By Margaret Dolinger, CRCM
1071 Dodd Frank requires financial institutions to collect data on small business loans and record them on a Small Business Lending Application Register. The Consumer Financial Protection Bureau (CFPB) issued a Proposed Rule on October 8, 2021, regarding the covered institutions and covered transaction pursuant to proposed Regulation B 1002.101 – 1002.114.
The CFPB agreed to the date of March 31, 2023, deadline for issuing a final rule for implementation of small business data collection requirements. The purpose of this new rule is to require financial institutions to collect and report data regarding applications for credit for small businesses, including those that are owned by women and minorities. The collection of the small business data will be used to identify fair lending violations and facilitate the enforcement of anti-discrimination laws. Below is the link to the proposed rule.
A financial institution that originated 25 loans or more to small businesses in the two preceding years will be required to collect the required data fields. Small businesses will be defined with revenue of $5 million or less in revenue. The link below will take you to a chart that lists all the data point fields required to be captured on a small business loan.
Link: Proposed data points for small business lending data collection (consumerfinance.gov)
In the proposed rule, covered transactions will include loans, lines of credit, credit card and merchant cash advances. Excluded transactions would include trade credit, public utilities credit, securities credit and incidental credit. In addition, factoring, leases, and consumer-designated credit used for business purposes and secured by investment properties would also be excluded.
Some good news; although data will be required to be collected and reported to the CFPB annually, the submission date in the proposed rule is June 1. This will be a welcome relief for current HMDA and CRA reporters. Submissions will be similar to HMDA and CRA filing and there is a three-year record retention requirement for submitted data.
Once the proposal becomes final, the effective date will be 90 days after publication in the Federal Register and implementation approximately 18 months from publication. The proposed rule would permit covered financial institutions to begin collecting applicant’s protected demographic information 12 months from the compliance date.
In the meantime, financial institutions impacted by this new rule should get their project plan underway. This means gathering stakeholders within your institution and begin conversations regarding the resources and staff necessary to collect, record and submit the data. The stakeholders should include at minimum Commercial Lenders, Commercial Lending Administrative Assistants/Processors, Loan Operations, Compliance, IT, Internal Audit, Risk Officer and Accounting. Remember to document your meetings and report to Management and the Board the status of the project; this is critical so proper resources can be allocated.
To help get the ball rolling on your project plan, here are some topics to be discussed.
- How many covered small business loans has the financial institution originated in each of the past two years?
- Does the financial institution have a commercial loan application?
- Will the Bank need to create an application to collect the data fields? If not, how will the data be collected?
- Can the data be entered in the bank’s core system or will the use of another platform be required? (Third-party software providers were contacted by the CFPB to discuss the technology platforms needed for financial institution to report.)
- Reach out to your core and loan origination system/document preparation vendor. Do /will their software/programs have the necessary data fields?
- Will the financial institution partner with a third-party software vendor to record the data and perform analysis along with mapping?
- Which department(s) of the financial institution will be responsible for collecting the data?
- Which department(s) of the financial institution will be responsible for recording and reporting the data?
- What are the costs of the resources needed to implement to ensure an effective and efficient process to collect the data?
- Will the financial institution need to hire staff dedicated to the project?
- Who will develop the procedures?
- Who will train the staff and when?
- Who will test the collected data periodically for accuracy?
The rulemaking will be placed under Regulation B. The amendment to the regulation will include a new subpart B related to the requirements of 1071 with sections 1002.101 through 1002.114. In addition, the CFPB will create a written Filing Instruction Guide and related materials to assist with data collection.
Understanding the definitions that arise from the final rule will be imperative for the commercial lending staff. These definitions will provide clarity on qualification factors of a small business, principal owner, application, transaction, product lines, and demographics. The definitions will be key to ensure accuracy of the Small Business LAR.
In reading through the proposal a few items stand out:
- An application is either oral or written as defined by Regulation B; however, if oral, the financial institution must determine how the application date will be obtained and documented.
- Written procedures for data collection will be required.
- Pages 698 through 749 are tables and descriptions of the methodology for estimating ongoing costs of implementing the proposed rule.
- A Public Notice will be required to be on the institution’s website or on request.
TCA will continue to review the progress of the required Small Business Lending Application Register as information becomes available from the CFPB.
Stay tuned for additional articles and resources to help your financial institution find A Better Way to plan and implement your Small Business LAR data collection process.
