The Consumer Financial Protection Bureau (CFPB) finalized a rule last week that is designed to increase transparency in small business lending, promote economic development, and combat unlawful discrimination.
With this new rule, lenders will report information about the small business credit applications they receive, including geographic and demographic data, lending decisions, and the price of credit. The increased transparency seeks to help small businesses, family farms, financial institutions, and the broader economy.
“Many local businesses were shuttered during the COVID-19 pandemic after they struggled to obtain credit under the Paycheck Protection Program,” CFPB Director Rohit Chopra said. “This small business loan census will give the public key data on this market to ensure that banks and nonbanks are serving small businesses fairly.”
Currently, there is limited data on small business entrepreneur access to credit and no comprehensive information available about small business lending. Data on small business lending will give investors and lenders more insights to identify new opportunities that support economic growth. It will also help policymakers measure the effectiveness of any government programs and detect potential discrimination.
The rule covers lenders making over 100 covered small business loans per year, which accounts for more than 95 percent of small business loans by banks and credit unions. Like with mortgages, lenders will submit data points required by Congress, as well as additional data points that are typically already included in lender files. Also, the rule defines a small business as one with gross revenue under $5 million in its last fiscal year.
The rule covers closed-end loans, lines of credit, business credit cards, online credit products, and merchant cash advances by banks, credit unions, and other lenders. Non-depository financial institutions will also be required to collect and report data, as will banks, savings associations, and credit unions.
Lenders that originate at least 2,500 small business loans annually must collect data starting Oct. 1, 2024, while lenders that originate at least 500 loans annually must collect data starting April 1, 2025. Lenders that originate at least 100 loans annually must collect data starting Jan. 1, 2026.
The CFPB got pushback from some industry groups, including the National Association of Federally-Insured Credit Unions (NAFCU). President and CEO Dan Berger said it will have a chilling effect on small business lending.
“The final rule to implement section 1071 ignores valid concerns raised by credit unions and community development groups. It will add significant compliance costs and burdens to business lending, forcing many small credit unions to stop making these loans all together,” Berger said.
The Independent Community Bankers of America (ICBA) also voiced its displeasure with the rule, as President and CEO Rebeca Romero Rainey said banks are “deeply frustrated” by the rule.
“With the finalization of this rule, the Bureau has dramatically exceeded the clear letter of the law and is requiring community banks to collect numerous intrusive data points beyond what Congress mandated, ignoring the concerns we have voiced about data privacy for these small businesses. As relationship bankers, community banks look at each small-business loan individually and often in customized terms based on many factors. The CFPB’s rigid data collection requirements will hamper the ability of community banks to tailor loans to meet the unique needs of local businesses,” Rainey said.