The Consumer Financial Protection Bureau recently finalized Dodd-Frank Act Section 1071, which governs the collection and reporting of small business lending data. Under the rule, lenders will be required to collect and report information about the small business credit applications they receive, including demographic and geographic information, lending decisions and the cost of credit. Lenders will need to furnish data on loans made to small businesses with less than $5 million in the last fiscal year, submit Congressionally-required data points and provide additional information typically included in lender files.
The CFPB plans to require lenders that originate at least 2,500 small business loans to collect data starting on Oct. 1, 2024. Lenders that originate at least 500 loans annually will need to begin collecting data on April 1, 2025, and those that originate at least 100 annually must collect data starting on Jan. 1, 2026.
According to the CFPB, the rule is needed because of the dearth of data on small business lending. “For decades, the government has assembled data pursuant to Congressional mandates on residential mortgages,” the CFPB stated. “Now, for the first time, data on small business lending will give investors and lenders more insights to identify new opportunities that support economic growth, help policymakers measure the effectiveness of any government programs and provide a data-driven approach to detect potential discrimination.”
Loans reportable under the Home Mortgage Disclosure Act will not be covered under the rule. Financial institutions can use third parties to develop the technologies and services needed to collect and report data tailored to their business model. The CFPB plans to provide additional time for small lenders with “high levels of success in serving their local communities, as measured by their performance under relevant frameworks like the Community Reinvestment Act and similar state laws.”
Following the decision, Independent Community Bankers of America President and CEO Rebeca Romero Rainey predicted that Section 1071 will make small business lending more challenging for community banks. She called on the CFPB to exempt more small businesses and community banks from the rule and delay the effective date of the plan until the Supreme Court considers the constitutionality of the regulatory agency’s funding structure.
“Not only will these data reporting requirements place a significant compliance burden on small community banks, but this final rule does not address the significant concerns ICBA has raised about the privacy of applicants, particularly in small communities,” she added. “The CFPB’s rule will make it possible for loan applicants to be identified, especially in rural areas — potentially driving small-business owners away from community banks and local communities while having a chilling effect on small-business lending.”