 One SER asked that, if the Bureau provided sample language for the
                notice to be provided pursuant to ECOA section 704B(d)(2), that the
                Bureau provide it in English as well as in other languages, such as
                Spanish. One SER stated that sample language for a notice should
                include a statement that underwriter access to demographic information
                is not detrimental and that such access is necessary due to the small
                size of the lender.
                 The SBREFA Panel recommended that the Bureau consider creating
                sample data collection forms that, to the extent possible, simply and
                clearly explain the information being requested for purposes of the
                minority-owned business data point, the women-owned business data
                point, and the principal owners' ethnicity, race, and sex data point.
                It also said that the Bureau should additionally consider providing
                these sample data collection forms in other languages, such as
                Spanish.\764\ The Panel also recommended that the Bureau consider
                developing sample disclosure language that financial institutions could
                use to provide some context as to why applicants are being asked to
                provide demographic information, in order to encourage applicants to
                respond.\765\
                ---------------------------------------------------------------------------
                 \764\ SBREFA Panel Report at 45-46.
                 \765\ Id. at 43, 47.
                ---------------------------------------------------------------------------
                Proposed Rule
                 Consistent with the SBREFA Panel's recommendation, the Bureau is
                proposing a sample data collection form that financial institutions
                could use to collect minority-owned business status, women-owned
                business status, and principal owners' ethnicity, race, and sex. As
                suggested in the feedback from SERs, the proposed sample data
                collection form would be similar to the HMDA data collection form and
                would include a notice of the applicant's right to refuse to provide
                the information as well as an explanation of why the financial
                institution is requesting the information. The sample data collection
                form would also include the definitions of minority individual,
                minority-owned business, principal owner, and women-owned business as
                they would be defined in proposed Sec. 1002.102(l), (m), (o), and (s),
                respectively. Although the Bureau is not currently proposing a sample
                data collection form in Spanish or any language other than English, the
                Bureau requests comment on whether a sample data collection form in
                Spanish or in another language other than English would be useful to
                financial institutions in the context of their 1071 obligations.
                 Additionally, to aid financial institutions with the collection of
                the information in proposed Sec. 1002.107(a)(21), the sample data
                collection form would include a question about the applicant's number
                of principal owners.
                 Finally, consistent with the SBREFA Panel's recommendation, the
                Bureau is proposing that the sample data collection form would include
                language that a financial institution could use to satisfy the notice
                requirement under ECOA section 704B(d)(2) if it determines that one or
                more employees or officers should have access to the applicant's
                protected demographic information pursuant to proposed Sec.
                1002.108(b)(2).
                 The Bureau is proposing appendix E 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, in order to facilitate compliance with the statutory
                requirements to collect minority-owned and women-owned business status,
                and the ethnicity, race, and sex of principal owners pursuant to
                704B(b)(1) and (e)(2)(G). Further, the Bureau is proposing appendix E
                pursuant to its obligation in 704B(g)(3) to issue guidance to
                facilitate compliance with the requirements of section 1071, including
                assisting financial institutions in working with applicants to
                determine whether the applicants are women-owned or minority-owned
                businesses.
                 The Bureau seeks comment on the proposed sample data collection
                form, including the proposed language for the notice under ECOA section
                704B(d)(2). The Bureau generally requests comment on whether additional
                clarification regarding any aspect of the sample data collection form
                or the related notice provided pursuant to 704B(d)(2) is needed. The
                Bureau also seeks comment on whether the sample data collection form
                should identify the Bureau to applicants as a potential resource in
                connection with their applicable legal rights or for additional
                information about the data collection, including concerns regarding
                non-compliance. In addition, the Bureau seeks comment on whether
                financial institutions need additional information on how to adapt this
                form for use in digital modes of data collection, and, if so, what
                specific information would be most useful.
                Appendix F to Part 1002--Instructions for Collecting and Reporting
                Small Business Applicants' Minority-Owned and Women-Owned Business
                Status Under Subpart B
                 ECOA section 704B(b) requires financial institutions to inquire
                whether applicants for credit are women-owned businesses, minority-
                owned businesses, or small businesses and to maintain a record of the
                responses to that inquiry separate from the applications and
                accompanying information. However, section 1071 does not include
                specific instructions on how a financial institution should collect or
                report such information.
                 The Bureau is proposing appendix F to provide instructions to aid
                financial
                [[Page 56510]]
                institutions when collecting minority-owned business status pursuant to
                proposed Sec. 1002.107(a)(18) and women-owned business status pursuant
                to proposed Sec. 1002.107(a)(19).
                 The Bureau is proposing appendix F 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, in order to facilitate compliance with the statutory
                requirements to collect minority-owned and women-owned business status
                pursuant to 704B(b)(1). Further, the Bureau is proposing appendix F
                pursuant to its obligation in 704B(g)(3) to issue guidance to
                facilitate compliance with the requirements of section 1071, including
                assisting financial institutions in working with applicants to
                determine whether the applicants are women-owned or minority-owned
                businesses.
                 The Bureau seeks comment on the proposed instructions, and
                generally requests comment on whether additional clarification
                regarding any aspect of the proposed instructions is needed. The Bureau
                further requests comment on whether additional or different
                instructions are needed for financial institutions that choose not to
                use a paper data collection form to collect minority-owned business
                status or women-owned business status, such as collecting such
                information using a web-based or other electronic data collection form,
                or over the telephone. The Bureau also seeks comment regarding the
                challenges faced by both applicants and financial institutions by the
                data collection instructions prescribed in appendix F and specifically
                requests comment on ways to improve the data collection of minority-
                owned business status and women-owned business status.
                Appendix G to Part 1002--Instructions for Collecting and Reporting
                Ethnicity, Race, and Sex of Small Business Applicants' Principal Owners
                Under Subpart B
                 ECOA section 704B(e) requires financial institutions to compile,
                maintain, and report certain information, including the ethnicity,
                race, and sex of an applicant's principal owners, but does not provide
                specific instructions on how a financial institution should do so.
                 The Bureau is proposing appendix G to provide instructions to aid
                financial institutions when collecting principal owners' ethnicity,
                race, and sex pursuant to proposed Sec. 1002.107(a)(20). The Bureau is
                proposing appendix G 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, to facilitate compliance with the statutory requirements to
                collect the ethnicity, race, and sex of principal owners pursuant to
                704B(e)(2)(G), and pursuant to 704B(g)(3), which directs the Bureau to
                issue guidance designed to facilitate compliance with the requirements
                of section 1071.
                 The Bureau seeks comment on the proposed instructions, and
                generally requests comment on whether additional clarification
                regarding any aspect of the proposed instructions is needed. The Bureau
                further requests comment on whether additional or different
                instructions are needed for financial institutions that chose not to
                use a paper data collection form to collect, principal owners'
                ethnicity, race, and sex, such as collecting such information using a
                web-based or other electronic data collection form or over the
                telephone. The Bureau also seeks comment regarding the challenges faced
                by both applicants and financial institutions by the data collection
                instructions prescribed in appendix G and specifically requests comment
                on ways to improve the data collection of principal owners' ethnicity,
                race, and sex.
                Appendix H to Part 1002--Tolerances for Bona Fide Errors in Data
                Reported Under Subpart B
                 The Bureau is proposing appendix H, which would set out a Threshold
                Table, as referred to in proposed Sec. 1002.112(b) and proposed
                comment 112(b)-1. As these provisions would explain, a financial
                institution is presumed to maintain procedures reasonably adapted to
                avoid errors with respect to a given data field if the number of errors
                found in a random sample of a financial institution's data submission
                for a given data field do not equal or exceed the threshold in column C
                of the Threshold Table.
                 Under the Threshold Table in proposed appendix H, column A would
                list the size of the financial institution's small business lending
                application register in ranges of application register counts (e.g., 25
                to 50, 51-100, 101-130, etc.). The applicable register count range
                would then determine both the size of the random sample, under column
                B, and the applicable error threshold, under column C. The error
                threshold of column C, as proposed comment 112(b)-1 would explain,
                identifies the maximum number of errors that a particular data field in
                a financial institution's small business lending application register
                may contain such that the financial institution is presumed to maintain
                procedures reasonably adapted to avoid errors with respect to a given
                data field. Column D would be illustrative, showing the error threshold
                as a percentage of the random sample size.
                 Proposed appendix H would also include examples of how financial
                institutions would use the Threshold Table.
                 For the reasons set out in the section-by-section analysis of
                proposed Sec. 1002.112(b), the Bureau is proposing appendix H 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
                to exempt any financial institution or class of financial institutions
                from the requirements section 1071 as the Bureau deems necessary or
                appropriate to carry out the purposes of section 1071.
                 The Bureau seeks comment on this proposed appendix H. In
                particular, the Bureau seeks comment on whether the register count
                ranges in column A, the random sample sizes in column B, and the error
                thresholds in column C are appropriate. The Bureau further seeks
                comment on whether a covered financial institution should be required
                to correct and resubmit data for a particular data field, if the
                institution has met or exceeded the thresholds provided in appendix H.
                VI. Public Disclosure of 1071 Data
                A. Introduction
                 Section 1071 of the Dodd-Frank Act amended ECOA to require
                financial institutions to collect and report to the Bureau data about
                applications for credit for women-owned, minority-owned, and small
                businesses, and for those data to be subsequently disclosed to the
                public.\766\
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                 \766\ See ECOA section 704B(e)(1), (f)(2) (detailing
                requirements for compilation, maintenance, and publication of
                information).
                ---------------------------------------------------------------------------
                [[Page 56511]]
                 The Bureau is proposing that financial institutions not compile,
                maintain, or submit any name, specific address, telephone number, email
                address or any personally identifiable information concerning any
                individual who is, or is connected with, an applicant, other than as
                would be required pursuant to proposed Sec. 1002.107. Nonetheless,
                publication of the data fields proposed in Sec. 1002.107(a) in an
                unedited, application-level format could potentially affect the privacy
                interests and lead to the re-identification of, and risk of harm to,
                small businesses, related natural persons, and financial institutions.
                 Section 1071 states that the Bureau may, ``at its discretion,
                delete or modify data collected under [section 1071] which is or will
                be available to the public, if the Bureau determines that the deletion
                or modification of the data would advance a privacy interest.'' \767\
                For the reasons discussed below, the Bureau is proposing to adopt a
                balancing test as the method by which it would implement its
                ``discretion'' to delete or modify data before making the data
                available to the public.
                ---------------------------------------------------------------------------
                 \767\ ECOA section 704B(e)(4).
                ---------------------------------------------------------------------------
                 However, the Bureau does not yet have any data under section 1071
                and the Bureau does not believe that there are any comparable datasets
                that it could use as an adequate proxy for 1071 data to which it could
                apply the balancing test at this time. The Bureau is thus setting forth
                herein a partial analysis under the balancing test, for public comment.
                With several exceptions, discussed in part VI.C.6 below, the Bureau is
                not at this time proposing specific modifications or deletions for the
                public application-level 1071 data. After the Bureau receives at least
                one full year of 1071 data from financial institutions following the
                compliance date of the final rule, the Bureau intends to issue a policy
                statement (informed by comments received on the partial analysis in
                this proposal), in which the Bureau would set forth its intended
                modifications and deletions.
                B. Background
                1. SBREFA Outline
                 In the SBREFA Outline, the Bureau stated it was considering
                proposing to use a balancing test for purposes of deciding how to
                exercise its discretion to modify or delete data prior to
                publication.\768\ The Bureau explained that data would be modified or
                deleted if disclosure of the data in unmodified form would pose risks
                to privacy interests that are not justified by the benefits of public
                disclosure in light of the statutory purposes of section 1071. If the
                risks of disclosing unmodified data are not justified by the benefits
                under the balancing test, the Bureau explained it would determine
                whether modifications could appropriately diminish the risks. The
                Bureau further explained that it was considering proposing to apply
                this balancing test to the privacy interests of non-natural persons
                (e.g., small business applicants or financial institutions), with
                respect to protecting sensitive commercial information, as well as the
                privacy interests of natural persons (e.g., principal owners), with
                respect to protecting personal information.
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                 \768\ See SBREFA Outline at 40-41.
                ---------------------------------------------------------------------------
                 As an alternative to a balancing test, the Bureau had considered an
                approach in which it would modify data prior to publication if an
                identified privacy risk crosses some significance threshold, without
                assessing that risk against the benefit of disclosure. The Bureau
                explained that such an approach, however, could be inconsistent with
                the express disclosure purposes of the statute.
                2. SBREFA Feedback
                 The Bureau received feedback on its privacy proposals under
                consideration from SERs and other commenters; \769\ the SBREFA Panel
                also made recommendations regarding privacy. Comments related to the
                design and implementation of the balancing test itself are described
                immediately below. Comments addressing general issues related to
                benefits, privacy risks, and potential modifications of data fields are
                described further below in part VI.C. Comments addressing the benefits
                of specific data fields the Bureau considered as part of the SBREFA
                process are discussed in the section-by-section analysis of proposed
                Sec. 1002.107(a), in part V above. Comments addressing the privacy
                risks and potential modifications of specific data fields are discussed
                below in part VI.C.
                ---------------------------------------------------------------------------
                 \769\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 34-36.
                ---------------------------------------------------------------------------
                 With respect to the balancing test itself, several SERs expressed
                the view that it would be difficult to balance transparency and
                fairness in the marketplace with privacy interests. A SER and another
                industry commenter suggested that the balancing test described in the
                SBREFA Outline would not adequately protect privacy interests because
                it appeared to be subjective, dependent on the limitations of agency
                expertise, and subject to change. A community group commenter
                maintained that financial institution privacy did not appear to have
                been a concern for Congress in section 1071.
                 One industry commenter recommended that the Bureau consider the
                alternative approach of not balancing privacy risks against the
                benefits of disclosure because of the heightened privacy risks in the
                small business market (relative to consumer privacy risks),
                particularly in geographies where re-identification risk is higher.
                Another industry commenter expressed the view that excluding community
                banks from collection and reporting would provide a more
                straightforward approach to protecting privacy. On the other hand, a
                community group maintained that the benefits of public disclosure would
                always justify any alleged privacy risks.
                 Commenters also addressed information security concerns and
                potential conflicts with other privacy laws. Two SERs raised concerns
                that the transmission of 1071 data to the Bureau could give rise to the
                risk of a data security breach involving personally identifiable
                information or information that would directly identify a small
                business. One SER requested that financial institutions be held
                harmless if there were a data security breach for which the Bureau was
                responsible. Another industry commenter expressed the concern that some
                applicants would be hesitant to provide information in light of data
                security concerns. Another requested that the Bureau describe and seek
                comment on its data security safeguards.
                 Commenters also addressed procedural issues surrounding the
                implementation of the Bureau's privacy analysis. Several industry
                commenters requested that the Bureau not bifurcate the analysis of
                privacy issues into a separate notice-and-comment rulemaking, which was
                the approach the Bureau took with respect to data fields reported under
                the 2015 HMDA Final Rule. One commenter stated that a full explanation
                of the balancing test design and its application would help financial
                institutions consider potential reputational risks associated with data
                disclosure. One industry stakeholder stated that the Bureau should take
                what the stakeholder described as a transparent approach to decisions
                about public disclosure. Another stakeholder stated that if privacy
                issues are raised after implementation of a rulemaking, the Bureau
                should, as the stakeholder described, promptly limit publication of
                data that might be released to the
                [[Page 56512]]
                public. Other industry commenters maintained that decisions about
                modifications or deletions to protect privacy should be published
                following notice-and-comment rulemaking, rather than by policy
                statement.
                 The SBREFA Panel recommended that the Bureau offer more detail in
                the proposal on the balancing test and its application to the 1071 data
                fields.\770\ The Panel also recommended that the Bureau seek comment on
                how it should design and implement the balancing test. In addition, the
                Panel recommended that the Bureau seek comment on the range of privacy
                concerns articulated by SERs, including potential re-identification of
                small businesses and financial institutions, as well as the types of
                harms and sensitivities the unmodified release of 1071 data could cause
                to financial institutions and small business applicants.\771\ Finally,
                the Panel recommended that the Bureau seek comment on the potential
                benefits of publishing unmodified 1071 data.\772\
                ---------------------------------------------------------------------------
                 \770\ See SBREFA Panel Report at 47-48.
                 \771\ See id.
                 \772\ See id.
                ---------------------------------------------------------------------------
                C. Design, Implementation, and Application of Balancing Test
                 In light of the feedback from SERs and other stakeholders, and for
                the reasons below, the Bureau is proposing to adopt a balancing test,
                consistent with the test described in the SBREFA Outline. As
                recommended by the SBREFA Panel, the Bureau is providing additional
                detail on the balancing test and how it would be applied to the
                proposed 1071 data points; this analysis is in Preliminary Application
                of the Balancing Test in part VI.C.6 below. As discussed under
                Implementation of the Balancing Test in part VI.C.2 below, however, the
                Bureau is not proposing specific modifications or deletions for most of
                the proposed data fields because data required for a statistical
                analysis of re-identification risk are not yet available.
                1. Balancing Test Design
                 Under ECOA section 704B(e)(4), the Bureau ``may, at its discretion,
                delete or modify data collected under this section which is or will be
                available to the public, if the Bureau determines that the deletion or
                modification of the data would advance a privacy interest.'' \773\
                Congress thus provided the Bureau with broad discretion to modify or
                delete data prior to public disclosure to advance privacy interests.
                The Bureau continues to believe that a balancing test is a reasonable
                approach for exercising this discretion and would effectuate the
                purposes of section 1071 better than the alternative approaches
                discussed in the SBREFA Outline and recommended by some commenters. As
                recognized by commenters, exercising this discretion inherently
                requires that the Bureau reconcile competing policy interests. A
                balancing test approach would help the Bureau consider the privacy
                risks and benefits of disclosing data fields, tailor modifications or
                deletions of data narrowly to appropriately balance privacy risks and
                benefits in the published data, and establish a decision framework that
                is responsive to a broad set of stakeholder concerns that might evolve
                over time. The Bureau intends to engage with stakeholders, including
                through this proposal, to supplement its own expertise in evaluating
                privacy interests for these purposes.
                ---------------------------------------------------------------------------
                 \773\ ECOA section 704B(e)(4).
                ---------------------------------------------------------------------------
                 Alternative approaches recommended by stakeholders are summarized
                in part VI.B.2 above. The Bureau is not proposing approaches that do
                not consider the benefits of public disclosure because it is concerned
                they would result in outcomes inconsistent with the statutory purposes.
                For example, deleting all application-level data from public release
                and instead publishing aggregate data would advance privacy interests
                but would substantially undermine the public disclosure purposes of the
                statute.
                 The Bureau also considered the suggestion that it exercise its
                discretion to modify or delete application-level data prior to
                publication by exempting classes of financial institutions from public
                disclosure. While this would address the privacy interests of those
                financial institutions and their customers that might arise in certain
                markets, this approach would be too narrow because privacy concerns
                that arise for these persons may also arise for others, such as small
                businesses and natural persons in other markets. The Bureau is not
                proposing an approach that assumes the benefits of disclosure will
                always justify risks to privacy interests. The commenter recommending
                this approach did not provide a basis for such a conclusion with
                respect to individual data fields, or the dataset as a whole.
                 With respect to the comment that the Bureau not consider the
                privacy interests of financial institutions, section 1071 generally
                provides that the Bureau may delete or modify data if it determines
                that doing so ``would advance a privacy interest.'' \774\ The statute
                does not define the term ``privacy interest,'' however, and the Bureau
                believes it can reasonably be interpreted broadly, for purposes of
                section 1071, to include interests of non-natural persons with respect
                to certain commercial information.
                ---------------------------------------------------------------------------
                 \774\ See ECOA section 704B(a) (statutory purposes), (e)(4)
                (deletion or modification authority), (f)(1) (reporting
                requirement), (f)(2)(C) (publication requirement).
                ---------------------------------------------------------------------------
                 Whether a non-natural person has cognizable ``privacy interests''
                under the Constitution or common law is not a settled legal question
                across all areas of the law. Common law recognizes that businesses have
                an interest in protecting sensitive commercial information, similar to
                the privacy interests enjoyed by natural persons.\775\ Although the
                courts have typically described these interests as property interests,
                cases sometimes describe these types of interests as privacy
                interests.\776\ Some circuits have held that non-natural persons have
                constitutionally protected privacy interests,\777\ while other circuits
                have rejected this notion.\778\ The Supreme Court has held that
                corporations do not have privacy rights on par with natural
                persons,\779\ and that corporations do not have ``personal'' privacy
                interests; \780\ however, it has not directly addressed the issue of
                whether a non-natural person has a cognizable ``privacy interest.'' The
                Bureau also understands that the interests of many small businesses may
                be closely tied to the privacy interests of natural persons.\781\
                ---------------------------------------------------------------------------
                 \775\ See, e.g., Carpenter v. United States, 484 U.S. 19, 26
                (1987) (``Confidential information acquired or compiled by a
                corporation in the course and conduct of its business is a species
                of property to which the corporation has the exclusive right and
                benefit . . . .'') (citation omitted).
                 \776\ See, e.g., Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470,
                487 (1974) (``A most fundamental human right, that of privacy, is
                threatened when industrial espionage is condoned or is made
                profitable.''); E.I. duPont deNemours & Co. v. Christopher, 431 F.2d
                1012, 1016 (5th Cir. 1970) (``Commercial privacy must be protected
                from espionage which could not have been reasonably anticipated or
                prevented.'').
                 \777\ See, e.g., Tavoulareas v. Wash. Post Co., 724 F.2d 1010,
                1023 (D.C. Cir. 1984), vacated on other grounds, 737 F.2d 1170 (D.C.
                Cir. 1984).
                 \778\ See, e.g., Fleck & Assocs., Inc. v. City of Phoenix, 471
                F.3d 1100, 1105 (9th Cir. 2006).
                 \779\ United States v. Morton Salt Co., 338 U.S. 632, 652 (1950)
                (``[C]orporations can claim no equality with individuals in the
                enjoyment of a right to privacy.'').
                 \780\ FCC v. AT&T, Inc., 562 U.S. 397, 402-407 (2011). In FCC,
                the Court held that corporations lack ``personal privacy'' interests
                under FOIA Exemption 6, which uses the term ``personal privacy.''
                The Court's opinion was based on the word ``personal'' and limited
                to the notion of ``personal privacy.'' The Court stated that it was
                not addressing the scope of a non-natural person's ``privacy
                interests'' generally under constitutional or common law. Id. at 407
                (``[T]his case does not call upon us to pass on the scope of a
                corporation's `privacy' interests as a matter of constitutional or
                common law.'').
                 \781\ See, e.g., Providence J. Co. v. FBI, 460 F. Supp. 778, 785
                (D.R.I. 1978) (``While corporations have no privacy, personal
                financial information is protected, including information about
                small businesses when the individual and corporation are
                identical.''), rev'd on other grounds, 602 F.2d 1010 (1st Cir.
                1979).
                ---------------------------------------------------------------------------
                [[Page 56513]]
                 The Bureau believes it is appropriate to consider the privacy
                interests of non-natural persons under the 1071 balancing test. The
                proposed 1071 data points would reveal information about non-natural
                persons--including small businesses and financial institutions--and
                Congress did not expressly limit the privacy interests the Bureau may
                consider to those of natural persons. Nor did Congress expressly limit
                the privacy interests the Bureau may consider to those of applicants or
                borrowers, as it did in HMDA.\782\ Further, courts have recognized that
                non-natural persons have privacy interests in certain contexts. The
                Bureau seeks comment on its interpretation of ``privacy interests''
                under section 1071 and its proposal to consider the privacy interests
                of both financial institutions and non-natural person applicants.
                ---------------------------------------------------------------------------
                 \782\ For context, the privacy interests that may be considered
                under HMDA are limited to the interests of ``applicants and
                mortgagors'' specifically. See 12 U.S.C. 2803(h)(1)(E), (h)(3)(B),
                (j)(2)(B). In contrast, section 1071 simply uses the term ``privacy
                interest,'' without qualification. See ECOA section 704B(e)(4).
                ---------------------------------------------------------------------------
                 Several commenters raised concerns about the information security
                implications of reporting data to the Bureau. While the Bureau's
                information security procedures are outside the scope of this
                rulemaking, the Bureau takes strong measures to mitigate and address
                any risks to the security of sensitive data it receives, consistent
                with the guidance and standards set for Federal information security
                programs, and is committed to protecting the privacy and information
                security of the 1071 data it receives from financial institutions. In
                addition, the Bureau does not believe a financial institution could be
                held legally liable for the exposure of data due to a breach at a
                government agency or for reporting data to a government agency if the
                institution was legally required to provide the data to the agency and
                did so in accordance with other applicable law.
                 The Bureau acknowledges the concern raised by some SERs and other
                stakeholders that some applicants might be hesitant to provide
                information in light of data security concerns. However, the Bureau
                does not believe that such concerns will broadly discourage applicants
                from seeking credit from financial institutions that are responsible
                for reporting data to the Bureau.
                 For the reasons described above, the Bureau proposes to use a
                balancing test to exercise its discretion under ECOA section 704B(e)(4)
                to delete or modify data collected under section 1071 which is or would
                be available to the public where the Bureau determines that the
                deletion or modification of the data would advance a privacy interest.
                Specifically, the Bureau proposes to modify or, as appropriate, delete
                data fields from the public application-level 1071 data where the
                release of the unmodified data would create risks to the privacy
                interests of applicants, related natural persons, or financial
                institutions that would not be justified by the benefits of such
                release to the public in light of the statutory purposes of section
                1071. In such circumstances, the need to protect the privacy interests
                of applicants, related natural persons, or financial institutions would
                require that individual data fields be modified or, as appropriate,
                deleted. Considering the public disclosure of 1071 data as a whole, the
                privacy interests of applicants, related natural persons, or financial
                institutions would arise under the balancing test only where the
                disclosure of 1071 data may both substantially facilitate the re-
                identification of an applicant or related natural person, in the data
                and disclose information about such persons, or the identified
                financial institution, that is not otherwise public and may be harmful
                or sensitive. Thus, disclosure of an unmodified individual data field
                may create a risk to privacy interests if such disclosure either would
                substantially facilitate the re-identification of an applicant or
                related natural person; or would disclose information about applicants
                or related natural persons, or an identified financial institution,
                that is not otherwise public and that may be harmful or sensitive.\783\
                This interpretation implements ECOA section 704(e)(4).
                ---------------------------------------------------------------------------
                 \783\ The Bureau is aware that ``re-identification'' risk often
                is used in reference to risks applicable to natural persons and that
                identification of a small business in the public application-level
                1071 data could be characterized as a ``harm'' or ``sensitivity.''
                However, for the ease of administrability, the proposed balancing
                test analyzes risks to both natural persons and small businesses as
                re-identification risks.
                ---------------------------------------------------------------------------
                 Where the publication of unmodified application-level 1071 data may
                create risks to privacy, the proposed balancing test would require that
                the Bureau consider the benefits of disclosure in light of section
                1071's purposes and, where these benefits do not justify the privacy
                risks the disclosure would create, modify the public application-level
                dataset to appropriately balance the privacy risks and disclosure
                benefits. The Bureau would delete the data field prior to publishing
                the application-level dataset if other modifications would not
                appropriately balance the privacy risks and disclosure benefits. An
                individual data field would be a candidate for modification or deletion
                under the proposed balancing test if its disclosure in unmodified form
                would create a risk of re-identification or a risk of harm or
                sensitivity.
                 The Bureau's proposed balancing test generally resembles the
                balancing test adopted in the 2015 HMDA Final Rule,\784\ with certain
                adjustments for the 1071 context. In particular, the Bureau's proposed
                1071 balancing test would consider the privacy interests of not just
                applicants, but also related natural persons who might not be
                applicants (such as principal owners of a business, where a legal
                entity is the applicant), as well as the privacy interests of financial
                institutions reporting 1071 data.
                ---------------------------------------------------------------------------
                 \784\ See 80 FR 66127, 66133-34 (Oct. 28, 2015).
                ---------------------------------------------------------------------------
                 The Bureau's proposed 1071 balancing test would not specifically
                consider the risks that a financial institution could be identified in
                the public application-level 1071 data. Section 1071 requires financial
                institutions to compile and maintain data and provides that such
                information be made available to the public upon request.\785\
                Accordingly, section 1071 contemplates that the public would know what
                application data are associated with particular financial institutions.
                Because the statute directly contemplates disclosure of a financial
                institution's identity in connection with the public application-level
                dataset, the Bureau proposes to disclose financial institution
                identity; the re-identification risk element of the analysis would not
                apply to financial institutions. However, the Bureau would consider the
                risk to a financial institution that the release of 1071 data in
                unmodified form would disclose information that may be harmful or
                sensitive to a financial institution.
                ---------------------------------------------------------------------------
                 \785\ See ECOA section 704B(e), (f)(2)(B).
                ---------------------------------------------------------------------------
                 As recommended by the SBREFA Panel, the Bureau seeks comment on the
                design of its proposed balancing test. The Bureau also seeks comment on
                whether the balancing test should apply to the privacy interests of
                natural persons generally, rather than just those of natural persons
                related to applicants.
                2. Implementation of the Balancing Test
                 As noted above, the SBREFA Panel and other commenters recommended
                that the Bureau offer more detail in the proposal on how the Bureau
                intends to implement and apply its balancing test
                [[Page 56514]]
                to the 1071 data fields it is proposing.\786\ Several industry
                commenters requested that the Bureau apply the balancing test directly
                in the Bureau's 1071 rulemaking, rather than after the Bureau issues a
                final rule. Because of data limitations discussed below, the Bureau is
                not proposing a full application of the balancing test to most of the
                proposed data points. Instead, the Bureau is setting forth and seeking
                comment on its analysis of the benefits and harms or sensitivities that
                could arise with respect to individual data fields and the dataset as a
                whole. The Bureau is not conducting a full analysis of the risks of re-
                identification; the Bureau is proposing to determine the extent of re-
                identification risk after it has obtained a full year of reported 1071
                data. Accordingly, the Bureau is not proposing specific modifications
                or deletions for most of the proposed data points, but is instead
                seeking comment throughout part VI.C.5 and .6 on the types of
                techniques it is considering.
                ---------------------------------------------------------------------------
                 \786\ See SBREFA Panel Report at 47.
                ---------------------------------------------------------------------------
                 The Bureau is not applying the proposed balancing test fully to the
                proposed data fields because the lack of an existing 1071 dataset, or a
                sufficiently similar dataset, materially limits its ability to analyze
                re-identification risks. Unlike the balancing test elements of
                benefits, harms, and sensitivities, the Bureau would analyze the re-
                identification risk element, in part, using a statistical analysis.
                Specifically, the Bureau would determine whether a particular
                combination of data fields in a dataset generates a unique set of
                records that can be accurately matched to records in another publicly
                available dataset identifying an applicant or a related natural
                person.\787\ Where certain data fields significantly contribute to re-
                identification risk, the Bureau can use this type of analysis to
                determine what modifications can be made to the data fields to reduce
                re-identification risk--that is, by reducing the number of unique
                combinations produced by data fields--while maintaining as much data
                utility as possible.
                ---------------------------------------------------------------------------
                 \787\ For purposes of this discussion of the proposed balancing
                test analysis, the term ``unique'' can refer to a combination of
                values for a particular record or a combination of values shared by
                a few records.
                ---------------------------------------------------------------------------
                 However, the absence of an existing 1071 dataset or sufficiently
                similar data significantly impedes the Bureau's ability to
                preliminarily determine whether a proposed 1071 data field,
                individually or in combination with others, would substantially
                facilitate re-identification, or how specifically to modify data to
                reduce that risk. Because there does not exist a dataset sufficiently
                similar to what would be published under section 1071, a re-
                identification analysis of data other than actual reported 1071 data
                would not provide an accurate basis on which the Bureau could apply the
                balancing test and modify or delete the data, as appropriate.\788\
                Underestimating the degree to which a 1071 data field, individually or
                in combination with others, facilitates re-identification risk could
                unnecessarily increase privacy risks to an applicant or a related
                natural person, while overestimating re-identification risk could
                unnecessarily reduce data utility.
                ---------------------------------------------------------------------------
                 \788\ The Bureau considered whether it could analyze re-
                identification risk using data released under the SBA's Paycheck
                Protection Program (PPP) and U.S. Census data. However, estimating
                re-identification risk--and making modification and deletion
                decisions designed to reduce re-identification risk--based on
                existing public data sources would be substantively limited. First,
                the more limited scope of the PPP and Census data makes it difficult
                to accurately estimate the re-identification risk associated with
                all of the data points in the eventual 1071 data. Second, a re-
                identification analysis using existing PPP and Census datasets would
                not cover the same sets of small businesses that will appear in the
                1071 data.
                ---------------------------------------------------------------------------
                 In light of these limitations, the Bureau considered deferring all
                analysis under the proposed balancing test until after the 1071 rule is
                finalized. However, the Bureau is concerned that doing so would reduce
                opportunities for public feedback on privacy issues and their
                relationship to the general 1071 proposal. Although the Bureau lacks
                data that would allow it to perform a complete re-identification
                analysis at this time, it believes there is substantial value in
                setting forth its preliminary analysis under other aspects of the
                balancing test. Specifically, the Bureau has preliminarily analyzed the
                benefits and harms or sensitivities associated with the proposed data
                fields, the capacity and motives of third parties to match proposed
                1071 data fields to other identifiable datasets, and potential
                modification techniques it may consider to address privacy risks. The
                Bureau's preliminary analysis of these aspects of the balancing test is
                set forth below. The Bureau acknowledges that the public will not have
                an opportunity to comment on the Bureau's intentions with respect to
                specific modifications or deletions for each proposed data field before
                a 1071 rule is finalized. However, the Bureau believes this limitation
                outweighs the risks of basing modifications or deletions on a
                potentially inaccurate re-identification analysis. And while a number
                of community groups that provided feedback on the Bureau's SBREFA
                Outline asserted that privacy risks would be low, they nonetheless
                recognized the role played by modification techniques. The Bureau
                agrees that modification techniques could play an important role in
                reducing privacy risks. The Bureau's ability to design effective
                modifications, however, requires application-level data that are not
                currently available.
                 As noted above, several industry commenters asserted that privacy
                decisions should be finalized by notice-and-comment rulemaking, rather
                than by policy statement. The Bureau believes, however, that a policy
                statement would be an appropriate vehicle for announcing its intentions
                with respect to modifications and deletions of 1071 data. First, under
                section 1071, the Bureau may delete or modify data at its discretion,
                in contrast to other provisions in the statute that require legislative
                rulemaking.\789\ Second, the Bureau's proposed approach with respect to
                modifications and deletions would not impose compliance obligations on
                financial institutions; as discussed in the section-by-section analysis
                of proposed Sec. 1002.110 above, the Bureau is proposing to publish
                application-level data on its website on behalf of financial
                institutions.\790\
                ---------------------------------------------------------------------------
                 \789\ Compare ECOA section 704B(e)(4), with ECOA section
                704B(f)(2).
                 \790\ Section 1071 requires financial institutions to compile
                and maintain data and provides that such information be made
                available to the public upon request. See ECOA section 704B(e),
                (f)(2)(B).
                ---------------------------------------------------------------------------
                 Nonetheless, in the interest of obtaining public feedback on the
                qualitative aspects of its balancing test analysis, the Bureau is
                including a preliminary detailed analysis for each of the proposed data
                points, described under Preliminary Application of the Balancing Test
                in part VI.C.6 below. After the first year of 1071 data is reported to
                the Bureau, but before the Bureau releases the first year of 1071 data
                to the public, it would publish a policy statement setting forth its
                intentions with respect to modifications and deletions to the public
                application-level 1071 data. Before publishing that policy statement,
                the Bureau would conduct a balancing test analysis based on feedback to
                this proposal as well as a quantitative analysis of re-identification
                risk using reported 1071 data. At this time, the Bureau does not intend
                to re-propose its balancing test analysis for public comment prior to
                issuing the policy statement, in the interest of making data publicly
                available in a timely manner.
                 While the Bureau is seeking public feedback on its analysis below,
                preserving the ability to exercise its
                [[Page 56515]]
                discretion to modify or delete data through policy statements allows
                the Bureau to manage the relationship between privacy risks and
                benefits of disclosure more actively. The Bureau believes this
                flexibility may be especially important in the event the Bureau becomes
                aware of developments that might contribute to privacy risks. The
                privacy landscape is constantly evolving, and risks to applicant
                privacy created by the publication of the application-level 1071 data
                may change as the result of technological advances and other external
                developments. For example, a new source of publicly available records
                may become accessible, increasing or decreasing privacy risks under the
                balancing test, or the Bureau may discover evidence suggesting that
                third parties are using the 1071 data in unforeseen, potentially
                harmful ways. Potential uses of the application-level 1071 data in
                furtherance of the statute's purposes may also evolve, such that the
                benefits associated with the disclosure of certain data may increase to
                an extent that justifies providing more information to the public in
                less modified form. As recommended by the SBREFA Panel, the Bureau
                seeks comment on its approach described above for implementing the
                balancing test.\791\
                ---------------------------------------------------------------------------
                 \791\ See SBREFA Panel Report at 24, 33, 48.
                ---------------------------------------------------------------------------
                3. Disclosure Benefits
                 In the SBREFA Outline, the Bureau explained that, under the
                balancing test it was considering, data would be modified or deleted if
                disclosure in unmodified form would pose risks to privacy interests
                that are not justified by the benefits of public disclosure in light of
                the statutory purposes of section 1071.\792\ The Bureau sought feedback
                on the data points generally, as well as the benefits of public
                disclosure to financial institutions for each of the data points under
                consideration.\793\ Feedback on the benefits of public disclosure of
                the data points under consideration during the SBREFA process is
                described in the applicable section-by-section analysis of proposed
                Sec. 1002.107(a)(1) through (21) in part V above. Feedback on the
                benefits of public disclosure of the 1071 dataset as a whole is
                described below.
                ---------------------------------------------------------------------------
                 \792\ See SBREFA Outline at 40-41.
                 \793\ See id.
                ---------------------------------------------------------------------------
                 Under the proposed balancing test, the Bureau would consider the
                benefits of disclosure of the application-level 1071 data to the public
                in light of the statutory purposes of section 1071. As described above,
                the 1071 data would be the most comprehensive dataset available to
                analyze trends within the U.S. small business lending industry. The
                Bureau expects that users of 1071 data would rely on this information
                to help achieve the statutory purposes of section 1071: (1)
                Facilitating the 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.\794\ This would make 1071 data
                the foremost data source that governmental entities, researchers,
                economists, industry, and community groups rely on to achieve 1071's
                purposes and to analyze the small business lending market. The Bureau
                received feedback provided by SERs, other commenters, and the SBREFA
                Panel on the potential benefits of disclosure. Comments related to the
                overall benefits of data disclosure, the fair lending benefits, and
                business and community development benefits are described below.
                ---------------------------------------------------------------------------
                 \794\ See ECOA section 704B(a).
                ---------------------------------------------------------------------------
                 Some SERs and industry stakeholders generally supported the public
                disclosure of 1071 data to promote the monitoring of equal access to
                credit for small businesses, and narrowing the information gap between
                lenders and borrowers, community groups, and public officials. A number
                of SERs 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 stated that the data
                currently available are limited, and that section 1071 has the
                opportunity to address lending disparities. The SER also explained that
                data transparency and fairness could address lending practices that
                tend to exclude women-owned and minority-owned businesses, exacerbating
                a racial wealth gap. An industry stakeholder supported the public
                disclosure of 1071 data to promote the monitoring of equal access to
                credit for women- and minority-owned businesses.
                 Several SERs also underscored the importance of public disclosure
                of 1071 data in furthering the 1071 rule's business and community
                development purpose. One SER stated that the 1071 rule could be a model
                for the marketplace and pro-innovation if implemented with checks and
                balances. Another SER said that more transparency would help
                governments and creditors understand what strategies are successful in
                reaching women-owned and minority-owned small businesses and shed light
                on the marketplace and pricing overall.\795\ Other SERs emphasized the
                importance of publishing pricing information (specifically captured as
                APR), together with product type for understanding the cost and
                availability of financing products to small businesses, the importance
                of NAICS codes or other industry information for determining which
                industries are getting funding generally, and the importance of census
                tract or other geographic information for understanding the extent of
                lending to small businesses in low-to-moderate income
                neighborhoods.\796\
                ---------------------------------------------------------------------------
                 \795\ See SBREFA Panel Report at 36.
                 \796\ See id.
                ---------------------------------------------------------------------------
                 However, several industry commenters expressed the belief that
                there were no, or few, benefits to publishing 1071 data in general, in
                addition to raising general concerns about privacy risks, discussed
                under Risks to Privacy Interests in part VI.C.4 below. Several
                commenters maintained that the benefits of public disclosure would be
                limited due to concerns about the data points the Bureau was
                considering and the absence of other data points that could, in the
                view of these commenters, reduce the risk of misinterpretation of the
                data. SERs and industry commenters also questioned the benefits
                associated with individual data points, as described in the applicable
                section-by-section analysis of proposed Sec. 1002.107(a)(1) through
                (21) in part V above.
                 Community group commenters supported public disclosure of 1071
                data. One commenter expressed the view that robust data collection
                would allow the public to gain a much greater understanding of gaps in
                lending to borrowers in the marketplace, and easily identify unmet
                borrowing needs. The commenter explained that the 1071 dataset would
                cover more types of loans from more institutions than existing CRA data
                (which had been used for similar kinds of analyses in the past),
                potentially giving the Bureau a comprehensive view of the small
                business lending market. The commenter also explained that data
                collection under the proposal would build an understanding of the
                credit needs and financing outcomes of small businesses in the lending
                marketplace through information from data fields such as amount applied
                for, action taken, and amount approved or originated. Additionally,
                several community group commenters asserted that transparency through
                public disclosure would benefit responsible financial institutions by
                allowing them
                [[Page 56516]]
                to distinguish themselves from others and providing a means for
                discovering and addressing problematic practices earlier.
                 The Bureau has considered these comments and the ways in which
                public disclosure of the proposed 1071 data fields would facilitate the
                enforcement of fair lending laws. Market transparency through
                publication of the application-level 1071 data would help to identify
                potential fair lending violations and address discrimination in small
                business lending. For example, the ability to compare pricing is a
                central outcome in many fair lending analyses, which often aim to
                determine if similarly situated applicants face higher prices due to a
                prohibited basis under ECOA, such as ethnicity, race, and sex. In
                supporting the inclusion of pricing as a discretionary data point, one
                community group explained that collecting data on price would
                facilitate enforcement of fair lending laws by identifying
                discrimination in lending through information on whether an application
                was approved and at what price. The 1071 data would also be used by
                public officials, researchers, and community groups to identify
                potentially discriminatory lending patterns and to enforce anti-
                discrimination statutes. For example, data on action taken would be
                used in fair lending analyses to identify potential disparities in
                denial rates among similarly situated applicants. Additionally, public
                disclosure of the 1071 data fields would enable data users to advocate
                that financial institutions maintain robust fair lending policies and
                practices and could also increase the prospect of self-correction when
                financial institutions conduct their own analyses to assess potential
                fair lending risks. At the same time, greater transparency could
                provide explanatory context for lending decisions, which may help
                protect responsible lenders from inaccurate assumptions based on more
                limited public data.
                 Moreover, data users, such as community groups, researchers, and
                public officials, would be able to use 1071 data to help determine
                whether certain types of credit are disproportionately available to
                different groups. For example, one community group commenter explained
                that because credit cards and other types of high-interest credit are
                widely used by small businesses, information on the types of credit
                applied for or originated could reveal the extent to which women-owned
                or minority-owned small businesses can access term loans or are served
                disproportionately by credit cards or other small business credit
                products that generally carry higher interest rates. The same commenter
                also explained that data users may be able to use the 1071 data to
                investigate whether certain products or businesses are
                disproportionately supported by government guarantee programs in
                business and community development and possibly help to develop more
                targeted programs.
                 The Bureau has also considered the ways in which publication of the
                application-level 1071 data would promote the business and community
                development purpose of 1071. The Bureau believes that the public
                application-level 1071 data would provide useful and robust data,
                allowing data users to appropriately and efficiently focus resources on
                particular areas of need. For example, reporting of information about
                rates of denial, and the associated reasons for denial of a business
                credit application, combined with data fields commonly used to help
                make underwriting decisions, such as gross annual revenue and time in
                business, would improve the public's ability to generally understand
                financial institutions' decision-making and to identify underserved
                areas of the market. The Bureau also believes that the public
                application-level 1071 data could yield information helpful in
                understanding the economic health of communities. NAICS codes, for
                example, could provide information about rates at which particular
                types of businesses are applying for and receiving credit in general,
                and which types of lending products are being requested, when combined
                with credit type. This information would also allow data users to
                identify trends in the small business market that could provide
                evidence as to the health of the overall economy. Understanding these
                potential indicators would also help public officials focus efforts to
                help creditors serve the lending needs of communities and give
                government officials information to efficiently distribute resources to
                vulnerable small business applicants. Finally, pricing information,
                such as total origination charges for different types of credit, would
                also allow data users to better understand pricing decisions and the
                cost of credit to small businesses. Information about credit purpose
                would allow data users to better understand why small businesses are
                using credit, thus helping communities determine whether creditors are
                serving the small business lending needs of their communities and also
                helping public officials to target public investment to better attract
                private investment and innovation. As recommended by the SBREFA Panel,
                the Bureau seeks comment on its understanding of the benefits of public
                disclosure of the 1071 data described above.\797\
                ---------------------------------------------------------------------------
                 \797\ See id. at 48.
                ---------------------------------------------------------------------------
                4. Risks to Privacy Interests
                 The Bureau has considered the risks to privacy that may be created
                by the public disclosure of the 1071 data that would be reported to the
                Bureau under the proposal. Based on its analysis to date, the Bureau
                believes that public disclosure of the unmodified application-level
                dataset, as a whole, might create risks to privacy interests under the
                1071 balancing test. As described in more detail below, this is due to
                the presence of unique data fields in the dataset that the Bureau
                believes could create re-identification risk and the presence of
                individual data fields that the Bureau believes would create a risk of
                harm or sensitivity. Accordingly, the Bureau intends to consider
                whether modifications or deletions to the public application-level 1071
                data would reduce these risks to privacy and appropriately balance them
                with the benefits of disclosure for section 1071's purposes.
                 As recommended by the SBREFA Panel, the Bureau seeks comment on the
                range of privacy concerns articulated by SERs, including potential re-
                identification of small businesses and financial institutions, as well
                as the types of harms and sensitivities the unmodified release of 1071
                data could cause to financial institutions and small business
                applicants, which are described further below.\798\
                ---------------------------------------------------------------------------
                 \798\ See id. at 47.
                ---------------------------------------------------------------------------
                i. Re-Identification Risk
                 In the Bureau's SBREFA Outline, the Bureau explained that, while
                information that directly identifies natural persons, such as name,
                address, date of birth, or Social Security number would not be
                collected pursuant to section 1071 requirements, publication of 1071
                data under consideration in an unmodified, application-level format
                potentially could be used to re-identify small business applicants and
                related natural persons or potentially harm their privacy
                interests.\799\ One SER stated that there has not been a single
                demonstrated incident of re-identification using HMDA data, and that
                privacy concerns could be addressed through modification techniques.
                However, many SERs and several industry stakeholders explained that
                1071 data would facilitate the re-
                [[Page 56517]]
                identification of natural persons and businesses, particularly in low-
                density geographies, like rural areas. Some stakeholders stated that it
                would be difficult to predict whether re-identification could arise,
                particularly as technology evolves.
                ---------------------------------------------------------------------------
                 \799\ See SBREFA Outline at 40.
                ---------------------------------------------------------------------------
                 The Bureau is concerned about two re-identification scenarios.
                First, a third party may use common data fields to match a 1071 record
                to a record in another dataset that contains the identity of the
                applicant or related natural person. The Bureau uses the term
                ``adversary'' when referring to such third parties.\800\ Second, an
                adversary may rely on pre-existing personal knowledge to recognize an
                applicant's record in the unmodified 1071 data.
                ---------------------------------------------------------------------------
                 \800\ The term is not intended to indicate that the adversary's
                motives are necessarily malicious or adverse to the interests of
                others. See, e.g., Nat'l Inst. of Standards & Tech., De-
                Identification of Personal Information (2015), http://nvlpubs.nist.gov/nistpubs/ir/2015/NIST.IR.8053.pdf (using the term
                ``adversary'').
                ---------------------------------------------------------------------------
                 Re-identification based on matching. Under the first scenario, it
                may be possible to match a 1071 record to an identified dataset, either
                directly or through a combination of intermediate datasets.\801\ The
                1071 data that would be reported under the proposal, like the data
                reported under HMDA and Regulation C, may contain data fields that
                create re-identification risk.\802\ However, successfully re-
                identifying a 1071 record would require several steps and may present a
                significant challenge.
                ---------------------------------------------------------------------------
                 \801\ For purposes of this discussion, an identified dataset is
                one that directly identifies a natural or non-natural person.
                 \802\ HMDA data have a large number of records with unique
                combinations of data fields. See 84 FR 649, 654 n.33 (Jan. 31, 2019)
                (citing a 2005 Board study finding that more than 90 percent of the
                loan records in a given year's HMDA data are unique--that is, an
                individual lender reported only one loan in a given census tract for
                a specific loan amount).
                ---------------------------------------------------------------------------
                 First, an adversary generally would have to isolate a record that
                is unique within the 1071 data. A 1071 record is unique when the values
                of the data fields associated with it are shared by zero or few other
                1071 records. As discussed above, the Bureau believes actual 1071 data
                are needed to perform an accurate re-identification analysis. Thus, the
                Bureau does not intend to apply the balancing test until after it has
                analyzed re-identification risk with at least a full year of reported
                1071 data.
                 A 1071 record having unique combinations of values would not
                automatically result in its re-identification; an adversary would also
                have to find a record corresponding to the applicant or related natural
                person in another dataset by matching similar combinations of data
                fields. Once a 1071 record has been matched to a corresponding record,
                an adversary would possess any additional fields found in the
                corresponding record but not found in the 1071 record, such as,
                possibly, the identity of the applicant. However, even after
                accomplishing such a match, an adversary might not have accurately re-
                identified the true applicant to whom the 1071 record relates. For
                example, if the corresponding record is not the only record in the
                other dataset that shares certain data fields with the unique 1071
                record, an adversary would have to make a probabilistic determination
                as to which corresponding record belongs to the applicant.
                 As described below and addressed with respect to individual data
                fields in part VI.C.6 further below, the Bureau expects that the census
                tract and NAICS code data fields may significantly contribute to re-
                identification risk. Geographic and industry information are publicly
                available in a variety of sources and in a form that directly
                identifies businesses or in a way that could be derived with reasonable
                accuracy. This information is also likely to produce unique instances
                in the data, both when used separately and also, especially, when
                combined. Other data fields may result in unique combinations
                (particularly when combined with census tract), but the Bureau would
                need actual 1071 data to analyze their contribution to uniqueness.
                 In the 1071 context, the Bureau believes that particularly relevant
                sources of identified data for matching purposes are UCC filings,
                property records, and titles. The Bureau believes that such filings
                could pose a serious re-identification risk because of the availability
                of information about the lender, the applicant, and the date of
                transaction. The proposed 1071 data fields in unmodified form would
                identify the financial institution as well as the action taken date or
                application date. If the action taken date is on or near the UCC filing
                date, for example, an adversary might be able to use the date and
                financial institution on the UCC filings to identify the applicants of
                originated loans in the public application-level 1071 data. The UCC
                filing also typically will have the address of the borrower.
                Combinations of lender, action taken date, and census tract might
                result in unique combinations of data fields that an adversary could
                connect to a publicly available source of information to re-identify
                the applicant. Therefore, the Bureau believes identity of the financial
                institution and the action taken date (and application date, which
                could be a proxy for action taken date) may significantly contribute to
                re-identification risk. UCC filings may also, although to a lesser
                extent, contain detailed information on the type of loan and the amount
                approved.
                 With respect to 1071 loans secured by residential and commercial
                property, publicly available real estate transaction records and
                property tax records would be particularly relevant sources of
                identified data, as the Bureau described in its proposed policy
                guidance on the disclosure of loan-level HMDA data.\803\ Because some
                of the data fields in such public records are also present in the 1071
                data, the Bureau believes that the publication of application-level
                1071 data without any modifications would create a risk that these
                public records could be directly matched to a 1071 record to re-
                identify an applicant. In addition, a business's own website, public
                directories, or websites that review businesses typically include the
                business's location, time in business, and information that could be
                used to derive information about the business's owners.
                ---------------------------------------------------------------------------
                 \803\ See 82 FR 44586, 44593 (Sept. 25, 2017). The Bureau
                explained that, although there is variance by jurisdiction, such
                records are often available electronically and typically identify a
                borrower through documents such as the mortgage or deed of trust.
                These documents typically include the loan amount, the financial
                institution, the borrower's name, and the property address, and may
                include other information.
                ---------------------------------------------------------------------------
                 UCC filings also frequently include the name of the lender, the
                name of the business, and the date that the filing was submitted.
                Though the availability differs by State, UCC filings are often
                searchable in State databases, and are a source of data frequently
                mined by data brokers. UCC statements are often filed against specific
                collateral and business assets generally, especially for products like
                general lines of credit. These types of filings would be available more
                broadly than just for loans with very specific collateral (like
                equipment or vehicles). Such filings could pose a serious re-
                identification risk because of the availability of information about
                the lender, the applicant, and the date of transaction.
                 Identified public data records in loan-level datasets for programs
                like the SBA's 7(a), 8(a), 504, and PPP programs, as well as State-
                level registries of women-owned and minority-owned businesses for
                contracting purposes, may also contribute to re-identification risk.
                These datasets include information such as loan program guarantee
                information, industry or NAICS code, demographic information about the
                business owners, time in business, and
                [[Page 56518]]
                number of workers. Time in business and number of workers could also
                likely significantly contribute to re-identification risk, especially
                in combination with other data fields like census tract and NAICS code.
                 Other publicly available sources of data similar to those included
                in the proposed 1071 data, but only for certain types of credit,
                include loan-level performance datasets made available by the
                Government-Sponsored Enterprises (GSEs). The GSE datasets include
                information such as borrower demographic information, loan program
                guarantee information, pricing data, loan term, loan purpose, and the
                year of action taken. Asset-backed securities datasets for securitized
                mortgage and auto loans are made available by the Securities and
                Exchange Commission through the Electronic Data Gathering, Analysis,
                and Retrieval (EDGAR) system. These datasets include information about
                the lender, the date of action taken, pricing data, loan term, loan
                amount applied for and approved. These datasets are available online
                with limited restrictions on access. But these datasets do not include
                the name of the borrower; as described above, this means that an
                adversary who is able to match a record in one of these datasets to a
                record in the 1071 data would need to make an additional match to an
                identified dataset to re-identify an applicant. And some of these
                datasets contain restrictions on use, such as a prohibition on
                attempting to re-identify borrowers.
                 Private datasets, which could be made available in identified or
                de-identified form, that could be matched to the 1071 data are also
                available. For example, data brokers collect information about small
                businesses from a wide range of sources and sell it for a variety of
                purposes, including marketing, identity verification, and fraud
                detection.\804\ These datasets typically include data collected from
                commercial, government, and other publicly available sources and may
                contain data about the business, including industry code, information
                about geography, and estimates of gross annual income, number of
                workers, and information about related natural persons, including the
                race and ethnicity of business owners. Some of these datasets contain
                restrictions on use, such as requiring a legitimate business purpose,
                and some may prohibit attempts to re-identify borrowers.
                ---------------------------------------------------------------------------
                 \804\ See generally Fed. Trade Comm'n, Data Brokers: A Call for
                Transparency and Accountability (May 2014), https://www.ftc.gov/system/files/documents/reports/data-brokers-call-transparency-accountability-report-federal-trade-commission-may-2014/140527databrokerreport.pdf (describing the types of products offered
                and the data sources used by data brokers).
                ---------------------------------------------------------------------------
                 In addition to considering the steps an adversary would need to
                complete to re-identify the 1071 data and the various data sources that
                may be required to accomplish re-identification, including their
                limitations, the Bureau also has considered the capacity, incentives,
                and characteristics of potential adversaries, including those that may
                attempt re-identification for harmful purposes. In particular, a
                potential competitor of a small business or a firm with other
                commercial interests may seek information about a business's expansion
                strategy or financial condition, including whether it was able to
                obtain credit approval. This could be part of routine market monitoring
                or to gain a specific commercial advantage.
                 These potential adversaries could possess the resources to use
                private datasets in addition to publicly available records to re-
                identify the 1071 data. However, the Bureau has considered the extent
                to which much of the commercial benefit to be obtained by re-
                identifying the 1071 data may be more readily available from private
                datasets to which these potential adversaries already have access
                without the need for recourse to the 1071 data. In many cases,
                information from other datasets may be timelier than that found in the
                1071 data.\805\ Furthermore, some of these potential adversaries may
                refrain from re-identifying the 1071 data for reputational reasons or
                because they have agreed to restrictions on using data from the
                additional datasets described above for re-identification purposes.
                ---------------------------------------------------------------------------
                 \805\ Cf. 82 FR 44586, 44594 (Sept. 25, 2017) (explaining that
                the delay between action taken and publication of reported HMDA data
                ranges from three to 15 months).
                ---------------------------------------------------------------------------
                 Additionally, while some academics, researchers, and journalists
                might use de-identified 1071 data, some may be interested in re-
                identifying the 1071 data for research purposes. These persons may
                differ in their capacity to re-identify an applicant in the 1071 data.
                However, as mentioned above, some private datasets may have contractual
                terms prohibiting their use for re-identification purposes and
                therefore these persons may be restricted from actually using the 1071
                data to re-identify applicants. Further, those academics or journalists
                with significant resources may be affiliated with organizations that
                have reputational or institutional interests that would not be served
                by re-identifying the 1071 data. These factors may reduce the risk of
                re-identification by such persons.
                 The Bureau has considered whether parties intending to commit
                identity theft or financial fraud may have the incentive and capacity
                to re-identify the 1071 data. As discussed under Risk of Harm or
                Sensitivity in part VI.C.4.ii below, the Bureau believes that the 1071
                data would be of minimal use for these purposes. Further, these
                potential adversaries are not law abiding and may have easier, albeit
                illegal, ways to secure data for these purposes than attempting to re-
                identify application-level 1071 data.
                 Re-identification based on personal knowledge. In addition to the
                possibility of re-identifying applicants through matching 1071 data to
                other datasets, some potential adversaries may be able to re-identify a
                particular applicant or related natural person in the 1071 data by
                relying on personal knowledge about the applicant or natural person.
                The unmodified 1071 data would include location and demographic
                information, such as the race, sex, and ethnicity of principal owners,
                and industry information. These types of information may be likely to
                be known to a potential adversary who is familiar with a specific
                applicant or related natural person. Therefore, such a potential
                adversary may be able to re-identify a known applicant or related
                natural person without attempting to match a 1071 record to another
                data source. This potential adversary could include a customer,
                competitor, or person with other commercial ties to the applicant, or a
                neighbor or acquaintance of a related natural person, and the interest
                in re-identification may range from mere curiosity to the desire to
                embarrass or otherwise harm the applicant. These potential adversaries
                may possess a high level of specific knowledge about the
                characteristics of a particular applicant or related natural person.
                Adversaries who can re-identify an applicant or natural person based on
                personal knowledge would be able to complement their existing knowledge
                with the full 1071 application-level data, and therefore could
                contribute to risks of harm or sensitivity.
                 Pre-existing personal knowledge possessed by such a potential
                adversary would be limited to information about a subset of applicants
                and related natural persons. Thus, any re-identification attempt by
                such an adversary would likely target or impact a more limited number
                of applicants or natural persons, compared to the large numbers of
                applicants or natural persons who could be re-identified by
                [[Page 56519]]
                adversaries possessing sophisticated matching techniques.\806\
                ---------------------------------------------------------------------------
                 \806\ There may be more potential adversaries with personal
                knowledge than those with the ability to do any kind of
                sophisticated matching to other datasets, but it is not possible to
                predict.
                ---------------------------------------------------------------------------
                 Although the Bureau believes that location, protected demographic
                information, and industry information may be more likely to be known
                than other information in the 1071 data, it is impossible to predict
                the exact content of any pre-existing personal knowledge that such a
                potential adversary may possess. This uncertainty creates challenges
                for evaluating the degree to which individual data fields contribute to
                the risk of re-identification by such a potential adversary. For these
                reasons, the discussions of re-identification risk in the Bureau's
                analysis of data points below generally focus on the risk of re-
                identification based on matching, not on personal knowledge. The Bureau
                seeks comment on how the Bureau could assess re-identification risk
                arising from adversaries with personal knowledge.
                 Applications that do not result in originations. In its final
                policy guidance on the disclosure of loan-level HMDA data, the Bureau
                explained that the risk of re-identification to applicants is
                significantly lower for applications that do not result in originated
                loans.\807\ The Bureau explained that the lack of public information
                about applications significantly reduces the likelihood that an
                adversary could match the record of a HMDA loan application that was
                not originated to an identified record in another dataset. The Bureau
                has not identified any publicly available information about
                applications for business loans. As discussed under Implementation of
                the Balancing Test in part VI.C.2 above, the Bureau lacks data
                necessary to perform a complete re-identification analysis at this
                time. However, the unmodified 1071 data might contain data fields that
                facilitate the re-identification of applicants. For example, the census
                tract and NAICS code data fields could result in unique combinations
                that an adversary could use to match to an identified public record,
                such as a business directory.\808\
                ---------------------------------------------------------------------------
                 \807\ See 84 FR 649, 658 (Jan. 31, 2019); see also 82 FR 44586,
                44593 n.55 (Sept. 25, 2017).
                 \808\ In addition, as the Bureau believed in the HMDA context,
                some of the information contained in the unmodified 1071 data for
                applicants may permit an adversary to re-identify an applicant
                despite the lack of publicly available records. For example, if an
                applicant withdraws an application and obtains a loan secured by the
                same property from another institution, it may be possible to link
                the 1071 data for the withdrawn application with the data for the
                origination, as much of the property and applicant information would
                be identical. See 84 FR 649, 658 (Jan. 31, 2019); see also 82 FR
                44586, 44593 n.55 (Sept. 25, 2017).
                ---------------------------------------------------------------------------
                 Overlap between HMDA and 1071 data generally. As noted above in the
                section-by-section analysis of proposed Sec. 1002.104(a), the Bureau
                anticipates that some applications would be reported under both HMDA
                and 1071.\809\ The public loan-level HMDA dataset contains data fields
                in addition to, or that overlap with, the proposed 1071 data fields,
                and the proposed 1071 data includes data fields that are not included
                in the public loan-level HMDA dataset. The Bureau recognizes that, in
                cases of overlap, some 1071 data fields may require additional analysis
                with respect to risks of harm or sensitivity and re-identification
                posed by such overlap. When the Bureau performs a full re-
                identification analysis, it intends to consider the potential for
                applications reported under 1071 to be matched to loans reported under
                HMDA. The Bureau seeks comment on this issue and the implications of
                potential re-identification risk and potential risk of harm or
                sensitivity for applications reported under both section 1071 and HMDA.
                ---------------------------------------------------------------------------
                 \809\ Applications involving certain investment properties would
                be excluded from 1071 reporting. As discussed in the section-by-
                section analysis of proposed Sec. 1002.104(b) above, proposed
                comment 104(b)-4 would exclude 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.
                ---------------------------------------------------------------------------
                ii. Risk of Harm or Sensitivity
                 In the SBREFA process, the Bureau sought feedback on the nature and
                scope of privacy interests of non-natural persons (e.g., small business
                applicants and financial institutions) and natural persons (e.g.,
                principal owners of small businesses) that the Bureau should consider
                under its potential balancing test, including the types of sensitive
                commercial information that could be exposed by publishing the data
                points (individually or in combination) under consideration.\810\
                ---------------------------------------------------------------------------
                 \810\ See SBREFA Outline at 40-41.
                ---------------------------------------------------------------------------
                 A number of SERs and other stakeholders addressed the risk of harm
                or sensitivity from the disclosure of 1071 data in unmodified
                form.\811\ Several SERs and other stakeholders stated that the
                disclosure of 1071 data could create a risk of harm or sensitivity for
                small businesses and related natural persons. Several SERs stated that
                public knowledge of borrowing activity (even without any other
                potential harms) would be very concerning to some small businesses as
                some small business owners consider that information sensitive or
                deeply personal. Some stakeholders stated that the disclosure of a
                banking relationship could raise harm or sensitivity concerns because
                it might lead to adverse inferences about the business's financial
                condition. One SER stated that small business owners valued their
                privacy just as much as consumers. Several industry commenters stated
                that 1071 data might reveal information about a small business's
                strategy or financial condition, as well as information about the
                personal characteristics or financial conditions of related natural
                persons, which the commenters stated could contribute to identity
                theft.
                ---------------------------------------------------------------------------
                 \811\ In this section, we summarize comments about harm and
                sensitivity that relate to the 1071 data generally. In the
                individual data field sections below, we summarize comments about
                risks of harm and sensitivity that relate to particular data fields.
                ---------------------------------------------------------------------------
                 Several community group stakeholders stated, in contrast, that the
                risk of harm or sensitivity from publishing 1071 data would be minimal
                because some of the data are already publicly available. These
                stakeholders also stated that financial institutions likely exaggerate
                privacy concerns of small businesses or natural persons. With respect
                to concerns that publication of data could facilitate targeted
                marketing of predatory lending products, a community group stated that
                rather than fostering predatory practices, public disclosure would
                deter them by enabling the public to identify problematic pricing or
                loan terms and conditions and prevent them from becoming more
                widespread.
                 In addition to addressing the risks of harm and sensitivity to
                small businesses, several SERs and other stakeholders addressed
                potential risks of harm and sensitivity to financial institutions from
                the disclosure of 1071 data. Several SERs stated that 1071 data could
                be used to generate marketing lists and that this would result in
                creditors taking other financial institutions' customers away. One SER
                stated that, because of this, financial institutions may stop lending
                to small businesses in certain markets. In contrast, two SERs stated
                that it was relatively easy to obtain information on other financial
                institutions' small business lending activity. Two SERs stated that
                they were more concerned about the privacy of small business applicants
                or borrowers than the privacy of financial institutions, but that both
                mattered. In addition, one industry stakeholder expressed concern that
                disclosing the type or purpose of financing and the amount applied for
                and approved could facilitate re-identification of borrowers,
                particularly in rural areas or small towns. The commenter also
                expressed concern that disclosing this information could harm
                [[Page 56520]]
                community banks located in such areas. The commenter stated that this
                could happen because small businesses in such areas are likely to
                perceive that this information could cause them to be re-identified,
                and that they would respond by seeking financing with a large creditor
                in another town or online, rather than their community bank.
                 A few industry commenters expressed concern that the 1071 data
                could reveal information such as a financial institution's client
                lists, terms and conditions, insights about the financial institution's
                strategy in particular geographic areas, or, for certain financial
                institutions, sensitive supply management data. A community group
                commenter stated that public disclosure of 1071 data would not have
                significant negative effects on competition and could provide lenders
                with insights that could allow them to become more competitive.
                 Some SERs expressed concern that 1071 data could be used against
                financial institutions in litigation by class action attorneys or to
                harm their public reputations. One SER expressed concern that public
                disclosure of 1071 data could cause financial institutions to face more
                litigation, which, in the SER's view, would increase the cost of credit
                for small businesses. Another SER expressed concern that data users
                could misinterpret pricing information. For example, according to the
                SER, data users might infer discrimination based on higher pricing for
                an applicant, when the pricing was in fact unrelated to the applicant's
                race. The SER stated that the purpose of section 1071 was to help small
                businesses and asserted that releasing full 1071 data would present an
                opportunity for third parties to sue or criticize financial
                institutions.
                 Several industry commenters stated that data about loan terms would
                be sensitive because they would invite criticism of or litigation over
                disparities without accounting for various legitimate business reasons
                for disparities and increase compliance costs. Other industry
                commenters stated that publication of 1071 data would lead financial
                institutions to artificially lower prices, standardize underwriting, or
                reduce access to credit to limit exposure to fair lending litigation or
                reputational risk. One community group stated that it did not believe
                the purposes of section 1071 required the Bureau to take into account
                such financial institution concerns about litigation or reputational
                risk, compliance costs, or impacts on underwriting. One industry
                stakeholder stated that the Bureau could address these risks by
                providing clear guidance about how it would use 1071 data in its fair
                lending supervisory program.
                 The Bureau has considered whether, if an application-level record
                in the public 1071 data were to be re-identified, 1071 data reported to
                the Bureau would disclose information about an applicant, related
                natural person, or financial institution that is not otherwise public
                and may be harmful or sensitive.\812\ Specifically, the Bureau has
                evaluated whether the 1071 data could be used for harmful purposes such
                as fraud or identity theft or the targeted marketing of products and
                services that may pose risks that are not apparent. The Bureau has also
                evaluated whether the 1071 data could cause competitive harm to small
                business applicants or to financial institutions. Furthermore, even
                where the disclosure of the data field is unlikely to lead to financial
                or other tangible harms, the Bureau has evaluated whether certain 1071
                data fields may be viewed as sensitive if associated with a particular
                applicant, related natural person, or financial institution. In
                evaluating the potential sensitivity of a data field, the Bureau has
                considered whether disclosure of the data field could cause dignitary
                or reputational harm to small business applicants and related natural
                persons. The Bureau has also evaluated whether disclosure of the data
                field could cause reputational harm to financial institutions.
                ---------------------------------------------------------------------------
                 \812\ To the extent a section 1071 record could be associated
                with an identified applicant or related natural person, and
                successfully matched to another de-identified dataset to re-identify
                such a dataset, harmful or sensitive information in that dataset
                that is not otherwise public may also be disclosed.
                ---------------------------------------------------------------------------
                 As discussed above and as noted by several community group
                stakeholders, some identifiable information about small business
                lending is currently available to the general public. Such information
                is available both in public records and in private datasets with
                varying barriers to access and restrictions on use. In evaluating the
                risk of harm or sensitivity created by the publication of the
                application-level 1071 data, the Bureau's analysis has considered the
                degree to which such disclosure would increase this risk relative to
                the risk that already exists, absent the public availability of 1071
                data. Accordingly, the Bureau has considered whether the data that
                would be reported to the Bureau are typically publicly available in an
                identifiable form. The Bureau has also considered whether there are any
                barriers to accessing such data or restrictions on its use. In general,
                the Bureau believes that, where a data field is already publicly
                available, the risk of harm or sensitivity from the disclosure of that
                data field in the 1071 data is reduced.\813\
                ---------------------------------------------------------------------------
                 \813\ However, where a data field is already publicly available,
                disclosing that data field in the 1071 data may enable the matching
                of 1071 data to other datasets that may not be controlled by the
                Bureau, which could substantially facilitate re-identification or
                the disclosure of harmful or sensitive information.
                ---------------------------------------------------------------------------
                 In evaluating the risk of harm or sensitivity created by the
                publication of the application-level 1071 data, the Bureau also has
                considered the likelihood that the application-level 1071 data would be
                re-identified. As discussed under Re-Identification Risk in part
                VI.C.4.i above, the Bureau generally believes that successful re-
                identification of application-level 1071 data would require several
                steps and may present a significant challenge. To the extent that the
                risk that re-identification would be accomplished is low, the risk of
                disclosing harmful or sensitive information would be reduced.
                 The Bureau agrees with commenters who stated that the disclosure of
                1071 data could potentially create a risk of harm or sensitivity not
                only to natural persons, such as the owner of a small business that is
                a sole proprietorship, but also to non-natural persons. As discussed
                under Balancing Test Design in part VI.C.1 above, when considering the
                risk of harm or sensitivity, the Bureau's proposed balancing test would
                consider the risks to non-natural persons, including financial
                institutions.
                 The Bureau has considered whether the 1071 data could be used for
                harmful purposes such as fraud or identity theft or the targeted
                marketing of products and services that may pose risks that are not
                apparent. As noted above, several SERs and other stakeholders stated
                that the 1071 data could potentially be used for these purposes. The
                Bureau's preliminary view is that the unmodified application-level 1071
                data would be of minimal use for purposes of perpetrating identity
                theft or financial fraud against applicants or related natural persons.
                The 1071 data would not include information typically required to open
                new accounts in the name of a small business's principal owner, such as
                Social Security number, date of birth, place of birth, passport number,
                or driver's license number. Additionally, the 1071 data would not
                include information useful to perpetrate existing account fraud, such
                as account numbers or passwords.\814\
                ---------------------------------------------------------------------------
                 \814\ As noted above, however, to the extent a section 1071
                record could be associated with an identified applicant or related
                natural person and could also successfully be matched to a de-
                identified dataset to re-identify such a dataset, harmful or
                sensitive information in that dataset that is not otherwise public
                may also be disclosed.
                ---------------------------------------------------------------------------
                [[Page 56521]]
                 However, while the Bureau believes that the unmodified 1071 data
                would be of minimal use for perpetrating fraud or identity theft, the
                Bureau acknowledges that almost any information relating to a small
                business could, theoretically, be used for these purposes. As a result,
                the unmodified 1071 data could provide at least some additional data
                that could be used for these purposes. For example, the 1071 data could
                potentially be used in a phishing attack against an applicant by a
                perpetrator purporting to be the financial institution, or for
                knowledge-based authentication purposes.\815\ While much information
                that may be useful for phishing or knowledge-based authentication--such
                as the name of the financial institution and the date of action taken--
                may already be available from UCC filings, the 1071 data may contain
                additional information that may be useful for such purposes, such as
                information about the type of loan and loan terms. However, some of
                this information may also be available from private data sources. The
                Bureau also notes that, based on the Bureau's expertise and analysis,
                the publication of HMDA data--which contains many data fields that are
                similar to data fields that would be disclosed under section 1071--has
                not resulted in any measurable increase in fraud or identity theft
                against mortgage applicants.
                ---------------------------------------------------------------------------
                 \815\ Knowledge-based authentication (KBA) is a method of
                authentication which seeks to prove the identity of someone
                accessing a service, such as an account at a financial institution.
                KBA requires the knowledge of information about someone to prove
                that a person attempting to access a service is that person.
                ---------------------------------------------------------------------------
                 As several of the SERs and other stakeholders suggested, the Bureau
                has also considered whether the unmodified application-level 1071 data
                would provide information that is not already public and could be used
                for the targeted marketing of products and services that may pose risks
                that are not apparent. Although the 1071 data could be used to market
                products and services that would be beneficial for small businesses--
                perhaps increasing competition among creditors that could help small
                businesses receive better terms--they could also be used to target
                potentially vulnerable small businesses with marketing for products and
                services that may pose risks that are not apparent. While, as a
                community group stakeholder stated, the 1071 dataset may generally be
                useful for identifying predatory lending practices in the small
                business lending market, the Bureau believes that the targeted
                marketing of products that may pose risks that are not apparent is a
                harmful purpose for which 1071 data could potentially be used.
                 For example, data users might perceive certain 1071 data to reveal
                negative information about an applicant's financial condition or
                vulnerability to scams relating to debt relief or credit repair.
                Information about a loan might also be used for a practice known as
                ``stacking,'' in which some creditors have been alleged to obtain lead
                lists based on publicly available information and offer follow-on loans
                or advances that add to the debt burden carried by small businesses.
                Some creditors might also use the data for deceptive marketing
                practices. However, the utility of the 1071 data for predatory
                marketing practices may be limited by the delay between action taken on
                a loan and publication of the application-level 1071 data.
                 As several of the SERs and other stakeholders suggested, the Bureau
                has also considered whether the unmodified 1071 data would result in
                competitive harm to small business applicants or related natural
                persons. The 1071 data, if re-identified, may disclose some general
                information about a small business's use of credit that is not
                currently available to the general public. As discussed in the
                individual data field sections below, the Bureau acknowledges that
                certain 1071 data points in unmodified form could reflect negatively on
                the financial condition of a business or its owners.
                 As several of the SERs and other stakeholders recommended, the
                Bureau has also considered whether the unmodified 1071 data would
                result in competitive harm to financial institutions. As discussed
                below with respect to the financial institution identifying information
                that would be reported pursuant to proposed Sec. 1002.109(b), the
                Bureau is proposing to identify the financial institution in the public
                application-level 1071 data. Therefore, the 1071 data could reveal
                general information about a financial institution's lending practices
                that is not widely available to the general public. Data fields such as
                census tract, NAICS code, credit type, and pricing could disclose
                information about where a financial institution is doing business, what
                industries it is doing business with, what kinds of products it is
                offering, and what kinds of prices it is charging, respectively.
                Additionally, as several SERs stated, if a small business applicant
                were to be re-identified, a financial institution's competitors could
                identify the small businesses to which the financial institution is
                offering or providing credit.
                 The Bureau acknowledges that the increased transparency into small
                business lending provided by 1071 data could reveal general information
                about a financial institution's lending practices that is not widely
                available to the general public, and that this information could be
                useful to others, including other financial institutions. For example,
                if the 1071 data were re-identified, a financial institution could
                potentially offer credit to a particular small business at a lower
                price than they received from another financial institution. However,
                the Bureau does not believe the unmodified application-level 1071 data
                would include key inputs for or be detailed enough to substantially
                facilitate the reverse-engineering of a financial institution's
                proprietary lending models. (For example, it would not include
                information about an applicant's credit history.) Financial institution
                concerns with disclosure of information about general lending practices
                are discussed in greater detail under Balancing Risks and Benefits in
                part VI.C.5 below.
                 As noted above, an industry commenter expressed concern that
                disclosing information about applicants in rural areas could lead them
                to seek financing elsewhere. However, from the perspective of a small
                business, seeking financing with a lender in another community would
                not necessarily reduce the risk that someone in the small business's
                community may ultimately re-identify them in the 1071 data because the
                1071 data would be reported with respect to the location of the
                business, as discussed in the section-by-section analysis of proposed
                Sec. 1002.107(a)(13) above (census tract). As discussed above, with
                respect to the concern about re-identification risk to applicants and
                related natural persons, the Bureau would determine the extent of re-
                identification risk when it has obtained a full year of reported 1071
                data and would state its intentions, at that time, about whether
                certain 1071 data fields should be modified or deleted prior to public
                disclosure.
                 Some SERs expressed the concern, further detailed above, that 1071
                data could harm financial institutions by increasing the amount of
                litigation against financial institutions. The Bureau acknowledges this
                risk, which is discussed in greater detail under Balancing Risks and
                Benefits in part VI.C.5 below, and in part VI.C.6.xviii with respect to
                the application of the proposed balancing test to financial institution
                identifying information.
                 In addition to considering whether the disclosure of a data field
                could lead to financial or other tangible harms,
                [[Page 56522]]
                such as those described above, the Bureau has also considered whether
                the 1071 data fields might be viewed as sensitive. As noted above,
                several SERs and other stakeholders stated that disclosure of the
                unmodified 1071 data would divulge data that may be sensitive to
                applicants, related natural persons, or financial institutions. In
                assessing whether a data field creates a risk of sensitivity, the
                Bureau has evaluated whether its disclosure could lead to dignitary or
                reputational harm to small business applicants or related natural
                persons. For example, as several industry commenters stated, if the
                1071 data were re-identified, the data could reveal information that
                casts a negative light on a small business's financial condition, such
                as the fact that a loan was denied due to a business's credit
                characteristics or cashflow. This information could be embarrassing to
                the small business and its owners.
                 The Bureau has also evaluated whether the disclosure of a data
                field could cause reputational harm to financial institutions. As noted
                above, some SERs expressed concern that 1071 data could harm a
                financial institution's reputation by leading data users to draw
                unfounded inferences about discrimination. The Bureau notes that
                several of the 1071 data fields, if disclosed in unmodified form, would
                help address this concern by serving as control variables. For example,
                many financial institutions consider a small business's revenue when
                assessing the risk of extending credit. As a result, disclosing gross
                annual revenue data would help ensure that data users who are
                evaluating potential disparities in underwriting or pricing can compare
                small businesses with similar revenues, thereby controlling for a
                factor that might provide a legitimate explanation for some
                disparities. The Bureau also notes that it does not expect that 1071
                data alone could generally be used to determine whether a lender is
                complying with fair lending laws. The Bureau expects that, when
                regulators conduct fair lending examinations, they would analyze
                additional information before reaching a determination about an
                institution's compliance with fair lending laws.
                 In assessing the risk of sensitivity, the Bureau has also
                considered general societal and cultural expectations with respect to
                what information is available to the general public. For example,
                disclosing gross annual revenue in unmodified form could disclose
                sensitive information because it could reflect the financial condition
                of a small business or, where a small business is a sole
                proprietorship, a natural person. This type of information about a
                business's or natural person's financial condition is typically not
                available to the general public.
                 The Bureau also acknowledges the comments stating that some small
                businesses and their owners would consider the very fact that they
                sought credit sensitive, or would consider the disclosure of a banking
                relationship sensitive because others may draw adverse inferences about
                the small business's financial condition. These are concerns about
                sensitivity that would result merely from the re-identification of the
                applicant, rather than from the disclosure of particular data fields.
                The Bureau seeks to address these concerns by mitigating the risk of
                re-identification, as described under Re-Identification Risk in part
                VI.C.4.i above.
                 The Bureau seeks comment on its approach to assessing the risks of
                harm and sensitivity presented by the disclosure of unmodified 1071
                data.
                5. Balancing Risks and Benefits
                 Under the approach described in the SBREFA Outline, the Bureau
                would delete or modify 1071 data if disclosure of the data in
                unmodified form would pose risks to privacy interests that are not
                justified by the benefits of public disclosure in light of the
                statutory purposes of section 1071.\816\ If the risks of disclosing
                unmodified data are not justified by the benefits under the balancing
                test, the Bureau would determine whether modifications or deletions
                could appropriately balance the risks and benefits. In the SBREFA
                Outline, the Bureau explained that it was considering various
                approaches that would appropriately advance privacy interests while
                still providing users with data useful to fulfilling the purposes of
                section 1071. The Bureau explained that these approaches could include
                various statistical disclosure limitation techniques when justified
                under the balancing test, such as those that mask the precise value of
                data points to prevent the disclosure of certain data elements. The
                Bureau also sought feedback generally on how it could mitigate concerns
                arising from re-identification risk.\817\
                ---------------------------------------------------------------------------
                 \816\ See SBREFA Outline at 41.
                 \817\ Id. at 40-41.
                ---------------------------------------------------------------------------
                 Several community group commenters stated that the Bureau should
                make as much data publicly available as possible to maximize data
                utility. One commenter stated that privacy concerns could be addressed
                through the prohibition on collecting personally identifiable
                information and increasing coverage of 1071 reporters and products. But
                this commenter, several SERs, and many other industry commenters
                expressed support for modifying or deleting the data from the public
                application-level 1071 data to balance privacy risks with the benefits
                of public disclosure. Commenters provided a wide variety of feedback on
                what kind of techniques would be appropriate, including publishing data
                in ranges, aggregating data, differential privacy, and data-
                swapping.\818\ In addition, several industry commenters recommended
                that the Bureau reduce rule coverage to limit harms, such as by using
                asset thresholds and exclusions for types of financial institutions. By
                contrast, a community group commenter recommended that the Bureau
                expand the rule's coverage to increase the number of observations and
                reduce re-identification risk. One SER recommended a process by which
                covered financial institutions could identify certain application
                records that might present heightened re-identification risk and
                trigger further analysis by the Bureau before full application-level
                data are published.\819\ Another SER suggested that the Bureau set a
                minimum sample size before publishing application-level data for some
                rural markets to avoid harm.\820\
                ---------------------------------------------------------------------------
                 \818\ See SBREFA Panel Report at 35-36.
                 \819\ See id. at 35.
                 \820\ See id.
                ---------------------------------------------------------------------------
                 Balancing risks and benefits generally. As noted previously, the
                Bureau intends to apply the proposed balancing test after it receives
                the first year of data reported pursuant to an eventual 1071 rule. For
                data fields the public disclosure of which the Bureau believes would
                create risks to privacy interests of applicants, related natural
                persons, or financial institutions, either because a field increases
                re-identification risk or poses a risk of harm or sensitivity, the
                Bureau intends to assess these risks against the benefits of
                disclosure. Where the Bureau determines that the disclosure of an
                individual data field, alone or in combination with other fields, would
                create risks to privacy that are not justified by the benefits of
                disclosure to 1071's purposes, the Bureau would consider whether it
                could appropriately balance the privacy risks and disclosure benefits
                through modification techniques or whether the field should be deleted
                from the public dataset. The Bureau also would evaluate the risks and
                benefits of disclosing a data field in light of modifications or
                deletions considered for other data fields.
                [[Page 56523]]
                 The Bureau is mindful of the connection between the risk of re-
                identification and the risk of harm or sensitivity. To the extent that
                the risk of re-identification created by disclosure of the 1071 data is
                reduced, the risk of disclosing harmful or sensitive information also
                would be reduced. Conversely, to the extent that the public
                application-level 1071 data would not disclose information that is
                harmful or sensitive, the consequences of re-identification would be
                reduced. Where the Bureau determines that modification of a data field
                is appropriate, the Bureau's consideration of the available forms of
                modification for the 1071 data would also be informed by the
                operational challenges associated with various forms of modification
                and the need to make application-level data available to the public in
                a timely manner.
                 The Bureau is also aware of concerns raised by SERs and other
                stakeholders, described under Risk of Harm or Sensitivity in part
                VI.C.4.ii above, that disclosing the proposed 1071 data in unmodified
                form could increase risks of litigation or reputational harm to
                financial institutions, and reveal information that could cause
                competitive harm to financial institutions. However, in applying the
                balancing test, the Bureau generally intends to give significant weight
                to the benefits of disclosure relative to these risks.
                 In general, the Bureau believes that deleting or modifying data
                because the data would disclose general information about a financial
                institution's lending practices--compared with information that could
                substantially facilitate, for example, the reverse-engineering of a
                financial institution's proprietary lending models--would be
                inconsistent with section 1071. As noted above, the statute directly
                contemplates disclosure of financial institution identity in connection
                with the public application-level dataset.\821\ Each of the data fields
                prescribed by the statute--with the exception of the application
                number--could provide some insight into a financial institution's
                lending practices. If the Bureau were to exclude data on this basis, it
                would exclude virtually all of the statutorily required 1071 data
                points from the public data. This would significantly frustrate both of
                the statutory purposes of section 1071 because it would prevent the
                public from using the data to identify potential fair lending
                violations, and it would prevent communities and creditors from using
                the 1071 data to identify business and community development needs and
                opportunities of small businesses.\822\ For example, this information
                could benefit more competitive creditors, as well as small businesses
                in obtaining credit at a lower cost.
                ---------------------------------------------------------------------------
                 \821\ See ECOA section 704B(f)(2)(B).
                 \822\ See ECOA section 704B(a).
                ---------------------------------------------------------------------------
                 While the Bureau acknowledges financial institutions' concern about
                the litigation and reputational risks involving section 1071 data, the
                Bureau does not believe that this concern justifies the exclusion of
                data from public disclosure. One of the statutory purposes of section
                1071 is to facilitate enforcement of fair lending laws, which authorize
                enforcement by parties other than the Bureau.\823\ Additionally,
                section 1071 contemplates that financial institutions would make their
                own application-level data available to the public, which necessarily
                entails their identification.\824\
                ---------------------------------------------------------------------------
                 \823\ See, e.g., ECOA section 706 (providing for civil
                liability).
                 \824\ See ECOA section 704B(f)(2).
                ---------------------------------------------------------------------------
                 Modification techniques generally. In light of the purposes of
                section 1071, the Bureau intends to modify or delete the 1071 data only
                as needed under the balancing test prior to public disclosure. The
                Bureau recognizes, as explained by community groups, that
                modifications, to varying degrees, may negatively impact the utility of
                the data for the fair lending and business and community development
                purposes of the statute. However, the proposed balancing test is
                designed to ensure that decisions to modify or delete the public
                application-level 1071 data take these benefits into account. Below,
                the Bureau addresses general issues related to modification techniques
                in the context of this proposal. These techniques are discussed in
                greater detail with respect to specific data points further below.
                Where no specific modification technique is described with respect to
                particular data points, the Bureau has not identified an obvious
                modification technique other than potentially swapping, suppression, or
                deletion, which are discussed below under Other techniques.
                 While certain information that directly identifies applicants or
                related natural persons generally would not be collected under the
                proposal, the Bureau does not believe this feature of the proposal
                would be sufficient to eliminate privacy risks that would arise from
                publishing the data in unmodified form, as discussed in greater detail
                under Risks to Privacy Interests in part VI.C.4 above. The Bureau also
                does not believe that privacy risks can be adequately resolved through
                rule coverage (e.g., using asset thresholds and exclusions for types of
                financial institutions). While some re-identification risk could be
                reduced by increasing the number of loans reported to the Bureau, the
                Bureau does not believe the effects of doing so are necessarily
                predictable because re-identification risk depends on the
                characteristics of the data. Further, increasing the number of loans
                would not address risks of harm or sensitivity to re-identified
                applicants or natural persons. Suggestions for addressing privacy risks
                through exemptions are discussed under Balancing Test Design in part
                VI.C.1 above.
                 Aggregate data. The Bureau does not intend to address privacy risks
                for application-level 1071 data through aggregate disclosures at this
                time. As discussed in the section-by-section analysis of proposed Sec.
                1002.110(a) above, and as required by section 1071, the Bureau is
                proposing to make available to the public the information submitted to
                it by financial institutions pursuant to proposed Sec. 1002.109,
                subject to deletions or modifications made by the Bureau. As discussed
                in the section-by-section analysis of proposed Sec. 1002.110(b) above,
                and as authorized by the statute, the Bureau may, at its discretion,
                compile and aggregate information submitted by financial institutions
                pursuant to proposed Sec. 1002.109, and make any compilations or
                aggregations of such data publicly available as the Bureau deems
                appropriate. The Bureau initially anticipates making the data collected
                under section 1071 available at the application level--with appropriate
                potential modifications and deletions--rather than providing aggregate
                data with counts and averages for each data field. The Bureau may
                consider releasing aggregated data in the future, after it determines
                whether narrower modifications or deletions could address privacy
                risks. The Bureau received some suggestions to consider ``differential
                privacy'' techniques.\825\ Such techniques are typically used in
                connection with aggregate statistics to reduce the identifiability of
                more granular data. The Bureau seeks comment on whether differential
                privacy techniques might be appropriate for application-level data.
                ---------------------------------------------------------------------------
                 \825\ Differential privacy provides a way to measure the
                contribution of any one record to the aggregate statistics disclosed
                in a way that makes re-identification risk easily quantifiable and
                allows those involved in the data production to keep re-
                identification risk under a certain risk tolerance.
                ---------------------------------------------------------------------------
                 Recoding. The Bureau intends to consider various methods to
                ``recode'' the proposed data fields as necessary
                [[Page 56524]]
                under the balancing test. Recoding techniques decrease the number of
                distinct categories for a data field. In the context of the 1071 data
                fields, recoding would involve providing the value of a data field in a
                higher-level category that increases the number of records within a
                given combination. Some data fields like census tract and NAICS code
                have structures that permit recoding without developing new 1071-
                specific recoding categories. For example, if the Bureau were to
                determine that the re-identification risk presented by the census tract
                data field does not justify the benefits of unmodified disclosure, the
                Bureau could instead provide geography at the county level, for
                example, since census tracts are designed to be non-overlapping
                subdivisions of a county.
                 The Bureau also intends to consider recoding through the use of
                bins or intervals of values for data fields that, in unmodified form,
                would have continuous values (such as data fields for amount applied
                for, amount approved, gross annual revenue, or number of workers).
                Unmodified continuous data fields can be highly identifying, depending
                on the data field, but binning these values can reduce the risk of re-
                identification substantially. An additional approach for continuous
                data fields would be to top- or bottom-code the data field to prevent
                extreme values from being released that may be particularly
                identifiable. This approach could be performed alone or in conjunction
                with recoding the data into intervals.
                 Other techniques. The Bureau might also consider ``targeted
                suppression'' techniques. Targeted suppression makes certain values of
                data points unavailable for records when a certain combination of
                values is held by too few records. The Bureau might consider, for
                example, treating certain values of data points as ``not available'' if
                the application is the only small business application from a
                particular census tract. Targeted suppression can be applied in several
                ways. One way would be to remove the value of a field that makes the
                record identifiable. For example, if census tract and NAICS code
                identify a record, the microdata could delete the value of the NAICS
                code for any applications that are in cells deemed sensitive. A second
                approach could leave the census tract and NAICS code but suppress the
                values of other data points. This method would reduce the potential
                harm if the record were re-identified. A third approach could be to
                remove the record from the dataset entirely. In general, suppression is
                a more common approach for aggregate data than for application-level
                data.
                 One drawback to targeted suppression is that it complicates data
                analysis for any end user. For example, with respect to the public
                application-level 1071 data, a data user would be presented with
                millions of rows, but in certain rows and for certain data points,
                values would be missing.\826\ Another drawback is that suppression
                would need to be done in a way such that the remaining unmodified data
                do not provide a user with the ability to back out the modified field,
                sometimes involving complementary suppression or deleting values of
                other applications to ensure that the missing value cannot be
                reengineered. The Bureau seeks comment on whether targeted suppression
                techniques could preserve the benefits of the public application-level
                1071 data, and, if so, what the Bureau should consider as the minimum
                cell size to implement targeted suppression.
                ---------------------------------------------------------------------------
                 \826\ Data users would need to carefully understand the method
                behind the modifications and plan analyses to account for the fact
                that the suppressed data would necessarily not reflect all small
                business loans in a given year.
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on other modification techniques, such as
                ``data swapping'' (sometimes called ``switching''). Data swapping
                involves finding two records that are similar on several dimensions and
                swapping the values for other data fields between the two records. In
                effect, data swapping would require that the Bureau preserve certain
                data fields while swapping others. Another set of techniques for
                addressing privacy risks for continuous data would involve adding
                ``random noise'' to the reported values. For example, under ``additive
                noise techniques,'' a random value is added to the existing value of
                the data field. Under ``multiplicative noise techniques,'' the true
                value is multiplied by a random value. The Bureau seeks comment on
                whether such techniques would preserve the benefits of the public
                application-level 1071 data. A drawback to these approaches is that
                data would be released with values that do not match the true values of
                the underlying data.\827\ Data users would need to take such
                modifications into account when performing any analyses.\828\
                ---------------------------------------------------------------------------
                 \827\ For example, with respect to the amount applied for data
                field, a recoding technique would release the values of the data
                field in broad categories, for instance ``$100,000-$150,000.'' In
                such case, the broader category provides less information but
                reflects the true value of the underlying data. Noise addition, by
                contrast, would involve the Bureau manipulating (in a standardized
                and documented way) the actual values of loan amount. An
                application's loan amount may be released as $85,000 in the public
                dataset when the true value was $78,000.
                 \828\ Even if, for instance with additive random noise, the data
                maintain the underlying average value, users would need to take into
                account the change in the variance associated with the modification.
                While the Bureau can provide all the required information to make
                these adjustments, they would require a level of data analysis
                sophistication that may not be possessed by all potential users of
                the eventual 1071 data.
                ---------------------------------------------------------------------------
                 The Bureau has considered the SER recommendation for allowing
                financial institutions to identify records that might present
                heightened re-identification risk. The Bureau appreciates this
                suggestion but is not proposing it because privacy risks are likely
                common to many types of applicants, related natural persons, and
                financial institutions and such risks should be addressed in a broader
                context, such as through this proposal. The Bureau's proposed process
                for obtaining public input on the balancing test is discussed under
                Implementation of the Balancing Test in part VI.C.2 above.
                6. Preliminary Application of the Balancing Test to Public Application-
                Level 1071 Data
                 As explained above, the Bureau does not yet have data under section
                1071 and does not believe that there are comparable datasets that it
                could use as an adequate proxy for 1071 data to which it could apply
                the balancing test at this time. However, as recommended by the SBREFA
                Panel, the Bureau is providing additional detail on how it would apply
                the balancing test to the 1071 data fields as set forth in the
                proposal.\829\
                ---------------------------------------------------------------------------
                 \829\ See SBREFA Panel Report at 48.
                ---------------------------------------------------------------------------
                 In accordance with the proposed balancing test described above,
                privacy risks may not be justified by the benefits of disclosure if
                disclosing the data field in unmodified form would substantially
                facilitate the re-identification of applicants and related natural
                persons, or disclose information about an applicant, related natural
                persons, or a financial institution that is not otherwise public and
                may be harmful or sensitive. The Bureau has proposed modifications or
                deletions for the proposed financial institution identifying
                information (other than contact information for natural persons), and
                the proposed use of free-form text for certain data. The Bureau also is
                proposing not to disclose the proposed unique identifier in unmodified
                form. However, because the Bureau is not conducting a full re-
                identification analysis at this time, it has not determined whether the
                privacy risks of disclosing the other proposed data fields
                [[Page 56525]]
                in unmodified form in the public application-level 1071 data would be
                justified by the benefits of disclosure. Accordingly, the Bureau has
                not yet determined whether data fields--other than those for the
                proposed unique identifier data point, the proposed financial
                institution identifying information, and the proposed free-form text
                that would be used to report some of the data--should be deleted,
                modified, or published in unmodified form.
                 The Bureau is setting forth its preliminary analysis below to
                provide transparency and obtain public feedback. The Bureau seeks
                comment on its analysis of the public disclosure benefits and privacy
                risks for each data field. Specifically, the Bureau seeks comment on
                the following issues with respect to each data field, individually or
                in combination with others: (1) Whether there are additional benefits
                of unmodified public disclosure in light of the purposes of the
                statute; (2) whether disclosure in unmodified form would reveal
                additional information that might be considered harmful or sensitive by
                an applicant, related natural person, or financial institution; and (3)
                whether disclosure in unmodified form would significantly contribute to
                the risk that an applicant or related natural person might be re-
                identified. The Bureau seeks comment on other modification techniques
                it could use, and whether deletion would appropriately balance the
                benefits of disclosure with privacy risks.
                i. Unique Identifier
                 Proposed Sec. 1002.107(a)(1) would require financial institutions
                to collect and report an alphanumeric identifier, starting with the
                legal entity identifier of the financial institution, unique within the
                financial institution to the specific covered application, and which
                can be used to identify and retrieve the specific file or files
                corresponding to the application for or extension of credit.
                 Disclosing the unique identifier in the public application-level
                1071 data in unmodified form would help data users conducting fair
                lending analysis or seeking to identify business and community
                development needs or opportunities. This data field would allow data
                users to run analyses that quickly compare specific records to detect
                trends or disparities. The unique identifier would also provide data
                users a way to identify, distinguish, and organize credit and
                application data, which is invaluable for data processing.
                 Disclosing the unique identifier in the 1071 data in unmodified
                form by itself would likely disclose minimal, if any, information about
                an applicant or related natural person that may be harmful or sensitive
                if such person were re-identified, or that may be harmful or sensitive
                to an identified financial institution. As noted above, section 1071
                prohibits financial institutions from including in 1071 records certain
                personally identifiable information that directly identifies a natural
                person applicant or someone connected with the applicant.\830\ In
                addition the Bureau is proposing to prohibit financial institutions
                from reporting information that would directly identify a small
                business. For these reasons, the Bureau does not expect that the unique
                identifier would be considered harmful or sensitive.
                ---------------------------------------------------------------------------
                 \830\ ECOA section 704B(e)(3).
                ---------------------------------------------------------------------------
                 A few industry stakeholders expressed concern that small businesses
                could be identified if application or loan numbers were added to UCC
                filings. Although publicly available datasets do not presently include
                the unique identifier data field, financial institution legal entity
                identifiers are publicly available, and the Bureau is aware of rare
                instances in which a loan number is included in UCC filings. In
                addition, as the Bureau noted in its policy guidance on the disclosure
                of loan-level HMDA data, many jurisdictions publicly disclose real
                estate transaction records in an identified form, and the Bureau
                believes many financial institutions include loan numbers on these
                publicly recorded documents.\831\
                ---------------------------------------------------------------------------
                 \831\ See 82 FR 44586, 44599 (Sept. 25, 2017); see also 84 FR
                649, 660 (Jan. 31, 2019).
                ---------------------------------------------------------------------------
                 The Bureau believes inclusion of the proposed unique identifier,
                rather than application or loan numbers, would limit the possibility of
                using application or loan number to match 1071 data to those publicly
                recorded documents, thus reducing risk of re-identification. However,
                there is a risk that, after financial institutions begin to report data
                under section 1071, they may replace the loan numbers currently
                assigned to small business loans with the unique identifier and, if
                they do, the unique identifier could be included on publicly recorded
                documents. Especially considering the uniqueness of the identifiers,
                this data field on a publicly recorded document could be used to match
                a 1071 record to an identified public record directly and reliably.
                 In light of these potential re-identification risks, the Bureau
                proposes not to publish the proposed unique identifier data field in
                unmodified form. The Bureau seeks comment on whether there are
                modifications that would appropriately balance identified privacy risks
                and disclosure benefits. The Bureau is considering the feasibility of
                disclosing a separate unique identifier that the Bureau could create.
                The Bureau is also considering deleting the data field from the public
                application-level 1071 data, but seeks comment on whether the proposed
                deletion would create challenges for users of the data and, if so, how
                the Bureau could address those challenges other than by creating a
                separate unique identifier. The Bureau notes that some of the benefits
                of the unique identifier in analyzing the data could be achieved
                through the Bureau's proposed disclosure of LEI, as discussed in part
                VI.C.6.xviii below. The Bureau also notes that the universal loan
                identifier reported to the Bureau under HMDA, which is similar in
                function to the proposed unique identifier, is currently excluded from
                the public loan-level HMDA data.\832\
                ---------------------------------------------------------------------------
                 \832\ See 84 FR 649, 660 (Jan. 31, 2019).
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on this analysis as well as its proposal
                not to publish the unique identifier in unmodified form.
                ii. Application Date
                 Proposed Sec. 1002.107(a)(2) would require financial institutions
                to collect and report the date the covered application was received by
                the financial institution or the date shown on a paper or electronic
                application form.
                 Disclosing application date in the public application-level 1071
                data in unmodified form would allow data users to monitor trends over
                time in small business lending. Application date also would provide a
                disaggregated piece of temporal data that can be used to identify
                seasonality in small business lending (for example, when combined with
                the pricing data fields to show interest rates charged to applicants
                over a specific date range). In fair lending analyses, application date
                would provide data users with the means to compare level of service
                (from application date to action taken date) and identify potential
                disparities on a prohibited basis between applications. Application
                date could also act as a control for factors that may provide a
                legitimate explanation for some disparities, such as interest rates
                during different time periods or differences in general economic
                conditions or institutional practices over time.
                 By itself, disclosing application date in the 1071 data in
                unmodified form would likely disclose minimal, if any, information
                about an applicant or
                [[Page 56526]]
                related natural person that may be harmful or sensitive if such person
                were re-identified, or that may be harmful or sensitive to an
                identified financial institution. It is conceivable that an adversary
                such as a competitor or other market participant may find it helpful to
                understand when a business is seeking credit; for example, to better
                understand the business's strategy and cash flow needs. In addition,
                marketers and creditors could use this information to target products
                to entities recently in the market for credit, either to deploy new
                funds or to refinance out of a current loan. However, the Bureau does
                not believe that disclosing the application date would otherwise
                disclose sensitive information about a small business or its owner, or
                any information that would be used for harmful purposes. Any utility of
                this data field for such purposes would be curtailed by the time lag in
                public release of the 1071 data.
                 The Bureau has not identified publicly available datasets that
                include data fields an adversary could directly match to the
                application date field. However, an adversary may be able to infer a
                likely origination date based on typical time lags between application,
                credit decision, and origination, potentially enabling matching to
                other datasets that record these later dates.
                 If the Bureau determines that application date should be modified,
                the Bureau may consider disclosing the application date at a higher
                level; for example, disclosing the month and year but not the specific
                date. In light of the potential re-identification risk arising from
                this data field, the Bureau seeks comment on whether there are other
                specific modifications it should consider, and whether deletion would
                balance the risks and benefits of disclosure.
                 The Bureau seeks comment on this analysis.
                iii. Application Method and Application Recipient
                 Proposed Sec. 1002.107(a)(3) would require financial institutions
                to collect and report the means by which the applicant submitted the
                covered application directly or indirectly to the financial
                institution. A financial institution would report whether the applicant
                submitted the application in person, by telephone, by mail, or online.
                Proposed Sec. 1002.107(a)(4) would require financial institutions to
                collect and report 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.
                 Disclosing application method and whether the application was
                submitted indirectly in the public application-level 1071 data would
                further the fair lending enforcement purpose of the statute.
                Application method information would allow the public to better
                understand the role of the financial institution as a creditor and
                would facilitate pricing analyses by helping the public identify
                potential factors in pricing outcomes. In addition, proposed Sec.
                1002.107(a)(20) would require the collection of race or ethnicity
                information for the applicant's principal owner(s) using visual
                observation or surname in certain circumstances. If the Bureau
                finalizes this proposal, application method information would provide
                context for the information collected.
                 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. This information
                would improve 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, the extent to which applicant
                preferences shift from in-person to online interactions).
                 Disclosing application method and whether the application was
                submitted directly or indirectly, in unmodified form, would likely
                disclose minimal, if any, information about an applicant or related
                natural person that may be harmful or sensitive if such person were re-
                identified. If applicants or related natural persons were re-
                identified, application method is likely to be of relatively limited
                utility to an adversary because it conveys little information about a
                natural person's characteristics or a business's financial condition.
                While adversaries interested in targeted marketing could direct future
                marketing efforts to a business using the same application channel, it
                is likely that marketing firms already possess strategic information
                about the best methods for establishing contact. Unmodified disclosure
                of application method and whether the application was submitted
                indirectly may reveal information that financial institutions regard as
                harmful or sensitive, but, as discussed under Risk of Harm or
                Sensitivity in part VI.C.4.ii above, the Bureau does not believe that
                disclosure would permit the reverse-engineering of a financial
                institution's proprietary lending models.
                 The Bureau has not identified publicly available datasets that
                include data fields an adversary could directly match to the
                application method or application recipient data fields in unmodified
                form in the public application-level 1071 data with respect to an
                applicant or related natural person. While the Bureau's HMDA data and
                the GSE loan-level datasets include acquisition channel information in
                loan-level data, these datasets do not identify applicants or related
                natural persons. Therefore, an adversary would face challenges in using
                application method or application recipient information to match a
                section 1071 record to an identified publicly available record.
                However, the Bureau seeks comment on whether there are other
                identifiable application/loan-level datasets that include this
                information or whether HMDA data or the GSE loan-level datasets could
                be matched to other identifiable datasets.
                 The Bureau seeks comment on this analysis.
                iv. Credit Type
                 Proposed Sec. 1002.107(a)(5) would require financial institutions
                to collect and report to the Bureau certain information about the type
                of credit applied for or originated. The proposal would require
                financial institutions to report three categories of information that
                together constitute the type of credit. First, the proposal would
                require financial institutions to report the type of credit
                product.\833\ Second, the proposal would require financial institutions
                to report 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 had been originated.\834\ Third, the proposal would
                require financial institutions to report the
                [[Page 56527]]
                length of the loan term, in months, if applicable.
                ---------------------------------------------------------------------------
                 \833\ A financial institution would be required to select the
                credit product requested from the following list: Term loan--
                unsecured, term loan--secured, line of credit--unsecured, line of
                credit--secured, credit card, merchant cash advance, other sales-
                based financing transaction, other, or not provided by applicant and
                otherwise undetermined. A financial institution reporting ``other''
                would be required to enter the type of credit product as free-form
                text. The Bureau analyzes free-form text under the proposed
                balancing test in part VI.C.6.xix below.
                 \834\ A financial institution would be required to select the
                type of guarantee from the following list: Personal guarantee--
                owner(s), personal guarantee--non-owner(s), SBA guarantee--7(a)
                program, SBA guarantee--504 program, SBA guarantee--other, USDA
                guarantee, FHA insurance, Bureau of Indian Affairs guarantee, other
                Federal guarantee, State or local government guarantee, other
                guarantee, or no guarantee. A financial institution reporting
                ``other guarantee'' would be required to enter the type of guarantee
                as free-form text. The Bureau analyzes the free-form text under the
                balancing test in a separate subsection below.
                ---------------------------------------------------------------------------
                 Disclosing data about the type of credit product, type of
                guarantee, and loan term in the public application-level 1071 data in
                unmodified form would facilitate enforcement of fair lending laws by
                allowing data users to determine whether any disparities in
                underwriting or pricing may be due to differences in these features of
                a loan.
                 Disclosing these data would also be useful for identifying business
                and community development needs. These data would enable the public to
                understand whether certain types of credit are disproportionately
                available to certain groups. For example, information about the
                presence or lack of collateral would provide more information about
                lending patterns in different geographic areas and for different groups
                of applicants. Furthermore, each of the credit type data fields would
                help the public avoid misinterpretations of the 1071 data. In addition,
                information on the distribution of government loan guarantees (such as
                those provided in SBA programs) across different geographic areas and
                groups of applicants could provide information about how those programs
                function on the ground, aiding in fulfilling the business and community
                development purpose of section 1071. Information about the type of
                guarantee would also allow communities, governmental entities, and
                creditors to monitor the use of personal guarantees, which carry
                additional risk to the guarantors and businesses. Finally, information
                about loan term would provide insights into the pricing and
                sustainability of closed-end credit transactions.
                 The Bureau believes that data about the type of credit product,
                type of guarantee, and loan term could disclose information that may be
                harmful or sensitive to applicants or related natural persons. A
                business's competitors could use these data fields--in conjunction with
                the loan amount and pricing data fields--to draw inferences about the
                business's financial condition based on whether the business obtained
                credit on favorable or unfavorable terms. The type of guarantee data
                fields could indicate heightened credit risk for the applicant.\835\
                Credit type data also could be used for targeted marketing of products
                and services that may pose risks that are not apparent to the business
                or related natural persons.
                ---------------------------------------------------------------------------
                 \835\ For example, the ``SBA guarantee--7(a) program'' data
                field could indicate heightened credit risk because this program is
                intended for businesses that have been unsuccessfully applying for
                credit or have had some other difficulty in accessing credit.
                ---------------------------------------------------------------------------
                 Disclosure of the type of credit product, type of guarantee, and
                loan term in unmodified form may reveal information that financial
                institutions regard as harmful or sensitive, such as the types of
                products they offer or the government programs in which they
                participate. However, as discussed under Risk of Harm or Sensitivity in
                part VI.C.4.ii above, the Bureau does not believe that disclosure of
                these data fields would permit the reverse-engineering of a financial
                institution's proprietary lending models. Furthermore, general
                information about the types of credit a financial institution is
                offering is widely available on creditor websites and in marketing
                materials.
                 The Bureau is aware that certain identified datasets include
                application-level information on the type of credit product, type of
                guarantee, or loan term. Government lending programs, such as the SBA's
                7(a) and 504 programs, publish loan-level data that indicate the term
                of the loan and whether the loan is a term loan or a line of credit. In
                some States, UCC filings may include some information related to the
                type of collateral. In the Bureau's view, the existing public
                availability of this information decreases the potential harm or
                sensitivity of disclosing information about the type of credit product,
                type of guarantee, and loan term in the 1071 data.
                 The Bureau has identified publicly available datasets that include
                data fields an adversary could directly match to the credit type data
                fields in unmodified form in the public application-level 1071 data
                with respect to an applicant or related natural person. As noted above,
                information about the type of credit product, loan term, and type of
                collateral is found in many publicly available datasets, including data
                from government lending programs and, in some States, UCC filings.
                Therefore, in many cases, an adversary could use this information,
                combined with other fields, to match a section 1071 record to an
                identified publicly available record.
                 If the Bureau determines that the type of guarantee should be
                modified, the Bureau may consider disclosing values that are more
                general than the values reported to the Bureau. For example, the Bureau
                could disclose ``Federal guarantee'' instead of disclosing the specific
                program. If the Bureau determines that the loan term should be
                modified, the Bureau may consider recoding loan term data into bins--
                for example, using intervals of two or five years--to reduce the
                potential for re-identification risk.
                 The Bureau seeks comment on this analysis.
                v. Credit Purpose
                 Proposed Sec. 1002.107(a)(6) would require financial institutions
                to collect and report to the Bureau the purpose or purposes of the
                credit applied for or originated.\836\
                ---------------------------------------------------------------------------
                 \836\ A financial institution would be required to report the
                credit purpose or purposes by selecting the purpose or purposes of
                the covered credit transaction applied for or originated from the
                following list: Purchase, construction/improvement, or refinance of
                owner-occupied dwelling(s); purchase, construction/improvement, or
                refinance of non-owner-occupied dwelling(s); purchase, construction/
                improvement, or refinance of non-dwelling real estate; purchase,
                construction/improvement, or refinance of owner-occupied, non-
                dwelling real estate; purchase, refinance, or rehabilitation/repair
                of motor vehicle(s) (including light and heavy trucks); purchase,
                refinance, or rehabilitation/repair of equipment; working capital
                (includes inventory or floor planning); business start-up; business
                expansion; business acquisition; refinance existing debt (other than
                refinancings listed above); line increase; other; not provided by
                applicant and otherwise undetermined; or not applicable. A financial
                institution reporting ``other'' would be required to enter the
                purpose or purposes as free-form text. The Bureau analyzes free-form
                text under the proposed balancing test in part VI.C.6.xix below.
                ---------------------------------------------------------------------------
                 Disclosing the purpose of the credit in the public application-
                level 1071 data in unmodified form would facilitate enforcement of fair
                lending laws. Because financial institutions may generally consider
                credit used for certain purposes to be riskier than credit used for
                other purposes, data about the purpose of the credit would help ensure
                that users can compare applicants with similar profiles, thereby
                controlling for factors that might provide non-discriminatory
                explanations for some disparities in credit and pricing decisions.
                Disclosing data about the purpose of the credit would also be useful
                for identifying business and community development needs and
                opportunities of small businesses. Information about the purpose of the
                credit would help the public understand whether small businesses face
                barriers accessing credit that they would be seeking to use for a
                particular purpose. In conjunction with NAICS code and census tract,
                information about the purpose of the credit could help the public
                understand whether small businesses in certain industries or in certain
                communities face unique challenges accessing credit to, for example,
                purchase equipment or expand their businesses.
                 Disclosing the purpose of the credit in the 1071 data in unmodified
                form by itself would likely disclose minimal, if any, information about
                an applicant or
                [[Page 56528]]
                related natural person that may be harmful or sensitive if such person
                were re-identified, or that may be harmful or sensitive to an
                identified financial institution. However, information about the
                purpose of the credit could be useful to adversaries such as a small
                business's competitors, potential acquirers, or new market entrants,
                since it contains information about a business's strategy and
                performance, such as whether a business is expanding or conducting an
                acquisition. Nonetheless, this information would generally not be
                detailed enough to cause small businesses competitive harm. The value
                of this information to a small business's competitors is also likely to
                be mitigated by the delay between the date of action taken on a loan
                and the publication of the application-level 1071 data.
                 Disclosure of credit purpose in unmodified form may also reveal
                information that financial institutions regard as harmful or sensitive,
                such as information that a financial institution offers credit that is
                used for certain purposes. However, as discussed under Risk of Harm or
                Sensitivity in part VI.C.4.ii above, the Bureau does not believe that
                disclosure would permit the reverse-engineering of a financial
                institution's proprietary lending models.
                 The Bureau has not identified publicly available datasets that
                include data fields an adversary could directly match to the credit
                purpose data fields in unmodified form in the public application-level
                1071 data with respect to an applicant or related natural person.
                Identified public datasets pertaining to small business loans generally
                do not contain information about the purpose of the credit. Therefore,
                an adversary would have difficulty using the credit purpose data fields
                to match a section 1071 record to an identified publicly available
                record accurately.
                 The Bureau seeks comment on this analysis.
                vi. Amount Applied for
                 Proposed Sec. 1002.107(a)(7) would require financial institutions
                to collect and report to the Bureau the initial amount of credit or the
                initial credit limit requested by the applicant.
                 Disclosing amount applied for in the public application-level 1071
                data in unmodified form would help facilitate enforcement of fair
                lending laws by allowing data users to control for other variables in
                the data. Several industry representatives expressed concern that these
                data could lead to misinterpretations based on perceived disparate
                treatment as opposed to the complex nature of commercial lending. For
                example, financial institutions may consider different or additional
                underwriting criteria, depending on the amount applied for.
                Applications for large lines of credit might require an in-depth cash-
                flow analysis, while a smaller line of credit may be underwritten, in
                part, based on a business's (or business owner's) credit scores. In
                conjunction with amount approved or originated, this data field would
                allow data users to determine the difference between the amount an
                applicant requested, and the amount approved or originated. This
                information would also help data users identify potentially
                discriminatory lending patterns and distinguish them from legitimate
                business factors when combined with other data. This type of
                information is important to consider in fair lending analyses since the
                amount applied for may affect the likelihood of denial or the price of
                an approved loan.
                 Amount applied for would also help data users understand lending
                disparities. For example, data users would be able to identify
                potential fair lending violations where certain small businesses
                disproportionately receive less credit than applied for on a prohibited
                basis. Finally, the amount applied for would help communities,
                governmental entities, and creditors monitor the demand for credit.
                Specifically, when combined with NAICS code and census tract, the
                amount applied for could help data users assess the demand for credit
                in particular industries and communities and enable data users to
                devise strategies for narrowing or eliminating potential inequalities.
                 Disclosing amount applied for in the 1071 data in unmodified form
                would likely disclose information about an applicant or related natural
                person that may be harmful or sensitive if such person were re-
                identified. Business owners might view details about the amount applied
                for as sensitive, particularly where they are concerned about the risk
                of being re-identified as an applicant for credit. In addition, the
                amount applied for could also lead to targeted marketing of products or
                services that pose risks that are not apparent, because it could help
                lenders target small businesses that received less credit than they
                requested with offers for loans at higher rates or fees. The amount
                applied for is generally not included in other publicly available data,
                so it would likely not be useful to adversaries seeking to match 1071
                data with other publicly available data. However, the Bureau believes
                amount applied for would be useful to an adversary. For example, a
                significant shortfall between the amount applied for and the amount
                approved could be used either by an applicant's competitor or by a
                consumer, to infer that the business has a relatively weak financial
                position. With information on whether or not a business is granted a
                loan, an adversary might gain insight into the scale of a business's
                objectives based on the amount applied for and/or approved. The
                relative scarcity of this information at present would also increase
                the value to adversaries of re-identification. In addition, as
                discussed under Risk of Harm or Sensitivity in part VI.C.4.ii above,
                the Bureau does not believe that disclosure would permit the reverse-
                engineering of a financial institution's proprietary lending models.
                 The Bureau has not identified publicly available datasets that
                include data fields an adversary could directly match to the amount
                applied for data field in unmodified form in the public application-
                level 1071 data with respect to an applicant or related natural person.
                 If the Bureau determines that the amount applied for should be
                modified, the Bureau may consider recoding the data into bins. For
                example, the Bureau could recode the amount applied for into bins of
                $25,000.
                 The Bureau seeks comment on this analysis.
                vii. Amount Approved or Originated
                 Proposed Sec. 1002.107(a)(8) would require financial institutions
                to collect and report to the Bureau: (i) For an application for a
                closed-end credit transaction that is approved but not accepted, the
                amount approved by the financial institution; or (ii) for a closed-end
                credit transaction that is originated, the amount of credit originated;
                or (iii) for an application for an open-end credit transaction that is
                originated or approved but not accepted, the amount of the credit limit
                approved.
                 Disclosing amount approved or originated in the public application-
                level 1071 data in unmodified form would allow users to identify
                potentially discriminatory lending patterns in which small business
                applicants might be receiving less credit due to a prohibited basis.
                These data would also enable data users to devise strategies for
                narrowing or eliminating these inequalities. Additionally, in
                conjunction with amount applied for, disclosure of these data fields
                would allow data users to determine if there is a difference between
                the amount requested and the amount approved or originated. This
                information would help data users identify any potentially
                discriminatory lending patterns in
                [[Page 56529]]
                which small businesses might disproportionately receive less credit
                than what they applied for on a prohibited basis. As described above,
                when combined with the amount applied for, these data also could
                provide significant value as a control in fair lending analysis.
                Additionally, due to the sometimes complex nature of underwriting in
                commercial lending, when combined with credit purpose these data would
                allow users to identify potential discrimination when comparing loan
                applications for similar purposes.
                 The amount approved or originated would also be useful for business
                and community development purposes. Disparities with respect to the
                provision of credit can significantly impede the growth of women-owned
                and minority-owned businesses. When combined with census tract, these
                data could help users understand whether women-owned and minority-owned
                businesses are experiencing issues accessing credit in their
                communities (separate from the question of whether potential fair
                lending violations are occurring). When combined with NAICS codes,
                these data could help users understand whether women-owned and
                minority-owned businesses in particular industries are struggling to
                access credit. In addition, these data would allow data users to
                approximate the size of the small business lending market.
                 Like the amount applied for data field, disclosing amount approved
                or originated in the 1071 data in unmodified form would likely disclose
                information about an applicant or related natural person that might be
                harmful or sensitive if such person were re-identified, or that might
                be harmful or sensitive to an identified financial institution. The
                Bureau believes that information about the amount approved or
                originated could be useful to potential adversaries. For example, for
                creditors, these data fields would provide some insight into
                competitors' lending practices, particularly when combined with other
                data points such as gross annual revenue, number of workers, time in
                business, and pricing. These data might allow creditors to make general
                inferences about the relative risk appetites of their competitors.
                However, as discussed under Risk of Harm or Sensitivity in part
                VI.C.4.ii above, the Bureau does not believe that disclosure would
                permit the reverse-engineering of a financial institution's proprietary
                lending models.
                 The Bureau has identified publicly available datasets that include
                data fields an adversary could directly match to the amount approved or
                originated data fields in unmodified form in the public application-
                level 1071 data with respect to an applicant or related natural person.
                Credit amount approved or originated is often widely available in
                public datasets, such as loan-level data for the SBA 7(a) and 504
                programs, as well as property records and UCC filings. Therefore, in
                unmodified form, adversaries would be able to match the amount of
                credit approved or originated to an existing public record.
                 If the Bureau determines that the amount approved or originated
                should be modified, the Bureau may consider recoding the data into
                bins. For example, the Bureau could recode the data into bins of
                $25,000.
                 The Bureau seeks comment on this analysis.
                viii. Action Taken (Type) and Denial Reasons
                 Proposed Sec. 1002.107(a)(9) and (11) would require financial
                institutions to collect and report to the Bureau 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; and if applicable, for denied applications,
                the principal reason or reasons the financial institution denied the
                covered application.\837\
                ---------------------------------------------------------------------------
                 \837\ As discussed in the section-by-section analysis of
                proposed Sec. 1002.107(a)(12) above, the list of denial reasons
                would include the following: Business credit characteristics,
                personal credit characteristics (of business owner(s) or
                guarantor(s)), use of loan proceeds (i.e., a non-permissible
                purpose), cash flow, collateral (insufficient or inappropriate or
                unacceptable), time in business, government criteria, aggregate
                exposure of business and its principal owner(s), unverifiable
                information, other, or not applicable. A financial institution
                reporting ``other'' would be required to enter the denial reason or
                reasons as free-form text. The Bureau analyzes free-form text under
                the proposed balancing test in part VI.C.6.xix below.
                ---------------------------------------------------------------------------
                 Disclosing action taken and denial reasons in the public
                application-level 1071 data in unmodified form would provide important
                data on credit outcomes for small businesses, including women-owned and
                minority-owned small businesses, that apply for credit. Data provided
                by these data fields would allow data users to examine the rates of
                originations, approvals, denials, and incomplete and withdrawn
                applications, and whether they differ among groups protected under
                ECOA. Of the stakeholders that provided feedback on this issue, several
                supported the collection of action taken and denial reason data in
                order to track demand for credit and identify potential discrimination.
                Information that credit was originated or was approved, but not
                accepted, would help data users determine whether there are potential
                disparities in the terms and conditions received by women-owned and
                minority-owned small businesses. Information that an application was
                incomplete or withdrawn would highlight potential issues of
                discouragement, level of assistance disparities, or other
                discriminatory treatment that could cause women-owned or minority-owned
                small businesses to walk away from the lending process or otherwise
                fail to complete the application. One 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. For example, when combined with amount approved or originated,
                data users could also identify issues of possible discouragement where
                lenders have potentially under-funded loan applications from women-
                owned and minority-owned businesses.
                 Denial reasons would help data users examine reasons for credit
                denials particularly for women-owned and minority-owned businesses. For
                example, when combined with action taken date, denial reasons could
                help identify potential denial reasons disproportionately affecting
                protected classes, which may be useful to identify discrimination and
                enable data users to potentially develop strategies for narrowing or
                eliminating inequalities. These data would also be useful as a way to
                compare similarly situated applicants, which could be useful to both
                identify and explain potential disparities. Disclosing action taken and
                denial reasons would also be useful for business and community
                development purposes. The type of action taken would provide insights
                into the supply of credit. Data users would be able to monitor rates of
                credit denial, which can provide information on the willingness of
                creditors to lend, when combined with other data. Granular denial
                reason codes would also provide useful actionable information to small
                business applicants generally. For example, where small businesses are
                denied loans because of insufficient collateral, or time in business,
                data users could help direct programs and investment targeted
                specifically to these businesses in a particular community. When
                combined with census tract, analysis of denial reasons by geographical
                area could help identify whether small businesses in certain areas are
                experiencing higher rates of
                [[Page 56530]]
                denial and the specific reasons for denial.
                 During the SBREFA process, stakeholders commented that disclosure
                of denial reasons would be embarrassing for applicants and might
                discourage them from applying for credit.\838\ Several industry
                commenters believed that reporting reasons for denial would reveal
                information that would be very harmful or sensitive for businesses or
                natural persons. The Bureau agrees that this information could be
                harmful or sensitive for applicants or related natural persons.
                ---------------------------------------------------------------------------
                 \838\ See SBREFA Panel Report at 34-35.
                ---------------------------------------------------------------------------
                 Commenters also described sensitivities associated with originated
                loans, such as concerns that some small business owners could be
                reluctant to be perceived as needing credit in the first place. One
                industry stakeholder believed that disclosure of action taken would
                allow competitors to reverse engineer a financial institution's credit
                scoring model. The Bureau does not believe disclosing the fact that
                credit was sought, in and of itself, likely would be harmful or
                sensitive to small businesses because credit is widely used by small
                businesses. Furthermore, the harm or sensitivity of disclosing
                information that credit was originated is mitigated by the publication
                of originated loan details in UCC filings, for instance. Additionally,
                as discussed under Risk of Harm or Sensitivity in part VI.C.4.ii above,
                the Bureau does not believe that disclosure of action taken would
                permit the reverse-engineering of a financial institution's proprietary
                lending models.
                 The Bureau has not identified publicly available datasets that
                include data fields an adversary could directly match to data fields
                for denied applications (and reasons for denial) in unmodified form in
                the public application-level 1071 data with respect to an applicant or
                related natural person. However, at a category level, these data fields
                could tell adversaries which records it may be possible to match
                against other databases that include originated loans, as opposed to
                unoriginated loan records that cannot be matched in this way. Credit
                denials or credit offered but not originated are generally not
                disclosed to the public. Specifically, most of these data fields
                included in this data point are not found in publicly available sources
                of records that contain the identity of an applicant; the only data
                field that would be consistently available would be for originated
                loans. Without such an identified publicly available record to match
                with, there would likely be difficulty in attempting to re-identify an
                applicant by matching a 1071 record using these data fields.
                 However, as discussed under Re-Identification Risk in part VI.C.4.i
                above, adversaries may be able to use other data fields, such as census
                tract, NAICS code, and identified public information, such as business
                directories, to determine the identity of an applicant or related
                natural person. Thus, if applicants and related natural persons could
                be re-identified, an adversary could learn information about
                application denials for these businesses and use this information for a
                variety of purposes.
                 The Bureau seeks comment on this analysis. In light of the
                potential harm or sensitivity arising from the disclosure of
                application denials and the reasons for denial, the Bureau seeks
                comment on whether there are specific modifications it should consider,
                and whether modifying these data fields by grouping them, or deleting
                these data fields, would appropriately balance the privacy risks and
                benefits of disclosure, in light of the purposes of section 1071.
                ix. Action Taken Date
                 Proposed Sec. 1002.107(a)(10) would require financial institutions
                to collect and report the date of the action taken by the financial
                institution.
                 Disclosing action taken date in the public application-level 1071
                data in unmodified form would allow data users to monitor trends over
                time in small business lending more precisely than they could if only
                the year were disclosed.\839\ When combined with application date,
                information about the date of action taken would enable data users to
                determine the length of time, for different groups, between when
                businesses applied for credit and when they received the credit
                decision. This information would have benefits for fair lending
                analysis, allowing data users to determine whether certain groups
                experience different processing times (for example, longer processing
                for women-owned business, or faster denials for minority-owned
                businesses). The action taken date also would help ensure that users
                evaluating potential disparities in pricing or other terms and
                conditions can compare applicants that obtained loans on similar dates,
                thereby controlling for factors that might provide a legitimate
                explanation for some disparities, such as different market interest
                rates or different institutional practices over different time periods.
                ---------------------------------------------------------------------------
                 \839\ Whether or not the Bureau discloses the date of action
                taken, the application-level data will indicate the year in which
                action was taken, because the 1071 data would be disclosed annually
                based on the date of action taken.
                ---------------------------------------------------------------------------
                 Disclosing action taken date in the 1071 data in unmodified form
                would likely disclose minimal, if any, information about an applicant
                or related natural person that may be harmful or sensitive if such
                person were re-identified, or that may be harmful or sensitive to an
                identified financial institution.
                 The Bureau has identified publicly available datasets that include
                data fields an adversary could directly match to the action taken date
                data field in unmodified form in the public application-level 1071 data
                with respect to an applicant or related natural person. Public
                availability of the action taken date depends on the type of action
                taken. For example, the approval date of originated loans is widely
                publicly available in SBA 7(a), 504, and other program loan-level
                records that identify borrowers, and the date of executed agreements is
                often available for property records and UCC filings, which could be
                closely related to action taken date. For originated loans, action
                taken date would substantially facilitate matching with publicly
                available datasets that identify borrowers. Additionally, the 1071 data
                could identify the lender as well as the application date and action
                taken date. Where action taken date is on or near the UCC filing date,
                for example, an adversary might be able to use the date and lender on
                the UCC filings to identify the borrowers of originated loans in the
                eventual 1071 data. Action taken date may be less useful in re-
                identifying applicants of loans that were not originated because the
                action taken date for such loans is rarely publicly available.
                 If the Bureau determined that action taken date should be modified,
                the Bureau may consider disclosing the date at a higher level; for
                example, disclosing the month in which action was taken, but not the
                specific date. This could reduce the re-identification risk from
                sources such as UCC filings that may include the specific date of
                action taken. In light of the potential re-identification risk arising
                from this data field, the Bureau seeks comment on whether there are
                other specific modifications it should consider and whether deletion
                would balance the risks and benefits of disclosure.
                 The Bureau seeks comment on this analysis.
                x. Pricing Information
                 Proposed Sec. 1002.107(a)(12) would require financial institutions
                to collect and report to the Bureau the following
                [[Page 56531]]
                information regarding the pricing of a covered credit transaction that
                is originated or approved but not accepted, as applicable: (i) The
                interest rate; \840\ (ii) total origination charges, defined as the
                total amount of all charges payable directly or indirectly by the
                applicant and imposed directly or indirectly by the financial
                institution at or before origination as an incident to or a condition
                of the extension of credit; (iii) broker fees, defined as the total
                amount of all origination charges that are fees paid by the applicant
                directly to a broker or to the financial institution for delivery to a
                broker; (iv) initial annual charges, defined as the total amount of all
                non-interest charges that are scheduled to be imposed over the first
                annual period of the covered credit transaction; (v) additional costs
                for merchant cash advances or other sales-based financing, defined as,
                for a merchant cash advance or other sales-based financing transaction,
                the difference between the amount advanced and the amount to be repaid;
                and (vi) prepayment penalties.\841\
                ---------------------------------------------------------------------------
                 \840\ If the interest rate is fixed, the proposal would require
                the financial institution to report the interest rate that is or
                would be applicable to the covered credit transaction. If the
                interest rate is adjustable, the proposal would require the
                financial institution to report the margin, index value, and index
                name that is or would be applicable to the covered credit
                transaction at origination. The proposal would also require the
                financial institution to report the index used by selecting the
                index used from a specified list. If the index used does not appear
                on the list of indices provided, the financial institution would
                report ``other'' and provide the name of the index as free-form
                text. The Bureau analyzes free-form text under the proposed
                balancing test in part VI.C.6.xix below.
                 \841\ The proposal would require the financial institution to
                report whether the financial institution could have included a
                charge to be imposed for paying all or part of the transaction's
                principal before the date on which the principal is due under the
                policies and procedures applicable to the covered credit
                transaction. The proposal also would require the financial
                institution to report whether the terms of the covered credit
                transaction include a charge imposed for paying all or part of the
                transaction's principal before the date on which the principal is
                due.
                ---------------------------------------------------------------------------
                 The Bureau believes that these pricing data fields would serve to
                further both the fair lending purpose and the business and community
                development purpose of section 1071. The statutory data points alone
                offer limited insight into underwriting disparities and no insight into
                predatory prices or pricing disparities. For example, the statutory
                data points alone 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 prioritize fair lending
                enforcement resources. In addition, if potential discriminatory conduct
                is monitored effectively with regard to loan approvals, but not with
                regard to pricing, industry compliance systems may focus solely on
                approvals and denials and ignore potential pricing disparities. Having
                pricing data available in the public application-level 1071 data would
                also increase transparency and demonstrate to responsible lenders where
                business opportunities exist to offer credit to underserved markets.
                Pricing data could also help small businesses identify where credit may
                be available on better terms. The Bureau provides additional analysis
                of the benefits of the pricing data fields in the section-by-section
                analysis of proposed Sec. 1002.107(a)(12) above, including proposed
                Sec. 1002.107(a)(12)(i) through (vi).
                 During the SBREFA process, several industry commenters expressed
                concern that pricing data could lead financial institutions to
                artificially flatten prices or create misperceptions about disparities
                among applicants, in light of the complexity of underwriting decisions.
                One industry commenter stated that pricing data could present ``privacy
                risk'' to applicants in rural communities, without specifying the
                nature of the risk. Several SERs stated that pricing data may be
                sensitive to financial institutions. One of these SERs suggested that
                even aggregate pricing information would be commercially sensitive data
                for a financial institution. While acknowledging other SERs' concerns,
                a few SERs stated that information on competitors' pricing is
                relatively easy to obtain now.
                 The Bureau believes that information about the interest rates and
                fees charged in connection with credit represents basic information
                about the features of a product generally would present low risk of
                harm or sensitivity. Disclosure of pricing data in unmodified form may
                reveal information that some applicants or related natural persons may
                regard as harmful or sensitive, such as a reflection of their perceived
                credit risk. However, the Bureau received feedback during the SBREFA
                process that multiple factors contribute to pricing for small business
                credit. Disclosure of pricing data in unmodified form may also reveal
                information that financial institutions regard as harmful or sensitive,
                such as the prices a financial institution charges for certain types of
                credit. However, as discussed under Risk of Harm or Sensitivity in part
                VI.C.4.ii above, the Bureau does not believe that disclosure of pricing
                information would permit the reverse-engineering of a financial
                institution's proprietary lending models.
                 The Bureau has identified publicly available datasets that include
                data fields an adversary could directly match to the pricing data
                fields in unmodified form in the public application-level 1071 data
                with respect to an applicant or related natural person. Identified data
                about the interest rate and fees charged for a given loan are available
                from a limited number of publicly available datasets, such as data for
                the SBA 7(a) and 504 programs. Additionally, the PPP loan program has a
                uniform 1 percent interest rate.
                 During the SBREFA process, one industry stakeholder stated that, if
                pricing data are collected, the Bureau should publish them along with
                demographic information only in aggregate form, such as at an industry
                or multi-firm level, rather than the application level. The commenter
                stated that publication of pricing information along with demographic
                information risks creating the perception of potential fair lending
                violations that are not based on adequate analysis. The Bureau notes
                that 1071 data alone (including pricing data) generally could not be
                used to determine whether a lender is complying with fair lending laws.
                For example, HMDA data have a long history of utility for fair lending
                purposes even though they alone generally do not offer proof of
                compliance with fair lending laws. Additionally, in the section-by-
                section analysis of proposed Sec. 1002.107(a)(12) above, the Bureau
                seeks comment on additional information that could help reduce
                misinterpretations of disparities in pricing, including modifications
                to the pricing information under proposed Sec. 1002.107(a)(12).
                 If the Bureau determines that pricing data should be modified, the
                Bureau may consider recoding the pricing information data fields into
                bins. For example, the Bureau may consider recoding interest rates into
                bins of 0.25 percentage points or origination fees into bins of $500.
                The Bureau may also consider top-coding pricing data fields, which
                would mask particularly high values.
                 The Bureau seeks comment on this analysis.
                [[Page 56532]]
                xi. Census Tract
                 Proposed Sec. 1002.107(a)(13) would require financial institutions
                to collect and report the census tract in which is located: (1) The
                address or location where the proceeds of the credit applied for or
                originated will be or would have been principally applied; or, (2) if
                this information is unknown, the address or location of the main office
                or headquarters of the applicant; or, (3) if this information is also
                unknown, another address or location associated with the applicant. In
                addition to reporting the census tract, the financial institution would
                be required to indicate which one of these three types of addresses or
                locations the census tract is based on.
                 Disclosing census tract data in the public application-level 1071
                data in unmodified form would aid in fulfilling both the fair lending
                and business and community development purposes of section 1071 by
                providing more useful information on the location of the credit
                activity for fair lending analysis and understanding where the business
                and community development is occurring. With respect to fair lending
                enforcement, a measure of geography at the neighborhood or community
                level is necessary to identify redlining--the illegal practice in which
                those in a certain area or neighborhood are denied access to credit,
                are charged higher prices, or are otherwise not given the same access
                to credit as those in other areas, on the basis of race or for some
                other prohibited reason. Additionally, because differences in the level
                of competition in the local credit market may contribute to differences
                in interest rates or approval rates for otherwise similarly situated
                small businesses, census tract data would help ensure that users can
                compare applicants with similar profiles, thereby controlling for
                factors that might provide non-discriminatory explanations for some
                disparities in credit and pricing decisions.
                 The inclusion of a geographic indicator, such as census tract, that
                identifies the appropriate community--not merely the appropriate county
                or State--would further the statute's community and business
                development purposes. Census tract data would enable data users to
                monitor credit conditions in particular communities and identify
                communities that are underserved by the small business credit market.
                In addition, requiring data on the nature of the address reported would
                aid in fulfilling both the fair lending and business and community
                development purposes of section 1071 by facilitating accurate analyses
                of the data reported.
                 Disclosing the census tract in the 1071 data in unmodified form
                would likely disclose minimal, if any, information about an applicant
                or related natural person that may be harmful or sensitive if such
                person were re-identified, or that may be harmful or sensitive to an
                identified financial institution. The Bureau is aware that, for sole
                proprietors, the main office address of small business applicants is
                frequently a home address. However, the actual street address would not
                be reported or disclosed. In addition, small businesses commonly make
                their locations available in the normal course of their business by
                disclosing their addresses.
                 If the address reflects where the proceeds of the credit will be or
                would have been principally applied, disclosing the census tract may
                reveal some information about an applicant's business strategy,
                particularly if paired with the loan purpose data field. For example,
                the data could indicate that a small business is pursuing or was
                pursuing an expansion to a particular address. However, the value of
                this information to a small business's competitors is likely to be
                mitigated by the delay between the date of action taken on a loan and
                the publication of the application-level 1071 data. Disclosure of the
                census tract in unmodified form may also reveal information that
                financial institutions regard as harmful or sensitive, such as a
                financial institution's trade area. However, as discussed under Risk of
                Harm or Sensitivity in part VI.C.4.ii above, the Bureau does not
                believe that disclosure would permit the reverse-engineering of a
                financial institution's proprietary lending models.
                 During the SBREFA process, several industry stakeholders stated
                that geographic identifiers such as census tract would have a high
                potential to contribute to the re-identification of businesses or
                natural persons, especially in small towns or rural areas, where only
                one or two businesses may be located in a census tract. Several
                industry commenters expressed concern about re-identification risks
                arising from the combination of the census tract data fields with other
                data fields, noting that it might be difficult to predict which data
                fields could contribute to re-identification. One commenter stated that
                tax assessor and UCC records could be used to re-identify businesses in
                rural areas, and that adversaries with personal knowledge of businesses
                in rural areas could learn about a business's or natural person's
                sensitive financial characteristics. Some SERs stated that the
                combination of geographic identifiers and information about a small
                business's industry could make it easy to re-identify businesses in
                remote or rural areas.\842\ Two industry stakeholders stated that
                census tract and data about the type and purpose of financing would
                contribute to the re-identification of businesses or natural persons.
                One of these commenters also stated that combining geographic
                identifiers with data on the amount applied for or approved could
                contribute to re-identification. One industry commenter stated that
                census tract, combined with gross annual revenue and NAICS code, could
                facilitate re-identification of applicants in areas with low
                populations. A community group stakeholder stated that increasing the
                universe of financial institutions reporting 1071 data would mitigate
                privacy concerns about disclosing census tract.
                ---------------------------------------------------------------------------
                 \842\ See SBREFA Panel Report at 34-35.
                ---------------------------------------------------------------------------
                 The Bureau has identified publicly available datasets that include
                data fields an adversary could directly match to the census tract data
                field in unmodified form in the public application-level 1071 data with
                respect to an applicant or related natural person. The Bureau expects
                that, in most cases, the census tract that financial institutions would
                report to the Bureau would be based on the address or location of the
                main office or headquarters of the applicant, either because that is
                where the proceeds of the credit will be applied or because the
                financial institution does not know the location or address where the
                proceeds of the credit will be applied, but does know the main office
                or headquarters address. The Bureau believes that, for many small
                businesses, this address or location is likely to be publicly available
                on the internet from sources such as the business's website and review
                websites. Information about a business's location is also likely
                available from loan-level data for public loan programs as well as from
                private datasets, such as from data brokers. Therefore, in many cases,
                the Bureau believes an adversary could use the census tract data
                fields, combined with other fields, to match a section 1071 record to
                an identified publicly available record.
                 Disclosing the census tract is likely to produce unique instances
                in the data--particularly when combined with the 6-digit NAICS code, if
                the 6-digit NAICS code is disclosed in unmodified form. There are
                currently 73,057 census tracts and 1,057 6-digit NAICS codes,\843\
                [[Page 56533]]
                which produce over 77 million combinations. With so many possible
                combinations, there would likely be many instances in the 1071 data
                where the census tract and 6-digit NAICS code form a unique
                combination. Regarding the comment that increasing the universe of
                financial institutions reporting 1071 data would mitigate privacy
                concerns about disclosing census tract, the Bureau's proposals
                regarding the coverage of the 1071 rule are addressed elsewhere in this
                proposed rule.
                ---------------------------------------------------------------------------
                 \843\ See U.S. Census Bureau, 2010 Census Tallies, https://www.census.gov/geographies/reference-files/time-series/geo/tallies.html (last visited Aug. 23, 2021) (2010 Census Tallies)
                (number of census tracts); Off. of Mgmt. & Budget, North American
                Industry Classification System (NAICS) Updates for 2022, 86 FR
                35350, 35352 (July 2, 2021) (number of 6-digit NAICS codes).
                ---------------------------------------------------------------------------
                 During the SBREFA process, several commenters suggested ways the
                Bureau might modify census tract data to reduce privacy risk. Several
                industry commenters recommended that the Bureau disclose geographical
                data on the county or State level to reduce re-identification risk. One
                SER recommended the reporting of geographic data only at the State
                level or higher. The SER stated that even county-level data in some
                areas could potentially lead to re-identification of applicants or
                borrowers.
                 A joint comment from a number of community groups recommended that
                the Bureau consider modifying data with a low number of observations in
                a census tract to be reported at the zip code or county level. One SER
                recommended that the Bureau establish a minimum sample size before
                publishing application-level data for some rural markets to avoid
                privacy risks. A community group stakeholder recommended masking
                techniques such as moving data from a census tract with few
                observations to a contiguous or nearby census tract. This commenter
                also recommended that the Bureau consider switching records for
                similarly situated applicants between nearby census tracts to make it
                impossible to reconnect individual applicants while preserving the
                benefits of the data.
                 If the Bureau were to modify census tract, it might consider
                disclosing a broader location category, such as county or State. Census
                tracts are defined by the U.S. Census Bureau, and the next-largest
                geographic identifier in the Census Bureau's hierarchy of geographic
                identifiers is county. The next-largest geographic identifier after
                county is State. While likely reducing re-identification risk
                substantially, disclosing the county or State instead of the census
                tract would also reduce the utility of the 1071 data. There are 73,057
                census tracts, as noted above, but only 3,143 counties,\844\ suggesting
                a significant loss of geographic detail in modifying census tract. The
                Bureau could potentially use a geographic designation larger than
                census tract but smaller than county. However, since the use of Census
                Bureau-defined geographies is widespread, using modifications that
                already reflect standard Census Bureau-defined geographies
                significantly improves the utility of the data to data users.
                ---------------------------------------------------------------------------
                 \844\ See 2010 Census Tallies.
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on this analysis. The Bureau seeks comment
                on how disclosing the county, State, or some other geographic
                identifier--rather than the census tract--would affect the benefits of
                disclosure, the potential for harm or sensitivity, and the potential
                for re-identification of applicants or related natural persons.
                xii. Gross Annual Revenue
                 Proposed Sec. 1002.107(a)(14) would require financial institutions
                to collect and report to the Bureau the gross annual revenue of the
                applicant for its preceding full fiscal year prior to when the
                information is collected.
                 Disclosing gross annual revenue in the public application-level
                1071 data in unmodified form would facilitate enforcement of fair
                lending laws. Many creditors use gross annual revenue to help define
                whether a business is a small business and set revenue thresholds for
                assigning risk. Information about gross annual revenue would help
                ensure that users who are evaluating potential disparities in
                underwriting or pricing can compare small businesses with similar
                revenues, thereby controlling for a factor that might provide a
                legitimate explanation for some disparities. Disclosing gross annual
                revenue would also be useful for identifying business and community
                development needs and opportunities of small businesses. And because
                gross annual revenue is often used as a proxy for the size of a small
                business, these data could allow users to determine the availability of
                credit for small businesses of various sizes--including the very
                smallest businesses, which may face unique challenges accessing credit.
                 Disclosing gross annual revenue in the 1071 data in unmodified form
                would likely disclose information about an applicant or related natural
                person that may be harmful or sensitive if such person were re-
                identified. One SER stated during the SBREFA process that, in the case
                of sole proprietorships, gross annual revenue can serve as a proxy for
                the small business owner's personal income. The Bureau believes that
                disclosing gross annual revenue in unmodified form would likely
                disclose sensitive information because it could reflect the financial
                condition of a small business or, where a small business is a sole
                proprietorship, a natural person. With respect to the risk of harm or
                sensitivity to financial institutions, other creditors might use gross
                annual revenue data to learn more about the types of small businesses
                with which their competitors do business. However, as discussed under
                Risk of Harm or Sensitivity in part VI.C.4.ii above, the Bureau does
                not believe that disclosure would permit the reverse-engineering of a
                financial institution's proprietary lending models.
                 Gross annual revenue data are likely to be of interest to potential
                adversaries. As described below, gross annual revenue data are not
                available on a widespread basis from identified public databases.
                Competitors of the small business, other commercial entities,
                creditors, researchers, or persons with criminal intent all may have an
                interest in using these data to monitor the size or performance of an
                applicant that may be a rival, partner, or target of inquiry,
                investigation, or illegal activity.
                 The Bureau has identified publicly available datasets that include
                data fields an adversary could directly match to the gross annual
                revenue data field in unmodified form in the public application-level
                1071 data with respect to an applicant or related natural person. Gross
                annual revenue data are available from private databases. Gross annual
                revenue data are also available from data for New York State's women-
                and minority-owned business certification program, in which it is
                recoded into bins. However, these data are not available from
                identified public databases on a widespread basis.
                 During the SBREFA process, a community group stakeholder
                recommended that the Bureau consider reporting gross annual revenue in
                categories rather than specific amounts. An industry commenter
                recommended that the Bureau delete gross annual revenue from the public
                application-level 1071 data to protect the privacy of an applicant or
                related natural person. If the Bureau determines that gross annual
                revenue should be modified, the Bureau may consider recoding gross
                annual revenue data into bins by, for example, disclosing the data in
                ranges of $25,000. The Bureau may also consider top-coding gross annual
                revenue, which would mask particularly high values, thereby reducing
                the identifiability of application data from businesses with especially
                high gross annual revenue.
                [[Page 56534]]
                 The Bureau seeks comment on this analysis.
                xiii. NAICS Code
                 Proposed Sec. 1002.107(a)(15) would require financial institutions
                to collect and report to the Bureau a 6-digit North American Industry
                Classification System (NAICS) code appropriate for the applicant.\845\
                ---------------------------------------------------------------------------
                 \845\ As discussed above in the section-by-section analysis of
                proposed Sec. 1002.107(a)(15), the SBA customizes its size
                standards on an industry-by-industry basis using 1,057 6-digit NAICS
                codes. The first two digits of a NAICS code broadly capture the
                industry sector of a business. The third digit captures the
                industry's subsector, the fourth captures the industry group, and
                the fifth captures the industry code. The NAICS code thus becomes
                more specific as digits increase and the 6-digit long code is the
                most specific. For example, NAICS code 453910 describes a pet supply
                store, for which the 2-digit industry sector is the 44-45 ``Retail
                Trade'' sector. See Small Bus. Admin., Table of Small Business Size
                Standards Matched to North American Industry Classification System
                Codes, https://www.sba.gov/sites/default/files/2019-08/SBA%20Table%20of%20Size%20Standards_Effective%20Aug%2019%2C%202019_Rev.pdf.
                ---------------------------------------------------------------------------
                 Disclosing 6-digit NAICS codes in the public application-level 1071
                data in unmodified form would be useful for identifying business and
                community development needs and opportunities of small businesses. Such
                business and community development needs and opportunities may differ
                widely based on industry, even controlling for other factors. For
                example, 6-digit NAICS codes would help data users understand how small
                businesses in different industries use credit as well as identify
                industries in which small businesses face challenges accessing credit.
                Furthermore, disclosing NAICS codes would provide for consistency and
                compatibility with other public datasets related to small business
                lending activity, which generally use NAICS codes. This ability to
                synthesize 1071 data with other datasets would help the public use the
                data in ways that would advance both the fair lending and business and
                community development purposes of section 1071.
                 Disclosing 6-digit NAICS codes in the 1071 data in unmodified form
                would also facilitate enforcement of fair lending laws in other ways.
                Financial institutions often designate certain industries as high-risk,
                such as industries that have high rates of businesses leaving the
                market or that deal primarily in cash transactions. The 6-digit NAICS
                codes would help ensure that users can compare applicants with similar
                profiles, thereby controlling for factors that might provide non-
                discriminatory explanations for some disparities in credit and pricing
                decisions. The Bureau also believes that using the SBA's 6-digit NAICS
                codes (as opposed to the 2-digit code) would enable the public to
                identify whether disparities arise at a sector level and would provide
                more specific information on the types of businesses that are accessing
                or struggling to access credit.\846\
                ---------------------------------------------------------------------------
                 \846\ For example, a wide variety of businesses, including those
                providing car washes, footwear and leather goods repair, and nail
                salons all fall under the 2-digit sector code 81: Other Services
                (except Public Administration).
                ---------------------------------------------------------------------------
                 Including 6-digit NAICS codes in the public application-level 1071
                data in unmodified form by itself would likely disclose minimal, if
                any, information about an applicant or related natural person that may
                be harmful or sensitive if such person were re-identified, or that may
                be harmful or sensitive to an identified financial institution. The 6-
                digit NAICS codes are unlikely to be harmful or sensitive to a small
                business because information about a small business's industry is
                likely to be apparent to anyone interacting with it. Disclosure of the
                6-digit NAICS codes in unmodified form may reveal information that
                financial institutions regard as harmful or sensitive, such as the
                industries with which the financial institution does business. However,
                as discussed under Risk of Harm or Sensitivity in part VI.C.4.ii above,
                the Bureau does not believe that disclosure would permit the reverse-
                engineering of a financial institution's proprietary lending models.
                 During the SBREFA process, several industry commenters stated that
                NAICS codes would increase re-identification risk for small businesses,
                particularly in combination with geographic identifiers, such as census
                tract. The Bureau has identified publicly available datasets that
                include data fields an adversary could directly match to the NAICS code
                data field in unmodified form in the public application-level 1071 data
                with respect to an applicant or related natural person. A business's
                NAICS code is likely to be publicly available in loan-level data for
                public loan programs such as the 7(a), 8(a), or PPP programs and in
                private datasets. In addition, even where the specific NAICS code may
                not be publicly available, it could be derived with reasonable accuracy
                from other public information that is available for most businesses,
                such as business directories, a business's website, or from personal
                observation by members of the community where a business is located.
                Therefore, in many cases, an adversary could use 6-digit NAICS codes,
                combined with other fields, to match a section 1071 record to an
                identified publicly available record.
                 The 6-digit NAICS code data field is likely to produce unique
                instances in the data, especially when combined with census tract, if
                census tract is disclosed in unmodified form. There are currently
                73,057 census tracts and 1,057 6-digit NAICS codes,\847\ which produce
                over 77 million combinations. With so many possible combinations, there
                would likely be many instances in the 1071 data where the census tract
                and 6-digit NAICS code form a unique combination.
                ---------------------------------------------------------------------------
                 \847\ See 2010 Census Tallies (number of census tracts); Off. of
                Mgmt. & Budget, North American Industry Classification System
                (NAICS) Updates for 2022, 86 FR 35350, 35352 (July 2, 2021) (number
                of 6-digit NAICS codes).
                ---------------------------------------------------------------------------
                 If the Bureau determines that the 6-digit NAICS code should be
                modified, the Bureau may consider disclosing NAICS codes at a higher
                level by disclosing the 2-digit, 3-digit, or 4-digit NAICS code instead
                of the 6-digit code. Disclosing NAICS code at a higher level would
                reduce re-identification risk but would also reduce the utility of the
                data. There are 1,057 6-digit NAICS codes, as noted above, but there
                are only 99 3-digit subsectors and 20 broad 2-digit sectors.\848\ As a
                result, disclosing NAICS code at a higher level would reduce the
                specificity of the information in the 1071 data about the small
                business's industry.
                ---------------------------------------------------------------------------
                 \848\ Off. of Mgmt. & Budget, North American Industry
                Classification System (NAICS) Updates for 2022, 86 FR 35350, 35352
                (July 2, 2021).
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on this analysis. The Bureau specifically
                seeks comment on how disclosing the 2-, 3-, or 4-digit NAICS code--
                rather than the 6-digit NAICS code--would affect the benefits of
                disclosure, the potential harm and sensitivity, and potential for re-
                identification for this data field.
                xiv. Number of Workers
                 Proposed Sec. 1002.107(a)(16) would require financial institutions
                to collect and report to the Bureau the number of non-owners working
                for the applicant.
                 Disclosing number of workers in the public application-level 1071
                data in unmodified form would be useful for identifying business and
                community development needs and opportunities of small businesses. This
                information would give the public a greater understanding of how the
                business and community development needs and opportunities of small
                businesses may differ based on the number of workers. The number of
                workers would help the public understand, for example, the extent to
                which ``non-employer'' businesses, which do not have
                [[Page 56535]]
                employees besides the owner, and ``microbusinesses,'' which are
                typically defined as having fewer than 10 employees, may face unique
                challenges accessing credit or may use credit in different ways.
                Identifying the number of workers would also allow data users to
                understand the number of jobs supported by loans to a business.
                Disclosing the number of workers would also advance the fair lending
                purpose of section 1071. This information would help ensure that users
                of the 1071 data who are evaluating potential disparities in
                underwriting or pricing can compare small businesses with a similar
                number of workers, thereby controlling for a factor that might provide
                a legitimate explanation for some disparities.
                 Disclosing number of workers in the application-level 1071 data in
                unmodified form would likely disclose minimal, if any, information
                about an applicant or related natural person that may be harmful or
                sensitive if such person were re-identified, or that may be harmful or
                sensitive to an identified financial institution. Financial
                institutions may use data about the number of workers to learn more
                about the types of small businesses with which their competitors do
                business. However, as discussed under Risk of Harm or Sensitivity in
                part VI.C.4.ii above, the Bureau does not believe that disclosure would
                permit the reverse-engineering of a financial institution's proprietary
                lending models.
                 Furthermore, information about the number of workers is also likely
                to be publicly available for many businesses. State registries of
                businesses may include information about a business's number of
                workers. Private databases also commonly include this information,
                which is often verified by the business. Further, loan-level records
                from SBA loan programs include a field for the number of jobs supported
                by a loan, which in some instances may reflect the business's number of
                workers. In the Bureau's view, the public availability of this
                information decreases any potential sensitivity or harm of disclosing
                number of workers in the application-level 1071 data. At the same time,
                the Bureau believes that the utility of number of workers data in the
                public application-level 1071 data to potential adversaries would be
                low due to the widespread public availability of this information.
                 The Bureau has identified publicly available datasets that include
                data fields an adversary could directly match to the number of workers
                data field in unmodified form in the public application-level 1071 data
                with respect to an applicant or related natural person. As noted above,
                information about a business's number of workers is found in many
                publicly available datasets in which the business's name is identified,
                including State business registries, commercial databases, and loan-
                level records from SBA loan programs. Therefore, in many cases, an
                adversary could use number of workers, combined with other fields, to
                match a section 1071 record to an identified publicly available record.
                Data on a business's number of workers may easily produce unique
                combinations, particularly when combined with other data fields in the
                public application-level 1071 data and particularly for businesses with
                higher numbers of workers, which are more likely to be unique in the
                dataset.
                 If the Bureau determines that the number of workers data field
                should be modified, the Bureau may consider recoding the data into
                bins. The Bureau could also top-code number of workers, given that
                larger values in the 1071 data are more likely to be unique.
                 The Bureau seeks comment on this analysis.
                xv. Time in Business
                 Proposed Sec. 1002.107(a)(17) would require financial institutions
                to collect and report to the Bureau the time the applicant has been in
                business, described in whole years, as relied on or collected by the
                financial institution.
                 Disclosing time in business in the public application-level 1071
                data in unmodified form would advance both the fair lending and
                business and community development purposes of section 1071. As
                discussed in greater detail above in the section-by-section analysis of
                proposed Sec. 1002.107(a)(17), start-ups and new businesses play an
                important role in the business ecosystem, particularly with respect to
                job creation. Time in business data would allow data users to better
                identify the proportion of small businesses seeking credit that are
                start-ups or relatively new businesses, the types of credit that are
                offered and provided to start-ups and newer businesses, the geographic
                makeup of those businesses, the types of financial institutions that
                are reaching such businesses, and where communities might focus
                business development efforts. The data may also aid policymakers in
                addressing issues impacting the growth of small start-ups. The data,
                particularly as to unmet demand, could help interested financial
                institutions identify lending opportunities to reach more start-ups and
                new businesses, promoting both business and community development.
                 Disclosing time in business would also facilitate the enforcement
                of fair lending laws. Because lenders generally perceive younger
                businesses as having higher credit risk, time in business data would
                help ensure that users can compare applicants with similar profiles,
                thereby controlling for factors that might provide non-discriminatory
                explanations for some disparities in credit and pricing decisions.
                 Disclosing time in business in the 1071 data in unmodified form
                would likely disclose minimal, if any, information about an applicant
                or related natural person that may be harmful or sensitive if such
                person were re-identified, or that may be harmful or sensitive to an
                identified financial institution. During the SBREFA process, one
                industry commenter recommended that the Bureau delete time in business
                from the public application-level 1071 data, citing general concerns
                that the data field could facilitate re-identification and disclose
                previously non-public information to competitors.\849\ However, while
                financial institutions may use time in business data to learn more
                about the types of small businesses with which their competitors do
                business, the Bureau does not believe that disclosure would permit the
                reverse-engineering of a financial institution's proprietary lending
                models, as discussed under Risk of Harm or Sensitivity in part
                VI.C.4.ii above. Information about time in business is also likely to
                be publicly available for many businesses. Businesses typically
                disclose their date of establishment in public registration filings.
                Many commercial databases also include this information. In the
                Bureau's view, the existing public availability of this information
                decreases any potential harm or sensitivity of disclosing time in
                business in the public application-level 1071 data.
                ---------------------------------------------------------------------------
                 \849\ The commenter did not make clear whether it was referring
                to competitors of a small business or competitors of a financial
                institution.
                ---------------------------------------------------------------------------
                 The Bureau has identified publicly available datasets that include
                data fields an adversary could directly match to the time in business
                data field in unmodified form in the public application-level 1071 data
                with respect to an applicant or related natural person. As noted above,
                information about time in business is found in many publicly available
                datasets, including State business registries and commercial databases.
                Therefore, in many cases, an adversary could use time in business,
                combined with other fields, to match a section 1071 record to an
                identified
                [[Page 56536]]
                publicly available record. Time in business data may easily produce
                unique combinations, particularly when combined with other data fields
                in the public application-level 1071 data, and particularly for larger
                time in business values, which are more likely to be unique in the
                dataset.
                 If the Bureau determines that the time in business data field
                should be modified, it may consider recoding time in business into
                bins--for example, using two- or five-year intervals--to reduce the
                identifiability of a specific length of time in business. The Bureau
                could also top-code time in business at a value such as 25 years, given
                that larger values are more likely to be unique. With regard to the
                industry commenter's recommendation that the Bureau delete time in
                business from the public application-level 1071 data based on re-
                identification concerns, the Bureau's determination about whether this
                field should be modified or deleted will be based on the re-
                identification analysis that it will conduct once it receives at least
                a full year of actual data reported by financial institutions.
                 The Bureau seeks comment on this analysis. The Bureau specifically
                seeks comment on what intervals the Bureau should use if it were to
                recode time in business into bins and what value the Bureau should use
                if it were to top-code this data field.
                xvi. Minority-Owned Business Status and Women-Owned Business Status
                 Proposed Sec. 1002.107(a)(18) and (19) would require financial
                institutions to collect and report to the Bureau whether the applicant
                is a minority-owned business or a women-owned business and whether
                minority-owned business status or women-owned business status is being
                reported based on previously collected data pursuant to proposed Sec.
                1002.107(c)(2).\850\
                ---------------------------------------------------------------------------
                 \850\ The collection and reporting of women-owned and minority-
                owned business status is proposed to be based on applicants' self-
                reporting and would rely on the meanings of ``ownership'' and
                ``control'' defined in the CDD rule.
                ---------------------------------------------------------------------------
                 Disclosing women-owned and minority-owned business status in the
                public application-level 1071 data in unmodified form is central to
                furthering the fair lending purpose of section 1071 and would promote
                the business and community development purpose of the statute by
                identifying opportunities for further development of women-owned and
                minority-owned small businesses. In fair lending analyses, knowing
                whether a business is women-owned or minority-owned would help data
                users identify potential discriminatory lending patterns. Publishing
                information on women-owned or minority-owned business status in the
                public application-level 1071 data would help data users examine and
                identify potential disparities in small business lending. For example,
                when combined with action taken, data users would be able to identify
                if women-owned and minority-owned small businesses are denied for
                credit at disproportionate rates. In addition, when combined with
                pricing information, data users would be able to identify if women-
                owned and minority-owned businesses are receiving credit at higher
                prices. Additionally, these data would allow communities, governmental
                entities, and creditors to determine areas where women-owned and
                minority-owned small businesses are underserved relative to other small
                businesses and to focus resources to identify business and community
                development opportunities for women-owned and minority-owned small
                businesses. Disclosing women-owned and minority-owned business status
                could also help communities, governmental entities, and creditors
                determine whether or not initiatives to increase access to credit for
                women-owned and minority-owned businesses are succeeding.
                 Disclosing women-owned and minority-owned business status in the
                1071 data in unmodified form would likely disclose minimal, if any,
                information about an applicant or related natural person that may be
                harmful or sensitive if such person were re-identified, or that may be
                harmful or sensitive to an identified financial institution. While some
                applicants or related natural persons may regard this information as
                harmful or sensitive, the Bureau believes this information generally
                would present low risk of harm or sensitivity. The Bureau also believes
                that this information already may be available to the general public,
                as discussed in the paragraph below, and that this information would
                have relatively limited utility for adversaries if an applicant or
                related natural person were re-identified.
                 However, in many cases, an adversary could use women-owned or
                minority-owned business status, in combination with other 1071 data, to
                match a section 1071 record to an identified publicly available record.
                The Bureau has identified publicly available datasets that include data
                fields an adversary could directly match to the minority- or women-
                owned status data fields in unmodified form in the public application-
                level 1071 data with respect to an applicant or related natural person.
                Women-owned business status and minority-owned business status is
                likely to be publicly available for many businesses. Many businesses
                also publicly register or certify with the SBA or State or local
                authorities as a women-owned or minority-owned business to access
                government programs. For example, businesses are identified as woman or
                minority-owned in the public loan-level SBA 7(a) and PPP data, and
                demographic status indicators are available in loan-level 8(a) records.
                Additionally, businesses' websites may have information about their
                owners that could be used to derive women-owned and minority-owned
                business status information. Private commercial databases also often
                contain this information, either imported from public records or
                estimated using software based on owner names (or both).
                 The Bureau invites comment on this analysis.
                xvii. Ethnicity, Race, and Sex of Principal Owners and Number of
                Principal Owners
                 Proposed Sec. 1002.107(a)(20) would require financial institutions
                to collect and report to the Bureau the ethnicity, race, and sex of the
                applicant's principal owner(s); \851\ whether ethnicity and race are
                being collected by the financial institution on the basis of visual
                observation or surname; \852\ and whether ethnicity, race, or sex are
                being reported based on previously collected data pursuant to proposed
                Sec. 1002.107(c)(2). Unless a financial institution is permitted to
                report ethnicity, race, and sex information based on previously
                collected data pursuant to proposed Sec. 1002.107(c)(2), a financial
                institution must ask an applicant about its principal owners'
                ethnicity, race, and sex for each application. A financial institution
                must permit an applicant to
                [[Page 56537]]
                refuse to answer the financial institution's inquiry and report its
                refusal to answer the inquiry, or its failure to respond to the
                inquiry.
                ---------------------------------------------------------------------------
                 \851\ Financial institutions would report ethnicity and race
                using the aggregate categories and disaggregated subcategories
                listed in proposed comments 107(a)(20)-5 and -6, respectively.
                Financial institutions would report sex as described in proposed
                comment 107(a)(20)-7, which prescribes that financial institutions
                shall report sex using the following categories: ``Male,''
                ``Female,'' ``I prefer to self-describe'' (with accompanying free-
                form text), and ``I do not wish to provide this information.'' The
                Bureau analyzes free-form text under the proposed balancing test in
                part VI.C.6.xix below.
                 \852\ Unless a financial institution is permitted to report
                ethnicity, race, and sex information based on previously provided
                data pursuant to proposed Sec. 1002.107(c)(2), a financial
                institution would be required to ask an applicant to report its
                principal owners' ethnicity, race, and sex for each application. In
                certain situations, discussed in proposed comments 107(a)(20)-7 and
                -8 and in proposed appendix G, a financial institution may also be
                required to report the ethnicity and race of one or more principal
                owner(s) based on visual observation and/or surname.
                ---------------------------------------------------------------------------
                 Disclosing the ethnicity, race, and sex of the applicant's
                principal owner(s) in the public application-level 1071 data in
                unmodified form would be central to furthering the fair lending purpose
                of section 1071 and would promote the business and community
                development purpose of the statute by identifying opportunities for
                further development of women-owned and minority-owned small businesses.
                In fair lending analyses, data on the ethnicity, race, and sex of an
                applicant's principal owner(s) would be used to identify potential risk
                of discrimination under fair lending laws. These data would be
                essential for this purpose when analyzed in conjunction with data
                fields such as action taken, credit amount approved or originated, and
                pricing. For example, when combined with the type of action taken,
                ethnicity, race, and sex data of an applicant's principal owner(s)
                would help data users identify whether women-owned and minority-owned
                applicants are denied at higher rates on a prohibited basis. In
                addition, as discussed above with women-owned and minority-owned
                business status, when combined with pricing information, data on
                ethnicity, race, and sex of an applicant's principal owner(s) would
                help data users identify if women-owned and minority-owned businesses
                are receiving credit at higher prices. In addition, because the Bureau
                is proposing to require that financial institutions report ethnicity
                and race using the aggregate categories and disaggregated subcategories
                listed in proposed comments 107(a)(20)-5 and -6, respectively, such
                data would enable data users to identify potential discrimination or
                challenges accessing credit by particular ethnic and racial minorities.
                 Data on ethnicity, race, and sex of the applicant's principal
                owner(s) would also be essential for the business and community
                development purpose of section 1071. These data would allow
                communities, governmental entities, and creditors to determine areas
                where women-owned and minority-owned small businesses are underserved
                relative to other small businesses. In addition, such demographic
                information about small business applicants would allow communities,
                governmental entities, and creditors to focus resources to identify
                business and community development opportunities for women-owned and
                minority-owned small businesses. For example, in conjunction with NAICS
                codes, these data would help data users identify challenges facing
                women-owned businesses and businesses owned by individuals from
                different ethnic and racial groups in particular industries. This
                information could also help communities and lenders focus investment
                and resources in traditionally underserved demographic groups.
                 In general, disclosing the ethnicity, race, and sex of the
                applicant's principal owner(s) in the 1071 data in unmodified form
                would likely disclose minimal, if any information about an applicant or
                related natural person that may be harmful or sensitive if such person
                were re-identified, or that may be harmful or sensitive to an
                identified financial institution. As noted similarly above for the data
                fields on women-owned and minority-owned business status, while some
                applicants or related natural persons may regard this information as
                harmful or sensitive, the Bureau believes this information generally
                would present low risk of harm or sensitivity. The Bureau also notes
                that this information may be already available to the general public,
                and that this information would have relatively limited utility for
                adversaries if an applicant or related natural person were re-
                identified.
                 The Bureau has identified publicly available datasets that include
                data fields an adversary could directly match to the ethnicity, race,
                and sex of the applicant's principal owner(s) data fields in unmodified
                form in the public application-level 1071 data with respect to an
                applicant or related natural person. Information about the ethnicity,
                race, and sex of the applicant's principal owner(s) is available to the
                general public in some datasets.\853\ For example, certain State
                business registries, including those required to access women-owned and
                minority-owned business programs, provide this information. Other
                public record databases such as for SBA 8(a) and PPP loan programs also
                include ethnicity, race, and sex data alongside the borrower's name.
                Private databases often include information about the owners of
                businesses, which can be used to estimate ethnicity, race, and sex
                based on owner name. Therefore, in many cases, an adversary could use
                the ethnicity, race, and sex of the applicant's principal owner(s),
                combined with other fields, to directly or indirectly match a section
                1071 record to an identified publicly available record.
                ---------------------------------------------------------------------------
                 \853\ Regulation B generally prohibits a creditor from inquiring
                about 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. See
                Sec. 1002.5(a)(2). Relatedly, 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).
                ---------------------------------------------------------------------------
                 As discussed in the section-by-section analysis of proposed Sec.
                1002.107(a)(20) in part V above, the Bureau is proposing that financial
                institutions would report sex as described in proposed comment
                107(a)(20)-7, which prescribes that financial institutions shall report
                sex using the following categories: ``Male,'' ``Female,'' ``I prefer to
                self-describe'' (with accompanying free-form text), and ``I do not wish
                to provide this information.'' As such, if finalized, the Bureau would
                permit an applicant to self-describe their sex by selecting ``I prefer
                to self-describe'' with using free-from text. As discussed in part
                VI.C.6.xix below, the Bureau is proposing to delete free-form text from
                the public application-level 1071 data. However, the Bureau seeks
                comment on whether there are additional specific modifications it
                should consider with regard to applicants who choose to self-describe
                their sex.
                 As discussed in the section-by-section analysis of proposed Sec.
                1002.107(a)(20) in part V above, the Bureau is seeking comment in this
                proposal about the reporting of sexual orientation and gender identity
                of principal owners--specifically, whether separate questions regarding
                sex, sexual orientation, and gender identity should be asked and, if
                so, what categories should be offered on the sample data collection
                form for use by applicants in responding to each question. The Bureau
                seeks comment on whether disclosing that one or more principal owners
                of an applicant has answered any of these questions, and how, could
                cause heightened sensitivity or risk of harm and whether there are
                specific modifications the Bureau should consider if such data points
                are included in the final rule.
                 The Bureau seeks comment on this analysis.
                xviii. Financial Institution Identifying Information
                 Proposed Sec. 1002.109(b) would require a financial institution to
                provide the Bureau with certain information with its submission of its
                small business lending application register: (1) Its name; (2) its
                headquarters address; (3) the name and business contact information of
                a person who may be contacted with questions about the financial
                institution's submission; (4) its Federal prudential regulator, if
                applicable; (5) its Federal Taxpayer Identification Number; (6) its
                LEI; (7) its RSSD ID, if applicable; (8)
                [[Page 56538]]
                parent entity information,\854\ if applicable; (9) the type of
                financial institution that it is, indicated by selecting the
                appropriate type or types of institution from the list provided or
                entering free-form text; \855\ and (10) whether the financial
                institution is voluntarily reporting covered applications for covered
                credit transactions.
                ---------------------------------------------------------------------------
                 \854\ Parent entity information would include the name of the
                immediate parent entity, the LEI of the immediate parent entity, if
                available, the RSSD ID number of the immediate parent entity, if
                available, the name of the top-holding parent entity, the LEI of the
                top-holding parent entity, if available, and the RSSD ID number of
                the top-holding parent entity, if available.
                 \855\ The list would include the following types: Bank or
                savings association, minority depository institution, credit union,
                nondepository institution, community development financial
                institution (CDFI), other nonprofit financial institution, Farm
                Credit System institution, government lender, commercial finance
                company, equipment finance company, industrial loan company,
                fintech, and ``other'' (reported as free-form text). The Bureau
                analyzes free-form text under the proposed balancing test in part
                VI.C.6.xix below.
                ---------------------------------------------------------------------------
                 Regulation C requires financial institutions to report similar
                information when submitting their loan-level HMDA data. Regulation C
                also requires financial institutions to report the calendar year of
                submission and the total number of entries in their loan-level HMDA
                data. Regulation C does not require financial institutions to submit
                their headquarters address, RSSD ID, or financial institution type or
                indicate whether they are reporting data voluntarily. With the
                exception of contact information for a person who can be reached about
                the financial institution's submission, the information financial
                institutions are required to submit with their HMDA submissions under
                Sec. 1003.5(a)(3) is publicly available through the FFIEC website.
                 Financial institution identifying information other than individual
                contact information. For the reasons described below, the Bureau
                preliminarily determines that the privacy risks of disclosing the
                financial institution identifying information data fields in unmodified
                form, other than data fields containing the information for the
                financial institution's point of contact for its 1071 data submission
                (i.e., the name and business contact information of a person who may be
                contacted with questions about the submission), would be justified by
                the benefits of disclosure for section 1071's purposes. As such, the
                Bureau proposes to disclose such information to the public as reported,
                without modification. The Bureau seeks comment on this determination.
                 Disclosing the financial institution identifying information, other
                than individual contact information, in the public application-level
                1071 data in unmodified form would facilitate the enforcement of fair
                lending laws. The purposes of section 1071 in large part concern
                evaluating the practices of individual financial institutions and
                disclosing their identifying information allows the public to evaluate
                their lending practices. Identifying their Federal regulator would also
                facilitate fair lending enforcement by enabling the public to
                communicate with the regulator in connection with administrative
                enforcement of fair lending laws. Disclosing RSSD ID and parent
                institution information would enable the public to map corporate
                relationships for financial institutions, which is also important for
                fair lending enforcement.
                 Disclosing financial institution identifying information, including
                financial institution type, would enable the public to evaluate which
                financial institutions are reaching underserved areas of the market and
                the extent to which different types of financing is available from
                different types of institutions. And as described more fully in the
                section-by-section analysis of proposed Sec. 1002.109(b) above,
                financial institution identifying information would promote the fair
                lending and community and business development purposes of the statute
                by allowing users to identify financial institutions precisely and draw
                appropriate conclusions from the data.
                 Several SERs and industry commenters expressed concern that
                disclosing financial institution identifying information would lead to
                frivolous litigation and unfounded reputational risks, and would
                increase the cost of credit or limit credit availability for small
                businesses.\856\
                ---------------------------------------------------------------------------
                 \856\ One industry commenter stated that financial institutions
                might respond to perceived reputational risks by eliminating certain
                product offerings or modifying underwriting practices in a way that
                reduces the overall diversity of small business products.
                ---------------------------------------------------------------------------
                 Disclosing financial institution identifying information in the
                1071 data in unmodified form would likely disclose minimal, if any,
                information about an applicant or related natural person that may be
                harmful or sensitive if such person were re-identified. While some
                businesses might view their identification as an applicant as harmful
                or sensitive, the Bureau does not believe revealing the name of the
                financial institution would significantly increase such risks. In
                addition, this information is already largely available from other
                identified public records, such as UCC filings. For the same reason,
                the Bureau does not believe revealing the name of the financial
                institution would significantly increase risk of fraud or identity
                theft to businesses or related natural persons caused by adversaries
                impersonating the financial institution.
                 Disclosing financial institution identifying information in the
                1071 data in unmodified form would not, by itself, reveal information
                that is harmful or sensitive, given financial institutions' commercial
                interests. Additionally, other public records, such as public HMDA
                data, tax records, and commercial databases disclose Federal Taxpayer
                Identification number, RSSD ID, and LEI.\857\ Disclosing financial
                institution identifying information in unmodified form may reveal
                information that financial institutions regard as harmful or sensitive,
                but, as discussed under Risk of Harm or Sensitivity in part VI.C.4.ii
                above, the Bureau does not believe that disclosure of the information
                in the public application-level 1071 data would permit the reverse-
                engineering of a financial institution's proprietary lending models.
                The Bureau acknowledges, however, that this information could, in some
                circumstances, lead to reputational risks and increased costs for
                financial institutions, which might be passed on to their customers in
                the form of increased costs or decreased access to credit.
                ---------------------------------------------------------------------------
                 \857\ The FFIEC publishes transmittal sheet information,
                including LEI and Federal Taxpayer Identification number, on its
                website. Fed. Fin. Insts. Examination Council, Public Transmittal
                Sheet--Schema, https://ffiec.cfpb.gov/documentation/2020/public-ts-schema/ (last visited July 23, 2021).
                ---------------------------------------------------------------------------
                 Several SERs were concerned that publishing financial institution
                identifying information could increase re-identification risk of
                applicants and related natural persons.\858\ One industry stakeholder
                provided feedback that customers of captive wholesale finance companies
                with applicant bases limited to franchises or licensees of a particular
                distributor or manufacturer would face unique re-identification risks.
                The commenter explained that, in many instances, these applicants may
                be the financial institution's only customer in a particular State, or
                one of only a very small number of customers in the State, heightening
                the privacy concerns for publication of data tied to these financial
                institutions.
                ---------------------------------------------------------------------------
                 \858\ See SBREFA Panel Report at 34.
                ---------------------------------------------------------------------------
                 The Bureau has identified publicly available datasets that include
                data fields an adversary could directly match
                [[Page 56539]]
                to financial institution identifying information data fields in
                unmodified form in the public application-level 1071 data with respect
                to an applicant or related natural person. Other identified public
                records, such as UCC filings, disclose financial institution name.
                Therefore, in many cases, an adversary could use identifying financial
                institution data fields, combined with other 1071 data fields, to match
                a section 1071 record to an identified public record. Because the
                Bureau does not intend to perform a re-identification analysis of the
                1071 data fields until 1071 data are reported, it has not determined
                the extent to which financial institution identifying information or
                other data fields could contribute to record uniqueness.\859\
                ---------------------------------------------------------------------------
                 \859\ As discussed under Balancing Test Design in part VI.C.1
                above, while the proposed balancing test would consider the risk of
                harm or sensitivity to financial institutions, it would not consider
                re-identification risk with respect to financial institutions
                because the statute contemplates the disclosure of their identity.
                ---------------------------------------------------------------------------
                 With respect to concerns raised regarding captive wholesale finance
                companies, the Bureau acknowledges that financial institution
                identifying information in unmodified form in the public application-
                level 1071 data could, in combination with other data fields like
                census tract, NAICS codes, and credit type or purpose, facilitate re-
                identification of applicants that have a common name, without requiring
                that adversaries match 1071 records to other identified datasets. As
                discussed in the section-by-section analysis of proposed Sec.
                1002.104(b) above, the Bureau proposes to exclude trade credit and
                other transactions from the scope of covered credit transactions. This
                might eliminate some transactions involving such lenders. The Bureau
                seeks comment on the circumstances under which a transaction involving
                a captive wholesale finance company would be covered by the proposal
                notwithstanding the exemption.
                 To the extent there are such transactions, the Bureau seeks comment
                on the instances in which captive wholesale finance companies lend
                exclusively to businesses that are publicly branded in a way that can
                be easily matched to the identity of the financial institution. As
                discussed in the section-by-section analysis of proposed Sec.
                1002.109(b) above, the Bureau also seeks comment on whether a final
                rule could include certain categories of financial institution types
                that would allow the Bureau to easily identify such financial
                institutions in the unmodified 1071 dataset without an application-
                level analysis. Finally, the Bureau seeks comment on whether there are
                particular modification techniques that would reduce re-identification
                risks and risks of harm or sensitivity for applicants and related
                natural persons who might be re-identified in the public application-
                level 1071 data.
                 The Bureau has considered whether a modification of the 1071 data
                available to the public short of deleting financial institution
                identifying information (other than individual contact information)
                would appropriately balance identified privacy risks and disclosure
                benefits of this data field. Several SERs stated that a solution to
                their concerns about financial institution privacy would be for the
                Bureau not to release the names of financial institutions when
                publishing 1071 data.\860\
                ---------------------------------------------------------------------------
                 \860\ See SBREFA Panel Report at 36.
                ---------------------------------------------------------------------------
                 The Bureau proposes to disclose financial institution identifying
                information, other than individual contact information, to the public
                as reported, without modification. The Bureau preliminarily determines
                that risks to privacy interests from the disclosure of this data field
                in unmodified form would be justified by the benefits of disclosure for
                section 1071's purposes. As described above, while the Bureau has not
                conducted a uniqueness analysis, it is very likely that disclosure of
                financial institution identifying information would substantially
                facilitate the re-identification of applicants or related natural
                persons. If such persons were re-identified, disclosure of other 1071
                data fields would likely create a risk of harm or sensitivity. In
                addition, the disclosure of other proposed 1071 data fields in
                combination with identifying financial institution name likely would
                reveal information that may be harmful or sensitive to financial
                institutions. The Bureau nonetheless determines that these risks to
                privacy would be justified by the benefits of disclosure in light of
                section 1071's purposes.
                 The Bureau also seeks comment on this analysis and its proposal to
                disclose these fields without modification in the public application-
                level 1071 data.
                 Individual contact information. Proposed Sec. 1002.109(b)(1)(iii)
                would require financial institutions to report the name and business
                contact information of a person who may be contacted with questions
                about the financial institution's submission. In contrast to the other
                financial institution identifying information described above, the
                Bureau preliminarily determines that the privacy risks of disclosure in
                unmodified form of this data field would not be justified by the
                benefits of disclosure for section 1071's purposes. As such, the Bureau
                proposes to delete such information from the publicly available data.
                The Bureau seeks comment on this determination.
                 Disclosing individual contact information in the public
                application-level 1071 data in unmodified form would enable the public
                to contact natural persons at financial institutions about the
                technical aspects of a financial institution's submission of
                application-level data. However, the Bureau does not believe this would
                promote the fair lending or community or business development purposes
                of section 1071 because the Bureau, not the general public, will
                coordinate with this person to ensure proper submission of data.
                Moreover, the person designated by the financial institution to respond
                to questions about the submission might not necessarily be designated
                by the financial institution for engaging with the general public.
                 Disclosing individual contact information in the 1071 data in
                unmodified form would likely not disclose any information about an
                applicant or related natural person if such person were re-identified.
                However, disclosing the name and contact information of natural persons
                designated by the financial institution would disclose information that
                may be harmful or sensitive to identified financial institutions and
                its employees. Financial institutions have a legitimate interest in
                protecting the identities of their employees from the public,
                consistent with their job functions, and persons identified for
                purposes of questions about the financial institution's submission to
                the Bureau might not necessarily be responsible for engaging with the
                general public.
                 The Bureau has considered whether a modification of the 1071 data
                available to the public other than exclusion of individual contact
                information would appropriately balance identified privacy risks and
                disclosure benefits of this data field. Because disclosure of this data
                field in unmodified form would not promote the purposes of section 1071
                and would likely reveal information that would be harmful or sensitive
                to a financial institution and its employees, the Bureau does not
                believe there is a modification that would appropriately balance the
                privacy risks and disclosure benefits for this data field. Accordingly,
                the Bureau preliminarily determines that deleting individual contact
                information would appropriately balance the privacy risks and
                disclosure benefits of this data field.
                [[Page 56540]]
                 The Bureau seeks comment on this analysis as well as its proposed
                deletion.
                xix. Free-Form Text
                 Proposed Sec. 1002.107(a) would require financial institutions to
                use free-form text to report certain data fields where a financial
                institution reports information that is not included in a list of data
                fields provided. Under proposed Sec. 1002.107(a)(5), (6), (11), (12),
                and (20), free-form text could be used to report credit type (product
                and guarantee information); credit purpose; denial reasons; pricing
                (the interest rate index used); and ethnicity, race, and sex.\861\
                Financial institutions also would have flexibility in describing
                identifying information that would be provided under proposed Sec.
                1002.109(b). Free-form text used to report ethnicity, race, and sex
                would be completed based on information provided by applicants; all
                other free-form text would be completed based on information provided
                by the financial institution.
                ---------------------------------------------------------------------------
                 \861\ For example, the proposal would require financial
                institutions to report credit purpose by choosing one or more
                purposes from a specified list. Financial institutions selecting
                ``other'' would be required to report that other purpose as free-
                form text.
                ---------------------------------------------------------------------------
                 Free-form text would allow the reporting of any information,
                including information that may be harmful or sensitive to applicants,
                related natural persons, and possibly the interests of financial
                institutions. Such information might also create a significant risk of
                re-identification for applicants or related natural persons. Given the
                expected amount of 1071 data reported each year, it will not be
                feasible for the Bureau to review the free-form text submitted before
                publishing the application-level 1071 data. The Bureau believes at this
                time that, under the balancing test, deleting free-form text from the
                public application-level 1071 data, other than with respect to the
                financial institution identifying information described in part
                VI.C.6.xviii above, would appropriately balance the benefits of
                disclosure with the risks to the privacy interests of applicants,
                related natural persons, and financial institutions.
                 The Bureau seeks comment on this analysis as well as its proposed
                deletion.
                VII. Dodd-Frank Act Section 1022(b)(2) Analysis
                 The Bureau is considering the potential benefits, costs, and
                impacts of the proposed rule. The Bureau requests comment on the
                preliminary discussion presented below, as well as submissions of
                additional data that could inform the Bureau's consideration of the
                benefits, costs, and impacts of the proposed rule. In developing the
                proposed rule, the Bureau has consulted with or offered to consult with
                the prudential regulators (the Board of Governors of the Federal
                Reserve System, the Federal Deposit Insurance Corporation, the National
                Credit Union Administration, and the Office of the Comptroller of the
                Currency), the Department of Agriculture, the Department of Housing and
                Urban Development, the Department of Justice, the Department of the
                Treasury, the Economic Development Administration, the Farm Credit
                Administration, the Federal Trade Commission, the Financial Crimes
                Enforcement Network, the Minority Business Development Agency, and the
                Small Business Administration regarding, among other things,
                consistency with any prudential, market, or systemic objectives
                administered by such agencies.
                 In the Dodd-Frank Act, which was enacted ``[t]o promote the
                financial stability of the United States by improving accountability
                and transparency in the financial system,'' Congress directed the
                Bureau to adopt regulations governing the collection of small business
                lending data. Under section 1071, covered financial institutions must
                compile, maintain, and submit certain specified data points regarding
                applications for credit for women-owned, minority-owned, and small
                businesses, along with ``any additional data that the Bureau determines
                would aid in fulfilling the purposes of [section 1071].'' Under the
                proposed rule, covered financial institutions would be required to
                collect and report the following data points: (1) A unique identifier,
                (2) application date, (3) application method, (4) application
                recipient, (5) credit type, (6) credit purpose, (7) amount applied for,
                (8) amount approved or originated, (9) action taken, (10) action taken
                date, (11) denial reasons, (12) pricing information, (13) census tract,
                (14) gross annual revenue, (15) NAICS code, (16) number of workers,
                (17) time in business, (18) minority-owned business status, (19) women-
                owned business status, (20) ethnicity, race, and sex of principal
                owners, and (21) the number of principal owners.
                 Under the proposed rule, financial institutions would be required
                to report data on small business credit applications under section 1071
                if they originated at least 25 covered credit transactions in each of
                the two preceding calendar years. The Bureau is proposing to define an
                application as an oral or written request for a covered credit
                transaction that is made in accordance with the procedures used by a
                financial institution for the type of credit requested, with some
                exceptions. The Bureau is proposing to define the term covered credit
                transaction as an extension of business credit that is not an excluded
                transaction. Loans, lines of credit, credit cards, and merchant cash
                advances (including such credit transactions for agricultural purposes
                and those that are also covered by HMDA \862\ (that is, HMDA-reportable
                transactions)) would all fall within the transactional scope of this
                proposed rule. The Bureau is broadly proposing to not cover the
                following types of transactions: Factoring, leases, consumer-designated
                credit used for business purposes, credit secured by certain investment
                properties, trade credit, public utilities credit, securities credit,
                and incidental credit. Additionally, 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.
                ---------------------------------------------------------------------------
                 \862\ 12 U.S.C. 2801 et seq.
                ---------------------------------------------------------------------------
                A. Statement of Need
                 Congress directed the Bureau to adopt regulations governing the
                collection of small business lending data. Specifically, section 1071
                of the Dodd-Frank Act amended ECOA to require financial institutions to
                compile, maintain, and submit to the Bureau certain data on
                applications for credit for women-owned, minority-owned, and small
                businesses. Congress enacted section 1071 for the purpose 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. The Bureau is issuing this proposed rule to implement
                the section 1071 mandate.
                 Small businesses play a key role in fostering community development
                and fueling economic growth both nationally and in their local
                communities.\863\ However, comprehensive data on loans to small
                businesses currently are limited. The largest sources of information on
                lending by depository institutions are the FFIEC and NCUA Call Reports
                and reporting under the CRA. Under the FFIEC Call Report 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'
                [[Page 56541]]
                and savings associations' total 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) by institution.\864\ The CRA requires banks and savings
                associations with assets over a specified threshold (currently $1.305
                billion) to report data on loans to businesses with origination amounts
                of $1 million or less; reporters are asked to indicate whether the
                borrower's gross annual revenue is $1 million or less, if they have
                that information.\865\ Under the CRA, banks and savings associations
                report aggregate numbers and values of originations at an institution
                level and at various geographic levels. The NCUA Call Report captures
                credit unions' total originations, but not applications, on all loans
                over $50,000 to members for commercial purposes, regardless of any
                indicator about the business's size.\866\ Some federally funded loan
                programs, such as the SBA's 7(a) or 504 programs and the CDFI Fund
                require reporting of loan-level data, but only for loans that received
                support under those programs. Nondepository institutions do not report
                small business lending applications under any of these reporting
                regimes. There are no similar sources of information about lending to
                small businesses by nondepository institutions.
                ---------------------------------------------------------------------------
                 \863\ See generally White Paper.
                 \864\ See FFIEC Call Report at Schedule RC-C Part II.
                 \865\ See 2015 FFIEC CRA Guide at 11, 13. 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 (TFR) 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 origination 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.''
                 \866\ See Nat'l Credit Union Admin., Call Report Form 5300 (June
                2020), https://www.ncua.gov/files/publications/regulations/form-5300-june-2020.pdf.
                ---------------------------------------------------------------------------
                 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. See part II.B for additional information on these
                sources. 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 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.
                 Under the proposed rule, covered financial institutions would be
                required to compile, maintain, and submit data regarding the race, sex,
                and ethnicity of the principal owners of the business and whether a
                small business is women-owned or minority-owned. No other source of
                data comprehensively collects this type of demographic information on
                small business loan applications.
                 Section 1071 requires financial institutions to report detailed
                application-level data to the Bureau, and to make it available to the
                public upon request. Such information will constitute a public good
                that illuminates the lending activities of financial institutions and
                the small business lending market in general. In particular, the public
                provision of application-level data will: (1) Provide small businesses
                and financial institutions with additional information to improve
                credit market outcomes and (2) allow members of the public, public
                officials, and other stakeholders to better assess compliance with
                antidiscrimination statutes.
                 First, the data made public pursuant to the proposed rule will
                provide information that could help to improve credit outcomes in the
                small business lending market. As discussed above, market-wide data on
                small business credit transactions is currently limited. Neither the
                public nor private sectors provide extensive data on credit products or
                terms. Small business owners have access to very little information on
                typical rates or products offered by different lenders. As a result,
                small business owners are limited in their ability to shop for the
                credit product that best suits their needs at the best price. The
                information made public pursuant to the proposed rule will provide
                extensive data on product types and credit terms that community
                development groups or commercial services could use to provide better
                information to small businesses. For example, a commercial provider
                could provide small businesses with information on what products
                lenders typically offer and at what rates. These data will allow small
                business owners to more easily compare credit terms and evaluate credit
                alternatives. By engaging in more informed shopping, small business
                owners may achieve better credit outcomes.
                 Furthermore, financial institutions can analyze data to understand
                small business lending market conditions and determine how best to
                provide credit to borrowers. However, financial institutions are not
                able to conduct very granular or comprehensive analyses because the
                data on small business lending are limited. The data made public
                pursuant to the proposed rule will allow financial institutions to
                better understand the demand for small business credit products and the
                conditions under which they are being supplied by other covered
                financial institutions. The data will help enable institutions to
                identify potentially profitable opportunities to extend credit. Small
                business owners, as a result, could benefit from increased credit
                availability.
                 Second, while data made public pursuant to the proposed rule may
                not constitute conclusive evidence of credit discrimination on its own,
                the data will enable members of the public, regulators, and other
                stakeholders to better assess compliance with antidiscrimination
                statutes. Application-level data that include information on business
                owners' race, sex, and ethnicity, as well as whether the business is
                women- or minority-owned, are necessary for the public to evaluate a
                lender's practices for potential risks of violating antidiscrimination
                statutes. However, as described above, there are currently no
                application-level data comprehensive enough or that contain the
                required demographic information to enable the public to conduct these
                kinds of analyses. The data made public pursuant to the proposed rule
                will be comprehensive and contain the necessary data fields for such
                analysis. Users will be able to examine whether, for example, a lender
                denies applications from women- or minority-owned businesses at higher
                rates than those that are not or whether these businesses are charged
                higher prices. This kind of transparency can place appropriate pressure
                on lenders to ensure that there is equity in their credit provision.
                Additionally, data collected under the proposed rule will contain the
                data fields that allow users to conduct more accurate fair lending
                analyses by comparing applications for credit products with similar
                characteristics.
                B. Baseline for the Consideration of Costs and Benefits
                 The Bureau has discretion in any rulemaking to choose an
                appropriate scope of consideration with respect to potential benefits
                and costs and an appropriate baseline. The Bureau
                [[Page 56542]]
                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.'' \867\ Accordingly, this analysis considers the benefits,
                costs, and impacts of the major provisions of the proposed rule against
                a pre-section 1071 rule baseline, i.e., the current state of the world
                before the Bureau's section 1071 rule is implemented. Under this
                baseline, the Bureau assumes that institutions are complying with
                regulations that they are currently subject to, including reporting
                data under HMDA and CRA. The Bureau believes that such a baseline will
                also provide the public with better information about the benefits and
                costs of this rule.
                ---------------------------------------------------------------------------
                 \867\ 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.
                ---------------------------------------------------------------------------
                C. Basic Approach of the Bureau's Consideration of Benefits and Costs
                and Data Limitations
                 Pursuant to section 1022(b)(2)(A) of the Dodd-Frank Act,\868\ in
                prescribing a rule under the Federal consumer financial laws (which
                include ECOA and title X of the Dodd-Frank Act), the Bureau is required
                to consider the potential benefits and costs to ``consumers'' and
                ``covered persons,'' including the potential reduction of access by
                consumers to consumer financial products or services resulting from
                such rule, and the impact of proposed rules on covered persons as
                described under section 1026 of the Dodd-Frank Act \869\ (i.e.,
                depository institutions and credit unions with $10 billion or less in
                total assets), and the impact on consumers in rural areas.
                ---------------------------------------------------------------------------
                 \868\ 12 U.S.C. 5512(b)(2)(A).
                 \869\ 12 U.S.C. 5516.
                ---------------------------------------------------------------------------
                 As mentioned above, section 1022(b)(2)(A) refers to ``consumers''
                and ``covered persons''; the Dodd-Frank Act defines the term
                ``consumer'' as an individual or someone acting on behalf of an
                individual, while a ``covered person'' is one who engages in offering
                or providing a ``consumer financial product or service,'' which means a
                financial product or service that is provided to consumers primarily
                for ``personal, family, or household purposes.'' \870\ In the 1071
                rulemaking, however, the only parties directly affected by the rule are
                small businesses (rather than individual consumers) and the financial
                institutions from whom they seek credit (rather than covered persons).
                Accordingly, a section 1022(b)(2)(A) analysis that considers only the
                costs and benefits to individual consumers and to covered persons would
                not meaningfully capture the costs and benefits of the rule.
                ---------------------------------------------------------------------------
                 \870\ 12 U.S.C. 5481(4) through (6).
                ---------------------------------------------------------------------------
                 Below, the Bureau conducts the statutorily required analysis with
                respect to the rule's effects on consumers and covered persons.
                Additionally, the Bureau is electing to conduct this same analysis with
                respect to small businesses and the financial institutions required to
                compile, maintain, and submit data fields under the proposed rule. This
                discussion relies on data that the Bureau has obtained from industry,
                other regulatory agencies, and publicly available sources. However, as
                discussed further below, the data limit the Bureau's ability to
                quantify the potential costs, benefits, and impacts of the proposed
                rule.
                1. Analysis With Respect to Consumers and Covered Persons
                 The proposed rule implements a data collection regime in which
                certain covered financial institutions must compile, maintain, and
                submit data with respect to applicants for credit for small businesses.
                The rule does not directly impact consumers or consumers in rural
                areas, as those terms are defined by the Dodd-Frank Act. Some covered
                persons, including some that are depository institutions or credit
                unions with $10 billion or less in total assets, will be directly
                affected by the rule not in their capacity as covered persons (i.e., as
                offerors or providers of consumer financial products or services) but
                in their separate capacity as covered financial institutions that offer
                commercial credit. The costs, benefits, and impact of the rule on those
                entities are discussed below.
                2. Costs to Covered Financial Institutions
                 Regarding the costs to covered financial institutions, the proposed
                rule generally establishes which financial institutions, transactions,
                and data points would be covered under section 1071. In order to
                precisely quantify the costs to covered financial institutions, the
                Bureau would need representative data on the operational costs that
                financial institutions would incur to gather and report 1071 data, one-
                time costs for financial institutions to update or create reporting
                infrastructure in response to the proposed rule, and information on the
                level of complexity of financial institutions' business models and
                compliance systems. Currently, the Bureau does not believe that data on
                section 1071 reporting costs with this level of granularity are
                systematically available from any source. The Bureau has made
                reasonable efforts to gather data on section 1071 reporting costs.
                Through outreach efforts with industry, community groups, and other
                regulatory agencies, the Bureau has obtained some information about
                potential ongoing operational and one-time compliance costs, and the
                discussion below uses this information to quantify certain costs of the
                proposed rule. The Bureau believes that the discussion constitutes the
                most comprehensive assessment to date of the potential costs of section
                1071 reporting by financial institutions. However, the Bureau
                recognizes that these estimations may not fully quantify the costs to
                covered financial institutions, especially given the wide variation of
                section 1071 reporting costs among financial institutions. The Bureau
                continues to seek data from available sources in order to better
                quantify the costs to covered financial institutions.
                 The Bureau categorizes costs required to comply with the proposed
                rule into ``one-time'' and ``ongoing'' costs. ``One-time'' costs refer
                to expenses that the financial institution would incur initially and
                only once to implement changes required in order to comply with the
                requirements of the new rule. ``Ongoing'' costs are expenses incurred
                as a result of the ongoing reporting requirements of the rule, accrued
                on an annual basis. In considering the costs and impacts of the
                proposed rule, the Bureau has engaged in a series of efforts to
                estimate the cost of compliance by covered entities. The Bureau
                conducted a One-Time Cost Survey, discussed in more detail in part
                VII.E.1 below, to learn about the one-time implementation costs
                associated with implementing section 1071 and adapted ongoing cost
                calculations from previous rulemaking efforts. The Bureau evaluated the
                potential one-time costs of implementing the procedures necessary and
                the potential ongoing costs of annually reporting under the proposed
                rule in part VII.F.3 below. The discussion below provides details on
                the Bureau's approach in performing these institution-level analyses.
                The Bureau realizes that costs vary by institution due to many factors,
                such as size, operational structure, and product complexity, and that
                this variance exists on a continuum that is impossible to fully
                represent. In order to conduct a cost consideration that is both
                practical and meaningful, the Bureau has chosen an approach that
                focuses on three
                [[Page 56543]]
                representative types of financial institutions. For each type, the
                Bureau has produced reasonable estimates of the costs of compliance
                given the limitations of the available data. Part VII.F.3 below
                provides additional details on this approach. More elaboration is
                available in the SBREFA Outline and the SBREFA Panel Report.
                3. Costs to Small Businesses
                 The Bureau has estimated the costs to small businesses in addition
                to those for covered financial institutions. The Bureau expects the
                direct costs of the proposed rule to small businesses will be
                negligible, especially compared to the overall cost of credit.
                Therefore, the Bureau focuses its analysis on whether and how the
                Bureau expects financial institutions to pass on the costs of
                compliance with the proposed rule to small businesses and any possible
                effects on the availability of small business credit. According to
                economic theory, in a competitive framework where financial
                institutions are profit maximizers, the affected financial institutions
                would pass on to small business applicants the marginal (i.e.,
                variable) cost per application or origination, and either absorb the
                one-time and increased fixed costs of complying with the rule or exit
                the market if the one-time and fixed costs are sufficiently high. As
                discussed below, the Bureau estimates that these costs would be
                relatively low. Further, the Bureau received feedback through the One-
                Time Cost Survey process on how creditors might react to increased
                compliance costs due to the proposed rule. The results generally
                suggest that covered financial institutions will generally pass the
                increased cost of compliance on to small businesses and would not exit
                the market. The Bureau received similar feedback during the SBREFA
                process.
                4. Benefits to Small Businesses and Covered Financial Institutions
                 Quantifying benefits to small businesses presents substantial
                challenges. As discussed above, Congress enacted section 1071 for the
                purpose 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. The Bureau is unable to readily
                quantify any of these benefits with precision, both because the Bureau
                does not have the data to quantify all benefits and because the Bureau
                is not able to assess completely how effective the implementation of
                section 1071 will be in achieving those benefits. The Bureau believes
                that its proposals appropriately implement the statutory mandate of
                section 1071 to effectuate the section's stated purposes. As discussed
                further below, as a data reporting rule, most provisions of the
                proposal would benefit small businesses in indirect ways. Nevertheless,
                the Bureau believes that the impact of enhanced transparency would
                substantially benefit small businesses. For example, the proposed rule
                would facilitate the detection (and thus remediation) of
                discrimination; promote public and private investment in certain under-
                served markets; and promote competitive markets. Quantifying and
                monetizing these benefits would require identifying all possible uses
                of section 1071 data, establishing causal links to the resulting public
                benefits, and then quantifying the magnitude of these benefits. The
                Bureau seeks comment on whether there are additional data sources
                available regarding the benefits to small businesses of the proposed
                rule. The Bureau is particularly interested in the quantifiable impact
                of increased transparency on financial institution behavior, and the
                need for public and private investment. The Bureau is unaware of data
                that would enable reliable quantitative estimates of all of these
                effects.
                 Similar issues arise in attempting to quantify the benefits to
                covered financial institutions. Certain benefits to covered financial
                institutions are difficult to quantify. For example, the Bureau
                believes that the section 1071 data will reduce the compliance burden
                of fair lending reviews for lower risk financial institutions by
                reducing the ``false positive'' rates during fair lending
                prioritization by regulators. The Bureau also believes that data made
                public pursuant to the proposed rule will allow financial institutions
                to better understand the demand for small business credit products and
                the conditions under which they are being supplied by other covered
                financial institutions. The Bureau believes that such benefits to
                financial institutions could be substantial. Nevertheless, quantifying
                them would require data that are currently unavailable.
                 In light of these data limitations, the discussion below generally
                provides a qualitative consideration of the benefits and impacts of the
                proposed rule. General economic principles, together with the limited
                data available, provide insight into these benefits and impacts. Where
                possible, the Bureau makes quantitative estimates based on these
                principles and the data that are available. The Bureau seeks comment on
                the appropriateness of the approach described above, including
                additional data relevant to the benefits to small businesses and
                covered financial institutions.
                D. Coverage of the Proposed Rule
                 The proposed rule provides that financial institutions (both
                depository and nondepository) that meet all the other criteria for a
                ``financial institution'' in proposed Sec. 1002.105(a) would only be
                required to collect and report section 1071 data if they originated at
                least 25 covered credit transactions in each of the two preceding
                calendar years. See proposed Sec. 1002.105(b).
                 As discussed above, market-wide data on small business lending are
                currently limited. The Bureau is unaware of any comprehensive data
                available on originations for all financial institutions, which would
                be needed in order to precisely identify all institutions covered by
                the rule. To estimate coverage of the proposed rule, the Bureau uses
                publicly available data for two groups of financial institutions:
                Depository and nondepository institutions.
                 To estimate coverage of depository institutions, the Bureau relies
                on NCUA Call Reports to estimate coverage for credit unions, including
                for those that are not federally insured, and FFIEC Call Reports and
                the CRA data to estimate coverage for banks and savings associations.
                For the purposes of the analysis in this part VII, the Bureau estimates
                the number of depository institutions that would have been required to
                report in 2019, based on the estimated number of originations of
                covered products for each institution in 2017 and 2018.\871\ The Bureau
                accounts for mergers and acquisitions between 2017 and 2019 by assuming
                that any depository institutions that merged in those years report as
                one institution.
                ---------------------------------------------------------------------------
                 \871\ The Bureau uses 2019 instead of 2020 to estimate coverage
                during a year unaffected by pandemic conditions.
                ---------------------------------------------------------------------------
                 As discussed above, 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 and including number and dollar
                value of originations. For the purposes of estimating the impacts of
                the proposed rule, the Bureau uses the annual number of originated
                commercial loans to members reported by credit unions as a proxy for
                the annual number of originated covered credit transactions under the
                [[Page 56544]]
                proposed rule.\872\ These are the best data available for estimating
                the number of credit unions that may be covered by the proposed rule.
                However, the Bureau acknowledges that the true number of covered credit
                unions may be different than what is presented here. For example, this
                proxy may overestimate the number of credit unions that would be
                covered if some commercial loans to members are not covered because the
                member is taking out a loan for a large business. Alternatively, this
                proxy may underestimate the number of credit unions that would be
                covered by the proposed rule if credit unions originate a substantial
                number of covered credit transactions with origination values under
                $50,000.
                ---------------------------------------------------------------------------
                 \872\ For this analysis, the Bureau includes all types of
                commercial loans to members except construction and development
                loans. This includes loans secured by multifamily residential
                property; 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.
                ---------------------------------------------------------------------------
                 As discussed above, the FFIEC Call Report captures banks' and
                savings associations' outstanding number and amount of small loans to
                businesses (i.e., loans originated under $1 million to businesses of
                any size; small loans to farms are those originated under $500,000).
                The CRA requires banks and savings associations with assets over a
                specified threshold ($1.322 billion as of 2021) \873\ to report loans
                to businesses in original amounts of $1 million or less. For the
                purposes of estimating the impacts of the proposed rule, the Bureau
                follows the convention of using small loans to businesses as a proxy
                for loans to small businesses and small loans to farms as a proxy for
                loans to small farms.\874\ These are the best data available for
                estimating the number of banks and savings associations that may be
                covered by the proposed rule. However, the Bureau acknowledges that the
                true number of covered banks and savings associations may be different
                than what is presented here. For example, this proxy would overestimate
                the number of banks and savings associations covered by the rule if a
                significant number of small loans to businesses and farms are to
                businesses or farms that are considered large under the definition of a
                small business in the proposed rule. Alternatively, this proxy would
                underestimate the number of banks and savings associations covered by
                the rule 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.
                ---------------------------------------------------------------------------
                 \873\ See Fed. Fin. Insts. Examination Council, Community
                Reinvestment Act, 2021 Reporting Criteria (Dec. 16, 2020), https://www.ffiec.gov/cra/reporter21.htm.
                 \874\ The FFIEC Call Reports do not collect information on small
                loans to businesses made for the purposes of funding multifamily
                property. In order to account for these loans in the coverage
                estimates, for each bank or savings association, the Bureau adds the
                number of multifamily loans originated for business purposes with
                origination amounts under $1 million reported in the HMDA data to
                the estimated number of small business lending originations. While
                multifamily loans for business purposes have been reportable in HMDA
                data for some time, these loans have only been identifiable with
                data fields available since 2018. For simplicity, the Bureau assumes
                that a bank or savings association made the same number of
                multifamily loans for business purposes with origination amounts
                under $1 million in 2017 as it did in 2018.
                ---------------------------------------------------------------------------
                 Although banks and savings associations reporting under the CRA are
                required to report the number of originations of small loans to
                businesses and farms, the Bureau is not aware of any comprehensive
                dataset that contains originations made by banks and savings
                associations below the CRA reporting threshold. To fill this gap, the
                Bureau simulated plausible values for the annual number and dollar
                value of originations for each bank and savings association that falls
                below the CRA reporting threshold for 2017, 2018, and 2019.\875\ The
                Bureau generated simulated originations in order to account for the
                uncertainty around the exact number and value of originations for these
                banks and saving associations. To simulate these values, the Bureau
                assumes that these banks have the same relationship between outstanding
                and originated small loans to businesses and farms as banks and savings
                associations above the CRA reporting threshold. First, the Bureau
                estimated the relationship between originated and outstanding numbers
                and balances of small loans to businesses and farms for CRA reporters.
                Then the Bureau used this estimate, together with the outstanding
                numbers and balances of small loans to businesses and farms of non-CRA
                reporters, to simulate these plausible values of originations. The
                Bureau has documented this methodology 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.\876\
                ---------------------------------------------------------------------------
                 \875\ Based on FFIEC Call Report data as of December 2019, of
                the 5,177 banks and savings associations that existed in 2019, only
                about 11 percent were required to report under CRA. That is, only
                about 11 percent of banks and savings associations had assets below
                $1.284 billion, the CRA reporting threshold in 2019. See Fed. Fin.
                Insts. Examination Council, 2019 Reporting Criteria, https://www.ffiec.gov/cra/reporter19.htm (last visited Aug. 5, 2021).
                 \876\ This document is available at https://www.consumerfinance.gov/data-research/research-reports/supplemental-estimation-methodologies-small-business-lending-data-collection-nprm/.
                ---------------------------------------------------------------------------
                 Below, the Bureau reports a range of values for the estimated
                number of depository institutions covered under the proposed rule. The
                range represents a 95 percent confidence interval over the number of
                credit unions, banks and savings associations that would be covered
                under the proposed rule. The Bureau presents this range to reflect the
                uncertainty associated with the estimate and notes that the uncertainty
                is driven by the lack of data on originations by banks and savings
                associations below the CRA reporting threshold.
                 The Bureau estimates that about 992 nondepository institutions will
                be covered by the proposed rule: About 340 nondepository CDFIs; about
                100 MCA providers; about 30 fintech companies; about 300 commercial
                finance companies; about 100 governmental lending entities; about 50
                nondepository mortgage providers; and 72 Farm Credit System
                members.\877\ See part II.D above for more detail on how the Bureau
                arrived at these estimates.
                ---------------------------------------------------------------------------
                 \877\ The Bureau provides estimates for the majority of
                nondepository institutions but knows an exact number of members of
                the Farm Credit System.
                ---------------------------------------------------------------------------
                 Based on 2019 data from FFIEC and NCUA Call Reports and the CRA
                data, using the methodology described above, the Bureau estimates that
                the number of depository institutions that would be required to report
                under the proposed rule would be between approximately 4,000 and 4,200.
                The Bureau estimates that between 3,600 and 3,800 banks and savings
                associations and about 400 credit unions would be required to report
                under the proposed rule.
                 The Bureau has attempted to use the best available data and methods
                to estimate the number of financial institutions that would be covered
                by the proposed rule. The Bureau seeks comment on whether there are
                additional data sources that could provide better estimates of
                coverage. The Bureau also seeks comment on its Supplemental estimation
                methodology for institutional coverage and market-level cost estimates
                in the small business lending data collection notice of proposed
                rulemaking describing the methods used to estimate coverage.
                [[Page 56545]]
                E. Methodology for Generating Cost Estimates
                 The Bureau used previous HMDA rulemaking estimates as the basis for
                its review of 1071 data collection and reporting tasks that would
                impose one-time and ongoing costs. In developing its ongoing cost
                methodology to estimate the impacts of its 2015 HMDA final rule, the
                Bureau used interviews with financial institutions to understand the
                processes of complying with a regulation that requires collecting and
                reporting credit application data and to generate estimates of how
                changes to the reporting requirements would impact the ongoing costs of
                collecting and reporting mortgage application data.\878\ To analyze the
                potential impacts of this proposed rule, the Bureau adapted its
                methodology from its HMDA rulemaking activities to the small business
                lending market.
                ---------------------------------------------------------------------------
                 \878\ Home Mortgage Disclosure (Regulation C), 80 FR 66128,
                66269 (Oct. 28, 2015).
                ---------------------------------------------------------------------------
                 The Bureau expects that the tasks required for data collection,
                checking for accuracy, and reporting under the proposed rule would be
                similar to those under HMDA. The similarities in data collection and
                reporting tasks allowed the Bureau to leverage its previous rulemaking
                experience in its analysis of the potential impacts of this proposed
                rule.
                 However, there are significant differences between the home
                mortgage and small business lending market. For example, small business
                lending is generally less automated, and has a wider variety of
                products, smaller volumes, and smaller credit amounts. The Bureau used
                the SBREFA process, research using publicly available information, and
                the Bureau's general expertise regarding the small business lending
                market to determine how these differences would change the tasks
                required for data collection, checking for accuracy, and reporting.
                 During the HMDA rulemaking process, the Bureau identified seven key
                aspects or dimensions of compliance costs with a data collection and
                reporting rule: (1) The reporting system used; (2) the degree of system
                integration; (3) the degree of system automation; (4) the tools for
                geocoding; (5) the tools for performing completeness checks; (6) the
                tools for performing edits; and (7) the compliance program. The Bureau
                assumes that financial institutions will set up their 1071 reporting in
                a manner similar to how HMDA reporting was implemented.\879\ The Bureau
                presented this list of key aspects or dimensions of compliance costs in
                its SBREFA Outline, but did not receive specific feedback or
                suggestions about these areas of compliance costs.
                ---------------------------------------------------------------------------
                 \879\ For example, the Bureau assumes that financial
                institutions will integrate their small business data management
                system with their other data systems the same way that similar
                institutions integrated their HMDA management system.
                ---------------------------------------------------------------------------
                 The Bureau found during the HMDA rulemaking process that,
                generally, the complexity of a financial institution's approach across
                dimensions was consistent--that is, a financial institution generally
                would not use less complex approaches on some dimensions and more
                complex approaches on others.\880\ This allowed the Bureau to classify
                financial institutions, including depository institutions and
                nondepository institutions, into three broad tiers according to the
                overall level of complexity of their compliance operations. Using very
                similar assumptions to HMDA, the Bureau's estimation of the costs of
                this proposed rule also assumed that complexity across dimensions of a
                financial institution's small business lending data collection and
                reporting system is consistent.
                ---------------------------------------------------------------------------
                 \880\ 80 FR 66128, 66269 (Oct. 28, 2015).
                ---------------------------------------------------------------------------
                 Table 3 below summarizes the typical approach to those seven key
                aspects or dimensions of compliance costs across three representative
                types of financial institutions based on level of complexity in
                compliance operations. Financial institutions that are Type A have the
                lowest level of complexity in compliance operations, while Type B and
                Type C have the middle and highest levels of complexity, respectively.
                [[Page 56546]]
                [GRAPHIC] [TIFF OMITTED] TP08OC21.002
                 In previous HMDA rulemakings, the Bureau found that the number of
                loan applications received was largely correlated with overall
                complexity of financial institutions' compliance operations.\882\ The
                Bureau used this observation from HMDA, in addition to early outreach
                to financial institutions and data from Call Reports and publicly
                available data from the CDFI Fund, to generate assumptions about the
                number of annual small business lending applications processed by each
                FI type. The Bureau assumes that Type A FIs receive fewer than 300
                applications per year, Type B FIs receive between 300 and 2,000
                applications per year, and Type C FIs receive more than 2,000
                applications per year. The Bureau assumes that, for types A and B, one
                out of two small business applications will result in an origination.
                Thus, the Bureau assumes that Type A FIs originate fewer than 150
                products per year and Type B FIs originate between 150 and 1,000
                products per year. The Bureau assumes that Type C FIs originate one out
                of three applications and more than 1,000 per year.\883\
                ---------------------------------------------------------------------------
                 \881\ The Bureau expects the development of a market for small
                business data management systems similar to HMDA management systems
                that financial institutions will license or purchase from third
                parties.
                 \882\ 80 FR 66128, 66270 (Oct. 28, 2015).
                 \883\ The Bureau chose the 1:2 and 1:3 application to
                origination ratios based on two sources of information. First see
                Biz2Credit, Small Business Loan Approval Rates Rebounded in May
                2020: Biz2Credit Small Business Lending Index (May 2020), https://cdn.biz2credit.com/appfiles/biz2credit/pdf/report-may-2020.pdf,
                which shows that, in December of 2019, large banks approved small
                business loans at a rate of 27.5 percent, while small banks and
                credit unions had approval rates of 49.9 percent and 40.1 percent.
                Additionally, and supported by the Bureau's data from supervisory
                exams, the Bureau chose a 33 percent approval rate as a conservative
                measure among these estimates for complex financial institutions
                (Type C FIs).
                ---------------------------------------------------------------------------
                 The Bureau understands that costs vary by financial institution due
                to many factors, such as size, operational structure, and product
                complexity. Due to data limitations, the Bureau is unable to capture
                many of the ways in which costs vary by institution, and therefore uses
                these representative financial institutions with the above assumptions
                for its analysis. In order to aggregate costs to a market level, the
                Bureau must map financial institutions onto its types using discrete
                volume categories.
                 For the ongoing costs discussion in part VII.F.3.ii below, the
                Bureau discusses costs in the context of representative institutions
                for ease of
                [[Page 56547]]
                exposition. The Bureau assumes that a representative Type A FI receives
                100 small business credit applications per year, a representative Type
                B FI receives 400 applications per year, and a representative Type C FI
                receives 6,000 applications per year. The Bureau further assumes that a
                representative Type A FI originates 50 covered credit transactions per
                year, a representative Type B FI originates 200 covered credit
                transactions per year, and a representative Type C FI originates 3,000
                covered credit transactions per year.
                 The Bureau presented an earlier version of this cost calculation
                methodology in the SBREFA Outline and during the SBREFA process.\884\
                In general, SERs provided minimal feedback on the overall structure of
                the categorization of financial institutions and activities required to
                collect, check, and report data under the proposed rule.\885\ The
                Bureau has made two changes to its methodology in response to SER
                feedback. One SER stated that the methodology would benefit from an
                additional category of complexity between Types B and C. To address
                this issue, while the Bureau did not add an additional category of
                complexity, it has increased the number of applications assumed for
                Type A FIs and Type B FIs so that these institutions cover more of the
                small business credit market. The Bureau has adjusted the categories of
                applications for Type A FIs and Type B FIs to 100 and 400 (from 75 and
                300, respectively). Several SERs also suggested that the ratio of
                applications per originated loans used in the SBREFA Outline was too
                high. The Bureau has accordingly updated its assumptions to assume two
                applications per origination (instead of its original three-to-one
                ratio) for Type A FIs and Type B FIs.
                ---------------------------------------------------------------------------
                 \884\ SBREFA Outline at 52-56.
                 \885\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 37-38.
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its methodologies, as described in this
                part VII.E (including parts VII.E.1, VII.E.2, and VII.E.3 below), for
                estimating one-time costs of implementation, estimating ongoing costs
                of implementation, and generating market-level estimates of one-time
                and ongoing costs.
                1. Methodology for Estimating One-Time Costs of Implementation of the
                Proposed Rule
                 The Bureau has identified the following eight categories of one-
                time costs that would likely be incurred by financial institutions to
                develop the infrastructure to collect and report data under the
                proposed rule:
                1. Preparation/planning
                2. Updating computer systems
                3. Testing/validating systems
                4. Developing forms/applications
                5. Training staff and third parties (such as dealers and brokers)
                6. Developing policies/procedures
                7. Legal/compliance review
                8. Post-implementation review of compliance policies and procedures
                 Conversations with financial institutions have informed the
                Bureau's understanding of one-time costs. Financial institutions will
                likely have to spend time and resources understanding the regulation,
                developing the required policies and procedures for their employees to
                follow, and engaging a legal team to review their draft policies and
                procedures. Additionally, financial institutions may require new
                equipment, such as new computer systems that can store and check the
                required data points; new or revised application forms or related
                materials to collect any data that would be required under the proposed
                rule that they do not currently collect, including minority-owned and
                women-owned business status and the ethnicity, race, and sex of
                applicants' principal owners, and to provide any related disclosures
                required by the rule. Some financial institutions mentioned that they
                may store, check, and report data using third-party providers such as
                Fiserv, Jack Henry, LaserPro, or Fidelity Information Systems (FIS),
                while others may use more manual methods of data storage, checking, and
                reporting using software applications such as Microsoft Excel.
                Financial institutions would also engage in a one-time training of all
                small business lending staff to ensure that employees understand the
                new policies and procedures. After all new policies and procedures have
                been implemented and systems/equipment deployed, financial institutions
                will likely undertake a final internal review to ensure that all the
                requirements of the section 1071 regulation have been satisfied.
                 The Bureau presented the one-time cost categories in the SBREFA
                Outline and during the SBREFA process.\886\ The SERs generally
                confirmed that the eight categories listed above accurately capture the
                components of one-time costs.
                ---------------------------------------------------------------------------
                 \886\ SBREFA Outline at 49-52.
                ---------------------------------------------------------------------------
                 The Bureau conducted a survey regarding one-time implementation
                costs for section 1071 compliance targeted at FIs who extend small
                business credit.\887\ The Bureau developed the survey instrument based
                on guidance from industry on the potential types of one-time costs
                institutions might incur if required to report under a 1071 rule and
                tested the survey instrument on a small set of FIs, incorporating their
                feedback prior to implementation. Estimates from survey respondents
                form the basis of the Bureau's estimates for one-time costs in
                assessing the potential impact of this proposed rule. The survey was
                broadly designed to ask about the one-time costs of reporting data
                under a regime that only includes mandatory data points, uses a
                reporting structure similar to HMDA, uses the Regulation B definition
                of an ``application,'' and uses the respondent's own internal small
                business definition. The survey was divided into three sections:
                Respondent Information, One-Time Costs, and the Cost of Credit to Small
                Entities.
                ---------------------------------------------------------------------------
                 \887\ The One-Time Cost Survey was released on July 22, 2020;
                the response period closed on October 16, 2020. The OMB control
                number for this collection is 3170-0032.
                ---------------------------------------------------------------------------
                 In the Respondent Information section, the Bureau obtained basic
                information about the respondent, including information on the type of
                institution, its size, and its volume of small business lending. (The
                Bureau did not, however, obtain the actual name or other directly
                identifying information about respondents.) The One-Time Costs section
                of the survey measured the total hours, staff costs, and non-salary
                expenses associated with the different tasks comprising one-time costs.
                Using the reported costs of each task, the Bureau estimated the total
                one-time cost for each respondent. The Cost of Credit to Small Entities
                section dealt with the respondent's anticipated response to the
                increased compliance costs of being covered by the rule in order to
                understand the impacts of the regulation on its small business lending
                activity, including any anticipated potential changes to underwriting
                standards, volume, prices, product mix, or market participation.
                 The Bureau worked with several major industry trade associations to
                recruit their members to respond to the survey. A total of 105
                financial institutions responded to the survey.
                 To estimate one-time costs, the Bureau needed information on a
                financial institution's one-time costs by category and number of
                originations. Of the 105 total respondents, 49 answered these
                questions. The Bureau will henceforth refer to these respondents as the
                ``cost estimation sample.'' Of these respondents, 42 (86 percent) self-
                [[Page 56548]]
                reported that they were a depository institution (bank or credit
                union). The remaining seven (14 percent) were nondepository
                institutions. Table 4 presents the self-reported asset size of the 42
                depository institution respondents in the cost estimation sample.\888\
                ---------------------------------------------------------------------------
                 \888\ Nondepository institutions also reported assets. The
                Bureau separately reports asset category for depository institutions
                because asset sizes are not as comparable between depositories and
                nondepositories. The Bureau does not report asset sizes for
                nondepository respondents because there were too few respondents to
                report separately without risking re-identification of respondents.
                [GRAPHIC] [TIFF OMITTED] TP08OC21.003
                 For the purposes of estimating one-time costs, the Bureau
                distinguishes between depository institutions and nondepository
                institutions. The majority of nondepository institutions are not
                currently subject to any data reporting requirements, with the notable
                exception of nondepository CDFIs. The Bureau anticipates that covered
                financial institutions that are not currently subject to data reporting
                requirements will need to make more changes to their existing business
                operations in order to comply with the requirements of the new rule.
                This expectation is confirmed by the higher estimated one-time costs
                for nondepository institutions relative to depository institutions
                discussed in part VII.F.3.i.
                 The Bureau categorizes depository institution respondents in the
                cost estimation sample into four groups according to the respondents'
                self-reported total originations. The first group contains the two
                depository institutions that reported fewer than 25 originations; the
                Bureau assumes these institutions would not report under the proposed
                rule. The second group contains ten depository institutions that
                reported between 25 and 149 originations. The Bureau categorizes these
                as Type A DIs (that is, a DI that is Type A as defined above.) The
                third group contains the 19 depository institutions that reported
                between 150 and 999 originations. The Bureau categorizes these as Type
                B DIs. The final group contains the 11 depository institutions that
                reported 1,000 or more originations. The Bureau categorizes these as
                Type C DIs.
                 There are not enough nondepository institutions in the cost
                estimation sample to separate nondepository institutions into Types A,
                B, and C and obtain meaningful estimates. Instead, the Bureau is
                relying on the assumption that nondepository institutions (referred to
                as Non-DIs for purposes of this analysis) will incur the same one-time
                costs regardless of complexity.
                 The Bureau estimated the one-time costs for each of the four
                categories of financial institutions (Type A DI, Type B DI, Type C DI,
                and Non-DI) using the following methodology.
                 For each of the eight categories of one-time costs, the Bureau
                asked financial institutions to estimate and report the total number of
                hours that junior, mid-level, and senior staff would spend on each
                task, along with any additional non-salary expenses. If a respondent
                did not provide estimates for any component (i.e., staff hours or non-
                salary expenses) of any category, it is not counted as part of the cost
                estimation sample. If a respondent provided estimates for some
                components but did not provide an estimate for a particular component
                (e.g., non-salary expenses for preparation/planning) then the Bureau
                assumed that the respondent estimated zero for that component.
                 The Bureau asked survey respondents to report the average hourly
                wage for junior, mid-level, and senior/executive staff involved in the
                one-time cost categories. However, for the purposes of estimating one-
                time costs, the Bureau assumed a constant wage across financial
                institutions for each level of staff. For junior staff, the Bureau used
                $16.18, the 10th percentile hourly wage estimate for ``loan officers''
                according to the 2020 Occupational Employment Statistics compiled by
                the Bureau of Labor Statistics.\889\ For mid-level staff, the Bureau
                used $36.99, the mean hourly wage estimate for ``loan officers.'' For
                senior staff, the Bureau used $64.35, the 90th percentile hourly wage
                estimate for ``loan officers.'' To account for non-monetary
                compensation, the Bureau also scaled these hourly wages up by 43
                percent.\890\ The Bureau assumed a total hourly compensation of $23.14
                for junior staff, as compared to $28.76, the mean of the junior wages
                [[Page 56549]]
                reported by respondents. The Bureau assumed a total hourly compensation
                of $52.90 for mid-level staff, as compared to $48.94, the mean of the
                mid-level wages reported by respondents. The Bureau assumed a total
                hourly compensation of $92.02, as compared to $90.19, the mean of the
                senior/executive wages reported by respondents.
                ---------------------------------------------------------------------------
                 \889\ See Bureau of Labor Statistics, U.S. Dep't of Labor,
                Occupational Employment and Wage Statistics (May 2020), https://www.bls.gov/oes/current/oes132072.htm.
                 \890\ The March 2020 Employer Costs for Employee Compensation
                from the Bureau of Labor Statistics documents that wages and
                salaries are, on average, 70 percent of employee compensation for
                private industry workers. The Bureau inflates the hourly wage to
                account for 100 percent of employee compensation ((100/70) - 1) *
                100 = 43 percent). See Bureau of Labor Statistics, U.S. Dep't of
                Labor, Employer Costs for Employee Compensation (Mar. 2020), https://www.bls.gov/news.release/archives/ecec_06182020.pdf.
                ---------------------------------------------------------------------------
                 For each respondent in the cost estimation sample, the Bureau
                calculated the cost of each one-time cost category as the sum of the
                junior wage multiplied by the reported junior hours, the mid-level wage
                multiplied by the reported mid-level hours, and the senior wage
                multiplied by the reported senior hours and the reported non-salary
                expenses. The total cost for the respondent was the sum of the costs
                across all eight categories.
                 After calculating the total costs for each respondent, the Bureau
                identified outliers within the four groups of financial institutions
                (Type A DI, Type B DI, Type C DI, and Non-DI) using the interquartile
                range method, a standard outlier identification method. For each group
                of financial institutions, an observation is considered an outlier if
                the estimated total cost is greater than 1.5*(P75-
                P25) + P75 or less than P25-
                1.5*(P75-P25) where P75 and
                P25 are the 75th and 25th percentiles, respectively, of
                total costs within that group. Using this method, the Bureau identified
                one outlier in each Type A DI, Type B DI, and Type C DI group and no
                outliers in the Non-DI group.
                 In addition to the total estimated one-time costs, the Bureau is
                interested in the hours, non-salary expenses, and total costs
                associated with each of the different one-time cost categories. For
                each group, the Bureau estimated each component of one-time costs by
                taking the mean of the estimated component within the group, after
                excluding outliers. For example, the estimated number of junior hours
                required by DIs of Type A to update computer systems is the mean number
                of junior hours reported by the nine DIs of Type A that were in the
                cost estimation sample, excluding one outlier. The Bureau estimated the
                cost associated with each category as the sum of the junior wage
                multiplied by the estimated junior hours, the mid-level wage multiplied
                by the estimated mid-level hours, and the senior wage multiplied by the
                estimated senior hours, and the estimated non-salary expenses.
                2. Methodology for Estimating Ongoing Costs of Implementation of the
                Proposed Rule
                 The Bureau identified 15 specific data collection and reporting
                activities that would impose ongoing costs. Table 5 presents the full
                list of 15 activities. Activities 1 through 3 can broadly be described
                as data collection activities: These tasks are required to intake data
                and transfer it to the financial institution's small business data
                entry system. Activities 4 through 10 are related to reporting and
                resubmission: These tasks are required to collect required data,
                conduct internal checks, and report data consistent with the proposed
                rule. Activities 11 through 13 are related to compliance and internal
                audits: Employee training, and internal and external auditing
                procedures required to ensure data consistency and reporting in
                compliance with the rule. Finally, activities 14 and 15 are related to
                1071 examinations by regulators: These tasks will be undertaken to
                prepare for and assist during regulatory compliance examinations.
                BILLING CODE 4810-25-P
                [GRAPHIC] [TIFF OMITTED] TP08OC21.004
                [[Page 56550]]
                 Table 6 provides an example of how the Bureau calculated ongoing
                compliance costs associated with each compliance task. The table shows
                the calculation for each activity and notes whether the task would be a
                ``variable cost,'' which would depend on the number of applications the
                institution receives, or a ``fixed cost'' that does not depend on the
                number of applications. Table 6 shows these calculations for a Type A
                FI, or the institution with the least amount of complexity. Table 7
                below summarizes the activities whose calculation differs by
                institution complexity and shows the calculations for Type B FIs and
                Type C FIs (where they differ from those for a Type A FI).\891\
                ---------------------------------------------------------------------------
                 \891\ In this table, the term ``variable'' means the complance
                cost depends on the number of applications. The term ``fixed'' means
                the compliance cost does not depend on the number of applications
                (even if there are other factors upon which it may vary).
                [GRAPHIC] [TIFF OMITTED] TP08OC21.005
                BILLING CODE 4810-25-C
                [[Page 56551]]
                 Many of the activities in Table 6 require time spent by loan
                officers and other financial institution employees. To account for time
                costs, the calculation used the hourly compensation of a loan officer
                multiplied by the amount of time required for the activity. The Bureau
                used a mean hourly wage of $36.99 for loan officers, based on data from
                the Bureau of Labor Statistics.\892\ To account for non-monetary
                compensation, the Bureau scaled this hourly wage by 43 percent to
                arrive at a total hourly compensation of $52.90 for use in these
                calculations.\893\ The Bureau used assumptions from its 2015 HMDA final
                rule analysis, updated to reflect differences between mortgage lending
                and small business lending, to estimate time spent on ``ongoing
                tasks.'' \894\ As an example of a time calculation, the Bureau
                estimated that transcribing the required data points would require
                approximately 11 minutes per application for a Type A FI. The
                calculation multiplied the number of minutes by the number of
                applications and the hourly compensation to arrive at the total cost,
                on an annual basis, of transcribing data. As another example, the
                Bureau estimated that ongoing training for loan officers to comply with
                a financial institution's 1071 policies and procedures would take about
                two hours per loan officer per year. The cost calculation multiplies
                the number of hours by the number of loan officers and by the hourly
                compensation.
                ---------------------------------------------------------------------------
                 \892\ These data reflect the mean hourly wage for ``loan
                officers'' according to the 2020 Occupational Employment Statistics
                compiled by the Bureau of Labor Statistics. See Bureau of Labor
                Statistics, U.S. Dep't of Labor, Occupational Employment and Wages
                (May 2020), https://www.bls.gov/oes/current/oes132072.htm.
                 \893\ The March 2020 Employer Costs for Employee Compensation
                from the Bureau of Labor Statistics documents that wages and
                salaries are, on average, 70 percent of employee compensation for
                private industry workers. The Bureau inflates the hourly wage to
                account for 100 percent of employee compensation ((100/70) - 1) *
                100 = 43 percent). Bureau of Labor Statistics, U.S. Dep't of Labor,
                Employer Costs for Employee Compensation (Mar. 2020), https://www.bls.gov/news.release/archives/ecec_06182020.pdf.
                 \894\ Home Mortgage Disclosure Act (Regulation C), 80 FR 66128
                (Oct. 28, 2015).
                 Some differences, for example, are reflected in the number of
                applications, the number of data points per application, and the
                number of loan officers for the representative institutions.
                ---------------------------------------------------------------------------
                 To arrive at the amount of time required per application for each
                of the 15 tasks covered financial institutions would conduct to
                collect, check, and report 1071 data, the Bureau began with the
                assumptions made for each task for the 35 data points under the 2015
                HMDA final rule and then adjusted these required times relative to the
                number of data points required under the proposed 1071 rule. The
                proposed rule would require covered financial institutions to collect
                21 data points for each covered application. Several of these data
                points have multiple components. For example, the credit type data
                point has three subcomponents of product type, the type of guarantee,
                and the term. The data points for pricing information and the
                ethnicity, race, and sex of principal owners also have multiple
                subcomponents.
                 Some activity costs in Table 6 depend on the number of
                applications. It is important to differentiate between these variable
                costs and fixed costs because the type of cost impacts whether and to
                what extent covered institutions might be expected to pass on their
                costs to small business loan applicants in the form of higher interest
                rates or fees (discussed in more detail in part VII.F.4 below). Data
                collection, reporting, and submission activities such as geocoding
                data, standard annual edits and internal checks, researching questions,
                and resolving question responses are variable costs. All other
                activities are fixed cost because they do not depend on the overall
                number of applications being processed. An example of a fixed cost
                calculation is exam preparation, where the hourly compensation is
                multiplied by the number of total hours required by loan officers to
                prepare for 1071-related compliance examinations.
                 Table 7 shows where and how the Bureau assumed Type B FIs and Type
                C FIs differ from Type A FIs in its ongoing cost methodology. Type B
                FIs and Type C FIs use more automated procedures, which result in
                different cost calculations. For example, for Type B FIs and Type C
                FIs, transferring data to the data entry system and geocoding
                applications are done automatically by business application data
                management software licensed annually by the financial institution. The
                relevant address is submitted for geocoding via batch processing,
                rather than done manually for each application. The additional ongoing
                geocoding costs reflect the time spent by loan officers on ``problem''
                applications--that is, a percentage of overall applications that the
                geocoding software misses--rather than time spent on all applications.
                However, Type B FIs and Type C FIs have the additional ongoing cost of
                a subscription to a geocoding software or service as well as a data
                management software that represents an annual fixed cost of reporting
                1071 application data. This is an additional ongoing cost that less
                complex Type A FIs will not incur. The Bureau expects that Type A FIs
                will use free geocoding software available from the FFIEC or the
                Bureau, which may include a new batch function that could be developed
                by either the FFIEC or the Bureau.
                 Additionally, audit procedures differ between the three
                representative institution types. The Bureau expects a Type A FI would
                not conduct an internal audit but would pay for an annual external
                audit. A Type B FI would be expected to conduct a simple internal audit
                for data checks and also pay for an external audit on an annual basis.
                Type C FIs would have a sophisticated internal audit process in lieu of
                an external audit.
                BILLING CODE 4810-25-P
                [[Page 56552]]
                [GRAPHIC] [TIFF OMITTED] TP08OC21.006
                 Table 8 below shows major assumptions that the Bureau made for each
                activity for each type of financial institution. Table 8 provides the
                total number of hours the Bureau assumes are required for each task
                that requires labor. For example, the Bureau assumes that transcribing
                data for 100 applications will require 18 hours of labor. The table
                also shows the assumed fixed cost of software and audits, as well as
                areas where the Bureau assumes there will be cost savings due to
                technology. In several cases, the activity does not apply to financial
                institutions of a certain type, and are therefore not displayed.
                [[Page 56553]]
                [GRAPHIC] [TIFF OMITTED] TP08OC21.007
                BILLING CODE 4810-25-C
                3. Methodology for Generating Market-Level Estimates of One-Time and
                Ongoing Costs
                 To generate market-level cost estimates, the Bureau relied on the
                estimates of the volume of small business lending originations
                described in part VII.D above. As with institutional coverage, the
                Bureau separates market-level cost estimates into estimates for
                depository institutions and for nondepository institutions.
                 For depository institutions, the Bureau estimated which
                institutions of those that existed at the end of 2019 would likely be
                covered or not covered by the proposed rule. An institution
                [[Page 56554]]
                would be required to report data on applications received in 2019 if it
                originated at least 25 covered originations in each of the preceding
                two years (i.e., 2017 and 2018). If two depository institutions merged
                between the end of 2017 and the end of 2019, the Bureau assumes that
                those institutions would report as one entity. The Bureau then
                categorized each institution as a Type A DI, Type B DI, or Type C DI
                based on its originations in 2019. Depository institutions with 0 to
                149 covered originations in 2019 are categorized as Type A. Depository
                institutions with 150 to 999 covered originations are categorized as
                Type B. Depository institutions with 1,000 or more covered originations
                are categorized as Type C. For each depository institution, the Bureau
                assigns the appropriate estimated one-time cost, ongoing fixed cost,
                ongoing variable cost per application, and applications per origination
                estimates associated with its institution type. The estimated number of
                annual applications for each institution is the estimated number of
                originations multiplied by the number of applications per origination
                for that institution type. The annual ongoing cost for each institution
                is the ongoing fixed cost plus the ongoing variable cost per
                application multiplied by the estimated number of applications.
                 To generate market-level estimates, the Bureau first calculates the
                estimated one-time and annual ongoing costs for each depository
                institution covered by the proposed rule based on the estimated number
                of originations for that institution in 2019. The Bureau then sums over
                the covered depository institutions to find market-level statistics of
                total costs. As with coverage estimates, the Bureau presents a range of
                estimates for market-level statistics. The range reflects the
                uncertainty associated with the estimate of costs for banks and savings
                associations below the CRA reporting threshold. The Bureau has
                documented how it calculated these ranges in its Supplemental
                estimation methodology for institutional coverage and market-level cost
                estimates in the small business lending data collection notice of
                proposed rulemaking.\895\
                ---------------------------------------------------------------------------
                 \895\ See https://www.consumerfinance.gov/data-research/research-reports/supplemental-estimation-methodologies-small-business-lending-data-collection-nprm/.
                ---------------------------------------------------------------------------
                 The Bureau is unaware of institution-level data on originations by
                nondepository institutions that are comprehensive enough to estimate
                costs using the same method as that for depository institutions.
                Therefore, to generate market-level estimates for nondepository
                institutions, the Bureau relies on the estimates discussed above and
                several key assumptions. The Bureau assumes that fintech lenders and
                MCAs are Type C FIs because they generally have more automated systems
                and originate more products. The Bureau assumes that the remaining
                nondepository institutions are Type B FIs. The Bureau assumes that each
                nondepository receives the same number of applications as the
                representative institution for each type, as described above. Hence,
                the Bureau assumes that fintech lenders and MCAs each receive 6,000
                applications per year and all other nondepository institutions receive
                400 applications per year. As explained above, the Bureau also assumes
                that all nondepository institutions have the same one-time costs.
                F. Potential Benefits and Costs to Covered Financial Institutions and
                Small Businesses
                1. Benefits to Small Businesses
                 The proposed rule could benefit small businesses by collecting data
                that further the two statutory purposes of section 1071. Those purposes
                are to facilitate the enforcement of fair lending laws and enable
                communities, governmental entities, and creditors to identify business
                and community development needs and opportunities of women-owned,
                minority-owned, and small businesses. Some of the benefits to small
                businesses discussed below stem from the public release of the data
                collected under the proposed rule. As discussed in more detail in part
                VI, the Bureau is proposing to exercise its discretion under ECOA
                section 704B(e)(4) to delete or modify data collected under section
                1071 which are or will be available to the public where the Bureau
                determines that the deletion or modification of the data would advance
                a privacy interest. The below discussion considers the benefits of
                unmodified data released for public consumption, but the Bureau
                acknowledges that the benefits derived from public disclosure may be
                lower if modifications are made that reduce the utility of the public
                dataset.
                 Data collected under the proposed rule would constitute the largest
                and most comprehensive data in the United States on credit availability
                for small businesses. These data would provide important insight into
                possible discriminatory lending patterns in the small business lending
                market. Regulators could use the data to gauge fair lending risks and
                prioritize examinations of lenders that have a higher likelihood of
                violating antidiscrimination statutes. This would lead to a more
                efficient use of government resources in enforcing fair lending
                provisions. Furthermore, the public nature of the dataset would allow
                for members of the public to review the public dataset for possible
                violations of antidiscrimination statutes. The increased ability to
                perform fair lending analyses would benefit women-owned and minority-
                owned small businesses both directly, in the form of remediation when
                lenders ultimately are found to have violated fair lending laws, and
                indirectly, with increased access resulting from the scrutiny placed on
                financial institutions.
                 Central to the fair lending benefit of the dataset is the proposed
                collection of the action taken data point. Existing datasets that
                collect transaction-level data only contain data on originated small
                business loans. Application-level data, combined with the collection of
                action taken data, could allow users to construct approval or denial
                rates, for example, for particular lenders. Such analyses could
                indicate whether, for example, women-owned or minority-owned small
                businesses are being denied credit at higher rates than other small
                businesses.
                 The proposed rule would also include several data points on the
                pricing of covered credit transactions that are originated or approved
                but not accepted. Data users could examine, for example, whether women-
                owned or minority-owned small businesses are charged higher interest
                rates, origination charges, or initial annual charges than similarly
                situated businesses that are not women- or minority-owned. The proposed
                rule would also require information on prepayment penalties, which is
                an area of increasing concern due to the potential for predatory
                lending practices.\896\ Users could examine whether women-owned or
                minority-owned small firms are more likely to have prepayment penalties
                on extended credit.
                ---------------------------------------------------------------------------
                 \896\ Such concerns have led California, for example, to include
                prepayment policies as a required component of pricing disclosures
                in commercial financing (see Cal. S.B. 1235 (Sept. 30, 2018),
                https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235).
                ---------------------------------------------------------------------------
                 Several data points included in the proposed rule would contribute
                to more accurate fair lending analyses by allowing users to compare
                credit products with similar characteristics. For example, there are
                likely differences in approval rates and prices for covered credit
                transactions based on credit amount applied for and approved, all
                [[Page 56555]]
                three aspects of credit type (type of credit product, types of
                guarantees, and loan term), and credit purpose, since these factors
                influence the risk of extending credit. Many creditors also consider
                characteristics about the small business, such as industry, gross
                annual revenue, or time in business during their underwriting or
                pricing processes. Supply and demand for small business credit also
                varies over time and by location, so the inclusion of census tract,
                application date, and action taken date could lead to more accurate
                analyses. More accurate screening for fair lending risk would, for
                example, reduce the false positive rate observed during fair lending
                prioritization and increase the efficiency of fair lending reviews.
                 Creditors would also likely use the data to understand small
                business lending market conditions more effectively and at a more
                granular level than is possible with existing data sources, such as
                Call Reports, data from public lending programs, or privately purchased
                data. Data collected under the proposed rule, combined with the
                institution's existing information on the small business lending
                market, could help creditors to identify potentially profitable
                opportunities to extend credit. For example, creditors could use the
                census tract information to find areas of high credit demand into which
                they could consider expanding. Small business owners would benefit from
                increased credit availability.
                 Governmental entities will likely use the data to develop solutions
                that achieve policy objectives. For example, loan guarantees provided
                by the SBA's 7(a) and 504 programs are designed to increase the
                availability of business credit for businesses that otherwise have
                difficulty accessing credit. Governmental entities could use the
                comprehensive data on applications for covered credit transactions
                collected under the proposed rule to identify additional opportunities
                to create new--or tailor existing--programs to advance their small
                business lending policy objectives.
                 The data collected under the proposed rule would be the most
                extensive data on credit access for women-owned and minority-owned
                small businesses, and such information will help various data users in
                understanding the needs and opportunities of women-owned and minority-
                owned small businesses. For example, governmental entities often create
                programs that specifically target women-owned and minority-owned
                businesses, such as those that reserve government contracts, those that
                provide grants, or those specifically targeted at women-owned and
                minority-owned small firms. Governmental entities could use data
                collected under the proposed rule to alter existing programs or create
                new ones to meet the needs of these business owners. Private lenders
                could also use the data to find untapped markets of credit demand from
                women-owned and minority-owned small businesses.
                 As one of the premier data sources on the small business credit
                market, data collected under the proposed rule would also facilitate
                rigorous academic research. HMDA data, which are similar in many ways
                to the data that will be collected under the proposed rule, have been
                analyzed in many scholarly publications. The data collected under
                section 1071 will provide academics and other researchers a clearer
                window into potential discrimination in the small business credit
                market, as well as a better understanding of small business credit
                market trends and dynamics. Like in the case of HMDA, data collected
                under the proposed rule will be more broadly used to understand how
                business owners make borrowing decisions, respond to higher prices, and
                respond to risk.\897\
                ---------------------------------------------------------------------------
                 \897\ For examples of how HMDA data has facilitated research on
                the mortgage market, see, e.g., Bureau of Consumer Fin. Prot., Data
                Point: Asian American and Pacific Islanders in the Mortgage Market
                (July 2021), https://files.consumerfinance.gov/f/documents/cfpb_aapi-mortgage-market_report_2021-07.pdf; Bureau of Consumer
                Fin. Prot., Manufactured Housing Finance: New Insights from the Home
                Mortgage Disclosure Act Data (May 2021), https://files.consumerfinance.gov/f/documents/cfpb_manufactured-housing-finance-new-insights-hmda_report_2021-05.pdf; Neil Bhutta & Benjamin
                J. Keys, Moral Hazard during the Housing Boom: Evidence from Private
                Mortgage Insurance, The Review of Fin. Studies (2021), https://academic.oup.com/rfs/advance-article/doi/10.1093/rfs/hhab060/6279755; Sumit Agarwal et al., The Effectiveness of Mandatory
                Mortgage Counseling: Can One Dissuade Borrowers from Choosing Risky
                Mortgages? (Nat'l Bureau of Econ. Research, Working Paper No. 19920,
                2014), https://www.nber.org/system/files/working_papers/w19920/w19920.pdf; Alexei Alexandrov & Sergei Koulayev, No Shopping in the
                U.S. Mortgage Market: Direct and Strategic Effects of Providing
                Information (Bureau of Consumer Fin. Prot., Off. of Research Working
                Paper No. 2017-01, 2018), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2948491.
                ---------------------------------------------------------------------------
                 The proposed data points would provide the above benefits in
                several ways. The action taken and pricing information data points
                would allow various entities to monitor the tightness of the small
                business credit market and identify areas where there are high denial
                rates for small business credit or where it is provided only at high
                cost, especially to women-owned or minority-owned small businesses.
                Data on census tract, NAICS code, gross annual revenue, and number of
                workers will provide insight into the availability of small business
                credit by geography, industry, and business size. Credit type and
                credit purpose would provide more information on how small women-owned
                and minority-owned businesses use credit and whether their use differs
                from that of other small businesses. Time in business information would
                allow data users to understand the credit needs of young small
                businesses, and specifically young women-owned and minority-owned small
                businesses. Recent research has shown that women-owned and minority-
                owned businesses face different financing challenges early in the
                business lifecycle than other firms, primarily driven by less access to
                external financing.\898\
                ---------------------------------------------------------------------------
                 \898\ See, e.g., JPMorgan Chase & Co. Inst., Small business
                ownership and liquid wealth (Mar. 2021), https://www.jpmorganchase.com/institute/research/small-business/small-business-ownership-and-liquid-wealth-report.
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its analysis of potential benefits to
                small businesses as described herein.
                2. Benefits to Covered Financial Institutions
                 The proposed rule would provide some benefits to some covered
                financial institutions--i.e., the financial institutions that would be
                required to collect and report 1071 data on small business applications
                for credit. The first is some reduction of the compliance burden of
                fair lending reviews for lower risk financial institutions, by reducing
                the ``false positive'' rates during fair lending review prioritization
                by regulators. Currently, financial institutions are subject to fair
                lending reviews by regulators to ensure that they are complying with
                the ECOA in their small business lending processes. Data reported under
                the proposed rule would allow regulators to prioritize fair lending
                reviews of financial institutions with higher risk of fair lending
                violations, which reduces the burden on institutions with lower fair
                lending risk. Covered financial institutions would also be able to use
                the data to monitor, identify, and address their own fair lending risks
                and thereby avoid liability from enforcement actions and adverse exam
                findings requiring remedial action.
                 The proposed data collection could also provide an unprecedented
                window into the small business lending market, and such transparency
                may benefit financial institutions covered by the rule. Comprehensive
                information on small business credit applications and originations are
                currently unavailable.
                [[Page 56556]]
                The data made public pursuant to the proposed rule could allow
                financial institutions to better understand the demand for small
                business credit products and the conditions under which they are being
                supplied by other covered financial institutions.
                 The Bureau seeks comment on its analysis of potential benefits to
                covered persons as described herein.
                3. Costs to Covered Financial Institutions
                i. One-Time Costs to Covered Financial Institutions
                 Using the methodology described in part VII.E.1 above, Table 9
                shows the estimated total expected one-time costs for financial
                institutions covered by the proposed rule as well as a breakdown by the
                eight component categories that comprise the one-time costs for Type A
                DIs, Type B DIs, and Type C DIs, and Non-DIs.
                 Table 10 shows the estimated number of junior, mid-level, and
                senior staff hours and non-salary expenses for each component activity
                for Type A DIs. Tables 11 through 13 show the same estimates for Type B
                DIs, Type C DIs and Non-DIs respectively. As discussed above, the
                Bureau estimates all one-time costs to covered financial institutions
                using the One-Time Cost Survey results.
                BILLING CODE 4810-25-P
                [GRAPHIC] [TIFF OMITTED] TP08OC21.008
                [GRAPHIC] [TIFF OMITTED] TP08OC21.009
                [[Page 56557]]
                [GRAPHIC] [TIFF OMITTED] TP08OC21.010
                [GRAPHIC] [TIFF OMITTED] TP08OC21.011
                [[Page 56558]]
                [GRAPHIC] [TIFF OMITTED] TP08OC21.012
                BILLING CODE 4810-25-C
                 The Bureau estimates that updating computer systems would be the
                biggest driver of one-time costs for Type A DIs, and Type B DIs and
                Non-DIs. Type A DIs and Type B DIs would be expected to spend similar
                amounts on updating computer systems, but Type A DIs would rely
                somewhat more on staff.
                 The Bureau expects that Non-DIs would have the highest one-time
                costs and the highest costs to update computer systems. To update
                computer systems, Non-DIs would rely on mid-level staff hours and
                third-party vendors. Non-DIs would also spend relatively more on
                preparation and planning than Type A DIs or Type B DIs. These estimates
                are consistent with the expectation that Non-DIs will incur higher
                costs because they are less likely to already report data to
                regulators.
                 The Bureau estimates that the biggest drivers of one-time costs for
                Type C DIs would be preparation and planning and post-implementation
                review. These depository institutions would generally rely on mid-level
                staff hours to implement the required one-time changes and, in
                particular, would rely on mid-level staff hours for these two key
                activities. The Bureau estimates that Type C DIs will spend the most of
                all financial institution types on staff hours to implement one-time
                changes and the least on non-salary expenses.
                 The Bureau estimates that one-time costs would be higher for Type A
                DIs than for Type B DIs. These two types of depository institutions
                have similar estimated costs for most activities, but Type A DIs are
                expected to spend more on testing/validating systems and legal/
                compliance review.
                 These estimates are generally consistent with feedback from SERs
                during the SBREFA process. Several SERs stated that changes to their
                computer systems would contribute to their one-time costs.\899\
                However, some SERs estimated larger one-time costs than the Bureau and
                others estimated smaller one-time costs. One SER (a commercial finance
                company) said that many financial institutions in their industry have
                no experience reporting data such as will be required under the 1071
                rule and that their current developer estimates that the costs just to
                develop, test, and integrate their system could be up to $200,000.
                Another SER (a fintech) stated that they do not anticipate any one-time
                costs. Two SERs estimated that one-time costs would be between $15,000
                and $25,000 without a detailed breakdown of those costs. One SER
                provided a detailed breakdown of costs and estimated that total one-
                time costs would be $27,000.
                ---------------------------------------------------------------------------
                 \899\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 38-39.
                ---------------------------------------------------------------------------
                 As mentioned above, the Bureau realizes that one-time costs vary by
                institution due to many factors, and that this variance exists on a
                continuum that is impossible to fully represent. The Bureau focuses on
                representative types of financial institutions in order to generate
                practical and meaningful estimates of costs. As a result, the Bureau
                expects that individual financial institutions would have slightly
                different one-time costs than the average estimates presented here.
                 The One-Time Cost Survey instructed respondents to assume that
                covered institutions would be required to report data at the
                application level on small business financing that constitutes
                ``credit'' for purposes of ECOA for the 13 statutorily mandated data
                points one time per year, and be responsible for validating the
                accuracy of all data. Respondents were further instructed to use their
                own institution's internal definition of small business, assume the
                Regulation B definition of an application, and assume a reporting
                structure similar to that under HMDA. Finally, respondents were
                instructed to not include any costs associated with creating a
                firewall. As such, respondents estimated one-time costs assuming that
                the proposed rule would be different in some ways from what the Bureau
                has ultimately proposed here. One SER provided feedback during the
                SBREFA Panel that it was hard to estimate one-time costs in the survey
                without knowing all the details of the proposed rule.
                 The Bureau estimates that the overall market impact of one-time
                costs for depository institutions would be between $218,000,000 and
                $229,000,000.\900\ Using a 7 percent discount rate and a five-year
                amortization window, the annualized
                [[Page 56559]]
                one-time costs for depository institutions would be $53,200,000 to
                $55,800,000. The Bureau estimates that the overall market impact of
                one-time costs for nondepository institutions would be $94,400,000.
                Using a 7 percent discount rate and a five-year amortization window,
                the annualized one-time costs for nondepository institutions would be
                $23,000,000. As a frame of reference for these market-level one-time
                cost estimates, the estimated total non-interest expenses from the
                FFIEC and NCUA Call Reports for depository institutions that the Bureau
                estimates would be covered under the proposed rule was about $439
                billion in 2019. The upper bound estimate of total one-time costs is
                approximately 0.05 percent of the total annual non-interest expenses.
                ---------------------------------------------------------------------------
                 \900\ The Bureau notes that the variation in this range comes
                primarily from the uncertainty in the number of originations made by
                small banks and savings associations. The range does not fully
                account for the uncertainty associated with estimates of the one-
                time costs for each type of institution.
                ---------------------------------------------------------------------------
                 The Bureau seeks comment on its analysis of one-time costs to
                covered financial institutions as described herein. In particular, the
                Bureau seeks comment on how to adjust the estimates of one-time costs
                to account for differences between what respondents to the survey were
                asked to assume and the proposed rule.
                ii. Ongoing Costs to Covered Financial Institutions
                 Using the methodology described in part VII.E.2, Table 14 shows the
                total expected annual ongoing costs of the proposed rule as well as a
                breakdown by the component 15 activities that comprise the ongoing
                costs for Type A FIs, Type B FIs, and Type C FIs. The bottom of the
                table shows the total estimated annual 1071 ongoing compliance cost for
                each type of institution, along with the total cost per application the
                financial institution processes. To produce the estimates in Table 14,
                the Bureau used the calculations described in Tables 6 and 7 above and
                the assumptions for each activity in Table 8. In the following
                analysis, the Bureau provides examples of these cost calculations for
                the largest drivers of ongoing costs.
                [GRAPHIC] [TIFF OMITTED] TP08OC21.013
                 The Bureau estimates that a representative low complexity
                institution (i.e., a Type A FI) would incur around $7,386 in total
                annual ongoing costs, or about $74 in total cost per application
                processed (assuming a representative 100 applications per year). For
                financial institutions of this type, the largest driver of ongoing
                costs is the fixed cost of the external audit, $3,500. Besides the
                audit cost, the largest drivers of the ongoing costs are activities
                that require employee time to complete. Activities like transcribing
                data, transferring data to the data management software, standard edits
                and internal checks, and training all require loan officer time. The
                Bureau expects training (activity number 11) to annually require
                approximately $638 for 6 representative loan officers to engage in two
                hours of training. The Bureau expects other time-dependent activities
                to cost around $1,000 each. For
                [[Page 56560]]
                example, the Bureau assumes that Type A FIs will spend around 18 hours
                transferring data to 1071 data management software (activity number 3)
                based on estimates of the required time to transfer data to HMDA data
                management software. At the assumed hourly compensation, our estimate
                is around $1,013 for the Type A FI institutions to transfer data. An
                assumption of around 17 total hours to conduct standard annual editing
                checks (activity number 5) with some savings assumed due to an online
                submission platform that automatically checks for errors, results in an
                estimated annual ongoing cost of $490.
                 The Bureau estimates that a representative middle complexity
                institution (i.e., a Type B FI), which is somewhat automated, would
                incur approximately $35,476 in additional ongoing costs per year, or
                around $89 per application (assuming a representative 400 applications
                per year). The largest components of this ongoing cost are the expenses
                of the small business application management software and geocoding
                software (activity 10) in the form of an annual software subscription
                fee, and the external audit of the data (activity number 13). Using
                interviews of financial institutions conducted to determine compliance
                costs with HMDA, the Bureau found mid-range HMDA data management
                systems to be approximately $8,000 in annual costs; the Bureau believes
                that cost would be comparable in the small business lending context and
                thus applies that estimate here. This analysis assumes that the
                subscription purchase would be separate from HMDA management systems,
                but the development of a software to jointly manage HMDA and small
                business lending-related data would likely result in cost savings for
                both products. The Bureau also estimates that a Type B FI would spend
                around $5,000 on external audits of their small business loan
                application data. The Type B FI incurs employee time-related fixed
                costs conducting internal checks ($10,576), training ($3,189), and
                prepping for examinations ($4,227) but saves time and expense on data
                entry and geocoding by using data management software. As an example,
                the Bureau expects Type B FIs to have two full-time employees spend 40
                hours each to prepare for an examination (activity number 14) resulting
                in a cost of $4,227, and have employees spend around 12 hours assisting
                with an examination (activity number 15) costing $672 annually.
                 The Bureau estimates a representative high complexity institution
                (i.e., a Type C FI), would incur $243,266 of annual ongoing costs, or
                $41 per application (assuming a representative 6,000 application per
                year). The largest driver of costs for a Type C FI is the employee time
                required to conduct an internal audit. The assumed 2,304 hours of
                employee time results in nearly $122,000 of ongoing costs annually.
                Exam preparation, training, and standard annual and internal checks
                would be expected to cost $25,365, $26,262, and $26,181 each year,
                respectively. The Bureau also assumes that a Type C institution would
                need a subscription to a small business data management software near
                the upper bound of the range found in interviews with financial
                institutions, of $13,271.
                 The Bureau estimates that the total annual ongoing costs for
                depository institutions would be between about $310,000,000 and
                $330,000,000 per year, about $192,000,00 to $201,000,000 of which would
                be annual variable costs. The Bureau estimates that the total annual
                ongoing costs for nondepository institutions would be about
                $62,300,000, about $13,700,000 of which would be annual variable costs.
                 To understand the impacts of these cost estimates on the profits of
                depository institutions, the Bureau estimates the average total net
                income across all products per small business origination for all DIs
                by type.\901\ There is no comprehensive published source of data on
                profits earned on small business credit transactions. The Bureau
                presents estimates of total net income per origination as an indication
                of a financial institution's ability to cover the additional expenses
                associated with the proposed rule. The Bureau estimates that banks and
                savings associations of Type A have an average net income per
                origination between $105,000 and $119,000. Credit Unions of Type A have
                an average net income per origination of $272,000. Assuming two
                applications per origination, a bank or savings association of Type A
                has a net income per application of approximately $53,000 to $60,000
                and a credit union of the same type has a net income per application of
                about $136,000. The Bureau estimates that banks and savings
                associations of Type B have an average net income per origination
                between $50,000 and $57,000 or a net income per application between
                $25,000 and $29,000. The Bureau estimates that credit unions of Type B
                have an average net income per origination of $218,000 or an average
                net income per application of $109,000. The Bureau estimates that banks
                and savings associations of Type C have a net income per origination
                between $237,000 and $267,000, or, assuming three applications per
                origination, a net income per application between $79,000 and $89,000.
                The Bureau estimates that credit unions of Type C have an average net
                income per origination of $8,000, and average net income per
                application of about $3,000.
                ---------------------------------------------------------------------------
                 \901\ There are no broadly available data on profit per
                application for nondepository institutions. The Bureau uses the
                FFIEC Bank and NCUA Credit Union Call Report data from December 31,
                2019, accessed on June 25, 2021. The Bureau uses the same internal
                estimates of small business loan originations as discussed in part
                VI.B above and total net income across all products. For estimates
                of net income per origination and per application, the Bureau uses
                only net income per origination for depository institutions with
                over 25 originations in 2019.
                ---------------------------------------------------------------------------
                 The Bureau presented early versions of these ongoing cost estimates
                in the SBREFA Outline and to SERs during the SBREFA process. Since
                then, the Bureau has adjusted its estimates to match the total number
                of data points in the proposed rule relative to the SBREFA Outline. The
                Bureau also adjusted its estimates in response to SER feedback.\902\
                Several SERs provided feedback that audit costs in the SBREFA Outline
                were likely too low for the lowest complexity (i.e., Type A)
                institution. The Bureau adjusted the Type A FI external audit costs to
                match estimates provided to the Bureau from a SER of $3,500, an
                increase from the original $500-$1,000 expected. The Bureau continues
                to assume the representative low complexity institution employs only an
                external audit but acknowledges feedback from SERs that this is not
                necessarily true for all Type A institutions.
                ---------------------------------------------------------------------------
                 \902\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 39.
                ---------------------------------------------------------------------------
                 The Bureau also seeks additional comment on the cost estimates
                above. During the Small Business Panel Review Process, several SERs
                indicated other areas where costs estimates should be adjusted. A
                number of SERs remarked that the annual training costs estimates were
                likely too low. One SER estimated that training costs should be around
                20 percent higher and several suggested that the number of employees
                the Bureau is assuming for training costs on an annual basis is too
                low. One SER, for example, stated that everyone who interacts with
                customers will need to be trained and several indicated that the scope
                of employees who will require training includes administrative and
                management staff, as well as those directly involved in the credit
                process. One SER stated that the hourly compensation the Bureau was
                using for
                [[Page 56561]]
                cost calculations is assuming employees are too junior given the
                complexity of the process and should be around $25 higher. Another
                suggested that the transcribing data costs estimate is too low. One SER
                remarked that researching questions and the annual subscription cost of
                1071 data management or geocoding software is too low. While the Bureau
                has not made specific changes in response to these suggestions, the
                Bureau seeks comment on its estimation methodology and cost estimates.
                In accordance with the balancing test discussed in part VI above, the
                Bureau expects to publicly release data collected under the rule,
                potentially with certain data modified or deleted. A more fulsome
                discussion of potential risks and harms from the publication of a
                public 1071 data can be found in part VI.C above, but in this section
                the Bureau acknowledges several potential costs to covered entities
                that stem from the publication of a public dataset under the proposed
                rule.
                 With the publicly disclosed data, users would be able to assess
                fair lending risks at the institution and market level, furthering
                section 1071's fair lending purpose. Several commenters to the Bureau's
                2017 RFI expressed concerns, however, about costs related to these
                analyses.\903\ During the SBREFA process, some SERs were concerned that
                published 1071 data could be used against financial institutions in
                litigation by class action attorneys or to harm their public
                reputations.\904\ Depending on the extent of publicly disclosed data,
                the Bureau expects that some financial institutions could incur ongoing
                costs related to responding to reports of disparities in their small
                business lending practices. Some financial institutions could also
                experience reputational risks associated with high profile reports of
                existing disparities where more fulsome analysis of its business
                practices would conclude that the disparities do not support a finding
                of discrimination on a prohibited basis. In anticipation of needing to
                respond to outside analysis and potential reputational risks, it is
                possible that some financial institutions may choose to change their
                product offerings available to small businesses, underwriting or
                pricing practices, or overall participation in the small business
                lending market. These costs are difficult to quantify, but the Bureau
                seeks comment on the extent of the possible costs posed by litigation
                or reputational harm as a result of the proposed rule.
                ---------------------------------------------------------------------------
                 \903\ 82 FR 22318 (May 15, 2017).
                 \904\ For example, one SER was concerned that published 1071
                data could lead to increased litigation and thus a higher cost of
                credit for small businesses. Another SER expressed concern that
                pricing information could be misinterpreted by users of 1071 data
                (for example, according to the SER, higher pricing for one race
                might be used to infer discrimination when the pricing was in fact
                unrelated to the race of the applicant). Such a misinterpretation
                may cause reputational damage and consequently decrease
                applications.
                ---------------------------------------------------------------------------
                 The Bureau also received feedback that financial institutions could
                face potential costs with the publication of a public dataset under the
                proposed rule either because potential clients would be concerned about
                their data being collected or because of the additional competitive
                pressure brought by a publicly available dataset. During the SBREFA
                process, a number of SERs were concerned that full disclosure of all
                1071 data would result in the re-identification of small business
                applicants and potentially harm their privacy interests. Several SERs
                asserted that public knowledge of borrowing activity (even without any
                other potential harms) would be very concerning to some small
                businesses as some small business owners consider that information
                sensitive or deeply personal. Relatedly, one SER said that the
                collection of 1071 data, including personal or demographic information,
                could seem like an invasion of privacy by the financial institution,
                particularly to minorities, and thus prospective applicants may decide
                to seek financing elsewhere. A number of these SERs stated that 1071
                data could be used to generate marketing lists, resulting in a
                financial institution's competitors stealing small business customers.
                Several SERs were concerned about the Bureau potentially making public
                pricing data. Several SERs were particularly focused on information
                regarding pricing and pricing structure being commercially sensitive to
                financial institutions. The Bureau seeks comment on this class of
                potential costs to covered financial institutions.
                 The Bureau seeks comment on its analysis of ongoing costs to
                covered financial institutions as described herein.
                4. Costs to Small Businesses
                 The Bureau expects that any direct costs of the proposed rule on
                small businesses would stem from additional fields that the applicant
                may have to complete on credit applications due to the proposed rule
                compared to the baseline application process. This could include
                information such as the race, ethnicity, and sex of business owners or
                number of workers that are not typically required on business credit
                applications. However, the Bureau expects that the cost of completing
                these fields on applications to be negligible, especially compared to
                the overall cost of credit. Therefore, the Bureau focuses the rest of
                the discussion on the costs of small businesses to whether and how the
                Bureau expects financial institutions to pass on the costs of
                compliance with the proposed rule to small businesses and any possible
                effects on the availability of small business credit.
                 Three types of costs (one-time, fixed ongoing, and variable
                ongoing) have the potential to influence the price and availability of
                credit to small businesses. In a competitive marketplace, standard
                microeconomics suggests that lenders will extend loans up to the point
                at which the revenue from granting an additional loan is equal to the
                additional cost associated with the financial institution providing the
                loan. One-time costs and fixed ongoing costs affect the overall
                profitability of a lender's loan portfolio but do not affect the added
                profit from extending an additional loan. Variable ongoing costs,
                however, affect the profitability of each additional loan and will
                influence the number of loans a lender provides. Based on the Bureau's
                available evidence, it expects that the variable ongoing costs will be
                passed on in full to small business credit applicants in the form of
                higher prices or fees and does not expect there to be a significant
                reduction in small businesses' ability to access credit.
                 One-time and fixed ongoing costs affect the overall profitability
                of the loan portfolio and will be considered in the lender's decision
                to remain in the small business credit market or the market for
                specific small business credit products. A financial institution would
                find it worthwhile to incur the one-time costs associated with
                complying with the proposed rule if it expects to generate enough
                profit over multiple years to cover those costs. Each year, a financial
                institution would find it worthwhile to continue extending credit if
                the total expected revenue from its chosen quantity of loans is greater
                than the sum of its ongoing fixed and variable costs. A financial
                institution would find it worthwhile to exit the market, even if it had
                already incurred the one-time costs, if the total expected revenue from
                that year were less than the total expected ongoing costs. During the
                SBREFA process, the Bureau asked panelists how they would respond to
                the cost of complying with the proposed rule.\905\ One nondepository
                institution participant did indicate that smaller firms in their
                industry may stop participating if one-time costs are too
                [[Page 56562]]
                high, particularly if small business lending is a secondary aspect of
                their business model.\906\ Another nondepository institution
                participant indicated that significantly increasing the time between
                application and decision could occur due to the proposed requirements,
                which they said would threaten their ability to compete with other
                lenders.
                ---------------------------------------------------------------------------
                 \905\ SBREFA Outline at 50-52.
                 \906\ The SER feedback discussed herein can be found in the
                SBREFA Panel Report at 40.
                ---------------------------------------------------------------------------
                 In the One-Time Cost Survey, the Bureau asked respondents to rank a
                list of potential actions they may take in response to the compliance
                costs of implementing section 1071. Respondents ranked the following
                list: ``Raise rates or fees on small business products''; ``Raise
                rates/fees on other credit products''; ``Accept lower profits''; ``Exit
                some geographic markets''; ``Tighten underwriting standards''; ``Offer
                fewer or less complex products''; ``No longer offer small business
                credit products''; or ``Other'' with two write-in options. Respondents
                ranked these options from ``1'' to ``9'' indicating their most to least
                likely responses, where ``1'' was the most likely.
                 In order to analyze these responses, the Bureau pooled data only
                from respondents that answered both the ranking question and the number
                of originations question. The Bureau implemented these restrictions to
                the pool to eliminate responses from institutions that would not be
                required to report under the proposed rule. Of the 105 total
                respondents to the One-Time Cost Survey, 44 ranked every option and
                reported more than 25 originations in the last year. The Bureau will
                henceforth refer to these respondents as the ``impacts of
                implementation'' sample.
                 Table 15 presents the potential responses to implementing section
                1071 and the average ranking assigned by respondents in the impacts of
                implementation sample. The responses are listed in order of most to
                least likely on average, where a lower average ranking number means
                that respondents ranked that response most likely. Consistent with
                economic theory, respondents reported that they would be most likely to
                raise rates or fees on small business products and other credit
                products. On average, respondents reported that they would be least
                likely to exit some geographic markets or cease offering small business
                credit products.
                [GRAPHIC] [TIFF OMITTED] TP08OC21.014
                 The Bureau expects that the variable ongoing costs would be passed
                on in full to small business credit applicants in the form of higher
                prices or fees. This expectation is consistent with both standard
                microeconomic theory and feedback from SERs during the SBREFA process
                and respondents to the One-Time Cost Survey. Per application, the
                variable costs are approximately $28, $24, and $7 for Type A FIs, Type
                B FIs, and Type C FIs, respectively. Even if the variable costs were
                passed on in full to small business applicants in the form of higher
                interest rates or fees associated with a loan or line of credit (or
                even applicants in the form of application fees), the Bureau expects
                that this would comprise a small portion of the total cost of the
                average loan to the small business applicant.
                 As discussed above, the Bureau believes financial institutions
                would decide to remain in or exit the small business credit market
                based on the revenue generated from small business credit relative to
                the sum of one-time costs, fixed ongoing costs, and variable ongoing
                costs. The Bureau's total estimated one-time and ongoing costs are non-
                negligible and could potentially result in exit from the market by
                financial institutions that do not regularly originate many covered
                credit transactions. The Bureau's proposed coverage threshold of 25
                covered credit transactions in two consecutive years could prevent some
                low-volume financial institutions from leaving the small business
                credit market in response to the compliance costs of the proposed rule.
                For example, the Bureau estimates that a Type A DI would incur one-time
                costs of $58,400 and fixed ongoing costs of $4,536. A depository
                institution that originates very few covered transactions every year
                may exit the market if it does not expect that profits, even over
                several years, would cover that one-time cost or if it does not expect
                annual revenues to exceed the annual ongoing costs. However, based on
                the net income per application estimates discussed above, the Bureau
                believes that institutions that are covered under the proposed rule
                (i.e., above the proposed coverage threshold) will earn enough revenue
                to exceed these costs. Furthermore, the Bureau's findings during the
                SBREFA process and the respondents to the One-Time Cost Survey
                (discussed above) additionally support the Bureau's conclusion that the
                increase in compliance costs will likely be passed through to customers
                in the form of increased fees, rather than result in financial
                institutions leaving the small business credit market.\907\
                ---------------------------------------------------------------------------
                 \907\ As stated in the SBREFA Panel Report at 40, ``[g]enerally,
                SERs did not suggest that they would leave the small business
                lending market in response to increased costs under the eventual
                1071 rule.''
                ---------------------------------------------------------------------------
                [[Page 56563]]
                 The Bureau seeks comment on other potential costs to small
                businesses not discussed here. The Bureau seeks comment on its analysis
                of costs to small businesses as described herein.
                5. Alternatives Considered
                 This section discusses two categories of alternatives considered:
                Other methods for defining a covered financial institution and limiting
                the data points to those mandated by section 1071. The Bureau uses the
                methodologies discussed in parts VII.D and VII.E to estimate the
                impacts of these alternatives.
                 First, the Bureau considered multiple reporting thresholds for
                purposes of defining a covered financial institution. In particular,
                the Bureau considered whether to exempt financial institutions with
                fewer than 50 or 100 originations in each of the two preceding calendar
                years instead of 25 originations, as proposed. The Bureau also
                considered whether to exempt depository institutions with assets under
                $100 million or $200 million from section 1071's data collection and
                reporting requirements.
                 Under a 50-origination threshold, the Bureau estimates that about
                2,900 to 3,100 depository institutions would report, which is
                approximately 1,100 fewer depository institutions relative to the
                proposed threshold of 25 originations. The Bureau estimates that about
                2,700 to 2,900 banks and savings associations and about 200 credit
                unions would be covered under a 50-origination threshold. The Bureau
                does not have sufficient information to estimate how many fewer
                nondepository institutions would report under this alternative
                threshold. The Bureau estimates that the total one-time costs across
                all financial institutions associated with a 50-origination threshold
                would be about $252,000,000 to $264,000,000, a decrease of about
                $60,000,000 relative to the 25-origination threshold. The Bureau
                estimates that the total annual ongoing costs associated with this
                threshold would be about $357,000,000 to $374,000,000, a decrease of
                about $17,000,000 per year relative to the 25-origination threshold.
                 Under a 100-origination threshold, the Bureau estimates that about
                1,800 to 2,000 depository institutions would report, which is
                approximately 2,200 fewer depository institutions relative to the
                proposed threshold of 25 originations. The Bureau estimates that about
                1,700 to 1,900 banks and savings associations and about 100 credit
                unions would be covered under a 100-origination threshold The Bureau
                estimates that the total one-time costs across all financial
                institutions associated with a 100-origination threshold would be about
                $192,000,000 to $203,000,000, a decrease of $120,000,000 relative to
                the 25-origination threshold. The Bureau estimates that the total
                annual ongoing costs associated with this threshold would be about
                $332,000,000 to $347,000,000, a decrease of about $40,000,000 to
                $45,000,000 per year relative to the 25-origination threshold. Again,
                the Bureau does not have sufficient information to estimate how many
                fewer nondepository institutions would be required to report under this
                alternative.
                 The Bureau also considered $100 million and $200 million asset-
                based thresholds for depository institutions. For the purposes of
                considering these alternatives, the Bureau estimates how institutional
                coverage and costs would be different if the Bureau required a 25-
                origination threshold in addition to an asset-based threshold for
                depository institutions. 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 than 25 originations 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.
                 Under a $100 million asset-based threshold, the Bureau estimates
                that between 3,500 and 3,600 depository institutions would report,
                approximately 500 to 600 fewer depository institutions relative to a
                25-origination threshold with no asset-based threshold. The Bureau
                estimates that about 3,100 to 3,300 banks and savings associations and
                about 300 credit unions would be covered under a 25-origination and
                $100 million asset-based threshold. The Bureau estimates that the total
                one-time costs across all financial institutions associated with the
                addition of a $100 million asset threshold would be about $284,000,000
                to $291,000,000, a decrease of between $28,000,000 and $32,000,000
                relative to the proposed rule. The Bureau estimates that the total
                annual ongoing costs associated with this threshold would be about
                $366,000,000 to $384,000,000, a decrease of about $7,000,000 to
                $9,000,000 per year relative to the 25-origination threshold with no
                asset-based threshold.
                 Under a $200 million asset-based threshold, the Bureau estimates
                that between 2,600 and 2,700 depository institutions would report,
                approximately 1,400 to 1,500 fewer depository institutions relative to
                a 25-origination threshold with no asset-based threshold. The Bureau
                estimates that about 2,300 to 2,400 banks and savings associations and
                about 300 credit unions would be covered under a 25-origination and
                $200 million asset-based threshold. The Bureau estimates that the total
                one-time costs across all financial institutions associated with the
                addition of a $200 million asset threshold would be about $240,000,000
                to $244,000,000, a decrease of between $73,000,000 and $80,000,000
                relative to the proposed rule. The Bureau estimates that the total
                annual ongoing costs associated with this threshold would be about
                $348,000,000 to $363,000,000, a decrease of about $25,000,000 to
                $29,000,000 per year relative to the 25-origination threshold with no
                asset-based threshold.
                 Second, the Bureau considered the costs and benefits for limiting
                its data collection to the data points required by the section 1071. In
                addition to the statutorily required data points enumerated in section
                1071, the statute also requires financial institutions to collect and
                report any additional data that the Bureau determines would aid in
                fulfilling the purposes of section 1071. The Bureau is proposing
                several additional data points that rely solely on this authority.
                Specifically, the Bureau is proposing to require that financial
                institutions collect and report data on application channel,
                application recipient, denial reasons (for denied applications only),
                pricing information (for applications that are originated or approved
                but not accepted), NAICS code, number of workers, time in business, and
                number of principal owners. The Bureau has considered the impact of
                instead proposing only the collection of those data points required by
                statute.
                 Requiring the collection and reporting of only the statutory data
                points would result in a reduction in the fair lending benefit of the
                data compared to the proposed rule. For example, not collecting pricing
                information would obscure possible fair lending risk by covered
                financial institutions. Potential discriminatory behavior is not
                limited to the action taken on an application, but rather includes the
                terms and conditions under which applicants can access credit. If the
                Bureau did not collect pricing information, it would not be able to
                evaluate potential discriminatory behaviors on the basis of price. As
                [[Page 56564]]
                mentioned in part VII.F.1 above, several of the data points the Bureau
                is proposing under its ECOA section 704B(e)(2)(H) authority are useful
                in creating more accurate fair lending analyses. A reduction in the
                rule's ability to facilitate the enforcement of fair lending laws would
                negatively impact small businesses and small business owners relative
                to the proposed rule.
                 Limiting the rule's data collection to only the data points
                required under the statute would also reduce the ability of the rule to
                support the business and community development purpose of the section
                1071. Not including pricing information would significantly reduce the
                ability of communities, governmental entities, and creditors to
                understand credit conditions available to small businesses. Not
                including NAICS code or time in business would reduce the ability of
                governmental entities to tailor programs that can specifically benefit
                young businesses or businesses in certain industries. This reduction in
                benefits might be disproportionately borne by women-owned and minority-
                owned small businesses.
                 Only requiring the collection and reporting of the statutory data
                points would have reduced the annual ongoing cost of complying with the
                proposed rule. Under this alternative, the estimated total annual
                ongoing costs for Type A FIs, Type B FIs, and Type C FIs would be
                $6,833; $34,004 and $233,209, respectively. Per application, the
                estimated ongoing cost would be $68, $85, and $39 for Type A FIs, Type
                B FIs, and Type C FIs, respectively. The estimated total annual market-
                level ongoing cost of reporting would be between $363,000,000 and
                $382,000,000 or about $10,000,000 per year less than under the proposed
                rule. As discussed above, respondents to the One-Time Cost Survey were
                instructed to assume that they would only report the mandatory data
                fields. Hence, the Bureau can only estimate how ongoing costs would be
                different under this alternative.
                G. Potential Impact on Depository Institutions and Credit Unions With
                $10 Billion or Less in Total Assets
                 As discussed above, the proposed rule would exclude financial
                institutions with fewer than 25 originated covered credit transactions
                in both of the two preceding calendar years. The Bureau believes that
                the benefits of the proposed rule to banks, savings associations, and
                credit unions with $10 billion or less in total assets will be similar
                to the benefits to covered financial institutions as a whole, discussed
                above. Regarding costs, other than as noted here, the Bureau also
                believes that the impact of the proposed rule on banks, savings
                associations, and credit unions with $10 billion or less in total
                assets will be similar to the impact for covered financial institutions
                as a whole. The primary difference in the impact on these institutions
                is likely to come from differences in the level of complexity of
                operations, compliance systems, and software, as well as number of
                product offerings and volume of originations of these institutions.
                 Based on FFIEC and NCUA Call Report data for December 2019, 10,375
                of 10,525 banks, savings associations, and credit unions had $10
                billion or less in total assets. The Bureau estimates that between
                3,900 and 4,000 of such institutions would be subject to the proposed
                rule. The Bureau estimates that the market-level impact of the proposed
                rule on annual ongoing costs for banks, savings associations, and
                credit unions with $10 billion or less in assets would be between
                $151,000,000 and $171,000,000. Regarding one-time costs, the Bureau
                estimates that the market-level impact of the proposed rule for banks,
                savings associations, and credit unions with $10 billion or less in
                assets would be between $209,000,000 and $220,000,000. Using a 7
                percent discount rate and a five-year amortization window, the
                estimated annualized one-time costs would be between $51,000,000 and
                $54,000,000.
                 The Bureau seeks comment on its analysis of the potential impact on
                depository institutions and credit unions with $10 billion or less in
                total assets as described herein.
                H. Potential Impact on Small Businesses in Rural Areas
                 The proposed rule would not directly impact small businesses in
                rural areas. However, as with all small businesses, small businesses in
                rural areas may bear some indirect costs of the proposal. This would
                occur if financial institutions serving rural areas are covered by the
                proposed rule and if those institutions pass on some or all of their
                cost of complying with the proposed rule to small businesses.
                 The source data from CRA submissions that the Bureau uses to
                estimate institutional coverage and market estimates provide
                information on the county in which small business borrowers are
                located. However, approximately 89 percent of banks did not report CRA
                data in 2019, and as a result the Bureau does not believe the reported
                data are robust enough to estimate the locations of the small business
                borrowers for the banks that do not report CRA data. The Credit Union
                Call Report data do not provide any information on the location of
                credit union borrowers. Nonetheless, the Bureau is able to provide some
                geographical estimates of institutional coverage based on depository
                institution branch locations.
                 The Bureau used the FDIC's Summary of Deposits to identify the
                location of all brick and mortar bank and savings association branches
                and the NCUA Credit Union Branch Information to identify the location
                of all credit union branch and corporate offices.\908\ A bank, savings
                association, or credit union branch was defined as rural if it is in a
                rural county, as specified by the USDA's Urban Influence Codes.\909\ A
                branch is considered covered by the proposed rule if it belongs to a
                bank, savings association, or credit union that the Bureau estimated
                would be included under the proposed threshold of 25 originations in
                2017 and 2018. Using the estimation methodology discussed in part VII.D
                above, the Bureau estimates that about 90 to 92 percent of rural bank
                and savings association branches and about 95 percent of non-rural bank
                and savings association branches would be covered under the proposed
                rule. The Bureau estimates that about 27 percent of rural credit union
                branches and about 29 percent of non-rural credit union branches would
                be covered under the proposed rule.\910\
                ---------------------------------------------------------------------------
                 \908\ See Fed. Deposit Ins. Corp., Summary of Deposits (SOD)--
                Annual Survey of Branch Office Deposits (last updated June 1, 2021),
                https://www.fdic.gov/regulations/resources/call/sod.html. The NCUA
                provides data on credit union branches in the quarterly Call Report
                Data files. See Nat'l Credit Union Admin., Call Report Quarterly
                Data, https://www.ncua.gov/analysis/credit-union-corporate-call-report-data/quarterly-data (last visited Aug. 5, 2021).
                 \909\ This is the same methodology as used in the Bureau's rural
                counties list. See Bureau of Consumer Fin. Prot., Rural and
                underserved counties list, https://www.consumerfinance.gov/compliance/compliance-resources/mortgage-resources/rural-and-underserved-counties-list/ (last visited July 28, 2020).
                 \910\ The Bureau notes that most credit union branches do not
                belong covered credit unions because most credit unions did not
                report any small business loans in the NCUA Call Report data. Of the
                5,437 credit unions that existed in December 2019, 4,359 (or 81.5
                percent) reported no small business originations in 2017 or 2018.
                ---------------------------------------------------------------------------
                 In a competitive framework in which financial institutions are
                profit maximizers, financial institutions would pass on variable costs
                to future small business applicants, but absorb one-time costs and
                increased fixed costs in the short run.\911\ Based on previous
                [[Page 56565]]
                HMDA rulemaking efforts and feedback through the SBREFA process, the
                following seven operational steps affect variable costs: Transcribing
                data, resolving reportability questions, transferring data to a data
                entry system, geocoding, researching questions, resolving question
                responses, and checking post-submission edits. Overall, the Bureau
                estimates that the impact of the proposed rule on variable costs per
                application is $28 for a Type A FI, $24 for type B FIs, and $7 for Type
                C FIs. The covered financial institutions that serve rural areas will
                attempt to pass these variable costs on to future small business
                applicants. Amortized over the life of the loan, this expense would
                represent a negligible increase in the cost of a covered credit
                transaction.
                ---------------------------------------------------------------------------
                 \911\ If markets are not perfectly competitive or financial
                institutions are not profit maximizers, then what financial
                institutions pass on may differ. For example, they may attempt to
                pass on one-time costs and increases in fixed costs, or they may not
                be able to pass on variable costs. Furthermore, some financial
                institutions may exit the market in the long run. However, other
                financial institutions may also enter the market in the long run.
                ---------------------------------------------------------------------------
                 The One-Time Cost Survey can shed light on how financial
                institutions that serve rural communities will respond to the proposed
                rule. The Bureau asked respondents to the survey to report whether
                their institution primarily served rural or urban communities or an
                even mix. All respondents in the impacts of implementation sample
                answered this question. Of the 44 respondents in the impacts of
                implementation sample, 13 primarily serve rural communities, 15
                primarily serve urban communities, and 16 serve an even mix. Table 16
                presents the potential responses to implementing section 1071 and the
                average ranking assigned by respondents that serve rural communities,
                urban communities, an even mix, and all of the respondents in the
                impacts of implementation sample. The responses are listed in order of
                most to least likely on average across all respondents, where a lower
                average ranking number means that respondents ranked that response most
                likely. Respondents that primarily serve rural communities or an even
                mix rank raising rates or fees on small business or other credit
                products as the most likely response. These institutions also rank
                exiting some geographic markets and no longer offering small business
                credit products as the least likely response to the proposed rule.
                [GRAPHIC] [TIFF OMITTED] TP08OC21.015
                 The Bureau thus does not anticipate any material adverse effect on
                credit access in the long or short term to rural small businesses.
                 The Bureau seeks comment on its analysis of potential impacts on
                small businesses in rural areas as described herein.
                VIII. Regulatory Flexibility Act Analysis
                 The Regulatory Flexibility Act (RFA) \912\ generally requires an
                agency to conduct an initial regulatory flexibility analysis (IRFA) and
                a final regulatory flexibility analysis (FRFA) of any rule subject to
                notice-and-comment rulemaking requirements. These analyses must
                ``describe the impact of the proposed rule on small entities.'' \913\
                An IRFA or FRFA is not required if the agency certifies that the rule
                will not have a significant economic impact on a substantial number of
                small entities.\914\ The Bureau also is subject to certain additional
                procedures under the RFA involving the convening of a panel to consult
                with small business representatives prior to proposing a rule for which
                an IRFA is required.\915\ The Bureau has not certified that the
                proposed rule would not have a significant economic impact on a
                substantial number of small entities within the meaning of the RFA.
                Accordingly, the Bureau convened and chaired a Small Business Review
                Panel under SBREFA to consider the impact of the proposed rule on small
                entities that would be subject to that rule and to obtain feedback from
                representatives of such small entities. The Small Business Review Panel
                for this rulemaking is discussed below in part VIII.A. The Bureau is
                also publishing an IRFA. Among other things, the IRFA estimates the
                number of small entities that will be subject to the proposed rule and
                [[Page 56566]]
                describes the impact of that rule on those entities. The IRFA for this
                rulemaking is set forth below in part VIII.B.
                ---------------------------------------------------------------------------
                 \912\ 5 U.S.C. 601 et seq.
                 \913\ 5 U.S.C. 603(a). For purposes of assessing the impacts of
                the proposed rule on small entities, ``small entities'' is defined
                in the RFA to include small businesses, small not-for-profit
                organizations, and small government jurisdictions. 5 U.S.C. 601(6).
                A ``small business'' is determined by application of SBA regulations
                and reference to the NAICS classifications and size standards. 5
                U.S.C. 601(3). A ``small organization'' is any ``not-for-profit
                enterprise which is independently owned and operated and is not
                dominant in its field.'' 5 U.S.C. 601(4). A ``small governmental
                jurisdiction'' is the government of a city, county, town, township,
                village, school district, or special district with a population of
                less than 50,000. 5 U.S.C. 601(5).
                 \914\ 5 U.S.C. 605(b).
                 \915\ 5 U.S.C. 609.
                ---------------------------------------------------------------------------
                A. Small Business Review Panel
                 Under section 609(b) of the RFA, as amended by SBREFA and the Dodd-
                Frank Act,\916\ the Bureau must seek, prior to conducting the IRFA,
                information from representatives of small entities that may potentially
                be affected by its proposed rules to assess the potential impacts of
                that rule on such small entities.\917\ Section 609(b) sets forth a
                series of procedural steps with regard to obtaining this information.
                The Bureau first notifies the Chief Counsel for Advocacy of the SBA
                (Chief Counsel) and provides the Chief Counsel with information on the
                potential impacts of the proposed rule on small entities and the types
                of small entities that might be affected.\918\ Not later than 15 days
                after receipt of the formal notification and other information
                described in section 609(b)(1) of the RFA, the Chief Counsel then
                identifies the small entity representatives, the individuals
                representative of affected small entities for the purpose of obtaining
                advice and recommendations from those individuals about the potential
                impacts of the proposed rule.\919\ The Bureau convenes a Small Business
                Review Panel for such rule consisting wholly of full-time Federal
                employees of the office within the Bureau responsible for carrying out
                the proposed rule, OIRA within the OMB, and the Chief Counsel.\920\ The
                Small Business Review Panel reviews any material the Bureau has
                prepared in connection with the SBREFA process and collects the advice
                and recommendations of each individual small entity representative
                identified by the Bureau after consultation with the Chief Counsel on
                issues related to sections 603(b)(3) through (b)(5) and 603(c) of the
                RFA.\921\ No later than 60 days after the date the Bureau convenes the
                Small Business Review Panel, the panel reports on the comments of the
                small entity representatives (SERs) and its findings as to the issues
                on which the Small Business Review Panel consulted with the SERs, and
                the report is made public as part of the rulemaking record.\922\ Where
                appropriate, the Bureau modifies the proposed rule or the IRFA in light
                of the foregoing process.\923\
                ---------------------------------------------------------------------------
                 \916\ 5 U.S.C. 609(b).
                 \917\ Id.
                 \918\ 5 U.S.C. 609(b)(1).
                 \919\ 5 U.S.C. 609(b)(2).
                 \920\ 5 U.S.C. 609(b)(3).
                 \921\ 5 U.S.C. 609(b)(4). As described in part VIII.B below,
                sections 603(b)(3) through (5) and 603(c) of the RFA, respectively,
                require a description of and, where feasible, provision of an
                estimate of the number of small entities to which the proposed rule
                will apply; a description of the projected reporting, record
                keeping, and other compliance requirements of the proposed rule,
                including an estimate of the classes of small entities which will be
                subject to the requirement and the type of professional skills
                necessary for preparation of the report or record; an
                identification, to the extent practicable, of all relevant Federal
                rules which may duplicate, overlap, or conflict with the proposed
                rule; and a description of any significant alternatives to the
                proposed rule which accomplish the stated objectives of applicable
                statutes and which minimize any significant economic impact of the
                proposed rule on small entities. 5 U.S.C. 603(b)(3) through (5),
                (c).
                 \922\ 5 U.S.C. 609(b)(5).
                 \923\ 5 U.S.C. 609(b)(6).
                ---------------------------------------------------------------------------
                 On August 10, 2020, the Bureau provided the Chief Counsel (as well
                as OIRA) with the formal notification and other information required
                under section 609(b)(1) of the RFA. To obtain feedback from small
                entities to inform the Small Business Review Panel pursuant to section
                609(b)(2) and (4) of the RFA, the Bureau, in consultation with the
                Chief Counsel, identified several categories of small entities that may
                be subject to the proposed rule for purposes of the IRFA: Depository
                institutions; fintech lenders and MCA providers; commercial finance
                companies; nondepository CDFIs; nondepository lenders of other 5+ unit
                mortgages; Farm Credit System members; and governmental lending
                entities. Section 3 of the IRFA, in part VIII.B.3 below, describes in
                greater detail the Bureau's analysis of the number and types of
                entities that may be affected by the proposed rule. Having identified
                the categories of small entities that may be subject to the proposed
                rule for purposes of an IRFA, the Bureau then, in consultation with the
                Chief Counsel and OIRA, selected 20 SERs to participate in the SBREFA
                process. As discussed in section 7 of the SBREFA Panel Report,\924\
                described below, the SERs included representatives from each of the
                categories identified by the Bureau and comprised a diverse group of
                individuals with regard to geography and type of locality (i.e., rural,
                urban, suburban, or metropolitan areas).
                ---------------------------------------------------------------------------
                 \924\ See SBREFA Panel Report at 15.
                ---------------------------------------------------------------------------
                 On October 15, 2020, the Bureau formally convened the Small
                Business Review Panel pursuant to section 609(b)(3) of the RFA.
                Afterwards, to collect the advice and recommendations of the SERs under
                section 609(b)(4) of the RFA, the Small Business Review Panel held a
                total of four Panel Outreach Meetings with the SERs during October 19-
                22, 2020, conducted online via video conference. To help SERs and to
                facilitate an informed and detailed discussion of the proposals under
                consideration, discussion questions for the SERs were included
                throughout the Bureau's SBREFA Outline.\925\ 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. The Panel also invited
                SERs to submit written feedback by November 9, 2020; the Bureau
                received written feedback from 15 of the SERs.\926\
                ---------------------------------------------------------------------------
                 \925\ These questions also appeared in a shorter Discussion
                Guide for Small Entity Representatives. Bureau of Consumer Fin.
                Prot., Small Business Advisory Review Panel, 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.
                 \926\ This written feedback is attached as appendix A to the
                SBREFA Panel Report.
                ---------------------------------------------------------------------------
                 The Bureau also invited other stakeholders to submit feedback on
                the SBREFA Outline, which was due by December 14, 2020. See generally
                SBREFA Outline. Feedback from these other stakeholders was not
                considered by the Panel and is not reflected in the Panel Report. See
                part III above for additional information.
                 On December 15, 2020, the Bureau publicly released the written
                SBREFA Panel Report.\927\ The SBREFA Panel Report includes the
                following:
                ---------------------------------------------------------------------------
                 \927\ 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,
                2021), 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/.
                ---------------------------------------------------------------------------
                 Background information on the proposals under consideration at the
                time; information on the types of small entities that would be subject
                to those proposals and on the SERs who were selected to advise the
                Panel; a summary of the Panel's outreach to obtain the advice and
                recommendations of those small entity representatives; a discussion of
                the comments and recommendations of the small entity representatives;
                and a discussion of the Panel's findings, focusing on the statutory
                elements required under section 603 of the RFA.\928\
                ---------------------------------------------------------------------------
                 \928\ 5 U.S.C. 609(b)(5).
                ---------------------------------------------------------------------------
                 In preparing this proposed rule and the IRFA, the Bureau has
                considered the
                [[Page 56567]]
                feedback from SERs through the SBREFA process and the findings and
                recommendations in the SBREFA Panel Report. The section-by-section
                analysis of the proposed rule in part V above and the IRFA discuss this
                feedback and the specific findings and recommendations of the Panel, as
                applicable. The SBREFA process provided the Panel and the Bureau with
                an opportunity to identify and explore opportunities to minimize the
                burden of the proposed rule on small entities while achieving the
                rule's purposes. It is important to note, however, that the Panel
                prepared the SBREFA Panel Report at a preliminary stage of the
                proposal's development and that the SBREFA Panel Report--in particular,
                the Panel's findings and recommendations--should be considered in that
                light. Also, any options identified in the SBREFA Panel Report for
                reducing the proposed rule's regulatory impact on small entities were
                expressly subject to further consideration, analysis, and data
                collection by the Bureau to ensure that the options identified were
                practicable, enforceable, and consistent with section 1071 of the Dodd-
                Frank Act and its statutory purposes. The proposed rule and the IRFA
                reflect further consideration, analysis, and data collection by the
                Bureau.
                B. Initial Regulatory Flexibility Analysis
                 Under RFA section 603(a), an IRFA ``shall describe the impact of
                the proposed rule on small entities.'' \929\ Section 603(b) of the RFA
                sets forth the required elements of the IRFA. Section 603(b)(1)
                requires the IRFA to contain a description of the reasons why action by
                the agency is being considered.\930\ Section 603(b)(2) requires a
                succinct statement of the objectives of, and the legal basis for, the
                proposed rule.\931\ The IRFA further must contain a description of and,
                where feasible, an estimate of the number of small entities to which
                the proposed rule will apply.\932\ Section 603(b)(4) requires a
                description of the projected reporting, recordkeeping, and other
                compliance requirements of the proposed rule, including an estimate of
                the classes of small entities that will be subject to the requirement
                and the types of professional skills necessary for the preparation of
                the report or record.\933\ In addition, the Bureau must identify, to
                the extent practicable, all relevant Federal rules which may duplicate,
                overlap, or conflict with the proposed rule.\934\ Furthermore, the
                Bureau must describe any significant alternatives to the proposed rule
                which accomplish the stated objectives of applicable statutes and which
                minimize any significant economic impact of the proposed rule on small
                entities.\935\ Finally, as amended by the Dodd-Frank Act, RFA section
                603(d) requires that the IRFA include a description of any projected
                increase in the cost of credit for small entities, a description of any
                significant alternatives to the proposed rule which accomplish the
                stated objectives of applicable statutes and which minimize any
                increase in the cost of credit for small entities (if such an increase
                in the cost of credit is projected), and a description of the advice
                and recommendations of representatives of small entities relating to
                the cost of credit issues.\936\
                ---------------------------------------------------------------------------
                 \929\ 5 U.S.C. 603(a).
                 \930\ 5 U.S.C. 603(b)(1).
                 \931\ 5 U.S.C. 603(b)(2).
                 \932\ 5 U.S.C. 603(b)(3).
                 \933\ 5 U.S.C. 603(b)(4).
                 \934\ 5 U.S.C. 603(b)(5).
                 \935\ 5 U.S.C. 603(c).
                 \936\ 5 U.S.C. 603(d)(1); Dodd-Frank Act section 1100G(d)(1),
                124 Stat. 2112.
                ---------------------------------------------------------------------------
                1. Description of the Reasons Why Agency Action Is Being Considered
                 As discussed in part I above, section 1071 of the Dodd-Frank Act
                amended ECOA 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.\937\ Section 1071's
                statutory purposes are (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.
                ---------------------------------------------------------------------------
                 \937\ ECOA section 704B.
                ---------------------------------------------------------------------------
                 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 its 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, publication of 1071 data, and the Bureau's
                discretion to modify or delete data prior to publication in order to
                advance a privacy interest.
                 As discussed throughout this notice, Congress amended ECOA by
                adding section 1071, which directs the Bureau to adopt regulations
                governing the collection and reporting of small business lending data.
                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.
                 In addition, as discussed in part II above, currently available
                data on small business lending are fragmented, incomplete, and not
                standardized, making it difficult to make meaningful comparisons across
                products, financial institutions, 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, or trends in funding that may be holding back
                some communities.\938\
                ---------------------------------------------------------------------------
                 \938\ 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.
                ---------------------------------------------------------------------------
                 Data collected under the proposed rule would constitute the largest
                and most comprehensive data in the United States on credit availability
                for small businesses. The proposed data collection would also provide
                an unprecedented window into the small business lending market, and
                such transparency will benefit financial institutions covered by the
                rule. The public data published under the proposed rule would allow
                financial institutions to better understand the demand for small
                business credit products and the conditions under which they are being
                supplied by other lenders. Lenders would likely use the data to
                understand small business lending market conditions more effectively
                and at a more granular level than is possible with existing data
                sources, such as Call Reports, data from public lending programs, or
                privately purchased data. Data collected under the proposed rule could
                enable lenders to identify promising opportunities to extend credit.
                 The proposed rule will also provide some reduction of the
                compliance burden of fair lending reviews for lower risk financial
                institutions by reducing the ``false positive'' rates during fair
                lending review prioritization by regulators. Currently, financial
                institutions are subject to fair lending reviews by regulators to
                ensure that they
                [[Page 56568]]
                are complying with the ECOA in their small business lending processes.
                Data reported under the proposed rule will allow regulators to
                prioritize fair lending reviews of lenders with higher risk of
                potential fair lending violations, which reduces the burden on
                institutions with lower fair lending risk.
                 The proposed rule effectuates Congress's specific mandate to the
                Bureau to adopt rules to implement section 1071. For a further
                description of the reasons why agency action is being considered, see
                the background discussion for the proposed rule in part II above.
                2. Succinct Statement of the Objectives of, and Legal Basis for, the
                Proposed Rule
                 This rulemaking has multiple objectives. The proposed rule is
                intended to advance the two statutory purposes of section 1071, which
                are (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. To achieve these objectives, the
                proposed rule would require covered financial institutions to collect
                and report certain data on applications for covered credit transactions
                for small businesses, including minority-owned and women-owned small
                businesses. The data to be collected and reported would include a
                number of statutorily required data fields regarding small business
                applications, as well as several additional data fields that the Bureau
                preliminarily determines would help fulfill the purposes of section
                1071. The Bureau would make available to the public, annually on the
                Bureau's website, the data submitted to it by financial institutions,
                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.
                 As described above, the Dodd-Frank Act amended ECOA by adding
                section 1071, which directs the Bureau to adopt regulations governing
                the collection and reporting of small business lending data. ECOA
                section 704B(g)(1) grants the Bureau general rulemaking authority,
                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. 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. In addition, section 703(a) of ECOA authorizes the
                Bureau to prescribe regulations to carry out the purposes of ECOA.
                 Much of section 1071 establishes requirements or obligations for
                financial institutions that the Bureau would implement in this proposed
                rule. ECOA section 704B(e)(2) requires that the information compiled
                and maintained be itemized in order to clearly and conspicuously
                disclose an enumerated list of data points. Section 704B(e)(2)(H)
                requires financial institutions to collect and report any additional
                data that the Bureau determines would aid in fulfilling the purposes of
                section 1071. Other parts of section 1071 require the Bureau to adopt
                regulations to implement certain requirements, including how financial
                institutions must compile and maintain data pursuant to section 1071,
                and the form of information made available by financial institutions to
                the public and the form and manner that the Bureau itself should make
                1071 data available to the public generally. Additional section 1071
                provisions give the Bureau the discretionary authority to 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, and to compile and aggregate 1071 data for its own
                use, as well as to make public such compilations of aggregate data. The
                legal basis for the proposed rule is discussed in detail in the legal
                authority analysis in part IV and in the section-by-section analyses in
                part V above.
                3. Description of and, Where Feasible, Provision of an Estimate of the
                Number of Small Entities to Which the Proposed Rule Will Apply
                 As discussed in the SBREFA Panel Report,\939\ for the purposes of
                assessing the impacts of the proposed rule on small entities, ``small
                entities'' is defined in the RFA to include small businesses, small
                nonprofit organizations, and small government jurisdictions.\940\ A
                ``small business'' is determined by application of SBA regulations in
                reference to the North American Industry Classification System (NAICS)
                classification and size standards.\941\ Under such standards, the
                Bureau identified several categories of small entities that may be
                subject to the proposed provisions: Depository institutions; fintech
                lenders and MCA providers; commercial finance companies; nondepository
                CDFIs; nondepository lenders of other 5+ unit mortgages; Farm Credit
                System members; and governmental lending entities. The NAICS codes
                covered by these categories are described below.
                ---------------------------------------------------------------------------
                 \939\ See SBREFA Panel Report at 41-42.
                 \940\ 5 U.S.C. 601(6).
                 \941\ The current SBA size standards are found on SBA's website,
                Small Bus. Admin., Table of size standards (Aug. 19, 2019), http://www.sba.gov/content/table-small-businesssize-standards.
                ---------------------------------------------------------------------------
                 The following table provides the Bureau's estimate of the number
                and types of entities that may be affected by the proposed rule:
                [[Page 56569]]
                [GRAPHIC] [TIFF OMITTED] TP08OC21.016
                 The following paragraphs describe the categories of entities that
                the Bureau expects would be affected by the proposed rule.
                 Depository institutions (banks and credit unions): The Bureau
                estimates that there are about 4,100 banks, savings associations, and
                credit unions engaged in small business lending that originate enough
                covered transactions to be covered by the proposed rule.\942\ These
                companies potentially fall into four different industry categories,
                including ``Commercial Banking'' (NAICS 522110), ``Savings
                Institutions'' (NAICS 522120), ``Credit Unions'' (NAICS 522130), and
                ``Credit Card Issuing'' (NAICS 522210). All of these industries have a
                size standard threshold of $600 million in assets. The Bureau estimates
                that about 2,700 of these institutions are small entities according to
                this threshold. See part VII.D above for more detail on how the Bureau
                arrived at these estimates.
                ---------------------------------------------------------------------------
                 \942\ The Bureau notes that the category of depository
                institutions also includes CDFIs that are also depository
                institutions.
                ---------------------------------------------------------------------------
                 Fintech lenders and MCA providers: As discussed in more detail in
                part II.D above, the Bureau estimates that there are about 130 fintech
                lenders and MCA providers engaged in small business lending that
                originate enough covered transactions to be covered by the proposed
                rule. These companies span multiple industries, including ``All Other
                Nondepository Credit Intermediation'' (NAICS 522298), ``Consumer
                Lending'' (NAICS 522291), ``Financial Transactions, Processing,
                Reserve, and Clearinghouse Activities'' (NAICS 522320), and ``Data
                Processing, Housing and Related Services'' (NAICS 518210). All of these
                industries have a size standard threshold of $35 million in sales
                (NAICS 518210) or $41.5 million in sales (all other NAICS). The
                [[Page 56570]]
                Bureau assumes that about 90 percent, or 117, of these entities are
                small according to these size standards.
                 Commercial finance companies: As discussed in more detail in part
                II.D above, the Bureau estimates that there are about 300 commercial
                finance companies, including captive and independent financing, engaged
                in small business lending that originate enough covered credit
                transactions to be covered by the proposed rule. These companies span
                multiple industries, including ``Software Publishers'' (NAICS 511210),
                ``Commercial Air, Rail, and Water Transportation Equipment Rental and
                Leasing'' (NAICS 532411), ``Other Commercial and Industrial Machinery
                and Equipment Rental and Leasing'' (NAICS 532490), ``Sales financing''
                (NAICS 522220) and ``Consumer Lending'' (NAICS 522291). These
                industries have size standard thresholds of $41.5 million in sales
                (NAICS 511210 and 522220) or $35 million in sales (NAICS 532411,
                532490, and 522291). The Bureau assumes that about 90 percent, or 270,
                commercial finance companies are small according to these size
                standards.
                 Nondepository CDFIs: As discussed in more detail in part II.D
                above, the Bureau estimates that there are 240 nondepository CDFIs
                engaged in small business lending that originate enough covered credit
                transactions to be covered by the proposed rule. CDFIs generally fall
                into ``Activities Related to Credit Intermediation (Including Loan
                Brokers)'' (NAICS 522390), ``Miscellaneous Intermediation'' (NAICS
                523910), ``Civic and Social Organizations'' (NAICS 813410), and
                ``Mortgage and Nonmortgage Loan Brokers'' (NAICS 522310). These
                industries have size standard thresholds of $8 million in sales (NAICS
                522310, 813410), $22 million in sales (NAICS 522390), and $41.5 million
                in sales (NAICS 523910). The Bureau assumes that about 95 percent, or
                228, nondepository CDFIs are small entities.
                 Nondepository lenders of other 5+ unit mortgages: As discussed in
                more detail in part II.D above, the Bureau estimates that there are
                about 50 nondepository mortgage lenders engaged in small business
                lending that originate enough covered credit transactions to be covered
                by the proposed rule. These institutions are in either ``Real estate
                credit'' (NAICS 522292) or ``Mortgage and Nonmortgage Loan Brokers''
                (NAICS 522310). These industries both have a size standard threshold of
                $41.5 million. The Bureau estimates that about 90 percent, or 45,
                nondepository mortgage lenders are small entities.
                 Farm Credit System members: The Bureau estimates that there are 72
                members of the Farm Credit System (banks and associations) that are
                engaged in small business lending and that originate enough covered
                credit transactions to be covered by the proposed rule.\943\ These
                institutions are in the ``All Other Nondepository Credit
                Intermediation'' (NAICS 522298) industry. The size standard for this
                industry is $41.5 million in sales. The Bureau estimates that 18
                members of the Farm Credit System are small entities.
                ---------------------------------------------------------------------------
                 \943\ 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/report.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.
                ---------------------------------------------------------------------------
                 Governmental lending entities: As discussed in more detail in part
                II.D above, the Bureau estimates that there are about 100 governmental
                lending entities engaged in small business lending that originate
                enough covered credit transactions to be covered by the proposed rule.
                ``Small governmental jurisdictions'' are the governments of cities,
                counties, towns, townships, villages, school districts, or special
                districts, with a population of less than fifty thousand. The Bureau
                assumes that none of the governmental lending entities covered by the
                proposed rule are considered small.
                4. Projected Reporting, Recordkeeping, and Other Compliance
                Requirements of the Proposed Rule, Including an Estimate of the Classes
                of Small Entities Which Will Be Subject to the Requirement and the Type
                of Professional Skills Necessary for the Preparation of the Report
                 Reporting requirements. ECOA section 704B(f)(1) provides that
                ``[t]he data required to be compiled and maintained under [section
                1071] by any financial institution shall be submitted annually to the
                Bureau.'' Section 1071 requires financial institutions to collect and
                report information regarding any application for ``credit'' made by
                women-owned, minority-owned, and small businesses. The Bureau is also
                proposing that the following transactions are not covered by the rule:
                leases, factoring, consumer-designated credit, credit secured by
                certain properties, trade credit, public utilities credit, securities
                credit, and incidental credit.
                 Under the proposed rule, financial institutions would be required
                to report data on small business credit applications if they originated
                at least 25 covered transactions in each of the previous two calendar
                years. The Bureau is proposing that 1071 data collection be done on a
                calendar-year basis and submitted to the Bureau by a specified time
                after the end of each calendar year. The section-by-section analyses of
                the proposed rule in part V above discuss the required data points and
                the scope of the proposed rule in greater detail. More information is
                also available in section 3 of the SBREFA Panel Report.
                 Recordkeeping requirements. ECOA section 704B(f)(2)(A) requires
                that information compiled and maintained under section 1071 be
                ``retained for not less than 3 years after the date of preparation.''
                The Bureau is proposing that financial institutions retain 1071 data
                for at least three years after it is submitted to the Bureau. Further,
                704B(f)(2) generally requires that the information compiled and
                maintained by financial institutions, and submitted annually to the
                Bureau, be made available to the public. Publication of these data
                would fill existing gaps in the public's general understanding of the
                small business lending environment and help identify potential fair
                lending concerns regarding small businesses as well as the needs and
                opportunities for both business and community development. In
                accordance with 704B(e)(3), the Bureau is also proposing a prohibition
                on including certain personally identifiable information about any
                individuals associated with small business applicants in the data that
                a financial institution is required to compile, maintain, and report to
                the Bureau, other than information specifically required to be
                collected and reported (such as the race, sex, and ethnicity of
                principal owners). Financial institutions must, unless subject to an
                exception, limit the access of a certain officers and employees to
                applicants' responses to the inquiries regarding women-owned and
                minority-owned business status, as well as the race, sex, and ethnicity
                of principal owners. In addition, applicants' responses to the
                inquiries regarding women-owned and minority-owned business status, as
                well as the race, sex, and ethnicity of principal owners, must be
                maintained separately from the application and accompanying
                information.
                 Costs to small entities. The Bureau expects that the proposed rule
                may impose one-time and ongoing costs on small-entity providers of
                credit to small businesses. The Bureau has preliminarily identified
                eight categories of one-time costs that make up the components
                necessary for a financial
                [[Page 56571]]
                institution to develop the infrastructure to collect and report data
                required by the eventual 1071 rule. Those categories are preparation/
                planning; updating computer systems; testing/validating systems;
                developing forms/applications; training staff and third parties (such
                as dealers and brokers); developing policies/procedures; legal/
                compliance review; and post-implementation review of compliance
                policies and procedures. The Bureau conducted a survey regarding
                potential one-time implementation costs for section 1071 compliance
                targeted at financial institutions who extend small business credit.
                The Bureau used the results of this survey to estimate the one-time
                costs for financial institutions covered by the proposed rule using the
                methodology described in part VII.E.1 above. The Bureau estimates that
                depository institutions with the lowest level of complexity in
                compliance operations (i.e., Type A DIs) would incur one-time costs of
                $58,400. The Bureau estimates that depository institutions with a
                middle level of complexity in compliance operations (i.e., Type B DIs)
                would incur one-time costs of $44,500. The Bureau estimates that
                depository institutions with the highest level of complexity in
                compliance operations (i.e., Type C DIs) would incur one-time costs of
                $75,700. Finally, the Bureau estimates that Non-DIs would incur one-
                time costs of $95,200.
                 The Bureau estimates that the overall market impact of one-time
                costs for small depository institutions will be between $143,000,000
                and $153,000,000.\944\ The Bureau estimates that the overall market
                impact of one-time costs for Non-DIs will be $63,000,000.
                ---------------------------------------------------------------------------
                 \944\ The Bureau notes that the variation in this range comes
                primarily from the uncertainty in the number of originations made by
                small banks and savings associations. The range does not fully
                account for the uncertainty associated with estimates of the one-
                time costs for each type of institution.
                ---------------------------------------------------------------------------
                 Adapting ongoing cost methodology from previous HMDA rulemaking
                efforts, the Bureau identified 15 specific data collection and
                reporting activities that would impose ongoing costs to financial
                institutions covered by the rule.\945\ The Bureau estimated that
                financial institutions with the lowest level of complexity in
                compliance operations (i.e. Type A FIs) would incur around $7,386 in
                total annual ongoing costs, or about $74 in total cost per application
                processed (assuming a representative 100 applications per year). For
                financial institutions of this type, the largest drivers of the ongoing
                costs are activities that require employee time to complete. Activities
                like transcribing data, transferring data to the data management
                software, standard edits and internal checks, and training all require
                loan officer time. The Bureau estimates that financial institutions
                with a middle level of complexity in compliance operations (i.e. Type B
                FIs), which is somewhat automated, would incur approximately $35,476 in
                additional ongoing costs per year, or around $89 per application
                (assuming a representative 400 applications per year). The largest
                components of this ongoing cost are the expenses of the small business
                application management software and geocoding software (in the form of
                an annual software subscription fee) and the external audit of the
                data. The Bureau estimates that financial institutions with the highest
                level of complexity in compliance operations (i.e. Type C FIs), which
                is significantly automated, would incur approximately $243,266 in
                additional ongoing costs per year, or around $41 per application
                (assuming a representative 6,000 applications per year). The largest
                components of this ongoing cost are the cost of an internal audit,
                transcribing data, and annual edits and internal checks.
                ---------------------------------------------------------------------------
                 \945\ The Bureau applied the same methodology for the ongoing
                costs for small entities as that found in part VII.E.2 above.
                ---------------------------------------------------------------------------
                 The Bureau estimates that the overall market impact of ongoing
                costs for small entities will be between $112,000,000 and $126,000,000
                per year.
                 Estimate of the classes of small entities that will be subject to
                the requirement and the type of professional skills necessary for the
                preparation of the report or record. Section 603(b)(4) of the RFA also
                requires an estimate of the type of professional skills necessary for
                the preparation of the reports or records. The recordkeeping and
                compliance requirements of the proposed rule that would affect small
                entities are summarized above. Based on outreach with financial
                institutions, vendors, and governmental agency representatives, the
                Bureau classified the operational activities that financial
                institutions would likely use for Section 1071 data collection and
                reporting into 15 operational ``tasks'' which can be further grouped
                into four ``primary tasks.'' These are:
                 1. Data collection: Transcribing data, resolving reportability
                questions, and transferring data to a 1071 data management system.
                 2. Reporting and resubmission: Geocoding, standard annual edit and
                internal checks, researching questions, resolving question responses,
                checking post-submission edits, filing post- submission documents, and
                using vendor data management software.
                 3. Compliance and internal audits: Training, internal audits, and
                external audits.
                 4. Section 1071-related exams: Exam preparation and exam
                assistance.
                 All these tasks are related to the preparation of reports or
                records and most of them are performed by compliance personnel in the
                compliance department of financial institutions. For some financial
                institutions, however, the data intake and transcribing stage could
                involve loan officers or processors whose primary function is to
                evaluate or process loan applications. For example, at some financial
                institutions the loan officers would take in information from the
                applicant to complete the application and input that information into
                the reporting system. However, the Bureau believes that such roles
                generally do not require any additional professional skills related to
                recordkeeping or other compliance requirements of this proposed rule
                that are not otherwise required during the ordinary course of business
                for small entities.
                 The type of professional skills required for compliance varies
                depending on the particular task involved. For example, data
                transcribing requires data entry skills. Transferring data to a data
                entry system and using vendor data management software requires
                knowledge of computer systems and the ability to use them. Researching
                and resolving reportability questions requires a more complex
                understanding of the regulatory requirements and the details of the
                relevant line of business. Geocoding requires skills in using the
                geocoding software, web systems, or, in cases where geocoding is
                difficult, knowledge of the local area in which the property is
                located. Standard annual editing, internal checks, and post-submission
                editing require knowledge of the relevant data systems, data formats,
                and section 1071 regulatory requirements in addition to skills in
                quality control and assurance. Filing post-submission documents
                requires skills in information creation, dissemination, and
                communication. Training, internal audits, and external audits require
                communications skills, educational skills, and regulatory knowledge.
                Section 1071-related exam preparation and exam assistance involve
                knowledge of regulatory requirements, the relevant line of business,
                and the relevant data systems.
                [[Page 56572]]
                 The Standard Occupational Classification (SOC) code has compliance
                officers listed under code 13-1041. The Bureau believes that most of
                the skills required for preparation of the reports or records related
                to this proposal are the skills required for job functions performed in
                this occupation. However, the Bureau recognizes that under this general
                occupational code there is a high level of heterogeneity in the type of
                skills required as well as the corresponding labor costs incurred by
                the financial institutions performing these functions. During the
                SBREFA process, some SERs noted that, for instance, high-level
                corporate officers such as CEOs and senior vice presidents could be
                directly involved in some regulatory tasks. As such, the Bureau seeks
                comment regarding the skills required for the preparation of the
                records related to this proposed rule.
                 The Bureau acknowledges the possibility that certain aspects of the
                proposed rule may require some small entities to hire additional
                compliance staff. The Bureau has no evidence that such additional staff
                will possess a qualitatively different set of professional skills than
                small entity staff employed currently for compliance purposes. It is
                possible, however, that compliance with the proposed rule may emphasize
                certain skills. For example, new data points may increase demand for
                skills involved in researching questions, standard annual editing, and
                post-submission editing. Nevertheless, the Bureau believes that
                compliance would still involve the general set of skills identified
                above. The recordkeeping and reporting requirements associated with
                this proposal would also involve skills for information technology
                system development, integration, and maintenance. Financial
                institutions required to report data under HMDA often use data
                management systems called HMDA Management Systems (HMS) for existing
                regulatory purposes. A similar software for reporting the data required
                under the proposed rule could be developed by the institution
                internally or purchased from a third-party vendor. It is possible that
                other systems used by financial institutions, such as loan origination
                systems, might also need to be upgraded to capture new data fields
                required to be collected and reported under the proposed rule. The
                professional skills required for this one-time upgrade would be related
                to software development, testing, system engineering, information
                technology project management, budgeting and operation.
                5. Identification, to the Extent Practicable, of All Relevant Federal
                Rules Which May Duplicate, Overlap, or Conflict With the Proposed Rule
                 The proposed rule contains requirements related to the collection
                and reporting of small business lending information by certain
                financial institutions and publication by the Bureau. In its SBREFA
                Outline, the Bureau identified certain other Federal statutes and
                regulations that relate in some fashion to these areas and has
                considered the extent to which they may duplicate, overlap, or conflict
                with this proposal.\946\ The SBREFA Panel Report included an updated
                list of these Federal statutes and regulations, as informed by SER
                feedback.\947\ Each of the statutes and regulations identified in the
                SBREFA Panel Report is discussed below.
                ---------------------------------------------------------------------------
                 \946\ Rules are duplicative or overlapping if they are based on
                the same or similar reasons for the regulation, the same or similar
                regulatory goals, and if they regulate the same classes of industry.
                Rules are conflicting when they impose two conflicting regulatory
                requirements on the same classes of industry.
                 \947\ See SBREFA Panel Report at app. C.
                ---------------------------------------------------------------------------
                 ECOA, implemented by the Bureau's Regulation B (12 CFR part 1002),
                prohibits creditors from discriminating in any aspect of a credit
                transaction, including a business-purpose transaction, on the basis of
                race, color, religion, national origin, sex (including sexual
                orientation and gender identity), marital status, age (if the applicant
                is old enough to enter into a contract), receipt of income from any
                public assistance program, or the exercise in good faith of a right
                under the Consumer Credit Protection Act. The Bureau has certain
                oversight, enforcement, and supervisory authority over ECOA
                requirements and has rulemaking authority under the statute.
                 Regulation B generally prohibits creditors from inquiring about an
                applicant's race, color, religion, national origin, or sex (including
                sexual orientation and gender identity), with limited exceptions,
                including if it is required by law. Regulation B requires creditors to
                request information about the race, ethnicity, sex, marital status, and
                age of applicants for certain dwelling-secured loans and to retain that
                information for certain periods. Regulation B requires this data
                collection for credit primarily for the purchase or refinancing of a
                dwelling occupied or to be occupied by the applicant as a principal
                residence, where the extension of credit will be secured by the
                dwelling, and requires the data to be maintained by the creditor for 25
                months for purposes of monitoring and enforcing compliance with ECOA/
                Regulation B and other laws. Section 1071 of the Dodd-Frank Act amended
                ECOA to require financial institutions to compile, maintain, and submit
                to the Bureau certain data on credit applications by women-owned,
                minority-owned, and small businesses.
                 The Small Business Act,\948\ administered through the SBA, defines
                a small business concern as a business that is ``independently owned
                and operated and which is not dominant in its field of operation'' and
                empowers the Administrator to prescribe detailed size standards by
                which a business concern may be categorized as a small business. The
                SBA has adopted more than one thousand industry-specific size
                standards, classified by 6-digit NAICS codes, to determine whether a
                business concern is ``small.'' In addition, the Small Business Act
                authorizes loans for qualified small business concerns for purposes of
                plant acquisition, construction, conversion, or expansion, including
                the acquisition of land, material, supplies, equipment, and working
                capital. The SBA sets the guidelines that govern the ``7(a) loan
                program,'' determining which businesses financial institutions may lend
                to through the program and the type of loans they can provide. The
                Bureau's proposed rule would include reporting on SBA lending and
                guarantee programs.
                ---------------------------------------------------------------------------
                 \948\ 15 U.S.C. 631 et seq.
                ---------------------------------------------------------------------------
                 The CRA, implemented through regulations issued by the OCC, the
                Board, and the FDIC, requires some institutions to collect, maintain,
                and report certain data about small business, farm, and consumer
                lending to ensure they are serving their communities. The purpose of
                the CRA is to encourage institutions to help meet the credit needs of
                the local communities in which they do business, including low- and
                moderate-income neighborhoods. The Bureau has been working with the CRA
                regulatory agencies to ensure that a 1071 rule and the CRA do not
                conflict and that 1071 data can be used as part of the CRA compliance
                process.
                 The Riegle Community Development and Regulatory Improvement Act of
                1994\949\ authorized the Community Development Financial Institution
                Fund (CDFI Fund). The Department of the Treasury administers the
                regulations that govern the CDFI Fund. A certified CDFI is a
                specialized financial institution that works in markets that are
                underserved by traditional financial institutions, including regulated
                institutions such as community
                [[Page 56573]]
                development banks and credit unions, and non-regulated institutions
                such as loan and venture capital funds. The CDFI program includes an
                annual mandatory Certification and Data Collection Report. The Bureau
                is proposing to require that financial institutions reporting 1071 data
                identify if they are CDFIs.
                ---------------------------------------------------------------------------
                 \949\ 12 U.S.C. 4701 et seq.
                ---------------------------------------------------------------------------
                 HMDA, implemented by the Bureau's Regulation C (12 CFR part 1003),
                requires lenders who meet certain coverage tests to collect, report,
                and disclose detailed information to their Federal supervisory agencies
                about mortgage applications and loans at the transaction level. The
                HMDA data are a valuable source 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
                proposed to be covered by section 1071 for certain credit applications
                secured by dwellings.
                 The Currency and Foreign Transactions Reporting Act,\950\ as
                amended by the USA PATRIOT Act,\951\ and commonly referred to as the
                Bank Secrecy Act, authorized the Financial Crimes Enforcement Network
                (FinCEN), a bureau of the Department of the Treasury, to combat money
                laundering and promote financial security. FinCEN regulations require
                covered financial institutions to establish and maintain written
                procedures that are reasonably designed to identify and verify
                beneficial owners of legal entity customers, which is sometimes called
                the customer due diligence (CDD) rule.
                ---------------------------------------------------------------------------
                 \950\ Public Law 91-508, tit. II, 84 Stat. 1118 (1970).
                 \951\ Public Law 107-56, 115 Stat. 272 (2001).
                ---------------------------------------------------------------------------
                 The Federal Credit Union Act, implemented by the NCUA (12 CFR part
                1756), requires Federal credit unions to make financial reports as
                specified by the agency. The NCUA requires quarterly reports of the
                total number of outstanding loans, total outstanding loan balance,
                total number of loans granted or purchased year-to-date, total amount
                granted or purchased year-to-date for commercial loans to members, not
                including loans with original amounts less than $50,000. The NCUA also
                requires quarterly reports of the total number and total outstanding
                balance (including the guaranteed portion) of loans originated under an
                SBA loan program.
                 The Federal Deposit Insurance Act,\952\ implemented by the FDIC (12
                CFR part 304), requires insured banks and savings associations to file
                Call Reports in accordance with applicable instructions. These
                instructions require quarterly reports of loans to small businesses,
                defined as loans for commercial and industrial purposes to sole
                proprietorships, partnerships, corporations, and other business
                enterprises and loans secured by non-farm non-residential properties
                with original amounts of $1 million or less. In accordance with
                amendments by the Federal Deposit Insurance Corporation Improvement Act
                of 1991,\953\ the instructions require quarterly reports of loans to
                small farms, defined as loans to finance agricultural production, other
                loans to farmers, and loans secured by farmland (including farm
                residential and other improvements) with original amounts of $500,000
                or less. The Bureau intends to work with the FDIC to ensure that a 1071
                rule and the Federal Deposit Insurance Act do not conflict.
                ---------------------------------------------------------------------------
                 \952\ 12 U.S.C. 1811 et seq.
                 \953\ Public Law 102-242, 105 Stat. 2236 (1991).
                ---------------------------------------------------------------------------
                 The Bureau requests comment to identify any additional such Federal
                statutes or regulations that impose duplicative, overlapping, or
                conflicting requirements on financial institutions and potential
                changes to the proposed rules in light of duplicative, overlapping, or
                conflicting requirements.
                6. Description of Any Significant Alternatives to the Proposed Rule
                Which Accomplish the Stated Objectives of Applicable Statutes and
                Minimize Any Significant Economic Impact of the Proposed Rule on Small
                Entities
                 In drafting this proposed rule, the Bureau considered multiple
                financial institution reporting thresholds. In particular, the Bureau
                considered whether to exempt financial institutions with fewer than 50
                or 100 originations of covered credit transactions for small businesses
                in each of the two preceding calendar years, instead of 25 originations
                as proposed. The Bureau also considered whether to exempt depository
                institutions with assets under $100 million or $200 million from
                section 1071's data collection and reporting requirements. The Bureau
                understands that some burden reduction may result from a threshold
                higher than 25 loans. However, the Bureau is concerned that a higher
                threshold would result in the elimination of data that are important in
                fulfilling the purposes of section 1071. Therefore, the Bureau is
                proposing an originations threshold of at least 25 covered transactions
                in each of the previous two calendar years.
                 The following table shows the estimated impact that different
                reporting thresholds the Bureau considered would have had on financial
                institution coverage. For the purposes of considering the asset-based
                threshold alternatives, the Bureau estimates how institutional coverage
                and costs would be different if the Bureau required a 25-origination
                threshold in addition to an asset-based threshold for depository
                institutions. For the asset-based threshold alternatives, 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 than 25 originations in both 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.
                [[Page 56574]]
                [GRAPHIC] [TIFF OMITTED] TP08OC21.017
                 Further, the Bureau is proposing a number of discretionary data
                points (i.e., data points that are not expressly listed in section 1071
                but that the Bureau is proposing to add pursuant to its authority under
                ECOA section 704B(e)(2)(H)) in this rule. The Bureau concluded that
                seven discretionary data points (application channel, application
                recipient, pricing, number of principal owners, NAICS code, number of
                workers, and time in business) would help the data collection fulfill
                the purposes of section 1071.
                 During the SBREFA process, SERs provided detailed feedback on the
                discretionary data points that the Bureau is considering.\954\ 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. Other SERs favored or opposed the
                inclusion of some or all of the individual discretionary data points
                under consideration during the SBREFA process.
                ---------------------------------------------------------------------------
                 \954\ The SER feedback discussed herein can be found in the
                SBREFA Panel Report at 30-32.
                ---------------------------------------------------------------------------
                 The Bureau understands that discretionary data points may introduce
                additional burden to small entities. However, the Bureau has
                preliminarily determined that these data points would aid in fulfilling
                the statutory purposes of section 1071--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. The
                Bureau seeks comment on the likely impact of the proposed rule on the
                compliance cost to small entities.
                7. Discussion of Impact on Cost of Credit for Small Entities
                 Three types of costs (one-time, fixed ongoing, and variable
                ongoing) have the potential to influence the price and availability of
                credit to small businesses. In a competitive marketplace, standard
                microeconomics suggests that lenders will extend loans up to the point
                at which the value of granting an additional loan is equal to the
                additional cost associated with the financial institution providing the
                loan. One-time costs and fixed ongoing costs affect the overall
                profitability of a lender's loan portfolio but do not affect the
                profitability of extending an additional loan. Variable ongoing costs,
                however, affect the profitability of each additional loan and will
                influence the number of loans a lender provides. Based on the Bureau's
                available evidence, it expects that the variable ongoing costs to
                comply with the proposed rule will be passed on in full to small
                business credit applicants in the form of higher prices or fees to
                small businesses.
                 During the SBREFA process, the Bureau asked SERs how they would
                respond to the cost of complying with the proposals under
                consideration.\955\ One nondepository SER did indicate that smaller
                firms in their industry may stop participating if one-time costs are
                too high, particularly if small business lending is a secondary aspect
                of their business model.\956\ Another nondepository SER indicated that
                significantly increasing the time between application and decision
                could occur due to the proposed requirements, which they said would
                threaten their ability to compete with other lenders. When asked if
                they expected the costs of the eventual 1071 rule to be passed on in
                the form of higher rates and fees, a number of SERs (from banks, credit
                unions, and nondepositories) indicated that they expected to do so at
                their institutions. However, a number of other SERs indicated that they
                did not believe an eventual 1071 rule would result in higher rates or
                fees. Several depository institution SERs said that they would be able
                to absorb the costs in their operating budgets as they have with
                previous regulations.
                ---------------------------------------------------------------------------
                 \955\ SBREFA Outline at 50.
                 \956\ The SER feedback discussed in this section-by-section
                analysis can be found in the SBREFA Panel Report at 40.
                ---------------------------------------------------------------------------
                 In the One-Time Cost Survey, the Bureau asked respondents to rank a
                list of potential actions they may take in response to the compliance
                costs of implementing section 1071.\957\ Respondents ranked the
                following list: ``Raise rates or fees on small business products'';
                ``Raise rates/fees on other credit products''; ``Accept lower
                profits''; ``Exit some geographic markets''; ``Tighten underwriting
                standards''; ``Offer fewer or less complex products''; ``No longer
                offer small business credit products''; or ``Other'' with two write-in
                options. Respondents ranked these options from ``1'' to ``9''
                indicating their most to least likely responses. Respondents also had
                the opportunity to write in their own responses. Consistent with
                economic
                [[Page 56575]]
                theory, respondents reported that they would be most likely to raise
                rates or fees on small business products and other credit products. On
                average, respondents reported that they would be least likely to exit
                some geographic markets or cease offering small business credit
                products. Accordingly, the Bureau expects the likely impact of an
                eventual 1071 rule on the cost of credit to small entities to be higher
                rates and fees because financial institutions pass on the variable
                ongoing costs of the required data collection. The Bureau estimates
                that $28, $24, and $7 in variable costs would be passed through per
                application to Type A, B, and C FIs, respectively. To put these values
                in context, the Bureau estimates that the per application net income is
                in a range of $53,000-$60,500; $25,000-$28,500; and $79,000-$89,000 for
                banks and savings associations of Types A, B, and C, respectively.
                ---------------------------------------------------------------------------
                 \957\ See One-Time Cost Survey at 11.
                ---------------------------------------------------------------------------
                IX. Paperwork Reduction Act
                 Under the Paperwork Reduction Act of 1995 (PRA),\958\ Federal
                agencies are generally required to seek approval from the Office of
                Management and Budget (OMB) for information collection requirements
                prior to implementation. Under the PRA, the Bureau may not conduct nor
                sponsor, and, notwithstanding any other provision of law, a person is
                not required to respond to, an information collection unless the
                information collection displays a valid control number assigned by OMB.
                ---------------------------------------------------------------------------
                 \958\ 44 U.S.C. 3501 et seq.
                ---------------------------------------------------------------------------
                 As part of its continuing effort to reduce paperwork and respondent
                burden, the Bureau conducts a preclearance consultation program to
                provide the general public and Federal agencies with an opportunity to
                comment on the information collection requirements in accordance with
                the PRA. This helps ensure that the public understands the Bureau's
                requirements or instructions, respondents can provide the requested
                data in the desired format, reporting burden (time and financial
                resources) is minimized, information collection instruments are clearly
                understood, and the Bureau can properly assess the impact of
                information collection requirements on respondents.
                 The proposed rule would amend 12 CFR part 1002 (Regulation B),
                which implements the ECOA. The Bureau's OMB control number for
                Regulation B is 3170-0013. This proposed rule would revise the
                information collection requirements contained in Regulation B that OMB
                has approved under that OMB control number.
                 Under the proposal, the Bureau would add four information
                collection requirements to Regulation B:
                 1. Compilation of reportable data (proposed Sec. 1002.107),
                including a notice requirement (in proposed Sec. 1002.107(a)(18)
                through (20)).
                 2. Reporting data to the Bureau (proposed Sec. 1002.109).
                 3. Firewall notice requirement (proposed Sec. 1002.108(d)).
                 4. Recordkeeping (proposed Sec. 1002.111).
                 The information collection requirements in this proposed rule would
                be mandatory. Certain data fields would be modified or deleted by the
                Bureau, in its discretion, to advance a privacy interest before the
                1071 data are made available to the public (as permitted by section
                1071 and the Bureau's proposed rule). The data that are not modified or
                deleted would be made available to the public and are not considered
                confidential. The rest of the data would be considered confidential if
                the information:
                 Identifies any natural persons who might not be applicants
                (e.g., owners of a business where a legal entity is the applicant); or
                 Implicates the privacy interests of financial
                institutions.
                 The collections of information contained in this proposed rule, and
                identified as such, have been submitted to OMB for review under section
                3507(d) of the PRA. A complete description of the information
                collection requirements (including the burden estimate methods) is
                provided in the information collection request (ICR) that the Bureau
                has submitted to OMB under the requirements of the PRA. Please send
                your comments to the Office of Information and Regulatory Affairs, OMB,
                Attention: Desk Officer for the Bureau of Consumer Financial
                Protection. Send these comments by email to [email protected]
                or by fax to 202-395-6974. If you wish to share your comments with the
                Bureau, please send a copy of these comments as described in the
                Addresses section above. The ICR submitted to OMB requesting approval
                under the PRA for the information collection requirements contained
                herein is available at www.regulations.gov as well as on OMB's public-
                facing docket at www.reginfo.gov.
                 Title of Collection: Regulation B: Equal Credit Opportunity Act.
                 OMB Control Number: 3170-0013.
                 Type of Review: Revision of a currently approved collection.
                 Affected Public: Private Sector; Federal and State Governments.
                 Estimated Number of Respondents: 188,800.
                 Estimated Total Annual Burden Hours: 5,688,000.
                 Comments are invited on: (a) Whether the collection of information
                is necessary for the proper performance of the functions of the Bureau,
                including whether the information will have practical utility; (b) the
                accuracy of the Bureau's estimate of the burden of the collection of
                information, including the validity of the methods and the assumptions
                used; (c) ways to enhance the quality, utility, and clarity of the
                information to be collected; and (d) ways to minimize the burden of the
                collection of information on respondents, including through the use of
                automated collection techniques or other forms of information
                technology. Comments submitted in response to this proposal will be
                summarized and/or included in the request for OMB approval. All
                comments will become a matter of public record.
                 If applicable, the notice of final rule will display the control
                number assigned by OMB to any information collection requirements
                proposed herein and adopted in the final rule.
                List of Subjects in 12 CFR Part 1002
                 Banks, Banking, Civil rights, Consumer protection, Credit, Credit
                unions, Marital status discrimination, National banks, Penalties.
                Authority and Issuance
                 For the reasons set forth in the preamble, the Bureau proposes to
                amend Regulation B, 12 CFR part 1002, as set forth below:
                PART 1002--EQUAL CREDIT OPPORTUNITY ACT (REGULATION B)
                0
                1. The authority citation for part 1002 is revised to read as follows:
                 Authority: 12 U.S.C. 5512, 5581; 15 U.S.C. 1691b. Subpart B is
                also issued under 15 U.S.C. 1691c-2.
                Subpart A--General
                0
                2. Sections 1002.1 through 1002.16 are designated as subpart A under
                the heading set forth above.
                0
                3. Section 1002.5 is amended by revising paragraph (a)(4) introductory
                text and adding paragraphs (a)(4)(vii) through (ix) to read as follows:
                Sec. 1002.5 Rules concerning requests for information.
                 (a) General rules--
                * * * * *
                 (4) Other permissible collection of information. Notwithstanding
                paragraph (b) of this section, a creditor may collect
                [[Page 56576]]
                information under the following circumstances provided that the
                creditor collects the information in compliance with appendices F and G
                to this part, or appendix B to 12 CFR part 1003, as applicable:
                * * * * *
                 (vii) A creditor that was required to report small business lending
                data pursuant to Sec. 1002.109 for any of the preceding five calendar
                years but is not currently a covered financial institution under Sec.
                1002.105(b) may collect information pursuant to subpart B of this part
                for a covered application as defined in 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 Sec. Sec.
                1002.107, 1002.108, 1002.111, 1002.112, and 1002.114 for that
                application.
                 (viii) A creditor that exceeded the loan-volume threshold in the
                first year of the two-year threshold period provided in Sec.
                1002.105(b) may, in the second year, collect information pursuant to
                subpart B of this part for a covered application as defined in 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 Sec. Sec. 1002.107, 1002.108, 1002.111, 1002.112, and
                1002.114 for that application.
                 (ix) A creditor that is not currently a covered financial
                institution under Sec. 1002.105(b), and is not otherwise a creditor to
                which Sec. 1002.5(a)(4)(vii) or (viii) applies, may collect
                information pursuant to subpart B of this part for a covered
                application as defined in 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 for a transaction if it complies with the
                requirements of subpart B as otherwise required for covered financial
                institutions pursuant to Sec. Sec. 1002.107 through 1002.112 and
                1002.114 for that application.
                * * * * *
                0
                4. Subpart B is added to read as follows:
                Subpart B--Small Business Lending Data Collection
                Sec. 1002.101 Authority, purpose, and scope.
                Sec. 1002.102 Definitions.
                Sec. 1002.103 Covered applications.
                Sec. 1002.104 Covered credit transactions and excluded
                transactions.
                Sec. 1002.105 Covered financial institutions and exempt
                institutions.
                Sec. 1002.106 Business and small business.
                Sec. 1002.107 Compilation of reportable data.
                Sec. 1002.108 Firewall.
                Sec. 1002.109 Reporting of data to the Bureau.
                Sec. 1002.110 Publication of data.
                Sec. 1002.111 Recordkeeping.
                Sec. 1002.112 Enforcement.
                Sec. 1002.113 Severability.
                Sec. 1002.114 Effective date, compliance date, and special
                transitional rules.
                Sec. 1002.101 Authority, purpose, and scope.
                 (a) Authority and scope. This subpart to Regulation B is issued by
                the Bureau pursuant to section 704B of the Equal Credit Opportunity Act
                (15 U.S.C. 1691c-2). Except as otherwise provided herein, this subpart
                Applies to covered financial institutions, as defined in Sec.
                1002.105(b), other than a person excluded from coverage of this part 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).
                 (b) Purpose. This subpart implements section 704B of the Equal
                Credit Opportunity Act, which is intended:
                 (i) To facilitate enforcement of fair lending laws; and
                 (ii) To enable communities, governmental entities, and creditors to
                identify business and community development needs and opportunities of
                women-owned, minority-owned, and small businesses.
                Sec. 1002.102 Definitions.
                 In this subpart:
                 (a) Affiliate means, with respect to a financial institution, 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 (12 U.S.C. 1841 et seq.). With respect to a business or an
                applicant, affiliate shall have the same meaning as in 13 CFR 121.103.
                 (b) Applicant means any person who requests or who has received an
                extension of business credit from a financial institution.
                 (c) Business is defined in Sec. 1002.106(a).
                 (d) Business credit shall have the same meaning as in Sec.
                1002.2(g).
                 (e) Closed-end credit transaction means an extension of credit that
                is not an open-end credit transaction under paragraph (n) of this
                section.
                 (f) Covered application is defined in Sec. 1002.103.
                 (g) Covered credit transaction is defined in Sec. 1002.104.
                 (h) Covered financial institution is defined in Sec. 1002.105(b).
                 (i) Credit shall have the same meaning as in Sec. 1002.2(j).
                 (j) Dwelling shall have the same meaning as in Regulation C, 12 CFR
                1003.2(f).
                 (k) Financial institution is defined in Sec. 1002.105(a).
                 (l) Minority 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.
                 (m) Minority-owned business means 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 losses
                accrue to one or more minority individuals.
                 (n) Open-end credit transaction means an open-end credit plan as
                defined in Regulation Z, 12 CFR 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).
                 (o) Principal owner means a natural person who directly owns 25
                percent or more of the equity interests of a business.
                 (p) Small business is defined in Sec. 1002.106(b).
                 (q) Small business lending application register or register means
                the data reported, or required to be reported, annually pursuant to
                Sec. 1002.109.
                 (r) State shall have the same meaning as in Sec. 1002.2(aa).
                 (s) Women-owned business means 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.
                Sec. 1002.103 Covered applications.
                 (a) Covered application. Except as provided in paragraph (b) of
                this section, covered application means 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.
                 (b) Circumstances that are not covered applications. 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.
                [[Page 56577]]
                 (2) Inquiries and prequalification requests.
                Sec. 1002.104 Covered credit transactions and excluded transactions.
                 (a) Covered credit transaction means an extension of business
                credit that is not an excluded transaction under paragraph (b) of this
                section.
                 (b) Excluded transactions. The requirements of this subpart do not
                apply to:
                 (1) Trade credit. 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.
                 (2) Public utilities credit. Public utilities credit as defined in
                Sec. 1002.3(a)(1).
                 (3) Securities credit. Securities credit as defined in Sec.
                1002.3(b)(1).
                 (4) Incidental credit. Incidental credit as defined in Sec.
                1002.3(c)(1), but without regard to whether the credit is consumer
                credit, as defined in Sec. 1002.2(h).
                Sec. 1002.105 Covered financial institutions and exempt institutions.
                 (a) Financial institution means any partnership, company,
                corporation, association (incorporated or unincorporated), trust,
                estate, cooperative organization, or other entity that engages in any
                financial activity.
                 (b) Covered financial institution means a financial institution
                that originated at least 25 covered credit transactions for small
                businesses in each of the two preceding calendar years. For purposes of
                this definition, if more than one financial institution was involved in
                the origination of a covered credit transaction, only the financial
                institution that made the credit decision approving the application
                shall count the origination for purposes of this paragraph (b).
                Sec. 1002.106 Business and small business.
                 (a) Business has the same meaning as the term ``business concern or
                concern'' in 13 CFR 121.105.
                 (b) Small business has 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. Notwithstanding the size standards set forth
                in 13 CFR 121.201, for purposes of this subpart, a business is a small
                business if and only if its gross annual revenue, as defined in Sec.
                1002.107(a)(14), for its preceding fiscal year is $5 million or less.
                Sec. 1002.107 Compilation of reportable data.
                 (a) Data format and itemization. A covered financial institution
                shall compile and maintain data regarding covered applications from
                small businesses. The data shall be compiled in the manner prescribed
                below and as explained in associated Official Interpretations and the
                Filing Instructions Guide for this subpart for the appropriate year.
                The data compiled shall include the items described in paragraphs
                (a)(1) through (21) of this section.
                 (1) Unique identifier. An alphanumeric identifier, starting with
                the legal entity identifier of the financial institution, unique within
                the financial institution to the specific covered application, and
                which can be used to identify and retrieve the specific file or files
                corresponding to the application for or extension of credit.
                 (2) Application date. The date the covered application was received
                by the financial institution or the date shown on a paper or electronic
                application form.
                 (3) Application method. The means by which the applicant submitted
                the covered application directly or indirectly to the financial
                institution.
                 (4) Application recipient. 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.
                 (5) Credit type. The following information regarding the type of
                credit applied for or originated:
                 (i) Credit product. The credit product.
                 (ii) Guarantees. 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.
                 (iii) Loan term. The length of the loan term, in months, if
                applicable.
                 (6) Credit purpose. The purpose or purposes of the credit applied
                for or originated.
                 (7) Amount applied for. The initial amount of credit or the initial
                credit limit requested by the applicant.
                 (8) Amount approved or originated. (i) For an application for a
                closed-end credit transaction that is approved but not accepted, the
                amount approved by the financial institution; or
                 (ii) For a closed-end credit transaction that is originated, the
                amount of credit originated; or
                 (iii) For an application for an open-end credit transaction that is
                originated or approved but not accepted, the amount of the credit limit
                approved.
                 (9) Action taken. 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.
                 (10) Action taken date. The date of the action taken by the
                financial institution.
                 (11) Denial reasons. For denied applications, the principal reason
                or reasons the financial institution denied the covered application.
                 (12) Pricing information. The following information regarding the
                pricing of a covered credit transaction that is originated or approved
                but not accepted, as applicable:
                 (i) Interest rate. (A) If the interest rate is fixed, the interest
                rate that is or would be applicable to the covered credit transaction;
                or
                 (B) If the interest rate is adjustable, the margin, index value,
                and index name that is or would be applicable to the covered credit
                transaction at origination;
                 (ii) Total origination charges. The total amount of all charges
                payable directly or indirectly by the applicant and imposed directly or
                indirectly by the financial institution at or before origination as an
                incident to or a condition of the extension of credit, expressed in
                dollars;
                 (iii) Broker fees. The total amount of all charges included in
                paragraph (a)(12)(ii) of this section that are fees paid by the
                applicant directly to a broker or to the financial institution for
                delivery to a broker, expressed in dollars;
                 (iv) Initial annual charges. The total amount of all non-interest
                charges that are scheduled to be imposed over the first annual period
                of the covered credit transaction, expressed in dollars;
                 (v) Additional cost for merchant cash advances or other sales-based
                financing. For a merchant cash advance or other sales-based financing
                transaction, the difference between the amount advanced and the amount
                to be repaid, expressed in dollars; and
                 (vi) Prepayment penalties. (A) Notwithstanding whether such a
                provision was in fact included, whether the financial institution could
                have included a charge to be imposed for paying all or part of the
                transaction's principal before the date on which the principal is due
                under the policies and procedures applicable to the covered credit
                transaction; and
                 (B) Notwithstanding the response to paragraph (a)(20)(iv)(A) of
                this section, whether the terms of the covered credit transaction do in
                fact include a charge imposed for paying all or part of the
                transaction's principal before the date on which the principal is due.
                 (13) Census tract. The census tract in which is located:
                [[Page 56578]]
                 (i) The address or location where the proceeds of the credit
                applied for or originated will be or would have been principally
                applied; or
                 (ii) If the information in paragraph (a)(13)(i) of this section is
                unknown, the address or location of the main office or headquarters of
                the applicant; or
                 (iii) If the information in both paragraphs (a)(13)(i) and (ii) of
                this section is unknown, another address or location associated with
                the applicant.
                 (iv) The financial institution shall also indicate which one of the
                three types of addresses or locations listed in paragraphs (a)(13)(i),
                (ii), or (iii) of this section the census tract is based on.
                 (14) Gross annual revenue. The gross annual revenue of the
                applicant for its preceding full fiscal year prior to when the
                information is collected.
                 (15) NAICS code. A 6-digit North American Industry Classification
                System (NAICS) code appropriate for the applicant.
                 (16) Number of workers. The number of non-owners working for the
                applicant.
                 (17) Time in business. The time the applicant has been in business,
                described in whole years, as relied on or collected by the financial
                institution.
                 (18) Minority-owned business status. Whether the applicant is a
                minority-owned business and whether minority-owned business status is
                being reported based on previously collected data pursuant to Sec.
                1002.107(c)(2). The financial institution shall collect and report
                minority-owned business status as prescribed in appendix F to this
                part. When requesting minority-owned business status from an applicant,
                the financial institution shall inform the applicant that the financial
                institution cannot discriminate on the basis of minority-owned business
                status, or on whether the applicant provides this information.
                 (19) Women-owned business status. Whether the applicant is a women-
                owned business and whether women-owned business status is being
                reported based on previously collected data pursuant to Sec.
                1002.107(c)(2). The financial institution shall collect and report
                women-owned business status as prescribed in appendix F to this part.
                When requesting women-owned business status from an applicant, the
                financial institution shall inform the applicant that the financial
                institution cannot discriminate on the basis of women-owned business
                status, or on whether the applicant provides this information.
                 (20) Ethnicity, race, and sex of principal owners. The ethnicity,
                race, and sex of the applicant's principal owners and whether
                ethnicity, race, and sex are being reported based on previously
                collected data pursuant to Sec. 1002.107(c)(2). The data compiled for
                purposes of this paragraph (a)(20) shall also include whether ethnicity
                and race are being reported based on visual observation or surname. The
                financial institution shall collect and report principal owners'
                ethnicity, race, and sex information as prescribed in appendix G to
                this part. When requesting ethnicity, race, and sex information from an
                applicant, the financial institution shall inform the applicant that
                the financial institution cannot discriminate on the basis of a
                principal owner's ethnicity, race, or sex, or on whether the applicant
                provides this information.
                 (21) Number of principal owners. The number of the applicant's
                principal owners.
                 (b) Verification of applicant-provided information. Unless
                otherwise provided in this subpart, the financial institution may rely
                on statements of the applicant when compiling data unless it verifies
                the information provided, in which case it shall use the verified
                information.
                 (c) Time and manner of collection--(1) In general. A covered
                financial institution shall maintain procedures to collect applicant-
                provided data under paragraph (a) of this section at a time and in a
                manner that is reasonably designed to obtain a response.
                 (2) Previously collected data. A covered financial institution is
                permitted, but not required, to reuse previously collected data to
                satisfy paragraphs (a)(13) through (21) of this section if:
                 (i) The data were collected within the same calendar year as the
                current covered application; and
                 (ii) The financial institution has no reason to believe the data
                are inaccurate.
                Sec. 1002.108 Firewall.
                 (a) Definitions. For purposes of this section, the following terms
                shall have the following meanings:
                 (1) Involved in making any determination concerning a covered
                application means participating in a decision regarding the evaluation
                of a covered application, including the creditworthiness of an
                applicant for a covered credit transaction.
                 (2) Should have access means that an employee or officer may need
                to collect, see, consider, refer to, or otherwise use the information
                to perform that employee's or officer's assigned job duties.
                 (b) Prohibition on access to certain information. Unless the
                exception under paragraph (c) of this section applies, an employee or
                officer of a covered financial institution or a covered financial
                institution's affiliate shall not have access to an applicant's
                responses to inquiries that the financial institution makes pursuant to
                this subpart regarding whether the applicant is a minority-owned
                business under Sec. 1002.107(a)(18) or a women-owned business under
                Sec. 1002.107(a)(19), and regarding the ethnicity, race, and sex of
                the applicant's principal owners under Sec. 1002.107(a)(20), if that
                employee or officer is involved in making any determination concerning
                that applicant's covered application.
                 (c) Exception to the prohibition on access to certain information.
                The prohibition in paragraph (b) of this section shall 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 responses to the financial institution's inquiries under
                Sec. 1002.107(a)(18) through (20) and the financial institution
                provides the notice required under paragraph (d) of this section to the
                applicant. It is not feasible to limit access as required pursuant to
                paragraph (b) of this section 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 the financial institution's inquiries under
                Sec. 1002.107(a)(18) through (20).
                 (d) Notice. In order to satisfy the exception set forth in
                paragraph (c) of this section, a financial institution shall provide a
                notice to each applicant whose responses will be accessed, informing
                the applicant that one or more employees or officers involved in making
                determinations concerning the covered application may have access to
                the applicant's responses to the financial institution's inquiries
                regarding whether the applicant is a minority-owned business or a
                women-owned business, and regarding the ethnicity, race, and sex of the
                applicant's principal owners. The financial institution shall provide
                the notice required by this paragraph (d) when making the inquiries
                required under Sec. 1002.107(a)(18) through (20) and together with the
                notices required pursuant to Sec. 1002.107(a)(18) through (20).
                Sec. 1002.109 Reporting of data to the Bureau.
                 (a) Reporting to the Bureau--(1) Annual reporting. (i) On or before
                June 1 following the calendar year for which data are compiled and
                maintained as required by Sec. 1002.107, a covered
                [[Page 56579]]
                financial institution shall submit its small business lending
                application register in the format prescribed by the Bureau.
                 (ii) An authorized representative of the covered financial
                institution with knowledge of the data shall certify to the accuracy
                and completeness of the data reported pursuant to this paragraph (a).
                 (iii) When the last day for submission of data prescribed under
                paragraph (a)(1) falls on a date that is not a business day, a
                submission shall be considered timely if it is submitted no later than
                the next business day.
                 (2) Reporting by subsidiaries. A covered financial institution that
                is a subsidiary of another covered financial institution shall complete
                a separate small business lending application register. The subsidiary
                shall submit its small business lending application register, directly
                or through its parent, to the Bureau.
                 (3) Reporting obligations where multiple financial institutions are
                involved in a covered credit transaction. If a covered application
                results in an origination, only one covered financial institution shall
                report the covered credit transaction. If more than one financial
                institution is involved in the origination of a covered credit
                transaction, the financial institution that makes the final credit
                decision approving the application shall report the loan as an
                origination (if that financial institution is a covered financial
                institution). If there was no origination, then any covered financial
                institution that made a credit decision shall report the application.
                 (b) Financial institution identifying information. A financial
                institution shall provide each of the following with its submission:
                 (1) Its name.
                 (2) Its headquarters address.
                 (3) The name and business contact information of a person who may
                be contacted with questions about the financial institution's
                submission.
                 (4) Its Federal prudential regulator, if applicable.
                 (5) Its Federal Taxpayer Identification Number (TIN).
                 (6) Its Legal Entity Identifier (LEI).
                 (7) Its Research, Statistics, Supervision, and Discount
                identification (RSSD ID) number, if applicable.
                 (8) Parent entity information, if applicable, including:
                 (i) The name of the immediate parent entity;
                 (ii) The LEI of the immediate parent entity, if available;
                 (iii) The RSSD ID number of the immediate parent entity, if
                available;
                 (iv) The name of the top-holding parent entity;
                 (v) The LEI of the top-holding parent entity, if available; and
                 (vi) The RSSD ID number of the top-holding parent entity, if
                available.
                 (9) The type of financial institution that it is, indicated by
                selecting the appropriate type or types of institution from the list
                provided.
                 (10) Whether the financial institution is voluntarily reporting
                covered applications for covered credit transactions.
                 (c) Procedures for the submission of data to the Bureau. The Bureau
                shall make available a Filing Instructions Guide, containing technical
                instructions for the submission of data to the Bureau pursuant to this
                section, as well as any related materials, available at [a designated
                Bureau website].
                Sec. 1002.110 Publication of data.
                 (a) Publication of small business lending application registers and
                associated financial institution information. The Bureau shall make
                available to the public generally the data reported to it by financial
                institutions pursuant to Sec. 1002.109, subject to deletions or
                modifications made by the Bureau, at its discretion, if the Bureau
                determines that the deletion or modification of the data would advance
                a privacy interest. The Bureau shall make such data available on an
                annual basis, by publishing it on the Bureau's website at [a designated
                Bureau website].
                 (b) Publication of aggregate data. The Bureau may, at its
                discretion, compile and aggregate data submitted by financial
                institutions pursuant to Sec. 1002.109, and make any compilations or
                aggregations of such data publicly available as the Bureau deems
                appropriate.
                 (c) Statement of financial institution's small business lending
                data available on the Bureau's website. A covered financial institution
                shall make available to the public on its website, or otherwise upon
                request, a statement that the covered financial institution's small
                business lending application register, as modified by the Bureau
                pursuant to Sec. 1002.110(a), is or will be available on the Bureau's
                website at [a designated Bureau website]. A financial institution shall
                use language provided by the Bureau, or substantially similar language,
                to satisfy the requirement to provide a statement pursuant to this
                paragraph (c).
                 (d) Availability of statements. A covered financial institution
                shall make the notice required by paragraph (c) of this section
                available to the public on its website when it submits a small business
                lending application register to the Bureau pursuant to Sec.
                1002.109(a)(1), and shall maintain the notice for as long as it has an
                obligation to retain its small business lending application registers
                pursuant to Sec. 1002.111(a).
                Sec. 1002.111 Recordkeeping.
                 (a) Record retention. A covered financial institution shall retain
                evidence of compliance with this subpart, 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 Sec. 1002.109.
                 (b) Certain information kept separate from the rest of the
                application. A financial institution shall maintain, separately from
                the rest of the application and accompanying information, an
                applicant's responses to the financial institution's inquiries pursuant
                to this subpart regarding whether an applicant for a covered credit
                transaction is a minority-owned business under Sec. 1002.107(18) or a
                women-owned business under Sec. 1002.107(19), and regarding the
                ethnicity, race, and sex of the applicant's principal owners under
                Sec. 1002.107(20).
                 (c) Limitation on personally identifiable information in records
                retained under this section. In compiling and maintaining any records
                under Sec. 1002.107 or paragraph (b) of this section, or reporting
                data pursuant to Sec. 1002.109, a financial institution shall not
                include any name, specific address, telephone number, email address, or
                any personally identifiable information concerning any individual who
                is, or is connected with, an applicant, other than as required pursuant
                to Sec. 1002.107 or paragraph (b) of this section.
                Sec. 1002.112 Enforcement.
                 (a) Administrative enforcement and civil liability. A violation of
                section 704B of the Act or this subpart is subject to administrative
                sanctions and civil liability as provided in sections 704 (15 U.S.C.
                1691c) and 706 (15 U.S.C. 1691e) of the Act, where applicable.
                 (b) Bona fide errors. A bona fide error in compiling, maintaining,
                or reporting data with respect to a covered application is one that was
                unintentional and occurred despite the maintenance of procedures
                reasonably adapted to avoid such an error. A bona fide error is not a
                violation of the Act or this subpart. A financial institution is
                presumed to maintain procedures reasonably adapted to avoid such errors
                with respect to a given data field if the number of errors found in a
                random
                [[Page 56580]]
                sample of the financial institution's submission for the data field
                does not equal or exceed a threshold specified by the Bureau for this
                purpose in appendix H to this part. However, an error is not a bona
                fide error if either there is a reasonable basis to believe the error
                was intentional or there is other evidence that the financial
                institution does not or has not maintained procedures reasonably
                adapted to avoid such errors.
                 (c) Safe harbors. (1) Incorrect entry for census tract. An
                incorrect entry for census tract is not a violation of the Act or this
                subpart if the financial institution obtained the census tract by
                correctly using a geocoding tool provided by the FFIEC or the Bureau.
                 (2) Incorrect entry for NAICS code. If a financial institution
                identifies the NAICS code for an applicant itself, without the
                applicant or another source providing the NAICS code, and the
                identified NAICS code is incorrect, the incorrect entry for the NAICS
                code is not a violation of the Act or this subpart provided that the
                first two digits of the NAICS code are correct and the financial
                institution maintains procedures reasonably adapted to correctly
                identify the subsequent four digits.
                 (3) Incorrect determination of small business status. A financial
                institution that initially determines that an applicant for a covered
                credit transaction is a small business, as defined in Sec.
                1002.106(b), but later concludes the applicant is not a small business,
                does not violate the Act or this regulation if the financial
                institution collected information pursuant to this subpart 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. A financial institution
                seeking to avail itself of this safe harbor shall comply with the
                requirements of this subpart As otherwise required pursuant to
                Sec. Sec. 1002.107, 1002.108, and 1002.111 with respect to the
                collected information.
                 (4) Incorrect application date. A financial institution does not
                violate the Act or this subpart 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 Sec.
                1002.107(a)(2).
                Sec. 1002.113 Severability.
                 The provisions of this subpart are separate and severable from one
                another. If any provision is stayed or determined to be invalid, the
                remaining provisions shall continue in effect.
                Sec. 1002.114 Effective date, compliance date, and special
                transitional rules.
                 (a) Effective date. The effective date for this subpart is [90 days
                after the date of publication of the final rule in the Federal
                Register].
                 (b) Compliance date. The compliance date for this subpart is
                [approximately 18 months after the date of publication of the final
                rule in the Federal Register].
                 (c) Special transitional rules--(1) Collection of information prior
                to the compliance date. A financial institution that will be a covered
                financial institution as of the compliance date in paragraph (b) of
                this section is permitted, but not required, to collect information
                regarding whether an applicant for a covered credit transaction is a
                minority-owned business under Sec. 1002.107(a)(18), a women-owned
                business under Sec. 1002.107(a)(19), and the ethnicity, race, and sex
                of the applicant's principal owners under Sec. 1002.107(a)(20)
                beginning [12 months prior to the compliance date]. A financial
                institution collecting such information pursuant to this paragraph
                (c)(1) must do so in accordance with the requirements set out in
                Sec. Sec. 1002.107(18) through (20) and 1002.108.
                 (2) Determining whether a financial institution is a covered
                financial institution for purposes of this subpart. For purposes of
                determining whether a financial institution is a covered financial
                institution under Sec. 1002.105(b) as of the compliance date specified
                in paragraph (b) of this section, a financial institution is permitted,
                but not required, to use its to use its originations of covered credit
                transactions for small businesses in the second and third preceding
                calendar years (rather than its originations in the two immediately
                preceding calendar years).
                0
                5. Appendices E through H are added to read as follows:
                Appendix E to Part 1002--Sample Form for Collecting Certain Applicant-
                Provided Data under Subpart B
                BILLING CODE 4810-25-P
                [[Page 56581]]
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                [[Page 56582]]
                [GRAPHIC] [TIFF OMITTED] TP08OC21.019
                [[Page 56583]]
                BILLING CODE 4825-25-C
                Appendix F to Part 1002--Instructions for Collecting and Reporting
                Small Business Applicants' Minority-Owned Business Status and Women-
                Owned Business Status Under Subpart B
                 Covered financial institutions are required by subpart B of this
                part to collect certain information from small business applicants
                about covered applications, including whether the applicant is a
                minority-owned business or a women-owned business. This appendix
                provides instructions for collecting that information.
                 1. Unless a financial institution is reporting based on
                previously collected data as discussed in Instruction 11, the
                financial institution must ask the applicant about its minority-
                owned business status and women-owned business status for each of
                the applicant's covered applications. However, the financial
                institution cannot require an applicant to provide this information.
                 2. Generally, a financial institution must ask the applicant
                whether it is a minority-owned business and whether it is a women-
                owned business on a paper or electronic data collection form that is
                separate from the application form and other documents used to
                collect other information related to the application. See the sample
                data collection form in appendix E for sample language. For a
                covered application taken solely by telephone or another medium that
                does not involve providing any paper or electronic documents, the
                financial institution must ask the applicant about its minority-
                owned business status and women-owned business status orally if the
                financial institution is not reporting based on previously collected
                data. The financial institution may combine these business status
                questions with questions regarding principal owners' ethnicity,
                race, and sex pursuant to Sec. 1002.107(a)(20) and a question about
                the applicant's number of principal owners pursuant to Sec.
                1002.107(a)(21). See the sample data collection form in appendix E.
                 3. When asking the questions regarding minority-owned business
                status and women-owned business status (regardless of whether they
                are asked on a paper form, electronically, or orally), the financial
                institution also must provide the applicant with definitions of the
                terms ``minority individual,'' ``minority-owned business,'' and
                ``women-owned business'' as set forth in Sec. 1002.102(l), (m), and
                (s). The financial institution satisfies this requirement if it
                provides the definitions of minority individual, minority-owned
                business, and women-owned business set forth in the sample data
                collection form in appendix E.
                 4. A financial institution may inform the applicant that Federal
                law requires it to ask for an applicant's minority-owned business
                status and women-owned business status to help ensure that all small
                business applicants for credit are treated fairly and that
                communities' small business credit needs are being fulfilled. The
                financial institution must inform the applicant that it is not
                required to respond to the financial institution's questions
                regarding the applicant's minority-owned business status and women-
                owned business status. The financial institution also must inform
                the applicant that the financial institution cannot discriminate on
                the basis of minority-owned business status or women-owned business
                status, or on the basis of whether the applicant provides this
                information.
                 5. A financial institution must report the answers to the
                minority-owned business status and women-owned business status
                questions that the applicant provided on the paper or electronic
                data collection form the financial institution uses to satisfy the
                requirements of Sec. 1002.107(a)(18) and (19) without regard to any
                answers provided for other purposes. If the financial institution
                asks the minority-owned business status and women-owned business
                status questions orally, the financial institution must report the
                answers the applicant provided in response to the inquiries the
                financial institution makes to satisfy the requirements of Sec.
                1002.107(a)(18) and (19) without regard to any answers provided for
                other purposes. For example, if a financial institution uses a paper
                data collection form to ask an applicant if it is a minority-owned
                business or women-owned business for purposes of Sec.
                1002.107(a)(18) and (19) and the applicant responds that it is not a
                minority-owned business or a women-owned business, the financial
                institution must report that the applicant is not a minority-owned
                business or a women-owned business, even if the applicant indicates
                that it is a minority-owned business for other purposes, such as for
                a special purpose credit program or a Small Business Administration
                program.
                 6. A financial institution is neither required nor permitted to
                verify the minority-owned business status or women-owned business
                status that the applicant provides.
                 7. If the applicant declines to provide information on the
                applicant's minority-owned business status or women-owned business
                status (such as by checking only the ``I do not wish to provide this
                information'' box on a paper or electronic data collection form or
                stating orally that it does not wish to provide this information),
                the financial institution must report that the applicant declined to
                provide information on the applicant's minority-owned business
                status or women-owned business status, as applicable.
                 8. If the applicant does not respond to the financial
                institution's inquiry regarding its minority-owned business status
                (such as by leaving the response blank or failing to submit a data
                collection form), the financial institution must report that the
                information was not provided by the applicant. Similarly, if the
                applicant does not respond to the financial institution's inquiry
                regarding its women-owned business status, the financial institution
                must report that the information was not provided by the applicant.
                 9. If the applicant both provides a substantive response to a
                question requesting business status (that is, checks either ``yes''
                or ``no'') and also checks the ``I do not wish to provide this
                information'' box for that question, the financial institution
                reports the minority-owned business status or women-owned business
                status provided by the applicant (rather than reporting that the
                applicant declined to provide the information).
                 10. A financial institution does not report minority-owned
                business status or women-owned business status based on visual
                observation, surname, or any basis other than the applicant's
                responses to the inquiries that the financial institution makes to
                satisfy Sec. 1002.107(a)(18) and (19) or, as discussed in
                Instruction 11, on the basis of the applicant's responses to the
                inquiries that the financial institution previously made to satisfy
                Sec. 1002.107(a)(18) and (19).
                 11. Section 1002.107(c)(2) and its commentary set forth when a
                financial institution is permitted to report information based on
                previously collected data. If the financial institution is permitted
                to report minority-owned business status or women-owned business
                status based on previously collected data, the financial institution
                may but is not required to do so.
                 12. If a financial institution reports minority-owned business
                status or women-owned business status based on previously collected
                data, the financial institution must also report that it is
                providing that information based on previously collected data.
                Appendix G to Part 1002--Instructions for Collecting and Reporting
                Ethnicity, Race, and Sex of Small Business Applicants' Principal Owners
                Under Subpart B
                 Covered financial institutions are required by subpart B of this
                part to collect certain information from small business applicants
                about covered applications, including the ethnicity, race, and sex
                of the applicant's principal owners. This appendix provides
                instructions for collecting that information.
                General Instructions
                 1. Unless a financial institution is reporting based on
                previously collected data as discussed in Instructions 26 through
                29, the financial institution must ask the applicant for the
                ethnicity, race, and sex of its principal owners for each of the
                applicant's covered applications. However, a financial institution
                cannot require an applicant or any principal owner to provide this
                information.
                 2. Generally, a financial institution must ask the applicant
                about the ethnicity, race, and sex of the applicant's principal
                owners on a paper or electronic data collection form that is
                separate from the application form and other documents used to
                collect other information related to the application. See the sample
                data collection form in appendix E for sample language. For a
                covered application taken solely by telephone or another medium that
                does not involve providing any paper or electronic documents, the
                financial institution must ask the applicant for the principal
                owners' ethnicity, race, and sex orally if the financial institution
                is not reporting based on previously collected data. A financial
                institution may combine the questions regarding the principal
                owners' ethnicity, race, and sex with a question regarding the
                applicant's number of principal owners pursuant to Sec.
                1002.107(a)(21) and questions regarding the applicant's minority-
                owned business status and women-owned
                [[Page 56584]]
                business status pursuant to Sec. 1002.107(a)(18) and (19). See the
                sample data collection form in appendix E.
                 3. When asking about principal owners' ethnicity, race, and sex,
                the financial institution must also provide the applicant with the
                definition of the term ``principal owner'' as set forth in Sec.
                1002.102(o). The financial institution satisfies this requirement if
                it provides the definition of principal owner set forth in the
                sample data collection form in appendix E.
                 4. A financial institution may inform the applicant that Federal
                law requires it to ask for the principal owners' ethnicity, race,
                and sex to help ensure that all small business applicants for credit
                are treated fairly and that communities' small business credit needs
                are being fulfilled. The financial institution must inform the
                applicant that the applicant is not required to respond to the
                financial institution's questions regarding the principal owner's
                ethnicity, race, and sex. The financial institution also must inform
                the applicant that the financial institution cannot discriminate on
                the basis of a principal owner's ethnicity, race, or sex, or on
                whether the applicant provides this information.
                 5. If it is possible that a financial institution will meet in
                person with one or more of the applicant's principal owners and the
                financial institution is not reporting based on previously collected
                data, the financial institution must inform the applicant that if
                the applicant does not provide any ethnicity, race, or sex
                information for at least one principal owner, the financial
                institution is required to report ethnicity and race on the basis of
                visual observation and/or surname for at least one of the principal
                owners that the financial institution has met in person. If a
                financial institution collects ethnicity, race, and sex information
                using a paper or electronic data collection form, the financial
                institution may satisfy this requirement by providing a statement on
                that form. See the sample data collection form in appendix E. If a
                financial institution meets in person with a natural person
                representing an applicant but does not know if the natural person is
                a principal owner, the financial institution must ask or otherwise
                determine if that person is a principal owner. See comment
                107(a)(20)-10 for examples of when a financial institution has and
                has not met in person with one or more principal owners. As
                described in Instruction 23, financial institutions do not report a
                principal owner's sex based on visual observation or surname.
                Instructions Regarding Ethnicity, Race, and Sex Categories
                 6. When asking for a principal owner's sex, a financial
                institution must allow the applicant to respond using the sex
                categories set forth in the sample data collection form in appendix
                E and discussed in comment 107(a)(20)-8. These categories must
                include the option to self-identify using free-form text on a paper
                or electronic form or using language that informs the applicant of
                the opportunity to self-identify when taking the application by
                means other than a paper or electronic data collection form, such as
                by telephone.
                 7. When asking for a principal owner's ethnicity and race, a
                financial institution must allow the applicant to respond using the
                aggregate and disaggregated ethnicity and race categories and
                subcategories as set forth in the sample data collection form in
                appendix E and discussed in comments 107(a)(20)-6 and -7. The
                disaggregated subcategories must include the ``other'' disaggregated
                subcategories that provide the option to self-identify using free-
                form text on a paper or electronic data collection form or using
                language that informs the applicant of the opportunity to self-
                identify when taking the application by means other than a paper or
                electronic data collection form, such as by telephone.
                 8. A financial institution must permit an applicant to identify
                its principal owners as being of a particular Hispanic or Latino
                disaggregated subcategory (Cuban, Mexican, Puerto Rican, Other
                Hispanic or Latino) or of a particular Asian disaggregated
                subcategory (Asian Indian, Chinese, Filipino, Japanese, Korean,
                Vietnamese, Other Asian) or of a particular Native Hawaiian or Other
                Pacific Islander disaggregated subcategory (Guamanian or Chamorro,
                Native Hawaiian, Samoan, Other Pacific Islander) or of a particular
                Black or African American disaggregated subcategory (African
                American, Ethiopian, Haitian, Jamaican, Nigerian, Somali, or Other
                Black or African American) or of a particular American Indian or
                Alaska Native enrolled or principal tribe. An applicant must be
                permitted to select a disaggregated ethnicity or race subcategory
                even if the applicant does not also select the corresponding
                aggregate ethnicity or aggregate race category. For example, if an
                applicant selects only the ``Mexican'' disaggregated subcategory,
                the financial institution reports ``Mexican'' for the ethnicity of
                the applicant but does not also report ``Hispanic or Latino.''
                 9. A financial institution must offer the applicant the option
                of selecting more than one ethnicity, race, and sex for each
                principal owner. If an applicant selects more than one ethnicity,
                race, or sex for a principal owner, the financial institution must
                report each selected designation. The financial institution must
                also report any additional information that the applicant has
                provided as free-form text in the appropriate data reporting field.
                For example, if the applicant chooses to self-identify a principal
                owner's sex and provides additional information, the financial
                institution must report that information as free-form text in the
                appropriate data reporting field. Similarly, if an applicant
                indicates that a principal owner is Other Asian and provides
                additional information, such as writing in Cambodian, the financial
                institution must report that information as free-form text in the
                appropriate data reporting field.
                 10. If an applicant provides ethnicity, race, or sex information
                for one or more principal owners, the financial institution must
                report the ethnicity, race, and sex as provided by the applicant.
                For example, if an applicant selects ``Asian'' for a principal
                owner's race, the financial institution reports ``Asian'' for the
                race of that principal owner. Similarly, if the applicant selects
                ``Asian'' and ``Native Hawaiian'' for a particular principal owner,
                the financial institution reports that principal owner's race as
                ``Asian'' and ``Native Hawaiian,'' even though ``Native Hawaiian''
                is not a disaggregated subcategory for the aggregate ``Asian''
                category.
                 11. A financial institution is neither required nor permitted to
                verify the ethnicity, race, or sex information that the applicant
                provides.
                Instructions for Reporting if the Applicant Fails To Provide or
                Declines To Provide Responses to a Financial Institution's Inquiries
                 12. Except as noted in Instruction 17, if the applicant declines
                to provide a principal owner's ethnicity, race, or sex (such as by
                answering these questions by checking only the ``I do not wish to
                provide this information'' box on a paper or electronic data
                collection form or stating orally that it does not wish to provide
                this information), the financial institution must report that the
                applicant declined to provide this information. The financial
                institution only reports that the applicant declined to provide
                information if the applicant specifically declines to provide that
                information. See Instruction 13 for reporting if the applicant does
                not respond rather than specifically declines to provide
                information.
                 13. Except as noted in Instruction 17, if the applicant does not
                respond to a request about a principal owner's ethnicity, race, or
                sex, the financial institution must report that the information was
                not provided by the applicant. For example, if the financial
                institution provides the applicant with a paper data collection form
                and asks the applicant to complete and return the form but the
                applicant does not return it, the financial institution reports that
                the principal owner's ethnicity, race, and sex was not provided by
                the applicant. Similarly, if the financial institution provides an
                electronic data collection form, the applicant indicates that it has
                two principal owners, the applicant provides ethnicity, race, and
                sex for the first principal owner, and the applicant does not check
                any of the boxes (including the ``I do not wish to provide this
                information'' boxes) for the second principal owner's ethnicity,
                race, and sex, the financial institution reports the ethnicity,
                race, and sex that the applicant provided for the first principal
                owner and reports that ethnicity, race, and sex for the second
                principal owner were not provided by the applicant.
                 14. If an applicant provides some but not all of the requested
                ethnicity, race, and sex information, the financial institution
                reports the information that was provided by the applicant and
                reports that the applicant declined to provide or did not provide
                (as applicable) the remainder of the information. For example,
                assume an applicant indicates that it has two principal owners and
                provides ethnicity, race, and sex information for the first
                principal owner and provides only ethnicity for the second principal
                owner. Further assume that the applicant does not indicate that it
                does not wish to provide race or sex information for the second
                principal owner. In this case, the financial institution reports the
                ethnicity, race, and sex
                [[Page 56585]]
                information provided for the first principal owner. The financial
                institution also reports the ethnicity provided for the second
                principal owner, and reports that the applicant did not provide race
                and sex information for the second principal owner.
                 15. If an applicant provides any ethnicity, race, or sex
                information for any principal owner, the financial institution does
                not report any additional information based on visual observation
                and/or surname. For example, if an applicant indicates that it has
                four principal owners and provides sex information for one principal
                owner and no other ethnicity, race, or sex information, the
                financial institution reports the sex information provided for one
                principal owner. It reports either that the applicant did not
                provide or declined to provide (as applicable) the ethnicity and
                race information for one principal owner and the ethnicity, race,
                and sex information for the other principal owners. The financial
                institution does not report any ethnicity or race information based
                on visual observation or surname, even if it is has met in person
                with one or more principal owners.
                 16. If an applicant provides information in response to the
                question requesting a given principal owner's ethnicity, race, or
                sex and also checks the ``I do not wish to provide this
                information'' box for that question or otherwise indicates that the
                applicant does not wish to provide the information, the financial
                institution reports the information on ethnicity, race, or sex that
                was provided by the applicant (rather than reporting that the
                applicant declined to provide the information). For example, if an
                applicant is completing a paper data collection form and provides
                information that a principal owner is female and also checks a box
                to indicate that the applicant does not wish to provide information
                regarding that principal owner's sex, the financial institution
                reports the principal owner's sex as female.
                Instructions for Collecting Ethnicity and Race Information via Visual
                Observation and/or Surname if the Applicant Declines To Provide
                Information or Does Not Respond
                 17. If an applicant does not provide any ethnicity, race, or sex
                information for any of its principal owners or declines to provide
                all of the requested ethnicity, race, or sex information, and during
                the application process the financial institution meets in person
                with at least one principal owner of that applicant, the financial
                institution must collect the ethnicity and race of the principal
                owner(s) with whom it meets on the basis of visual observation and/
                or surname. For example, assume a financial institution provides
                electronic data collection forms to applicants, and an applicant
                fails to complete and submit the data collection form. Assume that
                the financial institution is not permitted to report based on
                previously collected data. Also, assume that the financial
                institution meets in person with two of the applicant's four
                principal owners at the same time during the application process.
                The financial institution reports the ethnicity and race information
                for the two principal owners it met with in person based on visual
                observation and/or surname. Additionally, as noted in Instruction
                21, the financial institution reports that it is reporting this
                information based on visual observation and/or surname. The
                financial institution reports that the applicant did not provide sex
                information for these two principal owners. It also reports that the
                applicant did not provide ethnicity, race, and sex information for
                the other two principal owners. For additional information on when a
                financial institution has or has not met in person with a principal
                owner, see comment 107(a)(20)-10.
                 18. For purposes of determining whether reporting based on
                visual observation and/or surname is required, a financial
                institution is considered to have met in person with a principal
                owner if the financial institution has a meeting via an electronic
                medium with the principal owner and can visually observe the
                principal owner using a video component. For additional information
                on when a financial institution has or has not met in person with a
                principal owner, see comment 107(a)(20)-10. For additional
                information on when reporting based on visual observation and/or
                surname is required, see comment 107(a)(20)-9.
                 19. A financial institution is not required to report ethnicity
                and race information based on visual observation and/or surname if
                the financial institution only meets in person with one or more
                principal owners after the application process is complete, for
                example, at loan closing or account opening. In those circumstances,
                the financial institution may report that the information was not
                provided by the applicant or that the applicant declined to provide
                the information, as applicable.
                 20. A financial institution is required to collect race and
                ethnicity information based on visual observation and/or surname at
                only one meeting with one or more principal owners. If the financial
                institution meets in person with another principal owner at a
                different meeting, the financial institution is permitted, but not
                required, to also collect the other principal owner's race and
                ethnicity information via visual observation and/or surname. For
                example, assume that a financial institution meets in person with
                one of an applicant's principal owners on June 1 and records that
                principal owner's ethnicity and race. Also, assume that the
                financial institution meets in person with all four of the
                applicant's principal owners on June 10. The financial institution
                is permitted, but not required, to record the other principal
                owners' ethnicity and race information based on the meeting that
                occurs on June 10, because it already recorded one principal owner's
                ethnicity and race based on the meeting that occurred on June 1.
                 21. If a financial institution reports ethnicity and race based
                on visual observation and/or surname and is not relying on
                previously collected data, the financial institution also must
                report that the information was collected on the basis of visual
                observation and/or surname. If a financial institution is relying on
                previously collected data that the financial institution collected
                via visual observation and/or surname, the financial institution
                reports that it is reporting the information based on previously
                collected data, and that it is providing the information based on
                visual observation and/or surname.
                 22. When a financial institution reports ethnicity and race on
                the basis of visual observation and/or surname, the financial
                institution must select only from the following aggregate
                categories: Ethnicity (Hispanic or Latino; not Hispanic or Latino);
                race (American Indian or Alaska Native; Asian; Black or African
                American; Native Hawaiian or Other Pacific Islander; White).
                 23. A financial institution never reports sex based on visual
                observation or surname. If an applicant declines or otherwise does
                not provide a principal owner's sex, the financial institution
                reports that the applicant declined to provide that information or
                that the information was not provided by the applicant, as
                applicable.
                Instructions Regarding Persons who Are Not Principal Owners and When an
                Applicant Has Fewer Than Four Principal Owners
                 24. A financial institution does not report a guarantor's
                ethnicity, race, and sex unless the guarantor is also a principal
                owner of the applicant.
                 25. Because there are data reporting fields for four principal
                owners, when submitting data to the Bureau, a financial institution
                will need to report that the requirement to report ethnicity, race,
                and sex is not applicable for some principal owners if the applicant
                has fewer than four principal owners. For example, if an applicant
                has only one principal owner (i.e., only one natural person directly
                owns 25 percent or more of the applicant's equity interests), the
                financial institution reports that the requirement to report
                ethnicity, race, and sex is not applicable in the data fields for
                principal owners two through four.
                Instructions for Reporting Based on Previously Collected Data
                 26. Section 1002.107(c)(2) and its commentary set forth when a
                financial institution is permitted to report information based on
                previously collected data. If the financial institution is permitted
                to report ethnicity, race, or sex information based on previously
                collected data, the financial institution may but is not required to
                do so.
                 27. If a financial institution reports ethnicity, race, or sex
                information based on previously collected data, the financial
                institution must also report that it is providing that information
                based on previously collected data.
                 28. If a financial institution reports one or more principal
                owner's ethnicity, race, or sex information based on previously
                collected data, the financial institution does not need to collect
                any additional ethnicity, race, or sex information. However, the
                financial institution may need to report that the applicant did not
                provide or declined to provide information when the financial
                institution previously collected the data, as applicable.
                 29. If a financial institution is reporting a principal owner's
                ethnicity and/or race based on data that the financial institution
                previously collected via visual observation and/or surname, the
                financial institution
                [[Page 56586]]
                reports that it is reporting ethnicity and race based on previously
                collected data and based on visual observation and/or surname.
                Additionally, the financial institution reports that the applicant
                declined to provide information about the principal owner's sex or
                that the applicant did not provide the principal owner's sex, as
                applicable, and reports that the financial institution is reporting
                sex based on previously collected data.
                Appendix H to Part 1002--Tolerances for Bona Fide Errors in Data
                Reported Under Subpart B
                 As set out in Sec. 1002.112(b) and in comment 112(b)-1, a
                financial institution is presumed to maintain procedures reasonably
                adapted to avoid errors with respect to a given data field if the
                number of errors found in a random sample of a financial
                institution's data submission for a given data field do not equal or
                exceed the threshold in column C of the following table (Table 1,
                Tolerance Thresholds for Bona Fide Errors):
                [GRAPHIC] [TIFF OMITTED] TP08OC21.020
                 The size of the random sample, under column B, shall depend on
                the size of the financial institution's small business lending
                application register, as shown in column A of the Threshold
                Table.\959\
                ---------------------------------------------------------------------------
                 \959\ For a financial institution with fewer than 30 entries in
                its small business lending application register, the full sample
                size is the financial insitution's total number of entries. The
                threshold number for such financial institution's remains three.
                Accordingly, the threshold percentage will be higher for financial
                institions with fewer than 30 in their registers.
                ---------------------------------------------------------------------------
                 The thresholds in column C of the Threshold Table reflect the
                number of unintentional errors a financial institution may make
                within a particular data field (e.g., loan amount or gross annual
                revenue) in a small business lending application register that would
                be deemed bona fide errors for purposes of Sec. 1002.112(b).
                 For instance, a financial institution that submitted a small
                business lending application register containing 45 applications
                would be subject to a threshold of three errors per data field. If
                the financial institution had made two errors in reporting loan
                amount and two errors reporting gross annual income, all of these
                errors would be covered by the bona fide error provision of Sec.
                1002.112(b) and would not constitute a violation of the Act or this
                part. If the same financial institution had made four errors in
                reporting loan amount and two errors reporting gross annual income,
                the bona fide error provision of Sec. 1002.112(b) would not apply
                to the four loan amount errors but would still apply to the two
                gross annual income errors.
                 Even when the number of errors in a particular data field do not
                equal or exceed the threshold in column C, if either there is a
                reasonable basis to believe that errors in that field were
                intentional or there is other evidence that the financial
                institution did not maintain procedures reasonably adapted to avoid
                such errors, then the errors are not bona fide errors under Sec.
                1002.112(b). To illustrate, assume that a financial institution has
                incorrectly coded withdrawn applications as denials to such an
                extent that it likely prevents reliable fair lending analysis of
                underwriting disparities. If so, the errors would not be deemed bona
                fide errors under Sec. 1002.112(b) and would violate the Act and
                this part.
                 For purposes of determining bona fide errors under Sec.
                1002.112(b), the term ``data field'' generally refers to individual
                fields. However, with respect to information on the ethnicity or
                race of an applicant or borrower, or co-applicant or co-borrower, a
                data field group may consist of more than one field. If one or more
                of the fields within an ethnicity or race field group have errors,
                they count as one (and only one) error for that data field group.
                0
                6. In Supplement I to part 1002:
                0
                a. Under Section 1005.5--Rules Concerning Requests for Information,
                revise Paragraph 5(a)(2) by revising the heading and adding comment -4,
                and revise Paragraph 5(a)(4) including the heading.
                0
                b. Add Section 1002.102--Definitions; Section 1002.103--Covered
                Applications; Section 1002.104--Covered Credit Transactions and
                Excluded Transactions; Section 1002.105--Covered Financial Institutions
                and Exempt Institutions; Section 1002.106--Business and Small Business;
                Section 1002.107--Compilation of Reportable Data; Section 1002.108--
                Firewall; Section 1002.109--Reporting of Data to the Bureau; Section
                1002.110--Publication of Data; Section 1002.111--Recordkeeping; and
                Section 1002.112--Enforcement.
                 The revisions and additions read as follows:
                Supplement I to Part 1002--Official Interpretations
                Section 1002.5--Rules Concerning Requests for Information
                 5(a) General rules.
                * * * * *
                 5(a)(2) Required collection of information.
                * * * * *
                 4. Information required by subpart B. Subpart B of this part
                generally requires creditors that are covered financial institutions
                as defined in Sec. 1002.105(a) to collect and report information
                about the
                [[Page 56587]]
                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 Sec. 1002.102(m) and
                (s), respectively.
                 5(a)(4) Other permissible collection of information.
                 1. Other permissible collection of information. Information
                regarding ethnicity, race, and sex that is not required to be
                collected pursuant to Regulation C, 12 CFR part 1003, or subpart B
                of this part, may nevertheless be collected under the circumstances
                set forth in Sec. 1002.5(a)(4) without violating Sec. 1002.5(b).
                The information collected pursuant to 12 CFR part 1003 must be
                retained pursuant to the requirements of Sec. 1002.12. The
                information collected pursuant to subpart B of this part must be
                retained pursuant to the requirements set forth in Sec. 1002.111.
                * * * * *
                Section 1002.102--Definitions
                 102(j) Dwelling.
                 1. Consistency with Regulation C. Bureau interpretations that
                appear in supplement I to part 1003 containing official commentary
                in connection with Sec. 1003.2(f) are applicable to the definition
                of a dwelling in Sec. 1002.102(j).
                 2. Dwelling under subpart A. The definition of dwelling under
                Sec. 1002.14(b)(2) applies to relevant provisions under subpart A,
                and 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 Sec. 1002.14(b)(2).
                 102(l) Minority individual.
                 1. Purpose of definition. The definition of minority individual
                is used only when an applicant determines if it is a minority-owned
                business pursuant to Sec. Sec. 1002.102(m) and 1002.107(a)(18). A
                financial institution provides an applicant with the definition of
                minority individual when asking the applicant to determine if its
                business is a minority-owned business, as defined in Sec.
                1002.102(m). An applicant determines if the natural persons who own
                and control and to whom the business's profits or losses accrue are
                minority individuals when the applicant provides its minority-owned
                business status pursuant to Sec. 1002.107(a)(18). Separately,
                pursuant to Sec. 1002.107(a)(20) and related commentary, a
                financial institution may be required to report a principal owner's
                ethnicity and race based on visual observation and/or surname.
                However, the definition of minority individual in Sec. 1002.102(l)
                is not used when determining the race or ethnicity of a principal
                owner.
                 2. Multi-racial and multi-ethnic individuals. For purposes of
                subpart B of this part, a natural person who is multi-racial or
                multi-ethnic is a minority individual. For example, a natural person
                who is both Asian and White is a minority individual.
                 3. Relationship to disaggregated subcategories used to determine
                ethnicity and race of principal owners. The term ``minority
                individual'' is defined in Sec. 1002.102(l) using aggregate
                ethnicity (Hispanic or Latino) and race (American Indian or Alaska
                Native, Asian, Black or African American, and Native Hawaiian or
                Other Pacific Islander) categories. Separately an applicant may
                provide a principal owner's ethnicity and race using aggregate
                categories and/or disaggregated subcategories for purposes of Sec.
                1002.107(a)(20). However, as discussed in comment 107(a)(20)-11, a
                financial institution may only use aggregate ethnicity and race
                categories when required to report a principal owner's ethnicity and
                race based on visual observation and/or surname.
                 102(m) Minority-owned business.
                 1. In general. In order to be a minority-owned business for
                purposes of subpart B of this part, a business must satisfy both
                prongs of the definition of minority-owned business. First, one or
                more minority individuals must own or control more than 50 percent
                of the business. However, it is not necessary that one or more
                minority individuals both own and control more than 50 percent of
                the business. For example, a business that is owned entirely by
                minority individuals, but is not controlled by any minority
                individuals satisfies the first prong of the definition. If a
                business does not satisfy this first prong of the definition, it is
                not a minority-owned business. Second, 50 percent or more of the net
                profits or losses must accrue to one or more minority individuals.
                If a business does not satisfy this second prong of the definition,
                it is not a minority-owned business, regardless of whether it
                satisfies the first prong of the definition.
                 2. Purpose of definition. The definition of minority-owned
                business is used only when an applicant determines if it is a
                minority-owned business for purposes of Sec. 1002.107(a)(18). A
                financial institution provides an applicant with the definition of
                minority-owned business when asking the applicant to provide its
                minority-owned business status pursuant to Sec. 1002.107(a)(18),
                but the financial institution is neither permitted nor required to
                make its own determination regarding the applicant's minority-owned
                business status.
                 3. Further clarifications of terms used in the definition of
                minority-owned business. In order to assist an applicant when
                determining whether it is a minority-owned business, a financial
                institution may provide the applicant with the definitions of
                ownership, control, and accrual of net profits or losses and related
                concepts set forth in comments 102(m)-4 through -6. A financial
                institution may assist an applicant when the applicant is
                determining its minority-owned business status but is not required
                to do so. For purposes of reporting an applicant's status, a
                financial institution relies on the applicant's determinations of
                its ownership, control, and accrual of net profits and losses.
                 4. Ownership. For purposes of determining if a business is a
                minority-owned business, 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. Examples of ownership include being the
                sole proprietor of a sole proprietorship, directly or indirectly
                owning or holding the stock of a corporation or company, directly or
                indirectly having a partnership interest in a business, or directly
                or indirectly having a membership interest in a limited liability
                company. Indirect as well as direct ownership are used when
                determining ownership for purposes of Sec. Sec. 1002.102(m) and
                1002.107(a)(18). Thus, where applicable, ownership must be traced
                through corporate or other indirect ownership structures. For
                example, assume that the applicant is company A. If company B owns
                60 percent of applicant company A and a natural person owns 100
                percent of company B, the natural person owns 60 percent of
                applicant company A. Similarly, if a natural person directly owns 20
                percent of applicant company A and is an equal partner in
                partnership B that owns the remaining 80 percent of applicant
                company A, the natural person owns 60 percent of applicant company A
                (i.e., 20 percent due through direct ownership and 40 percent
                indirectly through partnership B). A trustee is considered the owner
                of the trust. Thus, if a trust owns a business and the trust has two
                co-trustees, each co-trustee owns 50 percent of the business.
                 5. Control. A natural person controls a business if that natural
                person has significant responsibility to manage or direct the
                business. A natural person controls a business if the natural person
                is an executive officer or senior manager (e.g., a chief executive
                officer, chief financial officer, chief operating officer, managing
                member, general partner, president, vice president, or treasurer) or
                regularly performs similar functions. Additionally, a business may
                be controlled by two or more minority individuals if those
                individuals collectively control the business, such as constituting
                a majority of the board of directors or a majority of the partners
                of a partnership.
                 6. Accrual of net profits or losses. 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.
                 102(o) Principal owner.
                 1. Natural person. Only a natural person can be a principal
                owner of a business for purposes of subpart B of this part.
                Entities, such as trusts, partnerships, limited liability companies,
                and corporations, are not principal owners for this purpose.
                Additionally, a natural person must directly own an equity share of
                25 percent or more in the business in order to be a principal owner.
                Unlike the determination of ownership for purposes of collecting and
                reporting minority-owned business status and women-owned business
                status, indirect ownership is not 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 is not traced through multiple corporate structures
                to determine if a natural person owns 25 percent or more of the
                equity interests. For example, if natural person A directly owns 20
                percent of a business, natural person B directly owns 20 percent,
                and partnership C owns 60 percent, the business does not have any
                owners who
                [[Page 56588]]
                satisfy the definition of principal owner set forth in Sec.
                1002.102(o), even if natural person A and natural person B are the
                only partners in the partnership C. Similarly, if natural person A
                directly owns 30 percent of a business, natural person B directly
                owns 20 percent, and trust D owns 50 percent, natural person A is
                the only principal owner as defined in Sec. 1002.102(o), even if
                natural person B is the sole trustee of trust D.
                 2. Purpose of definition. A financial institution shall provide
                an applicant with the definition of principal owner when asking the
                applicant to provide the number of its principal owners pursuant to
                Sec. 1002.107(a)(21) and the ethnicity, race, and sex of its
                principal owners pursuant to 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 a 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 comments 107(a)(20)-5 and
                -9.) Additionally, if an applicant does not provide the number of
                its principal owners in response to the financial institution's
                request pursuant to Sec. 1002.107(a)(21), the financial institution
                may need to determine and report the number of the applicant's
                principal owners based on other documents or information. (See
                comments 107(a)(21)-1 through -3.)
                 102(s) Women-owned business.
                 1. In general. In order to be a women-owned business for
                purposes of subpart B of this part, a business must satisfy both
                prongs of the definition of women-owned business. First, one or more
                women must own or control more than 50 percent of the business.
                However, it is not necessary that one or more women both own and
                control more than 50 percent of the business. For example, a
                business that is owned entirely by women, but is not controlled by
                any women satisfies the first prong of the definition. If a business
                does not satisfy this first prong of the definition, it is not a
                women-owned business. Second, 50 percent or more of the net profits
                or losses must accrue to one or more women. If a business does not
                satisfy this second prong of the definition, it is not a women-owned
                business, regardless of whether it satisfies the first prong of the
                definition.
                 2. Purpose of definition. The definition of women-owned business
                is used only when an applicant determines if it is a women-owned
                business pursuant to Sec. 1002.107(a)(19). A financial institution
                provides an applicant with the definition of women-owned business
                when asking the applicant to provide its women-owned business status
                pursuant to Sec. 1002.107(a)(19), but the financial institution is
                neither permitted nor required to make its own determination
                regarding the applicant's women-owned business status.
                 3. Further clarifications of terms used in the definition of
                women-owned business. In order to assist an applicant when
                determining whether it is a women-owned business, a financial
                institution may provide the applicant with the definitions of
                ownership, control, and accrual of net profits or losses and related
                concepts set forth in comments 102(s)-4 through -6. A financial
                institution may assist an applicant when the applicant is
                determining its women-owned business status but is not required to
                do so. For purposes of reporting an applicant's status, a financial
                institution relies on the applicant's determinations of its
                ownership, control, and accrual of net profits and losses.
                 4. Ownership. For purposes of determining if a business is a
                women-owned business, 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. Examples of ownership include being the
                sole proprietor of a sole proprietorship, directly or indirectly
                owning or holding the stock of a corporation or company, directly or
                indirectly having a partnership interest in a business, or directly
                or indirectly having a membership interest in a limited liability
                company. Indirect as well as direct ownership are used when
                determining ownership for purposes of Sec. Sec. 1002.102(s) and
                1002.107(a)(19). Thus, where applicable, ownership must be traced
                through corporate or other indirect ownership structures. For
                example, assume that the applicant is company A. If company B owns
                60 percent of the applicant company A and a natural person owns 100
                percent of company B, the natural person owns 60 percent of the
                applicant company A. Similarly, if a natural person directly owns 20
                percent of the applicant company A and is an equal partner in a
                partnership B that owns the remaining 80 percent of the applicant
                company A, the natural person owns 60 percent of applicant company A
                (i.e., 20 percent due through direct ownership and 40 percent
                indirectly through partnership B). A trustee is considered the owner
                of the trust. Thus, if a trust owns a business and the trust has two
                co-trustees, each co-trustee owns 50 percent of the business.
                 5. Control. A natural person controls a business if that natural
                person has significant responsibility to manage or direct the
                business. A natural person controls a business if the natural person
                is an executive officer or senior manager (e.g., a chief executive
                officer, chief financial officer, chief operating officer, managing
                member, general partner, president, vice president, or treasurer) or
                regularly performs similar functions. Additionally, a business may
                be controlled by two more women if those women collectively control
                the business, such as constituting a majority of the board of
                directors or a majority of the partners of a partnership.
                 6. Accrual of net profits or losses. 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.
                Section 1002.103--Covered Applications
                 103(a) In general.
                 1. In general. Subject to the requirements of subpart B of this
                part, a financial institution has latitude to establish its own
                application process or procedures, including designating the type
                and amount of information it will require from applicants.
                 2. Procedures used. The term ``procedures'' refers to the actual
                practices followed by a financial institution as well as its stated
                application procedures. For example, if a financial institution's
                stated policy is to require all applications to be in writing on the
                financial institution's application form, but the financial
                institution also makes credit decisions based on oral requests, the
                financial institution's procedures are to accept both oral and
                written applications.
                 3. Consistency with subpart A. Bureau interpretations that
                appear in this supplement I in connection with Sec. Sec. 1002.2(f)
                and 1002.9 are generally applicable to the definition of a covered
                application in Sec. 1002.103. However, the definition of a covered
                application in Sec. 1002.103 does not include inquiries and
                prequalification requests. The definition of a covered application
                also does not include reevaluation, extension, or renewal requests
                on an existing business credit account, unless the request seeks
                additional credit amounts. See Sec. 1002.103(b).
                 4. Requests for multiple covered credit transactions at one
                time. Assuming the requirements of a covered application are met, if
                an applicant makes a request for two or more covered credit
                transactions at the same time, the financial institution reports
                each request for a covered credit transaction as a separate covered
                application. For example, if an applicant requests both a term loan
                and a line of credit on an application form, the financial
                institution reports each request for a covered credit transaction as
                a separate covered application. Section 1002.107(c)(2) sets forth
                the requirements for reusing certain data required under Sec.
                1002.107(a) across multiple applications.
                 5. Initial request for a single covered credit transaction that
                results in the origination of multiple covered credit transactions.
                Assuming the requirements of a covered application are met, if an
                applicant initially makes a request for one covered credit
                transaction, but over the course of the application process requests
                and obtains multiple covered credit transactions, each covered
                credit transaction must be reported as a separate covered
                application.
                 6. Requests for multiple lines of credit at one time. Assuming
                the requirements of a covered application are met, if an applicant
                requests multiple lines of credit on a single credit account, it is
                reported as one or more covered applications based on the procedures
                used by the financial institution for the type of credit account.
                For example, if a financial institution treats a request for
                multiple lines of credit at one time as sub-components of a single
                account, the financial institution reports the request as a single
                covered application. If, on the other hand, the financial
                institution treats each line of credit as a separate account, then
                the financial institution reports each request for a line of credit
                as a separate covered application, as set forth in comment 103(a)-4.
                 7. Changes in whether there is a covered credit transaction. In
                certain circumstances, an applicant may change the type of product
                [[Page 56589]]
                requested during the course of the application process. Assuming
                other requirements of a covered application are met, 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. If, on
                the other hand, an applicant initially requests a product that is a
                covered credit transaction, but then during the application process
                decides instead to seek a product that is not a covered credit
                transaction, the application is not a covered application and thus
                is not reported. If an applicant initially requests a product that
                is a covered credit transaction, the financial institution
                counteroffers with a product that is not a covered credit
                transaction, and the applicant declines to proceed or fails to
                respond, the application is reported as a covered application. For
                example, if an applicant initially applies for a term loan, but
                then, after consultation with the financial institution, decides
                that a lease would better meet its needs and decides to proceed with
                that product, the application is not a covered application and thus
                is not reported. However, if an applicant initially applies for a
                term loan, the financial institution offers to consider the
                applicant only for a lease, and the applicant refuses, the
                transaction is a covered application that must be reported.
                 103(b) Circumstances that are not covered applications.
                 1. In general. The circumstances set forth in Sec. 1002.103(b)
                are not covered applications for purposes of subpart B of this part,
                even if considered applications under subpart A of this part.
                However, in no way are the exclusions in Sec. 1002.103(b) intended
                to repeal, abrogate, annul, impair, change, or interfere with the
                scope of the term application in Sec. 1002.2(f) as applicable to
                subpart A.
                 2. Reevaluation, extension, or renewal requests that do not
                request additional credit amounts. An applicant's request to change
                one or more terms of an existing account does not constitute a
                covered application, unless the applicant is requesting additional
                credit amounts on the account. For example, an applicant's request
                to extend the duration on a line of credit or to remove a guarantor
                would not be a covered application.
                 3. Reevaluation, extension, or renewal requests that request
                additional credit amounts. An applicant's request for additional
                credit amounts on an existing account that is a covered credit
                transaction constitutes a covered application. For example, an
                applicant's request for a line increase on an existing line of
                credit, made in accordance with a financial institution's procedures
                for the type of credit requested, would be a covered application. As
                discussed in comment 107(a)(7)-4, when reporting a covered
                application that seeks additional credit amounts on an existing
                account, the financial institution need only report the additional
                credit amount sought, and not the entire credit amount. For example,
                if an applicant currently has a line of credit account for $100,000,
                and seeks to increase the line to $150,000, the financial
                institution reports the amount applied for as $50,000.
                 4. Reviews or evaluations initiated by the financial
                institution. For purposes of subpart B of this part, the term
                covered application does not include evaluations or reviews of
                existing accounts initiated by the financial institution because the
                applicant has not made the request. For example, if a creditor
                conducts periodic reviews of its existing lines of credit and
                decides to increase the applicant's line by $10,000, it is not a
                covered application because the applicant never made a request for
                the additional credit amounts. However, if such an evaluation or
                review of an existing account by a financial institution results in
                the financial institution inviting the applicant to apply for
                additional credit amounts on an existing account that is a covered
                credit transaction, and the applicant does so, the applicant's
                request constitutes a covered application for purposes of subpart B
                of this part. Similarly, the term covered application also does not
                include solicitations and firm offers of credit.
                 5. Inquiries and prequalification requests. An inquiry is a
                request by a prospective applicant for information about credit
                terms offered by the financial institution. A prequalification
                request is a request by a prospective applicant for a preliminary
                determination on whether the prospective applicant would likely
                qualify for credit under a financial institution's standards or for
                a determination on the amount of credit for which the prospective
                applicant would likely qualify. Inquiry and prequalification
                requests are not covered applications under subpart B of this part,
                even though in certain circumstances inquiries and prequalification
                requests may constitute applications under subpart A.
                Section 1002.104--Covered Credit Transactions and Excluded
                Transactions
                 104(a) Covered credit transaction.
                 1. General. The term ``covered credit transaction'' includes all
                business credit (including loans, lines of credit, credit cards, and
                merchant cash advances) unless otherwise excluded under Sec.
                1002.104(b).
                 104(b) Excluded transactions.
                 1. Factoring. The term ``covered credit transaction'' does not
                cover factoring as described herein. For the purpose of this
                subpart, 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. This description of
                factoring 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
                comment 9(a)(3)-3. A financial institution shall report an extension
                of business credit incident to a factoring arrangement that is
                otherwise a covered credit transaction as a ``Other sales-based
                financing transaction'' under Sec. 1002.107(a)(5).
                 2. Leases. The term ``covered credit transaction'' does not
                cover leases as described herein. A lease, for the purpose of this
                subpart, 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. 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.
                 3. Consumer-designated credit. The term ``covered credit
                transaction'' does not include consumer-designated credit used for
                business purposes. 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 subpart B of this
                part unless the financial institution designated or intended for the
                primary purpose of the account to be business-related.
                 4. Credit secured by certain investment properties. The term
                ``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. A financial institution should determine
                whether the property to which the covered credit transaction or
                application relates is or will be used as an investment property.
                For purposes of this comment, a property is an investment property
                if the applicant or one or more of the applicant's principal owners
                does not or will not occupy the property. For example, if an
                applicant purchases a property, does not occupy the property, and
                generates income by renting the property, the property is an
                investment property for purposes of this comment. Similarly, if an
                applicant purchases a property, does not occupy the property, and
                does not generate income by renting the property, but intends to
                generate income by selling the property, the property is an
                investment property. A property is an investment property if the
                applicant does not or will not occupy the property, even if the
                applicant does not consider the property as owned for investment
                purposes. For example, if a corporation purchases a property that is
                a dwelling under Sec. 1002.102(j), that it does not occupy, but
                that is for the long-term residential use of its employees, the
                property is an investment, even if the corporation considers the
                property as owned for business purposes rather than investment
                purposes, does not generate income by renting the property, and does
                not intend to generate income by selling the property at some point
                in time. If the property is for transitory use by employees, the
                property would not be considered a dwelling under Sec. 1002.102(j).
                 104(b)(1) Trade credit.
                 1. General. Trade credit, as defined in Sec. 1002.104(b)(1), is
                excluded from the definition of a covered credit transaction. An
                example of trade credit involves a supplier that finances the sale
                of equipment, supplies, or inventory. However, an extension of
                business credit by a financial institution other than the supplier
                for the financing of such items is not trade credit.
                 2. Trade credit under subpart A. The definition of trade credit
                under comment
                [[Page 56590]]
                9(a)(3)-2 applies to relevant provisions under subpart A, and 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
                comment 9(a)(3)-2.
                Section 1002.105--Covered Financial Institutions and Exempt
                Institutions
                 105(a) Financial institution.
                 1. Examples. Section 1002.105(a) defines 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 definition
                includes, but is not limited to, banks, savings associations, credit
                unions, online lenders, platform lenders, community development
                financial institutions, lenders involved in equipment and vehicle
                financing (captive financing companies and independent financing
                companies), commercial finance companies, organizations exempt from
                taxation pursuant to 26 U.S.C. 501(c), and governments or
                governmental subdivisions or agencies.
                 2. Motor vehicle dealers. Pursuant to Sec. 1002.101(a), subpart
                B of this part excludes from coverage persons defined 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).
                 105(b) Covered financial institution.
                 1. Preceding calendar year. The definition of covered financial
                institution refers to preceding calendar years. For example, in
                2026, the two preceding calendar years are 2024 and 2025.
                Accordingly, in 2026, Financial Institution A does not meet the
                loan-volume threshold in Sec. 1002.105(b) if did not originate at
                least 25 covered credit transactions for small businesses both
                during 2024 and during 2025.
                 2. Origination threshold. 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. For example, if in both
                2024 and 2025, Financial Institution B received 30 covered
                applications from small businesses and originated 20 covered credit
                transactions for small businesses, then for 2026, Financial
                Institution B is not a covered financial institution.
                 3. Annual consideration. Whether a financial institution is a
                covered financial institution in a particular year depends on its
                small business lending activity in the preceding two calendar years.
                Therefore, whether a financial institution is a covered financial
                institution is an annual consideration for each year that data may
                be compiled and maintained for purposes of subpart B of this part. A
                financial institution may be a covered financial institution for a
                given year of data collection (and the obligations arising from
                qualifying as a covered financial institution shall continue into
                subsequent years, pursuant to Sec. Sec. 1002.110 and 1002.111), but
                the same financial institution may not be a covered financial
                institution for the following year of data collection. For example,
                Financial Institution C originated 30 covered transactions for small
                businesses in both 2024 and 2025. In 2026, Financial Institution C
                is a covered financial institution and therefore is obligated to
                compile and maintain applicable 2026 small business lending data
                under Sec. 1002.107(a). During 2026, Financial Institution C
                originates 10 covered transactions for small businesses. In 2027,
                Financial Institution C is not a covered financial institution with
                respect to 2027 small business lending data, and is not obligated to
                compile and maintain 2027 data under Sec. 1002.107(a) (although
                Financial Institution C may volunteer to collect and maintain 2027
                data pursuant to Sec. 1002.5(a)(4)(vii) and as explained in comment
                105(b)-7). Pursuant to Sec. 1002.109(a), Financial Institution C
                shall submit its small business lending application register for
                2026 data in the format prescribed by the Bureau by June 1, 2027
                because Financial Institution C is a covered financial institution
                with respect to 2026 data, and the data submission deadline of June
                1, 2027 applies to 2026 data.
                 4. Merger or acquisition--coverage of surviving or newly formed
                institution. After a merger or acquisition, the surviving or newly
                formed financial institution is a covered financial institution
                under Sec. 1002.105(b) if it, considering the combined lending
                activity of the surviving or newly formed institution and the merged
                or acquired financial institutions (or acquired branches or
                locations), satisfies the criteria included in Sec. 1002.105(b).
                For example, Financial Institutions A and B merge. The surviving or
                newly formed financial institution meets the threshold in Sec.
                1002.105(b) if the combined previous components of the surviving or
                newly formed financial institution (A plus B) would have reported at
                least 25 covered credit transactions for small businesses for each
                of the two preceding calendar years. Similarly, if the combined
                previous components and the surviving or newly formed financial
                institution would have reported at least 25 covered transactions for
                small businesses for the year previous to the merger as well as 25
                covered transactions for small businesses for the year of the
                merger, the threshold described in Sec. 1002.105(b) would be met
                and the surviving or newly formed financial institution would be a
                covered institution under Sec. 1002.105(b) for the year following
                the merger. Comment 105(b)-5 discusses a financial institution's
                responsibilities with respect to compiling and maintaining (and
                subsequently reporting) data during the calendar year of a merger.
                 5. Merger or acquisition--coverage specific to the calendar year
                of the merger or acquisition. The scenarios described below
                illustrate a financial institution's responsibilities specifically
                for data from the calendar year of a merger or acquisition. For
                purposes of these illustrations, an ``institution that is not
                covered'' means either an institution that is not a financial
                institution, as defined in Sec. 1002.105(a), or a financial
                institution that is not a covered financial institution, as defined
                in Sec. 1002.105(b).
                 i. Two institutions that are not covered financial institutions
                merge. The surviving or newly formed institution meets all of the
                requirements necessary to be a covered financial institution. No
                data are required to be compiled, maintained, or reported for the
                calendar year of the merger (even though the merger creates an
                institution that meets all of the requirements necessary to be a
                covered financial institution).
                 ii. A covered financial institution and an institution that is
                not covered merge. The covered financial institution is the
                surviving institution, or a new covered financial institution is
                formed. For the calendar year of the merger, data are required to be
                compiled, maintained, and reported for covered applications from the
                covered financial institution and is optional for covered
                applications from the financial institution that was previously not
                covered.
                 iii. A covered financial institution and an institution that is
                not covered merge. The institution that is not covered is the
                surviving institution and remains not covered after the merger, or a
                new institution that is not covered is formed. For the calendar year
                of the merger, data are required to be compiled and maintained (and
                subsequently reported) for covered applications from the previously
                covered financial institution that took place prior to the merger.
                After the merger date, compiling, maintaining, and reporting data is
                optional for applications from the institution that was previously
                covered.
                 iv. Two covered financial institutions merge. The surviving or
                newly formed financial institution is a covered financial
                institution. Data are required to be compiled and maintained (and
                subsequently reported) for the entire calendar year of the merger.
                The surviving or newly formed financial institution files either a
                consolidated submission or separate submissions for that calendar
                year.
                 6. Foreign applicability. As discussed in comment 1(a)-2,
                Regulation B (including subpart B) generally does not apply to
                lending activities that occur outside the United States.
                 7. Voluntary collection and reporting. Section 1002.5(a)(4)(vii)
                through (ix) permits a creditor that is not a covered financial
                institution under Sec. 1002.105(b) to voluntarily collect and
                report information regarding covered applications in certain
                circumstances. If a creditor is voluntarily collecting information
                for covered applications regarding whether the applicant is a
                minority-owned business under Sec. 1002.107(a)(18) or a women-owned
                business under Sec. 1002.107(a)(19), and regarding the ethnicity,
                race, and sex of the applicant's principal owners under Sec.
                1002.107(20), it shall do so in compliance with Sec. Sec. 1002.107,
                1002.108, 1002.111, 1002.112, and 1002.114 as though it were a
                covered financial institution. See also comment 5(a)(4)-1. If a
                creditor is voluntarily reporting those covered applications to the
                Bureau, it shall do so in compliance with Sec. Sec. 1002.109 and
                1002.110 as though it were a covered financial institution.
                Section 1002.106--Business and Small Business
                 106(b) Small business.
                [[Page 56591]]
                 1. Change in determination of small business status--business is
                ultimately not a small business. If a financial institution
                initially determines an applicant is a small business as defined in
                Sec. 1002.106 based on available information and collects data
                required by Sec. 1002.107(a)(18) through (20) but later concludes
                that the applicant is not a small business, the financial
                institution may process and retain the data without violating the
                Act or this regulation if it meets the requirements of Sec.
                1002.112(c)(3). The financial institution shall not report the
                application on its small business lending application register
                pursuant to Sec. 1002.109.
                 2. Change in determination of small business status--business is
                ultimately a small business. Consistent with Sec. 1002.107(a)(14),
                a financial institution need not independently verify gross annual
                revenue. If a financial institution initially determines that the
                applicant is not a small business as defined in Sec. 1002.106, but
                later concludes the applicant is a small business, the financial
                institution shall endeavor to compile, maintain, and report the data
                required under Sec. 1002.107(a) in a manner that is reasonable
                under the circumstances. For example, if the applicant initially
                provides a gross annual revenue of $5.5 million (that is, above the
                threshold for a small business as defined in Sec. 1002.106(b)), but
                during the course of underwriting the financial institution
                discovers the applicant's gross annual revenue was in fact $4.75
                million (meaning that the applicant is within the definition of a
                small business under Sec. 1002.106(b)), the financial institution
                is required to report the covered application pursuant to Sec.
                1002.109. In this situation, the financial institution shall take
                reasonable steps upon discovery to compile, maintain, and report the
                data necessary under Sec. 1002.107(a) to comply with subpart B of
                this part for that covered application. Thus, in this example, even
                if the financial institution's procedure is typically to request
                applicant-provided data together with the application form, in this
                circumstance, the financial institution shall seek to collect the
                data during the application process necessary to comply with subpart
                B in a manner that is reasonable under the circumstances. The
                financial institution remains subject to Sec. 1002.107(c)(1)
                related to the time and manner of collecting applicant-provided
                data.
                 3. Affiliate revenue. As explained in comment 107(a)(14)-3, a
                financial institution is permitted, but not required, to report the
                gross annual revenue for the applicant that includes the revenue of
                affiliates as well. As explained in comment 107(a)(14)-1, pursuant
                to Sec. 1002.107(b), if the financial institution verifies the
                gross annual revenue provided by the applicant, it must report the
                verified information. Likewise, a financial institution is permitted
                to rely on an applicant's representations regarding gross annual
                revenue (which may or may not include the affiliate's revenue) for
                purposes of determining small business status under Sec.
                1002.106(b). However, if the applicant provides updated gross annual
                revenue information (see comment 107(c)(1)-7), or the financial
                institution verifies the gross annual revenue information, the
                financial institution must use the updated or verified information
                in determining small business status.
                Section 1002.107--Compilation of Reportable Data
                 107(a) Data format and itemization.
                 1. General. Section 1002.107(a) describes a covered financial
                institution's obligation to compile and maintain data regarding the
                covered applications it receives from small businesses.
                 i. A covered financial institution reports these 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.
                 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.
                 2. Filing Instructions Guide. Additional details and procedures
                for compiling data pursuant to Sec. 1002.107 are included in the
                Filing Instructions Guide, which is available at [a designated
                Bureau website].
                 107(a)(1) Unique identifier.
                 1. Unique within the financial institution. A financial
                institution complies with Sec. 1002.107(a)(1) by compiling and
                reporting an alphanumeric application or loan identifier unique
                within the financial institution to the specific application. The
                identifier must not exceed 45 characters, and must begin with the
                financial institution's Legal Entity Identifier (LEI), as defined in
                comment 109(b)(6)-1. Separate applications for the same applicant
                must have separate identifiers. The identifier may only include
                standard numerical and/or alphabetical characters and cannot include
                dashes, other special characters, or characters with diacritics. The
                financial institution may assign the unique identifier at any time
                prior to reporting the application. Refinancings or applications for
                refinancing must be assigned a different identifier than the
                transaction that is being refinanced. A financial institution with
                multiple branches must ensure that its branches do not use the same
                identifiers to refer to multiple applications.
                 2. Does not include directly identifying information. The unique
                identifier must not include any directly identifying information
                about the applicant or persons (natural or legal) associated with
                the applicant. See also Sec. 1002.111(c) and related commentary.
                 107(a)(2) Application date.
                 1. Consistency. Section 1002.107(a)(2) requires that, in
                reporting the date of covered application, a financial institution
                shall report the date it received the covered application, as
                defined under Sec. 1002.103, or the date shown on a paper or
                electronic application form. Although a financial institution need
                not choose the same approach for its entire small business lending
                application register, it should generally be consistent in its
                approach by, for example, establishing procedures for how to report
                this date within particular scenarios, products, or divisions. If
                the financial institution chooses to report the date shown on an
                application form and the institution retains multiple versions of
                the application form, the institution reports the date shown on the
                first application form satisfying the application definition
                provided under Sec. 1002.103.
                 2. Indirect applications. For an application that was not
                submitted directly to the financial institution or its affiliate (as
                described in Sec. 1002.107(a)(4)), the institution may report the
                date the application was received by the party that initially
                received the application, the date the application was received by
                the financial institution, or the date shown on the application
                form. Although a financial institution need not choose the same
                approach for its entire small business lending application register,
                it should generally be consistent in its approach by, for example,
                establishing procedures for how to report this date within
                particular scenarios, products, or divisions.
                 107(a)(3) Application method.
                 1. General. A financial institution complies with 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.
                 i. In-person. A 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).
                 ii. Telephone. 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 comment 1002.107(a)(3)-
                1.i but communicated with the applicant by telephone or via audio-
                based electronic media without a video component.
                 iii. Online. A financial institution reports the application
                method as ``online'' 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 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.
                 iv. Mail. 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 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).
                 2. Reporting for interactions with applicants involving both
                mail and online. If
                [[Page 56592]]
                a financial institution, or another party acting on the financial
                institution's behalf, communicated with the applicant both online as
                described in comment 1002.107(a)(3)-1.iii and by mail as described
                in 1002.107(a)(3)-1.iv, the financial institution reports the
                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 Sec. 1002.107(a)(20). For
                example, if a financial institution requests the ethnicity, race,
                and sex information through an online form, it reports the
                application method as ``online.'' If the financial institution
                requests the ethnicity, race, and sex information via a paper form
                sent to the applicant by mail, it reports the application method as
                ``mail.'' If the financial institution requests the ethnicity, race,
                and sex information electronically online or via an electronic
                document that is emailed to the applicant, that the applicant then
                prints and returns to the financial institution by mail, the
                financial institution reports the application method as ``online''
                (because that is the method by which the financial institution
                requested the ethnicity, race, and sex information).
                 107(a)(4) Application recipient.
                 1. Agents. If a financial institution is reporting actions taken
                by its agent consistent with comment 109(a)(3)-3, the agent is
                considered the financial institution for the purposes of Sec.
                1002.107(a)(4). For example, assume that an applicant submitted an
                application to Financial Institution A, and Financial Institution A
                made the credit decision acting as Financial Institution B's agent
                under State law. Financial Institution B reports the origination and
                indicates that the application was submitted directly to Financial
                Institution B.
                 107(a)(5) Credit type.
                 1. Reporting credit product--in general. A financial institution
                complies with Sec. 1002.107(a)(5)(i) by selecting the credit
                product requested from the list below. If an applicant requests more
                than one credit product, the financial institution reports each
                credit product requested as a separate application. If the credit
                product requested or originated is not included on this list, the
                financial institution selects ``other,'' and reports the credit
                specific product as free-form text.
                 i. Term loan--unsecured.
                 ii. Term loan--secured.
                 iii. Line of credit--unsecured.
                 iv. Line of credit--secured.
                 v. Credit card.
                 vi. Merchant cash advance.
                 vii. Other sales-based financing transaction.
                 viii. Other.
                 ix. Not provided by applicant and otherwise undetermined.
                 2. Credit product not provided by the applicant and otherwise
                undetermined. Pursuant to 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 financial institution
                reports that the credit product is ``not provided by applicant and
                otherwise undetermined.''
                 3. Reporting credit product involving counteroffers. 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, the
                financial institution reports the application for the original
                credit product as denied pursuant to 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.
                See comment 107(a)(9)-2.
                 4. Guarantees. A financial institution complies with Sec.
                1002.107(a)(5)(ii) by selecting the type or types of guarantees that
                were obtained for an originated covered credit transaction, or that
                would have been obtained if the covered credit transaction was
                originated, from the list below. The financial institution selects,
                if applicable, up to a maximum of five guarantees for a single
                application or transaction. If the type of guarantee does not appear
                on the list, the financial institution selects ``other guarantee''
                and reports the type of guarantee as free-form text. If no guarantee
                is obtained or would have been obtained if the covered credit
                transaction was originated, the financial institution selects ``no
                guarantee.''
                 i. Personal guarantee--owner(s).
                 ii. Personal guarantee--non-owner(s).
                 iii. SBA guarantee--7(a) program.
                 iv. SBA guarantee--504 program.
                 v. SBA guarantee--other.
                 vi. USDA guarantee.
                 vii. FHA insurance.
                 viii. Bureau of Indian Affairs guarantee
                 ix. Other Federal guarantee.
                 x. State or local government guarantee.
                 xi. Other guarantee.
                 xii. No guarantee.
                 5. Loan term. A financial institution complies with Sec.
                1002.107(a)(5)(iii) by reporting the number of months in the loan
                term for the covered credit transaction. The loan term is the number
                of months after which the legal obligation will mature or terminate.
                The financial institution does not include in the loan term the time
                that elapses, if any, between the settlement of the transaction and
                the first payment period. For example, if a loan closes on April 12,
                but the first payment is not due until June 1 and includes the
                interest accrued in May (but not April), the financial institution
                does not include the month of April in the loan term. The financial
                institution may round the loan term to the nearest full month or may
                count only full months and ignore partial months, as it so chooses.
                If a credit product, such as a credit card, does not have a loan
                term, the financial institution reports that the loan term is ``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.
                 6. Other sales-based financing transaction. For an extension of
                business credit incident to a factoring arrangement that is
                otherwise a covered credit transaction, a financial institution
                selects ``other sales-based financing transaction'' as the credit
                product. See comment 104(b)-1.
                 107(a)(6) Credit purpose.
                 1. General. A financial institution complies with Sec.
                1002.107(a)(6) by selecting the purpose or purposes of the covered
                credit transaction applied for or originated from the list below.
                 i. Purchase, construction/improvement, or refinance of owner-
                occupied dwelling(s).
                 ii. Purchase, construction/improvement, or refinance of non-
                owner-occupied dwelling(s).
                 iii. Purchase, construction/improvement, or refinance of non-
                owner-occupied, non-dwelling real estate.
                 iv. Purchase, construction/improvement, or refinance of owner-
                occupied, non-dwelling real estate.
                 v. Purchase, refinance, or rehabilitation/repair of motor
                vehicle(s) (including light and heavy trucks).
                 vi. Purchase, refinance, or rehabilitation/repair of equipment.
                 vii. Working capital (includes inventory or floor planning).
                 viii. Business start-up.
                 ix. Business expansion.
                 x. Business acquisition.
                 xi. Refinance existing debt (other than refinancings listed
                above).
                 xii. Line increase.
                 xiii. Other.
                 xiv. Not provided by applicant and otherwise undetermined.
                 xv. Not applicable.
                 2. More than one purpose. 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
                reports those purposes, up to a maximum of three, using the list
                provided, in any order it chooses. For example, if an applicant
                refinances a non-dwelling commercial building it owns and uses the
                funds to purchase a motor vehicle and expand the business it runs in
                a part of that building, the financial institution reports that the
                three purposes of the credit are purchase, construction/improvement,
                or refinance of owner-occupied, non-dwelling real estate; purchase,
                refinance, or rehabilitation/repair of motor vehicle(s) (including
                light and heavy trucks); and business expansion. If an application
                has more than three purposes, the financial institution reports any
                three of those purposes. In the example above, if the funds were
                also used to purchase equipment, the financial institution would
                select only three of the relevant purposes to report.
                 3. ``Other'' credit purpose. If a purpose of an application does
                not appear on the list of purposes provided, the financial
                institution reports ``other'' as the credit purpose and reports the
                credit purpose as free-form text. 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.
                [[Page 56593]]
                The financial institution reports a maximum of three credit
                purposes, including any ``other'' purpose reported.
                 4. Credit purpose not provided by applicant and otherwise
                undetermined. Pursuant to 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
                reports that the credit purpose is ``not provided by applicant and
                otherwise undetermined.''
                 5. Not applicable. If the application is for a credit product
                that generally has indeterminate or numerous potential purposes,
                such as a credit card, the financial institution may report credit
                purpose as ``not applicable.''
                 6. Excluded dwellings. As explained in comment 104(b)-4, subpart
                B of this part 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.
                 7. Collecting credit purpose. Pursuant to Sec. 1002.107(c)(1),
                a financial institution shall maintain procedures reasonably
                designed to collect applicant-provided information, including credit
                purpose. The financial institution is permitted, but not required,
                to present the list of credit purposes provided in comment
                107(a)(6)-1 to the applicant. The financial institution is also
                permitted to ask about purposes not included on the list provided in
                comment 107(a)(6)-1. If the applicant chooses a purpose or purposes
                not included on the provided list, the financial institution follows
                the instructions in comment 107(a)(6)-3 regarding reporting of
                ``other'' as the credit purpose. If an applicant chooses a purpose
                or purposes that are similar to purposes on the list provided, but
                uses different language, the financial institution reports the
                purpose or purposes from the list provided.
                 107(a)(7) Amount applied for.
                 1. Initial amount requested. A financial institution complies
                with Sec. 1002.107(a)(7) by reporting the initial amount of credit
                or the credit limit initially requested by the applicant. The
                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. 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. If the applicant requests an amount as a
                range of numbers, the financial institution reports the midpoint of
                that range.
                 2. No amount requested. Pursuant to 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.'' If the particular product applied for does
                not involve a specific amount requested or underwritten, the
                financial institution reports that the requirement is ``not
                applicable.''
                 3. Firm offers. 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.
                 4. Additional amounts on an existing account. 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
                extended. See comment 103(b)-3.
                 107(a)(8) Amount approved or originated.
                 1. General. A financial institution complies with 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 Sec.
                1002.107(a)(9), reports as denied, withdrawn by the applicant, or
                incomplete, the financial institution reports that the amount
                approved or originated is ``not applicable.''
                 2. Multiple approval amounts. A financial institution may
                sometimes approve an applicant for more than one credit amount,
                allowing the applicant to choose which amount the applicant prefers
                for the extension or line of credit. When multiple approval amounts
                are offered for a closed-end credit transaction for which the action
                taken is approved but not accepted, and the applicant does not
                accept the approved offer of credit in any amount, the financial
                institution reports the highest amount approved. If the applicant
                accepts the offer of closed-end credit, the financial institution
                reports the amount originated. When multiple approval amounts are
                offered for an open-end credit transaction for which the action
                taken is approved but not accepted, and the applicant does not
                accept the approved offer of credit in any amount, the financial
                institution reports the highest amount approved. If the applicant
                accepts the offer of open-end credit, the financial institution
                reports the actual credit limit established.
                 3. Amount approved or originated--closed-end credit transaction.
                For an originated closed-end credit transaction, the financial
                institution reports the principal amount to be repaid. This amount
                will generally be disclosed on the legal obligation.
                 4. Amount approved or originated--refinancing. For a
                refinancing, the financial institution reports the amount of credit
                approved or originated under the terms of the new debt obligation.
                 5. Amount approved or originated--counteroffer. 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. If an applicant
                does not agree to proceed with consideration of a counteroffer or
                fails to respond, the institution reports the application as denied
                and reports ``not applicable'' for the amount approved or
                originated. See comment 107(a)(9)-2.
                 107(a)(9) Action taken.
                 1. General. A financial institution complies with Sec.
                1002.107(a)(9) by selecting the action taken by the financial
                institution on the application from the following list: originated,
                approved but not accepted, denied, withdrawn by the applicant, or
                incomplete. A financial institution identifies the applicable action
                taken code based on final action taken on the covered application.
                 i. Originated. A financial institution reports that the covered
                credit transaction was originated if the financial institution made
                a credit decision approving the application and that credit decision
                results in an extension of credit.
                 ii. Approved but not accepted. A financial institution reports
                an application as approved but not accepted if the financial
                institution made a credit decision approving the application, but
                the applicant or the party that initially received the application
                fails to respond to the financial institution's approval within the
                specified time, or the covered credit transaction was not otherwise
                consummated or the account was not otherwise opened.
                 iii. Denied. A financial institution reports that the
                application was denied if it made a credit decision denying the
                application before an applicant withdraws the application, before
                the file is closed for incompleteness, or before the application is
                denied for incompleteness.
                 iv. Withdrawn by the applicant. A financial institution reports
                that the application was withdrawn if the application is expressly
                withdrawn by the applicant before the financial institution makes a
                credit decision approving or denying the application, before the
                file is closed for incompleteness, or before the application is
                denied for incompleteness.
                 v. Incomplete. A financial institution reports incomplete if the
                financial institution took adverse action on the basis of
                incompleteness under Sec. 1002.9(c)(1)(i) or provided a written
                notice of incompleteness under Sec. 1002.9(c)(2), and the applicant
                did not respond to the request for additional information within the
                period of time specified in the notice.
                 2. Treatment of counteroffers. If a financial institution makes
                a counteroffer to grant credit on terms other than those originally
                requested by the applicant (for example, for a shorter loan
                maturity, with a different interest rate, or in a different amount)
                and the applicant declines 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
                [[Page 56594]]
                as the disposition of the application based on the terms of the
                counteroffer. For example, assume an applicant applies for a term
                loan and the financial institution makes a counteroffer to proceed
                with consideration of a line of credit. If the applicant declines to
                be considered for a line of credit, the financial institution
                reports the application as a denied request for a term loan. If, on
                the other hand, the applicant agrees to be considered for a line of
                credit, then the financial institution reports the action taken as
                the disposition of the application for the line of credit. For
                instance, using the same example, if the financial institution makes
                a credit decision approving the line of credit, but the applicant
                fails to respond to the financial institution's approval within the
                specified time by accepting the credit offer, the financial
                institution reports the application on the line of credit as
                approved but not accepted.
                 3. Treatment of rescinded transactions. If a borrower
                successfully rescinds a transaction after closing but before a
                financial institution is required to submit its small business
                lending application register containing the information for the
                application under Sec. 1002.109, the institution reports the
                application as approved but not accepted.
                 4. Treatment of pending applications. A financial institution
                does not report any application still pending at the end of the
                calendar year; it reports such applications on its small business
                lending application register for the year in which final action is
                taken.
                 5. Treatment of conditional approvals. If a financial
                institution issues an approval that is subject to the applicant
                meeting certain conditions, the financial institution reports the
                action taken as provided below dependent on whether the conditions
                are solely customary commitment or closing conditions or if the
                conditions include any underwriting or creditworthiness conditions.
                Customary commitment or closing conditions include, for example, a
                clear-title requirement, proof of insurance policies, a
                subordination agreement from another lienholder, or property titling
                of associated accounts. Underwriting or creditworthiness conditions
                include, for example, conditions that constitute a counteroffer
                (such as a demand for a higher down-payment), satisfactory loan-to-
                value ratios, or verification or confirmation, in whatever form the
                institution requires, that the applicant meets underwriting
                conditions concerning applicant creditworthiness, including
                documentation or verification of revenue, income or assets.
                 i. Conditional approval--denial. If the approval is conditioned
                on satisfying underwriting or creditworthiness conditions, those
                conditions are not met, and the financial institution takes adverse
                action on some basis other than incompleteness, the financial
                institution reports the action taken as denied.
                 ii. Conditional approval--incompleteness. If the approval is
                conditioned on satisfying underwriting or creditworthiness
                conditions that the financial institution needs to make the credit
                decision, and the financial institution takes adverse action on the
                basis of incompleteness under Sec. 1002.9(c)(1)(i), or has sent a
                written notice of incompleteness under Sec. 1002.9(c)(2) and the
                applicant did not respond within the period of time specified in the
                notice, the financial institution reports the action taken as
                incomplete.
                 iii. Conditional approval--approved but not accepted. If the
                approval is conditioned on satisfying conditions that are solely
                customary commitment or closing conditions and the conditions are
                not met, the financial institution reports the action taken as
                approved but not accepted. If all the conditions (underwriting,
                creditworthiness, or customary commitment or closing conditions) are
                satisfied and the financial institution agrees to extend credit but
                the covered credit transaction is not originated (for example,
                because the applicant withdraws), the financial institution reports
                the action taken as approved but not accepted.
                 iv. Conditional approval--withdrawn by the applicant. If the
                applicant expressly withdraws before satisfying all underwriting or
                creditworthiness conditions and before the institution denies the
                application or before the institution closes the file for
                incompleteness, the financial institution reports the action taken
                as withdrawn.
                 107(a)(10) Action taken date.
                 1. Reporting action taken date for denied applications. For
                applications that are denied, a financial institution reports either
                the date the application was denied or the date the denial notice
                was sent to the applicant.
                 2. Reporting action taken date for applications withdrawn by
                applicant. For applications that are withdrawn by the applicant, the
                financial institution reports the date the express withdrawal was
                received, or the date shown on the notification form in the case of
                a written withdrawal.
                 3. Reporting action taken date for applications that are
                approved but not accepted. For applications approved by a financial
                institution but not accepted by the applicant, the financial
                institution reports any reasonable date, such as the approval date,
                the deadline for accepting the offer, or the date the file was
                closed. A financial institution should generally be consistent in
                its approach to reporting by, for example, establishing procedures
                for how to report this date for particular scenarios, products, or
                divisions.
                 4. Reporting action taken date for originated covered credit
                transactions. For covered credit transactions that are originated, a
                financial institution generally reports the closing or account
                opening date. 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. A financial
                institution should generally be consistent in its approach to
                reporting by, for example, establishing procedures for how to report
                this date in different scenarios, products, or divisions.
                 5. Reporting action taken date for incomplete applications. For
                files closed for incompleteness or denied for incompleteness, the
                financial institution reports either the date the action was taken
                or the date the denial or incompleteness notice was sent to the
                applicant.
                 107(a)(11) Denial reasons.
                 1. Reason for denial--in general. A financial institution
                complies with 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. For example, if a financial institution denies an
                application due to insufficient cashflow, unacceptable collateral,
                and unverifiable business information, the financial institution is
                required to report these three reasons. The reasons reported must
                accurately describe the principal reason or reasons the financial
                institution denied the application. A financial institution reports
                denial reasons by selecting its principal reason or reasons for
                denying the application from the following list:
                 i. Credit characteristics of the business. A financial
                institution reports the denial reason as ``credit characteristics of
                the business'' if it denies the application based on an assessment
                of the business's ability to meet its current or future credit
                obligations. Examples include business credit score, history of
                business bankruptcy or delinquency, and/or a high number of recent
                business credit inquiries.
                 ii. Credit characteristics of the principal owner(s) or
                guarantor(s). A financial institution reports the denial reason as
                ``credit characteristics of the principal owner(s) or guarantor(s)''
                if it denies the application based on an assessment of the principal
                owner(s) or guarantor(s)'s ability to meet its current or future
                credit obligations. Examples include principal owner(s) or
                guarantor(s)'s credit score, history of charge offs, bankruptcy or
                delinquency, low net worth, limited or insufficient credit history,
                or history of excessive overdraft.
                 iii. Use of loan proceeds. A financial institution reports the
                denial reason as ``use of loan proceeds'' if it denies an
                application because, as a matter of policy or practice, it limits
                lending to certain kinds of businesses, particular product lines
                within a business class, or certain industries it has identified as
                high risk. For example, if an application for credit to establish a
                cannabis dispensary is denied by a financial institution because it
                has classified all cannabis-related business as ``high risk,'' the
                financial institution reports the reason for denial as ``use of loan
                proceeds.''
                 iv. Cashflow. A financial institution reports the denial reason
                as ``cashflow'' when it denies an application due to insufficient or
                inconsistent cashflow.
                 v. Collateral. A financial institution reports the denial reason
                as ``collateral'' when it denies an application due to insufficient,
                inappropriate, or unacceptable collateral.
                 vi. Time in business. A financial institution reports the denial
                reason as ``time in business'' when it denies an application due to
                insufficient time or experience in a line of business. For example,
                a credit applicant establishes a business and applies for credit
                [[Page 56595]]
                five months later. The financial institution may determine that the
                applicant has insufficient experience in the business under the
                institution's underwriting standards and deny the application.
                 vii. Government criteria. Certain loan programs are backed by
                government agencies that have specific eligibility requirements.
                When those requirements are not met by an applicant, and the
                financial institution denies the application, the financial
                institution reports the denial reason as ``government criteria.''
                For example, if an applicant cannot meet a government-guaranteed
                loan program's requirement to provide a guarantor or proof of
                insurance, the financial institution reports the reason for the
                denial as ``government criteria.''
                 viii. Aggregate exposure. Aggregate exposure is a measure of the
                total exposure or level of indebtedness of the business and its
                principal owner(s) associated with an application. A financial
                institution reports the denial reason as ``aggregate exposure''
                where the total debt associated with the application is deemed high
                or exceeds certain debt thresholds set by the financial institution.
                For example, if an application for unsecured credit exceeds the
                maximum amount a financial institution is permitted to approve per
                applicant, as stated in its credit guidelines, and the financial
                institution denies the application for this reason, the financial
                institution reports the reason for denial as ``aggregate exposure.''
                 ix. Unverifiable information. A financial institution reports
                the denial reason as ``unverifiable information'' when it is unable
                to verify information on an application, and denies the application
                for that reason. The unverifiable information must be necessary for
                the financial institution to make a credit decision based on its
                procedures for the type of credit requested. Examples include
                unverifiable assets or collateral, unavailable business credit
                report, and unverifiable business ownership composition.
                 x. Other. 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.
                 2. Reason for denial--not applicable. A financial institution
                complies with Sec. 1002.107(a)(11) by reporting that the
                requirement is not applicable if the action taken on the
                application, pursuant to Sec. 1002.107(a)(9), is not a denial. For
                example, if the application resulted in an originated covered credit
                transaction, or the application was approved but not accepted, the
                financial institution complies with Sec. 1002.107(a)(11) by
                reporting not applicable.
                 107(a)(12) Pricing information.
                 1. General. For applications that a financial institution,
                pursuant to Sec. 1002.107(a)(9), reports as denied, withdrawn by
                the applicant, or incomplete, the financial institution reports that
                pricing information is ``not applicable.''
                 107(a)(12)(i) Interest rate.
                 1. Interest rate--introductory period. If a covered credit
                transaction includes an initial period with an introductory interest
                rate, after which the interest rate adjusts upwards or shifts from a
                fixed to variable rate, a financial institution complies with Sec.
                1002.107(a)(12)(i) by reporting information about the interest rate
                applicable after the introductory period. For example, if a
                financial institution originates a covered credit transaction with a
                fixed, initial interest rate of 0 percent for six months following
                origination, after which the interest rate will adjust according to
                a Prime index rate plus a 3 percent margin, the financial
                institution reports the 3 percent margin, Prime's value, and Prime
                as the name of the index used to adjust the interest rate.
                 2. Multiple interest rates. If a covered credit transaction
                includes multiple interest rates applicable to different credit
                features, a financial institution complies with Sec.
                1002.107(a)(12)(i) by reporting the interest rate applicable to the
                amount of credit approved or originated reported in Sec.
                1002.107(a)(8). For example, if a financial institution originates a
                credit card with different interest rates for purchases, balance
                transfers, cash advances, and overdraft advances, the financial
                institution reports the interest rate applicable for purchases.
                 3. Index names. A financial institution complies with Sec.
                1002.107(a)(12)(i) by selecting the index used from the following
                list: Wall Street Journal Prime, 6-month CD rate, 1-year T-Bill, 3-
                year T-Bill, 5-year T-Note, 12-month average of 10-year T-Bill, Cost
                of Funds Index (COFI)-National, Cost of Funds Index (COFI)-11th
                District. If the index used does not appear on the list of indices
                provided, the financial institution reports ``other'' and provides
                the name of the index via free-form text.
                 4. Index value. For covered transactions with an adjustable
                interest rate, a financial institution complies with Sec.
                1002.107(a)(12)(i)(B) by reporting the index value that is
                applicable at the time the application was approved by the financial
                institution. For covered credit transactions that include an initial
                period with an introductory interest rate, after which the interest
                rate adjusts upwards or shifts from a fixed to variable rate, a
                financial institution complies with Sec. 1002.107(a)(12)(i)(B) by
                reporting the index value applicable at the time the application was
                approved by the financial institution of the rate in effect after
                the introductory interest rate is complete.
                 107(a)(12)(ii) Total origination charges.
                 1. Charges in comparable cash transactions. Charges imposed
                uniformly in cash and credit transactions are not reportable under
                Sec. 1002.107(a)(12)(ii). In determining whether an item is part of
                the total origination charges, a financial institution should
                compare the covered credit transaction in question with a similar
                cash transaction. A financial institution financing the sale of
                property or services may compare charges with those payable in a
                similar cash transaction by the seller of the property or service.
                 2. Charges by third parties. A financial institution includes
                fees and amounts charged by someone other than the financial
                institution in the total charges reported if the financial
                institution:
                 i. Requires the use of a third party as a condition of or an
                incident to the extension of credit, even if the applicant can
                choose the third party; or
                 ii. Retains a portion of the third-party charge, to the extent
                of the portion retained.
                 3. Special rule; broker fees. A financial institution complies
                with Sec. 1002.107(a)(12)(ii) by including fees charged by a broker
                (including fees paid by the applicant directly to the broker or to
                the financial institution for delivery to the broker) in the total
                origination charges reported even if the financial institution does
                not require the applicant to use a broker and even if the financial
                institution does not retain any portion of the charge. For more
                information on broker fees, see commentary for Sec.
                1002.107(a)(12)(iii).
                 4. Bundled services. Total origination charges include all
                charges imposed directly or indirectly by the financial institution
                at or before origination as an incident to or a condition of the
                extension of credit. Accordingly, a financial institution complies
                with Sec. 1002.107(a)(12)(ii) by including charges for other
                products or services paid at or before origination in the total
                origination charges reported if the financial institution requires
                the purchase of such other product or service as a condition of or
                an incident to the extension of credit.
                 5. Origination charges--examples. Examples of origination
                charges may include application fees, credit report fees, points,
                appraisal fees, and other similar charges.
                 107(a)(12)(iii) Broker fees.
                 1. Amount. A financial institution complies with Sec.
                1002.107(a)(12)(iii) by including the fees reported in Sec.
                1002.107(a)(12)(ii) that are fees paid by the applicant directly to
                the broker or to the financial institution for delivery to the
                broker. For example, a covered transaction has $3000 of total
                origination charges. Of that $3000, $250 are fees paid by the
                applicant directly to a broker and an additional $300 are fees paid
                to the financial institution for delivery to the broker. The
                financial institution complies with Sec. 1002.107(a)(12)(iii) by
                reporting $550 in the broker fees reported.
                 2. Fees paid directly to a broker by an applicant. A financial
                institution complies with Sec. 1002.107(a)(12)(iii) by relying on
                the best information readily available to the financial institution
                at the time final action is taken. Information readily available
                could include, for example, information provided by an applicant or
                broker that the financial institution reasonably believes regarding
                the amount of fees paid by the applicant directly to the broker.
                 107(a)(12)(iv) Initial annual charges.
                 1. Charges during the initial annual period. The total initial
                annual charges include all charges scheduled to be imposed during
                the initial annual period following origination. For example, if a
                financial institution originates a covered credit transaction with a
                $50 monthly fee and a $100 annual fee, the financial institution
                complies with Sec. 1002.107(a)(12)(iv) by reporting $700 in the
                initial annual charges reported.
                 2. Interest excluded. A financial institution complies with
                Sec. 1002.107(a)(12)(iv) by excluding any interest expense from the
                initial annual charges reported.
                [[Page 56596]]
                 3. Avoidable charges. A financial institution complies with
                Sec. 1002.107(a)(12)(iv) by only including scheduled charges and
                excluding any charges for events that are avoidable by the applicant
                from the initial annual charges reported. Examples of avoidable
                charges include charges for late payment, for exceeding a credit
                limit, for delinquency or default, or for paying items that overdraw
                an account.
                 4. Initial annual charges--examples. Examples of charges
                scheduled to be imposed during the initial annual period may include
                monthly fees, annual fees, and other similar charges.
                 5. Scheduled charges with variable amounts. A financial
                institution complies with Sec. 1002.107(a)(12)(iv) by reporting as
                the default the highest amount for a charge scheduled to be imposed.
                For example, if a covered credit transaction has a $75 monthly fee,
                but the fee is reduced to $0 if the applicant maintains an account
                at the financial institution originating the covered credit
                transaction, the financial institution complies with Sec.
                1002.107(a)(12)(iv) by reporting $900 ($75x12) in the initial annual
                charges reported.
                 107(a)(12)(v) Additional cost for merchant cash advances or
                other sales-based financing.
                 1. Merchant cash advances. Section 1002.107(a)(12)(v) requires a
                financial institution to report the difference between the amount
                advanced and the amount to be repaid for a merchant cash advance or
                other sales-based financing transaction. For example, in a merchant
                cash advance, a financial institution reports the difference between
                the purchase price and the amount to be repaid, using the amounts
                provided in the contract between the financial institution and the
                applicant.
                 107(a)(12)(vi) Prepayment penalties.
                 1. Policies and procedures applicable to the covered credit
                transaction. The policies and procedures applicable to the covered
                credit transaction include the practices that the financial
                institution follows when evaluating applications for the specific
                credit type and credit purpose requested. For example, assume that a
                financial institution's written procedures permit it to include
                prepayment penalties in the loan agreement for its term loans
                secured by non-owner occupied commercial real estate. For such
                transactions, the financial institution includes prepayment
                penalties in some loan agreements but not others. For an application
                for, or origination of, a term loan secured by non-owner occupied
                commercial real estate, the financial institution reports under
                Sec. 1002.107(12)(vi)(A) that a prepayment penalty could have been
                included under the policies and procedures applicable to the
                transaction, regardless of whether the term loan secured by non-
                owner occupied commercial real estate actually includes a prepayment
                penalty.
                 107(a)(13) Census tract.
                 1. General. A financial institution complies with Sec.
                1002.107(a)(13) by reporting a census tract number as defined by the
                U.S. Census Bureau, which includes State and county numerical codes.
                A financial institution complies with Sec. 1002.107(a)(13) if it
                uses the boundaries and codes in effect on January 1 of the calendar
                year covered by the small business lending application register that
                it is reporting. The financial institution reports census tract
                based on the following:
                 i. Proceeds address. A financial institution complies with Sec.
                1002.107(a)(13) by reporting a census tract based on the address or
                location where the proceeds of the credit applied for or originated
                will be or would have been principally applied, if known. For
                example, a financial institution would report a census tract based
                on the address or location of the site where the proceeds of a
                construction loan will be applied.
                 ii. Main office or headquarters address. If the address or
                location where the proceeds of the credit applied for or originated
                is unknown, a financial institution complies with Sec.
                1002.107(a)(13) by reporting a census tract number based on the
                address or location of the main office or headquarters of the
                applicant, if known. For example, the address or location of the
                main office or headquarters of the applicant may be the home address
                of a sole proprietor or the office address of a sole proprietor or
                other applicant.
                 iii. Another address or location. If neither the address or
                location where the proceeds of the credit applied for or originated
                will be or would have been principally applied nor the address or
                location of the main office or headquarters of the applicant are
                known, a financial institution complies with Sec. 1002.107(a)(13)
                by reporting a census tract number based on another address or
                location associated with the applicant.
                 iv. Type of address used. In addition to reporting the census
                tract, pursuant to Sec. 1002.107(a)(13)(iv) a financial institution
                must report which one of the three types of addresses or locations
                listed in Sec. 1002.107(a)(13)(i) through (iii) and described in
                comments 107(a)(13)-1.i through iii that the census tract is
                determined from.
                 2. Financial institution discretion. A financial institution
                complies with Sec. 1002.107(a)(13) by identifying the appropriate
                address or location and the type of that address or location in good
                faith, using appropriate information from the applicant's credit
                file or otherwise known by the financial institution. A financial
                institution is not required to make inquiries beyond its standard
                procedures as to the nature of the addresses or locations it
                collects.
                 3. Address or location not provided by applicant and otherwise
                undetermined. Pursuant to Sec. 1002.107(c)(1), a financial
                institution shall maintain procedures reasonably designed to collect
                applicant-provided information, which includes at least one address
                or location for an applicant for census tract reporting. However, if
                a financial institution is nonetheless unable to collect or
                otherwise determine any address or location for an application, the
                financial institution reports that the census tract information is
                ``not provided by applicant and otherwise undetermined.''
                 4. Safe harbor. As described in Sec. 1002.112(c)(1) and comment
                112(c)(1)-1, a financial institution that obtains an incorrect
                census tract by correctly using a geocoding tool provided by the
                FFIEC or the Bureau does not violate the Act or subpart B of this
                part.
                 107(a)(14) Gross annual revenue.
                 1. Collecting gross annual revenue. A financial institution may
                rely on statements of or information provided by the applicant in
                collecting and reporting gross annual revenue. However, pursuant to
                Sec. 1002.107(b), if the financial institution verifies the gross
                annual revenue provided by the applicant, it must report the
                verified information. The financial institution may use the
                following language to ask about gross annual revenue, if it does not
                collect gross annual revenue by another method, and may rely on the
                applicant's answer:
                 What was the gross annual revenue of the business applying for
                credit in its last full fiscal year? Gross annual revenue is the
                amount of money the business earned before subtracting taxes and
                other expenses. You may provide gross annual revenue calculated
                using any reasonable method.
                 2. Gross annual revenue not provided by applicant and otherwise
                undetermined. Pursuant to Sec. 1002.107(c)(1), a financial
                institution shall maintain procedures reasonably designed to collect
                applicant-provided information, which includes the gross annual
                revenue of the applicant. However, if a financial institution is
                nonetheless unable to collect or determine the gross annual revenue
                of the applicant, the financial institution reports that the gross
                annual revenue is ``not provided by applicant and otherwise
                undetermined.''
                 3. Affiliate revenue. A financial institution is permitted, but
                not required, to report the gross annual revenue for the applicant
                that includes the revenue of affiliates as well. For example, if the
                financial institution does not normally collect information on
                affiliate revenue, the financial institution reports only the
                applicant's revenue and does not include the revenue of any
                affiliates when it has not collected that information. Similarly, in
                determining whether the applicant is a small business under Sec.
                1002.106(b), a financial institution may rely on an applicant's
                representations regarding gross annual revenue, which may or may not
                include the affiliate's revenue.
                 107(a)(15) NAICS code.
                 1. General. NAICS stands for North American Industry
                Classification System. The Office of Management and Budget has
                charged the Economic Classification Policy Committee with the
                maintenance and review of NAICS. A financial institution complies
                with Sec. 1002.107(a)(15) if it uses the NAICS codes in effect on
                January 1 of the calendar year covered by the small business lending
                application register that it is reporting.
                 2. NAICS not provided by applicant and otherwise undetermined.
                Pursuant to Sec. 1002.107(c)(1), a financial institution shall
                maintain procedures reasonably designed to collect applicant-
                provided information, which includes NAICS code. However, if a
                financial institution is nonetheless unable to collect or otherwise
                determine the applicant's NAICS code, the financial institution
                reports that the NAICS code is ``not provided by applicant and
                otherwise undetermined.''
                [[Page 56597]]
                 3. Reliance on statements by applicant. Consistent with Sec.
                1002.107(b), a financial institution may rely on statements of or
                information provided by the applicant in collecting and reporting
                the NAICS code. For example, a financial institution may rely on the
                NAICS code on an applicant's tax return that the applicant has
                otherwise provided to the financial institution.
                 4. Reliance on other information. A financial institution may
                rely on a NAICS code obtained through the financial institution's
                use of business information products, such as company profiles or
                business credit reports, which provide the applicant's NAICS code.
                 5. Safe harbor. A financial institution that identifies an
                incorrect NAICS code does not violate the Act or subpart B of this
                part under the circumstances described in Sec. 1002.112(c)(2).
                 107(a)(16) Number of workers.
                 1. Collecting number of workers. In collecting the number of
                workers from an applicant, a financial institution shall explain
                that full-time, part-time and seasonal employees, as well as
                contractors who work primarily for the applicant, would be counted
                as workers, but principal owners of the business would not. If
                asked, the financial institution shall explain that volunteers would
                not be counted as workers, and workers for affiliates of the
                applicant would only be counted if the financial institution were
                also collecting the affiliates' gross annual revenue. The financial
                institution may rely on statements of or information provided by the
                applicant in collecting and reporting number of workers. However,
                pursuant to Sec. 1002.107(b), if the financial institution verifies
                the number of workers provided by the applicant, it must report the
                verified information. The financial institution may use the
                following language to ask about the number of workers, if it does
                not collect the number of workers by another method, and may rely on
                the applicant's answer:
                 Counting full-time, part-time and seasonal workers, as well as
                contractors who work primarily for the business applying for credit,
                but not counting principal owners of the business, how many people
                work for the business applying for credit?
                 2. Number of workers not provided by applicant and otherwise
                undetermined. Pursuant to Sec. 1002.107(c)(1), a financial
                institution shall maintain procedures reasonably designed to collect
                applicant-provided information, which includes the number of workers
                of the applicant. However, if a financial institution is nonetheless
                unable to collect or determine the number of workers of the
                applicant, the financial institution reports that the number of
                workers is ``not provided by applicant and otherwise undetermined.''
                 107(a)(17) Time in business.
                 1. As relied on or collected. A financial institution complies
                with Sec. 1002.107(a)(17) by reporting the time the applicant has
                been in business as relied on in making the credit decision or
                collected by the financial institution. The financial institution
                must report the time in business in whole years and indicate if a
                business has not begun operating yet or has been in operation for
                less than a year. When the financial institution relies on an
                applicant's time in business as part of a credit decision, it
                reports the time in business relied on in making the credit
                decision. (See comments 107(a)(17)-2 and -3 below regarding
                reporting of the time in business relied on.) However, Sec.
                1002.107(a)(17) does not require the financial institution to rely
                on an applicant's time in business in making a credit decision. The
                financial institution may rely on statements of or information
                provided by the applicant in collecting and reporting time in
                business. However, pursuant to Sec. 1002.107(b), if the financial
                institution verifies the time in business provided by the applicant,
                it must report the verified information.
                 2. Time in business relied on. When a financial institution
                evaluates an applicant's time in business as part of a credit
                decision, it reports the time in business relied on in making the
                credit decision. For example, if the financial institution relies on
                the number of years of experience the applicant's owners have in the
                current line of business, the financial institution reports that
                number of years as the time in business. Similarly, if the financial
                institution relies on the number of years that the applicant has
                existed, the financial institution reports the number of years that
                the applicant has existed as the time in business. The financial
                institution reports the length of business existence or experience
                duration that it relies on in making its credit decision, and is not
                required to adopt any particular definition of time in business.
                 3. Multiple factors considered. A financial institution relies
                on an applicant's time in business in making a credit decision if
                the time in business was a factor in the credit decision, even if it
                was not a dispositive factor. For example, if the time in business
                is one of multiple factors in the financial institution's credit
                decision, the financial institution has relied on the time in
                business even if the financial institution denies the application
                because one or more underwriting requirements other than the time in
                business are not satisfied.
                 4. Collecting time in business. If the financial institution
                does not rely on time in business in considering an application,
                pursuant to Sec. 1002.107(c)(1) it shall still maintain procedures
                reasonably designed to collect applicant-provided information, which
                includes the applicant's time in business. In collecting time in
                business from an applicant, the financial institution complies with
                Sec. 1002.107(a)(17) by asking for the number of years that the
                applicant has been operating the business it operates now. When the
                applicant has multiple owners with different numbers of years
                operating that business, the financial institution collects and
                reports the greatest number of years of any owner. (However, the
                financial institution does not need to comply with this instruction
                if it collects and relies on the time in business by another method
                in making the credit decision.)
                 5. Time in business not provided by applicant and otherwise
                undetermined. Pursuant to Sec. 1002.107(c)(1), a financial
                institution shall maintain procedures reasonably designed to collect
                applicant-provided information, which includes the time in business
                of the applicant. However, if a financial institution is nonetheless
                unable to collect or determine the time in business of the
                applicant, the financial institution reports that the time in
                business is ``not provided by applicant and otherwise
                undetermined.''
                 107(a)(18) Minority-owned business status.
                 1. General. Unless a financial institution is permitted to
                report minority-owned business status based on previously collected
                data pursuant to Sec. 1002.107(c)(2), a financial institution must
                ask an applicant whether it is a minority-owned business for each
                covered application. The financial institution must permit an
                applicant to refuse to answer the financial institution's inquiry
                and must inform the applicant that the applicant is not required to
                provide the information. The financial institution must report the
                applicant's response, its refusal to answer the inquiry (such as
                when the applicant indicates that it does not wish to provide the
                requested information), or its failure to respond to the inquiry
                (such as when the applicant fails to submit a data collection form).
                See appendix F for additional instructions on collecting and
                reporting minority-owned business status.
                 2. Notice of non-discrimination. When requesting minority-owned
                business status from an applicant, a financial institution must
                inform the applicant that the financial institution cannot
                discriminate on the basis of the applicant's minority-owned business
                status, or on whether the applicant provides its minority-owned
                business status. A financial institution may combine this non-
                discrimination notice regarding minority-owned business status with
                the similar non-discrimination notices that a financial institution
                is required to provide when requesting women-owned business status
                and a principal owner's ethnicity, race, and sex if a financial
                institution requests minority-owned business status, women-owned
                business status, and/or a principal owner's ethnicity, race, and sex
                in the same data collection form or at the same time.
                 3. Recording an applicant's response regarding minority-owned
                business status separate from the application. A financial
                institution must record an applicant's response to the financial
                institution's inquiry pursuant to Sec. 1002.107(a)(18) separate
                from the application and accompanying information. See comment
                111(b)-1. If the financial institution provides a paper or
                electronic data collection form, the data collection form must not
                be part of the application form or any other document that the
                financial institution uses to provide or collect any information
                other than women-owned business status, minority-owned business
                status, principal owners' ethnicity, race, and sex, and the number
                of the applicant's principal owners. See the sample data collection
                form in appendix E. For example, if the financial institution sends
                the data collection form via email, the data collection form should
                be a separate attachment to the email or accessed through a separate
                link in the email. If the financial
                [[Page 56598]]
                institution uses a web-based data collection form, the form should
                be on its own page.
                 4. Minority-owned business status not provided by applicant.
                Pursuant to Sec. 1002.107(c)(1), a financial institution shall
                maintain procedures reasonably designed to collect applicant-
                provided information, which includes the applicant's minority-owned
                business status. However, if a financial institution does not
                receive a response to the financial institution's inquiry for
                purposes of Sec. 1002.107(a)(18), the financial institution reports
                that the applicant's minority-owned business status is ``not
                provided by applicant.''
                 5. No verification. Notwithstanding Sec. 1002.107(b), a
                financial institution must report the applicant's response, the
                applicant's refusal to answer the inquiry, or the applicant's
                failure to respond to the inquiry pursuant to Sec. 1002.107(a)(18),
                even if the financial institution verifies or otherwise obtains an
                applicant's minority-owned business status for other purposes.
                 6. No reporting based on visual observation or surname. A
                financial institution does not report minority-owned business status
                based on visual observation, surname, or any basis other than the
                applicant's response to the inquiry that the financial institution
                makes to satisfy Sec. 1002.107(a)(18) or, if the financial
                institution is permitted to report based on previously collected
                data, on the basis of the applicant's response to the inquiry that
                the financial institution previously made to satisfy Sec.
                1002.107(a)(18).
                 7. Previously collected data. A financial institution may report
                minority-owned business status based on previously collected data if
                the financial institution is permitted to do so pursuant to Sec.
                1002.107(c)(2) and its commentary.
                 107(a)(19) Women-owned business status.
                 1. General. Unless a financial institution is permitted to
                report women-owned business status based on previously collected
                data pursuant to Sec. 1002.107(c)(2), a financial institution must
                ask an applicant whether it is a women-owned business for each
                covered application. The financial institution must permit an
                applicant to refuse to answer the financial institution's inquiry
                and must inform the applicant that the applicant is not required to
                provide the information. The financial institution must report the
                applicant's response, its refusal to answer the inquiry (such as
                when the applicant indicates that it does not wish to provide the
                requested information), or its failure to respond to the inquiry
                (such as when the applicant fails to submit a data collection form).
                See appendix F for additional instructions on collecting and
                reporting women-owned business status.
                 2. Notice of non-discrimination. When requesting women-owned
                business status from an applicant, a financial institution must
                inform the applicant that the financial institution cannot
                discriminate on the basis of the applicant's women-owned business
                status, or on whether the applicant provides its women-owned
                business status. A financial institution may combine this non-
                discrimination notice regarding women-owned business status with the
                similar non-discrimination notices that a financial institution is
                required to provide when requesting minority-owned business status
                and a principal owner's ethnicity, race, and sex if a financial
                institution requests minority-owned business status, women-owned
                business status, and/or a principal owner's ethnicity, race, and sex
                in the same data collection form or at the same time.
                 3. Recording an applicant's response regarding women-owned
                business status separate from the application. A financial
                institution must record an applicant's response to the financial
                institution's inquiry pursuant to Sec. 1002.107(a)(19) separate
                from the application and accompanying information. See comment
                111(b)-1. If the financial institution provides a paper or
                electronic data collection form, the data collection form must not
                be part of the application form or any other document that the
                financial institution uses to provide or collect any information
                other than women-owned business status, minority-owned business
                status, principal owners' ethnicity, race, and sex, and the number
                of the applicant's principal owners. See the sample data collection
                form in appendix E. For example, if the financial institution sends
                the data collection form via email, the data collection form should
                be a separate attachment to the email or accessed through a separate
                link in the email. If the financial institution uses a web-based
                data collection form, the form should be on its own page.
                 4. Women-owned business status not provided by applicant.
                Pursuant to Sec. 1002.107(c)(1), a financial institution shall
                maintain procedures reasonably designed to collect applicant-
                provided information, which includes the applicant's women-owned
                business status. However, if a financial institution does not
                receive a response to the financial institution's inquiry for
                purposes of Sec. 1002.107(a)(19), the financial institution reports
                that the applicant's women-owned business status is ``not provided
                by applicant.''
                 5. No verification. Notwithstanding Sec. 1002.107(b), a
                financial institution must report the applicant's response, the
                applicant's refusal to answer the inquiry, or the applicant's
                failure to respond to the inquiry pursuant to Sec. 1002.107(a)(19),
                even if the financial institution verifies or otherwise obtains an
                applicant's women-owned business status for other purposes.
                 6. No reporting based on visual observation or surname. A
                financial institution does not report women-owned business status
                based on visual observation, surname, any basis other than the
                applicant's response to the inquiry that the financial institution
                makes to satisfy Sec. 1002.107(a)(19) or, if the financial
                institution is permitted to report based on previously collected
                data, on the basis of the applicant's response to the inquiry that
                the financial institution previously made to satisfy Sec.
                1002.107(a)(19).
                 7. Previously collected data. A financial institution may report
                women-owned business status based on previously collected data if
                the financial institution is permitted to do so pursuant to Sec.
                1002.107(c)(2) and its commentary.
                 107(a)(20) Ethnicity, race, and sex of principal owners.
                 1. General. Unless a financial institution is permitted to
                report ethnicity, race, and sex information based on previously
                collected data pursuant to Sec. 1002.107(c)(2), a financial
                institution must ask an applicant to report its principal owners'
                ethnicity, race, and sex for each covered application. The financial
                institution must permit an applicant to refuse to answer the
                financial institution's inquiries and must inform the applicant that
                it is not required to provide the information. The financial
                institution must report the applicant's responses, its refusal to
                answer the inquiries, or its failure to respond to the inquiries. In
                certain situations, discussed in comments 107(a)(20)-9 and -10 and
                in appendix G, a financial institution may also be required to
                report one or more principal owners' ethnicity and race based on
                visual observation and/or surname. However, a financial institution
                shall not report a principal owner's sex based on visual
                observation, surname, or any basis other than the applicant-provided
                information (including previously collected data if permitted
                pursuant to Sec. 1002.107(c)(2)). See appendix G for additional
                instructions on collecting and reporting the ethnicity, race, and
                sex of principal owners.
                 2. Notice of non-discrimination. When requesting a principal
                owner's ethnicity, race, and sex from an applicant, a financial
                institution must inform the applicant that the financial institution
                cannot discriminate on the basis of a principal owner's ethnicity,
                race, or sex, or on whether the applicant provides the information.
                A financial institution may combine this non-discrimination notice
                with the similar non-discrimination notices that a financial
                institution is required to provide when requesting minority-owned
                business status and women-owned business status if a financial
                institution requests minority-owned business status, women-owned
                business status, and/or a principal owner's ethnicity, race, and sex
                in the same data collection form or at the same time.
                 3. Recording an applicant's responses regarding principal
                owners' ethnicity, race, and sex separate from the application. A
                financial institution must record an applicant's response to the
                financial institution's inquiries pursuant to Sec. 1002.107(a)(20)
                separate from the application and accompanying information. See
                comment 111(b)-1. If the financial institution provides a paper or
                electronic data collection form, the data collection form must not
                be part of the application form or any other document that the
                financial institution uses to provide or collect any information
                other than women-owned business status, minority-owned business
                status, principal owners' ethnicity, race, and sex, and the number
                of the applicant's principal owners. See the sample data collection
                form in appendix E. For example, if the financial institution sends
                the data collection form via email, the data collection form should
                be a separate attachment to the email or accessed through a separate
                link in the email. If the financial institution uses a web-based
                data collection form, the form should be on its own page.
                 4. Ethnicity, race, or sex of principal owners not provided by
                applicant. Pursuant to Sec. 1002.107(c)(1), a financial institution
                [[Page 56599]]
                shall maintain procedures reasonably designed to collect applicant-
                provided information, which includes the ethnicity, race, and sex of
                an applicant's principal owners. However, if a financial institution
                is nonetheless unable to collect the principal owners' ethnicity,
                race, or sex from the applicant, and if the financial institution is
                not required to report based on visual observation or surname, the
                financial institution reports that the principal owner's ethnicity,
                race, or sex (as applicable) is ``not provided by applicant.''
                 5. Determining who is a principal owner. Generally, an applicant
                determines its principal owners and decides whether to provide
                information about those principal owners. However, as discussed in
                comments 107(a)(20)-9 and -10 and appendix G, a financial
                institution may be required to report ethnicity and race information
                based on visual observation and/or surname if the applicant does not
                provide ethnicity, race, or sex information for at least one
                principal owner and the financial institution meets in person with
                one or more principal owners. Thus, a financial institution may need
                to determine if a natural person that it meets with in person is a
                principal owner. In that case, the financial institution may either
                ask the natural person who is acting on behalf of an applicant
                whether that natural person is a principal owner, or it may
                independently determine if the natural person is a principal owner.
                For example, if a financial institution has collected information
                regarding an applicant's ownership structure and obtained the name
                or identity of the natural person for other purposes, it may use
                this information to independently determine whether the natural
                person who meets in person with the financial institution is a
                principal owner. If a financial institution asks if a natural person
                is a principal owner, the financial institution can rely on an
                applicant's or natural person's response, unless the financial
                institution has knowledge to the contrary. The financial institution
                is not required to verify any responses regarding whether a natural
                person is a principal owner.
                 6. Ethnicity. i. Aggregate categories. A financial institution
                must permit an applicant to provide a principal owner's ethnicity
                for purposes Sec. 1002.107(a)(20) using one or more of the
                following aggregate categories:
                 A. Hispanic or Latino.
                 B. Not Hispanic or Latino.
                 ii. Disaggregated subcategories. A financial institution must
                permit an applicant to provide a principal owner's ethnicity for
                purposes of Sec. 1002.107(a)(20) using one or more the following
                disaggregated subcategories, regardless of whether the applicant has
                indicated that the relevant principal owner is Hispanic or Latino
                and regardless of whether the applicant selects any aggregate
                categories: Cuban; Mexican; Puerto Rican; or Other Hispanic or
                Latino. If an applicant indicates that a principal owner is Other
                Hispanic or Latino, the financial institution must permit the
                applicant to provide additional information regarding the principal
                owner's ethnicity, such as indicating, for example, that the
                principal owner is Argentinean, Colombian, Dominican, Nicaraguan,
                Salvadoran, or Spaniard. If an applicant chooses to provide
                additional information regarding a principal owner's ethnicity, such
                as indicating that a principal owner is Argentinean, a financial
                institution must report that additional information as free-form
                text in the appropriate data reporting field.
                 iii. Selecting multiple categories. The financial institution
                must permit the applicant to select one, both, or none of the
                aggregate categories and as many disaggregated subcategories as the
                applicant chooses. A financial institution must permit an applicant
                to select a disaggregated subcategory even if the applicant does not
                select the corresponding aggregate category. A financial institution
                must also permit the applicant to refuse to provide ethnicity
                information for one or more principal owners. If an applicant
                provides ethnicity information for a principal owner, the financial
                institution reports all of the aggregate categories and
                disaggregated subcategories provided by the applicant. For example,
                if an applicant selects both aggregate categories and four
                disaggregated subcategories for a principal owner, the financial
                institution reports the two aggregate categories that the applicant
                selected and all four of the disaggregated subcategories that the
                applicant selected.
                 iv. Information not provided by applicant. Unless a financial
                institution is required to report based on visual observation and/or
                surname (see comments 107(a)(20)-9 and -10 and appendix G), if an
                applicant refuses or fails to provide ethnicity information for a
                principal owner, the financial institution reports that the
                applicant declined to provide the information or failed to respond,
                as applicable. Because there are data reporting fields for four
                principal owners, when submitting data to the Bureau, a financial
                institution will need to report that the requirement to report
                ethnicity is not applicable for some principal owners if the
                applicant has fewer than four principal owners. For example, if an
                applicant has only one principal owner, the financial institution
                reports that the requirement to report ethnicity is not applicable
                in the data fields for principal owners two through four.
                 7. Race. i. Aggregate categories. A financial institution must
                permit an applicant to provide a principal owner's race for purposes
                of Sec. 1002.107(a)(20) using one or more of the following
                aggregate categories:
                 A. American Indian or Alaska Native.
                 B. Asian.
                 C. Black or African American.
                 D. Native Hawaiian or Other Pacific Islander.
                 E. White.
                 ii. Disaggregated subcategories. The financial institution must
                permit an applicant to provide a principal owner's race for purposes
                of Sec. 1002.107(a)(20) using one or more of the disaggregated
                subcategories as listed in this comment 107(a)(20)-7.ii and set
                forth in the sample data collection form in appendix E, regardless
                of whether the applicant has selected the corresponding aggregate
                category.
                 A. The Asian aggregate category includes the following
                disaggregated subcategories: Asian Indian; Chinese; Filipino;
                Japanese; Korean; Vietnamese; and Other Asian. An applicant must
                also be permitted to provide the principal owner's race using one or
                more of these disaggregated subcategories regardless of whether the
                applicant indicates that the principal owner is Asian and regardless
                of whether the applicant selects any aggregate categories.
                Additionally, if an applicant indicates that a principal owner is
                Other Asian, the financial institution must permit the applicant to
                provide additional information about the principal owner's race,
                such as providing information, for example, that the principal owner
                is Cambodian, Hmong, Laotian, Pakistani, or Thai.
                 B. The Black or African American category includes the following
                disaggregated subcategories: African American; Ethiopian; Haitian;
                Jamaican; Nigerian; Somali; or Other Black or African American. An
                applicant must also be permitted to provide the principal owner's
                race using one or more of these disaggregated subcategories
                regardless of whether the applicant indicates that the principal
                owner is Black or African American and regardless of whether the
                applicant selects any aggregate categories. Additionally, if an
                applicant indicates that a principal owner is Other Black or African
                American, the financial institution must permit the applicant to
                provide additional information about the principal owner's race,
                such as providing information, for example, that the principal owner
                is Barbadian, Ghanaian, or South African.
                 C. The Native Hawaiian or Other Pacific Islander includes the
                following disaggregated subcategories: Guamanian or Chamorro; Native
                Hawaiian; Samoan; and Other Pacific Islander. An applicant must also
                be permitted to provide the principal owner's race using one or more
                of these disaggregated subcategories regardless of whether the
                applicant indicates that the principal owner is Native Hawaiian or
                Other Pacific Islander and regardless of whether the applicant
                selects any aggregate categories. Additionally, if an applicant
                indicates that a principal owner is Other Pacific Islander, the
                financial institution must permit the applicant to provide
                additional information about the principal owner's race, such as
                providing information, for example, that the principal owner is
                Fijian or Tongan.
                 D. If an applicant chooses to provide additional information
                regarding a principal owner's race, such as indicating that a
                principal owner is Cambodian, Barbadian, or Fijian, a financial
                institution must report that additional information as free-form
                text in the appropriate data reporting field.
                 E. In addition to permitting an applicant to indicate that a
                principal owner is American Indian or Alaska Native, a financial
                institution must permit an applicant to provide the name of an
                enrolled or principal tribe. An applicant must be permitted to
                provide the name of an enrolled or principal tribe regardless of
                whether the applicant indicates that the principal owner is American
                Indian or Alaska Native. If an applicant chooses to provide the name
                of an enrolled or principal tribe, a financial institution must
                report that information as free-form text in the appropriate data
                reporting field.
                [[Page 56600]]
                 iii. Selecting multiple categories. The financial institution
                must permit the applicant to select as many aggregate categories and
                disaggregated subcategories as the applicant chooses. A financial
                institution must permit an applicant to select one or more
                disaggregated subcategories even if the applicant does not select an
                aggregate category. A financial institution must also permit the
                applicant to refuse to provide this information for one or more
                principal owners. If an applicant provides race information for a
                principal owner, the financial institution reports all of the
                aggregate categories and disaggregated subcategories provided by the
                applicant. For example, if an applicant selects two aggregate
                categories and five disaggregated subcategories for a principal
                owner, the financial institution reports the two aggregate
                categories that the applicant selected and the five disaggregated
                subcategories that the applicant selected.
                 iv. Information not provided by applicant. Unless the financial
                institution is required to report based on visual observation and/or
                surname (see comments 107(a)(20)-9 and -10 and appendix G), if an
                applicant refuses or fails to provide race information for a
                principal owner, the financial institution reports that the
                applicant declined to provide the information or failed to respond,
                as applicable. Because there are data reporting fields for four
                principal owners, when submitting data to the Bureau, a financial
                institution must report that the requirement to report race is not
                applicable for some principal owners if the applicant has fewer than
                four principal owners. For example, if an applicant has only one
                principal owner (i.e., only one natural person directly owns 25
                percent or more of the applicant's equity interests), the financial
                institution reports that the requirement to report race is not
                applicable in the data reporting fields for principal owners two
                through four.
                 8. Sex. A financial institution must permit an applicant to
                provide a principal owner's sex for purposes of Sec.
                1002.107(a)(20) using one or more of the following categories: Male,
                Female, and/or that the principal owner prefers to self-describe
                their sex. Additionally, if an applicant indicates that a principal
                owner prefers to self-describe their sex, the financial institution
                must permit the applicant to provide additional information about
                the principal owner's sex. A financial institution must permit an
                applicant to select as many categories as the applicant chooses. A
                financial institution reports the category or categories selected by
                the applicant, any additional information provided by the applicant
                (reported as free-form text in the appropriate data reporting
                field), or reports that the applicant refused to provide the
                information or failed to respond. A financial institution is not
                permitted to report sex based on visual observation, surname, or any
                basis other than the applicant-provided information. Because there
                are data reporting fields for four principal owners, when submitting
                data to the Bureau a financial institution must report that the
                requirement to report sex is not applicable for some principal
                owners if the applicant has fewer than four principal owners. For
                example, if an applicant has only one principal owner, the financial
                institution reports that the requirement to report sex is not
                applicable in the data fields for principal owners two through four.
                See appendix G for additional information on collecting and
                reporting a principal owner's sex.
                 9. Reporting based on visual observation and/or surname. If a
                financial institution meets in person with one or more of an
                applicant's principal owners and the applicant does not provide
                ethnicity, race, or sex information for at least one principal
                owner, the financial institution must report at least one principal
                owner's ethnicity and race (but not sex) based on visual
                observation, surname, or a combination of both visual observation
                and surname. (See comment 107(a)(20)-10 for additional information
                regarding what constitutes an in-person meeting with an applicant's
                principal owners.) However, a financial institution is not required
                to report based on visual observation and/or surname if the
                principal owner only meets in person with a third party through whom
                it is submitting an application to the financial institution. For
                example, a financial institution is not required to report based on
                visual observation and/or surname when an employee or officer of an
                equipment dealer or retailer that is not an affiliate of the
                financial institution meets in person with a principal owner.
                 10. Meeting in person with a principal owner. i. In-person
                meetings. A financial institution meets in person with a principal
                owner if an employee or officer of the financial institution or one
                of its affiliates has a meeting or discussion with the applicant's
                principal owner about an application and can visually observe the
                principal owner. The following provides a non-exhaustive list of
                examples to illustrate when a financial institution meets in person
                with a principal owner for purposes of the requirement to collect
                principal owners' race and ethnicity information based on visual
                observation and/or surname if not provided by the applicant:
                 A. A principal owner comes to a financial institution's branch
                or office and meets with the financial institution's loan officer to
                discuss the status of a pending application.
                 B. A principal owner comes to a financial institution's branch
                or office and meets in person with one or more employees or officers
                of a financial institution in order to complete an application and
                related paperwork.
                 C. A principal owner contacts a financial institution's loan
                officer using an electronic communication method with a video
                component and, using the video component, meets with the loan
                officer to discuss outstanding documentation needed for a pending
                application.
                 ii. Not in-person meetings. The following provides a non-
                exhaustive list of examples to illustrate when a financial
                institution does not meet in person with a principal owner for
                purposes of the requirement to collect principal owners' race and
                ethnicity information via visual observation and/or surname if not
                provided by the applicant:
                 A. A principal owner drops off documents at a financial
                institution's branch or office or provides the applicant's name and
                drops off documents without engaging in any discussion regarding a
                covered application.
                 B. A principal owner meets in person with an employee or officer
                of the financial institution to discuss something other than a
                covered application, such as another financial product.
                 C. The financial institution meets with a principal owner after
                the application process is complete, such as at account opening or
                loan closing.
                 D. A financial institution meets with a principal owner before
                the applicant submits an application.
                 11. Use of aggregate categories when reporting based on visual
                observation or surname. When reporting ethnicity and race based on
                visual observation and/or surname, the financial institution uses
                only the aggregate ethnicity and race categories. See appendix G for
                additional information on collecting and reporting based on visual
                observation and/or surname.
                 12. No verification of ethnicity, race, and sex of principal
                owner. Notwithstanding Sec. 1002.107(b), a financial institution is
                neither required nor permitted to verify the ethnicity, race, or sex
                information that the applicant provides for purposes of Sec.
                1002.107(a)(20), even if the financial institution verifies or
                otherwise obtains the ethnicity, race, or sex of the applicant's
                principal owners for other purposes. Additionally, if an applicant
                refuses to respond to the inquiry pursuant to Sec. 1002.107(a)(20)
                or fails to respond to this inquiry, the financial institution
                reports that the applicant declined to provide the information or
                did not respond to the request to provide the information (as
                applicable), unless the financial institution is required to report
                ethnicity and race based on visual observation and/or surname. The
                financial institution does not report ethnicity, race, or sex based
                on information that the financial institution collects for other
                purposes.
                 107(a)(21) Number of principal owners.
                 1. General. A financial institution may request an applicant's
                number of principal owners from the applicant or may determine the
                number of principal owners from information provided by the
                applicant or that the financial institution otherwise obtains. If
                the financial institution asks the applicant to provide the number
                of its principal owners pursuant to Sec. 1002.107(a)(21), a
                financial institution must provide the definition of principal owner
                set forth in Sec. 1002.102(o). If permitted pursuant to Sec.
                1002.107(c)(2), a financial institution may also report an
                applicant's number of principal owners based on previously collected
                data.
                 2. Number of principal owners provided by applicant;
                verification of number of principal owners. The financial
                institution may rely on statements or information provided by the
                applicant in collecting and reporting the number of the applicant's
                principal owners. However, pursuant to Sec. 1002.107(b), if the
                financial institution verifies the number of principal owners
                provided by the applicant, it must report the verified information.
                The financial institution is not required to verify the number of
                principal owners, but if the financial institution verifies the
                number of
                [[Page 56601]]
                principal owners in making the credit decision, then the financial
                institution reports the verified number of principal owners.
                 3. Number of principal owners not provided by applicant and
                otherwise undetermined. Pursuant to Sec. 1002.107(c)(1), a
                financial institution shall maintain procedures reasonably designed
                to collect applicant-provided information, which includes the number
                of principal owners of the applicant. However, if a financial
                institution is nonetheless unable to collect or otherwise determine
                the applicant's number of principal owners, the financial
                institution reports that the number of principal owners is ``not
                provided by applicant and otherwise undetermined.''
                 107(b) Verification of applicant-provided information.
                 1. Reliance on statements or information provided by an
                applicant. A financial institution may rely on statements made by an
                applicant (whether made in writing or orally) or information
                provided by an applicant when compiling and reporting data pursuant
                to subpart B of this part for applicant-provided data; the financial
                institution is not required to verify those statements. However, if
                the financial institution does verify applicant statements for its
                own business purposes, such as statements relating to gross annual
                revenue or time in business, the financial institution reports the
                verified information. Depending on the circumstances and the
                financial institution's procedures, certain applicant-provided data
                can be collected without a specific request from the applicant. For
                example, gross annual revenue may be collected from tax return
                documents. Applicant-provided data are the data required that are or
                could be provided by the applicant, including Sec. 1002.107(a)(5)
                through (7) and (13) through (21). See comment 107(c)(2)-3.
                 107(c) Time and manner of collection.
                 107(c)(1) In general.
                 1. Procedures. The term ``procedures'' refers to the actual
                practices followed by a financial institution as well as its stated
                policies or procedures. For example, if a financial institution's
                stated policy is to collect applicant-provided data on or with a
                paper application form, but the financial institution's employees
                encourage applicants to skip the page that asks whether the
                applicant is a minority-owned business or a women-owned business
                under Sec. 1002.107(a)(18) and (19), the financial institution's
                procedures are not reasonably designed to obtain a response.
                 2. Latitude to design procedures. A financial institution has
                flexibility to establish procedures concerning the timing and manner
                that it collects applicant-provided data that work best for its
                particular lending model and product offerings, provided that those
                procedures are reasonably designed to collect the applicant-provided
                data in Sec. 1002.107(a).
                 3. Applicant-provided data. Applicant-provided data are the data
                required that are or could be provided by the applicant, including
                Sec. 1002.107(a)(5) (credit type), Sec. 1002.107(a)(6) (credit
                purpose), Sec. 1002.107(a)(7) (amount applied for), Sec.
                1002.107(a)(13) (address or location for purposes of determining
                census tract), Sec. 1002.107(a)(14) (gross annual revenue), Sec.
                1002.107(a)(15) (NAICS code, or information about the business such
                that the financial institution can determine the applicant's NAICS
                code), Sec. 1002.107(a)(16) (number of workers), Sec.
                1002.107(a)(17) (time in business), Sec. 1002.107(a)(18) (minority-
                owned business status), Sec. 1002.107(a)(19) (women-owned business
                status), Sec. 1002.107(a)(20) (ethnicity, race, and sex of the
                applicant's principal owners), and Sec. 1002.107(a)(21) (number of
                principal owners). Applicant-provided data does not include data
                that are generated or supplied only by the financial institution,
                including Sec. 1002.107(a)(1) (unique identifier), Sec.
                1002.107(a)(2) (application date), Sec. 1002.107(a)(3) (application
                method), Sec. 1002.107(a)(4) (application recipient), Sec.
                1002.107(a)(8) (amount approved or originated), Sec. 1002.107(a)(9)
                (action taken), Sec. 1002.107(a)(10) (action taken date), Sec.
                1002.107(a)(11) (denial reasons), Sec. 1002.107(a)(12) (pricing
                data), and Sec. 1002.107(a)(13) (census tract, based on address or
                location provided by the applicant). Depending on the circumstances
                and the financial institution's procedures, certain applicant-
                provided data can be collected without a specific request from the
                applicant. For example, credit type may be collected based on the
                type of product chosen by the applicant or NAICS code may be
                collected from an applicant's tax return that the applicant has
                otherwise provided to the financial institution.
                 4. Reasonably designed--generally. Whether a financial
                institution's procedures are reasonably designed to collect
                applicant-provided data depends on the financial institution's
                particular lending model and product offerings. A financial
                institution shall reassess on a periodic basis, based on available
                data, whether its procedures are reasonably designed to obtain a
                response. For example, a financial institution may be able to assess
                whether its procedures are reasonably designed by comparing its
                response rate with similarly situated financial institutions (for
                instance, those that offer similar products, use a similar lending
                model, or are of a similar size). A financial institution is
                permitted, but not required, to develop different procedures for
                different applicant-provided data, so long as the procedures used
                are reasonably designed to obtain a response. A financial
                institution is permitted, but not required, to make more than one
                attempt to obtain applicant-provided data if the applicant does not
                respond to an initial request.
                 5. Examples of procedures that are generally reasonably designed
                to obtain a response. Although a fact-based determination, the
                following procedures reflect practices concerning the time or manner
                of collection that are generally reasonably designed to obtain a
                response:
                 i. Timing of collection. A financial institution requests
                applicant-provided data early in the application process; for
                example, at the time of a covered application, as defined in Sec.
                1002.103. The earlier in the application process, the more likely
                the timing of collection is reasonably designed to obtain a
                response.
                 ii. Manner of collection. A financial institution requests
                applicant-provided data on the same form or in connection with other
                required information. For example, a financial institution requests
                applicant-provided data as part of a written application form or on
                a separate data collection form provided with the written
                application form. See also comments 107(a)(18)-3, 107(a)(19)-3, and
                107(a)(20)-3, which discuss the use of a separate data collection
                form for collecting minority-owned business status, women-owned
                business status, and the ethnicity, race, and sex of an applicant's
                principal owners.
                 6. Examples of procedures that are generally not reasonably
                designed to obtain a response. The following procedures reflect
                practices concerning the time or manner of collection that are
                generally not reasonably designed to obtain a response. Depending on
                the particular facts, however, these procedures may be reasonably
                designed to obtain a response; for example, if the financial
                institution has evidence or a reason to believe that under its
                procedures the response rate would be similar to or better than
                other alternatives.
                 i. Timing of collection. A financial institution requests
                applicant-provided data simultaneous with or after notifying an
                applicant of its action taken on a covered application.
                 ii. Manner of collection. A financial institution requests
                applicant-provided data in a manner that imposes unnecessary
                applicant burden or is inconsistent with the rest of its application
                process. For example, collecting application information related to
                the creditworthiness determination in electronic form, but mailing a
                paper form to the applicant seeking the data required under Sec.
                1002.107(a) that the financial institution does not otherwise need
                for its creditworthiness determination and requiring the applicant
                to mail it back.
                 7. Updated applicant-provided data. A financial institution
                reports updated applicant-provided data if it obtains more current
                data during the application process. For example, if an applicant
                states it has 100 non-owners working for the business, but then the
                applicant notifies the financial institution that the number is
                actually 75, the financial institution reports 75 non-owners working
                for the business. For reporting of verified applicant-provided
                information, see Sec. 1002.107(b) and comment 107(b)-1.
                 8. Change in determination of small business status. If a
                financial institution changes its determination regarding an
                applicant's status as a small business under Sec. 1002.106(b), it
                must follow the procedures described in comments 106(b)-1 and -2.
                 107(c)(2) Previously collected data.
                 1. In general. A financial institution may reuse certain
                previously collected data if the requirements of Sec.
                1002.107(c)(2) are met. In that circumstance, a financial
                institution need not seek to collect the data anew in connection
                with a subsequent covered application. For example, if an applicant
                applies for and is granted a term loan, and
                [[Page 56602]]
                then subsequently applies for a credit card in the same calendar
                year, the financial institution need not request again the data set
                forth in Sec. 1002.107(c)(2). Similarly, if an applicant applies
                for more than one covered credit transaction at one time, a
                financial institution need only ask once for the data set forth in
                Sec. 1002.107(c)(2).
                 2. Data that can be reused. Subject to the requirements of Sec.
                1002.107(c)(2) and comment 107(c)(2)-3, a financial institution may
                reuse the following data: Sec. 1002.107(a)(13) (census tract),
                Sec. 1002.107(a)(14) (gross annual revenue), Sec. 1002.107(a)(15)
                (NAICS code), Sec. 1002.107(a)(16) (number of workers), Sec.
                1002.107(a)(17) (time in business), Sec. 1002.107(a)(18) (minority-
                owned business status), Sec. 1002.107(a)(19) (women-owned business
                status), Sec. 1002.107(a)(20) (ethnicity, race, and sex of
                principal owners), and Sec. 1002.107(a)(21) (number of principal
                owners). A financial institution is not, however, permitted to reuse
                other data, such as Sec. 1002.107(a)(6) (credit purpose).
                 3. Previously reported data without a substantive response.
                Section 1002.107(c)(2) permits a financial institution to reuse
                certain previously collected data to satisfy Sec. 1002.107(a)(13)
                through (21), if certain conditions are met. Data have not been
                ``previously collected'' within the meaning of this provision if the
                applicant did not provide a substantive response to the financial
                institution's request for that data and the financial institution
                was not otherwise able to obtain the requested data (for example,
                from the applicant's credit report, tax returns, or through visual
                observation or surname collection for race and ethnicity
                information).
                 4. Collection in the same calendar year. Pursuant to Sec.
                1002.107(c)(2)(i), data can be reused if they are collected in the
                same calendar year. For applications that span more than one
                calendar year, the following applies:
                 i. If the data are collected in connection with a covered
                application in one calendar year, but then final action was taken on
                the application in the following calendar year, the financial
                institution may consider the data as collected in the year that
                final action was taken on the application.
                 ii. If data are collected in connection with a covered
                application in one calendar year, a financial institution may reuse
                that data pursuant to Sec. 1002.107(c)(2) in a subsequent
                application initiated in the same calendar year, even if final
                action was taken on the subsequent application in the following
                calendar year.
                 5. Reason to believe data are inaccurate. Whether a financial
                institution has reason to believe data are inaccurate pursuant to
                Sec. 1002.107(c)(2)(ii) depends on the particular facts and
                circumstances. For example, a financial institution may have reason
                to believe data on the applicant's women-owned business status,
                minority-owned business status, and ethnicity, race, and sex of
                principal owners may be inaccurate if it knows that the applicant
                has had a change in ownership.
                 6. Minority-owned business status and women-owned business
                status. If the financial institution asked the applicant to provide
                its minority-owned business status or women-owned business status
                for purposes of Sec. 1002.107(a)(18) and (19) and the applicant
                refused to provide the information (such as by selecting ``I do not
                wish to provide this information'' on a data collection form or by
                telling the financial institution that it did not wish to provide
                the information), the financial institution may use that response
                when reporting data for a subsequent application pursuant to Sec.
                1002.107(c)(2). However, if the applicant failed to respond (such as
                by leaving the response to the question blank or by failing to
                return a data collection form), the financial institution must
                inquire about the applicant's minority-owned business status or
                women-owned business status, as applicable, because the data were
                not previously obtained.
                 7. Principal owners' ethnicity, race, and sex. If the financial
                institution asked the applicant to provide its principal owners'
                ethnicity, race, or sex for purposes Sec. 1002.107(a)(20) and the
                applicant refused to provide the information (such as by selecting
                ``I do not wish to provide this information'' on a data collection
                form or by telling the financial institution that it did not wish to
                provide the information) or if the financial institution reported
                ethnicity and race based on visual observation and/or surname, the
                financial institution may use these data when reporting information
                for a subsequent application under Sec. 1002.107(c)(2). However, if
                the applicant failed to respond (such as by leaving the response to
                the question blank or by failing to return a data collection form)
                and the financial institution did not report ethnicity and race
                based on visual observation and/or surname, the financial
                institution must inquire about the ethnicity, race, and sex of the
                applicant's principal owners, as applicable, because the data were
                not previously obtained.
                Section 1002.108--Firewall
                 108(a) Definitions.
                 1. Involved in making any determination concerning a covered
                application. An employee or officer is involved in making a
                determination concerning a covered application if the employee or
                officer makes, or otherwise participates in, a decision regarding
                the evaluation of a covered application or the creditworthiness of
                an applicant for a covered credit transaction. This includes, but is
                not limited to, employees and officers serving as underwriters. The
                decision that an employee or officer makes or participates in must
                be about a specific covered application. An employee or officer is
                not involved in making a determination concerning a covered
                application if the employee or officer is involved in making a
                decision that affects covered applications generally, or interacts
                with small businesses prior to them becoming applicants or
                submitting a covered application. This group might include officers
                and employees who develop policies and procedures, program systems,
                or conduct marketing. Additionally, an employee or officer is not
                involved in making a determination concerning a covered application
                if the employee or officer makes or participates in a decision after
                the financial institution has taken final action on the application,
                such as a decision about servicing or collecting a covered credit
                transaction. Furthermore, an officer or employee is not involved in
                making a determination concerning a covered application for purposes
                of Sec. 1002.108 if the officer or employee simply uses a check box
                form to confirm whether an applicant has submitted all necessary
                documents or handles a minor or clerical matter during the
                application process, such as suggesting or selecting a time for an
                appointment with an applicant.
                 2. Should have access. i. General. A financial institution may
                determine that an employee or officer should have access for
                purposes of Sec. 1002.108 if that employee or officer is assigned
                one or more job duties that may require the employee or officer to
                collect (based on visual observation, surname, or otherwise), see,
                consider, refer to, or use information otherwise subject to the
                prohibition in Sec. 1002.108(b). The employee or officer does not
                have to be required to collect, see, consider, refer to or use such
                information or to actually collect, see, consider, refer to or use
                such information. It is sufficient if the employee or officer might
                need to do so to perform the employee's or officer's assigned job
                duties. For example, if a loan officer's job description states that
                the loan officer may need to collect ethnicity and race information
                based on visual observation and/or surname or if the loan officer is
                assigned the task of assisting applicants with the completion of
                data collection forms, the financial institution may determine that
                the loan officer should have access. If a financial institution
                determines that an employee or officer who is involved in making any
                determination concerning a covered application should have access
                for purposes of Sec. 1002.108, the financial institution is
                responsible for ensuring that the employee or officer only accesses
                and uses the protected information for lawful purposes.
                 ii. When a group of employees or officers should have access. A
                financial institution may determine that all employees or officers
                with the same job description or assigned duties should have access
                for purposes of Sec. 1002.108. If a job description assigns one or
                more tasks that may require access to one or more applicants'
                responses to the financial institution's inquiries under Sec.
                1002.107(a)(18) through (20), the financial institution may
                determine that all employees and officers who share that job
                description should have access for purposes of Sec. 1002.108. For
                example, if the job description for the position of loan officer
                states that a loan officer may have to distribute, collect, and help
                applicants complete a data collection form that asks about the
                applicant's minority-owned business status, women-owned business
                status, and its principal owners' ethnicity, race, and sex, the
                financial institution may determine that all employees and officers
                who have been assigned the position of loan officer should have
                access for purposes of Sec. 1002.108.
                 108(b) Prohibition on access to certain information.
                [[Page 56603]]
                 1. Scope of information subject to the prohibition. i. When the
                prohibition applies. The prohibition in Sec. 1002.108(b) applies
                only to an applicant's responses to the inquiries that the covered
                financial institution makes to satisfy Sec. 1002.107(a)(18) through
                (20). For example, if a financial institution satisfies Sec.
                1002.107(a)(18) through (20) by using a paper data collection form
                to ask an applicant if it is a minority-owned business, if it is a
                women-owned business, and for the ethnicity, race, and sex of its
                principal owners, the prohibition applies to the responses that the
                applicant provides on the paper data collection form and any other
                paper or electronic records that the financial institution creates
                based on the applicant's responses provided on the paper data
                collection form. Similarly, if a financial institution satisfies
                Sec. 1002.107(a)(18) through (20) by asking an applicant about its
                minority-owned business status, its women-owned business status, and
                the ethnicity, race, and sex of its principal owners during a
                telephone call, the prohibition applies to the responses to those
                inquiries provided during that telephone call and to any records
                created on the basis of those responses.
                 ii. When the prohibition does not apply. Because the prohibition
                in Sec. 1002.108(b) only applies to the applicant's responses to
                the inquiries that the financial institution makes to satisfy Sec.
                1002.107(a)(18) through (20), the prohibition does not apply to
                ethnicity or race information about principal owners that the
                financial institution collects via visual observation or surname.
                Additionally, the prohibition in Sec. 1002.108(b) does not apply to
                an applicant's responses to inquiries regarding minority-owned or
                women-owned business status, or principal owners' ethnicity, race,
                or sex, made for other purposes. Thus, an employee or officer who
                obtains information to determine if an applicant is eligible for a
                Small Business Administration program for women-owned businesses may
                make determinations concerning the applicant's covered application
                without regard to whether the exception in Sec. 1002.108(c) is
                satisfied. Additionally, Sec. 1002.108(b) does not prohibit an
                employee or officer from making a determination regarding a covered
                application if the employee or officer generally knows that an
                applicant is a minority-owned business or women-owned business or
                knows the ethnicity, race, or sex of any of the applicant's
                principal owners due to activities unrelated to the inquiries made
                to satisfy the financial institution's obligations under subpart B
                of this part. Thus, an employee or officer who knows, for example,
                that an applicant is a minority-owned business due to social
                relationships or other professional relationships with the applicant
                or any of its principal owners may make determinations concerning
                the applicant's covered application.
                 2. Scope of persons subject to the prohibition. The prohibition
                in Sec. 1002.108(b) applies to an employee or officer of a covered
                financial institution or its affiliate if the employee or officer is
                involved in making any determination concerning a covered
                application. For example, if a financial institution is affiliated
                with company B and an employee of company B is involved in making a
                determination regarding a covered application on behalf of the
                financial institution, then the financial institution must comply
                with Sec. 1002.108 with regard to company B's employee. Section
                1002.108 does not require a financial institution to limit the
                access of employees and officers of third parties who are not
                affiliates of the financial institution. Section 1002.108 does not
                require a financial institution to limit the access of third parties
                (who are not employees or officers of the financial institution or
                its affiliates) through whom the financial institution receives
                covered applications.
                 108(c) Exception to the prohibition on access to certain
                information.
                 1. General. A financial institution is not required to limit the
                access of a particular employee or officer who is involved in making
                determinations concerning covered applications if the financial
                institution determines that the particular employee or officer
                should have access to the information collected pursuant to Sec.
                1002.107(a)(18) through (20) and the financial institution provides
                the notice required by Sec. 1002.108(d). A financial institution
                can also determine that several employees and officers should have
                access or that all of a group of similarly situated employees or
                officers should have access. See comment 108(a)-2. However, the
                financial institution cannot permit all employees and officers to
                have access simply because it has determined that one or more
                employees or officers should have access. For example, a financial
                institution may determine that a single compliance officer or all of
                its compliance officers should have access and then permit one or
                all of its compliance officers, respectively, to have access.
                However, the financial institution cannot permit other employees or
                officers to have access unless it independently determines that they
                should have access.
                 108(d) Notice.
                 1. General. If a financial institution determines that one or
                more employees or officers should have access pursuant to Sec.
                1002.108(c), the financial institution must provide the required
                notice to, at a minimum, the applicant or applicants whose responses
                will be accessed by an employee or officer involved in making
                determinations regarding the applicant's or applicants' covered
                applications. Alternatively, the financial institution may also
                provide the required notice to larger group of applicants, including
                all applicants, if it determines that one or more officers or
                employees should have access.
                 2. Content of the required notice. The notice must inform the
                applicant that one or more employees and officers involved in making
                determinations regarding the applicant's covered application may
                have access to the applicant's responses regarding the applicant's
                minority-owned business status, women-owned business status, and its
                principal owners' ethnicity, race, and sex. The financial
                institution may, but is not required to, provide the notice on its
                data collection form. If the financial institution provides the
                notice on an electronic or paper data collection form, the notice
                must use language substantially similar to the following:
                ``Employees and officers making determinations concerning an
                application, such as loan officers and underwriters, may have access
                to the information provided on this form.'' If the financial
                institution provides the notice orally, it must use language
                substantially similar to the following: ``Employees and officers
                making determinations concerning your application, such as loan
                officers and underwriters, may have access to your responses
                regarding your minority-owned business status, your women-owned
                business status, and your principal owners' ethnicity, race, or
                sex.''
                 3. Timing for providing the notice. If the financial institution
                is providing the notice orally, it must provide the notice required
                by Sec. 1002.108(d) prior to asking the applicant if it is a
                minority-owned business or women-owned business and prior to asking
                for a principal owner's ethnicity, race, or sex. If the notice is
                provided on the same paper or electronic data collection form as the
                inquiries about minority-owned business status, women-owned business
                status, and the principal owners' ethnicity, race, or sex, the
                notice must appear at the top of the form. If the notice is provided
                in an electronic or paper document that is separate from the data
                collection form, the notice must be provided at the same time as the
                data collection form or prior to providing data collection form.
                Additionally, the notice must be provided with the non-
                discrimination notices required pursuant to Sec. 1002.107(a)(18)
                through (20). See appendix E.
                Section 1002.109--Reporting of Data to the Bureau
                 109(a) Reporting to the Bureau.
                 109(a)(2) Reporting by subsidiaries.
                1. Subsidiaries. A covered financial institution is considered a
                subsidiary of another covered financial institution for purposes of
                reporting data pursuant to Sec. 1002.109 if more than 50 percent
                of the ownership or control of the first covered financial
                institution is held by the second covered financial institution.
                 109(a)(3) Reporting obligations where multiple financial
                institutions are involved in a covered credit transaction.
                 1. General. The following provides guidance on how to report
                originations and applications involving more than one institution.
                The discussion below assumes that all of the parties are covered
                financial institutions. However, the same principles apply if any of
                the parties is not a covered financial institution. See also comment
                109(a)(3)-2 (providing examples of transactions involving more than
                one financial institution) and comment 109(a)(3)-3 (discussing how
                to report actions taken by agents).
                 i. Only one financial institution reports each originated
                covered credit transaction as an origination. If more than one
                financial institution was involved in the origination of a covered
                credit transaction, the financial institution that made the final
                credit decision approving the application reports the covered
                [[Page 56604]]
                credit transaction as an origination. It is not relevant whether the
                covered credit transaction closed or, in the case of an application,
                would have closed in the financial institution's name. If more than
                one financial institution approved an application prior to closing
                or account opening and one of those financial institutions purchased
                the covered credit transaction after closing, the financial
                institution that purchased the covered credit transaction after
                closing reports the covered credit transaction as an origination. If
                a financial institution reports a transaction as an origination, it
                reports all of the information required for originations, even if
                the covered credit transaction was not initially payable to the
                financial institution that is reporting the covered credit
                transaction as an origination.
                 ii. In the case of an application for a covered credit
                transaction that did not result in an origination, a financial
                institution reports the action it took on that application if it
                made a credit decision on the application or was reviewing the
                application when the application was withdrawn or closed for
                incompleteness. It is not relevant whether the financial institution
                received the application directly from the applicant or indirectly
                through another party, such as a broker, or whether another
                financial institution also reviewed and reported an action taken on
                the same application.
                 2. Examples. The following scenarios illustrate how a financial
                institution reports a particular application or originated covered
                credit transaction. The illustrations assume that all of the parties
                are covered financial institutions. However, the same principles
                apply if any of the parties is not a covered financial institution.
                 i. Financial Institution A received a covered application from
                an applicant and forwarded that application to Financial Institution
                B. Financial Institution B reviewed the application and approved the
                covered credit transaction prior to closing. The covered credit
                transaction closed in Financial Institution A's name. Financial
                Institution B purchased the covered credit transaction from
                Financial Institution A after closing. Financial Institution B was
                not acting as Financial Institution A's agent. Since Financial
                Institution B made the final credit decision prior to closing,
                Financial Institution B reports the application as an origination.
                Financial Institution A does not report the application.
                 ii. Financial Institution A received a covered application from
                an applicant and forwarded that application to Financial Institution
                B. Financial Institution B reviewed the application before the
                covered credit transaction would have closed, but the application
                did not result in an origination because Financial Institution B
                denied the application. Financial Institution B was not acting as
                Financial Institution A's agent. Since Financial Institution B made
                the credit decision, Financial Institution B reports the application
                as a denial. Financial Institution A does not report the
                application. If, under the same facts, the application was withdrawn
                before Financial Institution B made a credit decision, Financial
                Institution B would report the application as withdrawn and
                Financial Institution A would not report the application.
                 iii. Financial Institution A received a covered application from
                an applicant and approved the application before closing the loan in
                its name. Financial Institution A was not acting as Financial
                Institution B's agent. Financial Institution B later purchased the
                covered credit transaction from Financial Institution A. Financial
                Institution B did not review the application before closing.
                Financial Institution A reports the application as an origination.
                Financial Institution B has no reporting obligation for this
                transaction.
                 iv. Financial Institution A received a covered application from
                an applicant. If approved, the covered credit transaction would have
                closed in Financial Institution B's name. Financial Institution A
                denied the application without sending it to Financial Institution B
                for approval. Financial Institution A was not acting as Financial
                Institution B's agent. Since Financial Institution A made the credit
                decision before the loan would have closed, Financial Institution A
                reports the application. Financial Institution B does not report the
                application.
                 v. Financial Institution A reviewed a covered application and
                made the credit decision to approve a covered credit transaction
                using the underwriting criteria provided by a third party (e.g.,
                another financial institution or party). The third party did not
                review the application and did not make a credit decision prior to
                closing. Financial Institution A was not acting as the third party's
                agent. Financial Institution A reports the application. The third
                party has no reporting obligation for this application. Assume the
                same facts, except that Financial Institution A made a credit
                decision to approve the application, and the applicant chose not to
                accept the covered credit transaction from Financial Institution A.
                Financial Institution A reports the application as approved but not
                accepted and the third party does not report the application.
                 vi. Financial Institution A reviewed and made the credit
                decision on a covered application based on the criteria of a third-
                party insurer or guarantor (for example, a government or private
                insurer or guarantor). Financial Institution A reports the action
                taken on the application.
                 vii. Financial Institution A received a covered application and
                forwarded it to Financial Institutions B and C. Financial
                Institution A made a credit decision, acting as Financial
                Institution D's agent, and approved the application. Financial
                Institution B made a credit decision approving the application, and
                Financial Institution C made a credit decision denying the
                application. The applicant did not accept the covered credit
                transaction from Financial Institution D. Financial Institution D
                reports the application as approved but not accepted. Financial
                Institution A does not report the application. The applicant
                accepted the offer of credit from Financial Institution B, and
                credit was extended. Financial Institution B reports the
                origination. Financial Institution C reports the application as
                denied.
                 3. Agents. If a covered financial institution made a credit
                decision on a covered application through the actions of an agent,
                the financial institution reports the application. For example,
                acting as Financial Institution A's agent, Financial Institution B
                approved an application prior to closing and a covered credit
                product was originated. Financial Institution A reports the covered
                credit product as an origination. State law determines whether one
                party is the agent of another.
                 109(b) Financial institution identifying information.
                 Paragraph 109(b)(4).
                 1. Federal prudential regulator. For purposes of Sec.
                1002.109(b)(4), Federal prudential regulator means, if applicable,
                the Federal prudential regulator for a financial institution that is
                a depository institution as determined pursuant to section 3q of the
                Federal Deposit Insurance Act (12 U.S.C. 1813(q)), including the
                Office of the Comptroller of the Currency, the Federal Deposit
                Insurance Corporation, or the Board of Governors of the Federal
                Reserve System; or the National Credit Union Administration Board
                for financial institutions that are Federal credit unions.
                 2. Change in Federal prudential regulator. If the Federal
                prudential regulator for a financial institution changes (as a
                consequence of a merger or a change in the institution's charter,
                for example), the institution must identify its new Federal
                prudential regulator in its data submission under Sec. 1002.109 for
                the calendar year of the change. For example, if a financial
                institution's Federal prudential regulator changes in February 2026,
                it must identify its new Federal prudential regulator in the annual
                submission for its 2026 data (which is due by June 1, 2027) pursuant
                to Sec. 1002.109(b)(4).
                 Paragraph 109(b)(5).
                 1. Federal Taxpayer Identification Number. If a financial
                institution obtains a new Federal Taxpayer Identification Number
                (TIN), it should provide the new number in its subsequent data
                submission. For example, if two financial institutions that
                previously reported data under subpart B of this part merge and the
                surviving institution retained its Legal Entity Identifier but
                obtained a new TIN, then the surviving institution should report the
                new TIN with its data submission. For example, if a financial
                institution's TIN changes in February 2026, it must identify its new
                TIN in the annual submission for its 2026 data (which is due by June
                1, 2027) pursuant to Sec. 1002.109(b)(5).
                 Paragraph 109(b)(6).
                 1. Legal Entity Identifier (LEI). A Legal Entity Identifier is a
                utility endorsed by the LEI Regulatory oversight committee, or a
                utility endorsed or otherwise governed by the Global LEI Foundation
                (GLEIF) (or any successor of the GLEIF) after the GLEIF assumes
                operational governance of the global LEI system. A financial
                institution complies with Sec. 1002.109(b)(6) by reporting its
                current LEI number. A financial institution that does not currently
                possess an LEI number must obtain an LEI number, and has an ongoing
                obligation to maintain the LEI number. The GLEIF website provides a
                list of LEI issuing
                [[Page 56605]]
                organizations. A financial institution may obtain an LEI, for
                purposes of complying with Sec. 1002.109(b)(6), from any one of the
                issuing organizations listed on the GLEIF website.
                 Paragraph 109(b)(7).
                 1. RSSD ID number. The RSSD ID is a unique identifying number
                assigned to institutions, including main offices and branches, by
                the Board of Governors of the Federal Reserve System. A financial
                institution's RSSD ID may be found on the website of the National
                Information Center, which provides comprehensive financial and
                structure information on banks and other institutions for which the
                Federal Reserve Board has a supervisory, regulatory, or research
                interest including both domestic and foreign banking organizations
                that operate in the United States. If a financial institution does
                not have an RSSD ID, it reports that this information is not
                applicable.
                 Paragraph 109(b)(8).
                 1. Immediate parent entity. An entity is the immediate parent of
                a financial institution for purposes of Sec. 1002.109(b)(8)(i)
                through (iii) if it is a separate entity that directly owns more
                than 50 percent of the financial institution.
                 2. Top-holding parent entity. An entity is the top-holding
                parent of a financial institution for purposes of Sec.
                1002.109(b)(8)(iv) through (vi) if it ultimately owns more than 50
                percent of the financial institution, and the entity itself is not
                controlled by any other entity. If the immediate parent entity and
                the top-holding parent entity are the same, the financial
                institution reports that Sec. 1002.109(b)(8)(iv) through (vii) are
                not applicable.
                 3. LEI. For purposes of Sec. 1002.109(b)(8)(ii) and (v), a
                financial institution shall report the LEI of a parent entity if the
                parent entity has an LEI number. If a financial institution's parent
                entity does not have an LEI, the financial institution reports that
                this information is not applicable.
                 4. RSSD ID numbers. For purposes of Sec. 1002.109(b)(8)(iii)
                and Sec. 1002.109(b)(8)(vi), a financial institution shall report
                the RSSD ID number of a parent entity if the entity has an RSSD ID
                number. If a financial institution's parent entity does not have an
                RSSD ID, the financial institution reports that this information is
                not applicable.
                 Paragraph 109(b)(9).
                 1. Type of financial institution. A financial institution
                complies with Sec. 1002.109(b)(9) by selecting the applicable type
                or types of financial institution from the list below. A financial
                institution shall select all applicable types.
                 i. Bank or savings association.
                 ii. Minority depository institution.
                 iii. Credit union.
                 iv. Nondepository institution.
                 v. Community development financial institution (CDFI).
                 vi. Other nonprofit financial institution.
                 vii. Farm Credit System institution.
                 viii. Government lender.
                 ix. Commercial finance company.
                 x. Equipment finance company.
                 xi. Industrial loan company.
                 xii. Fintech.
                 xiii. Other.
                 2. Use of ``other'' for type of financial institution. A
                financial institution reports type of financial institution as
                ``other'' where none of the enumerated types of financial
                institution appropriately describe the applicable type of financial
                institution, and the institution reports the type of financial
                institution as free-form text. A financial institution that selects
                at least one type from the list is permitted, but not required, to
                also report ``other'' (with appropriate free-form text) if there is
                an additional aspect of its business that is not one of the
                enumerated types set out in comment 109(b)(9)-1.
                 Paragraph 109(b)(10).
                 1. Financial institutions that voluntarily report covered
                applications under subpart B of this part. A financial institution
                that is not a covered financial institution pursuant to Sec.
                1002.105(b) but that elects to voluntarily compile, maintain, and
                report data under Sec. Sec. 1002.107 through 1002.109 (see comment
                1002.105(b)-6) complies with Sec. 1002.109(b)(10) by selecting
                ``voluntary reporter.''
                 109(c) Procedures for the submission of data to the Bureau.
                 1. Filing Instructions Guide. The Bureau includes in the Filing
                Instructions Guide additional details and procedures for the
                submission of data to the Bureau pursuant to Sec. 1002.109, as well
                as any related materials, which are available at [a designated
                Bureau website].
                Section 1002.110--Publication of Data
                 110(c) Statement of financial institution's small business
                lending data available on the Bureau's website.
                 1. Statement. A financial institution shall provide the
                statement required by Sec. 1002.110(c) using the following, or
                substantially similar, language:
                Small Business Lending Data Notice
                 Data about our small business lending are available online for
                review at the Consumer Financial Protection Bureau's website at [a
                designated Bureau website]. The data show the geographic
                distribution of our small business lending applications; information
                about our loan approvals and denials; and demographic information
                about the principal owners of our small business applicants. The
                Bureau may delete or modify portions of our data prior to posting it
                if the Bureau determines that doing so would advance a privacy
                interest. Small business lending data for many other financial
                institutions are also available at this website.
                 2. website. A financial institution without a website complies
                with Sec. 1002.110(c) by making a written statement using the
                language in comment 110(c)-1, or substantially similar language,
                available upon request.
                Section 1002.111--Recordkeeping
                 111(a) Record retention.
                 1. Evidence of compliance. Section 1002.111(a) requires a
                financial institution to retain evidence of compliance with subpart
                B of this part for at least three years after its small business
                lending application register is required to be submitted to the
                Bureau pursuant to Sec. 1002.109. In addition to the financial
                institution's small business lending application register, such
                evidence of compliance is likely to include, but is not limited to,
                the applications for credit from which information in the register
                is drawn, as well as the files or documents that, under Sec.
                1002.111(b), are kept separate from the applications for credit.
                 2. Record retention for creditors under Sec. 1002.5(a)(4)(vii)
                and (viii). A creditor that is voluntarily, under Sec.
                1002.5(a)(4)(vii) and (viii), collecting information pursuant to
                subpart B of this part complies with Sec. 1002.111(a) by retaining
                evidence of compliance with subpart B for at least three years after
                June 1 of the year following the year that data was collected.
                 111(b) Certain information kept separate from the rest of the
                application.
                 1. Separate from the application. A financial institution may
                satisfy the requirement in Sec. 1002.111(b) by keeping an
                applicant's responses to the financial institution's request
                pursuant to Sec. 1002.107(a)(18) through (20) in a file or document
                that is discrete or distinct from the application and its
                accompanying information. For example, such information could be
                collected on a piece of paper that is separate from the rest of the
                application form. In order to satisfy the requirement in Sec.
                1002.111(b), an applicant's responses to the financial institution's
                request pursuant to Sec. 1002.107(a)(18) through (20) need not be
                maintained in a separate electronic system, nor need they be removed
                from the physical files containing the application. However, the
                financial institution may nonetheless need to keep this information
                in a different electronic or physical file in order to satisfy the
                requirements of Sec. 1002.108.
                 111(c) Limitation on personally identifiable information in
                records retained under this section.
                 1. Small business lending application register. The prohibition
                in Sec. 1002.111(c) applies to data compiled and maintained
                pursuant to Sec. 1002.107, data in the small business lending
                application register submitted by the financial institution to the
                Bureau under Sec. 1002.109, the version of the register that the
                financial institution maintains under Sec. 1002.111(a), and the
                separate record of certain information created pursuant to Sec.
                1002.111(b).
                 2. Examples. Section 1002.111(c) prohibits a financial
                institution from including any name, specific address (other than
                the census tract required under Sec. 1002.107(a)(13)), telephone
                number, or email address in the data it compiles and maintains
                pursuant to Sec. 1002.107, in its records under Sec. 1002.111(b),
                or in data reported to the Bureau under Sec. 1002.109. It likewise
                prohibits a financial institution from including any personally
                identifiable information concerning any individual who is, or is
                connected with, an applicant, except as required pursuant to Sec.
                1002.107 or Sec. 1002.111(b). Examples of such personally
                identifiable information that a financial institution may not
                include in its small business lending application register include,
                but are not limited to, the following: Date of birth, Social
                Security number, official government-issued driver's license or
                [[Page 56606]]
                identification number, alien registration number, government
                passport number, or employer or taxpayer identification number.
                 3. Other records. The prohibition in Sec. 1002.111(c) does not
                extend to the application or any other records that the financial
                institution maintains.
                 4. Name and business contact information for submission. The
                prohibition in Sec. 1002.111(c) does not bar financial institutions
                from providing to the Bureau, pursuant to Sec. 1002.109(b)(3), the
                name and business contact information of the person who may be
                contacted with questions about the financial institution's
                submission under Sec. 1002.109.
                Section 1002.112--Enforcement
                 112(b) Bona fide errors.
                 1. Tolerances for bona fide errors. Section 1002.112(b) provides
                that a financial institution is presumed to maintain procedures
                reasonably adapted to avoid errors with respect to a given data
                field if the number of errors found in a random sample of the
                financial institution's data submission for the data field does not
                equal or exceed a threshold specified by the Bureau for this
                purpose. The Bureau's thresholds appear in column C of the table in
                appendix H. The size of the random sample, set out in column B,
                shall depend on the size of the financial institution's small
                business lending application register, as shown in column A of the
                table in appendix H. A financial institution has not maintained
                procedures reasonably adapted to avoid errors if either there is a
                reasonable basis to believe the error was intentional or there is
                other evidence that the financial institution has not maintained
                procedures reasonably adapted to avoid errors. To illustrate, assume
                that a financial institution has incorrectly coded withdrawn
                applications as denials to such an extent that it likely prevents
                reliable fair lending analysis of underwriting disparities. If so,
                the errors would not be deemed bona fide errors under Sec.
                1002.112(b) and would violate the Act and this Regulation.
                 2. Tolerances and data fields. For purposes of determining
                whether an error is bona fide under Sec. 1002.112(b), the term
                ``data field'' generally refers to individual fields. However, with
                respect to information on the ethnicity and race of an applicant's
                principal owner, a data field group consists of more than one field.
                If one or more of the fields within an ethnicity or race field group
                have errors, they count as one (and only one) error for that data
                field group. For instance, in the ethnicity data field group, if an
                applicant indicates that one of its principal owners is Cuban, but
                the financial institution reports that the principal owner is
                Mexican and Puerto Rican, the financial institution has made errors
                in two fields within the ethnicity data field group for that
                principal owner. For purposes of the error threshold table in
                appendix H, the financial institution is deemed to have made one
                error. However, a financial institution that makes, for example, one
                error in the race data field group and one error in the ethnicity
                field group regarding a particular principal owner has made two
                errors for purposes of the error threshold table in appendix H.
                 3. Tolerances and safe harbors. An error that meets the criteria
                for one of the four safe harbor provisions in Sec. 1002.112(c) is
                not counted as an error for purposes of determining whether a
                financial institution has exceeded the relevant error threshold in
                appendix H for a given data field.
                 112(c) Safe harbors.
                 1. Information from a Federal agency--census tract. Section
                1002.112(c)(1) provides that an incorrect entry for census tract is
                not a violation of the Act or subpart B of this part, if the
                financial institution obtained the census tract using a geocoding
                tool provided by the FFIEC or the Bureau. However, this safe harbor
                provision does not extend to a financial institution's failure to
                provide the correct census tract number for a covered application on
                its small business lending application register, as required by
                Sec. 1002.107(a)(13), because the FFIEC or Bureau geocoding tool
                did not return a census tract for the address provided by the
                financial institution. In addition, this safe harbor provision does
                not extend to a census tract error that results from a financial
                institution entering an inaccurate address into the FFIEC or Bureau
                geocoding tool.
                 2. Applicability of NAICS code safe harbor. A financial
                institution is permitted to rely on an applicant's representations
                or on other information regarding the NAICS code as described in
                comments 107(a)(15)-3 and -4. The safe harbor in Sec.
                1002.112(c)(2) applies when a financial institution does not rely on
                such information, but instead the financial institution identifies
                the NAICS code for an applicant and the NAICS code is incorrect.
                Where the incorrect NAICS code entry is due to an unintentional
                error, the safe harbor in Sec. 1002.112(c)(2) may apply in addition
                to the bona fide error provision in Sec. 1002.112(b), provided its
                requirements are met.
                * * * * *
                 Dated: August 31, 2021.
                David Uejio,
                Acting Director, Bureau of Consumer Financial Protection.
                [FR Doc. 2021-19274 Filed 9-30-21; 4:15 pm]
                 BILLING CODE 4810-25-P
                

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