On March 30, 2023, the CFPB issued the final rule for the small business lending rule. This is the most significant fair lending collection effort by the CFPB to date. It requires financial institutions to compile data regarding certain business credit applications and report that data to the CFPB to aid in its fair lending enforcement.
Details of the final rule and implementation resources are published by the CFPB at the following link:
Small business lending collection and reporting requirements | Consumer Financial Protection Bureau (consumerfinance.gov)
The rule provides implementation dates based on the number of covered transactions each financial institution originated during 2022 and 2023 as follows:
- A financial institution must begin collecting data and otherwise complying with the final rule on October 1, 2024, if it originated at least 2,500 covered originations in both 2022 and 2023.
- A financial institution must begin collecting data and otherwise complying with the final rule on April 1, 2025, if it:
- Originated at least 500 covered originations in both 2022 and 2023;
- Did not originate 2,500 or more covered originations in both 2022 and 2023; and
- Originated at least 100 covered originations in 2024.
- A financial institution must begin collecting data and otherwise complying with the final rule on January 1, 2026, if it originated at least 100 covered originations in both 2024 and 2025.
When determining whether a transaction is a covered financial institution and what compliance date tier applies to it, a financial institution must count covered originations, which are certain covered credit transactions that it originated to small businesses. Similarly, a covered financial institution must collect and report data about an application if the application is from a small business and is for a covered credit transaction. A “small business” is a business that had $5 million or less in gross annual revenue for its preceding fiscal year.
A covered credit transaction is an extension of business credit under Regulation B. Covered credit transactions can include loans, lines of credit, credit cards, merchant cash advances, and credit products used for agricultural purposes.
The following transactions are excluded from coverage:
- Trade credit, which is a financing arrangement wherein a business acquires goods or services from another business without making immediate payment in full to the business providing the goods or services;
- HMDA-reportable transactions;
- Insurance premium financing, which generally is a financing arrangement wherein a business agrees to repay a financial institution the proceeds advanced to an insurer for payment of the premium on the business’s insurance contract and wherein the business assigns to the financial institution certain rights, obligations, and/or considerations in its insurance contract to secure repayment of the advanced proceeds;
- Public utilities credit as defined in Regulation B, 12 CFR 1002.3(a)(1);
- Securities credit as defined in Regulation B, 12 CFR 1002.3(b)(1); and
- Incidental credit as defined in Regulation B, 12 CFR 1002.3(c)(1), but without regard to whether the credit is consumer credit, is extended by a creditor, or is extended to a consumer.
The following steps are a great start for implementation:
- Inform the Board, executive management, and loan department of the new rule and upcoming compliance dates.
- Begin counting small business loans from 2022.
- Ensure the loan department begins documenting gross annual income for business loan applicants for 2023 forward. This information is necessary for determining small business status. It is also a good idea to begin collecting NAICS codes.
- Review current commercial loan applications and make adjustments to ensure needed information is obtained. If commercial loan applications aren’t used, it is a great time to start.
Steve H. Powell & Company will be offering training webinars and in-person seminars throughout the year to assist with implementation. Announcements of such offerings will be made at a later date. This will be a huge undertaking and we are here to help!