Thirteen years later, and one day early, the Consumer Financial Protection Bureau (CFPB) issued a final rule on small business data collection as required by Section 1071 of the Dodd-Frank Act. While there are 18 months before data collection rules become mandatory for the largest reporters, banks and other financial institutions can take important steps now to prepare for reporting deadlines.
- The number of covered small business loans your institution originated in 2022 and 2023 determines whether the Section 1071 rule applies to you
- The rule does not cover institutions that originate less than 100 covered small business loans
- The largest reporters, with 2,500 or more annual originations, will be required to begin collecting data in 18 months on October 1, 2024
- Smaller reporters have a longer implementation period and will be required to begin data collection on April 1, 2025, or January 1, 2026, depending on the number of covered loans they originate
As banks and other financial institutions prepare for upcoming small business data collection requirements, there are likely dozens of questions that need to be answered. Some of the most common questions we’ve received in the lead-up to the release of the Section 1071 final rule are covered below to give you a sense of where your next steps may take you.
Does this Rule Apply to My Bank or Credit Union?
This depends on the number of covered small business loans that you originated in 2022 and 2023. If the number was less than 100 for either of these years, then you are not currently covered. You will need to keep track of how many covered loans you originate each year. If that number exceeds 100 in two consecutive years, you will be subject to the rule.
When Do I Have to Start Collecting Data?
While the largest reporters (those with 2,500 annual originations) will begin collecting data in 18 months, smaller reporters have a longer implementation period. This rule applies not only to banks and credit unions, but to other lenders who meet the following origination thresholds as well:
- 2,500 or more covered originations in both 2022 and 2023 means data collection begins on October 1, 2024
- 500 or more covered originations in both 2022 and 2023 means data collection begins April 1, 2025
If neither of the first two thresholds are met, then:
- 100 or more covered originations in both 2024 and 2025 means data collection begins January 1, 2026
The CFPB has also stated that a rule may be forthcoming which would extend the implementation time for small lenders that have demonstrated a high level of success in serving their communities under the Community Reinvestment Act (CRA) or similar state laws.
What Is a Small Business Under the Rule?
A small business is defined as one that had $5 million or less in gross annual revenue for its preceding fiscal year. Non-profit organizations and governmental entities are not considered small businesses under the rule. They do not need to be included in your count of annual originations and are not otherwise subject to the data collection and reporting requirements.
What Types of Loans Must Be Reported?
Since these rules are part of Regulation B, which implements the Equal Credit Opportunity Act, that is a good place to look for detailed information. Essentially the rule will apply to business or agricultural loans, lines of credit, credit cards and merchant cash advances. Unlike the current small business and small farm data collection requirements under CRA, which only require reporting for originated loans, the 1071 rule also requires data collection and reporting for applications that do not result in origination (e.g., denials and withdrawals).
What Type of Information Will I Need to Collect and Report?
Section 1071 data will more closely resemble Home Mortgage Disclosure Act (HMDA) data than CRA small business and farm data. Following is a list of the general data points:
- Unique Identifier
- Credit Type
- Number of Workers
- Application Date
- Credit Purpose
- Time in Business
- Application Method
- Amount Applied for
- Number of Principal Owners
- Application Recipient Census Tract
- Gross Annual Revenue
- Action Taken
- Action Taken Date
- Three Digit NAICS Code
- Interest Rate
- Origination Charges
- Broker Fees
- Amount Approved
- Prepayment Penalty
- Other Charges
Additionally, lenders will need to request and report the ethnicity, race, and sex of the principal owners and the minority-, women-, or LGBTQI+-owned business status of the applicant.
What Can My Organization Do to Prepare in the Coming Months?
First, determine how many covered transactions your institution, whether it’s a bank, credit union or other lender, originated in 2022 and 2023 to determine your initial data collection and reporting dates. You will also want to establish a team to begin working towards those reporting deadlines. Current HMDA or CRA reporters, or someone familiar with those processes, would be valuable members of this team.
Take this time to revisit your small business/agricultural loan underwriting and pricing practices. These are often not as standardized as home and consumer loans given the variety of unique situations posed by each borrower. Section 1071 data will be available to regulators and, at some level, to the public. Application rates, denial rates and pricing data based on the demographics of the business owners and the census tract where the business is located will be scrutinized. Just as you know your HMDA data, be prepared to know your 1071 data.
Above all else, stay informed. This will be a long road with guidance, interpretations and revisions likely to throw sharp curves and perhaps a couple U-turns in our path. Designate someone at your institution to take charge of keeping their eye on the road ahead.
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