Small Business Lending Data Collection Under the Equal Credit Opportunity Act (Regulation B), 56356-56606 [2021-19274]
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Federal Register / Vol. 86, No. 193 / Friday, October 8, 2021 / Proposed Rules
BUREAU OF CONSUMER FINANCIAL
PROTECTION
12 CFR Part 1002
[Docket No. CFPB–2021–0015]
RIN 3170–AA09
Small Business Lending Data
Collection Under the Equal Credit
Opportunity Act (Regulation B)
Bureau of Consumer Financial
Protection.
ACTION: Proposed rule; request for
public comment.
AGENCY:
The Bureau of Consumer
Financial Protection (Bureau) is
publishing for public comment a
proposed rule amending Regulation B to
implement changes to the Equal Credit
Opportunity Act (ECOA) made by
section 1071 of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act (Dodd-Frank Act). Consistent with
section 1071, the Bureau is proposing to
require covered financial institutions to
collect and report to the Bureau data on
applications for credit for small
businesses, including those that are
owned by women or minorities. The
Bureau’s proposal also addresses its
approach to privacy interests and the
publication of section 1071 data;
shielding certain demographic data from
underwriters and other persons;
recordkeeping requirements;
enforcement provisions; and the
proposed rule’s effective and
compliance dates.
DATES: Comments must be received on
or before January 6, 2022.
ADDRESSES: You may submit comments,
identified by Docket No. CFPB–2021–
0015 or RIN 3170–AA09, by any of the
following methods:
• Federal eRulemaking Portal:
https://www.regulations.gov. Follow the
instructions for submitting comments.
• Email: 2021-NPRM-1071@cfpb.gov.
Include Docket No. CFPB–2021–0015 or
RIN 3170–AA09 in the subject line of
the message.
• Mail/Hand Delivery/Courier:
Comment Intake—Section 1071 Small
Business Lending Data Collection,
Bureau of Consumer Financial
Protection, 1700 G Street NW,
Washington, DC 20552.
Instructions: The Bureau encourages
the early submission of comments. All
submissions should include the agency
name and docket number or Regulatory
Information Number (RIN) for this
rulemaking. Because paper mail in the
Washington, DC area and at the Bureau
is subject to delay, and in light of
difficulties associated with mail and
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SUMMARY:
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hand deliveries during the COVID–19
pandemic, commenters are encouraged
to submit comments electronically. In
general, all comments received will be
posted without change to https://
www.regulations.gov. In addition, once
the Bureau’s headquarters reopens,
comments will be available for public
inspection and copying at 1700 G Street
NW, Washington, DC 20552, on official
business days between the hours of 10
a.m. and 5 p.m. Eastern Time. At that
time, you can make an appointment to
inspect the documents by telephoning
202–435–7275.
All comments, including attachments
and other supporting materials, will
become part of the public record and
subject to public disclosure. Proprietary
information or sensitive personal
information, such as account numbers
or Social Security numbers, or names of
other individuals, should not be
included. Comments will not be edited
to remove any identifying or contact
information.
FOR FURTHER INFORMATION CONTACT:
Camille Gray, Paralegal Specialist; Tola
Adenuga, Regulatory Implementation
and Guidance Specialist; Tarrian Ellis,
Honors Attorney; Jaydee DiGiovanni,
Counsel; Kristine M. Andreassen,
Pavitra Bacon, Benjamin Cady, Joseph
Devlin, Amy Durant, Gregory Evans,
David Jacobs, Kathryn Lazarev,
Lawrence Lee, Kristen Phinnessee, or
Michael Scherzer, Senior Counsels,
Office of Regulations, at 202-435-7700
or https://reginquiries.consumerfinance.
gov/. If you require this document in an
alternative electronic format, please
contact CFPB_Accessibility@cfpb.gov.
SUPPLEMENTARY INFORMATION:
I. Summary of the Proposed Rule
In 2010, Congress passed the DoddFrank Act. Section 1071 of that Act
amended ECOA1 to require that
financial institutions collect and report
to the Bureau certain data regarding
applications for credit for womenowned, minority-owned, and small
businesses.2 Section 1071’s statutory
purposes are to (1) facilitate
enforcement of fair lending laws, and (2)
enable communities, governmental
entities, and creditors to identify
business and community development
needs and opportunities of womenowned, minority-owned, and small
businesses.
Section 1071 specifies a number of
data points that financial institutions
are required to collect and report, and
1 15
U.S.C. 1691 et seq.
Law 111–203, tit. X, section 1071, 124
Stat. 1376, 2056 (2010), codified at ECOA section
704B, 15 U.S.C. 1691c–2.
2 Public
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also provides authority for the Bureau to
require any additional data that the
Bureau determines would aid in
fulfilling section 1071’s statutory
purposes. Section 1071 also contains a
number of other requirements,
including those that address restricting
the access of underwriters and other
persons to certain 1071 data;
recordkeeping; publication of 1071 data;
and modifications or deletions of data
prior to publication in order to advance
a privacy interest.
Section 1071 directs the Bureau to
prescribe such rules and issue such
guidance as may be necessary to carry
out, enforce, and compile data pursuant
to section 1071, and permits the Bureau
to adopt exceptions to any requirement
or to exempt financial institutions from
the requirements of section 1071 as the
Bureau deems necessary or appropriate
to carry out the purposes of section
1071. The Bureau is proposing to add a
new subpart B to Regulation B to
implement the requirements of section
1071.3 Key aspects of the Bureau’s
proposal are summarized below.
If finalized, the Bureau’s proposed
rule would create the first
comprehensive database of small
business credit applications in the
United States. This would include
critical information about womenowned and minority-owned small
businesses to help regulators and the
public identify and address fair lending
concerns. The database would also
enable a range of stakeholders to better
identify business and community
development needs and opportunities
for small businesses, including womenowned and minority-owned small
businesses. Just as the Bureau works in
other ways to help foster fairness and
opportunity in consumer financial
services markets for all consumers, the
proposed 1071 rule is structured to
realize these same goals for the small
business market—for all small
businesses within the scope of the rule,
including those that are owned by
women and minorities. Research
indicates that minority-owned small
businesses face particular obstacles, as
do those that are women-owned, but the
current lack of comprehensive,
quantitative data has made it difficult to
understand the extent of these obstacles
and address them with responsive
3 The Bureau interpreted section 1071 to mean
that obligations for financial institutions to collect,
maintain, and submit data ‘‘do not arise until the
Bureau issues implementing regulations and those
regulations take effect.’’ See Letter from Leonard
Kennedy, General Counsel, CFPB, to Chief
Executive Officers of Financial Institutions under
Section 1071 of the Dodd-Frank Act (Apr. 11, 2011),
https://files.consumerfinance.gov/f/2011/04/GCletter-re-1071.pdf.
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policy. By shining a light on lending
practices in this area, the Bureau
believes that the 1071 data would not
only foster a culture of compliance but
bring particular attention to the
underserved parts of the small business
market that have traditionally faced the
greatest obstacles to success. In this
way, the proposed rule is intended to
help small businesses drive inclusive
and equitable growth.
Scope. The Bureau is proposing to
require financial institutions to collect
and report 1071 data regarding
applications for credit for small
businesses, including those that are
owned by women and minorities. The
Bureau is not proposing to require that
financial institutions collect and report
data regarding applications for womenowned and minority-owned businesses
that are not small. Because most existing
businesses are small businesses,
covering small businesses necessarily
means nearly all women-owned and
minority-owned businesses will also be
covered. The Bureau believes that this
scope is consistent with the statute and
will allow the rule to carry out section
1071’s purposes without requiring
collection of data that would be of
limited utility.
Covered financial institutions.
Consistent with language from section
1071, the Bureau is proposing to define
a ‘‘financial institution’’ to include any
partnership, company, corporation,
association (incorporated or
unincorporated), trust, estate,
cooperative organization, or other entity
that engages in any financial activity.
Under the proposed definition, the
Bureau’s 1071 rule would apply to a
variety of entities that engage in small
business lending, including depository
institutions (i.e., banks, savings
associations, and credit unions),4 online
lenders, platform lenders, community
development financial institutions (both
depository and nondepository
institutions), lenders involved in
equipment and vehicle financing
(captive financing companies and
independent financing companies),
4 For purposes of this notice of proposed
rulemaking, the Bureau is using the term depository
institution to mean any bank or savings association
defined by the Federal Deposit Insurance Act, 12
U.S.C. 1813(c)(1), or credit union defined pursuant
to the Federal Credit Union Act, 12 U.S.C. 1751 et
seq., as implemented by 12 CFR 700.2. The Bureau
notes that the Dodd-Frank Act defines a depository
institution to mean any bank or savings association
defined by the Federal Deposit Insurance Act, 12
U.S.C. 1811 et seq.; there, that term does not
encompass credit unions. 12 U.S.C. 5301(18)(A),
1813(c)(1). To facilitate analysis and discussion, the
Bureau is referring to banks and savings
associations together with credit unions as
depository institutions throughout this notice,
unless otherwise specified.
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commercial finance companies,
governmental lending entities, and
nonprofit nondepository lenders.5
The Bureau’s proposal uses the term
‘‘covered financial institution’’ to refer
to those financial institutions that
would be required to comply with
section 1071’s data collection and
reporting requirements. The Bureau is
proposing that a covered financial
institution would be a financial
institution that originated at least 25
covered credit transactions for small
businesses in each of the two preceding
calendar years. The Bureau is not
proposing an asset-based exemption
threshold for depository institutions, or
any other general exemptions for
particular categories of financial
institutions.
The Bureau is also proposing to
permit creditors that are not covered
financial institutions to voluntarily
collect and report data under section
1071 in certain circumstances.
Covered credit transactions. The
Bureau is proposing to require that
covered financial institutions collect
and report data regarding covered
applications from small businesses for
covered credit transactions. The Bureau
is proposing to define a ‘‘covered credit
transaction’’ as one that meets the
definition of business credit under
existing Regulation B, with certain
exceptions. Loans, lines of credit, credit
cards, and merchant cash advances
(including such credit transactions for
agricultural purposes and those that are
also covered by the Home Mortgage
Disclosure Act of 1975 (HMDA) 6)
would all be covered credit transactions
within the scope of this proposed rule.
The Bureau is proposing to exclude
trade credit, public utilities credit,
securities credit, and incidental credit.
Factoring, leases, consumer-designated
credit used for business purposes, and
credit secured by certain investment
properties would also not be covered
credit transactions.
Covered applications. The Bureau is
proposing to define a ‘‘covered
application’’—which would trigger data
collection and reporting and related
requirements—as an oral or written
request for a covered credit transaction
that is made in accordance with
procedures used by a financial
institution for the type of credit
requested. This proposed definition of
5 The Bureau’s rules, including this proposed rule
to implement section 1071, generally do not apply
to motor vehicle dealers, as defined in section
1029(f)(2) of the Dodd-Frank Act, that are
predominantly engaged in the sale and servicing of
motor vehicles, the leasing and servicing of motor
vehicles, or both. 12 U.S.C. 5519.
6 12 U.S.C. 2801 et seq.
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covered application is largely consistent
with the existing Regulation B
definition of that term. However, the
Bureau is also proposing that certain
circumstances would not be covered
applications, even if they are considered
applications under existing Regulation
B. Specifically, the Bureau is proposing
that a covered application does not
include (1) reevaluation, extension, or
renewal requests on an existing business
credit account, unless the request seeks
additional credit amounts; or (2)
inquiries and prequalification requests.
Small business definition. The Bureau
is proposing to define a ‘‘small
business,’’ about whose applications for
credit data must be collected and
reported, by reference to the definitions
of ‘‘business concern’’ and ‘‘small
business concern’’ as set out in the
Small Business Act 7 and Small
Business Administration (SBA)
regulations. However, in lieu of using
the SBA’s size standards for defining a
small business concern, the Bureau’s
proposed definition would look to
whether the business had $5 million or
less in gross annual revenue for its
preceding fiscal year. The Bureau is
seeking SBA approval for its alternate
small business size standard pursuant to
the Small Business Act.8
Data to be collected and reported. The
Bureau’s proposal addresses the data
points that must be collected and
reported by covered financial
institutions for covered applications
from small businesses. Many of the
proposed data points are specifically
enumerated in section 1071; for the
others, the Bureau is proposing to use
the authority granted by section 1071 to
require financial institutions to collect
and report any additional data that the
Bureau determines would aid in
fulfilling the purposes of section 1071.
Certain of these data points are or could
be collected from the applicant (or
otherwise determined based on
information provided or authorized by
the applicant); other data points are
based on information solely within the
financial institution’s control. The
Bureau is proposing that covered
financial institutions maintain
procedures to collect applicantprovided data at a time and in a manner
that is reasonably designed to obtain a
response. The Bureau’s proposal also
addresses what financial institutions
should do if, despite having such
procedures in place, they are unable to
obtain certain data from an applicant. A
financial institution would be permitted
to rely on statements made by an
7 15
U.S.C. 631 et seq.
15 U.S.C. 632(a)(2)(C).
8 See
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applicant (whether in writing or orally)
or information provided by an applicant
when collecting and reporting 1071
data, although for most data points if the
financial institution verifies the
information provided it must report the
verified information. The Bureau’s
proposal would also permit financial
institutions to reuse certain previously
collected data in certain circumstances.
As noted above, the Bureau’s proposal
includes certain data points that are, or
could be, provided by the applicant.
Some data points specifically relate to
the credit being applied for: The credit
type (which includes information on the
credit product, types of guarantees, and
loan term); The credit purpose; and the
amount applied for. There are also data
points that relate to the applicant’s
business: A census tract based on an
address or location provided by the
applicant; gross annual revenue for the
applicant’s preceding full fiscal year;
the 6-digit North American Industry
Classification System (NAICS) code
appropriate for the applicant; the
number of workers that the applicant
has (i.e., non-owners working for the
applicant); the applicant’s time in
business; and the number of principal
owners of the applicant.
There are also data points that would
be provided by the applicant addressing
the demographics of the applicant’s
ownership: Whether the applicant is a
minority-owned business; whether the
applicant is a women-owned business;
and the ethnicity, race, and sex of the
applicant’s principal owners. The
Bureau refers to these data points
collectively as an applicant’s ‘‘protected
demographic information.’’ The Bureau
is proposing that principal owners’
ethnicity and race be collected from
applicants using aggregate categories as
well as disaggregated subcategories. The
Bureau is proposing to permit principal
owners to self-describe their sex
(instead of or in addition to choosing
male and/or female), and is seeking
comment on whether and, if so, how its
collection of principal owners’ sex
should incorporate sexual orientation
and gender identity in light of the recent
Supreme Court decision in Bostock v.
Clayton County 9 and the Bureau’s
subsequent ECOA interpretive rule.10 If
an applicant does not provide any
ethnicity, race, or sex information for
any principal owners, the Bureau is
proposing that the financial institution
must collect at least one principal
owner’s race and ethnicity (but not sex)
via visual observation or surname, but
only if the financial institution meets
9 140
10 86
S. Ct. 1731 (2020).
FR 14363 (Mar. 16, 2021).
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with any principal owners in person or
via electronic media with an enabled
video component. The Bureau is
proposing detailed instructions to assist
financial institutions in collecting and
reporting applicants’ protected
demographic information pursuant to
section 1071. The Bureau is also
proposing a sample data collection
form, which would include a required
notice to applicants that the financial
institution cannot discriminate on the
basis of an applicant’s minority- or
women-owned business status or any
principal owner’s ethnicity, race, or sex.
In addition, the Bureau’s proposal
includes data points that would be
generated or supplied solely by the
financial institution. These data points
include, for all applications: A unique
identifier for each application for or
extension of credit; the application date;
the application method (i.e., the means
by which the applicant submitted its
application); the application recipient
(that is, whether the financial institution
or its affiliate received the application
directly, or whether it was received by
the financial institution via a third
party); the action taken by the financial
institution on the application; and the
action taken date. For denied
applications, there is also a data point
for denial reasons. For applications that
are originated or approved but not
accepted, there is a data point for the
amount originated or approved, and a
data point for pricing information
(which would include, as applicable,
interest rate, total origination charges,
broker fees, initial annual charges,
additional cost for merchant cash
advances or other sales-based financing,
and prepayment penalties).
Firewall. The Bureau’s proposal
includes a section to implement the
requirement in section 1071 that certain
data collected be shielded from
underwriters and certain other persons;
the Bureau refers to this as the
‘‘firewall.’’ An employee or officer of a
financial institution or a financial
institution’s affiliate that is involved in
making any determination concerning
the application would be prohibited
from accessing an applicant’s responses
to inquiries that the financial institution
makes pursuant to section 1071
regarding whether the applicant is a
minority-owned or women-owned
business, and the ethnicity, race, and
sex of the applicant’s principal owners.
This prohibition would not apply to
an employee or officer, however, if the
financial institution determines that it is
not feasible to limit that employee’s or
officer’s access to an applicant’s
responses to the financial institution’s
inquiries regarding the applicant’s
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protected demographic information, and
the financial institution provides a
notice to the applicant regarding that
access. It would not be feasible to limit
access if the financial institution
determines that an employee or officer
involved in making any determination
concerning a covered application
should have access to one or more
applicants’ responses to inquiries
regarding protected demographic
information. The notice must be
provided to each applicant whose
information will be accessed or,
alternatively, the financial institution
could provide the notice to all
applicants whose information could be
accessed. The Bureau is proposing
sample language that a financial
institution could use in providing this
notice.
Reporting data to the Bureau;
publication of data by the Bureau; and
privacy considerations. The Bureau is
proposing to require that 1071 data be
collected on a calendar year basis and
reported to the Bureau on or before June
1 of the following year. Financial
institutions reporting data to the Bureau
would be required to provide certain
identifying information about
themselves as part of their submission.
The Bureau is proposing to provide
technical instructions for the
submission of 1071 data in a Filing
Instructions Guide and related
materials.
The Bureau is proposing to make
available to the public, on an annual
basis and on the Bureau’s website, the
data submitted to it by financial
institutions, subject to modifications or
deletions made by the Bureau, at its
discretion, to protect privacy interests.
To determine whether and how the
Bureau might use its discretion to
modify or delete data prior to
publication, the Bureau is proposing a
‘‘balancing test’’ that would assess the
risks and benefits of public disclosure.
After the Bureau receives at least one
full year of 1071 data following the
compliance date of the final rule, the
Bureau plans to issue a policy statement
in which it would set forth its intended
modifications and deletions. The
Bureau is also proposing that the
Bureau’s publication of the data would
satisfy financial institutions’ statutory
obligation to make data available to the
public upon request.
Recordkeeping, enforcement,
severability, and effective and
compliance dates. The Bureau’s
proposal addresses issues related to
recordkeeping and to severability of the
rule. It also addresses enforcement of
violations of the rule, along with
provisions regarding bona fide errors
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under the rule as well as several safe
harbors.
Finally, the Bureau is proposing that
its final rule to implement section 1071
would become effective 90 days after
publication in the Federal Register,
though compliance with the rule would
not be required until approximately 18
months after publication in the Federal
Register. The Bureau is also proposing
several related transitional provisions
that would permit covered financial
institutions to begin collecting
applicants’ protected demographic
information prior to the compliance
date and would permit financial
institutions to use a different time
period to determine whether they will
be covered by the rule as of the
compliance date.
II. Background
As discussed above, in 2010, Congress
enacted the Dodd-Frank Act. Section
1071 of the Dodd-Frank Act, which
amended ECOA, requires financial
institutions to collect and report to the
Bureau data regarding applications for
credit for women-owned, minorityowned, and small businesses. Section
1071 was adopted for the dual purposes
of facilitating fair lending enforcement
and enabling communities,
governmental entities, and creditors to
identify business and community
development needs and opportunities of
such businesses. Section 1071
complements other Federal efforts to
ensure fair lending and to promote
community development for small
businesses, including through ECOA,
the Community Reinvestment Act of
1977 (CRA),11 and the Community
Development Financial Institutions
(CDFI) Fund.12
The collection and subsequent
publication of more robust and granular
data regarding credit applications for
small businesses, including those that
are women- and minority-owned, will
provide much-needed transparency to
the small business lending market. The
current COVID–19 pandemic has shown
that transparency is essential,
particularly at a time of crisis, when
small businesses, especially those
owned by women and minorities, may
be in urgent need of credit in order to
recover from economic shocks.
Furthermore, in the years and decades
to come, the collection and publication
of these data will be helpful in
11 12
U.S.C. 2901 et seq.
Riegle Community Development Banking
and Financial Institutions Act of 1994, 12 U.S.C.
4701 et seq., authorized the Community
Development Financial Institution Fund (CDFI
Fund). The CDFI Fund is discussed in more detail
in part II.F.2.ii below.
12 The
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identifying potential fair lending
violations and in facilitating the
enforcement of anti-discrimination
laws. It will also help governments,
community groups, financial
institutions, and other stakeholders to
identify opportunities and gaps in the
market, thereby enhancing business and
community development and boosting
broad-based economic activity and
growth.
Overview
Small businesses are a cornerstone of
the U.S. economy. There were over 30
million small businesses in the U.S. in
2017, employing almost half of all
private sector employees.13 Small
businesses, particularly start-ups, also
generated 65 percent of new jobs since
2000.14 Small businesses were hit hard
by two major shocks in the last two
decades. First, the Great Recession,
which began in 2007, disproportionately
affected small businesses.15 Between
2007 and 2009, employment at
businesses with under 50 employees fell
by 10.4 percent, compared with 7.5
percent at larger firms,16 while between
2008 and 2011 lending to small firms
fell by 18 percent, compared with 9
percent at larger firms.17 Small
businesses suffered again because of the
COVID–19 pandemic. Around 40
13 Off. of Advocacy, Small Bus. Admin., 2020
Small Business Profile (May 2020), https://
cdn.advocacy.sba.gov/content/uploads/2020/06/
04144214/2020-Small-Business-Economic-ProfileStates-Territories.pdf (estimating 31.7 million small
businesses in the United States).
14 Off. of Advocacy, Small Bus. Admin.,
Frequently Asked Questions About Small Business,
at 1 (Oct. 2020), https://cdn.advocacy.sba.gov/wpcontent/uploads/2020/11/05122043/SmallBusiness-FAQ–2020.pdf (SBA OA 2020 FAQs)
(small businesses accounted for 65.1 percent of new
jobs since 2000). See generally Congressional
Research Serv., Small Business Administration and
Job Creation (updated June 23, 2021), https://
fas.org/sgp/crs/misc/R41523.pdf (discussing small
business job creation); Jon Haltiwanger et al., Who
Creates Jobs? Small Versus Large Versus Young, 95
Rev. Econ. Stat. 347, 347–48 (May 2013), https://
direct.mit.edu/rest/article/95/2/347/58100/WhoCreates-Jobs-Small-versus-Large-versus-Young
(finding that young firms, which are generally
small, contribute disproportionately to both gross
and net job creation).
15 Jason Dietrich et al., Bureau of Consumer Fin.
Prot., Data Point: Small Business Lending and the
Great Recession, at 9 (Jan. 23, 2020), https://files.
consumerfinance.gov/f/documents/cfpb_datapoint_small-business-lending-great-recession.pdf
(finding that small business lending fell sharply
during the Great Recession and recovered slowly,
still not reaching pre-Recession levels by 2017).
16 Ays
¸egu¨l S
¸ ahin et al., Fed. Reserve Bank of N.Y.,
Current Issues in Economics & Finance, Why Small
Businesses Were Hit Harder by the Recent
Recession, at 1 (Vol. 17, No. 4, 2011), https://
www.newyorkfed.org////_issues/ci17-4.pdf.
17 Rebel A. Cole, Off. of Advocacy, Small Bus.
Admin, How Did the Financial Crisis Affect Small
Business Lending in the United States?, at 2 (Nov.
2012), https://www.microbiz.org/content/ploads//
04/SmallBizLending-and-FiscalCrisis.pdf.
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percent of small businesses were
temporarily closed in late March and
early April 2020, due primarily to
demand shocks and employee health
concerns.18 Across the first year of the
pandemic, ‘‘excess’’ business
establishment exits from the market, in
comparison to exits over the same
period from prior years, numbered up to
200,000.19 As of mid-2021, loan
approvals (other than for government
emergency programs) still remained
low, and some 845,000 non-farm private
sector jobs had not yet been recovered.20
During the last two decades, the small
business lending landscape has also
transformed. Traditional providers—
namely banks—consolidated, leading to
branch closures. The number of banks
in the U.S. has declined from over
18,000 in 1986 to under 5,200 today and
the number of branches declined by 14
percent from 2009 to 2020.21
Meanwhile, new providers and
products, such as fintechs and merchant
cash advances (MCAs), have become
increasingly prevalent in the small
business lending market. Financing by
MCA providers is estimated to have
increased from $8.6 billion in volume
during 2014 to $15.3 billion in 2017.22
From 2017 to 2019, the volume may
18 Alexander W. Bartik et al., The Impact of
COVID–19 on Small Business Outcomes and
Expectations, 117 Proc. Nat’l Acad. Sci. 17656,
17656 (July 2020), https://www.pnas.org/content/
pnas/117/30/17656.full.pdf.
19 Leland D. Crane et al., Bd. of Governors of the
Fed. Reserve Sys., Finance and Economics
Discussion Series, 2020–089, Business Exit During
the COVID–19 Pandemic: Non-Traditional
Measures in Historical Context, at 4 (2020), https://
www.federalreserve.gov/econres/feds/files/
2020089r1pap.pdf (estimating excess establishment
exits and analyzing other estimates of small
business exits during the pandemic). The paper
defines ‘‘exit’’ as permanent shutdown and
calculates ‘‘excess’’ exits by comparing the number
of exits during the 12-month period from March
2020 to February 2021 with previous years. Id. at
2–4.
20 ADP Research Inst., ADP National Employment
Report (May 2021), https://
adpemploymentreport.com////May-2021.aspx (nonfarm private sector jobs as of June 2021 as compared
to Feb. 2020); Biz2Credit, Biz2Credit Small
Business Lending Index Finds April 2021 Non-PPP
Loan Approval Rates Move Little for All Types of
Lenders (Apr. 2021), https://www.biz2credit.com/
business-lending-index/april-2021 (approvals as of
May 2021).
21 Congressional Research Serv., Small Business
Credit Markets and Selected Policy Issues, at 6
(Aug. 20, 2019), https://fas.org/sgp//misc/
R45878.pdf (decline since 1986); Bruce C. Mitchell
et al., Nat’l Cmty. Reinvestment Coal.,
Relationships Matter: Small Business and Bank
Branch Locations, https://ncrc.org/relationshipsmatter-small-business-and-bank-branch-locations/
(last visited Aug. 24, 2021) (branch closures).
22 PYMNTS, How Long Can MCAs Avoid the
‘Loan’ Label? (Jan. 20, 2016), https://
www.pymnts.com/in-depth/2016/how-long-canmcas-avoid-the-loan-label/.
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have increased further to $19 billion.23
Meanwhile, financing by fintechs 24 is
estimated to have increased from $1.4
billion 25 in outstanding balances in
2013 to approximately $25 billion 26 in
2019.
Both recent economic shocks and
changes in patterns of small business
financing have had fair lending and
community development implications.
In terms of the effect of economic
shocks, data suggest that women-owned
and minority-owned small businesses
were impacted disproportionately by
the economic crises of the last two
decades.27 Data further suggest that
women-owned and minority-owned
small businesses, compared to other
small businesses, had fewer cash
reserves and faced steeper hurdles in
accessing credit that would have
allowed them to better weather these
crises.28
23 Paul Sweeney, Gold Rush: Merchant Cash
Advances are Still Hot, deBanked (Aug. 18, 2019),
https://debanked.com/2019/08/gold-rushmerchant-cash-advances-are-still-hot/. Although
the article does not specify one way or the other,
estimates by the underlying source, Bryant Park
Capital, appear to reference origination volumes
rather than outstanding balances. See Nimayi Dixit,
S&P Global Market Intelligence, Payment Fintechs
Leave Their Mark On Small Business Lending (Aug.
28, 2018), https://www.spglobal.com/
marketintelligence/en/news-insights/research/
payment-fintechs-leave-their-mark-on-smallbusiness-lending. Depending on credit multiplier
effects, the value of annual origination volumes
could be smaller or greater than outstanding
balances. Without information on outstanding
balances and for the purposes of calculating a
market size for small business financing in 2019,
the Bureau assumes in this paper a 1:1 ratio
between annual origination volumes and
outstanding balances for MCA products. See part
II.D below for discussion of credit multiplier effects
and for market size calculations for MCA and other
small business financing products in 2019.
24 Fintechs are defined as ‘‘technology companies
providing alternatives to traditional banking
services, most often exclusively in an online
environment,’’ and may overlap in part with other
categories of financial institution, such as
commercial finance companies and/or providers of
specialized products, including factoring and
MCAs. Brett Barkley & Mark Schweitzer, The Rise
of Fintech Lending to Small Businesses: Businesses’
Perspectives on Borrowing, 17 Int’l J. Cent. Banking
35, 35–36 (Mar. 2021), https://www.ijcb.org/journal/
ijcb21q1a2.pdf.
25 Id. (citing Katie Darden et al., S&P Global
Market Intelligence, 2018 US Fintech Market
Report, at 5, https://www.spglobal.com/
marketintelligence/en/documents/2018-us-fintechmarket-report.pdf (2018 US Fintech Market
Report)). This figure annualizes $121 million in
estimated 2013 quarterly originations to $484
million in annual originations and scales up to
estimated outstanding balances using the ratio
between the FFIEC Call Report and the CRA data
discussed in part II.D below.
26 2018 US Fintech Market Report at 6. This figure
scales up $9.3 billion in estimated 2019 credit
originations for small to medium sized enterprise
(SME) borrowers to outstanding balances using the
ratio methodology discussed in part II.D below.
27 See part II.E below.
28 Id.
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Regarding trends in the small
business financing landscape, the shift
away from traditional providers of small
business credit toward newer types of
providers gives rise to both potential
harm and opportunity. In terms of
potential harms, bank closures may
have made it more difficult for small
businesses, particularly women-owned
and minority-owned small businesses,
to access credit and remain open—
particularly in low- and moderateincome areas and rural communities.
Newer providers, often offering newer
products, have less experience
complying with both Federal and State
lending laws and regulations.
Additionally, they may use algorithms
and artificial intelligence (AI), which
may create or heighten ‘‘risks of
unlawful discrimination, unfair,
deceptive, or abusive acts or practices
. . . or privacy concerns.’’ 29 In
addition, opaque product terms and
high interest rates could trap business
owners in cycles of debt.
In terms of opportunity, innovative
products and lending models, including
the use of AI, may yield benefits of more
accurate, lower-cost, and faster
underwriting, as well as expanded
credit access for small businesses that
may not have obtained credit under
traditional credit underwriting
approaches.30 Specifically, newer
providers and approaches may permit
those with low or nonexistent personal
or business credit scores—including
women and minorities who own or seek
to start small businesses but on average
have relatively lower personal credit
scores than male and white business
owners 31—to more easily access
29 86
FR 16837, 16839 (Mar. 31, 2021).
See also Patrice Ficklin et al., Bureau of
Consumer Fin. Prot., Innovation Spotlight:
Providing Adverse Action Notices When Using AI/
ML Models (July 7, 2020), https://www.consumer
finance.gov/about-us/blog/innovation-spotlightproviding-adverse-action-notices-when-using-ai-mlmodels/ (discussing potential benefits and risks
from financial institutions using AI in credit
underwriting and other areas).
31 Geng Li, Bd. of Governors of the Fed. Reserve
Sys., FEDS Notes: Gender-Related Differences in
Credit Use and Credit Scores (June 22, 2018),
https://www.federalreserve.gov/econres/notes/fedsnotes/gender-related-differences-in-credit-use-andcredit-scores-20180622.htm (finding that single
women on average have lower credit scores than
single men); Alicia Robb, Off. of Advocacy, Small
Bus. Admin., Minority-Owned Employer Businesses
and their Credit Market Experiences in 2017, at 4
(July 22, 2020), https://cdn.advocacy.sba.gov/wpcontent/uploads/2020/07/22172533/MinorityOwned-Employer-Businesses-and-their-CreditMarket-Experiences-in-2017.pdf (finding that Black
and Hispanic small business borrowers are
disproportionately denied credit or discouraged
from applying for credit on the basis of their credit
score).
30 Id.
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credit.32 Non-traditional credit
providers may help offset decreases in
lending associated with the closure of
bank branches. For instance, fintechs
may help provide financing to small
businesses in rural communities that
lack bank branches.
The precise impacts of these broader
trends are not well understood at
present because there are no
comprehensive, comparable, and
application-level data across the
fragmented and complex small business
lending market. Some small business
lending data exist, provided mostly by
Federal regulators, but available data are
incomplete in certain ways. Some do
not include lending by certain
categories of institutions, such as
smaller depository institutions. And
none include lending by nondepository
institutions, which comprises almost
half of all small business financing.33
The datasets that do exist both overand underestimate small business
lending in certain respects by including
small dollar loans to non-small
businesses and by excluding larger
loans to small businesses.34 Further,
these datasets all concern originated
loans; they do not include information
on applications that do not result in
originated loans. Nor do they generally
include borrower demographics. Other
public, private, and nonprofit datasets
offer only partial snapshots of particular
areas of the market. Finally, much of the
publicly available data are aggregated,
which does not permit more granular,
loan- or application-level analysis that
32 See Jessica Battisto et al., Who Benefited from
PPP Loans by Fintech Lenders?, Liberty Street
Economics (May 27, 2021), https://libertystreet
economics.newyorkfed.org/2021/05/who-receivedppp-loans-by-fintech-lenders.html (showing that
fintech lenders were an important source of credit
for Black owners during the COVID–19 pandemic).
33 The Bureau estimates that nondepository
private business financing totaled approximately
$550 billion out of around $1.2 trillion in total
private outstanding balances in 2019 (47 percent).
This $550 billion figure includes estimated
financing by fintechs (around $25 billion),
commercial finance companies (around $160
billion), nondepository CDFIs (around $1.5 billion),
MCA providers (around $19 billion), factors
(around $100 billion), equipment leasing providers
(around $160 billion), nondepository mortgage
lenders originating loans for 5+ unit residential
developments (around $30 billion), and nonfinancial trade creditors (around $50 billion). There
may additionally be lending by equipment and
vehicle dealers originating loans in their own name
that is not captured here. Public lenders include the
Small Business Association (SBA), the Federal
Housing Association (FHA), Fannie Mac and
Freddie Mac, and the Farm Credit System (FCS),
with public lending totaling around $210 billion in
traditional lending programs plus $1 trillion in
emergency COVID–19 SBA lending programs. See
part II.D below for methodology and sources
regarding market size estimates for each lending
category.
34 See part II.B below.
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would facilitate fair lending or business
and community development analysis
by stakeholders other than those that
collected the data. See part II.B below
for a detailed discussion on existing
data on small business financing.
The remainder of this part II focuses
on several broad topics that explain, in
more detail, the need for the small
business lending data that the proposed
rule to implement section 1071 would
provide: (A) The role of small
businesses in the U.S. economy; (B)
existing data on small business
financing; (C) the landscape of small
business financing; (D) estimating the
size of the small business financing
market despite limited data; (E) the
particular challenges faced by womenowned and minority-owned small
businesses; and (F) the purposes and
impact of section 1071.
A. Small Businesses in the United States
Small businesses are an important,
dynamic, and widely diverse part of the
U.S. economy. They are critical to
employment, innovation, and economic
growth and stability, both overall and
specifically for minority and women
entrepreneurs.
The Small Business Act, as
implemented by the SBA, defines a
small business using size standards that
generally hinge on the average number
of employees or average annual receipts
of the business concern and are
customized industry by industry across
1,057 6-digit North American Industry
Classification System (NAICS) codes.35
Size standards based on average number
of employees are used in all industries
in the manufacturing and wholesale
trade sectors, as well as in certain
industries across a variety of other
sectors as well. Employee-based size
standards range from 100 (used almost
entirely in certain industries within the
wholesale trade sector) to 1,000 (used in
industries across a variety of sectors
including, for example, petroleum
refineries, automobile manufacturing,
and greeting card publishers).36 Size
standards based on average annual
receipts are used in nearly all other
industries, and range from $1 million
(used in most industries in the crop
production and animal production and
aquaculture subsectors) to $41.5 million
(used in industries across a variety of
sectors including, for example,
35 See Small Bus. Admin., Table of Small
Business Size Standards Matched to North
American Industry Classification System Codes
(effective Aug. 19, 2019), https://www.sba.gov/sites/
default/files/2019-08/SBA%20%20%20Size%
20Standards_Effective%20Aug%2019%2C%202
019_Rev.pdf.
36 See id.
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passenger car leasing, television
broadcasting, and general medical and
surgical hospitals).37
Simpler definitions of what
constitutes a small business are used in
certain contexts. For example, in certain
annual research releases the SBA’s
Office of Advocacy defines a small
business as one that has fewer than 500
employees.38 According to the Office of
Advocacy, and based on this definition
of a small business, there are 31.7
million such businesses in the U.S. that
represent 99.9 percent of all U.S. firms
and employ over 60 million
Americans.39 Six million of these small
businesses have paid employees, while
25.7 million are non-employer
businesses (i.e., the owner(s) are the
only people involved in the business).40
From 2000 to 2019, small businesses,
particularly young businesses and startups, created 10.5 million net new jobs
in the U.S., while large businesses
created 5.6 million.41
Nearly one third of all businesses are
minority-owned and more than one
third are women-owned, though
minorities and women own a smaller
share of employer firms. As of 2018,
minorities owned over one million
employer firms in the U.S. (amounting
to 18.3 percent of all employer firms) 42
and, as of 2017, approximately 8.2
million non-employer firms.43 Likewise,
as of 2018, women owned about 1.1
million employer firms (19.9 percent of
all employer firms) 44 and, as of 2017,
37 A small number of industries use a size
standard based on a metric other than average
annual receipts or average number of employees.
For example, the commercial banking industry
(NAICS 522110) is subject to an asset-based size
standard. See id.
38 See SBA OA 2020 FAQs at 1.
39 See id.
40 See id.
41 See id.; see also Haltiwanger et al., 95 Rev.
Econ. Stat. at 347–48 (finding that young firms,
which are generally small, contribute
disproportionately to both gross and net job
creation).
42 See Press Release, U.S. Census Bureau, Annual
Business Survey Release Provides Data on MinorityOwned, Veteran-Owned and Women-Owned
Businesses (Jan. 28, 2021), https://www.census.gov/
newsroom/press-releases//business-survey.html.
43 Minority Bus. Dev. Agency, U.S. Dep’t of Com.,
The Number of Minority Nonemployer Firms Grew
by Nearly 17% between 2014 and 2017 (Dec. 18,
2020), https://www.mbda.gov/news/press-releases/
2020/12/the-number-of-minority-nonemployer
(stating that the nearly 8.2 million minority nonemployer firms in the U.S. generated $279.3 billion
in revenues in 2017, and grew in number at four
times the rate of non-minority non-employer firms
between 2014 and 2017). See also SBA OA 2020
FAQs at 3 (showing over 7.6 million minorityowned non-employer firms as of 2016).
44 See Press Release, U.S. Census Bureau, Annual
Business Survey Release Provides Data on MinorityOwned, Veteran-Owned and Women-Owned
Businesses (Jan. 28, 2021), https://www.census.gov/
newsroom/press-releases//business-survey.html.
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approximately 10.6 million nonemployer firms.45
Businesses are legally structured in
several ways. In 2017, 87 percent of
non-employer businesses were sole
proprietorships, which means that the
business is not distinguishable from the
owner for tax and legal purposes; the
owner receives profits directly but is
also legally responsible for the
business’s obligations.46 Seven percent
of non-employer businesses were
partnerships, which can be structured to
limit the personal liability of some or all
owners; limited partners may exchange
control for limited liability, while
general partners that run the business
may remain personally liable.47 Six
percent of non-employer businesses
were structured as corporations—4.6
percent are S-corporations and 1.5
percent are C-corporations—which are
independent legal entities owned by
shareholders who are not personally
liable for the corporation’s obligations.48
In 2017, most small employer
businesses were corporations, with 50.5
percent choosing to be S-corporations
and 16.8 percent preferring Ccorporation status, although sole
proprietorship and partnership
structures remained relatively popular
at 12.9 percent and 11.8 percent
respectively. By contrast, 74.2 percent of
large employer businesses chose to be Ccorporations, with 9.3 percent preferring
a partnership structure and 8.1 percent
S-corporation status.49
Small businesses are particularly
important in specific sectors of the
economy. In 2016, in the services sector,
small businesses supplied 45 percent of
19.7 million healthcare and social
services jobs, over 60 percent of 13.7
million accommodation and food
services jobs, and over 80 percent of 6.3
million construction jobs.50 In the same
year, in manufacturing, small businesses
made up 44 percent out of 11.6 million
45 See Press Release, Nat’l Women’s Bus. Council,
NWBC Shares 2017 Nonemployer Statistics by
Demographics Estimates for Women-Owned
Businesses (Dec. 17, 2020), https://www.nwbc.gov/
2020/12/17/nwbc-shares-2017-nonemployerstatistics-by-demographics-estimates-for-womenowned-businesses/ (also stating that these 10.6
million non-employer firms generate $286.1 billion
in revenue, and that nearly half of all womenowned non-employer firms generate less than
$10,000 in annual receipts, while only 0.05 percent
generate $1 million or more in revenue).
46 See SBA OA 2020 FAQs at 3.
47 Id. at 4.
48 Id.
49 Id.
50 See Off. of Advocacy, Small Bus. Admin., 2019
Small Business Profile (Apr. 2019), https://
cdn.advocacy.sba.gov/wp-content/uploads/2019/
04/23142719/2019-Small-Business-Profiles-US.pdf
(2019 Small Business Profile).
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jobs.51 Finally, in 2016, small family
farms totaled 96 percent out of 2.2
million farms,52 and small businesses
provided over 80 percent of agriculture,
forestry, and fishing and hunting jobs
out of 161,000.53 As such, the financial
health of small businesses is essential to
the U.S. economy, especially to the
supply of critical and basic goods and
services—from producing food to
serving it at restaurants, and from home
building to healthcare.
Small businesses have been especially
hard-hit by the COVID–19 pandemic. At
a low point in the pandemic in April
2020, 20 percent of self-employed
workers had temporarily exited the
labor market.54 Industries in which
small businesses played a large role
have been particularly impacted. For
example, comparing April 2020 with
April 2019, employment declined by
almost 50 percent in the leisure and
hospitality industries (also declining by
50 percent among food services and
drinking establishments within the
leisure and hospitality industry), in
which small businesses employ 60
percent of workers.55
B. Existing Data on Small Business
Lending
While small businesses are a critical
part of the U.S. economy and require
financial support, it is still true, as it
was in 2017 when the Bureau published
its White Paper on small business
lending, that it is not possible with
current data to confidently answer basic
questions regarding the state of small
business lending. This limitation is
especially the case with regard to the
race, sex, and ethnicity of small
business owners, applications as
opposed to originations, and for small
business financing products that are not
currently reported in Call Report data.56
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51 Id.
at 3.
52 Nat’l Inst. of Food & Agric., U.S. Dep’t of Agric.,
Family Farms, https://nifa.usda.gov/family-farms
(last visited July 26, 2021) (classifying family farms
as any farm organized as a sole proprietorship,
partnership, or family corporation. Family farms
exclude farms organized as non-family corporations
or cooperatives, as well as farms with hired
managers.).
53 2019 Small Business Profile at 3.
54 Daniel Wilmoth, Off. of Advocacy, Small Bus.
Admin., The Effects of the COVID–19 Pandemic on
Small Businesses (Issue Brief No. 16) (Mar. 2021),
https://cdn.advocacy.sba.gov/wp-content/uploads/
2021/03/02112318/COVID-19-Impact-On-SmallBusiness.pdf.
55 Id. By August 2021, many of these jobs had
since returned as mandatory closure orders ended
and the economy began to recover.
56 Bureau of Consumer Fin. Prot., Key dimensions
of the small business lending landscape, at 39–40
(May 2017), https://files.consumerfinance.gov/f/
documents/201705_cfpb_Key-Dimensions-SmallBusiness-Lending-Landscape.pdf (White Paper).
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Data on small business lending are
fragmented, incomplete, and not
standardized, making it difficult to
conduct meaningful comparisons across
products and over time. This hinders
attempts by policymakers and other
stakeholders to understand the size,
shape, and dynamics of the small
business lending marketplace, including
the interaction of supply and demand,
as well as potentially problematic
lending practices, gaps in the market, or
trends in funding that may be holding
back some communities.57 For example,
absent better data, it is hard to
determine if relatively lower levels of
bank loans to small businesses in the
decade before the pandemic began were
reflective of a net relative decline in
lending to small businesses as compared
to large businesses or rather a shift
within small business lending from
banks to alternative lenders.58 To the
extent there may have been a relative
decline, it is difficult to assess if that
decline affected certain types of small
businesses more than others, including
women-owned and minority-owned
small businesses.59
The primary sources of information
on lending by depository institutions
are the Federal Financial Institutions
Examination Council (FFIEC) and
National Credit Union Administration
(NCUA) Consolidated Reports of
Condition and Income (Call Reports), as
well as reporting under the CRA. Under
the FFIEC and CRA reporting regimes,
small loans to businesses of any size are
used in whole or in part as a proxy for
loans to small businesses. The FFIEC
Call Report captures banks’ outstanding
number and amount of small loans to
businesses (that is, loans originated
under $1 million to businesses of any
size; small loans to farms are those
originated under $500,000).60 The CRA
57 While Call Report and CRA data provide some
indication of the level of supply of small business
credit, the lack of data on small business credit
applications makes demand for credit by small
businesses more difficult to assess, including with
respect to local markets or protected classes.
58 Rebel A. Cole, Off. of Advocacy, Small Bus.
Admin., How Did Bank Lending to Small Business
in the United States Fare After the Financial Crisis?,
at 26 (Jan. 2018), https://cdn.advocacy.sba.gov/wpcontent/uploads/2019/05/09134658/439-How-DidBank-Lending-to-Small-Business-Fare.pdf (showing
a decline in bank loans to small businesses from
2008 to 2015 from $710 billion to $600 billion). The
level of bank lending to small businesses has
recovered somewhat since a trough in 2012–13 that
represented the lowest amount of lending since
2005. Fed. Deposit Ins. Corp., https://www.fdic.gov/
analysis/quarterly-banking-profile/qbp/timeseries/
small-business-farm-loans.xlsx (last visited July 22,
2021).
59 White Paper at 40.
60 See Fed. Fin. Insts. Examination Council,
Reporting Forms 31, 41, and 51 (last modified Mar.
16, 2021), https://www.ffiec.gov/ffiec_report_
forms.htm (FFIEC Call Report).
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requires banks and savings associations
with assets over a specified threshold to
report loans in original amounts of $1
million or less to businesses; reporters
are asked to indicate whether the
borrower’s gross annual revenue is $1
million or less, if they have that
information.61 The NCUA Call Report
captures data on all loans over $50,000
to members for commercial purposes,
regardless of any indicator about the
business’s size.62 There are no similar
sources of information about lending to
small businesses by nondepository
institutions. The SBA also releases data
concerning its loan programs, but these
typically do not include demographic
information, and this covers only a
small portion of the overall small
business financing market.
These public data sources provide
some of the most extensive information
currently available on small business
lending. However, they suffer from four
material limitations, namely that the
data capture only parts of the market,
are published at a high level of
aggregation, do not permit detailed
analysis across the markets, and lack
standardization across different
agencies.
First, these datasets exclude entire
categories of lenders. For example,
banks under $1.322 billion in assets do
not have to report under the CRA.63 The
FFIEC and NCUA Call Reports and CRA
data do not include lending by
nondepository financial institutions,
which the Bureau estimates to represent
40 percent of the small business
financing market and is rapidly
growing.64
61 See Fed. Fin. Insts. Examination Council, A
Guide to CRA Data Collection and Reporting, at 11,
13 (2015), https://www.ffiec.gov/cra/pdf/2015_
CRA_Guide.pdf (2015 FFIEC CRA Guide). Small
business loans are defined for CRA purposes as
loans whose original amounts are $1 million or less
and that were reported on the institution’s Call
Report or Thrift Financial Report as either ‘‘Loans
secured by nonfarm or nonresidential real estate’’
or ‘‘Commercial and industrial loans.’’ Small farm
loans are defined for CRA purposes as loans whose
original amounts are $500,000 or less and were
reported as either ‘‘Loans to finance agricultural
production and other loans to farmers’’ or ‘‘Loans
secured by farmland.’’ Id. at 11. Beginning in 2023,
national banks supervised by the OCC with assets
greater than $2.5 billion will be required to report
loans of $1.6 million or less and indicate whether
the borrower’s gross annual review is $1.6 million
or less. See 85 FR 34734 (June 5, 2020).
62 See Nat’l Credit Union Admin., Call Report
Form 5300 (June 2020), https://www.ncua.gov/files/
publications/regulations/form-5300-june-2020.pdf.
63 Fed. Fin. Insts. Examination Council,
Community Reinvestment Act 2021 Reporting
Criteria, https://www.ffiec.gov/cra/reporter21.htm
(last visited Aug. 5, 2021).
64 Nondepository lending is estimated to total
approximately $550 billion out of $1.4 trillion in
total lending, excluding $1 trillion in COVID–19
emergency program lending. See part II.D below
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Second, Federal agencies publish
summary data at a high level in a
manner that does not facilitate
independent analysis by other agencies
or stakeholders. The FFIEC and NCUA
Call Reports and the CRA data are all
available at a higher level of aggregation
than loan-level, limiting fair lending
and detailed geographic analyses since
race, sex, and ethnicity as well as
business location data are rarely
disclosed.
Third, the detailed data collected by
these Federal sources have significant
limitations as well, preventing any
analysis into certain issues or types of
borrowers, even by the regulators
possessing these data. Neither Call
Report nor CRA data include
applications, which limits insights into
any potential discrimination or
discouragement in application processes
as well as into the interaction between
credit supply and demand. The Call
Report and CRA data separately identify
loans of under $1 million in value, and
CRA data also identify loans to
businesses with annual revenues of $1
million or less.65 However, the Call
Report definition of small business
loans as those with a loan size of $1
million or less at origination is both
overinclusive, as it counts small loans to
businesses of all sizes, and
underinclusive, as it excludes loans
over $1 million made to small
businesses. Credit unions report any
loans under $50,000 as consumer loans
and not as commercial loans,66
potentially excluding from
measurement an important source of
funding for many small businesses,
particularly the smallest and often most
underserved.
Finally, the Federal sources of small
business lending data are not
standardized across agencies and cannot
be easily compared. For example, the
FFIEC Call Report collects small loans
to businesses as a proxy for small
business lending, whereas the NCUA
Call Report collects loans to members
for commercial purposes above $50,000
but with no upper limit. The loan-level
(providing a detailed breakdown and methodology
of estimates across lending products).
65 Fed. Fin. Insts. Examination Council, Schedule
RC–C, Part II Loans to Small Businesses and Farms,
at 1, https://www.fdic.gov/regulations/resources/
call/crinst-031-041/2017/2017-03-rc-c2.pdf
(detailing the Call Report loan size threshold of $1
million at origination for loans to small businesses);
2015 FFIEC CRA Guide at 11 (detailing the CRA
size thresholds of $1 million both for loan amount
at origination and for revenue of small business
borrowers).
66 Nat’l Credit Union Admin., Call Report Form
5300 Instructions, at 26 (effective Mar. 31, 2021),
https://www.ncua.gov/files/publications/
regulations/call-report-instructions-march2021.pdf.
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data for the Paycheck Protection
Program (PPP) offer an unprecedented
level of insight into small business
lending, but this dataset is a one-off
snapshot into the market for a specific
lending program at an acute moment of
crisis and is also limited in utility by
relatively low response levels to
demographic questions concerning
borrowers.67
The Federal government also
conducts and releases a variety of
statistics, surveys, and research reports
on small business lending through the
member banks for the Federal Reserve
System, the FDIC, CDFI Fund, and the
U.S. Census Bureau. These data sources
offer insights into broad trends and
specific small business lending issues
but are less useful for detailed fair
lending analyses or identification of
specific areas, industries, or
demographic groups being underserved.
Periodic changes in survey methodology
and questions can also limit
comparability and the ability to track
developments over time.
There are also a variety of nongovernmental data sources, issued by
both private and nonprofit entities, that
cover small businesses and/or the small
business financing market. These
include datasets and surveys published
by commercial data and analytics firms,
credit reporting agencies, trade
associations, community groups, and
academic institutions. Certain of these
data sources are publicly available and
track specific topics, such as small
business optimism,68 small business
employment,69 rates of small business
credit application approvals,70 small
business lending and delinquency
levels,71 and rates of small business
closure.72 Other databases have more
67 Zachary Warmbrodt, Tracking the Money: Bid
to Make Business Rescue More Inclusive Undercut
by Lack of Data, Politico (Mar. 2, 2021), https://
www.politico.com/news/2021/03/02/businessesinclusive-coronavirus-relief-money-data-472539
(reporting that 75 percent of PPP recipients did not
report their ethnicity and 58 percent did not reveal
their gender).
68 Nat’l Fed’n of Indep. Bus., Small Business
Optimism Index (June 2021), https://www.nfib.com/
surveys/small-business-economic-trends/.
69 ADP, Employment Reports, https://
adpemploymentreport.com/ (last visited July 22,
2021).
70 Biz2Credit, Biz2Credit Small Business Lending
Index, https://www.biz2credit.com/small-businesslending-index (last visited July 27, 2021).
71 PayNet, Small Business Lending Index, https://
sbinsights.paynetonline.com/lending-activity/ (last
visited July 27, 2021).
72 Opportunity Insights Economic Tracker,
https://tracktherecovery.org/ (last visited July 27,
2021). The Opportunity Insights Economic Tracker
and similar data sources may materially
overestimate the number of business closures by not
controlling for attrition in the small business client
base of data providers. See Leland D. Crane et al.,
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granularity and provide detailed
information on individual businesses,
including revenue, credit utilization,
industry, and location.73
While these non-public sources of
data on small businesses may provide a
useful supplement to existing Federal
sources of small business lending data,
these private and nonprofit sources
often do not have lending information,
may rely in places on unverified
research based on public internet
sources, and/or narrowly limit use cases
for parties accessing data. Further,
commercial datasets are generally not
free to public users and can be costly,
raising equity issues for stakeholders
who cannot afford access.
C. The Landscape of Small Business
Finance
Notwithstanding the lack of data on
the market, it is clear that financing
plays an important role in enabling
small businesses to grow and contribute
to the economy. When it is available,
financing not only provides resources
for small businesses to smooth cash
flows for current operations, but also
affords business owners the opportunity
to invest in business growth. An
analysis by the National Small Business
Association, which examined data from
1993 through 2016, found a correlation
between small business owners’ ability
to access credit and their ability to
hire.74 This same study found that,
while not the sole cause, the inability to
secure financing may have led 16
percent of small businesses to reduce
their number of employees and
approximately 10 percent of small
businesses to reduce employee benefits.
Lack of access to financing also
contributed to a further 10 percent of
small businesses being unable to
increase store inventory in order to meet
existing demand.75
To support their growth or to make it
through harder times, small businesses
look to a variety of funding sources.
Especially when starting out,
entrepreneurs often rely on their own
Bd. of Governors of the Fed. Reserve Sys., Finance
and Economics Discussion Series, 2020–089,
Business Exit During the COVID–19 Pandemic:
Non-Traditional Measures in Historical Context, at
21–22 (2020), https://www.federalreserve.gov/
econrest/feds/files2020089r1pap.pdf.
73 See, e.g., Dun & Bradstreet, https://
www.dnb.com/ (data provider and credit reporter);
Data Axle, https://www.data-axle.com/ (data
provider); Equifax, https://www.equifax.com/
business/business-credit-reports/ (credit reporter);
Experian, https://www.experian.com/smallbusiness/business-credit-reports (credit reporter).
74 Nat’l Small Bus. Ass’n, 2016 Year-End
Economic Report (July 2017), https://www.nsba.biz/
wp-content/uploads/2017/02/Year-End-EconomicReport-2016.pdf.
75 Id.
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savings and help from family and
friends. If a business generates a profit,
its owners may decide to reinvest
retained earnings to fund further
growth. However, for many aspiring
business owners—and their personal
networks—savings and retained
earnings may not be sufficient to fund
a new venture or grow it, leading
owners to seek other sources of funding.
This is particularly true for minorityand women-led households, which on
average have less wealth than their
white- and men-led counterparts.76
One such source of funding comes
from others besides family and friends,
whether high net worth individuals or
‘‘angel investors,’’ venture capital funds,
or, in a more recent development
usually facilitated by online platforms,
via crowdsourcing from retail investors.
Often, these early investments take the
form of equity funding, which business
owners are not obligated to repay to
investors. However, equity funding
requires giving up some ownership and
control to investors, which certain
entrepreneurs may not wish to do. For
small businesses, equity funding also
tends to be somewhat more expensive
than debt financing in the longer run.
This is for a number of reasons,
including that loan interest payments,
unlike capital gains, are taxdeductible.77 Finally, equity
investments from others besides family
and friends are available to only a
minority of small businesses.
Many small businesses instead seek
debt financing from a wide range of
providers. These providers include
depository institutions, such as banks,
savings associations, and credit
76 Emily Moss et al., The Black-White Wealth Gap
Left Black Households More Vulnerable, Brookings
Inst. (Dec. 8, 2020), https://www.brookings.edu/
blog/up-front/2020/12/08/the-black-white-wealthgap-left-black-households-more-vulnerable/
(detailing wealth gaps in 2019 by race and sex that
show white male households with more wealth
than white female or Black male or female
households at all age brackets). See also Erin Ruel
& Robert Hauser, Explaining the Gender Wealth
Gap, 50 Demography 1155, 1165 (Dec. 2012),
https://read.dukeupress.edu/demography/article/
50/4/1155/169553/Explaining-the-Gender-WealthGap (finding a gender wealth gap of over $100,000
in a longitudinal study over 50 years of a single age
cohort in Wisconsin); Neil Bhutta et al., Bd. of
Governors of the Fed. Reserve Sys., Disparities in
Wealth by Race and Ethnicity in the 2019 Survey
of Consumer Finances (Sept. 28, 2020), https://
www.federalreserve.gov/econres/notes/feds-notes/
disparities-in-wealth-by-race-and-ethnicity-in-the2019-survey-of-consumer-finances-20200928.htm
(finding median white family wealth in 2019 of
$188,200 compared with $24,100 for Black families
and $36,100 for Hispanic families).
77 Jim Woodruff, The Advantages and
Disadvantages of Debt and Equity Financing,
CHRON (updated Mar. 4, 2019), https://
smallbusiness.chron.com/advantagesdisadvantages-debt-equity-financing-55504.html.
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unions,78 as well as fintechs and
commercial finance companies,
specialized providers of specific
financing products, and a range of
government and government-sponsored
enterprises, among others.
In the past, small businesses
principally sought credit from banks;
however, as banks have merged and
consolidated, particularly in the wake of
the Great Recession, they have provided
less financing to small businesses.79 As
noted earlier, the number of banks has
declined significantly since a post-Great
Depression peak in 1986 of over 18,000
institutions to around 5,200 institutions
today,80 while 13,500 branches closed
from 2009 to mid-2020, representing a
14 percent decrease.81 Although nearly
half of counties either gained bank
branches or retained the same number
between 2012 and 2017, the majority
lost branches over this period.82 Out of
44 counties that were deeply affected by
branch closures, defined as having 10 or
fewer branches in 2012 and seeing five
or more of those close by 2017, 39 were
rural counties.83 Of rural counties, just
78 For purposes of this notice of proposed
rulemaking, the Bureau is using the term depository
institution to mean any bank or savings association
defined by section 3(c)(1) of the Federal Deposit
Insurance Act, 12 U.S.C. 1813(c)(1), or credit union
defined pursuant to the Federal Credit Union Act,
as implemented by 12 CFR 700.2. The Bureau notes
that the Dodd-Frank Act defines a depository
institution to mean any bank or savings association
defined by the Federal Deposit Insurance Act; there,
that term does not encompass credit unions. 12
U.S.C. 5301(18)(A), 1813(c)(1). The Bureau is
referring to banks and savings associations together
with credit unions as depository institutions
throughout this notice, unless otherwise specified,
to facilitate analysis and discussion.
79 Rebel A. Cole, Off. of Advocacy, Small Bus.
Admin., How Did Bank Lending to Small Business
in the United States Fare After the Financial Crisis?,
at 26 (Jan. 2018), https://cdn.advocacy.sba.gov/wpcontent/uploads/2019/05/09134658/439-How-DidBank-Lending-to-Small-Business-Fare.pdf (showing
a decline in bank loans to small businesses from
2008 to 2015 from $710 billion to $600 billion). The
level of bank lending to small businesses has
recovered somewhat since a trough in 2012–13 that
represented the lowest amount of lending since
2005. Fed. Deposit Ins. Corp., https://www.fdic.gov/
analysis/quarterly-banking-profile/qbp/timeseries/
small-business-farm-loans.xlsx (last visited July 22,
2021).
80 Congressional Research Serv., Small Business
Credit Markets and Selected Policy Issues, at 6
(Aug. 20, 2019), https://fas.org/sgp/crs/misc/
R45878.pdf.
81 Bruce C. Mitchell et al., Nat’l Cmty.
Reinvestment Coal., Relationships Matter: Small
Business and Bank Branch Locations, at 6 (2020),
https://ncrc.org/relationships-matter-smallbusiness-and-bank-branch-locations/ (stating that
in 2009 there were 95,596 brick and mortar fullservice branches or retail locations but, as of June
30, 2020, that number had fallen to 82,086).
82 Bd. of Governors of the Fed. Reserve Sys.,
Perspectives from Main Street: Bank Branch Access
in Rural Communities, at 1, 3–4, 19 (Nov. 2019),
https://www.federalreserve.gov/publications/files/
bank-branch-access-in-rural-communities.pdf.
83 Id.
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over 40 percent lost bank branches in
that period; the rural counties that
experienced substantial declines in
bank branches tend to be lower-income
and with a higher proportion of AfricanAmerican residents relative to other
rural counties,84 raising concerns about
equal access to credit.
As banks and branches have merged
and/or closed, the share of banking
assets has also become increasingly
concentrated in the largest institutions,
with banks of over $10 billion in assets
representing 84 percent of all industry
assets in 2018,85 totaling $15.1 out of
$17.9 trillion.86 Nevertheless, banks of
under $10 billion in assets continue to
hold approximately half of all small
business loans (using the FFIEC Call
Report definition of loans of under $1
million), highlighting the importance of
smaller banks to the small business
lending market.87 Since smaller bank
credit approvals have traditionally been
close to 50 percent, while large banks
approve only 25–30 percent of
applications, bank consolidation may
have implications for small business
credit access.88 Since institutions under
$1.322 billion in assets are not required
to report on lending under the CRA,89
it is difficult to precisely assess the
84 Id.
85 Congressional Research Serv., Small Business
Credit Markets and Selected Policy Issues, at 6
(Aug. 20, 2019), https://fas.org/sgp/crs/misc/
R45878.pdf.
86 Fed. Deposit Ins. Corp., Bank Data and
Statistics, https://www.fdic.gov/bank/statistical/
(last visited Aug. 22, 2021).
87 Speech by Board Governor Lael Brainard:
Community Banks, Small Business Credit, and
Online Lending (Sept. 30, 2015), https://
www.federalreserve.gov/newsevents/speech/
brainard20150930a.htm. Banks with under $10
billion in assets are often referred to as ‘‘community
banks.’’ Congressional Research Serv., Over the
Line: Asset Thresholds in Bank Regulation, at 2–3
(May 3, 2021), https://fas.org/sgp/crs/misc/
R46779.pdf (noting that the Board of Governors of
the Federal Reserve System (Board) and the Office
of the Comptroller of the Currency (OCC) define
community banks as having under $10 billion in
assets, although there may be other criteria, with
the FDIC considering also geographic footprint and
a relative emphasis on making loans and taking
deposits as opposed to engaging in securities and
derivatives trading). Community banks are also
more likely to engage in relationship-based lending.
See id. at 3.
88 Biz2Credit, Biz2Credit Small Business Lending
Index, https://www.biz2credit.com/small-businesslending-index (last visited July 22, 2021). These
historical approval rates are reflected in prepandemic Small Business Lending Index releases
by Biz2Credit. See, e.g., Biz2Credit, Small Business
Loan Approval Rates at Big Banks Remain at
Record High in February 2020: Biz2Credit Small
Business Lending Index, https://
www.biz2credit.com/small-business-lending-index/
february-2020 (last visited July 29, 2021) (showing
large bank approvals of 28.3 percent in February
2020 and of 27.2 percent in February 2019 and
smaller bank approvals of 50.3 percent in February
2020 and of 48.6 percent in February 2019).
89 See part II.B above.
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impact of bank consolidation and
shuttered branches on small business
lending and access to credit in local
areas.90 By contrast, credit unions
increased their small business lending
from $30 billion in 2008 to at least $55
billion in 2019.91 Like banks, credit
unions typically receive high
satisfaction scores among small business
borrowers, reflecting more high-contact,
relationship-based lending models.92
Certain banks and credit unions
choose to be mission-based lenders, as
CDFIs or Minority Depository
Institutions (MDIs).93 Mission-based
lenders focus on providing credit to
traditionally underserved and lowincome communities and individuals to
promote community development and
expand economic opportunity, making
them a relatively smaller by dollar value
but essential part of the small business
lending market. There were over 1,200
CDFIs (around half of which are
depository institutions) as of May 2021
and over 140 MDIs as of March 2021.94
During a period in which that
depository institutions have been
providing relatively less funding to
small businesses,95 small businesses
90 Bruce C. Mitchell et al., Nat’l Cmty.
Reinvestment Coal., Relationships Matter: Small
Business and Bank Branch Locations, https://
ncrc.org/relationships-matter-small-business-andbank-branch-locations/ (last visited July 27, 2021).
91 Rebel A. Cole, Off. of Advocacy, Small Bus.
Admin., How Did Bank Lending to Small Business
in the United States Fare After the Financial Crisis?,
at 26 (Jan. 2018), https://cdn.advocacy.sba.gov/wpcontent/uploads/2019/05/09134658/439-How-DidBank-Lending-to-Small-Business-Fare.pdf.
92 Fed. Reserve Banks, Small Business Credit
Survey, 2021 Report On Employer Firms (2021),
https://www.fedsmallbusiness.org/medialibrary/
FedSmallBusiness/files/2021/2021-sbcs-employerfirms-report.
93 According to the FDIC, FDIC-insured MDIs and
CDFI banks are banks, savings banks, and savings
associations (collectively, banks) that serve
minority, low- or moderate-income (LMI), and rural
communities at higher rates than mainstream banks.
MDIs serve minority communities including
African American, Asian American, Hispanic
American, and Native American. CDFI banks are
certified through the U.S. Department of the
Treasury by demonstrating they serve LMI
communities. See, e.g., Fed. Deposit Ins. Corp.
Minority Depository Institutions Program website,
https://www.fdic.gov/regulations/resources/
minority/mission-driven/ (last visited
July 11, 2021).
94 Cmty. Dev. Fin. Inst., CDFI Certification,
https://www.cdfifund.gov/programs-training/
certification/cdfi (last visited July 21, 2021); Fed.
Deposit Ins. Corp., Minority Depository Institutions
Program (last updated June 9, 2021), https://
www.fdic.gov/regulations/resources/minority/
mdi.html.
95 See Rebel A. Cole, Off. of Advocacy, Small Bus.
Admin., How Did Bank Lending to Small Business
in the United States Fare After the Financial Crisis?,
at 26 (Jan. 2018), https://cdn.advocacy.sba.gov/wpcontent/uploads/2019/05/09134658/439-How-DidBank-Lending-to-Small-Business-Fare.pdf (showing
a decline in bank loans to small businesses from
2008–15 from $710 billion to $600 billion). The
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have increasingly relied on other
nondepository institutions for financing.
Since nondepositories typically do not
report their small business financing
activities to regulators, however, there
are no authoritative sources for either
the number of such entities or the dollar
value of financing they provide to small
businesses.96 However, what data are
available make clear that fintech firms
are rapidly increasing their share of the
small business financing market.97
Whether depository or nondepository,
each provider of small business
financing assesses a variety of different
criteria to determine whether and on
what terms to grant an extension of
credit or other financing product,
including business and financial
performance, the credit history of the
business and its owner(s), the time in
business, and the industry, among other
factors. Protections such as guarantees,
collateral, and insurance can mitigate
perceived risks, potentially enabling a
lender to offer better terms or facilitating
an extension of credit that would
otherwise not meet lending limit or
underwriting criteria. Often,
government agencies, including the
SBA, FHA, and USDA, guarantee or
insure loans themselves to encourage
lenders to provide credit to borrowers
that may not otherwise be able to obtain
credit, either on affordable terms and
conditions or at all.98 Different lenders
also employ diverse methods for
assessing risk, with smaller banks
generally relying more on traditional
underwriting methods and typically
managing multi-product relationships.
Fintechs increasingly use algorithms,
automation, and even AI and machine
learning to assess risk and make
underwriting decisions, with
level of bank lending to small businesses has
recovered somewhat since a trough in 2012–13 that
represented the lowest amount of lending since
2005. See also Fed. Deposit Ins. Corp., https://
www.fdic.gov/analysis/quarterly-banking-profile/
qbp/timeseries/small-business-farm-loans.xlsx (last
visited July 21, 2021) (tabulating outstanding
balances for credit extended to small- and nonsmall business lending by banks and thrifts over
time).
96 See part II.B above.
97 See part II.D below.
98 Congressional Research Serv., Small Business
Administration 7(a) Loan Guaranty Program
(updated June 21, 2021), https://fas.org/sgp/crs/
misc/R41146.pdf (discussing the SBA’s flagship 7(a)
loan guarantee program); U.S. Dep’t of Hous. &
Urban Dev., Descriptions Of Multifamily Programs,
https://www.hud.gov/program_offices/housing/
mfh/progdesc (last visited July 27, 2021) (listing
FHA mortgage insurance programs for 5+ unit
residential developments); Farm Serv. Agency, U.S.
Dep’t of Agric., Guaranteed Loan Program Fact
Sheet (Mar. 2020), https://www.fsa.usda.gov/Assets/
USDA-FSA-Public/usdafiles/FactSheets/
guaranteed_loan_program-factsheet.pdf (discussing
the USDA’s Farm Service Agency guaranteed loan
program).
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originations typically being less
relationship-based in nature.
As well as diversity in underwriting
methodology and criteria, there are also
considerable differences across small
business financing products and
providers with respect to pricing
methods and repayment structures. As a
result, it can be challenging to compare
the competitiveness of product pricing
and terms. The Bureau understands that
term loans, lines of credit, and credit
cards typically disclose annualized
interest rates; leases often take into
account depreciation; factoring products
discount an invoice’s value and add a
fee; and MCAs apply a multiple to the
value of the up-front payment.99
Moreover, providers may add additional
fees that are not standardized within
industries, much less across them. The
Bureau believes that this complexity
may confuse business owners and
render them unable to secure more
favorable rates due to opacity in offers
presented—which in some cases may
even be deliberate 100—and a
corresponding inability to effectively
compare across different financing
options.101 This may impair applicants’
ability to make informed choices.
D. Estimating the Size and Scope of the
Small Business Financing Market
In light of the lack of data and the
heterogeneity of products and providers
within the small business financing
market, it can be difficult to get a clear
sense of the size and scope of the
market. In this section, the Bureau
describes its estimates of the total
outstanding balances of credit in the
market, the number of institutions that
are active in the small business
99 See part II.D below for definitions of the
different product categories.
100 Press Release, Fed. Trade Comm’n, Cash
Advance Firm to Pay $9.8M to Settle FTC
Complaint It Overcharged Small Businesses (Apr.
22, 2021), https://www.ftc.gov/news-events/pressreleases/2021/04/cash-advance-firm-pay-98msettle-ftc-complaint-it-overcharged (settling a
lawsuit between the Federal Trade Commission
(FTC) and an MCA provider for $9.8 million where
the complaint alleged that the provider ‘‘deceived’’
and ‘‘misle[d]’’ business borrowers about the
amount and terms of financing); Bd. of Governors
of the Fed. Reserve Sys., Record of Meeting:
Community Advisory Council and the Board of
Governors, at 7 (Oct. 5, 2018), https://www.federal
reserve.gov/aboutthefed/files/cac-20181005.pdf
(noting a growing trend of small business owners
facing difficulty with expensive loan products such
as MCAs where the pricing and structure of the
loans is often deliberately obscured).
101 Fed. Trade Comm’n, ‘Strictly Business’ Forum,
Staff Perspective, at 5 (Feb. 2020), https://
www.ftc.gov/system/files/documents/reports/staffperspective-paper-ftcs-strictly-business-forum/
strictly_business_forum_staff_perspective.pdf
(discussing the difficulty in comparing across
financing products with widely differing methods
for calculating and describing key features).
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financing market, and how the Bureau
arrived at these estimates. Where
possible, the Bureau tries to estimate the
state of the small business financing
market at the end of 2019 in order to
estimate the state of the market during
a year unaffected by the COVID–19
pandemic.
One challenge is that some of the data
report the dollar value of originations
and some report outstanding balances.
For the purposes of this exercise and for
most, but not all, products, the Bureau
assumes that for every $1 originated in
the market in a given year, there is
approximately a corresponding $3 of
outstanding balances. This assumption
is based on the ratio of the 2019 FFIEC
Call Report data, which totaled $721
billion in outstanding balances on bank
loans to small businesses and small
farms, and the 2019 CRA data, which
recorded $264 billion in bank loan
originations to small businesses and
small farms.102 This assumption is
limited by the extent to which other
small business financing products differ
from loans and lines of credit, which
make up the majority of financing
products captured by the FFIEC Call
Report data and the CRA data.103
As detailed in this section, the Bureau
estimates that the market for small
business financing products totaled $1.4
trillion in outstanding balances in 2019.
The Bureau estimates that small
business financing by depository
institutions makes up just over half of
small business financing by private
institutions. In 2020 and 2021, COVID–
19 emergency lending programs added a
further $1 trillion to this value, bringing
102 FFIEC Call Report data records outstanding
balances on loans with origination amounts less
than $1 million across Commercial & Industrial,
Nonfarm Nonresidential, Agricultural, and Secured
by Farmland lending categories. See FDIC Quarterly
Banking Profile Time Series, https://www.fdic.gov/
analysis/quarterly-banking-profile/qbp/timeseries/
small-business-farm-loans.xlsx (last visited August
29, 2021).
103 FFIEC Call Report data and CRA data on small
business credit products also include business
credit card products, but loans and lines of credit
made up $713 billion out of $775 billion in
outstanding balances on bank, savings association,
and credit union loans to small businesses in 2019.
One important caveat to this assumption is that
products with materially shorter average term
lengths, for example credit cards, factoring
products, and MCAs, may have an inverse ratio of
originations to outstanding balances. For example,
top issuers of general purpose credit cards recorded
purchase volumes of two to seven times their
outstanding balances in 2020. Nilson Report, Issue
1192, at 6 (Feb. 2021), https://nilsonreport.com/
publication_newsletter_archive_
issue.php?issue=1192. If business-purpose credit
cards, factoring products, and MCAs behaved
similarly with respect to the ratio of originations to
outstanding balances, then for every $1 originated
in the market in a given year, there could be a
corresponding $0.14–0.50 in outstanding balances
for such products ($1 divided by two to seven).
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the overall size of the small business
financing market up to $2.4 trillion.
Below, the Bureau estimates the market
share for different small business
financing products.
Since the available data regarding
depository institutions’ small loans to
businesses address term loans, lines of
credit, and credit cards together, the
respective share of different products in
the overall small business financing
market is difficult to assess. As detailed
in this section, the Bureau estimates that
together, private term loans and lines of
credit constitute the largest small
business credit product by value,
totaling approximately $770 billion in
outstanding balances in 2019, although
PPP and EIDL Program loans have since
added $1 trillion to this figure.
Lending by banks, saving
associations, and credit unions
comprises the largest part of this total
amount for private term loans and lines
of credit. Using FFIEC Call Report data
for December 2019, the Bureau
estimates that banks and savings
associations account for a total of about
$721 billion in outstanding credit to
small businesses and small farms as of
December 2019.104 Using NCUA Call
Report data for December 2019, the
Bureau estimates that credit unions
account for a total of about $55 billion
in outstanding credit to members for
commercial purposes.105 From this
104 Calculated from FFIEC Call Report data
accessed on June 8, 2021. The Bureau notes that,
as discussed in part II.B above, these estimates rely
on small loans to businesses as a proxy for loans
to small businesses. As such, the Bureau
acknowledges that the true outstanding value of
credit extended to small businesses by such
institutions may be different than what is presented
here. For example, the small loans to businesses
proxy would overestimate the value of outstanding
credit if a significant number of small loans to
businesses and farms are to businesses or farms that
are actually large. Alternatively, the proxy would
underestimate the value of outstanding credit to
small businesses if a significant number of
businesses and farms that are small under the
proposed rule take out loans that are larger than $1
million or $500,000, for businesses and farms,
respectively.
105 Nat’l Credit Union Admin., 2019 Call Report
Quarterly Data, https://www.ncua.gov/analysis/
credit-union-corporate-call-report-data/quarterlydata (last visited Aug. 24, 2021) (2019 NCUA Call
Report). The Bureau notes that, as discussed in part
II.B above, credit unions only report credit
transactions made to members for commercial
purposes with values over $50,000. The Bureau
uses this value as a proxy for small business credit.
The Bureau acknowledges that the true value of
small business credit extended by credit unions
may be different than what is presented here. For
example, this proxy may overestimate the value of
outstanding small business credit because some
members are taking out loans for large businesses.
Alternatively, this proxy may underestimate the
value of outstanding small business credit if credit
unions originate a substantial number of small
business loans with origination values of under
$50,000. For this analysis, the Bureau includes all
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value, the Bureau subtracts $62 billion
in credit card lending to arrive at $713
billion in outstanding balances for term
loans and lines of credit. From this
value, the Bureau further subtracts $134
billion in SBA guaranteed loans to
arrive at $580 billion in outstanding
balances for private term loans and lines
of credit extended by depository
institutions (i.e., banks, savings
associations, and credit unions) as of
December 2019.
The remaining $190 billion in
outstanding balances for private term
loans and lines of credit was extended
by various nondepository institutions,
namely commercial finance companies,
fintechs, and nondepository CDFIs.106
Commercial finance companies
specialize in financing equipment and
vehicle purchases. The Bureau estimates
that the value of outstanding balances
on credit extended by commercial
finance companies totaled
approximately $160 billion. Using data
from the Federal Reserve Board’s
Finance Company Business Receivables
data on owned assets as of December
2019, the Bureau estimates commercial
finance companies outstanding credit
for commercial purposes as the value of
retail motor vehicle loans plus
equipment loans and other business
receivables, which totaled about $215
billion.107 The Bureau further assumes
that about 75 percent of this value, or
$162 billion, can be attributed to loans
to small businesses.108
Typical fintech providers are
characterized primarily by providing
banking services exclusively in an
online environment.109 The Bureau
estimates that total outstanding loan
balances for fintech providers reached
around $25 billion in 2019. In a 2018
report, S&P Global projected that online
types of commercial loans to members except
construction and development loans and
multifamily residential property. This includes
loans secured by farmland; loans secured by owneroccupied, non-farm, non-residential property; loans
secured by non-owner occupied, non-farm, nonresidential property; loans to finance agricultural
production and other loans to farmers; commercial
and industrial loans; unsecured commercial loans;
and unsecured revolving lines of credit for
commercial purposes. The Bureau does include
multifamily in part VII below.
106 There may additionally be lending by
equipment and vehicle dealers originating loans in
their own name that is not captured here.
107 Bd. of Governors of the Fed. Reserve Sys.,
Finance Companies—G.20 (updated July 15, 2021),
https://www.federalreserve.gov/releases/g20/hist/
fc_hist_b_levels.html. The Bureau does not include
leases, since they are already counted within the
product category of equipment and vehicle leasing,
or wholesale loans, which it assumes are typically
made to non-small businesses.
108 This methodology is consistent with the
approach taken by Gopal and Schnabl (2020).
109 Barkley & Schweitzer, 17 Int’l J. Cent. Banking
at 35–36.
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platform lenders would originate about
$9.3 billion in credit to small and
medium enterprises in 2019.110 Using
this estimate, the Bureau scales up the
value of originations to $25 billion in
estimated outstanding balances, under
the assumptions discussed above.111 At
the beginning of the COVID–19
pandemic and financial crisis, fintechs
originated around $22 billion in PPP
loans to small businesses from March to
August 2020 112 and likely continued to
originate billions more during the third
wave of PPP loans in 2021, which
represents an almost 90 percent increase
or more in outstanding balances since
2019.113 This follows already rapid
growth from $1.4 billion in estimated
outstanding balances in 2013.114
The Bureau estimates the value of
outstanding balances on credit extended
by nondepository CDFIs to small
business borrowers to be around $1.5
billion. Using reporting by the CDFI
Fund for 2019, the Bureau scales down
the outstanding balances for loan funds
of $13.8 billion and for venture capital
funds of $0.3 billion by the proportion
of all CDFI lending attributable to
business borrowers, which totaled $15.4
billion out of $141.2 billion.115
US Fintech Market Report at 6.
Bureau notes that this figure may
underestimate the total value of fintech lending
because it focuses on platform lenders and may
overestimate the value of lending to small
businesses because it also includes credit to
medium businesses. Additionally, the Bureau notes
that fintechs often offer products besides loans and
lines of credit, and that there is no clear
demarcation between fintech, commercial finance
company, and MCA provider, limiting the precision
of market size estimates. Finally, fintechs often sell
loans once originated to other entities, securitize
their originations, or purchase loans that banks
have originated, which may further present
challenges to the precision of market size estimates
for this market segment.
112 Jessica Battisto et al., Who Benefited from PPP
Loans by Fintech Lenders?, Liberty Street
Economics (May 27, 2021), https://libertystreet
economics.newyorkfed.org/2021/05/who-receivedppp-loans-by-fintech-lenders.html; Small Bus.
Admin., Paycheck Protection Program (PPP) Report
(approvals through 12 p.m. EST Apr. 16, 2020),
https://www.sba.gov/sites/default/files/2020-06/
PPP%20Deck%20copy-508.pdf; Small Bus. Admin.,
Paycheck Protection Program (PPP) Report
(approvals through Aug. 8, 2020), https://
www.sba.gov/sites/default/files/2020-08/PPP_
Report%20-%202020-08-10-508.pdf.
113 Per the program’s intent, many PPP loans have
been forgiven since the program began, which may
mean that outstanding balances on PPP loans
extended by fintech providers have since declined.
114 Barkley & Schweitzer, 17 Int’l J. Cent. Banking
at 35–36 (citing 2018 US Fintech Market Report at
5). This figure annualizes $121 million in estimated
2013 quarterly originations to $484 million in
annual originations and scales up to estimated
outstanding balances using the ratio between the
FFIEC Call Report and the CRA data discussed
above.
115 CDFI Fund, CDFI Annual Certification and
Data Collection Report (ACR): A Snapshot for Fiscal
Year 2019, at 17, 22 (Oct. 2020), https://
Categorized here separately so as to
distinguish residential from nonresidential loans, the Bureau estimates
outstanding balances for loans on 5+
unit residential dwellings to total over
$30 billion.116 Using data from the
Mortgage Bankers Association, the
Bureau scales up $11 billion in 2019
annual originations on loans of under $1
million in value at origination for 5+
unit residential dwellings to $30 billion
in estimated outstanding balances, using
the ratio between the FFIEC Call Report
and the CRA data discussed above.117
Also categorized separately from
depository institution totals so as to
distinguish private from government
and government-sponsored loans, the
Bureau estimates that outstanding
balances for loans extended by the
Small Business Administration and the
Farm Credit System totaled around $200
billion in 2019.118
The SBA, through its traditional 7(a),
504, and microloan programs as well as
the Economic Impact Disaster Loan
(EIDL) program and funding for Small
Business Investment Companies
(SBICs), is the largest governmental
lender by value, with $143.5 billion in
outstanding balances at the end of fiscal
2019.119 However, since the outbreak of
110 2018
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111 The
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www.cdfifund.gov/sites/cdfi/files/2021-01/ACRPublic-Report-Final-10292020-508Compliant.pdf.
To the extent that CDFI loan funds and venture
capital funds extend credit to business customers at
different rates than CDFI banks and credit unions,
this calculation may over- or underestimate the
value of lending to small businesses by
nondepository CDFIs. This figure also assumes that
all CDFI lending is for small businesses.
116 Depository institutions, discussed above,
extend a sizeable proportion of loans for 5+ unit
residential dwellings; both nondepository and
depository institutions are included in the total for
5+ unit outstanding balances.
117 See Mortg. Bankers Ass’n, Annual Report on
Multi-Family Lending—2019, at 5 (2020), https://
www.mba.org/store/products/research/general/
report/2019-annual-report-on-multifamily-lending.
This includes both private loans, estimated at
around $18 billion, and loans extended by Fannie
Mae, Freddie Mac, and the FHA, estimated at
around $13 billion. The share of 5+ unit residential
dwelling loans of all sizes extended by
governmental or government-sponsored entities was
41 percent. The Bureau assumes for the purposes
of this exercise that the same share is reflected in
loans of under $1 million in value at origination,
although arguably this share would be higher if
government and government-sponsored entities are
extended disproportionately smaller dollar value
loans on average.
118 The grand total for lending by government and
government-sponsored entities would be
approximately $210 billion, including 5+ unit
residential dwelling loans extended by Fannie Mae,
Freddie Mac, and the FHA, which are separately
recorded within the 5+ unit residential dwelling
loan product category.
119 Small Bus. Admin., Small Business
Administration Loan Program Performance
(effective Mar. 31, 2021), https://www.sba.gov/
document/report-small-business-administrationloan-program-performance. SBA guaranteed loans
comprised $134 billion out of this total, which
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the COVID–19 pandemic, SBA lending
has increased in size by over $1 trillion
due to the PPP, which totaled $800
billion, and the EIDL Program, which
totaled $210 billion.120
The Farm Credit System is another
important government-related part of
the small business credit landscape. The
Bureau estimates that Farm Credit
System members had around $55 billion
in outstanding balances of credit
extended to small farms in 2019. Using
the same small loan to farms proxy as
is used in the FFIEC Call Report, the
Bureau estimates credit to farms with an
origination value of less than $500,000.
Based on the Farm Credit System’s 2019
Annual Information Statement of the
Farm Credit System, the Bureau
estimates that outstanding balances of
such small credit to farms totaled $55
billion at the end of 2019.121 The
Bureau notes that, as with the FFIEC
Call Report proxy, this number may
include credit to non-small farms and
may exclude larger credit transactions
extended to small farms.
Mostly extended by depository
institutions, the Bureau estimates that
the market for small business credit
cards totaled over $60 billion in
outstanding balances for 2020.122 Using
data from Y–14 Form submissions to the
Federal Reserve Board, the Bureau
estimates the value of outstanding
balances for small business credit card
accounts where the loan is underwritten
amount has been deducted from the totals for
depository institutions to avoid double counting.
120 Small Bus. Admin., Paycheck Protection
Program (PPP) Report (approvals through May 31,
2021), https://www.sba.gov/sites/default/files/202106/PPP_Report_Public_210531-508.pdf; Small Bus.
Admin., Disaster Assistance Update—Nationwide
COVID EIDL, Targeted EIDL Advances,
Supplemental Targeted Advances (June 3, 2021),
https://www.sba.gov/sites/default/files/2021-06/
COVID-19%20EIDL%20TA%20STA_6.3.2021_
Public-508.pdf; Small Bus. Admin., Disaster
Assistance Update—Nationwide EIDL Loans (Nov.
23, 2020), https://www.sba.gov/sites/default/files/
2021-02/EIDL%20COVID-19%20Loan%2011.23.20508_0.pdf.
121 Fed. Farm Credit Banks Funding Corp., Farm
Credit 2019 Annual Information Statement of the
Farm Credit System, at 54, https://www.farmcredit
funding.com/ffcb_live/investorResources/
informationStatements.html (last visited Aug. 13,
2021).
122 See Bd. of Governors of the Fed. Reserve Sys.,
Report Forms FR Y–14M, https://www.federal
reserve.gov/apps/reportforms/reportdetail.
aspx?sOoYJ+5BzDYnbIw+U9pka3sMtCMopzoV
(last visited July 12, 2021). The Board’s data are
received from bank holding companies over $50
billion in assets, which represent 70 percent of
outstanding balances for consumer credit cards; the
corresponding percent of balances captured for
small business cards is not known, so the total
small business-purpose credit card market could be
substantially higher or lower. See Bureau of
Consumer Fin. Prot., The Consumer Credit Card
Market, at 18 (Aug. 2019), https://files.consumer
finance.gov/f/documents/cfpb_consumer-creditcard-market-report_2019.pdf.
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with the sole proprietor or primary
business owner as an applicant.123
Equipment and vehicle leasing,
whereby businesses secure the right to
possess and use a piece of equipment or
vehicle for a term in return for
consideration, is another important
product category that is estimated to
value roughly $160 billion in
outstanding balances in 2019. Using
data from the Equipment Leasing and
Financing Foundation for 2019, the
Bureau estimates the total size of the
equipment and vehicle leasing market
for all sized businesses in 2019 to be
approximately $900 billion.124 The
Bureau further assumes that small
businesses comprise around 18 percent
of the total equipment and vehicle
leasing market.125
Factoring is a similarly significant
product type, estimated at around $100
billion in market size for 2019.126 In a
factoring transaction, factors purchase,
at a discount, a legally enforceable claim
for payment (i.e., accounts receivables
or invoices) for goods already supplied
or services already rendered by a
business for which payment has not yet
been made; hence, a factor’s risk related
to repayment often lies with the
business’s customer and not the
business itself. In most cases, specific
companies, called factors, provide
factoring products.
123 Off. of Mgmt. & Budget, Instructions for the
Capital Assessments and Stress Testing Information
Collection (Reporting Form FR–Y14M), OMB No.
7100–0341, at 148 (Mar. 2020), https://omb.report/
icr/202101-7100-006/doc/108187801.
124 See Equip. Leasing & Fin. Found., Horizon
Report, https://www.leasefoundation.org/industryresources/horizon-report/ (last updated Apr. 22,
2021).
125 See Karen Mills, Harvard Bus. Sch., State of
Small Business Lending, at 29 (July 2014), https://
www.hbs.edu/ris/Supplemental%20Files/15004%20HBS%20Working%20Paper%
20Chart%20Deck_47695.pdf (estimating equipment
leasing outstanding balances for small business
borrowers at approximately $160 billion at Dec. 31,
2013); Monitor Daily, SEFI Report Finds Strong
Performance Despite Challenges, https://
www.monitordaily.com/news-posts/sefi-report-finds
-strong-performance-despite-challenges/ (last
visited July 27, 2021) ($903 billion market in 2014,
commensurate with an 18 percent market share for
small business borrowers at the time of the Karen
Mills report).
126 See Secured Fin. Found., 2019 Secured
Finance: Market Sizing & Impact Study Extract
Report, at 7 (June 2019), https://www.sfnet.com/
docs/default-source/data-files-and-researchdocuments/sfnet_market_sizing___impact_study_
extract_f.pdf?sfvrsn=72eb7333_2. This study
estimated the total volume of the U.S. factoring
market to be $101 billion. To the extent that
factoring volumes differ from outstanding balances,
the value of outstanding balances may be higher or
lower than this estimate. Also, this estimate
captures factoring for business borrowers of all
sizes, not just small business borrowers. The Bureau
assumes that most factoring is provided to small
business customers.
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The market for MCAs is developing
rapidly and data are even more scarce
than for other segments of the small
business lending market. This limits the
reliability of estimates as to the MCA
market’s size. Based on market research
conducted by Bryant Park Capital (BPC)
and reported on by deBanked.com, the
Bureau estimates the 2019 market size
to be around $20 billion.127 The MCA
market is also of particular significance
for smaller and traditionally
underserved businesses that may not
qualify for other types of credit.128
MCAs are typically structured to
provide a lump sum payment up front
(a cash advance) in exchange for a share
of future revenue until the advance,
plus an additional amount, is repaid.
Unlike the majority of other small
business financing products, MCAs
typically purport to be for short
durations.129 The Bureau understands
that MCAs also tend to be relatively
high-cost products.130 Two States, New
York and California, will soon
implement laws that will require
providers of ‘‘sales-based financing,’’
such as MCAs, to provide disclosures
(including estimated APR) similar to
those required under the Truth in
127 Paul Sweeney, Gold Rush: Merchant Cash
Advances are Still Hot, deBanked (Aug. 18, 2019),
https://debanked.com/2019/08/gold-rush-merchant
-cash-advances-are-still-hot/. BPC estimates appear
to reference origination volumes rather than
outstanding balances. See Nimayi Dixit, S&P Global
Market Intelligence, Payment Fintechs Leave Their
Mark On Small Business Lending (Aug. 28, 2018),
https://www.spglobal.com/marketintelligence/en/
news-insights/research/payment-fintechs-leavetheir-mark-on-small-business-lending. Depending
on credit multiplier effects, the value of annual
origination volumes could be smaller or greater
than outstanding balances. Without information on
outstanding balances and for the purposes of
calculating a market size for small business
financing in 2019, the Bureau assumes in this paper
a 1:1 ratio between annual origination volumes and
outstanding balances for MCA products. See above
for discussion of credit multiplier effects.
128 Cf. Barbara Lipman & Ann Marie Wiersch, Bd.
of Governors of the Fed. Reserve Sys., Uncertain
Terms: What Small Business Borrowers Find When
Browsing Online Lender websites, at 3 (Dec. 2019),
https://www.federalreserve.gov/publications/files/
what-small-business-borrowers-find-when-browsing
-online-lender-websites.pdf (observing that online
lenders, including providers of MCA products,
position themselves as offering financing to
borrowers underserved by traditional lenders).
129 See id. (stating that MCAs are generally repaid
in three to 18 months).
130 Id. (stating that annual percentage rates on
MCA products can exceed 80 percent or rise to
triple digits). See also Fed. Trade Comm’n, ‘Strictly
Business’ Forum, Staff Perspective, at 5 (Feb. 2020),
https://www.ftc.gov/system/files/documents/report/
staff-perspective-paper-ftcs-strictly-business-forum/
strickly_business__forum_staff_perspective.pdf
(observing stakeholder concern about the high-cost
of MCAs that can reach triple digit annual
percentage rates).
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Lending Act (TILA),131 which generally
only applies to consumer credit.132
Finally, trade credit is another
significant market, which the Bureau
estimates to total $51 billion in
outstanding balances in 2019. Using a
report by Fundbox/PYMNTS, the
Bureau estimates the trade credit market
size by adding the total accounts
payable for businesses under $1 million
in annual revenue.133 Considering the
total value of accounts payable for
businesses between $1 million and $5
million would increase the market size
by $88 billion.134 Trade credit is an
often informal, business-to-business
transaction, usually between nonfinancial firms whereby suppliers allow
their customers to acquire goods and/or
131 15
U.S.C. 1601 et seq.
York State law will require, as of January
1, 2022, that providers of ‘‘sales-based financing’’
provide disclosures to borrowers which would
include calculations of an estimated annual
percentage rate in accordance with the Bureau’s
Regulation Z, 12 CFR part 1026. See New York
S.898, section 803(c) (signed Jan. 6, 2021)
(amending S.5470–B), https://legislation.
nysenate.gov/pdf/bills/2021/s898. Similarly,
California’s Department of Financial Protection and
Innovation is in the process of issuing a rule to
implement a California law requiring disclosures by
commercial financing companies, including those
providing sales-based financing. See 10 Cal. Code
Reg. 2057(a)(22) (defining sales-based financing as
‘‘a commercial financing transaction that is repaid
by a recipient to the financer as a percentage of
sales or income, in which the payment amount
increases and decreases according to the volume of
sales made or income received by the recipient’’
and including ‘‘a true-up mechanism’’); 10 Cal.
Code Reg. 2065(a)(3) and 3001 (requiring salesbased financing providers disclosure estimated
annual percentage rate according to Regulation Z,
12 CFR part 1026). Under these laws, providers of
commercial financing generally will be required to
disclose: (1) The total amount financed, and the
amount disbursed if it is different from the total
amount financed; (2) the finance charge; (3) the
APR (or the estimated APR for sales-based financing
and factoring transactions), calculated in
accordance with TILA and Regulation Z; (4) the
total repayment amount; (5) the term (or the
estimated term for sales-based financing) of the
financing; (6) periodic payment amounts; (7)
prepayment charges; (8) all other fees and charges
not otherwise disclosed; and (9) any collateral
requirements or security interests. See Cal. S.B.
1235 (Sept. 30, 2018), https://leginfo.
legislature.ca.gov/faces/billTextClient.xhtml?bill_
id=201720180SB1235; N.Y. S.B. S5470B (July 23,
2020), https://legislation.nysenate.gov/pdf/bills/
2019/S5470B.
133 See Fundbox/PYMNTS.com, The Trade Credit
Dilemma, at 11 (May 2019), https://
www.pymnts.com/wp-content/uploads/2019/05/
Trade-Credit-Dilemma-Report.pdf (estimating
accounts payable for businesses with revenue of
under $250,000 at $6.7 billion and for businesses
with revenue of $250,000 to $999,000 at $44.6
billion).
134 Id. The trade credit market is estimated to total
$1.6 trillion across all business sizes in the United
States. In the overall $1.4 trillion market size total
for all small business financing products, the
Bureau has included only the trade credit market
for businesses of up to $1 million in revenue for
consistency with its White Paper.
132 New
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services without requiring immediate
payment.
The Bureau estimates that there were
approximately 8,100 financial
institutions extending small business
financing in 2019, almost 80 percent of
which were depository institutions.
Based on FFIEC Call Report data for
December 2019, the Bureau estimates
that about 5,100 banks and savings
associations are active in the small
business lending market, out of a total
of about 5,200 banks and savings
associations.135 The Bureau assumes
that a bank or savings association is
‘‘active’’ in the market if it reports a
positive outstanding balance of small
loans, lines of credit, and credit cards to
businesses.
Based on the NCUA Call Report data
for December 2019, the Bureau
estimates that about 1,200 out of 5,300
total credit unions were active in the
small business lending market.136 The
Bureau defines a credit union as
‘‘active’’ in the market if it reported a
positive number of originations of loans,
lines of credit, and credit cards to
members for commercial purposes in
2019.
The Bureau estimates that there are
about 1,800 nondepository institutions
active in the small business financing
market,137 accounting for around $550
billion in outstanding credit to small
businesses.
The Bureau estimates that about 300
commercial finance companies are
engaged in small business lending. By
searching UCC filings, Manasa Gopal
and Philipp Schnabl identified almost
300 commercial finance companies,
including both independent and captive
finance companies, with at least 1,500
small business loans between 2006 and
2016.138 The Bureau also estimates there
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135 Calculated
from FFIEC Call Report data
accessed on June 8, 2021.
136 2019 NCUA Call Report. (One hundred twelve
credit unions were not federally insured as of
December 2019 but are included here as depository
institutions. Calculated from NCUA Call Report
data accessed on June 8, 2021.)
137 There may also be cooperative or nonprofit
lenders as well as equipment and vehicle finance
dealers originating in their own name that are not
captured by the Bureau in these figures. For
example, by searching Uniform Commercial Code
(UCC) filings, Manasa Gopal and Philipp Schnabl
identified 19 cooperative lenders that originated at
least 1,500 loans over the period from 2006 to 2016.
Manasa Gopal & Philipp Schnabl, The Rise of
Finance Companies and FinTech Lenders in Small
Business Lending, N.Y.U. Stern Sch. of Bus., at 18
(May 13, 2020), https://ssrn.com/abstract=3600068.
Additionally, these figures do not include trade
creditors, which are non-financial companies that
extend credit by allowing customers a period of
time in which to pay and which are much greater
in number since the practice is widespread across
the economy.
138 Id. This figure combines 192 independent
finance companies with 95 captive finance
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to be about 30 or more fintechs
currently active in the small business
lending market, not including MCA
providers. Using the same methodology
as for commercial finance companies,
Gopal and Schnabl identified 19 fintech
companies.139 The Bureau
conservatively increases this estimate to
30 to account for rapid growth in the
industry from 2016 to 2019.
The Bureau estimates that 340
nondepository CDFIs are engaged in
small business lending. Both depository
and nondepository institutions can be
CDFIs. Depository CDFIs are counted in
the numbers of banks, savings
associations, and credit unions engaged
in small business lending. According to
the CDFI fund, 487 nondepository funds
(i.e., loan funds and venture capital
funds) reported as CDFIs in 2019.140 Of
these, 340 institutions reported that
business finance or commercial real
estate finance were a primary or
secondary line of business in 2019.141
The Bureau estimates that about 270
nondepository mortgage lenders
participated in the credit market for 5+
unit residential dwellings in 2019 and
that about 50 of these institutions
extended 25 or more of these loans to
small businesses. In its ‘‘2019
Multifamily Lending Report,’’ the
Mortgage Bankers Association lists
annual multifamily lending volumes by
institution, including a distinction for
loans of under $1 million in value at
origination.142 Using the same small
loan to business proxy as is used in the
FFIEC Call Report, the Bureau estimates
the number of nondepository mortgage
companies. Since this estimate captures only those
commercial finance companies averaging at least
150 loans per year over the 2006 to 2016 period,
it may exclude smaller volume lenders and should
be considered conservative.
139 Id. Since this estimate captures only those
fintechs averaging at least 150 loans per year over
the 2006 to 2016 period, it may exclude smaller
volume lenders and should be considered
conservative. On the other hand, since 2019, the
COVID–19 economic shock may have led to some
fintechs scaling back or exiting the small business
financing market. See, e.g., Ingrid Lunden, Amex
Acquires SoftBank-backed Kabbage After Tough
2020 for the SMB Lender, TechCrunch (Aug. 17,
2020), https://techcrunch.com/2020/08/17/amexacquires-softbank-backed-kabbage-after-tough2020-for-the-smb-lender/ (noting that Kabbage
temporarily shut down credit lines to small
businesses during April 2020 and then spun off its
small business loan portfolio when it was
subsequently acquired by American Express).
140 CDFI Fund, CDFI Annual Certification and
Data Collection Report (ACR): A Snapshot for Fiscal
Year 2019, at 8 (Oct. 2020), https://
www.cdfifund.gov/sites/cdfi/files/2021-01/ACRPublic-Report-Final-10292020-508Compliant.pdf.
141 Id. at 15–16.
142 See Mortg. Bankers Ass’n, Annual Report on
Multi-Family Lending—2019, at 9–66 (2020),
https://www.mba.org/store/products/research/
general/report/2019-annual-report-on-multifamilylending.
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56369
lenders by counting the number of
institutions that appear on this list that
are not depository institutions and that
extended at least 50 loans in 2019. The
Bureau counts institutions extending at
least 50 loans of any size in order to
estimate institutions extending at least
25 small loans, based on the assumption
that some 50 percent of these loans may
have been for values greater than $1
million.
Based on data from UCC filings
collected by deBanked.com, the Bureau
estimates that about 100 institutions
were active in the market for providing
MCA products to small businesses in
2021.143
The Bureau estimates the number of
factors to be between 700–900 and
assumes that most factors are providing
financing to small business.144
Finally, many government agencies
and government-sponsored enterprises
provide or facilitate a significant
proportion of small business credit. As
the flagship government lender, the
Small Business Administration
managed in 2019 a portfolio of over
$140 billion in loans to small
businesses, to which it added over $1
trillion in loans extended as part of the
COVID–19 emergency lending
programs. Across Federal, State, and
municipal governments, the Bureau
estimates that there are likely over 100
government small business lending
programs.145 Additionally, the Farm
Credit System reports that, as of
December 2019, the Farm Credit System
contains a total of 72 banks and
associations.146 The Bureau assumes
that all of these Farm Credit System
institutions are engaged in lending to
small farms.
143 deBanked, UCC–1 and UCC–3 Filings by
Merchant Cash Advance Companies & Alternative
Business Lenders, https://debanked.com/merchantcash-advance-resource/merchant-cash-advanceucc/ (last visited July 11, 2021).
144 See Secured Fin. Found., 2019 Secured
Finance: Market Sizing & Impact Study Extract
Report, at 15 (June 2019), https://www.sfnet.com/
docs/default-source/data-files-and-researchdocuments/sfnet_market_sizing___impact_study_
extract_f.pdf?sfvrsn=72eb7333_2 (estimating the
number of factors at between 700 and 900).
145 In addition to several Federal small business
lending programs, States and major municipalities
also often have one or more programs of their own.
One State and one municipal program in each State
would already total 100 government lending
programs across Federal, State, and municipal
governments.
146 Fed. Farm Credit Banks Funding Corp., Farm
Credit 2019 Annual Information Statement of the
Farm Credit System, at 7 (Feb. 28, 2020), https://
www.farmcreditfunding.com/ffcb_live/serve/public/
pressre/finin/.pdf?assetId=395570. The Bureau
notes that Farm Credit System banks do not report
FFIEC Call Reports and are thus not counted in the
number of banks and savings associations discussed
above.
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Federal Register / Vol. 86, No. 193 / Friday, October 8, 2021 / Proposed Rules
E. Challenges for Women-Owned and
Minority-Owned Small Businesses
Within the context of small business
financing, women-owned and minorityowned businesses often face relatively
more challenges than their counterparts.
Specifically, women-owned and
minority-owned small businesses can be
even more susceptible to the impact of
economic shocks and have a harder time
accessing credit to survive and thrive in
better times.
Although women-owned and
minority-owned businesses are found in
many industry sectors, women-owned
businesses are concentrated in the
health care and social assistance sector,
while minority-owned businesses are
primarily concentrated in the service
sector, the healthcare and social
assistance sector, and the administrative
support, waste management and
remediation sectors.147 During
economic downturns, such as the Great
Recession and the financial crisis
resulting from the COVID–19 pandemic,
women-owned and minority-owned
small businesses tend to fare worse than
other small businesses. Women and
minority business owners have been
disproportionately hurt by the COVID–
19 pandemic, with rates of business
ownership dropping from February to
April 2020 by 41 percent, 32 percent,
and 26 percent for African American,
Latinx, and Asian individuals,
respectively, compared with 17 percent
for white individuals.148 Female
business ownership declined by 25
percent, compared with 20 percent for
male ownership.149
Women-owned and minority-owned
small businesses often have smaller
cash reserves on average, leaving them
less able to weather downturns and
credit crunches. For example, in
February 2021, 39 percent of womenowned businesses had one month or
less in cash reserves, compared with 29
percent of men-owned firms.150 And in
147 White
Paper at 12, 15.
Fairlie, Stanford Inst. for Economic
Policy Research, Working Paper No. 20–022, The
Impact of COVID–19 on Small Business Owners:
Evidence of Early Stage Losses from the April 2020
Current Population Survey, at 5 (May 2020), https://
siepr.stanford.edu/sites/default/files/publications/
20-022.pdf. The authors define the rate of business
ownership as the percentage of the labor force that
owns and is actively employed in a business as
their main job in the survey month. Id. at 3. As
such, the decline in business ownership could
reflect owners not only exiting the labor market but
also switching to a different (wage and salary) job.
In many cases, these exit or switching trends were
temporary reactions to public health lockdowns and
have since partially reversed.
149 Id. at 6, 8.
150 Eric Groves, Cash Strapped SMBs, While 75%
Of PPP Is Still Available, Alignable (Feb. 9, 2021),
https://www.alignable.com/forum/alignable-road-
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148 Robert
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around 90 percent of majority Black and
Hispanic communities, most businesses
have fewer than 14 days of cash buffer,
while this is true of only 35 percent of
majority white communities.151 As a
result, many small businesses,
especially those owned by women and
minorities, may have had a greater need
for financing just as small business
lenders began to approve fewer loans in
response to economic uncertainty. Loan
approvals at smaller banks dropped
from 50 percent pre-pandemic to 12
percent in April 2020 and have settled
between 18 and 19 percent since June
2020; the trend is similar for large
banks, credit unions, and fintechs.152
The PPP—part of the Federal
government’s response to the
pandemic—helped to keep many small
businesses afloat, but a number of
factors prevented minority-owned small
businesses from accessing PPP loans as
easily as other firms. For example,
established banking relationships
between applicants and lending
providers were often critical to
approvals in early PPP underwriting; 153
many minority-owned businesses did
not have such relationships.154 Further,
many minority-owned firms are sole
proprietorships and independent
contractors, both of which received
delayed access to PPP loans.155
to-recovery-report-february-2021?utm_campaign=
February&utm_medium=Press&utm_source=Press.
151 JPMorgan Chase Inst., Place Matters: Small
Business Financial Health in Urban Communities,
at 5 (Sept. 2019), https://www.jpmorganchase.com/
content/dam/jpmc/jpmorgan-chase-and-co/
institute/pdf/institute-place-matters.pdf.
152 Biz2Credit, Small Business Lending Index,
https://www.biz2credit.com/small-businesslending-index (last visited July 27, 2021).
153 Sara Savat, Who you know matters, even when
applying for PPP loans, The Source, Newsroom,
Wash. Univ. in St. Louis (Feb. 15, 2021), https://
source.wustl.edu/2021/02/who-you-know-matterseven-when-applying-for-ppp-loans/ (previous
lender relationship increased likelihood of
obtaining a PPP loan by 57 percent). See generally
86 FR 7271, 7280 (Jan. 27, 2021) (noting that many
banks restricted access to PPP loans to existing
customers, which may run a risk of violating the
ECOA and Regulation B).
154 Claire Kramer Mills, Fed. Reserve Bank of
N.Y., Double Jeopardy: COVID–19’s Concentrated
Health and Wealth Effects in Black Communities,
at 6 (Aug. 2020), https://www.newyorkfed.org/
medialibrary/media/smallbusiness/
DoubleJeopardy_COVID19andBlackOwned
Businesses (arguing that a lack of strong banking
relationships among Black-owned firms may have
led to relatively lower rates of access to PPP loans
for such firms); Fed. Reserve Banks, Small Business
Credit Survey: 2021 Report on Firms Owned by
People of Color, at ii (Apr. 15, 2021), https://
www.fedsmallbusiness.org/medialibrary/
FedSmallBusiness/files/2021/sbcs-report-on-firmsowned-by-people-of-color (Small Business Credit
Survey of Firms Owned by People of Color) (finding
that ‘‘firms owned by people of color tend to have
weaker banking relationships’’).
155 Greg Iacurci, Coronavirus loan program
delayed for independent contractors and self-
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Unprofitable non-employer firms were
also initially barred from receiving
loans.156 Although Black-owned firms
are more likely to use fintech providers,
these lenders were only belatedly
allowed to disburse PPP funds.157
However, once fintech providers were
allowed to disburse PPP loans, Black
borrowers in particular benefited from
this access, highlighting the ability of
fintech firms to reach minority-owned
business borrowers.158
Finally, applicants whose owners
belong to protected categories may have
received different credit outcomes when
applying for PPP loans, although
limitations in demographic information
for PPP loans have hindered fair lending
analyses.159
Given the severity of the COVID–19
pandemic for small businesses generally
and its potentially disproportionate
impact on women-owned and minorityowned small businesses, it is essential
to better understand the small business
financing landscape to maintain support
for this key part of the U.S. economy
both during and after the pandemic.
employed workers, CNBC (Apr. 3, 2020), https://
www.cnbc.com/2020/04/03/delays-in-sba-loans-forindependent-contractors-self-employedworkers.html.
156 Stacy Cowley, ‘It Was a Joke’: Some Small
Businesses Got $1 Relief Loans, N.Y. Times (Jan. 11,
2021), https://www.nytimes.com/2021/01/11/
business/small-businesses-ppp-covid.html
(observing that sole proprietorships were initially
eligible for PPP loans only if they were profitable);
see also Stacy Cowley, Minority Entrepreneurs
Struggled to Get Small-Business Relief Loans, N.Y.
Times (Apr. 4, 2021), https://www.nytimes.com/
2021/04/04/business/ppp-loans-minoritybusinesses.html (noting that sole proprietorships
and independent contractor business structures are
particularly prevalent among minority-owned
businesses, which led to minority-owned
businesses being disproportionately restricted from
accessing PPP loans during initial roll-out of the
program).
157 Claire Kramer Mills, Fed. Reserve Bank of
N.Y., Double Jeopardy: COVID–19’s Concentrated
Health and Wealth Effects in Black Communities,
at 5–7 (Aug. 2020), https://www.newyorkfed.org/
medialibrary/media/smallbusiness/
DoubleJeopardy_COVID19andBlackOwned
Businesses.
158 Jessica Battisto et al., Liberty Street
Economics, Fed. Reserve Bank of N.Y., Who
Benefited from PPP Loans by Fintech Lenders? (May
27, 2021), https://libertystreeteconomics.
newyorkfed.org/2021/05/who-benefited-from-ppploans-by-fintech-lenders.html.
159 Rocio Sanchez-Moyano, Fed. Reserve Bank of
S.F., Paycheck Protection Program Lending in the
Twelfth Federal Reserve District (Mar. 3, 2021),
https://www.frbsf.org/community-development/
publications/community-development-researchbriefs/2021/february/ppp-lending-12th-district/
(citing matched-pair audit studies that found
discouragement and provision of incomplete
information for minority business owners seeking
PPP loans); 86 FR 7271, 7280 (Jan. 27, 2021) (noting
that facially neutral PPP policies such as limiting
loans to businesses with pre-existing relationships
may run a risk of violating the ECOA and
Regulation B due to a disproportionate impact on
a prohibited basis).
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Federal Register / Vol. 86, No. 193 / Friday, October 8, 2021 / Proposed Rules
F. The Purposes and Impact of Section
1071
The Dodd-Frank Act sets forth the
Bureau’s purposes and mission. It
provides that a key component of the
Bureau’s fair lending work is to ensure
fair, equitable, and nondiscriminatory
access to credit for both individuals and
their communities.160 And in passing
section 1071, Congress articulated two
purposes for requiring the Bureau to
collect data on small business credit
applications and loans—to ‘‘facilitate
enforcement of fair lending laws’’ and to
‘‘enable communities, governmental
entities, and creditors to identify
business and community development
needs and opportunities of womenowned, minority-owned, and small
businesses.’’ 161 Although the DoddFrank Act does not further explain or
clarify these dual statutory purposes,
other Federal laws shed light on both
purposes. That is, a set of existing
Federal laws form the backdrop for the
use of 1071 data to facilitate the
enforcement of fair lending laws, and to
identify business and community
development needs of small businesses
across the United States.
1. Facilitating Enforcement of Fair
Lending Laws
Congress intended for section 1071 to
‘‘facilitate enforcement of fair lending
laws,’’ 162 which include ECOA, the
Home Mortgage Disclosure Act of 1975
(HMDA),163 the Fair Housing Act
(FHAct),164 and other Federal and State
anti-discrimination laws.
i. Equal Credit Opportunity Act (ECOA)
jspears on DSK121TN23PROD with PROPOSALS2
ECOA, which is implemented by
Regulation B, applies to all creditors.
Congress first enacted ECOA in 1974 to
require financial institutions and other
firms engaged in the extension of credit
to ‘‘make credit equally available to all
creditworthy customers without regard
to sex or marital status.’’ 165 Two years
later, Congress expanded ECOA’s scope
to include age, race, color, religion,
national origin, receipt of public
assistance benefits, and exercise of
160 See 12 U.S.C. 5493(c)(2)(A) (directing the
Office of Fair Lending and Equal Opportunity to
provide ‘‘oversight and enforcement of Federal laws
intended to ensure the fair, equitable, and
nondiscriminatory access to credit for both
individuals and communities that are enforced by
the Bureau,’’ including ECOA and the Home
Mortgage Disclosure Act).
161 ECOA section 704B(a).
162 Id.
163 12 U.S.C. 2801 et seq.
164 42 U.S.C. 3601 through 3619.
165 Public Law 93–495, tit. V, section 502, 88 Stat.
1500, 1521 (1974).
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rights under the Federal Consumer
Credit Protection Act.166
ECOA makes it unlawful for any
creditor to discriminate against any
applicant with respect to any aspect of
a credit transaction (1) on the basis of
race, color, religion, national origin, sex
(including sexual orientation and
gender identity),167 marital status, or age
(provided the applicant has the capacity
to contract); (2) because all or part of the
applicant’s income derives from any
public assistance program; or (3)
because the applicant has in good faith
exercised any right under the Consumer
Credit Protection Act.168 In keeping
with the broad reach of the statute’s
prohibition, Regulation B covers
creditor activities before, during, and
after the extension of credit.169
Regulation B also bars creditors from
making any oral or written statement, in
advertising or otherwise, to applicants
or prospective applicants that would
discourage, on a prohibited basis, a
reasonable person from making or
pursuing an application.170 Regulation
B also generally prohibits creditors from
making inquiries about whether an
applicant is a member of certain
protected categories.171
The Bureau has recognized the
following methods of proving lending
discrimination under ECOA and
Regulation B: Overt evidence of
discrimination, evidence of disparate
treatment, and evidence of disparate
impact.172 Overt evidence of
166 See Equal Credit Opportunity Act
Amendments of 1976, Public Law 94–239, section
701(a), 90 Stat. 251, 251 (1976).
167 In March 2021, the Bureau issued an
interpretive rule clarifying that the scope of ECOA’s
and Regulation B’s prohibition on credit
discrimination on the basis of sex encompasses
discrimination based on sexual orientation and
gender identity, including discrimination based on
actual or perceived nonconformity with sex-based
or gender-based stereotypes and discrimination
based on an applicant’s associations. 86 FR 14363
(Mar. 16, 2021). See also Press Release, Bureau of
Consumer Fin. Prot., CFPB Clarifies That
Discrimination by Lenders on the Basis of Sexual
Orientation and Gender Identity Is Illegal (Mar. 9,
2021), https://www.consumerfinance.gov/about-us/
newsroom/cfpb-clarifies-discrimination-by-lenderson-basis-of-sexual-orientation-and-gender-identityis-illegal/. The interpretive rule states that an
example of discriminatory sex-based or genderbased stereotyping occurs if a small business lender
discourages a small business owner appearing at its
office from applying for a business loan and tells
the prospective applicant to go home and change
because, in the view of the creditor, the small
business customer’s attire does not accord with the
customer’s gender. 86 FR at 14365.
168 15 U.S.C. 1601 et seq.
169 See Regulation B § 1002.4(a) and (b).
170 Id. § 1002.4(b).
171 Id. § 1002.5(b) through (d).
172 See Bureau of Consumer Fin. Prot., CFPB
Bulletin 2012–04 (Fair Lending), Lending
Discrimination (Apr. 18, 2012), https://
files.consumerfinance.gov/f/201404_cfpb_bulletin_
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56371
discrimination exists when a creditor
blatantly discriminates on a prohibited
basis.173 Disparate treatment occurs
when a creditor treats an applicant
differently based on a prohibited basis
such as race or national origin.174
Disparate impact occurs when a creditor
employs facially neutral policies or
practices that have an adverse effect or
impact on a member of a protected class
unless the facially neutral policies or
practices meet a legitimate business
need that cannot reasonably be achieved
by means that are less disparate in their
impact.175
Multiple Federal regulators can
enforce violations of ECOA and
Regulation B and apply various
penalties. Enforcement and penalties for
those who violate ECOA and Regulation
B are set forth in 15 U.S.C. 1691e(b) and
12 CFR 1002.16. Violations may also
result in civil money penalties, which
are governed by 12 U.S.C. 5565(c)(3).
The Bureau and multiple other Federal
regulators have the statutory authority
to bring actions to enforce the
requirements of ECOA.176 These
regulators have the authority to engage
in research, conduct investigations, file
administrative complaints, hold
hearings, and adjudicate claims through
the administrative enforcement process
regarding ECOA. Regulators also have
independent litigation authority and can
file cases in Federal court alleging
violations of fair lending laws under
their jurisdiction. Like other Federal
regulators who are assigned
enforcement authority under section
704 of ECOA, the Bureau is required to
refer matters to the Department of
Justice (DOJ) when it has reason to
lending_discrimination.pdf (Interagency Policy
Statement on Discrimination in Lending)
(concurring with Interagency Task Force on Fair
Lending, Policy Statement on Discrimination in
Lending, 59 FR 18266 (Apr. 15, 1994)).
173 See Interagency Policy Statement on
Discrimination in Lending at 18268.
174 See Regulation B comment 4(a)–1 (stating that
‘‘[d]isparate treatment on a prohibited basis is
illegal whether or not it results from a conscious
intent to discriminate’’); Bureau of Consumer Fin.
Prot., Equal Credit Opportunity Act (ECOA)
Examination Procedures, at 1 (Oct. 30, 2015),
https://files.consumerfinance.gov/f/documents/
201510_cfpb_ecoa-narrative-and-procedures.pdf
(ECOA Examination Procedures); see also
Interagency Policy Statement on Discrimination in
Lending at 18268.
175 See Regulation B comment 6(a)–2; ECOA
Examination Procedures at 1; see also Interagency
Policy Statement on Discrimination in Lending at
18269.
176 These regulators include the OCC, the Board,
the FDIC, the NCUA, the Surface Transportation
Board, the Civil Aeronautics Board, the Secretary of
Agriculture, the Farm Credit Administration, the
Securities and Exchange Commission, the SBA, the
Secretary of Transportation, the Bureau, and the
FTC. See 15 U.S.C. 1691c; Regulation B
§ 1002.16(a).
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Federal Register / Vol. 86, No. 193 / Friday, October 8, 2021 / Proposed Rules
believe that a creditor has engaged in a
pattern or practice of lending
discrimination.177 Private parties may
also bring claims under the civil
enforcement provisions of ECOA,
including individual and class action
claims against creditors for actual and
punitive damages for any violation of
ECOA.178
ii. Home Mortgage Disclosure Act
(HMDA)
HMDA, implemented by the Bureau’s
Regulation C (12 CFR part 1003),
requires lenders who meet certain
coverage tests to report detailed
information to their Federal supervisory
agencies about mortgage applications
and loans at the transaction level. These
reported data are a valuable resource for
regulators, researchers, economists,
industry, and advocates assessing
housing needs, public investment, and
possible discrimination as well as
studying and analyzing trends in the
mortgage market for a variety of
purposes, including general market and
economic monitoring. There may be
some overlap between what is required
to be reported under HMDA and what
is covered by section 1071 for certain
mortgage applications and loans for
women-owned, minority-owned, and
small businesses.
A violation of HMDA and Regulation
C is subject to administrative sanctions,
including civil money penalties.
Compliance can be enforced by the
Bureau, the U.S. Department of Housing
and Urban Development (HUD), the
FDIC, the Board, the National Credit
Union Administration (NCUA), or the
Office of the Comptroller of Currency
(OCC). These regulators have the
statutory authority to bring actions to
enforce the requirements of HMDA and
to engage in research, conduct
investigations, file administrative
complaints, hold hearings, and
adjudicate claims through the
administrative enforcement process
regarding HMDA.
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iii. Fair Housing Act (FHAct)
Title VIII of the Civil Rights Act of
1968, as amended (Fair Housing Act, or
FHAct), prohibits discrimination in the
sale, rental, or financing of dwellings
and in other housing-related activities
because of race, color, religion, sex
(including sexual orientation and
177 See
15 U.S.C. 1691e(h).
U.S.C. 1691e(a); Regulation B
§ 1002.16(b)(1).
178 15
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gender identity),179 disability,180
familial status, or national origin.181 The
Fair Housing Act 182 and its
implementing regulations specifically
prohibit discrimination in the making of
loans,183 the purchasing of loans,184 and
in setting the terms and conditions for
making loans available,185 without
reference to consumers, legal entities, or
the purpose of the loan being made,
although these prohibitions relate
exclusively to dwellings.186 As with
ECOA, the courts have recognized three
methods of proof of lending
discrimination under the FHAct: (1)
Overt evidence of discrimination; (2)
evidence of disparate treatment; and (3)
evidence of disparate impact.187
The DOJ and HUD are jointly
responsible for enforcing the Fair
Housing Act. The Fair Housing Act
authorizes the HUD Secretary to issue a
Charge of Discrimination on behalf of
aggrieved persons following an
investigation and a determination that
reasonable cause exists to believe that a
discriminatory housing practice has
occurred.188 The DOJ may bring
lawsuits where there is reason to believe
that a person or entity is engaged in a
‘‘pattern or practice’’ of discrimination
or where a denial of rights to a group of
persons raises an issue of general public
179 See U.S. Dep’t of Hous. & Urban Dev.,
Implementation of Executive Order 13988 on the
Enforcement of the Fair Housing Act (Feb. 11,
2021), https://www.hud.gov/sites/dfiles/PA/
documents/HUD_Memo_EO13988.pdf.
180 The Bureau uses the term ‘‘disability’’ to refer
to what the FHA and its implementing regulations
term a ‘‘handicap’’ because that is the preferred
term. See, e.g., Hunt v. Aimco Props., L.P., 814 F.3d
1213, 1218 n.1 (11th Cir. 2016) (noting the term
disability is generally preferred over handicap).
181 42 U.S.C. 3601 through 3619, 3631.
182 42 U.S.C. 3605(b) (noting that for purposes of
3605(a), a ‘‘residential real estate-related
transaction’’ includes the making or purchasing of
loans or providing other financial assistance for
purchasing, constructing, improving, repairing, or
maintaining a dwelling, or transactions secured by
residential real estate).
183 24 CFR 100.120.
184 24 CFR 100.125.
185 24 CFR 100.130.
186 A ‘‘dwelling,’’ as defined by the Fair Housing
Act, is any building, structure, or portion thereof
which is occupied as, or designed or intended for
occupancy as, a residence by one or more families,
and any vacant land which is offered for sale or
lease for the construction or location thereon of any
such building, structure, or portion thereof. 42
U.S.C. 3602(b).
187 See Interagency Policy Statement on
Discrimination in Lending at 18268. See also 78 FR
11459, 11459 (Feb. 15, 2013) (stating that HUD,
which is statutorily charged with the authority and
responsibility for interpreting and enforcing the
Fair Housing Act and with the power to make rules
implementing the Act, ‘‘has long interpreted the Act
to prohibit practices with an unjustified
discriminatory effect, regardless of whether there
was an intent to discriminate’’).
188 42 U.S.C. 3610(g)(1) and (2).
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importance,189 or where a housing
discrimination complaint has been
investigated by HUD, HUD has issued a
Charge of Discrimination, and one of the
parties to the case has ‘‘elected’’ to go
to Federal court.190 In FHAct cases,
HUD and the DOJ can obtain injunctive
relief, including affirmative
requirements for training and policy
changes, monetary damages and, in
pattern or practice cases, civil
penalties.191
Upon receipt of a complaint alleging
facts that may constitute a violation of
the FHAct or upon receipt of
information from a consumer
compliance examination or other
information suggesting a violation of the
FHAct, Federal executive agencies
forward such facts or information to
HUD and, where such facts or
information indicate a possible pattern
or practice of discrimination in
violation of the FHAct, to the DOJ.192
Private parties may also bring claims
under the civil enforcement provisions
of FHAct.193
iv. Other Fair Lending Laws
Several other Federal statutes seek to
promote fair lending. The CRA seeks
affirmatively to encourage institutions
to help to meet the credit needs of the
entire community served by each
institution covered by the statute, and
CRA ratings take into account lending
discrimination by those institutions.194
The Americans with Disabilities Act of
1990 prohibits discrimination against
persons with disabilities in the
provision of goods and services,
including credit services.195 Sections
1981196 and 1982 197 of the Federal Civil
Rights Acts are broad antidiscrimination laws that have been
applied to many aspects of credit
transactions.198
189 See
42 U.S.C. 3614(a).
U.S.C. 3612(o)(1).
191 See 42 U.S.C. 3612, 3614.
192 59 FR 2939, 2939 (Jan. 17, 1994).
193 See 42 U.S.C. 3613.
194 See 12 U.S.C. 2901 et seq.
195 See 42 U.S.C. 12101 et seq.
196 42 U.S.C. 1981(a).
197 42 U.S.C. 1982.
198 See, e.g., Jackson v. Novastar Mortg., Inc., 645
F. Supp. 2d 636 (W.D. Tenn. 2007) (motion to
dismiss claim that defendants violated sections
1981 and 1982 by racial targeting and by offering
credit on less favorable terms on the basis of race
denied); Johnson v. Equicredit Corp., No. 01–CIV–
5197, 2002 U.S. Dist. LEXIS 4817 (N.D. Ill. Mar. 22,
2002) (predatory lending/reverse redlining case
brought pursuant to section 1981); Hargraves v.
Cap. City Mortg. Corp., 140 F. Supp. 2d 7 (D.D.C.
2000) (predatory lending/reverse redlining case
brought under both sections 1981 and 1982),
reconsideration granted in part, denied in part, 147
F. Supp. 2d 1 (D.D.C. 2001) (section 1981 claim
dismissed for lack of standing, but not section 1982
claim); Doane v. Nat’l Westminster Bank USA, 938
190 42
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Many States and municipalities have
also enacted fair lending, fair housing,
and/or civil rights laws (often modeled
on their Federal counterparts) that seek
to broadly prohibit credit
discrimination, including protections
for business credit.199 Some of these
laws expressly enumerate protections
beyond those expressly enumerated in
the Federal statutes.200
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v. Facilitating Enforcement
In order for the 1071 rule to facilitate
enforcement of the fair lending laws
discussed above, the Bureau believes
that it must collect and make available
F. Supp. 149 (E.D.N.Y. 1996) (mortgage redlining
case brought under sections 1981 and 1982);
Fairman v. Schaumberg Toyota, Inc., No. 94–CIV–
5745, 1996 U.S. Dist. LEXIS 9669 (N.D. Ill. July 10,
1996) (section 1981 suit over allegedly predatory
credit scheme targeting African Americans and
Hispanics); Steptoe v. Sav. of Am., 800 F. Supp.
1542 (N.D. Ohio 1992) (mortgage redlining case
brought under sections 1981 and 1982 and the Fair
Housing Act); Evans v. First Fed. Sav. Bank of Ind.,
669 F. Supp. 915 (N.D. Ind. 1987) (section 1982 can
be used in mortgage lending discrimination case);
Assocs. Home Equity Servs. v. Troup, 778 A.2d 529
(N.J. 2001) (predatory lending/reverse redlining
case brought pursuant to section 1981).
199 See, e.g., Cal. Civ. Code 51 and 51.5 and Cal.
Gov’t Code 12955; Colo. Rev. Stat. 24–34–501(3)
and 5–3–210; Conn. Gen. Stat. 46a-81e, 46a-81f, and
46a-98; Del. Code Ann. tit. 6, 4604; D.C. Code 2–
1402.21; Haw. Rev. Stat. 515–3 and 515–5; 775 Ill.
Comp. Stat. 5/1–102, 5/1–103, 5/4–102, 5/3–102,
and 5/4–103; Iowa Code 216.8A and 216.10; Me.
Rev. Stat. tit. 5, 4553(5–C) and (9–C), 4595 to 4598,
and 4581 to 4583; Md. Code Ann. State Gov’t 20–
705, 20–707, and 20–1103; Mass. Gen. Laws ch.
151B, 4(3B), (14); Minn. Stat. 363A.03 (Subd. 44),
363A.09(3), 363A.16 (Subds. 1 and 3), and 363A.17;
N.H. Rev. Stat. Ann. 354–A:10; N.J. Stat. Ann. 10:5–
12(i); N.M. Stat. Ann. 28–1–7; N.Y. Civ. Rights Law
40-c(2); N.Y. Exec. Law 296–A; Or. Rev. Stat.
174.100(7) and 659A.421; R.I. Gen. Laws 34–37–4(a)
through (c), 34–37–4.3, and 34–37–5.4; Va. Code
Ann. 6.2–501(B)(1), 15.2–853, and 15.2–965; Vt.
Stat. Ann. tit. 8, 10403 and tit. 9, 2362, 2410, and
4503(a)(6); Wash. Rev. Code 49.60.030, 49.60.040
(14), (26), and (27), 49.60.175, and 49.60.222; Wis.
Stat. 106.50 and 224.77. There are also a number
of municipalities that have enacted credit
discrimination ordinances. See, e.g., Austin City
Code 5–1–1 et seq.; N.Y.C. Admin. Code 8–101 and
8–107 et seq.; S.F. Police Code 3304(a) et seq.
200 See, e.g., Mass. Gen. Laws ch. 151B, 4(3B)
(prohibiting discrimination based on genetic
information); N.J. Stat. Ann. 10:5–1 to 10:5–42
(same); D.C. Code 2–1401.02 and 2–1402.21
(extending protections from discrimination to
domestic violence victims); Wis. Stat. 224.77
(same); N.Y. Exec. Law 296-a (prohibiting
discrimination on the basis of military status)
(credit transactions); N.Y. Exec. Law 296(5)(a)
through (c) (same) (housing transactions); Wash.
Rev. Code 49.60.176 (protecting veterans and
honorably discharged service members); 775 Ill.
Comp. Stat. 5/3–101 and 5/4–101 (prohibiting
discrimination based on an applicant’s unfavorable
discharge from the military); 815 Ill. Comp. Stat.
140/1a (same). Several other State statutes also
prohibit discrimination based on the geographic
area of residence. See, e.g., 815 Ill. Comp. Stat. 120/
1 to 120/6; Iowa Code 535A.1 to 535A.9; Md. Code
Ann., Com. Law 12–603 (West); Mich. Comp. Laws
445.1601 to 445.1614; Minn. Stat. 363A.09(3)(c);
N.Y. Banking Law 9–f; Wash. Rev. Code 30.04.500
to 30.04.515.
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sufficient data to help the public and
regulators identify potentially
discriminatory lending patterns that
could constitute violations of fair
lending laws. Financial regulators and
enforcement agencies need a consistent
and comprehensive dataset for all
financial institutions subject to 1071
reporting in order to also use 1071 data
in their initial prioritization, peer
analysis, redlining reviews, and
screening processes to select institutions
for monitoring, examination, or
investigation. Section 1071 data would
facilitate more efficient fair lending
examinations. For example, regulators
could use pricing and other data to
prioritize fair lending examinations—
without such data, some financial
institutions would face unnecessary
examination burden while others whose
practices warrant closer review would
not receive sufficient scrutiny.
Moreover, as discussed in part V
below, the Bureau believes specific
aspects of its proposal offer particular
benefits for the enforcement of fair
lending laws. For example, the Bureau’s
proposal regarding transactional and
institutional coverage would allow
community groups and government
agencies to include most of the small
business financing market in fair
lending analyses. The proposed
inclusion of pricing data fields such as
interest rate and fees would provide
information on disparities in pricing
outcomes, and data fields such as gross
annual revenue, denial reasons, and
time in business would allow for a more
refined analysis and understanding of
disparities in both underwriting and
pricing outcomes. While 1071 data
alone generally will not offer proof of
compliance with fair lending laws,
regulators, community groups,
researchers, and financial institutions
will be able to use 1071 data to identify
potential disparities in small business
lending based on disaggregated
categories of race and ethnicity. Overall,
the data collection under 1071 rule will
allow, for the first time, for
comprehensive and market-wide fair
lending risk analysis.
2. Identifying Business and Community
Development Needs
The second purpose of section 1071 is
to enable communities, governmental
entities, and creditors to identify
business and community development
needs and opportunities of womenowned, minority-owned, and small
businesses.201
Section 1071 does not expressly
define the phrase ‘‘business and
201 ECOA
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community development needs.’’
However, other Federal statutes and
regulations, including the CRA and the
Riegle Community Development and
Regulatory Improvement Act of 1994,202
reference or define the phrases
‘‘business development’’ and
‘‘community development’’ and can
help explain what it means to enable
communities, governmental entities,
and creditors to ‘‘identify business and
community development needs and
opportunities.’’
The Bureau believes, based on its
consideration of these other Federal
statutes and regulations, that the
proposed 1071 rule would provide more
data to the public—including
communities, governmental entities,
and creditors—for analyzing whether
financial institutions are serving the
credit needs of their small business
customers. In addition, with 1071 data,
the public would be better able to
understand access to and sources of
credit in particular communities or
industries, such as a higher
concentration of risky loan products in
a given community, and to identify the
emergence of new loan products,
participants, or underwriting practices.
The data would not only assist in
identifying potentially discriminatory
practices, but would also contribute to
a better understanding of the
experiences that members within
certain communities may share in the
small business financing market.
i. Community Reinvestment Act (CRA)
The CRA, a part of the Housing and
Community Development Act, was
passed by Congress in 1977, which
found that ‘‘regulated financial
institutions have continuing and
affirmative obligation to help meet the
credit needs of the local communities in
which they are chartered.’’ 203 As such,
one of the statutory purposes of the CRA
is to encourage such institutions to help
meet the credit needs of the local
communities in which they are
chartered consistent with the safe and
sound operation of such institutions.204
The legislative history for the CRA
suggests that the concerns motivating
the Act’s passage included certain
practices by banks including redlining
(i.e., declining to extend credit in
neighborhoods populated by ethnic or
racial minorities) 205 and community
202 Public Law 103–325, tit. I, section 102, 108
Stat. 2160, 2163 (1994) (12 U.S.C. 4701 through
4719).
203 12 U.S.C. 2901(a)(3).
204 12 U.S.C. 2901(b).
205 See H.R. Rep. No. 561, 94th Cong., 1st Sess.
4 (1975) (‘‘[The practice of redlining] increasingly
section 704B(a).
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disinvestment (i.e., taking deposits from
lower-income areas, often populated by
ethnic or racial minorities, without
extending credit or banking services to
residents of those areas).206 The CRA
requires the ‘‘appropriate Federal
financial supervisory agency’’ of a given
depository institution to ‘‘prepare a
written evaluation of the institution’s
record of meeting the credit needs of its
entire community, including low- and
moderate-income neighborhoods.’’ 207
These requirements were first
implemented by a 1978 rulemaking,208
and were amended in 1995 209 and
2005.210 These rulemakings, adopted by
each of the agencies responsible for
ensuring compliance with the CRA,
established specific performance
measures,211 requiring banks to disclose
information about small business, small
farm and community development
lending.212
The agencies tasked with ensuring
compliance—including the OCC,213 the
Board,214 and the FDIC 215—evaluate
each insured depository institution’s
record in helping meet the credit needs
of its entire community.216 Overall, the
CRA and its regulations generate data
that help agencies and the public at
large identify instances of redlining,
community disinvestment, and
geographical areas that are ‘‘banking
deserts.’’ 217 The CRA regulations of the
has served to polarize elements of our society . . . .
As polarization intensifies, neighborhood decline
accelerates.’’), reprinted in 1975 U.S.C.C.A.N. 2303,
2305–06.
206 Robert C. Art, Social Responsibility in Bank
Credit Decisions: The Community Reinvestment Act
One Decade Later, 18 Pac. L.J. 1071, 1076–77 & n.23
(1987) (citing 123 Cong. Rec. S8958 (daily ed. June
6, 1977), which stated that Sen. Proxmire, the
congressional sponsor of the Act described
redlining as ‘‘the fact that banks and savings and
loans will take their deposits from a community
and instead of reinvesting them in that community,
they will invest them elsewhere, and they will
actually or figuratively draw a red line on a map
around the areas of their city,’’ further noting that
those lines are drawn ‘‘sometimes in the inner city,
sometimes in the older neighborhoods, sometimes
ethnic and sometimes black . . . .’’).
207 12 U.S.C. 2906(a)(1).
208 43 FR 47144 (Oct. 12, 1978).
209 60 FR 22156 (May 4, 1995).
210 70 FR 44256 (Aug. 2, 2005).
211 12 CFR 228.11.
212 See, e.g., 12 CFR 25.42, 228.11.
213 12 CFR part 25.
214 12 CFR part 228.
215 12 CFR parts 345, 195.
216 Most specifically, that record is taken into
account in considering an institution’s application
for deposit facilities, including mergers and
acquisitions with other financial institutions and
the opening of bank branches.
217 OCC regulations define ‘‘CRA desert’’ as an
area that has ‘‘significant unmet community
development or retail lending needs’’ and where:
(1) Few banks have branches or non-branch deposittaking facilities, (2) There is ‘‘less retail or
community development lending than would be
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Board and the FDIC currently have the
same definitions of ‘‘community
development’’ that include banking and
credit services that support the
following: (1) Affordable housing for
low- and moderate-income (LMI)
individuals; 218 (2) community services
for LMI individuals; 219 (3) activities
that promote economic development by
financing small business and small
farms; 220 and (4) activities that
revitalize or stabilize LMI geographies,
disaster areas, and certain distressed or
underserved middle-income areas based
on other factors.221
In September 2020, the Board
announced an advance notice of
proposed rulemaking to update its CRA
regulations, specifically to more
effectively meet the needs of LMI
communities and address inequities in
credit access.’’ 222 As part of this
exercise, the Board requested feedback
on potential revisions to its data
collection and reporting
requirements.223 The Board suggested
that more granular reporting of
community development loan and
investment data may be needed to aid
community development and improve
compliance with the CRA, noting that
the lack of such data ‘‘means that there
is no aggregate community development
data at a local level available to create
the local benchmarks for the community
development financing metric.’’ 224 As
such, the publication of 1071 data
would also be a useful resource for
supporting community development
efforts under the CRA.
In June 2020, the OCC promulgated a
final rule that adopted a broader
definition of ‘‘community development’’
than the one used by the Board and the
FDIC.225 However, in July 2021, the
expected based on demographic or other factors,’’
or (3) The area ‘‘lacks community development
organizations or infrastructure.’’ 12 CFR 25.03.
218 12 CFR 228.12(g)(1), 345.12(g)(1).
219 12 CFR 228.12(g)(2), 345.12(g)(2).
220 12 CFR 228.12(g)(3), 345.12(g)(3).
221 12 CFR 228.12(g)(4), 345.12(g)(4).
222 85 FR 66410 (Oct. 19, 2020).
223 Id. at 66459–63.
224 Id. at 66462.
225 The FDIC initially joined the OCC in issuing
its early 2020 proposed rule to expand the
definition of ‘‘community development’’ for
purposes of CRA compliance, but it did not join the
OCC in its issuance of a rule finalizing that
proposal. Compare 85 FR 1204 (Jan. 9, 2020) (joint
FDIC–OCC proposal to amend the agencies’
respective CRA regulations), with 85 FR 34734 (June
5, 2020) (OCC final rule amending CRA
regulations). The rule added to the range of
activities that comprise ‘‘community development’’
for purposes of the OCC’s revisions to the CRA
regulations. Specifically, the OCC expanded the
qualifying activities criteria to capture activities the
OCC stated were consistent with the statutory
purpose of the CRA but that generally did not
receive credit under CRA regulations prior to the
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OCC announced that it was
reconsidering the June 2020 revisions to
its CRA regulations,226 and that it may
join the Board’s consideration of
proposed revisions to strengthen bank
compliance with CRA regulations.227
ii. Community Development Financial
Institution Fund (CDFI Fund)
The Riegle Community Development
and Regulatory Improvement Act of
1994 authorized the CDFI Fund.228 In
passing that statute, Congress found that
many of the Nation’s urban, rural, and
Native American communities face
‘‘critical social and economic problems
arising in part from the lack of economic
growth, people living in poverty, and
the lack of employment and other
opportunities.’’ 229
To address these problems, Congress
created the CDFI Fund to ‘‘promote
economic revitalization and community
development’’ through investment in
and assistance to CDFIs, including
enhancing the liquidity of CDFIs.230
The concept of community
development is central to the operation
of the CDFI Fund. While CDFI Fund
regulations do not directly define that
term, any entity applying for CDFI
certification must have ‘‘promoting
community development’’ as its
‘‘primary mission.’’ 231 In making this
determination, the CDFI Fund considers
whether the activities of the entity are
purposefully directed toward improving
the social and/or economic conditions
of underserved people, which may
include low-income persons or persons
OCC’s revisions, including certain activities in
identified ‘‘areas of need beyond LMI areas (i.e.,
underserved areas, distressed areas, disaster areas,
Indian country and other tribal and native lands)’’
as well as those activities that ‘‘benefit a whole
community, while maintaining an appropriate focus
on LMI neighborhoods.’’ 85 FR 34734, 34735 (June
5, 2020); see also 12 CFR 25.04(a)(1) (stating that
a retail loan, a community development loan, a
community development investment, or a
community development service ‘‘that helps to
meet the credit needs of a bank’s entire community,
including low- and moderate-income communities,
is a qualifying activity if it meets the criteria in this
section at the time the activity is originated, made,
or conducted’’); 12 CFR 25.04(b)(3) (listing 12 sets
of activities that qualify as community development
loans, investments and services).
226 Off. of the Comptroller of the Currency, OCC
Statement on Rescinding its 2020 Community
Reinvestment Act Rule (News Release 2021–76)
(July 20, 2021), https://www.occ.gov/newsissuances/news-releases/2021/nr-occ-2021-76.html
(stating that the OCC will propose rescinding its
June 2020 CRA final rule).
227 Id. (noting the crucial nature of strengthening
the CRA jointly with the Board and FDIC and
signaling intention to issue a joint notice of
proposed rulemaking building on the ANPR
proposed by the Board in September 2020).
228 12 U.S.C. 4701(b).
229 12 U.S.C. 4701(a)(1).
230 12 U.S.C. 4701(b).
231 12 CFR 1805.201(b)(1).
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who lack adequate access to capital and
financial services and residents of
economically distressed
communities.232
The CDFI Fund collects data from the
recipients of its financial and technical
assistance, shedding some light on the
extent of community development in
the areas where CDFIs operate.233 The
CDFI Fund also publishes the data it
receives with appropriate redactions to
protect privacy interests.234 However,
given that CDFIs comprise a relatively
small share of the overall small business
lending market, section 1071 would
materially enhance understanding of the
broader extent of community
development outside of areas where
CDFIs already operate. The data from a
1071 rulemaking would also likely
augment the data the CDFI Fund already
receives.
3. Potential Impact of Section 1071 Data
A section 1071 rule would provide on
an annual basis application-level data
on small business credit, including
certain protected demographic
information about applicants and their
principal owners. This would include
information on applications for credit
that are originated, as well as those that
are denied, withdrawn, incomplete, or
approved by the financial institution but
not accepted by the applicant. This
information would enable stakeholders
of all kinds in the small business
lending market to gain unprecedented
insight into trends in small business
lending, specifically with respect to
women-owned and minority-owned
small businesses. It would also provide
insight into the interaction of supply
and demand over time.
In terms of facilitating fair lending
enforcement, interested government
agencies and other stakeholders would
be able to use 1071 data to analyze
potential instances of practices resulting
in the disparate treatment of or
disparate impact on women- and
minority-owned small businesses, using
statistical methods to identify possible
fair lending risks.
Regarding the identification of
business and community development
needs, the data that would be made
available by the Bureau under this
rulemaking, if finalized as proposed,
would help government entities and
public and private lenders identify and
target sub-segments of the market that
remain underserved, facilitating
232 Id.
233 12 CFR 1805.803(e) (requiring recipients of
technical and financial assistance to provide to the
CDFI Fund certain information and
documentation).
234 12 CFR 1805.803(e)(4).
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entrepreneurship and business
development in those communities.
The advancement of both statutory
purposes of section 1071—facilitating
fair lending enforcement and identifying
business and community development
needs—in turn will support small
businesses across all sectors of the
economy, which are fundamental to the
economic health of the U.S. and which
have been hard hit by recent economic
and financial crises. The use of data that
would be provided pursuant to
regulations under section 1071 can both
support the underlying purposes of
section 1071 and help the economy as
a whole. For example, according to one
estimate, fair and equitable lending to
Black entrepreneurs could have added
$13 trillion in business revenue over the
last 20 years and created 6 million
jobs.235 As the economy recovers from
the effects of the COVID–19 pandemic,
data collected and published pursuant
to regulations implementing section
1071 would help to support equitable
and sustainable growth and prosperity
in all communities in the U.S.
4. Bureau Priorities
On June 2, 2021, the Bureau
announced as priorities action to
address issues of pervasive racial
injustice and the long-term economic
impacts of the COVID–19 pandemic on
consumers.236 The Acting Director
explained that the Bureau will use all of
its tools and authority—including
rulemaking—to protect and fight for
fairness for all consumers in financial
markets.237 The Bureau believes that
implementing the section 1071 data
collection, maintenance, and reporting
obligations established in the DoddFrank Act would advance those
priorities.
Congress enacted section 1071 for the
purposes of facilitating enforcement of
fair lending laws, and enabling
communities, governmental entities,
and creditors to identify business and
community development needs and
opportunities for women-owned,
minority-owned, and small businesses.
The Bureau believes that 1071 data will
come to play an important role as
235 Citigroup, Citi GPS: Global Perspectives &
Solutions, Closing the Racial Inequality Gaps: The
Economic Cost of Black Inequality in the U.S., at
4 (Sept. 2020), https://ir.citi.com/NvIUklHPilz14
Hwd3oxqZBLMn1_XPqo5FrxsZD0x6hhi
l84ZxaxEuJUWmak51UHvYk75VKeHCMI%3D.
236 Blog post, Dave Uejio, Acting Director, Bureau
of Consumer Fin. Prot., Addressing racial inequities
in consumer finance markets (June 2, 2021), https://
www.consumerfinance.gov/about-us/blog/
addressing-racial-inequities-consumer-financemarkets/.
237 See Bureau of Consumer Fin. Prot., https://
www.consumerfinance.gov/about-us/racial-equity/.
PO 00000
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56375
HMDA data have done for the mortgage
market. HMDA data have provided
lenders, community groups, and others
the tools to identify and address fair
lending risks and strengthen fair lending
oversight and enforcement. In a similar
way, section 1071 data will allow
diverse stakeholders to analyze lending
patterns that are potentially
discriminatory. By identifying and
addressing discriminatory small
business lending practices, the Bureau
will help to ensure fair, equitable, and
nondiscriminatory access to credit for
both individuals and their communities.
HMDA data have also proven effective
in creating transparency in the mortgage
market that improves the understanding
of credit needs, where they may remain
unmet, and the relationship between
mortgage lending and community
development. The Bureau believes that
the 1071 data will provide the Bureau
and other stakeholders with critical
insights into the small business lending
market. The current COVID–19
pandemic has shown that transparency
is essential at a time of crisis, when
small businesses, especially those
owned by women and minorities, may
be in urgent need of credit in order to
recover from the economic shocks. As at
least one SER suggested, a 1071 rule
would help lenders across the country
better connect underserved
entrepreneurs to working capital and
resources in order to build a more
inclusive economy.
III. Outreach
In the years leading up to the release
of this proposed rule, the Bureau held
over 100 outreach meetings with
financial institutions, trade associations,
community groups, researchers,
governmental entities, and other
stakeholders regarding the 1071
rulemaking. The Bureau also took a
number of other steps, beyond
individual stakeholder meetings, to
solicit feedback more broadly from the
public on a 1071 rule.
Request for information, field hearing,
and White Paper on small business
lending. On May 10, 2017, the Bureau
published a request for information
(RFI) regarding the small business
lending market 238 in which it sought
public comment to understand more
about the products that are offered to
small businesses, the financial
institutions that offer such credit, the
small business lending data that
currently are used and may be
maintained by financial institutions, the
potential complexity and cost of small
business data collection and reporting,
238 82
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FR 22318 (May 15, 2017).
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and privacy concerns related to the
disclosure purposes of section 1071.239
On the same date, the Bureau held a
field hearing regarding section 1071 at
which the RFI was announced and thenDirector Richard Cordray noted the
importance of a section 1071
rulemaking given the absence of
systematic data on how small
businesses are faring and whether or
how much they are being held back by
financing constraints.240 Finally, at the
same time, the Bureau also published its
White Paper on small business
lending,241 which reflected the initial
findings of the Bureau’s research
providing a preliminary understanding
of the small business lending
environment, with a particular
emphasis on lending to women-owned
and minority-owned small businesses.
1071 Symposium. In November 2019,
the Bureau held a symposium on
section 1071 to assist the Bureau in its
policy development process and to
receive feedback from experts, including
academic, think tank, consumer
advocate, industry, and government
experts in the small business lending
arena.242 The symposium had two
panels. The first panel focused on the
evolution in the small business lending
marketplace. The second panel included
a discussion surrounding the
implementation of section 1071,
including issues raised in response to
the Bureau’s RFI.
Small Business Advisory Review
Panel. Under the Small Business
Regulatory Enforcement Fairness Act of
1996 (SBREFA),243 which amended the
Regulatory Flexibility Act (RFA), the
Bureau must convene and chair a Small
Business Advisory Review Panel (Panel)
if it is considering a proposed rule that
could have a significant economic
239 In response to the RFI, the Bureau received
over 2,000 comments in total, and over 100 unique
comments offering detailed substantive responses
on the topics raised in the RFI. These comments
from the public helped to inform the Bureau’s
approach in its SBREFA Outline. See Bureau of
Consumer Fin. Prot., Request for Information
Regarding the Small Business Lending Market,
Docket ID CFPB–2017–0011, https://
www.regulations.gov/docket/CFPB-2017-0011.
240 See Bureau of Consumer Fin. Prot., Prepared
Remarks of CFPB Director Richard Cordray at the
Small Business Lending Field Hearing (May 10,
2017), https://www.consumerfinance.gov/about-us/
newsroom/prepared-remarks-cfpb-director-richardcordray-small-business-lending-field-hearing/.
241 Bureau of Consumer Fin. Prot., Key
dimensions of the small business lending landscape
(May 2017), https://files.consumerfinance.gov/f/
documents/201705_cfpb_Key-Dimensions-SmallBusiness-Lending-Landscape.pdf.
242 Bureau of Consumer Fin. Prot., Symposium:
Section 1071 of the Dodd-Frank Act (held Nov. 6,
2019), https://www.consumerfinance.gov/about-us/
events/archive-past-events/cfpb-symposiumsection-1071-dodd-frank-act/.
243 Public Law 104–121, 110 Stat. 857 (1996).
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impact on a substantial number of small
entities.244 The Panel considers the
impact of the proposals under
consideration by the Bureau and obtains
feedback from representatives of the
small entities that would likely be
subject to the rule. The Panel is
comprised of a representative from the
Bureau, the Chief Counsel for Advocacy
of the Small Business Administration
(SBA), and a representative from the
Office of Information and Regulatory
Affairs (OIRA) in the Office of
Management and Budget (OMB).
Representatives from 20 small
businesses were selected as small entity
representatives (SERs) for this SBREFA
process. These SERs were
representatives of small businesses that
are financial institutions that would
likely be directly affected by a 1071
rule. These SERs did not represent the
small business applicants for credit
about whom information would be
collected and reported under a 1071
rule.
On September 15, 2020, the Bureau
issued its Outline of Proposals under
Consideration and Alternatives
Considered (Outline or SBREFA
Outline) for the section 1071
rulemaking, a detailed document that
discusses (1) the relevant law, (2) the
regulatory process, (3) the rule
proposals the Bureau was considering,
and (4) an economic analysis of the
potential impacts of those proposals on
directly affected small entities.245
The Bureau convened the Panel for
this proposed rule on October 15, 2020
and held a total of four meetings with
SERs during October 19–22, 2020,
conducted online via video conference
(Panel Outreach Meetings). In
preparation for the Panel Outreach
Meetings and to facilitate an informed
and detailed discussion of the proposals
under consideration, discussion
questions for the SERs were included
throughout the Bureau’s Outline.246
244 5
U.S.C. 609(b).
of Consumer Fin. Prot., Small Business
Advisory Review Panel for Consumer Financial
Protection Bureau Small Business Lending Data
Collection Rulemaking, Outline of Proposals Under
Consideration and Alternatives Considered (Sept.
15, 2020), https://files.consumerfinance.gov/f/
documents/cfpb_1071-sbrefa_outline-of-proposalsunder-consideration_2020-09.pdf (SBREFA
Outline). See also Bureau of Consumer Fin. Prot.,
Consumer Financial Protection Bureau Releases
Outline of Proposals Under Consideration to
Implement Small Business Lending Data Collection
Requirements (Sept. 15, 2020), https://
www.consumerfinance.gov/about-us/newsroom/
cfpb-releases-outline-proposals-implement-smallbusiness-lending-data-collection-requirements/.
246 These questions also appeared in a shorter
Discussion Guide for Small Entity Representatives.
See Bureau of Consumer Fin. Prot., Small Business
Advisory Review Panel for Consumer Financial
Protection Bureau Small Business Lending Data
245 Bureau
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In advance of the Panel Outreach
Meetings, the Bureau, SBA’s Office of
Advocacy, and OIRA held a series of
video conferences with the SERs to
describe the Small Business Review
Process, obtain important background
information about each SER’s current
business practices, and begin
discussions on selected portions of the
proposals under consideration.
All 20 SERs participated in the Panel
Outreach Meetings. Representatives
from the Bureau, SBA’s Office of
Advocacy, and OIRA provided
introductory remarks. The meetings
were then organized around discussions
led by the Bureau about each aspect of
the proposals under consideration and
the potential impact on small
businesses. The Bureau also invited
SERs to submit written feedback by
November 9, 2020; most SERs did so.
On December 15, 2020, the Bureau
released the Final Report of the Small
Business Review Panel on the CFPB’s
Proposals Under Consideration for the
Small Business Lending Data Collection
Rulemaking.247 This report includes a
summary of the feedback received from
SERs during the panel process
(including oral feedback received during
the pre-Panel video conferences and
Panel Outreach Meetings, as well as
timely submitted written feedback) and
findings and recommendations made by
the Panel.248 As required by the RFA,
the Bureau considers the Panel’s
findings in its initial regulatory
flexibility analysis, as set out in part VIII
below.
The Bureau also invited other
stakeholders to submit feedback on the
SBREFA Outline by December 14, 2020.
The Bureau received approximately 60
submissions from a variety of other
stakeholders, including financial
institutions, trade associations,
Collection Rulemaking, Discussion Guide for Small
Entity Representatives (Sept. 15, 2020), https://
files.consumerfinance.gov/f/documents/cfpb_1071sbrefa_discussion-guide_2020-09.pdf.
247 Bureau of Consumer Fin. Prot., Final Report of
the Small Business Review Panel on the CFPB’s
Proposals Under Consideration for the Small
Business Lending Data Collection Rulemaking (Dec.
14, 2020), https://files.consumerfinance.gov/f/
documents/cfpb_1071-sbrefa-report.pdf (SBREFA
Panel Report). See also Bureau of Consumer Fin.
Prot., Consumer Financial Protection Bureau
Releases Report on Implementing the Dodd-Frank
Act’s Small Business Lending Data Collection
Requirement (Dec. 15, 2020), https://www.consumer
finance.gov/about-us/newsroom/consumerfinancial-protection-bureau-releases-report-onimplementing-the-dodd-frank-acts-small-businesslending-data-collection-requirement/. The Bureau’s
SBREFA Outline and related materials, as well as
the Bureau’s presentation slides framing the
discussion during the Panel Outreach Meetings, are
appended to the SBREFA Panel Report. See
SBREFA Panel Report at app. C through F.
248 The written feedback from SERs is appended
to the Panel Report. See id. at app. A.
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community groups, a think tank, and a
government agency.249 Feedback from
these other stakeholders was not
considered by the Panel and is not
reflected in the Panel Report.
The Bureau has considered the
feedback it received from SERs, the
findings and recommendations of the
Panel, and the feedback from other
stakeholders in preparing this proposed
rule. The feedback, findings, and
recommendations are summarized
throughout this notice where relevant.
One-Time Cost Survey. On July 22,
2020, the Bureau released a voluntary
survey to measure the one-time costs of
compliance with an eventual small
business lending data collection rule.250
The objective of the survey was to
solicit, from institutions offering small
business credit products that could
potentially be covered by this rule,
information about potential one-time
costs to prepare to collect and report
data. The survey did not cover potential
on-going costs from actually collecting
and reporting 1071 data, and assumed
that reporting was required only for the
13 statutorily required data points and
that compliance with the statutory
firewall requirement was not
required.251 The deadline for responses
was October 16, 2020. The Bureau
received responses from 105 financial
institutions.252 The results of the survey
inform the Bureau’s analyses of the
potential impacts of the proposed rule
as set out in parts VII and VIII below.
ECOA request for information. On
July 28, 2020, the Bureau issued a
request for information to seek public
input on ECOA and Regulation B.253 In
the RFI, the Bureau sought public
comment on a number of topics,
including small business lending and
the ways that the Bureau, in light of its
authority under ECOA and Regulation
B, might support efforts to meet the
credit needs of small businesses,
particularly those that are minorityowned and women-owned.254
Ongoing market monitoring. The
Bureau conducts outreach to industry
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249 Feedback
received from these stakeholders on
the SBREFA Outline will be placed on the public
docket for this notice.
250 Bureau of Consumer Fin. Prot., Survey: Small
Business Compliance Cost Survey (July 22, 2020),
https://files.consumerfinance.gov/f/documents/
cfpb_1071-survey_2020-10.pdf.
251 Id. at 1.
252 See part VI below for additional details
regarding this survey.
253 Bureau of Consumer Fin. Prot., Consumer
Financial Protection Bureau Requests Information
on Ways to Prevent Credit Discrimination and Build
a More Inclusive Financial System (July 28, 2020),
https://www.consumerfinance.gov/about-us/
newsroom/cfpb-rfi-prevent-credit-discriminationbuild-more-inclusive-financial-system/.
254 85 FR 46600, 46602 (Aug. 3, 2020).
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and other stakeholders to understand
their experiences with the small
business finance market, economic
conditions, and the collection and
reporting of data regarding that market.
A particular near-term priority in the
Bureau’s recent market monitoring has
been the impacts of the pandemic and
the effectiveness of the Federal
government response. Findings from
market monitoring activities inform the
Bureau on matters affecting the small
business sector.
Technical outreach. In the months
before the publication of this proposed
rule, the Bureau began conducting
technical outreach with third party
software providers that serve financial
institutions and software and
technology staff from financial
institutions that are likely to have to
report 1071 data to the Bureau. With
these software vendors and technical
staffs, the Bureau has held and, after
publication of this proposed rule, will
continue to hold discussions concerning
the technical systems and procedures
the Bureau will provide to collect 1071
data. The Bureau intends to understand
the technology solutions currently
provided by vendors to support the
small business lending activities of
financial institutions. The Bureau
believes this information will be helpful
in informing the Bureau in its design
and implementation of a platform for
intake and processing of 1071 data to
help the platform integrate, to the
degree possible, with existing systems
and data collection procedures. These
meetings also serve to raise awareness of
technology providers as to their
potential future role in supporting the
1071 rule as well as the lead time that
may be necessary for some or all
affected financial institutions to come
into compliance with the requirements
of a final section 1071 rule. The
feedback that the Bureau is gathering is
purely technical in nature. This
outreach process is ongoing and will
continue throughout the rulemaking.
IV. Legal Authorities
The Bureau is issuing this proposed
rule pursuant to its authority under
section 1071. Some aspects of this rule
are also proposed under the Bureau’s
more general rulemaking authorities in
ECOA. Congress enacted ECOA to
prohibit discrimination against any
applicant, regarding any aspect of a
credit transaction, on the basis of,
amongst other things, race, color,
national origin, and sex.255 The Bureau
has certain oversight, enforcement, and
supervisory authority over ECOA
255 15
PO 00000
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56377
requirements and has rulemaking
authority under the statute.
ECOA is implemented in Regulation
B.256 Among other things, Regulation B
generally prohibits creditors from
inquiring about an applicant’s race,
color, religion, national origin, or sex,
with limited exceptions, including if it
is required by law.257
As discussed above, in the DoddFrank Act Congress amended ECOA by
adding section 1071, which directs the
Bureau to adopt regulations governing
the collection and reporting of small
business lending data. Specifically,
section 1071 requires financial
institutions to collect and report to the
Bureau certain data on applications for
credit for women-owned, minorityowned, and small businesses.258
Congress enacted section 1071 for the
purpose of (1) facilitating enforcement
of fair lending laws and (2) enabling
communities, governmental entities,
and creditors to identify business and
community development needs and
opportunities of women-owned,
minority-owned, and small
businesses.259 The Bureau often refers to
these as section 1071’s fair lending
purpose and its business and
community development purpose,
respectively.
To advance these statutory purposes,
section 1071 grants the Bureau general
rulemaking authority for section 1071,
providing that the Bureau shall
prescribe such rules and issue such
guidance as may be necessary to carry
out, enforce, and compile data pursuant
to section 1071.260 ECOA section
704B(g)(2) also permits the Bureau to
adopt exceptions to any requirement of
section 1071 and to conditionally or
unconditionally exempt any financial
institution or class of financial
institutions from the requirements of
section 1071, as the Bureau deems
necessary or appropriate to carry out the
purposes of section 1071. The Bureau
principally relies on its 704B(g)(1)
authority in this proposed rule and
relies on 704B(g)(2) when proposing
specific exceptions or exemptions to
section 1071’s requirements. Section
704B(g)(3) directs the Bureau to issue
guidance designed to facilitate
compliance with the requirements of
section 1071.
In addition, section 703(a) of ECOA
gives the Bureau broad authority to
prescribe regulations to carry out the
purposes of ECOA, including provisions
256 12
CFR part 1002.
B § 1002.5(a)(2).
258 ECOA section 704B.
259 ECOA section 704B(a).
260 ECOA section 704B(g)(1).
257 Regulation
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that in the judgment of the Bureau are
necessary or proper to effectuate the
purposes of ECOA, to prevent
circumvention or evasion thereof, or to
facilitate or substantiate compliance
therewith. That section also states that
the Bureau may provide for such
adjustments and exceptions for any
class of transactions, as in the judgment
of the Bureau are necessary or proper to
effectuate the purposes of ECOA, to
prevent circumvention or evasion
thereof, or to facilitate or substantiate
compliance therewith.
Section 1071 establishes requirements
or obligations for financial institutions
that the Bureau would implement in
this proposed rule. These provisions
include the requirement in ECOA
section 704B(b) that a financial
institution shall inquire whether an
applicant for credit is a women-owned,
minority-owned, or small business; that
a financial institution must maintain a
record of responses to such inquiry,
separate from the application; that an
applicant may refuse to provide any
information requested regarding the
inquiry under 704B(b); that a financial
institution must limit access of loan
underwriters, or other officers or
employees of the financial institution or
any affiliate, to applicant responses to
inquiries under 704B(b); and that if a
financial institution determines that a
loan underwriter or other officer or
employee should have access to any
information provided by the applicant
pursuant to a request under 704B(b) that
the financial institution shall provide
notice to the applicant of the access of
the underwriter to such information,
along with notice that the financial
institution may not discriminate on the
basis of such information.261
ECOA section 704B(e)(1) directs
financial institutions to compile and
maintain, in accordance with
regulations of the Bureau, records of the
information provided by applicants for
credit pursuant to a request under
704B(b). Section 704B(e)(2) requires that
the information compiled and
maintained under 704B(e)(1) be
itemized in order to clearly and
conspicuously disclose an enumerated
list of data points. Section 704B(e)(2)(H)
requires financial institutions to
compile and maintain any additional
data that the Bureau determines would
aid in fulfilling the purposes of section
1071.
Several provisions of section 1071
expressly refer to regulations that the
Bureau shall promulgate to implement
certain requirements, including in
261 ECOA
section 704B(b)(1), (b)(2), (c), (d)(1) and
(2).
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ECOA section 704B(e)(1) regarding how
financial institutions must compile and
maintain data pursuant to section 1071,
and in 704B(f)(2)(B) and (C) regarding
the form of information made available
by financial institutions to the public
and the form and manner in which the
Bureau itself should make 1071 data
available to the public generally.
Two provisions expressly give the
Bureau discretion with respect to public
availability of 1071 data. Specifically,
ECOA section 704B(e)(4) states that the
Bureau may, at its discretion, delete or
modify 1071 data before making it
available to the public if the Bureau
determines that the deletion or
modification of the data would advance
a privacy interest. Section 704B(f)(3)
gives the Bureau the discretion to
compile and aggregate 1071 data for its
own use, as well as to make public such
compilations of aggregate data.
V. Section-by-Section Analysis
Overview
In this Overview of part V, the Bureau
first provides an overview of section
1071 and then a brief summary of the
proposed rule. Each provision, along
with its rationale and relevant feedback
received through the SBREFA process,
is discussed in detail in the section-bysection analyses that follow. The
Bureau’s proposed rule is largely
consistent with, though more detailed
than, its proposals under consideration
in the SBREFA Outline. However, the
Bureau has altered or refined its
approach since SBREFA in certain
respects, which are noted in the
summary of the proposed rule below
and discussed in detail in the sectionby-section analyses that follow.
Next, the Bureau discusses the highlevel and general comments regarding
this rulemaking that it received from
SERs and other stakeholders on its
SBREFA Outline. Finally, the Bureau
addresses several issues for which there
is no proposed regulatory text or
commentary.
The Bureau seeks comment on its
proposed approach to implementing
section 1071. Requests for comment on
each provision and on particular issues
are included throughout the section-bysection analyses in this part V.
A. Overview of Section 1071
As discussed above, section 1071 of
the Dodd-Frank Act requires that
financial institutions collect and report
to the Bureau certain data regarding
applications for credit for womenowned, minority-owned, and small
businesses. Section 1071’s statutory
purposes are to (1) facilitate
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Fmt 4701
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enforcement of fair lending laws, and (2)
to enable communities, governmental
entities, and creditors to identify
business and community development
needs and opportunities of womenowned, minority-owned, and small
businesses.
Section 1071 specifies a number of
data points that financial institutions
are required to collect and report, and
also provides authority for the Bureau to
require any additional data that the
Bureau determines would aid in
fulfilling section 1071’s statutory
purposes. Section 1071 also contains a
number of other requirements,
including those that address restricting
the access of underwriters and other
persons to certain 1071 data and
publication of 1071 data. In addition,
section 1071 permits the Bureau, at its
discretion, to modify or delete data prior
to publication if it determines that such
a deletion or modification would
advance a privacy interest.
Section 1071 directs the Bureau to
prescribe such rules, and issue such
guidance as may be necessary to carry
out, enforce, and compile data pursuant
to section 1071. It also permits the
Bureau to adopt exceptions to any
requirement or to exempt financial
institutions from the requirements of
section 1071 as the Bureau deems
necessary or appropriate to carry out the
purposes of section 1071. Section 1071
also directs the Bureau to issue
guidance designed to facilitate
compliance with the requirements of
section 1071. As discussed in part IV
above and throughout the section-bysection analyses in this part V, most of
the Bureau’s proposal is dedicated to
implementing these statutory
provisions.
B. Section 1071 in the Context of HMDA
The Bureau’s proposal for
implementing section 1071 necessarily
exists against the backdrop of HMDA 262
(as discussed in part II.F.1.ii above).
With the passage of the Dodd-Frank Act
in 2010, Congress enacted section 1071
at the same time that it amended HMDA
and transferred HMDA rulemaking
authority and other functions to the
Bureau. HMDA is a data collection and
reporting statute that requires certain
depository institutions and for-profit
nondepository institutions to collect,
report, and disclose data about
originations and purchases of mortgage
loans, as well as mortgage loan
applications that do not result in
originations (for example, applications
that are denied or withdrawn). The
Bureau’s Regulation C, 12 CFR part
262 12
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1003, implements HMDA. In light of the
similarities between 1071 and HMDA,
the Bureau’s section-by-section analyses
in this part V often discusses how
similar provisions are addressed in the
context of HMDA.
HMDA’s purposes are: (1) To help
determine whether financial institutions
are serving their communities’ housing
needs; (2) to assist public officials in
distributing public investment to attract
private investment; and (3) to assist in
identifying potential discriminatory
lending patterns and enforcing
antidiscrimination statutes.
A covered institution for purposes of
HMDA reporting is a depository or
nondepository institution that meets the
relevant coverage criteria set forth in the
regulation. A depository institution is
required to comply with Regulation C if
it meets the asset-size threshold,
location test, loan activity test, federally
related test, and the loan-volume
threshold for either closed-end loans or
open-end lines of credit set forth in the
regulation. A nondepository institution
is required to comply with Regulation C
if it meets the location test and the loanvolume threshold for either closed-end
loans or open-end lines of credit set
forth in the regulation.
A covered transaction under HMDA is
generally a loan or line of credit secured
(or, for applications, proposed to be
secured) by a lien on a dwelling, that is
not specifically excluded under
Regulation C § 1003.3(c). The data
points generally required to be reported
about each covered transaction can be
grouped into four broad categories: 263
• Information about the applicants,
borrowers, and underwriting process,
such as ethnicity, race, and sex of the
applicant,264 the applicant’s gross
income and debt-to-income ratio, the
application channel, action taken, and,
if applicable, reason(s) for denial.
• Information about the property
securing the loan or proposed to secure
the loan, such as census tract and other
property location information,
construction method, property value,
and additional information about
manufactured and multifamily housing.
263 Under the Economic Growth, Regulatory
Relief, and Consumer Protection Act, Public Law
115–174, 132 Stat. 1296 (2018), as implemented in
Regulation C § 1003.3(d), certain HMDA-covered
institutions may be eligible for partial exemptions
from some of the HMDA reporting requirements
and only certain covered loans and applications are
covered under partial exemptions. If a covered loan
or application is covered under a partial exemption,
the covered institution is not required to collect,
record, and report certain data points.
264 As with section 1071, collection of an
applicant’s ethnicity, race, and sex under HMDA is
an exception to the general prohibition on inquiring
into protected demographic information in existing
§ 1002.5(b).
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• Information about the features of
the loan, such as the loan type, pricing
information (including interest rate and
origination charges), loan term,
introductory rate period, and nonamortizing features.
• Certain unique identifiers, such as a
universal loan identifier, loan originator
identifier, and a legal entity identifier
for the financial institution.
Covered institutions are required to
submit their HMDA data by March 1
following the calendar year for which
data are collected. Covered institutions
with larger volumes of covered loans
and applications are required to submit
their HMDA data for each of the first
three quarters of the year in addition to
their annual submission.
Following the calendar year in which
HMDA data are collected, a covered
institution’s disclosure statement 265
and modified loan/application register
(LAR) become publicly available on the
FFIEC’s HMDA Platform.266 In addition,
aggregate reports for each Metropolitan
Statistical Area and Metropolitan
Division that show lending patterns by
property location, age of housing stock,
and income level, sex, ethnicity, and
race become publicly available.
HMDA data are the primary source of
information for regulators, researchers,
economists, industry, and advocates
analyzing the mortgage market both for
HMDA’s purposes and for general
market monitoring. HMDA data are used
by the Federal supervisory agencies to
support a variety of activities. For
example, Federal supervisory agencies
use HMDA data as part of their fair
lending 267 examination process, and
also use HMDA data in conducting
Community Reinvestment Act 268
performance evaluations. HMDA
disclosures provide the public with
265 A disclosure statement contains aggregated
data derived from loan-level data.
266 A HMDA LAR contains the record of
information required to be collected and the record
submitted annually or quarterly, as applicable. A
modified LAR is a covered institution’s LAR
modified by the Bureau, on its website, to protect
applicant and borrower privacy. The Bureau
interprets HMDA, as amended by the Dodd-Frank
Act, to call for the use of a balancing test to
determine whether and how HMDA data should be
modified prior to its disclosure to the public in
order to protect applicant and borrower privacy
while also fulfilling HMDA’s public disclosure
purposes. See 80 FR 66127, 66133–34 (Oct. 28,
2015). In December 2018, the Bureau issued final
policy guidance describing the modifications the
Bureau intends to apply to the loan-level HMDA
data that covered institutions report before the data
are disclosed publicly. See 84 FR 649 (Jan. 31,
2019).
267 See ECOA (15 U.S.C. 1691 through 1691f),
Regulation B, 12 CFR part 1002, and FHA, 42 U.S.C.
3605, 24 CFR part 100.
268 12 U.S.C. 2901 through 2908, and 12 CFR
parts 25, 195, 228, and 345.
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information on the home mortgage
lending activities of particular reporting
entities and on activity in their
communities. These disclosures are
used by local, State, and Federal
officials to evaluate housing trends and
issues and by community organizations
to monitor financial institution lending
patterns.
C. Summary of the Proposed Rule
The Bureau is proposing to add a new
subpart B to Regulation B to implement
the requirements of section 1071 and to
make conforming amendments to
existing Regulation B. The Bureau’s
proposal is summarized below, in the
order of the section-by-section analyses
in this part V that follow.
1. General Provisions (§§ 1002.5(a)(4),
1002.101, and 1002.102)
Changes to existing Regulation B
(§ 1002.5(a)(4)). The Bureau is
proposing to amend existing
§ 1002.5(a)(4) to expressly permit
voluntary collection and reporting of
information regarding the ethnicity,
race, and sex of applicants’ principal
owners, or whether the applicant is a
minority-owned business or a womenowned business, in certain
circumstances.
Scope, purpose, and authority
(§ 1002.101). The Bureau is proposing in
§ 1002.101 to set forth the authority,
purpose, and scope for proposed
subpart B. Among other things, this
proposed section would set forth section
1071’s two statutory purposes of
facilitating enforcement of fair lending
laws and enabling communities,
governmental entities, and creditors to
identify business and community
development needs and opportunities of
women-owned, minority-owned, and
small businesses.
Definitions (§ 1002.102). The Bureau
is proposing in § 1002.102 a number of
definitions for terms used in proposed
subpart B, which generally fall into
several categories. First, some proposed
definitions refer to terms defined
elsewhere in proposed subpart B—
specifically, terms of particular
importance including business, covered
application, covered credit transaction,
covered financial institution, financial
institution, and small business. Second,
some proposed definitions refer to terms
defined elsewhere in existing
Regulation B (i.e., business credit,
credit, and State) or other regulations
(i.e., the definition of dwelling and a
portion of the definition of affiliate
reference Regulation C and an SBA
regulation, respectively). Finally, the
remaining terms are defined in
proposed § 1002.102, including
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applicant, closed-end credit transaction,
minority individual, minority-owned
business, open-end credit transaction,
principal owner, small business lending
application register, women-owned
business, and a portion of the definition
of affiliate.
2. Coverage (§§ 1002.103 Through
1002.106)
Covered applications (§ 1002.103).
The Bureau is proposing § 1002.103 to
define what is, and is not, a covered
application under proposed subpart B;
this definition would trigger the data
collection and reporting requirements
under subpart B for covered financial
institutions. The Bureau is proposing to
define a covered application in
§ 1002.103(a) as an oral or written
request for a covered credit transaction
that is made in accordance with
procedures used by a financial
institution for the type of credit
requested. The Bureau is also proposing
that a covered application does not
include (1) reevaluation, extension, or
renewal requests on an existing business
credit account, unless the request seeks
additional credit amounts; and (2)
inquiries and prequalification requests.
Covered credit transactions
(§ 1002.104). The Bureau is proposing to
require that covered financial
institutions collect and report data for
all covered applications from small
businesses for transactions that meet the
definition of business credit under
existing Regulation B, with certain
exceptions. The Bureau is proposing
§ 1002.104(a) to define the term covered
credit transaction as an extension of
business credit that is not an excluded
transaction under proposed
§ 1002.104(b). Loans, lines of credit,
credit cards, and MCAs (including such
credit transactions for agricultural
purposes and those that are also covered
by HMDA‘‘ 269 (that is, HMDAreportable transactions)) would all fall
within the scope of this proposed rule.
The Bureau is proposing in
§ 1002.104(b) to exclude from the
requirements of proposed subpart B
trade credit, public utilities credit,
securities credit, and incidental credit.
Factoring, leases, consumer-designated
credit used for business purposes, and
credit secured by certain investment
properties would also not be covered
credit transactions.
Covered financial institutions
(§ 1002.105). The Bureau is proposing to
define in § 1002.105(a) the term
financial institution, consistent with the
definition in section 1071, as any
partnership, company, corporation,
269 12
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association (incorporated or
unincorporated), trust, estate,
cooperative organization, or other entity
that engages in any financial activity.
Under this proposed definition,
proposed subpart B’s requirements
would apply to a variety of entities that
engage in small business lending,
including depository institutions (i.e.,
banks, savings associations, and credit
unions), online lenders, platform
lenders, CDFIs, lenders involved in
equipment and vehicle financing
(captive financing companies and
independent financing companies),
commercial finance companies,
governmental lending entities, and
nonprofit nondepository lenders. The
Bureau is not proposing to cover motor
vehicle dealers.270 The Bureau is
proposing in § 1002.105(b) to define the
term covered financial institution as a
financial institution that originated at
least 25 covered credit transactions for
small businesses in each of the two
preceding calendar years. Only financial
institutions that meet this loan-volume
threshold would be required to collect
and report small business lending data
under proposed subpart B.
Small business definition
(§ 1002.106). The Bureau is proposing in
§ 1002.106 to adopt the SBA’s
definitions of ‘‘business’’ and ‘‘small
business’’ as set out in the Small
Business Act and SBA regulations. The
Bureau is also proposing that,
notwithstanding the small business size
standards established by SBA
regulations, for purposes of proposed
subpart B, a business is a small business
if and only if its gross annual revenue
is $5 million or less for its preceding
fiscal year. The Bureau is seeking SBA
approval for this alternate small
business size standard pursuant to the
Small Business Act.
3. Compiling, Maintaining, and
Reporting 1071 Data (§§ 1002.107
Through 1002.111)
Compilation of reportable data
(§ 1002.107). The Bureau is proposing in
§ 1002.107 to address several aspects of
collecting data on covered applications
from small businesses. The Bureau is
proposing in § 1002.107(a) to require
financial institutions to compile and
maintain the data points enumerated in
§ 1002.107(a)(1) through (21) regarding
covered applications from small
businesses. These data points would be
collected and reported in accordance
270 The Bureau is proposing that subpart B does
not apply to a person excluded from coverage by
section 1029 of the Consumer Financial Protection
Act of 2010, title X of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, Public Law
111–203, 124 Stat. 1376, 2004 (2010).
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with the proposed official commentary
and the Filing Instructions Guide that
the Bureau anticipates later providing
for the appropriate year. Certain of these
data points are or could be collected
from the applicant (or otherwise
determined based on information
provided or authorized by the
applicant); other data points are based
on information solely within the
financial institution’s control. Proposed
appendix E would provide a sample
data collection form for requesting from
applicants their minority- and womenowned business status and the race, sex,
and ethnicity of their principal owners.
Proposed appendices F and G provide
additional details and guidance
regarding collecting those data points.
The Bureau is proposing in
§ 1002.107(c)(1) that covered financial
institutions maintain procedures to
collect applicant-provided data at a time
and in a manner that is reasonably
designed to obtain a response. The
Bureau’s proposal also addresses what
financial institutions should do if,
despite having such procedures in
place, they are unable to obtain certain
data from an applicant. Pursuant to
proposed § 1002.107(b), financial
institutions would be permitted to rely
on statements made by an applicant
(whether in writing or orally) or
information provided by an applicant
when collecting and reporting 1071
data, although for most data points if the
financial institution verifies the
information provided it must report the
verified information. Proposed
§ 1002.107(c)(2) would also permit
financial institutions to reuse certain
previously collected data in certain
circumstances.
Firewall (§ 1002.108). The Bureau is
proposing § 1002.108 to implement the
requirement in section 1071 that certain
data collected be shielded from
underwriters and certain other persons;
the Bureau refers to this as the
‘‘firewall.’’ Pursuant to proposed
§ 1002.108(b), an employee or officer of
a financial institution or a financial
institution’s affiliate that is involved in
making any determination concerning
the application would be prohibited
from accessing an applicant’s responses
to inquiries that the financial institution
makes pursuant to section 1071
regarding whether the applicant is a
minority-owned or women-owned
business, and the ethnicity, race, and
sex of the applicant’s principal owners.
However, pursuant to proposed
§ 1002.108(c), this prohibition would
not apply to an employee or officer if
the financial institution determines that
it is not feasible to limit that employee’s
or officer’s access to an applicant’s
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responses to the financial institution’s
inquiries regarding the applicant’s
protected demographic information, and
the financial institution provides a
notice to the applicant regarding that
access. It would not be feasible to limit
access if the financial institution
determines that an employee or officer
involved in making any determination
concerning a covered application
should have access to one or more
applicants’ responses to inquiries
regarding the applicant’s protected
demographic information. The notice
must be provided to each applicant
whose information will be accessed or,
alternatively, the financial institution
could provide the notice to all
applicants whose information could be
accessed. The Bureau is proposing
sample language that a financial
institution could use in providing this
notice.
Reporting data to the Bureau
(§ 1002.109). The Bureau is proposing
§ 1002.109 to address several aspects of
financial institutions’ obligations to
report section 1071 data to the Bureau.
First, the Bureau is proposing in
§ 1002.109(a) that 1071 data be collected
on a calendar year basis and reported to
the Bureau on or before June 1 of the
following year. The Bureau also
addresses collection and reporting
requirements of subsidiaries of financial
institutions and collection and reporting
requirements of financial institutions
where multiple financial institutions are
involved in a transaction in proposed
§ 1002.109(a). Second, the Bureau lists
in proposed § 1002.109(b) the
information that financial institutions
would be required to provide about
themselves when reporting 1071 data to
the Bureau, including the financial
institution’s name, headquarters
address, contact person, Federal
prudential regulator, institutional
identifiers, and parent entity
information. Finally, the Bureau is
proposing § 1002.109(c) to address
technical instructions for the
submission of data to the Bureau,
including information about the Filing
Instructions Guide, which the Bureau
anticipates later providing for the
appropriate year.
Publication of 1071 data by the
Bureau (§ 1002.110). The Bureau is
proposing in § 1002.110 to address
several issues regarding the publication
of 1071 data. The Bureau is proposing
in § 1002.110(a) that it shall make
available to the public, on an annual
basis and on the Bureau’s website, the
data submitted to it by financial
institutions. The Bureau is proposing to
make these data available subject to
deletions or modifications made by the
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Bureau, at its discretion, if the Bureau
determines that such deletions or
modifications would advance a privacy
interest. To determine whether and how
the Bureau might use its discretion to
modify or delete data prior to
publication, the Bureau is proposing a
‘‘balancing test’’ that assesses the risks
and benefits of public disclosure. The
Bureau’s proposed approach to the
balancing test is discussed in detail in
part VI below. Proposed § 1002.110(b)
would state that the Bureau may, at its
discretion, compile and aggregate data
submitted by financial institutions and
may publish such compilations or
aggregations.
Proposed § 1002.110(c) would require
a covered financial institution to
publish on its website a statement that
its 1071 data, as modified by the
Bureau, are or will be available on the
Bureau’s website. Proposed
§ 1002.110(d) would set forth when a
covered financial institution shall make
this statement available and how long
the financial institution shall maintain
the statement on its website. These
requirements would satisfy financial
institutions’ statutory obligation to make
data available to the public upon
request.
Recordkeeping (§ 1002.111). The
Bureau is proposing § 1002.111 to
address several aspects of the
recordkeeping requirements for 1071
data. First, the Bureau is proposing
§ 1002.111(a) to require a covered
financial institution to retain evidence
of compliance with proposed subpart B,
which includes a copy of its small
business lending application register,
for at least three years after the register
is required to be submitted to the
Bureau pursuant to proposed
§ 1002.109. Second, the Bureau is
proposing § 1002.111(b) to require a
financial institution to maintain,
separately from the rest of an
application for credit and accompanying
information, an applicant’s responses to
a financial institution’s inquiries
regarding the applicant’s protected
demographic information. Finally, the
Bureau is proposing § 1002.111(c) to
require that, in compiling and
maintaining its small business lending
application register, a financial
institution not include any personally
identifiable information concerning any
individual who is, or is connected with,
an applicant.
4. Other Provisions (§§ 1002.112
Through 1002.114)
Enforcement (§ 1002.112). The Bureau
is proposing § 1002.112 to address
several issues related to the enforcement
of proposed subpart B. First, the Bureau
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is proposing § 1002.112(a) to state that
a violation of section 1071 or proposed
subpart B is subject to administrative
sanctions and civil liability as provided
in sections 704 and 706 of ECOA.
Second, the Bureau is proposing in
§ 1002.112(b) to provide that a bona fide
error in compiling, maintaining, or
reporting data with respect to a covered
application is an error that was
unintentional and occurred despite the
maintenance of procedures reasonably
adapted to avoid such an error, and that
such an error is presumed not to be a
violation of ECOA or proposed subpart
B if the number of such errors does not
exceed the thresholds set forth in
proposed appendix H. Third, the Bureau
is proposing in § 1002.112(c) to identify
four safe harbors under which certain
errors—specifically those regarding
census tract, NAICS code, small
business status, and application date—
would not constitute violations of ECOA
or Regulation B.
Severability (§ 1002.113). The Bureau
is proposing in § 1002.113 to provide
that the provisions of proposed subpart
B are separate and severable from one
another, and that if any provision is
stayed or determined to be invalid, it is
the Bureau’s intent that the remaining
provisions shall continue in effect.
Effective date, compliance date, and
special transitional rules (§ 1002.114).
The Bureau is proposing § 1002.114 to
address several issues related to the
Bureau’s eventual final rule to
implement section 1071. First, the
Bureau is proposing in § 1002.114(a)
that its final rule to implement section
1071 would become effective 90 days
after publication in the Federal
Register, but pursuant to proposed
§ 1002.114(b) compliance with the final
rule would not be required until
approximately 18 months after
publication in the Federal Register.
Second, the Bureau is proposing in
§ 1002.114(c) certain transitional
provisions that would permit covered
financial institutions to begin collecting
protected applicants’ demographic
information beginning 12 months prior
to the compliance date and would
permit financial institutions to use a
different time period to determine
whether they will be covered by the rule
as of the compliance date.
D. High-Level and General Comments
on the SBREFA Outline
During the SBREFA process, SERs
provided feedback on nearly all aspects
of the Bureau’s proposals under
consideration as set forth in the
SBREFA Outline. Other stakeholders
did likewise in their written feedback
on the SBREFA Outline. That feedback
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is discussed in the section-by-section
analyses of the proposed rule below.
SERs and other stakeholders also
provided feedback of a more general
nature on the Bureau’s section 1071
rulemaking. That feedback is
summarized here; the SBREFA Panel
Report provides a more complete
summary of the SBREFA process and
comments provided by SERs.271
Most SERs and stakeholders were
generally supportive of the statutory
purposes of section 1071.272 Several
SERs as well as a range of other
stakeholders—including community
groups, CDFIs, several community
banks, and a State consumer financial
protection agency—were supportive of
the Bureau’s statutory mandate to
promulgate a section 1071 rule. Many
stakeholders, including community
groups, several CDFI banks, and a small
community bank, expressly supported
broad coverage of both financial
institutions and products in the 1071
rulemaking. One community bank
stakeholder stated that larger financial
institutions should not be excluded;
another community bank asserted that a
1071 rule should cover credit unions,
governmental entities, commercial
finance firms, and alternative online
lenders.
Several trade association stakeholders
supported a more limited approach to
implementation of a 1071 rulemaking. A
number of trade associations requested
exemptions for the specific types of
financial institutions they represented,
including credit unions, vendor finance
and dealer-related institutions, and
community banks. One trade association
argued that Federal credit union laws
limited the extent to which credit
unions could seek to expand their small
business lending operations. Two trade
association stakeholders suggested that
the Bureau adopt a phased or staged
approach to implementation, starting
only with certain products and
institutions. One trade association
suggested that the Bureau adopt a high
size-based exemption for institutions.
A number of SERs and stakeholders,
including several CDFIs, a number of
community groups and a community
bank, expressed the view that data
transparency in the small business
lending market is critical to advance the
goals of fair lending enforcement and
access to credit for small businesses,
especially those that are minorityowned and women-owned. One SER
and several stakeholders, including two
community groups and one small
271 See
generally SBREFA Panel Report.
SER feedback discussed herein can be
found in the SBREFA Panel Report at 17–18.
business trade association, stated that
the limited data currently available
show that the lending practices of many
financial institutions exclude womenowned and minority-owned businesses,
exacerbating a racial wealth gap, and
that section 1071 has the opportunity to
address such lending disparities, which
are costly to businesses, lenders, and the
economy as a whole. The SER also said
that data transparency and fairness
should be an advantage to smaller, local
financial institutions, allowing them to
better distinguish their value
proposition compared to larger financial
institutions or predatory lenders.273 A
CDFI stakeholder and a community
group stakeholder emphasized that 1071
data would be an important supplement
to CRA and HMDA data to determine
community development needs.
Another community group stakeholder
and a small business trade association
emphasized the importance of
supporting access to credit for womenowned and minority-owned small
businesses. One community group
argued that the availability of 1071 data
would spur innovation in the small
business lending market.
Several SERs and several community
groups and CDFI stakeholders stated
that the completion of a 1071
rulemaking was welcome, given the
many years stakeholders have been
waiting for these data. Several SERs and
other stakeholders, including
community groups and CDFIs,
supported a 1071 rulemaking as
necessary to better understand the small
business lending market, as the COVID–
19 pandemic highlighted how the most
vulnerable small businesses can be
disproportionately impacted by
economic shocks. Several community
groups and a small business trade
association stakeholders argued that the
response to the COVID–19 pandemic,
including the PPP program, exacerbated
existing gender and racial disparities,
and did not provide access to credit to
excluded lower- and middle-income
communities and women-owned or
minority-owned small businesses. Two
community bank trade associations
noted the outsized importance of
community banks and CDFIs in
providing PPP loans to their local
communities, including to minorityowned small businesses, and warned
that an unintended consequence of a
1071 rulemaking may be to impair this
existing lending. One trade association
suggested that the Bureau delay issuing
any proposal until the economic forces
driven by the COVID–19 pandemic have
subsided and recovery is evident.
272 The
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273 Id.
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Other stakeholders expressed
concerns about the uses of data coming
from a 1071 rulemaking. One trade
association suggested that the collection
of data on race and gender would create
the perception among customers that
these factors played a role in credit
decisions. One community bank
stakeholder asserted that 1071 data
should not be used in regulatory
oversight or examinations of financial
institutions, but rather to better
understand the small lending market
and help regulators support lending.
Several trade associations expressed
concerns that misleading conclusions
could be drawn from data from a 1071
rulemaking, and that small business
lending was complex and varied.
SERs nearly uniformly suggested that
the Bureau aim to draft simple
regulations, and choose simpler options
if possible, noting that more complex
rules tend to make compliance more
difficult and drive up compliance costs,
which could potentially increase prices
or reduce small businesses’ access to
credit. A number of stakeholders—
including community banks,
community groups, a small business
trade association, and bank and credit
union trade associations—similarly
supported simple and clear regulations
and requested that the Bureau avoid
complex or ambiguous rules, which
they asserted would make compliance
more costly. One CDFI bank stakeholder
asserted that existing ambiguities and
conflicts in the law have caused
financial institutions to avoid collecting
the very data they would need to
identify lending discrimination, and
that mandating data collection and
clarifying rules would be critical to
addressing these concerns.
Many SERs and a community bank
stakeholder requested clear written
guidance and implementation support
materials from the Bureau, such as small
entity compliance guides, a ‘‘help desk’’
for questions, and sample disclosure
language (translated into languages
other than English for individuals with
limited English proficiency). Several
SERs also discussed the need for
applicant-facing materials explaining
what the section 1071 regulation is and
why the financial institution must
collect data. Relatedly, one SER
requested that the Bureau educate and
train currently unregulated financial
institutions to help them implement the
rule.
A number of SERs (representing
financial institutions that operate
primarily online as well as financial
institutions that interact with small
business applicants in-person) indicated
their belief that financial institutions
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with extensive online lending
operations would be able to comply
with an eventual 1071 rule more easily,
more quickly, and at lower cost due to
their greater degree of automation than
financial institutions with primarily inperson and/or paper-based operations.
SERs and several stakeholders
(including a community bank trade
association, a community group, and a
community bank) urged the Bureau to
align with other Federal data reporting
regimes—such as HMDA, CRA, CDFI
Fund, or SBA—if possible, and thought
that financial institutions with
experience complying with these other
Federal data reporting regimes would
have an easier time complying with an
eventual 1071 rule than would financial
institutions, including some SERs, with
no such experience. One trade
association suggested that any
comparisons with HMDA were
misplaced, as the small business
lending market is more varied and
complex than the market for residential
mortgage lending.
Several SERs stated that a 1071 rule
should take into account the different
types of financial institutions operating
in the small business lending market.
One SER suggested that the Bureau had
not focused enough attention on the
impact of a 1071 rule on nondepository
institutions, which they said play a vital
role in providing essential credit to
small businesses in the United States,
many of which are women-owned and
minority-owned. Another SER and two
trade associations asserted that the data
collected from credit unions, which are
bound by their charters (pursuant to
Federal and State laws and regulations)
to serve a specific field of membership,
would likely be incomparable with data
from other financial institutions that are
permitted to serve any kind of customer.
Many SERs supported broad coverage
of both financial institutions and
products, as reflected in section 1071’s
language covering any application to a
financial institution for credit for a
women-owned, minority-owned, or
small business.
The SBREFA Panel recommended
that the Bureau issue implementation
and guidance materials (including a
small entity compliance guide as
required by the RFA, as well as other
materials), specifically to assist small
financial institutions in complying with
the eventual 1071 rule.274 The Panel
also recommended that the Bureau
consider providing sample disclosure
language related to the collection of
ethnicity, race, and sex of applicants.275
274 Id.
at 43.
275 Id.
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The Bureau agrees with the general
comments made in favor of keeping the
scope of the proposed rule broad. In
general, the Bureau believes that broad
coverage of institutions and products as
requested by a number of SERs and
stakeholders would result in the
collection of more data and would be
consistent with the statutory purposes
of section 1071. The Bureau does not
believe that the request made by several
trade association stakeholders to take a
more limited approach to scope—
including the various limitations on the
coverage of certain types of financial
institutions and products—would be
consistent with the statutory purposes
of section 1071. The Bureau addresses
these issues directly in the section-bysection analyses of proposed
§§ 1002.104 and 1002.105 below.
The Bureau agrees with the SERs and
stakeholders that expressed the view
that data transparency in the small
business lending market is critical to
advancing the statutory purposes of
section 1071. The Bureau believes that
the limited data that do exist, cited by
one SER and several stakeholders,
appear to support the existence of
disparities in the small business lending
markets, as identified in part II above.
The Bureau agrees—as do other Federal
regulators that the Bureau has consulted
in developing this proposed rule—that
1071 data would be an important
supplementation to CRA and HMDA
data in helping a variety of parties
determine and address business and
community development needs. The
Bureau agrees with the SERs and
stakeholders that identified specific
ways that the publication of 1071 data
would advance this statutory purpose in
helping the public identify business
needs, including, as one SER suggested,
creating data that would be useful to
help smaller, local financial institutions
distinguish their value proposition
compared to other lenders, and could be
used to spur innovation in the small
business lending market.
Regarding the support of certain SERs
and other stakeholders welcoming the
completion of a 1071 rulemaking, the
Bureau’s views on this are best
expressed in the section-by-section
analyses of proposed §§ 1002.113 and
1002.114 concerning effective date and
compliance date. Regarding the data
cited by SERs and other stakeholders
concerning lending disparities in the
PPP program during the COVID–19
pandemic, the Bureau believes that the
availability of data on PPP lending
further supports the importance of
collecting and publishing 1071 data; it
was only the existence of PPP lending
data, despite its limitations, that
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enabled these stakeholders to make
arguments regarding the state of fair
lending and business and community
development under PPP.
The Bureau appreciates the concerns
expressed by some stakeholders
concerning the uses of 1071 data. The
Bureau believes that the firewall
provision of proposed § 1002.108,
including the proposed notice
provision, are intended to address the
concern by one trade association
stakeholder that the collection of
ethnicity, race, and sex data may create
the perception among customers that
these factors play a role in credit
decisions. The Bureau disagrees with
the stakeholder that asserted that 1071
data should not be used in regulatory
oversight or examinations. Such use is
contemplated by ECOA section
704B(a)(2), which provides that the data
are intended to facilitate the
enforcement of fair lending laws. The
Bureau does agree with the same
stakeholder, however, that 1071 data
should be used to help regulators better
understand the small business lending
markets and better support such
lending. The Bureau does not disagree
in the abstract with the assertions made
by several trade associations that
misleading conclusions could be drawn
from 1071 data; the Bureau notes that
these stakeholders did not cite any
examples and that any source of data
may be misinterpreted absent robust
procedures and methodologies. The
Bureau believes, given its experience
with HMDA data, that such concerns are
misplaced—overall, HMDA data have
helped shed light on previously hidden
issues and proven highly effective in
accomplishing its congressionally
mandated purposes.
The Bureau has attempted as much as
possible to propose rules that are both
simple and clear, as SERs and other
stakeholders suggested. For instance,
the Bureau is proposing a simple
definition of small business in proposed
§ 1002.106 below. While the Bureau has
endeavored to avoid unnecessary
ambiguity and complexity in its
proposed rule, complexity in the
proposed rule reflects the inherent
complexity of the subject, including the
variations and diversity in the small
business lending market as well as the
complications of collecting data to
conduct fair lending analyses and
identify business and community
development needs.
Regarding the request for clear written
guidance and implementation support
materials, the Bureau intends to develop
various compliance materials, as it does
with most major rules. These materials
will include a small entity compliance
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guide that will provide regulatory
implementation guidance, and a Filing
Instructions Guide that will provide
technical instructions for the
submission of 1071 data to the Bureau.
With regard to the comment that the
Bureau should provide applicant-facing
materials, the Bureau proposes in
appendix E a sample data collection
form that can be used to collect from
applicants their minority-owned
business status, women-owned business
status, and the ethnicity, race, and sex
of their principal owners, along with the
related required disclosures.
The Bureau generally agrees with the
observation of a number SERs that
financial institutions with extensive
online lending operations would likely
find compliance with a section 1071
rule easier than those with primarily inperson operations. The Bureau sets out
its preliminary assessment of the costs
of the rule on financial institutions in
parts VII and VIII below.
The Bureau has attempted, whenever
possible, to align or conform its
proposed rule with other Federal data
reporting regimes, as several SERs and
other stakeholders requested. The
Bureau references and, where possible,
aligns the proposed rule with specific
Federal data reporting regimes, as
explained in the section-by-section
analyses below. The Bureau appreciates
the comments made by some SERs and
other stakeholders that there are
different types of financial institutions
in the small business lending market
and that the differences between
institutional types may complicate data
analysis. The Bureau notes, however,
that simply excluding certain types of
institutions from 1071 reporting
requirements would be inconsistent
with the statutory purposes of section
1071, and that it would be more
congruent with section 1071 instead to
collect information on financial
institution type as set out in proposed
§ 1002.109(b)(9), for the reasons set out
below.
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E. Cross-Cutting Interpretive Issues
1. The Bureau’s Approach to Non-Small
Women-Owned and Minority-Owned
Businesses in This Rulemaking
The Bureau is proposing to require
financial institutions to collect and
report data regarding applications for
credit for small businesses; the Bureau
is not, however, proposing to require
financial institutions to collect and
report data with respect to applicants
that are not small businesses. ECOA
section 704B(b) states that ‘‘in the case
of any application to a financial
institution for credit for [a] women-
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owned, minority-owned, or small
business,’’ the financial institution must
‘‘inquire whether the business is a
women-owned, minority-owned or
small business . . . .’’ For the reasons
set forth below, the Bureau is proposing
this approach as an interpretation of the
statute pursuant to its authority under
704B(g)(1), and, in the alternative,
pursuant to its authority under
704B(g)(2) to adopt exceptions to any
requirement of section 1071 as the
Bureau deems necessary or appropriate
to carry out the purposes of section 1071
and its implied de minimis authority.
The Bureau explained in the SBREFA
Outline that in light of the
comprehensive coverage of womenowned and minority-owned businesses
within the scope of small businesses
(discussed in more detail below), it was
considering proposing that the data
collection and reporting requirements of
its eventual 1071 rule would apply to
any application to a financial institution
for credit only for small businesses as
defined under the eventual 1071 rule.276
The Bureau explained that it was
concerned that a requirement to collect
and report 1071 data on applications for
women-owned and minority-owned
businesses that are not small businesses
could affect all aspects of financial
institutions’ commercial lending
operations while resulting in limited
information beyond what would already
be collected and reported about womenowned and minority-owned small
businesses. In addition, financing for
large businesses can be much more
varied and complex than are the
products used for small business
lending. Thus, under the approach the
Bureau was considering proposing,
financial institutions would collect and
report lending data for all applicants
that satisfy the Bureau’s definition of a
small business, including identifying
women-owned and minority-owned
businesses within that pool, but
financial institutions would not be
required to collect and report 1071 data
for women-owned and minority-owned
businesses that are not ‘‘small.’’
In the SBREFA Outline, the Bureau
noted that most existing businesses,
including almost all women-owned and
minority-owned businesses, are ‘‘small
business concerns’’ as that term is
currently defined by the SBA.277
Therefore, the Bureau posited that
coverage of small businesses by this rule
would necessarily include nearly all
women-owned and minority-owned
businesses. Based on the 2018 Annual
Business Survey by the U.S. Census, the
Bureau estimated that 5.72 million
employer firms—99.6 percent of all
employer firms—are small (defined for
the purposes of the survey as having
fewer than 500 employees). That same
definition covers one million minorityowned employer firms (99.9 percent of
all minority-owned firms) and 1.1
million women-owned employer firms
(99.9 percent of all women-owned
firms).278 The Bureau estimated that,
among non-small businesses, which are
only 0.4 percent of all firms nationally,
10 percent of this small fraction are
minority-owned firms and 13 percent
are women-owned.279
A number of SERs expressed a belief
that covering just small business
applications would supply adequate or
nearly complete lending data for
purposes of section 1071.280 However,
other SERs stated that the Bureau’s
regulation should collect data regarding
applications for credit for non-small
minority-owned and women-owned
businesses as well. One SER relayed
first-hand observations in their
community that larger minority-owned
and women-owned businesses were
excluded from full access to credit, and
expressed an interest in the Bureau
capturing and reporting that
information. One SER observed that
smaller financial institutions, or those
that generally focus on small business
lending, might find that collecting and
reporting data for all business loan
applications would be simpler than
determining which applications would
be within the scope of the eventual 1071
rule.
The SBREFA Panel recommended
that the Bureau continue to explore
whether the data collection and
reporting requirements in its 1071 rule
should be limited to any application to
a financial institution for credit only for
small businesses (as defined by the
Bureau’s regulation) or whether it
should also extend to applications for
women-owned and minority-owned
businesses that are not small.281 The
Panel also recommended that the
Bureau seek comment on the costs to
small financial institutions of collecting
and reporting 1071 data regarding
applications for credit for womenowned and minority-owned businesses
276 SBREFA
278 SBREFA
277 See
279 Id.
Outline at 9.
the section-by-section analysis of
proposed § 1002.106 below for additional
discussion regarding the definition of ‘‘small
business’’ for purposes of this rulemaking.
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Outline at 9.
280 The SER feedback discussed in herein can be
found in the SBREFA Panel Report at 18.
281 Id. at 43.
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that are not small (as defined by the
Bureau’s regulation).282
Feedback from other stakeholders
generally supported the Bureau’s
approach to limiting 1071 data
collection to small businesses, including
identifying women- and minorityowned businesses within that pool. A
number of commenters expressed
support for the Bureau’s approach under
consideration, arguing that requiring
data collection for non-small womenand minority-owned businesses would
increase compliance burden without
significantly contributing to 1071’s
purposes. Some responses also stated
that this approach was consistent with
legislative intent, positing that Congress
did not intend for financial institutions
to collect 1071 data on large companies.
A community group noted that its
support for the Bureau’s approach was
conditional on the Bureau adopting a
broad definition of small business, thus
limiting the likelihood of missing
significant women- and minority-owned
business application data. A joint
comment from a number of community
groups urged the Bureau to monitor the
market and to reevaluate this approach
if later publications of the Annual
Business Survey show that the number
of non-small women- and minorityowned businesses exceed current
estimates. Another joint comment from
community groups did not support the
Bureau’s approach under consideration,
urging the Bureau to consider instead
covering non-small women- and
minority-owned businesses in the data
collection and arguing that it might be
easier for financial institutions to collect
data for all applicants, as opposed to
developing systems for screening out
applicants that are not covered. Two
banks suggested that 1071 data
collection should extend to all
businesses; one was concerned about
fair lending disparities, while the other
remarked that large business applicants
should not be relieved of the burden of
having their data collected under 1071.
The Bureau believes that section 1071
is ambiguous with respect to its
coverage of applications for credit for
non-small women- or minority-owned
businesses, and the Bureau therefore
proposes to interpret this ambiguity
pursuant to ECOA section 704B(g)(1).
The Bureau acknowledges that the plain
language of 704B(b) could be read to
require financial institutions to collect
information from all women-owned and
minority-owned businesses, including
those that are not small businesses. But
based on a close consideration of the
text, structure, and purpose of the
282 Id.
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statute, and the interactions between
section 1071 and other provisions of
ECOA and Regulation B, the Bureau
believes that the statute’s coverage of,
and Congress’s intent with respect to,
data regarding non-small businesses is
ambiguous.
The Bureau interprets ECOA section
704B(b) and (b)(1) to require that
financial institutions first determine
whether an applicant is a small business
within the scope of the rule’s data
collection before making the required
inquiries that would otherwise be
prohibited by existing Regulation B.
There is a general prohibition in
existing Regulation B (in § 1002.5(b))
which states that a ‘‘creditor shall not
inquire about the race, color, religion,
national origin, or sex of an applicant or
any other person in connection with a
credit transaction, except’’ if expressly
permitted to do so by law or regulation.
In the introductory language to ECOA
section 704B(b), Congress instructed
that the 1071 data collection regime
applies only ‘‘in the case of any
application to a financial institution for
credit for women-owned, minorityowned, or small business’’ (emphasis
added). The Bureau believes that ‘‘in the
case of’’ indicates Congress’s intent to
limit application of section 1071 to
these types of businesses, rather than
requiring financial institutions to make
1071-related inquiries of all business
applicants for credit.283 The next
paragraph (704B(b)(1)) does not use the
conditional phrase ‘‘in the case of’’ used
in 704B(b); rather, it instructs a financial
institution to ‘‘inquire.’’ The Bureau
believes that the instruction to
‘‘inquire’’ in 704B(b)(1) is intended to
provide the necessary exception to
Regulation B’s general prohibition
against ‘‘inquir[ing]’’ as to protected
demographic information in connection
with a credit transaction.284 Indeed,
absent section 1071’s lifting of the
prohibition, generally, a financial
institution could not determine, or even
283 Merriam-Webster defines ‘‘case’’ as meaning
‘‘a set of circumstances or conditions,’’ ‘‘a situation
requiring investigation or action (as by the police),’’
or ‘‘the object of investigation or consideration.’’
284 As discussed in greater detail in the next
section, the fact that the language of ECOA section
704B(b)(1) is designed to expressly permit inquiry
into protected demographic information, which
would otherwise be prohibited by existing
§ 1002.5(b), is also evidenced by the statute’s three
provisions creating special protections for
responses to the inquiry: 704B(b)(2) requires that
responses to protected inquiries remain separate
from the application and accompanying
information; 704B(c) requires that applicants have
a right to refuse to answer the protected inquiry;
and 704B(d) requires that certain underwriters or
other employees involved in making determinations
on an application not have access to the responses
to protected inquiries.
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ask about, an applicant’s women- or
minority-owned status, because doing
so would necessarily constitute
‘‘inquir[ing] about the race, color,
religion, national origin, or sex of an
applicant’’ in violation of existing
§ 1002.5(b). The Bureau believes that
Congress likely intended to ensure that
financial institutions could determine
whether an applicant is covered by the
1071 data collection without risking a
violation of other provisions of ECOA
and Regulation B.
However, unlike with women- and
minority-owned business status, there is
no legal impediment to a financial
institution’s determining whether an
applicant is a small business, and
financial institutions can make that
determination as a threshold matter
without risking running afoul of ECOA
and Regulation B. Therefore, the Bureau
believes that the scope of the
introductory ‘‘in the case of’’ language
in ECOA section 704(b) is ambiguous as
to coverage of non-small women- and
minority-owned businesses. To resolve
this ambiguity, the Bureau has applied
its expertise to interpreting the language
and structure of 1071 within the context
of the general prohibition on inquiring
into protected demographic information
in existing § 1002.5(b), and concludes
that ECOA section 704B(b)(1) is best
read as only referring to questions about
applicants’ protected demographic
information (i.e., women- and minorityowned business status as well as the
race, sex, and ethnicity of the principal
owners of the business). The Bureau
believes 704B(b)’s more general ‘‘in the
case of’’ language should be understood
to indicate the conditions under which
1071 data collection should take place,
and requires financial institutions to
make a threshold determination that an
applicant is a small business before
proceeding with an inquiry into the
applicant’s protected demographic
information.
The Bureau also notes that the
collection of data on applications for
non-small women- or minority-owned
businesses would not carry out either of
section 1071’s stated purposes because
the data would be of only limited
usefulness for conducting the relevant
analyses of non-small businesses. Such
analyses would necessitate comparing
data regarding non-small women-owned
and minority-owned business
applicants to data regarding non-small
non-women-owned and non-minorityowned business applicants, in order to
control for lending outcomes that result
from differences in applicant size. But
section 1071 does not require or
otherwise address the collection of data
for non-small business applicants that
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are not women- or minority-owned.
Therefore, the resulting data set will
lack a control group, arguably the most
meaningful comparator for any data on
non-small women- or minority-owned
businesses. It is unlikely that Congress
intended, and the statute is reasonably
read not to require, the collection of
data that would be of limited utility.285
Finally, the Bureau notes that the title
of section 1071 is ‘‘Small Business Data
Collection,’’ and 1071 amends ECOA to
add a new section titled ‘‘Small
Business Loan Data Collection.’’ In the
presence of ambiguity, these titles
provide some additional evidence that
Congress did not intend the statute to
authorize the collection of data on
businesses that are not small.286
For these reasons, the Bureau
proposes to interpret ECOA section
704B(b) to cover the collection only of
data with respect to small businesses,
including those that are women- and
minority-owned. Likewise, as discussed
immediately below in E.2 of this
Overview to part V, the Bureau is
proposing to clarify that the 704B(b)(1)
inquiry, when applicable, pertains to an
applicant’s minority-owned business
status and women-owned business
status as well as the race, sex, and
ethnicity of its principal owners. For the
same reasons, the Bureau believes that
not requiring the collection of data with
respect to applications for non-small
businesses would be necessary or
appropriate to carry out the purposes of
section 1071; therefore, in the
alternative, the Bureau proposes to
exercise its exception authority in
704B(g)(2) to effect this outcome.
Finally, because the Bureau believes
that the collection of data on non-small
women- and minority-owned businesses
would ‘‘yield a gain of trivial or no
value,’’ the Bureau proposes, in the
alternative, to exercise its implied de
minimis authority to create this
exception.287
The Bureau seeks comment on its
proposed approach to limiting the scope
of data collection pursuant to subpart B
285 See, e.g., Pub. Citizen v. U.S. Dep’t of Just., 491
U.S. 440, 454 (1989) (‘‘Where the literal reading of
a statutory term would ‘compel an odd result,’
Green v. Bock Laundry Machine Co., 490 U.S. 504,
509 (1989), we must search for other evidence of
congressional intent to lend the term its proper
scope.’’).
286 Almendarez-Torres v. United States, 523 U.S.
224, 234 (1998) (‘‘ ‘[T]he title of a statute and the
heading of a section’ are ‘tools available for the
resolution of a doubt’ about the meaning of a
statute.’’) (quoting Bhd. of R.R. Trainmen v. Balt. &
Ohio R.R., 331 U.S. 519, 529 (1947)).
287 Waterkeeper All. v. EPA, 853 F.3d 527, 530
(D.C. Cir. 2017) (quoting Pub. Citizen v. FTC, 869
F.2d 1541, 1556 (D.C. Cir. 1989)); see Alabama
Power Co. v. Costle, 636 F.2d 323, 360–61 (D.C. Cir.
1979).
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to covered applications for small
businesses, but not women- or minorityowned businesses that are not small. As
recommended by the SBREFA Panel,
the Bureau also seeks comment on the
costs to small financial institutions of
collecting and reporting 1071 data
regarding applications for credit for
women-owned and minority-owned
businesses that are not small businesses
as defined in proposed § 1002.106(b).
See the section-by-section analysis of
proposed § 1002.106(b) below, where
the Bureau is seeking comment on the
proposed definition of a small business.
2. The Meaning of ‘‘information
requested pursuant to subsection (b)’’
Four different provisions of section
1071 refer to or rely on ‘‘information
requested pursuant to subsection (b)’’ or
similar language. First, ECOA section
704B(b)(2) provides that financial
institutions must ‘‘maintain a record of
the responses to such inquiry’’ and keep
those records separate from the
application and information that
accompanies it. Second, 704B(c) states
that applicants for credit ‘‘may refuse to
provide any information requested
pursuant to subsection (b).’’ Third,
704B(d) requires financial institutions to
limit the access of certain employees to
‘‘information provided by the applicant
pursuant to a request under subsection
(b),’’ with certain exceptions. Fourth,
704B(e) instructs financial institutions
that ‘‘information provided by any loan
applicant pursuant to a request under
subsection (b) . . . shall be itemized in
order to clearly and conspicuously
disclose’’ data including the loan type
and purpose, amount of credit applied
for and approved, and gross annual
revenue.
In light of these four disparate
provisions, the Bureau believes that
section 1071 is ambiguous with respect
to the meaning of ‘‘any information
provided by the applicant pursuant to a
request under subsection (b).’’ 288 On the
one hand, ECOA section 704B(b)(1)
directs financial institutions to inquire
whether a business is ‘‘a women-owned,
minority-owned, or small business,’’ so
the phrase could be interpreted as
referring only to those three data points.
Section 704B(e), however, indicates that
the scope of 704B(b) could be much
broader; it suggests that all of the
information that financial institutions
are required to compile and maintain—
not simply an applicant’s status as a
women-owned, minority-owned, or
small business—constitutes information
288 The Bureau does not believe that the minor
linguistic variations in these four provisions
themselves have significance.
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provided by an applicant ‘‘pursuant to
a request under subsection (b).’’ But as
noted above, information deemed
provided pursuant to subsection (b) is
subject to the notable protections of
separate recordkeeping under
704B(b)(2), a right to refuse under
704B(c), and the firewall under 704B(d).
Applying these special protections to
many of the data points in 704B(e), such
as gross annual revenue or amount
applied for, would be extremely
difficult to implement, because this
information is critical to financial
institutions’ ordinary operations in
making credit decisions. Additionally,
704B(e) describes as ‘‘provided by any
loan applicant’’ under 704B(b) data
points that plainly must come from the
financial institution itself, such as
application number and action taken,
further suggesting that Congress viewed
this term as encompassing more
information than lies within the four
corners of 704B(b)(1). Finally, as noted
above, the circular structure of 704B(b)
complicates the question of what
constitutes information provided
‘‘pursuant to a request under subsection
(b).’’ Read together, the introductory
language in 704B(b) and (b)(1) direct
financial institutions, ‘‘in the case of’’ a
credit application ‘‘for [1] womenowned, [2] minority-owned, or [3] small
business,’’ to ‘‘inquire whether the
business is a [1] women-owned, [2]
minority-owned, or [3] small business.’’
The Bureau believes that this circularity
further demonstrates the ambiguity of
the phrase ‘‘pursuant to a request under
subsection (b).’’
The Bureau believes that it is
reasonable to resolve these ambiguities
by giving different meanings to the
phrase ‘‘any information provided by
the applicant pursuant to a request
under subsection (b)’’ (or similar) with
respect to ECOA section 704B(e) as
opposed to 704B(b)(2), (c), and (d).289
With respect to 704B(e), the Bureau
interprets the phrase to refer to all the
data points now articulated in proposed
§ 1002.107(a). Section 704B(e) is the
source of financial institutions’
obligation to ‘‘compile and maintain’’
data that they must then submit to the
289 While there is a presumption that a phrase
appearing in multiple parts of a statute has the same
meaning in each, ‘‘this is no more than a
presumption. It can be rebutted by evidence that
Congress intended the words to be interpreted
differently in each section, or to leave a gap for the
agency to fill.’’ Catskill Mountains Chapter of Trout
Unlimited, Inc. v. EPA, 846 F.3d 492, 532 (2d Cir.
2017) (citing Env’t Def. v. Duke Energy Corp., 549
U.S. 561, 575 (2007)). Here, the Bureau believes
Congress indicated such an intention by using the
same phrase in the substantially different contexts
of providing special protections for sensitive
demographic information on the one hand and
‘‘itemiz[ing]’’ all collected data on the other.
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Bureau, so it would be reasonable to
interpret this paragraph as referring to
the complete data collection Congress
devised in enacting section 1071.
But with respect to the three statutory
provisions creating special protections
for certain information—the firewall in
ECOA section 704B(d), separate
recordkeeping in 704B(b)(2), and the
right to refuse in 704B(c)—the Bureau
interprets the phrase to refer to the data
points in proposed § 1002.107(a)(18)
(women-owned business status), (a)(19)
(minority-owned business status), and
(a)(20) (ethnicity, race, and sex of
principal owners).290 Each of these data
points requests sensitive demographic
information that has no bearing on the
creditworthiness of the applicant, about
which existing § 1002.5(b) would
generally prohibit the financial
institution from inquiring absent section
1071’s mandate to collect and report
that information, and with respect to
which applicants are protected from
discrimination. The Bureau accordingly
believes that it would be reasonable to
apply section 1071’s special-protection
provisions to apply to this information,
regardless of whether the statutory
authority to collect it originates in
704B(b)(1) (women-owned and
minority-owned business status) or
704B(e)(2)(G) (race, sex, and ethnicity of
principal owners). The Bureau similarly
believes that it would have been
unreasonable for Congress to have
intended that these special protections
would apply to any of the other data
points now proposed in § 1002.107(a),
which the financial institution is
permitted to request regardless of
coverage under section 1071 which are
not the subject of Federal
antidiscrimination law, and many of
which financial institutions currently
use for underwriting purposes.
The Bureau implements these
interpretations of ‘‘information
requested pursuant to subsection (b)’’ in
several different section-by-section
discussions. With respect to ECOA
section 704B(e), the Bureau discusses its
interpretation of the phrase in the
section-by-section analysis of proposed
§ 1002.107(a). The Bureau’s
interpretation of 704B(d)’s firewall
requirement is addressed at greater
length in the section-by-section analysis
of proposed § 1002.108, and the
Bureau’s interpretation of the separate
recordkeeping requirement in
704B(b)(2) is addressed in the sectionby-section analysis of proposed
§ 1002.111(b). The right to refuse in
290 The Bureau’s interpretations with respect to a
separate data point for small business status are
discussed in the next section.
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704B(c) is discussed in the section-bysection analyses of the data points that
the Bureau proposes to be subject to the
right to refuse: Proposed
§ 1002.107(a)(18) (women-owned
business status), (19) (minority-owned
business status), and (20) (ethnicity,
race, and sex of principal owners).
3. No Collection of Small Business
Status as a Data Point
The Bureau notes that neither of its
interpretations of ‘‘information
requested pursuant to subsection (b)’’
reference a specific data point for an
applicant’s status as a small business,
nor is the Bureau otherwise including in
proposed § 1002.107(a) that financial
institutions collect, maintain, or submit
a data point whose sole function is to
state whether the applicant is or is not
a small business.
At SBREFA, the Bureau conveyed that
it was considering proposing small
business status as a separate data point.
The Bureau also stated that it was
considering not proposing to extend the
right to refuse or firewall to a financial
institution’s specific inquiry regarding
small business status; 291 the Bureau did
not address in the SBREFA Outline
whether small business status would be
subject to the separate recordkeeping
requirement. In lieu of further details
about the potential data point on small
business status, the Bureau noted that it
was considering proposing that
collection and reporting of whether an
applicant for credit is a small business
be based on applicant-reported
information, but that the precise nature
of the data point would depend on the
ultimate definition of small business.
As discussed below in the section-bysection analysis of proposed
§ 1002.106(b), the Bureau is now
proposing a definition of small business
that largely adopts the SBREFA
Outline’s First Alternative Approach
with a threshold of $5 million. After
considering the implications of this
approach, the Bureau now believes that
it would render redundant any
requirement that financial institutions
also collect a standalone data point
whose sole purpose is to state whether
an applicant is a small business,
because the gross annual revenue data
point wholly encompasses whether an
applicant is a small business. Indeed,
under the proposed definition of small
business, when a financial institution
asks an applicant its gross annual
revenue, that question is functionally
identical to asking, ‘‘are you a small
business?’’ The Bureau believes that it
would be a reasonable interpretation of
291 SBREFA
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56387
ECOA section 704B(b)’s query as to
small business status for that question to
take the form of, ‘‘what is your gross
annual revenue?’’ Furthermore, as
discussed above with respect to the
Bureau’s approach to non-small womenand minority-owned businesses, the
Bureau is interpreting financial
institutions’ data collection obligations
as attaching only in the case of
applications from small businesses; if a
financial institution determines that an
applicant is not a small business, none
of the obligations under this rule would
apply. As such, a standalone data point
that serves only to designate whether a
business qualifies as small for purposes
of the rule would be redundant with the
mere fact that the 1071 data collection
occurs at all, as well as with the
collection of gross annual revenue.
The Bureau acknowledges that the
plain language of ECOA section 704B(b)
could be read to require financial
institutions to ask applicants subject to
the data collection the precise question,
‘‘are you a small business?’’ Upon
further analysis, however, the Bureau
believes that Congress’s intended
treatment of small business status as a
standalone data point is ambiguous. As
described in more detail above with
respect to the rulemaking’s coverage of
women- and minority-owned businesses
that are not small, 704B(b)’s
introductory language and 704B(b)(1)
appear to require financial institutions
to know the answer to whether an
applicant is women-owned, minorityowned, or small before they make their
inquiry; to resolve this ambiguity, the
Bureau interprets 704B(b)’s introductory
language and 704B(b)(1) to require that
financial institutions first
straightforwardly assess whether an
applicant is a small business before
proceeding to inquire into the
applicant’s protected demographic
information that would otherwise be
prohibited by existing § 1002.5(b).
In sum, pursuant to its authority
under ECOA section 704B(g)(1) to
prescribe such rules as may be
necessary to carry out, enforce, and
compile data pursuant to section 1071,
the Bureau interprets 704B(b) and (b)(1)
to obviate the need for financial
institutions to collect a standalone data
point whose sole purpose is to note an
applicant’s small business status. For
the same reasons, the Bureau believes
that not requiring the collection of a
separate data point on small business
status would be necessary or
appropriate to carry out the purposes of
section 1071; therefore, in the
alternative, the Bureau proposes to
exercise its exception authority in
704B(g)(2) to effect this outcome.
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Finally, because the Bureau believes
that the collection of a standalone data
point on small business status would
‘‘yield a gain of trivial or no value,’’ the
Bureau proposes, in the alternative, to
exercise its implied de minimis
authority to create this exception.292
In light of the above, the Bureau seeks
comment on whether a standalone data
point solely dedicated to small business
status might nonetheless be useful and,
if so, how it might be implemented.
F. Conforming Amendments to Existing
Regulation B
As discussed above, the Bureau is
proposing to implement its section 1071
rule in a new subpart B of Regulation B.
The content of existing Regulation B
would become subpart A of Regulation
B. This change would not affect the
current section numbering in Regulation
B. The Bureau believes it is appropriate
to make this rule a part of Regulation B,
as section 1071 is a part of ECOA.
Nonetheless, the Bureau seeks comment
on whether it should instead codify its
section 1071 rule as a free-standing
regulation with its own CFR part and, if
so, why.
As noted above and as discussed in
more detail below, the Bureau is
proposing amendments to amend
existing § 1002.5(a)(4) and associated
commentary to expressly permit
voluntary collection of minority-owned
business status, women-owned business
status, and the race, sex, and ethnicity
of applicants’ principal owners in
accordance with the requirements of
subpart B. In addition, the Bureau
anticipates revising certain references to
the entire regulation (which use the
terms ‘‘regulation’’ or ‘‘part’’) in existing
Regulation B to instead refer specifically
to subpart A. The Bureau does not
intend to make any substantive changes
with these revisions, but rather intends
to maintain the status quo.
Subpart A—General
Section 1002.5 Rules Concerning
Requests for Information
5(a) General Rules
5(a)(4) Other Permissible Collection of
Information
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Background
ECOA prohibits creditors from
discriminating against applicants, with
respect to any aspect of a credit
transaction, on the basis of—among
other things—race, color, religion,
national origin, sex or marital status, or
292 Waterkeeper All., 853 F.3d at 530 (quoting
Pub. Citizen, 869 F.2d at 1556); see Alabama Power,
636 F.2d at 360–61.
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age.293 It also states that making an
inquiry under 15 U.S.C. 1691c–2 (that
is, section 1071), in accordance with the
requirements of that section, shall not
constitute discrimination for purposes
of ECOA.294 Regulation B, in existing
§ 1002.5(b), generally prohibits a
creditor from inquiring about protected
demographic information in connection
with a credit transaction unless
otherwise required by Regulation B,
ECOA, or other Federal law or
regulation.295
In 2017, the Bureau amended
Regulation B, adding § 1002.5(a)(4) to
allow creditors to collect ethnicity, race,
and sex from mortgage applicants in
certain cases where the creditor is not
required to report under HMDA and
Regulation C.296 As part of this
rulemaking, the Bureau added
§ 1002.5(a)(4) to expressly permit the
collection of ethnicity, race, and sex
information from mortgage applicants in
certain cases where the creditor is not
required to report under HMDA and
Regulation C. For example, existing
§ 1002.5(a)(4) expressly permits the
collection of ethnicity, race, and sex
information for certain transactions for
which Regulation C permits optional
reporting. However, nothing in existing
Regulation B (or in ECOA) expressly
permits voluntary collection and
reporting of information regarding the
ethnicity, race, and sex of applicants’
principal owners, or whether the
applicant is a minority-owned business
or women-owned business, under
section 1071.
SBREFA Proposal Under Consideration
and Feedback Received
During the SBREFA process, some
SERs, primarily small CDFIs and
mission-oriented community banks,
stated that they would be inclined to
collect and report 1071 data to the
Bureau even if not required to do so,
such as if they fell under loan-volume
thresholds. These SERs expressed an
intent to report data even if not required
to out of a belief in the importance and
utility of 1071 data.
Proposed Rule
The Bureau is proposing to amend
existing § 1002.5(a)(4) to add three
exemptions (in proposed
§ 1002.5(a)(4)(vii), (viii), and (ix)) that
would permit certain creditors that are
not covered financial institutions under
the rule to collect small business
293 15
U.S.C. 1691(a).
U.S.C. 1691(b)(5).
295 Existing § 1002.5(a)(2).
296 Equal Credit Opportunity Act (Regulation B)
Ethnicity and Race Information Collection, 82 FR
45680, 45684 (Oct. 2, 2017).
294 15
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applicants’ protected demographic
information under certain
circumstances. The Bureau is also
proposing to add comment 5(a)(2)–4 and
to revise existing comment 5(a)(4)–1 to
provide guidance on these proposed
exemptions.
Proposed § 1002.5(a)(4)(vii) would
provide that a creditor that was required
to report small business lending data
pursuant to proposed § 1002.109 for any
of the preceding five calendar years but
is not currently a covered financial
institution under proposed
§ 1002.105(b) may collect information
pursuant to proposed subpart B for a
covered application as defined in
proposed § 1002.103 regarding whether
the applicant is a minority-owned
business or a women-owned business,
and the ethnicity, race, and sex of the
applicant’s principal owners if it
complies with the requirements of
proposed subpart B as otherwise
required for covered financial
institutions pursuant to proposed
§§ 1002.107, 1002.108, 1002.111,
1002.112, and 1002.114 for that
application. In short, proposed
§ 1002.5(a)(4)(vii) would permit a
previously covered financial institution
to collect such information for covered
applications for up to five years after it
fell below the loan-volume threshold of
proposed § 1002.105(b), provided that it
does so in accordance with the relevant
requirements of proposed subpart B.
The Bureau expects that some
creditors that are no longer covered
financial institutions and thus no longer
required to report 1071 data in a given
reporting year may prefer to continue to
collect applicants’ protected
demographic information in the event
they become a covered financial
institution again, in order to maintain
consistent compliance standards from
year to year. As it did in a similar
context for HMDA reporting,297 the
Bureau believes that permitting such
collection for five years provides an
appropriate time frame under which a
financial institution should be
permitted to continue collecting the
information without having to change
its compliance processes. The Bureau
believes that a five-year period is
sufficient to help an institution discern
whether it is likely to have to report
1071 data in the near future but not so
long as to permit it to collect such
information in a period too attenuated
from previous 1071 reporting.
Therefore, the Bureau believes that it
is an appropriate use of its statutory
authority under sections 703(a) 298 and
297 Existing
298 15
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704B(g)(1) of ECOA to permit creditors
to collect the 1071 demographic
information in the manner set out in
proposed § 1002.5(a)(4)(vii). The
proposal would effectuate the purposes
of and facilitate compliance with ECOA
and is necessary to carry out, enforce,
and compile data pursuant to section
1071 because it would permit creditors
to collect information without
interruption from year to year, thereby
facilitating compliance with the 1071
rule’s data collection requirements and
improving the quality and reliability of
the data collected. The Bureau also
believes that this provision is narrowly
tailored and would preserve and respect
the general limitations in existing
§ 1002.5(b) through (d).
Proposed § 1002.5(a)(4)(viii) would
provide that a creditor that exceeded the
loan-volume threshold in the first year
of the two-year threshold period
provided in proposed § 1002.105(b)
may, in the second year, collect
information pursuant to proposed
subpart B for a covered application as
defined in proposed § 1002.103
regarding whether the applicant is a
minority-owned business or a womenowned business, and the ethnicity, race,
and sex of the applicant’s principal
owners if it complies with the
requirements of subpart B as otherwise
required for covered financial
institutions pursuant to proposed
§§ 1002.107, 1002.108, 1002.111,
1002.112, and 1002.114 for that
application.
The Bureau believes that its proposal
would benefit creditors in certain
situations in which the creditor has not
previously reported 1071 data but
expects to be covered in the following
year and wishes to prepare for that
future reporting obligation. For
example, where a creditor surpasses the
loan-volume threshold of proposed
§ 1002.105(b) for the first time in a given
calendar year, it may wish to begin
collecting applicants’ protected
demographic information for covered
applications received in the next
calendar year (second calendar year) so
as to ensure its compliance systems are
fully functional before it is required to
collect and report information pursuant
to proposed subpart B in the following
calendar year (third calendar year).
The Bureau believes that it is an
appropriate use of its statutory authority
under sections 703(a) and 704B(g)(1) of
ECOA to permit creditors to collect
information under proposed
§ 1002.5(a)(4)(viii). A creditor likely
would benefit from being able to collect
applicants’ protected demographic
information with assurance of
compliance with existing § 1002.5
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regardless of whether it actually
becomes subject to proposed subpart B
reporting at the end of the two-year
threshold period. The proposal would
effectuate the purposes of and facilitate
compliance with ECOA and is necessary
to carry out, enforce, and compile data
pursuant to section 1071 because it
would facilitate compliance with the
1071 rule’s data collection requirements
and improve the quality and reliability
of the data collected by financial
institutions that may be transitioning
into being required to collect and report
1071 data.
Proposed § 1002.5(a)(4)(ix) would
state that a creditor that is not currently
a covered financial institution under
proposed § 1002.105(b), and is not
otherwise a creditor to which proposed
§ 1002.5(a)(4)(vii) or (viii) applies, may
collect information pursuant to
proposed subpart B for a covered
application as defined in proposed
§ 1002.103 regarding whether an
applicant for a covered credit
transaction is a minority-owned
business or a women-owned business,
and the ethnicity, race, and sex of the
applicant’s principal owners if the
creditor complies with the requirements
of proposed subpart B as otherwise
required for covered financial
institutions pursuant to proposed
§§ 1002.107 through 1002.112 and
1002.114 for that application. The
proposal would permit a financial
institution that wishes to voluntarily
report 1071 data to collect applicants’
protected demographic information
without running afoul of Regulation B.
Unlike creditors subject to proposed
§ 1002.5(a)(4)(vii) or (viii), a creditor
seeking to voluntarily collect applicant’s
protected demographic information
under proposed § 1002.5(a)(4)(ix) would
be required to report it to the Bureau.
The Bureau believes that permitting
creditors to collect 1071 demographic
information pursuant to proposed
§ 1002.5(a)(4)(vii) or (viii) would
facilitate compliance and promote data
quality in the event that creditors
subject to those provisions later become
covered financial institutions. For those
creditors that wish to voluntarily report
1071 data, as well as others covered by
proposed § 1002.5(a)(4)(ix) (where
reporting is required when applicants’
protected demographic information is
collected), the reported data would be
additional information that would
further the intended purposes of the
statute. An analysis of business and
community development needs would
benefit from the inclusion of voluntarily
reported data from financial institutions
below the reporting threshold. Such
institutions more often serve sparsely
PO 00000
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56389
populated rural, underserved
communities or are member-owned
organizations (such as credit unions). As
some SERs suggested, the voluntary
collection and reporting of 1071 data by
such financial institutions may stem
from a community development
orientation and commitment to fair
lending. Further, the reporting of such
data would provide a more complete
picture of total lending activity—and
therefore enable a more complete
analysis of fair lending risks as well as
business and community development
needs—especially given that larger
financial institutions may be less likely
to operate in sparsely populated, rural,
and underserved communities, for the
reasons set out in part II above. The
Bureau is proposing § 1002.5(a)(4)(ix) in
response to feedback from some
stakeholders that indicated they might
want to collect and report 1071 data
even if they were not required to do so.
The Bureau believes, for the reasons set
out above, that it is an appropriate use
of its general authority under sections
703(a) and 704B(g)(1) of ECOA to permit
creditors to collect information under
proposed § 1002.5(a)(4)(ix), as such
collection would effectuate the purposes
of and facilitate compliance with ECOA
and is necessary to carry out, enforce,
and compile data pursuant to section
1071. Further, the Bureau believes that
permitting creditors to collect
applicants’ protected demographic
information would result in the
collection of additional information that
could carry out section 1071’s business
and community development purpose.
Existing comment 5(a)(4)–1 currently
addresses recordkeeping requirements
for ethnicity, race, and sex information
that is voluntarily collected for HMDA
under the existing provisions of
§ 1002.5(a)(4). The Bureau is proposing
to revise this comment by adding to it
a parallel reference to proposed subpart
B, along with a statement that the
information collected pursuant to
proposed subpart B must be retained
pursuant to the requirements set forth in
proposed § 1002.111.
Proposed comment 5(a)(2)–4 would
state that proposed subpart B of
Regulation B generally requires
creditors that are covered financial
institutions as defined in proposed
§ 1002.105(a) to collect and report
information about the ethnicity, race,
and sex of the principal owners of
applicants for certain small business
credit, as well as whether the applicant
is minority-owned or women-owned as
defined in proposed § 1002.102(m) and
(s), respectively. The Bureau is
proposing this comment for parity with
existing comment 5(a)(2)–2, which
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addresses the requirement to collect and
report information about the race,
ethnicity, and sex of applicants under
HMDA. Existing comment 5(a)(2)–3
explains that persons such as loan
brokers and correspondents do not
violate ECOA or Regulation B if they
collect information that they are
otherwise prohibited from collecting,
where the purpose of collecting the
information is to provide it to a creditor
that is subject to HMDA or another
Federal or State statute or regulation
requiring data collection. The Bureau
believes that the reference to another
Federal statute or regulation adequately
encompasses section 1071 and proposed
subpart B, and thus it does not propose
to amend this existing comment in order
to make clear that loan brokers and
other persons collecting applicants’
protected demographic information on
behalf of covered financial institutions
are not violating ECOA or Regulation B
by doing so.
The Bureau seeks comment on these
three proposed exemptions to be added
to existing § 1002.5(a)(4), and associated
commentary, including whether there
are other specific situations that should
be added to the list of exemptions in
§ 1002.5(a)(4) to permit the collection of
applicants’ protected demographic
information, and whether any similar
modifications to other provisions are
necessary. In particular, the Bureau
seeks comment on whether it should
add another exemption to § 1002.5(a)(4)
relating to proposed § 1002.114(c)(1),
wherein the Bureau is proposing to
permit financial institutions to collect,
but would not require them to report,
applicants’ protected demographic
information prior to the compliance
date.
The Bureau also notes that, as
discussed in the section-by-section
analysis of proposed § 1002.104(a)
below, it seeks comment on whether it
should permit financial institutions to
voluntarily collect and report 1071 data
on applications for products that the
Bureau is not proposing to cover. If the
Bureau were to permit such voluntary
collection and reporting, the Bureau
expects to add a provision similar to
proposed § 1002.5(a)(4)(ix) to address it.
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Subpart B—Small Business Lending
Data Collection
Section 1002.101
and Scope
Authority, Purpose,
Proposed § 1002.101 would set forth
the authority, purpose, and scope for
proposed subpart B. Specifically, it
would provide that proposed subpart B
is issued by the Bureau pursuant to
section 704B of ECOA (15 U.S.C. 1691c–
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2). It would further state that, except as
otherwise provided therein, proposed
subpart B applies to covered financial
institutions, as defined in proposed
§ 1002.105(b), other than a person
excluded from coverage of this part by
section 1029 of the Dodd-Frank Act. It
also would set out section 1071’s two
statutory purposes of facilitating fair
lending enforcement and enabling the
identification of business and
community development needs and
opportunities for women-owned,
minority-owned, and small businesses.
The Bureau seeks comment on its
proposed approach to this section,
including whether any other
information on the 1071 rule’s
authority, purpose, or scope should be
addressed herein.
Section 1002.102
Definitions
The Bureau is proposing a number of
definitions for terms used in subpart B,
in § 1002.102.299 These definitions
generally fall into several categories.
First, some definitions in proposed
§ 1002.102 refer to terms defined
elsewhere in proposed subpart B—
specifically, the terms business, covered
application, covered credit transaction,
covered financial institution, financial
institution, and small business are
defined in proposed §§ 1002.106(a),
1002.103, 1002.104, 1002.105(b),
1002.105(a), and 1002.106(b),
respectively. These terms are of
particular importance in proposed
subpart B, and the Bureau is proposing
to define them in separate sections,
rather than in proposed § 1002.102, for
ease of reading.
Second, some terms in proposed
§ 1002.102 are defined by crossreferencing the definitions of terms
defined in existing Regulation B—
specifically, business credit, credit, and
State are defined by reference to existing
§ 1002.2(g), (j), and (aa), respectively.
Similarly, several definitions refer to
terms defined in other regulations—
specifically, a portion of the affiliate
definition refers to the SBA’s regulation
at 13 CFR 121.103, and dwelling refers
to the definition in Regulation C
§ 1003.2(f). These terms are each used in
proposed subpart B, and the Bureau
believes it is appropriate to incorporate
299 The Bureau notes that there are certain terms
defined in proposed subpart B outside of proposed
§ 1002.102. This occurs where a definition is
relevant only to a particular section. For example,
the firewall provisions in proposed § 1002.108 use
the phrases ‘‘involved in making any determination
concerning a covered application’’ and ‘‘should
have access.’’ Those phrases are defined in
§ 1002.108(a). Those definitions are discussed in
detail in the section-by-section analysis of the
provisions in which they appear.
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them into the subpart B definitions in
this manner.
Finally, the remaining terms are
defined directly in proposed § 1002.102.
These include applicant, closed-end
credit transaction, minority individual,
minority-owned business, open-end
credit transaction, principal owner,
small business lending application
register, and women-owned business, as
well as a portion of the definition of
affiliate. Some of these definitions draw
on definitions in existing Regulation B
or elsewhere in Federal laws or
regulations.
The Bureau believes that basing this
proposal’s definitions on previously
defined terms (whether in Regulation B,
Regulation C, or regulations
promulgated by another agency), to the
extent possible, would minimize
regulatory uncertainty and facilitate
compliance, particularly where the
other regulations are likely to apply, in
their own right, to the same
transactions. However, as discussed
further below, the Bureau is in certain
instances proposing to deviate from the
existing definitions for purposes of this
proposal.
These definitions are each discussed
in detail below. The Bureau is
proposing these definitions pursuant to
its authority under section 704B(g)(1) to
prescribe such rules and issue such
guidance as may be necessary to carry
out, enforce, and compile data pursuant
to section 1071. In addition, the Bureau
is proposing certain of these definitions
to implement particular definitions in
section 1071 including the statutory
definitions set out in 704B(h). Any other
authorities that the Bureau is relying on
to propose certain definitions are
discussed in the section-by-section
analysis of those specific definitions.
The Bureau seeks comment on its
proposed approach to each of these
definitions, as well as whether there are
any other terms that the Bureau should
define for purposes of proposed subpart
B.
102(a) Affiliate
Proposed § 1002.102(a) would define
‘‘affiliate’’ based on whether the term is
used to refer to a financial institution or
to an applicant.
Proposed § 1002.102(a) would define
‘‘affiliate’’ with respect to a financial
institution as any company that
controls, is controlled by, or is under
common control with, another
company, as set forth in the Bank
Holding Company Act of 1956.300
Existing Regulation B does not define
affiliate. This proposed definition
300 12
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would provide a consistent approach
with the Bureau’s Regulation C, which
applies the term to financial
institutions, as defined in Regulation C,
for certain reporting obligations.301 The
Bureau believes that this definition
would be appropriate to define an
affiliate of a financial institution, and
that it should provide sufficient clarity
for financial institutions when
determining responsibilities under
proposed subpart B.
Proposed § 1002.102(a) would define
‘‘affiliate’’ with respect to a business or
an applicant as having the same
meaning as described in 13 CFR
121.103, which is an SBA regulation
titled ‘‘How does SBA determine
affiliation?’’ This proposed definition
would provide consistency with the
Bureau’s proposed approach to what
constitutes a small business for
purposes of section 1071, as discussed
in the section-by-section analysis of
proposed § 1002.106(b) below. As
discussed in the section-by-section
analysis of proposed § 1002.106(b)
below, the Bureau is proposing to define
a small business by reference to the
SBA’s regulations (with the exception of
an alternate size standard, as set forth in
proposed § 1002.106(b)). As discussed
in the section-by-section analysis of
proposed § 1002.107(a)(14), the Bureau
is proposing to permit, but not require,
a financial institution to report the gross
annual revenue for the applicant in a
manner that includes the revenue of
affiliates as well. As discussed in the
section-by-section analysis of proposed
§ 1002.107(a)(16), the Bureau is
proposing that a financial institution, if
asked, shall explain to the applicant that
workers for affiliates of the applicant
would only be counted if the financial
institution were also collecting the
affiliates’ gross annual revenue. The
Bureau is therefore proposing to define
affiliate in subpart B for purposes of a
business or an applicant by referring to
the SBA’s definition of affiliate.
The Bureau seeks comment on its
proposed approach to this definition.
102(b) Applicant
Proposed § 1002.102(b) would define
‘‘applicant’’ to mean any person who
requests or who has received an
extension of business credit from a
financial institution. The term
‘‘applicant’’ is undefined in section
1071. Proposed § 1002.102(b) is based
on the definition of applicant in existing
Regulation B, though for consistency
with other parts of this proposed rule,
it adds a limitation that the credit be
business credit and uses the term
301 See
Regulation C comment 4(a)(11)–3.
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financial institution instead of creditor.
It also omits the references to other
persons who are or may become
contractually liable regarding an
extension of credit such as guarantors,
sureties, endorsers, and similar parties.
The Bureau is concerned that including
other such persons could exceed the
scope of the data collection anticipated
by section 1071. Including them could
also make the data collection more
difficult as financial institutions might
need to report data points (such as gross
annual revenue, NAICS code, time in
business, and others) regarding multiple
persons in connection with a single
application. Collecting such information
on guarantors, sureties, endorsers, and
similar parties would likely not support
1071’s business and community
development purpose. Thus, the Bureau
believes it is appropriate to limit the
definition of applicant in proposed
subpart B to only those persons who
request, or have received, an extension
of business credit from a financial
institution.
The Bureau seeks comment on its
proposed approach to this definition.
102(c) Business
Proposed § 1002.102(c) would refer to
proposed § 1002.106(a) for a definition
of the term ‘‘business.’’ See the sectionby-section analysis of proposed
§ 1002.106(a) for a detailed discussion
of that definition.
102(d) Business Credit
Proposed § 1002.102(d) would refer to
existing § 1002.2(g) for a definition of
the term ‘‘business credit.’’ The term
‘‘credit’’ is undefined in section 1071.
Section 1071 does not use the term
‘‘business credit,’’ though it does define
‘‘small business loan’’ as a loan made to
a small business. Existing § 1002.2(g)
defines ‘‘business credit’’ as ‘‘referring
to extensions of credit primarily for
business or commercial (including
agricultural) purposes, but excluding
extensions of credit of the types
described in § 1002.3(a) through (d).’’
The Bureau believes it is appropriate to
define business credit by reference to
the existing definition in Regulation B.
The Bureau’s proposal uses the term
business credit principally in defining a
covered credit transaction in proposed
§ 1002.104(a).
As described in the section-by-section
analysis of proposed § 1002.104(a)
below, loans, lines of credit, credit
cards, and MCAs (including such credit
transactions for agricultural purposes
and those that are also covered by
HMDA) would all fall under the
proposed definition for business credit.
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The Bureau notes existing § 1002.2(g)
excludes public utilities credit,
securities credit, incidental credit, and
government credit (that is, extensions of
credit made to governments or
governmental subdivisions, agencies, or
instrumentalities—not extensions of
credit made by governments), as defined
in existing § 1002.3(a) through (d), from
certain aspects of existing Regulation
B.302 As described in the section-bysection analysis of proposed
§ 1002.104(b) below, for the purpose of
subpart B, the Bureau is proposing
complete exclusions for public utilities
credit, securities credit, and incidental
credit from the definition of a covered
credit transaction in proposed
§ 1002.104(b). The Bureau is not
proposing an exclusion for extensions of
credit made to governments or
governmental subdivisions, agencies, or
instrumentalities, because governmental
entities would not constitute small
businesses under the proposed rule.303
Moreover, as described in the sectionby-section analysis of proposed
§ 1002.104(b) below, the Bureau
believes it is appropriate to interpret
section 1071 as not applying to
factoring, leases, consumer-designated
credit used for business purposes, or
credit secured by certain investment
properties.
The Bureau seeks comment on its
proposed approach to this definition.
102(e) Closed-End Credit Transaction
Proposed § 1002.102(e) states that a
closed-end credit transaction means an
extension of credit that is not an openend credit transaction under proposed
§ 1002.102(n). The Bureau’s proposal
specifies different requirements for
collecting and reporting certain data
points based on whether the application
is for a closed-end credit transaction or
an open-end credit transaction. See the
section-by-section analysis of proposed
§ 1002.102(n) for a discussion of what
constitutes an open-end credit
transaction.
The Bureau seeks comment on its
proposed approach to this definition.
102(f) Covered Application
Proposed § 1002.102(f) would refer to
proposed § 1002.103 for a definition of
the term ‘‘covered application.’’ See the
302 As explained in existing comment 3–1, under
§ 1002.3, procedural requirements of Regulation B
do not apply to certain types of credit. The
comment further states that all classes of
transactions remain subject to § 1002.4(a) (the
general rule barring discrimination on a prohibited
basis) and to any other provision not specifically
excepted.
303 Government entities are not ‘‘organized for
profit’’ and thus would not be a ‘‘business concern’’
under proposed § 1002.106(a).
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section-by-section analysis of proposed
§ 1002.103 for a detailed discussion of
that definition.
102(g) Covered Credit Transaction
Proposed § 1002.102(g) would refer to
proposed § 1002.104 for a definition of
the term ‘‘covered credit transaction.’’
See the section-by-section analysis of
proposed § 1002.104 for a detailed
discussion of that definition.
102(h) Covered Financial Institution
Proposed § 1002.102(h) would refer to
proposed § 1002.105(b) for a definition
of the term ‘‘covered financial
institution.’’ See the section-by-section
analysis of proposed § 1002.105(b) for a
detailed discussion of that definition.
102(i) Credit
Proposed § 1002.102(i) would refer to
existing § 1002.2(j) for a definition of the
term ‘‘credit.’’ The term ‘‘credit’’ is
undefined in section 1071. Existing
§ 1002.2(j), which largely follows the
definition of credit in ECOA,304 defines
‘‘credit’’ to mean the right granted by a
creditor to an applicant to defer
payment of a debt, incur debt and defer
its payment, or purchase property or
services and defer payment therefor.
The Bureau believes that referring to
this existing definition of credit for
purposes of subpart B would help to
foster consistency with existing
Regulation B. The term credit in
proposed subpart B is used in the
context of what constitutes a covered
credit transaction—that is, whether the
application is reportable under the
section 1071 rule. See the section-bysection analysis of proposed § 1002.104
below for more details.
The Bureau seeks comment on its
proposed approach to this definition.
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102(j) Dwelling
Proposed § 1002.102(j) would refer to
Regulation C § 1003.2(f) for a definition
of the term ‘‘dwelling.’’ That provision
defines dwelling to mean a residential
structure, whether or not attached to
real property. The term includes but is
not limited to a detached home, an
individual condominium or cooperative
unit, a manufactured home or other
factory-built home, or a multifamily
residential structure or community.
Proposed comment 102(j)–1 would
provide that Bureau interpretations that
appear in supplement I to part 1003
containing official commentary in
connection with § 1003.2(f) are
generally applicable to the definition of
a dwelling in proposed § 1002.102(j).
304 See 15 U.S.C. 1691a. Existing Regulation B
uses the term ‘‘applicant’’ instead of ‘‘debtor.’’
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Proposed comment 102(j)–2 would
clarify that the definition of dwelling
under existing § 1002.14(b)(2) applies to
relevant provisions under existing
Regulation B, and proposed
§ 1002.102(j) is not intended to repeal,
abrogate, annul, impair, or interfere
with any existing interpretations,
orders, agreements, ordinances, rules, or
regulations adopted or issued pursuant
to existing § 1002.14(b)(2).
The Bureau believes that adopting the
Regulation C definition of dwelling
would streamline reporting and
minimize compliance risks for financial
institutions that are also reporting
covered credit transactions under
HMDA and would simplify data
analysis for HMDA-reportable
transactions. As an alternative, the
Bureau considered adopting the existing
Regulation B definition of dwelling,
which is similar to the Regulation C
definition. The Bureau understands that
the existing Regulation B definition of
dwelling is primarily applied in the
context of the ECOA Valuations Rule305
and would thus not streamline reporting
and minimize compliance risks in the
same way as would adopting the
Regulation C definition, which is
already being applied to data collection
and reporting requirements. The
existing Regulation B definition of
dwelling is also not supported by the
same level of clarifying commentary as
the definition under Regulation C. The
Bureau believes that proposed comment
102(j)–1 will address most if not all
questions related to the definition of
dwelling by incorporating the Bureau’s
official commentary related to
§ 1003.2(f). Proposed comment 102(j)–2
also seeks to avoid potential confusion
by clarifying that proposed § 1002.102(j)
does not affect the status of existing
§ 1002.14(b)(2), which defines the term
‘‘dwelling’’ for purposes of existing
Regulation B.
The Bureau seeks comment on its
proposed approach to this definition.
102(k) Financial Institution
Proposed § 1002.102(l) would refer to
proposed § 1002.105(a) for a definition
of the term ‘‘financial institution.’’ See
the section-by-section analysis of
proposed § 1002.105(a) for a detailed
discussion of that definition.
102(l) Minority Individual
Background
ECOA section 704B(b)(1) requires a
financial institution to ask whether an
applicant is a minority-owned business.
Additionally, 704B(h)(5) uses the term
‘‘minority individual’’ when defining
305 See
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the term minority-owned business.
Although 704B(h)(5) defines the term
‘‘minority,’’ section 1071 does not
define the term ‘‘minority individual.’’
Section 704B(h)(4) defines the term
‘‘minority’’ as having the same meaning
as in section 1204(c)(3) of the Financial
Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA).306
That statute defines ‘‘minority’’ to mean
any Black American, Native American,
Hispanic American, or Asian
American.307
SBREFA Proposal Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
stated that it was considering proposing
guidance that would clarify that a
minority individual is a natural person
who is Black or African American,
Asian, American Indian or Alaska
Native, Native Hawaiian or Other
Pacific Islander, and/or Hispanic or
Latino 308 (i.e., would mirror the
aggregate race and ethnicity categories
in Regulation C).thnsp;309 The Bureau
also stated it was considering proposing
guidance clarifying that a multi-racial
person would be considered a minority
individual.
Several SERs supported clarifying the
meaning of minority individual using
the aggregate categories for race and
ethnicity in Regulation C.310 However,
one SER suggested using the
disaggregated categories in Regulation
C, instead of the aggregate categories, for
this purpose. Other stakeholders
providing feedback on the SBREFA
Outline generally supported using the
aggregate categories when determining
who is a minority individual for
purposes of reporting whether a
business is a minority-owned business.
The SBREFA Panel recommended
clarifying that, consistent with the
aggregate categories for race and
ethnicity in Regulation C, a minority
individual is a natural person who is
Black or African American, Asian,
American Indian or Alaska Native,
Native Hawaiian or Other Pacific
Islander, and/or Hispanic or Latino.311
Proposed Rule
Consistent with the approach that the
Bureau took during the SBREFA
process, proposed § 1002.102(1) would
clarify that the term ‘‘minority
306 Public Law 101–73, section 1204(c)(3), 103
Stat. 183, 521 (1989) (12 U.S.C. 1811 note).
307 Id.
308 SBREFA Outline at 18–19.
309 Appendix B to 12 CFR part 1003.
310 The SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 22.
311 Id. at 44.
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individual’’ means a natural person who
is American Indian or Alaska Native,
Asian, Black or African American,
Native Hawaiian or Other Pacific
Islander, and/or Hispanic or Latino. The
Bureau believes that these categories
represent contemporary, more specific
delineations of the categories described
in section 1204(c)(3) of FIRREA.312
Proposed comment 102(1)–2 would
clarify that a multi-racial or multi-ethnic
person would be a minority individual.
Proposed comment 102(1)–1 would
clarify that this definition would be
used only when an applicant
determines whether it is a minorityowned business pursuant to proposed
§§ 1002.102(m) and 1002.107(a)(18).
Proposed comment 102(1)–3 would
clarify the relationship of the definition
of minority individual to the
disaggregated subcategories used to
determine a principal owner’s ethnicity
and race. The Bureau’s proposed
approach is consistent with the SBREFA
Panel’s recommendation discussed
above.
The Bureau believes this clarified
terminology, which uses the aggregate
ethnicity and race categories set forth in
existing Regulation B 313 and Regulation
C,314 would avoid the potentially
confusing situation where an applicant
is using one set of aggregate race and
ethnicity categories when answering
questions about the principal owners’
race and ethnicity but is asked to use a
different set of aggregate categories
when indicating whether a business is
a minority-owned business. It also
avoids creating a situation where a
financial institution is required to use
different race and ethnicity categories
when complying with different portions
of Regulation B and, if applicable,
Regulation C. Consistency among race
and ethnicity data collection regimes
may also allow for better coordination
among data users when reviewing data
across multiple data collection
regimes.315
The Bureau seeks comment on its
proposed approach to this definition,
including its proposed clarification of
the definition of minority individual,
and requests comment on whether
additional clarification is needed.
Additionally, in section-by-section
312 See, e.g., 80 FR 36356 (June 24, 2015) (NCUA
interpretive ruling and policy statement
implementing an identical FIRREA definition of
minority using this same modern terminology).
313 12 CFR 1002.13(a)(1)(i).
314 Appendix B to 12 CFR part 1003.
315 For example, the OMB uses these same
categories for the classification of Federal data on
race and ethnicity. See Off. of Mgmt. & Budget,
Revisions to the Standards for the Classification of
Federal Data on Race and Ethnicity, 62 FR 58785
(Oct. 30, 1996).
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analysis of proposed § 1002.107(a)(20),
the Bureau is requesting comment
regarding whether an additional
category for Middle Eastern or North
African should be added for purposes of
responding to a financial institution’s
inquiry regarding a principal owner’s
ethnicity or race and, if so, how this
category should be included and
defined. The Bureau also seeks
comment on whether the definition of
minority individual should include a
natural person who is Middle Eastern or
North African, as well as whether the
inclusion of a natural person who is
Middle Eastern or North African in the
definition of minority individual for
purposes of proposed § 1002.102(l)
should be dependent on whether
Middle Eastern or North African is
added as an aggregate category for
purposes of proposed § 1002.107(a)(20).
102(m) Minority-Owned Business
Background
ECOA section 704B(b)(1) requires
financial institutions to inquire whether
applicants for credit are minority-owned
businesses. For purposes of the financial
institution’s inquiry under 704B(b),
704B(h)(5) defines a business as a
minority-owned business if (A) more
than 50 percent of the ownership or
control is held by one or more minority
individuals, and (B) more than 50
percent of the net profit or loss accrues
to one or more minority individuals.
Section 1071 does not expressly define
the related terms of ‘‘ownership’’ or
‘‘control,’’ nor does it describe what it
means for net profits or losses to accrue
to an individual.
SBREFA Proposal Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
stated it was considering proposing use
of the statutory definition of ‘‘minorityowned business’’ (as set forth above)
with further clarification of the terms
‘‘ownership’’ and ‘‘control.’’ 316 The
Bureau considered proposing use of
concepts set forth in the Financial
Crimes Enforcement Network’s
(FinCEN) Customer Due Diligence
(CDD) rule 317 to clarify these terms.
Some SERs expressed concerns with
certain aspects of the statutory
definition of minority-owned business,
asserting that the definition could cause
confusion or pose particular
complexities.318 Several SERs and some
other stakeholders providing feedback
316 SBREFA
Outline at 18–19.
31 CFR 1010.230.
318 The SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 22.
317 See
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on the SBREFA Outline asked that the
definition of minority-owned business
be revised to align with the definition
used by other agencies, such as the SBA
and the CDFI Fund. These SERs and
other commenters recommended that
the Bureau use a ‘‘50 percent or more’’
threshold for ownership or control,
instead of the ‘‘more than 50 percent’’
standard in the statutory definition.
Conversely, two SERs and several other
commenters supported using the
statutory definition of minority-owned
business, including the ‘‘more than 50
percent’’ portion of the definition.
A number of SERs recommended that
the Bureau simplify the definition to
ensure it is understandable to small
business applicants and to thereby
facilitate consistent data collection.
SERs’ suggestions included eliminating
the portion of the definition that refers
to accrual of net profits and losses,
eliminating the portion of the definition
that refers to control, and providing a
simplified and standardized definition.
Several SERs supported using the
concepts of ownership and control in
FinCEN’s CDD rule when defining
minority-owned business; one SER said
that doing so would be logical and
efficient, while another said it would
create regulatory consistency and ease
compliance burden. One SER said that
most credit unions are familiar with the
CDD rule. Generally, other commenters
supported use of the CDD concepts to
clarify the terms ‘‘ownership’’ and
‘‘control.’’ They stated that small
business applicants are familiar with the
concepts in the CDD rule or that they
appreciated the consistency with
existing regulatory requirements.
However, one trade association
commenter requested that the Bureau
provide simplified applicant-facing
materials without clarifying the
definition, and two other stakeholders
suggested that applicants might not be
familiar with the CDD rule or may not
understand the CDD rule.
The SBREFA Panel recommended
seeking comment on potential
interpretations of the definition of
minority-owned business to clarify the
term and to ensure that small business
applicants would be able to understand
questions asking if they are minorityowned businesses.319
Proposed Rule
Proposed § 1002.102(m) would define
a minority-owned business as a business
for which more than 50 percent of its
ownership or control is held by one or
more minority individuals, and more
than 50 percent of its net profits or
319 Id.
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losses accrue to one or more minority
individuals. This definition is
consistent with ECOA section
704B(h)(5) and the Bureau’s proposal
under consideration in the SBREFA
Outline.
Proposed comment 102(m)–1 would
explain that a business must satisfy both
prongs of the definition to be a
minority-owned business—that is, (A)
more than 50 percent of the ownership
or control is held by one or more
minority individuals, and (B) more than
50 percent of the net profits or losses
accrue to one or more minority
individuals.
Proposed comment 102(m)–2 would
clarify that the definition of minorityowned business is used only when an
applicant determines if it is a minorityowned business for purposes of
proposed § 1002.107(a)(18). A financial
institution would provide the definition
of minority-owned business when
asking the applicant to provide
minority-owned business status
pursuant to proposed § 1002.107(a)(18),
but a financial institution would not be
permitted or required to make its own
determination regarding whether an
applicant is a minority-owned business
for this purpose.
Proposed comment 102(m)–3 would
further note that a financial institution
would be permitted to assist an
applicant when determining whether it
is a minority-owned business but would
not be required to do so, and could
provide the applicant with the
definitions of ownership, control, and
accrual of net profits or losses set forth
in proposed comments 102(m)–4
through –6. Additionally, for purposes
of reporting an applicant’s minorityowned business status, a financial
institution would rely on the applicant’s
determinations of its ownership,
control, and accrual of net profits and
losses.
Consistent with the approach
described during the SBREFA process,
the Bureau is proposing to clarify
‘‘ownership’’ and ‘‘control’’ using
concepts from the CDD rule. Proposed
comment 102(m)–4 would clarify that a
natural person owns a business if that
natural person directly or indirectly,
through any contract, arrangement,
understanding, relationship or
otherwise, has an equity interest in the
business. Proposed comment 102(m)–4
would also provide examples of
ownership and clarify that, where
applicable, ownership would need to be
traced or followed through corporate or
other indirect ownership structures for
purposes of proposed §§ 1002.102(m)
and 1002.107(a)(18). Proposed comment
102(m)–5 would clarify that a natural
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person controls a business if that natural
person has significant responsibility to
manage or direct the business, and
would provide examples of natural
persons who control a business.
Proposed comment 102(m)–6 would
clarify that a business’s net profits and
losses accrue to a natural person if that
natural person receives the net profits or
losses, is legally entitled or required to
receive the net profits or losses, or is
legally entitled or required to recognize
the net profits or losses for tax purposes.
The Bureau believes many small
business applicants already respond to
questions about who owns and who
controls a business entity when
completing CDD forms or otherwise
responding to questions related to the
CDD rule and thus should be familiar
with the concepts in the CDD rule.
Because the CDD rule does not address
the second prong of the definition in
ECOA section 704B(h)(5) (regarding
accrual of net profit or loss), the Bureau
is proposing in § 1002.102(m) that this
prong of the definition be defined to
mean that one or more minority
individuals must receive or be legally
entitled to receive the net profits or
losses or that one or more minority
individuals must be legally required to
recognize the net profits and losses.
However, the Bureau shares some SERs’
concerns that the statutory definition of
minority-owned business might, in
some cases, be difficult for applicants to
understand, which could in turn
jeopardize the accuracy of reported data.
Thus, consistent with the SBREFA
Panel’s recommendation, the Bureau
seeks comment on the proposed
definition of minority-owned business
and possible alternatives that may
clarify the term in order to help ensure
that small business applicants can
determine whether they are minorityowned businesses for purposes of
section 1071 data collection.
102(n) Open-End Credit Transaction
Proposed § 1002.102(n) would state
that open-end credit transaction means
an open-end credit plan as defined in
Regulation Z § 1026.2(a)(20), but
without regard to whether the credit is
consumer credit, as defined in
§ 1026.2(a)(12), is extended by a
creditor, as defined in § 1026.2(a)(17), or
is extended to a consumer, as defined in
§ 1026.2(a)(11). The term ‘‘open-end
credit transaction’’ is undefined in
section 1071. The Bureau’s proposal
specifies different rules for collecting
and reporting certain data points based
on whether the application is for a
closed-end credit transaction or an
open-end credit transaction. The Bureau
believes its proposed definition is
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reasonable because it aligns with the
definition of ‘‘open-end credit
transaction’’ in Regulation Z
§ 1026.2(a)(20). The Bureau further
believes that such alignment will
minimize confusion and facilitate
compliance.
The Bureau seeks comment on its
proposed approach to this definition.
102(o) Principal Owner
Background
ECOA section 704B(e) requires
financial institutions to compile and
maintain the ethnicity, race, and sex of
an applicant’s principal owners.
However, section 1071 does not
expressly define who is a principal
owner of a business.
SBREFA Proposal Under Consideration
and Feedback
In the SBREFA Outline, the Bureau
stated that it was considering proposing
to define the term ‘‘principal owner’’ in
a manner consistent with the CDD
rule.320 Under a definition consistent
with the CDD rule, an individual would
be a principal owner if the individual
directly or indirectly, through any
contract, arrangement, understanding,
relationship or otherwise, owns 25
percent or more of the equity interests
of the business.
Several SERs and other stakeholders
providing feedback on the SBREFA
Outline expressed familiarity with the
CDD rule, and supported aligning with
that rule’s 25 percent ownership
standard for defining a principal owner
for the section 1071 rule.321 One SER
said that aligning definitions with the
CDD rule would be logical and efficient.
Another SER supported use of the CDD
rule’s concepts in determining who was
a principal owner. Other SERs and
stakeholders said they currently collect
this information for beneficial owners at
or above 20 percent in order to comply
with SBA or other requirements and
suggested aligning with that standard
instead.
The SBREFA Panel recommended
that the Bureau propose aligning the
definition of principal owner with
concepts of ownership and control that
exist in other Federal regulations with
which financial institutions are already
complying, to the extent possible.322
Proposed Rule
Proposed § 1002.102(o) would define
principal owner in a manner that is, in
320 SBREFA
Outline at 32.
SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 30.
322 Id. at 46.
321 The
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part, consistent with the CDD rule.
Specifically, a natural person would be
a principal owner if the natural person
directly owns 25 percent or more of the
equity interests of the business.
However, as proposed comment 102(o)–
1 would note, a natural person would
need to directly own an equity share of
25 percent or more in the business in
order to be a principal owner. Due to the
potential complications with collecting
a principal owner’s ethnicity, race, and
sex information when a trust or entity
is an owner, the Bureau is proposing
that entities not be considered principal
owners and indirect ownership by
individuals likewise not be considered
when determining if someone is a
principal owner for purposes of
collecting and reporting principal
owners’ ethnicity, race, and sex or the
number of principal owners. Thus,
when determining who is a principal
owner, ownership would not be traced
through multiple corporate structures to
determine if a natural person owns 25
percent or more of the applicant’s equity
interests. Additionally, because only a
natural person would be a principal
owner for the 1071 rule, entities such
trusts, partnerships, limited liability
companies, and corporations, would not
be principal owners.
Proposed comment 102(o)–2 would
clarify that a financial institution would
provide an applicant with the definition
of principal owner when asking the
applicant to provide the number of its
principal owners pursuant to proposed
§ 1002.107(a)(21) and the ethnicity, race,
and sex of its principal owners pursuant
to proposed § 1002.107(a)(20). If a
financial institution meets in person
with a natural person about a covered
application, the financial institution
may be required to determine if the
natural person with whom it meets is a
principal owner in order to collect and
report the principal owner’s ethnicity
and race based on visual observation
and/or surname. (See proposed
comments 107(a)(20)–5 and –9.)
Additionally, proposed comment
102(o)–2 would note that if an applicant
does not provide the number of its
principal owners in response to the
financial institution’s request pursuant
to proposed § 1002.107(a)(21), the
financial institution may need to
determine the number of the applicant’s
principal owners and report that
information based on other documents
or information. (See proposed
comments 107(a)(21)–1 through –3.)
Consistent with its approach in the
SBREFA Outline and with the SBREFA
Panel’s recommendation, the Bureau is
proposing that the definition of
principal owner align with the 25
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percent ownership definition in the
CDD rule. The Bureau believes that this
standard, which aligns with another
Federal regulation, is already broadly in
use and is likely to be familiar to most
financial institutions and applicants.
Banks, credit unions, and certain other
financial institutions must comply with
the CDD rule. The Bureau believes
applicants, as a general matter, are more
likely to be familiar with CDD
requirements than SBA or CDFI Fund
requirements because they have to
complete CDD forms before opening an
initial account (i.e., loan or deposit
account) at a bank or at certain other
institutions. However, due to potential
complications with collecting ethnicity,
race, and sex information for principal
owners, the Bureau is proposing that
individuals that only indirectly own 25
percent or more of an applicant’s equity
interests, as well as entities and trusts,
are not principal owners.
The Bureau notes that it is possible
under its proposed approach that an
applicant might not identify any
principal owners as being women or
minorities but nonetheless could be a
women- and/or minority-owned
business. This could occur, for example,
if a white male owned 40 percent of a
business while three Asian women each
owned 20 percent. Only the white male
would be designated as a principal
owner, but the business would be
nonetheless both women-owned and
minority-owned. While the Bureau
acknowledges that some applicants
could find this approach confusing, it is
consistent with the statutory language in
section 1071. To help mitigate against
potential confusion, the Bureau has
proposed that the questions regarding
minority-owned business status and
women-owned business status appear in
the proposed sample data collection
form before questions about the race,
sex, and ethnicity of principal owners.
The Bureau seeks comment on this
proposed definition of a principal
owner, including the proposal not to
include individuals that only indirectly
own 25 percent or more of an
applicant’s equity interests as principal
owners. The Bureau requests comment
on whether additional clarification on
any aspect of the proposed definition is
needed.
102(p) Small Business
Proposed § 1002.102(p) would refer to
proposed § 1002.106(b) for a definition
of the term ‘‘small business.’’ See the
section-by-section analysis of proposed
§ 1002.106(b) for a detailed discussion
of that definition.
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102(q) Small Business Lending
Application Register
Proposed § 1002.102(q) would define
the term ‘‘small business lending
application register’’ or ‘‘register’’ as the
data reported, or required to be
reported, annually pursuant to proposed
§ 1002.109. The Bureau did not include
a definition of small business lending
application register in the SBREFA
Outline, though it did address proposals
under consideration for compiling,
maintaining, and reporting 1071 data to
the Bureau.323 See the section-bysection analysis of proposed § 1002.109
for a detailed discussion of the proposed
rule’s provisions addressing reporting
data to the Bureau, including feedback
received from SERs and other
stakeholders on that subject. The
Bureau’s proposed definition refers only
to the data that is reported, or required
to be reported, annually; it does not
refer to the data required to be collected
and maintained (prior to reporting).324
The Bureau seeks comment on its
proposed definition of ‘‘small business
lending application register’’ or
‘‘register’’ in proposed § 1002.102(q).
102(r) State
Proposed § 1002.102(r) would refer to
existing § 1002.2(aa) for a definition of
the term ‘‘State.’’ Existing § 1002.2(aa)
defines the term as any State, the
District of Columbia, the
Commonwealth of Puerto Rico, or any
territory or possession of the United
States. The Bureau did not include a
definition of State in the SBREFA
Outline nor did it receive any feedback
on the term from SERs. This proposed
definition of State would be consistent
with existing Regulation B and familiar
to financial institutions.
The Bureau seeks comment on its
proposed approach to this definition.
102(s) Women-Owned Business
Background
ECOA section 704B(b)(1) requires
financial institutions to inquire whether
applicants for credit are women-owned
businesses. For purposes of the financial
institution’s inquiry under 704B(b),
704B(h)(5) defines a business as a
women-owned business if (A) more than
50 percent of the ownership or control
is held by one or more women, and (B)
more than 50 percent of the net profit
or loss accrues to one or more women.
323 SBREFA
Outline at 39.
contrast, the term ‘‘Loan/Application
Register’’ in Regulation C § 1003.2(k) refers to both
the record of information required to be collected
pursuant to § 1003.4 as well as the record submitted
annually or quarterly, as applicable, pursuant to
§ 1003.5(a).
324 In
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Section 1071 does not expressly define
the related terms of ‘‘ownership’’ or
‘‘control,’’ nor does it describe what it
means for net profits or losses to accrue
to an individual.
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SBREFA Proposal Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
stated that it was considering proposing
use of the statutory definition of a
‘‘women-owned business’’ (as set forth
above) with further clarification of the
terms ‘‘ownership’’ and ‘‘control’’ using
concepts set forth in the CDD rule.325
Some SERs expressed concerns with
certain aspects of the statutory
definition of women-owned business,
asserting that the definition could cause
confusion or pose particular
complexities.326 Several SERs and some
other stakeholders providing feedback
on the SBREFA Outline asked that the
definition of women-owned business be
revised to align with the definition used
by other agencies, such as the SBA and
the CDFI Fund. Some SERs as well as
some other commenters expressed
concern that a business that is owned
equally by a woman and a man would
not be a ‘‘women-owned business’’
under the statutory definition of
women-owned business because the
woman would not own ‘‘more than 50
percent’’ of the business and the woman
might not control more than 50 percent
of the business. These SERs and other
commenters recommended that the
Bureau instead use a ‘‘50 percent or
more’’ threshold for ownership or
control as the standard. Conversely, two
SERs and several other stakeholders
supported using the statutory definition
of women-owned business, including
the ‘‘more than 50 percent’’ portion of
the definition.
A number of SERs recommended that
the Bureau simplify the definition to
ensure it is understandable to small
business applicants and to thereby
facilitate consistent data collection.
SERs’ suggestions included eliminating
the portion of the definition that refers
to accrual of net profit and loss,
eliminating the portion of the definition
that refers to control, and providing a
simplified and standardized definition.
Several SERs supported using the
concepts of ownership and control in
the CDD rule when defining womenowned business; one SER said that
doing so would be logical and efficient,
while another said it would create
regulatory consistency and ease
325 SBREFA
Outline at 18–19.
SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 22.
326 The
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compliance burden. One SER said that
most credit unions are familiar with the
CDD rule. Generally, other commenters
supported use of the CDD concepts to
clarify the terms ‘‘ownership’’ and
‘‘control.’’ They stated that small
business applicants are familiar with the
concepts in the CDD rule or that they
appreciated the consistency with
existing regulatory requirements.
However, one trade association
commenter thought the Bureau should
provide simplified applicant-facing
materials without clarifying the
definition, and two other stakeholders
suggested that applicants might not be
familiar with the CDD rule or may not
understand the CDD rule.
The SBREFA Panel recommended
seeking comment on potential
interpretations of the definition of
women-owned business to clarify the
term and to ensure that small business
applicants would be able to understand
questions asking if they are a womenowned business.327
Proposed Rule
Proposed § 1002.102(s) would define
a women-owned business as a business
for which more than 50 percent of its
ownership or control is held by one or
more women, and more than 50 percent
of its net profits or losses accrue to one
or more women. This definition is
consistent with ECOA section
704B(h)(6) and the Bureau’s proposal
under consideration in the SBREFA
Outline.
Proposed comment 102(s)–1 would
explain that a business must satisfy both
prongs of the definition to be a womenowned business—that is, (A) more than
50 percent of the ownership or control
is held by one or more women, and (B)
more than 50 percent of the net profits
or losses accrue to one or more women.
Proposed comment 102(s)–2 would
clarify that the definition of womenowned business is used only when an
applicant determines if it is a womenowned business for purposes of
proposed § 1002.107(a)(19). A financial
institution would provide the definition
of women-owned business when asking
the applicant to provide women-owned
business status pursuant to proposed
§ 1002.107(a)(19), but a financial
institution would not be permitted or
required to make its own determination
regarding whether an applicant is a
women-owned business for this
purpose.
Proposed comment 102(s)–3 would
further note that a financial institution
would be permitted to assist an
applicant when determining whether it
327 Id.
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is a women-owned business but would
not be required to do so, and could
provide the applicant with the
definitions of ownership, control, and
accrual of net profits or losses set forth
in proposed comments 102(s)–4 through
–6. Additionally, for purposes of
reporting an applicant’s women-owned
business status, a financial institution
would rely on the applicant’s
determinations of its ownership,
control, and accrual of net profits and
losses.
Consistent with the approach during
the SBREFA process, the Bureau is
proposing to clarify ‘‘ownership’’ and
‘‘control’’ using concepts from the CDD
rule. Proposed comment 102(s)–4 would
clarify that a natural person owns a
business if that natural person directly
or indirectly, through any contract,
arrangement, understanding,
relationship or otherwise, has an equity
interest in the business. Proposed
comment 102(s)–4 would also provide
examples of ownership and clarify that,
where applicable, ownership would
need to be traced or followed through
corporate or other indirect ownership
structures for purposes of proposed
§§ 1002.102(s) and 1002.107(a)(19).
Proposed comment 102(s)–5 would
clarify that a natural person controls a
business if that natural person has
significant responsibility to manage or
direct the business and would provide
examples of natural persons who
control a business. Proposed comment
102(s)–6 would clarify that a business’s
net profits and losses accrue to a natural
person if that natural person receives
the net profits, is legally entitled or
required to receive the net profits or
losses, or is legally entitled or required
to recognize the net profits or losses for
tax purposes.
The Bureau believes many small
business applicants already respond to
questions about who owns and who
controls a business entity when
completing CDD forms or otherwise
responding to questions related to the
CDD rule and would be familiar with
the concepts in the CDD rule. Because
the CDD rule does not address the
second prong of the definition in ECOA
section 704B(h)(6) (regarding accrual of
net profit or loss), the Bureau is
proposing in comment 102(s)–4 that this
prong of the definition be defined to
mean that one or more women must
receive or be legally entitled to receive
the net profits or losses or that one or
more women must be legally required to
recognize the net profits or losses.
However, the Bureau shares some SERs’
concerns that the statutory definition of
women-owned business might, in some
cases, be difficult for applicants to
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understand, which could in turn
jeopardize the accuracy of reported data.
Thus, consistent with the SBREFA
Panel’s recommendation, the Bureau
seeks comment on the proposed
definition of women-owned business
and possible alternatives that may
clarify the term in order to help ensure
that small business applicants can
determine whether they are a womenowned business for purposes of section
1071 data collection.
Section 1002.103
Applications
Covered
ECOA section 704B(b) requires that
financial institutions collect, maintain,
and report to the Bureau certain
information regarding ‘‘any application
to a financial institution for credit.’’ For
covered financial institutions, the
definition of ‘‘application’’ will trigger
data collection and reporting obligations
with respect to covered credit
transactions. However, section 1071
does not expressly define ‘‘application.’’
The Bureau is proposing § 1002.103 to
define what is, and is not, a covered
application for purposes of subpart B
pursuant to its authority in ECOA
section 704B(g)(1) to prescribe such
rules and issue such guidance as may be
necessary to carry out, enforce, and
compile data pursuant to section 1071.
Proposed § 1002.103(a) would provide a
general definition of the term ‘‘covered
application,’’ followed by a list of the
circumstances that are not covered
applications in proposed § 1002.103(b).
103(a) Covered Application
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SBREFA Proposal Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
stated it was considering defining an
‘‘application’’ largely consistent with
the definition of that term in existing
§ 1002.2(f)—i.e., ‘‘an oral or written
request for an extension of credit that is
made in accordance with procedures
used by a creditor for the type of credit
requested.’’328 The Bureau considered
possible alternative definitions of
‘‘application,’’ including defining the
term by using the definition of the term
‘‘completed application’’ in existing
§ 1002.2(f) (when ‘‘a creditor has
received all the information that the
creditor regularly obtains and considers
in evaluating applications for the
amount and type of credit requested
. . . ’’). The Bureau also considered
defining ‘‘application’’ as particular
documents or specific data points that,
if collected, would trigger a duty to
collect and report data.
328 SBREFA
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SERs discussed their varied methods
of defining what constitutes an
‘‘application’’ within their
institutions.329 Many SERs define an
application as the point when there is
enough information to make a credit
decision. Several SERs define an
application as meeting the requirements
of a checklist, stating that obtaining all
the information and satisfying due
diligence can take a long time. Other
SERs define an application as the
submission of specific data or
documents, or obtaining sufficient
information about the borrower to pull
a credit report. One SER explained that
their in-person application process is
iterative, not readily definable, and
unique for each applicant. The SER also
explained that a single underwriting
process could be used at their financial
institution for multiple loans requested
throughout the year.
Several SERs supported using the
definition of ‘‘application’’ in existing
§ 1002.2(f). One of these SERs
emphasized the importance of capturing
data that may indicate potential
discouragement of minority-owned
businesses, including discouragement
that could occur in advance of an
application being submitted for
underwriting. Another SER stated that
using the definition in existing
§ 1002.2(f) would be helpful for training
purposes, rather than creating a wholly
new definition for purposes of
implementing section 1071. Many SERs
urged the Bureau in an eventual 1071
rule to define an application as a
completed application, that is, at the
point when there is sufficient
information to render a credit decision.
One SER opposed using the definition
of ‘‘completed application,’’ explaining
that it would be too restrictive and less
aligned with the purposes of section
1071. Another SER opposed use of the
definition of application in existing
§ 1002.2(f), explaining that in a
‘‘relationship lending’’ model, each
small business application is unique.
SERs expressed varying views on
whether withdrawn and incomplete
applications should be captured in the
1071 data. Some SERs felt incomplete
applications should be captured in the
1071 data as a potential indicator of
discouragement. One SER stated that
small and unsophisticated businesses
are more likely to leave an application
incomplete. Another SER recommended
not capturing incomplete applications,
asserting that such data would not be
informative or useful. Another SER
329 The SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 24.
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expressed concern about whether
incomplete or withdrawn applications
would include sufficient data for
reporting.
Other stakeholders also provided
feedback on the definition of
‘‘application.’’ The overwhelming
majority of commenters, including both
community groups and industry
representatives, supported use of the
definition of an ‘‘application’’ in
existing § 1002.2(f). Community groups,
CDFIs, and a SER noted that use of the
definition would further the purposes of
1071 by capturing applicants dissuaded
from completing an application,
potentially due to unlawful
discouragement or other discrimination.
Commenters highlighted research that
minority-owned and women-owned
businesses are disproportionately
discouraged from applying for credit
and the frequency of discrimination
during the pre-application stage. One
commenter stated that the definition
could better identify barriers to credit,
consistent with the community
development purpose of section 1071.
Other commenters, including many
industry commenters, stated that
financial institutions are familiar with
the definition in existing § 1002.2(f),
and so use of this definition would
reduce burden by minimizing the need
for additional training or different
procedures. Several commenters also
stated that using the definition in
existing § 1002.2(f) is appropriate given
that section 1071 amends ECOA, which
is implemented by existing Regulation
B. One industry commenter also
highlighted the flexibility provided by
the definition in existing § 1002.2(f).
Although supportive of using the
definition in existing § 1002.2(f) for the
1071 rule, several industry commenters
sought further clarification or
illustrations of the definition given
considerable variations in practices
among financial institutions. One
commenter suggested a safe harbor that
allows a financial institution to define
what constitutes an ‘‘application.’’ One
industry trade representative expressed
that many of its members have no
formal ‘‘application’’ and so attempts to
leverage existing definitions or stages to
define an application would be
unfamiliar to their members and could
create an inflexible process.
Several industry commenters
supported triggering section 1071 data
collection and reporting based on the
‘‘completed application’’ definition in
existing § 1002.2(f) and stated that the
Bureau should not require data
collection on withdrawn and
incomplete applications. These
commenters stated that using a
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‘‘completed application’’ definition
would provide more complete and
meaningful data, more uniformity across
products and lenders, and conserve
resources that would otherwise be
required to gather missing data points
on incomplete or withdrawn
applications. One commenter stated that
collection of data on incomplete
applications would not further section
1071’s purposes or reflect potential
discrimination, but rather would merely
represent borrower confusion in the
application process. One commenter
suggested using a defined set of criteria
to define an ‘‘application.’’
Several SERs and other stakeholders
also provided comments on applicant
requests for more than one product at
the same time. For example, in
connection with the application/loan
number data point (referred to in this
proposal as the unique identifier data
point), one SER stated that if an
applicant requests more than one type
of credit product, a separate
application/loan number is assigned to
each product request. In contrast, other
SERs indicated they use a single
application number even if multiple
products are requested. Among other
stakeholders, some commenters
supported reporting separate
applications in instances where the
applicant requests multiple covered
credit transactions at the same time,
while others supported requiring
reporting of only one application. One
commenter suggested that the Bureau
should accommodate both approaches.
Another commenter remarked that if a
business is applying for multiple
products, the basic information is going
to be the same, the only difference being
that only one product is funded. This
same commenter suggested that if these
requests are reported as multiple
applications, that will overinflate the
data.
Relatedly, two SERs discussed the
issue of multiple extensions of credit
resulting from a single application. One
of these SERs explained that such
multiple extensions of credit are
assigned separate application/loan
numbers at their financial institution.
The other SER suggested that reporting
in this situation will be complex, and
that combining the separate loans that
could result into a single reporting line
would be extremely difficult.
The SBREFA Panel recommended
that, if the Bureau proposes using the
Regulation B definition of the term
‘‘application’’330 for 1071 data
collection, the Bureau consider
clarifying when a completed
application—i.e., an application
sufficient to make a credit decision—
falls within the proposed definition of
the term ‘‘application.’’ 331 The SBREFA
Panel further recommended the Bureau
seek comment on the benefits and costs
of collecting 1071 data on incomplete or
withdrawn applications.332 Finally,
with respect to lines of credit, the
SBREFA Panel recommended (in the
context of the loan/credit type and loan/
credit purpose data points) that the
Bureau seek comment on how financial
institutions currently handle increases
in lines of credit and how best to require
reporting of multiple lines of credit
within the same account.333
Proposed Rule
The Bureau is proposing to define a
covered application in § 1002.103(a) as
an oral or written request for a covered
credit transaction that is made in
accordance with procedures used by a
financial institution for the type of
credit requested. This proposed
definition of ‘‘covered application’’ is
consistent with the definition of
‘‘application’’ that the Bureau said it
was considering proposing in the
SBREFA Outline.334 As noted above, the
term ‘‘application’’ is undefined in
section 1071. The Bureau believes its
proposed definition of the term is
reasonable, particularly as it aligns with
the definition of ‘‘application’’ in
existing § 1002.2(f). The Bureau is also
proposing commentary to accompany
this definition. Circumstances that are
not covered applications are addressed
in the section-by-section analysis of
proposed § 1002.103(b) below. Pursuant
to ECOA section 704B(b)(1), an
‘‘application’’ triggering data collection
and reporting obligations occurs
without regard to whether such
application is received in person, by
mail, by telephone, by electronic mail or
other form of electronic transmission, or
by any other means.
Several SERs and a majority of other
commenters supported use of this
definition, noting that it best aligns with
the purposes of section 1071 and is
familiar to creditors. The Bureau agrees
with certain SERs and other
commenters that incomplete and
withdrawn applications—which would
generally be captured under proposed
§ 1002.103(a)—are essential to the
purposes of section 1071 as a tool to
identify potential discrimination
(including through discouragement) and
to better understand the credit market.
331 SBREFA
Panel Report at 45.
332 Id.
333 Id.
330 12
CFR 1002.2(f).
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The definition of ‘‘covered application’’
in proposed § 1002.103(a), which is
similar to the definition of
‘‘application’’ in existing § 1002.2(f), is
also familiar to creditors and provides
flexibility to accommodate different
application processes described by the
SERs (including written and oral
applications; online and relationship
lending models; and use of standard
forms, checklists, and other minimum
requirements).335 Finally, the Bureau
believes this approach strikes an
appropriate balance by triggering 1071
collection and reporting requirements
only after there is a request for credit
(using procedures defined by the
financial institution), but still early
enough in the process to capture most
incomplete, withdrawn, and denied
applications.
The Bureau recognizes that the
proposed definition of ‘‘covered
application’’ in § 1002.103(a), while
flexible, would mean that 1071 data
collection and reporting may be
triggered at different times for different
financial institutions and different types
of covered credit transactions. For
example, for a financial institution that
defines an application under its
procedures as the submission of a
standard form either online or inperson, a ‘‘covered application’’ would
be triggered when an applicant submits
the form. In contrast, another financial
institution may not use a standard form
and instead define an application as a
request for credit and authorization to
pull a credit check on the business and
principal owners. In that circumstance,
a ‘‘covered application’’ under proposed
§ 1002.103(a) would not be triggered
until that process is satisfied. Using the
same example, if the financial
institution orally collects certain
information from a prospective
applicant (such as gross annual revenue
and business location) and discusses
with the prospective applicant potential
credit product options offered by the
335 Business creditors should be familiar with
operationalizing this definition based on their
experience providing adverse action notices under
existing Regulation B, which can be triggered in
relation to an incomplete application. See
§ 1002.9(a)(1) and (c) (requiring notice within 30
days after taking adverse action on an incomplete
application or 30 days after receiving an incomplete
application). Financial institutions may also be
familiar with Regulation C’s definition of
‘‘application,’’ which aligns with existing
§ 1002.2(f)’s definition of the term. See § 1003.2(b)
(generally defining an ‘‘application’’ as ‘‘an oral or
written request for a covered loan that is made in
accordance with procedures used by a financial
institution for the type of credit requested’’); see
also Regulation C comment 2(b)–1 (noting that
Bureau interpretations that appear in the official
commentary to Regulation B are generally
applicable to the definition of application under
Regulation C).
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financial institution, no ‘‘covered
application’’ would be triggered until
the prospective applicant indicates that
it wants to proceed to apply for credit
and authorizes the financial institution
to pull a credit check. Similarly, if a
prospective applicant merely expresses
interest in obtaining credit—not yet
focusing on any particular type of
covered credit transaction and not
submitting a ‘‘covered application’’—the
interaction also would not be reportable.
While the proposed definition of
‘‘covered application’’ does not provide
a bright-line rule, the Bureau believes
the proposed definition would be
familiar to financial institutions and
provide consistency with existing
Regulation B and Regulation C.
During SBREFA, SERs asked the
Bureau to clarify when an application
sufficient to make a credit decision
would align with an ‘‘application’’
triggering 1071 collection and reporting
requirements. Accordingly, the Bureau
notes that a ‘‘covered application’’ may
align with the information necessary to
make a credit decision or it may be
possible to have a ‘‘covered application’’
before having information necessary to
make a credit decision—it depends on
each financial institution’s own
procedures. For example, suppose a
financial institution defines an
application under its procedures as the
point when an applicant, or someone on
the applicant’s behalf, fills out certain
key pieces of information on an
application form. If the financial
institution’s process is to immediately
transmit the application to underwriting
for a decision once the form is
submitted, 1071 collection and
reporting would likely be triggered at
the same time there is sufficient
information to make a credit decision.
On the other hand, if the financial
institution requires additional
verification of documents and follow-up
requests before submitting the loan file
to underwriting, the financial institution
would likely have a ‘‘covered
application’’ before it has sufficient
information to make a credit decision.
Proposed comment 103(a)–1 would
underscore that a financial institution
has latitude to establish its own
application process or procedure and to
decide the type and amount of
information it will require from
applicants. Proposed comment 103(a)–2
would explain that the term
‘‘procedures’’ refers to the actual
practices followed by a financial
institution as well as its stated
application procedures, and provides an
example. Because the definition of
‘‘covered application’’ is based on a
financial institution’s actual practices, a
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financial institution should have little
incentive to attempt to artificially define
an ‘‘application’’ in its written
procedures as occurring later in the
process; for example, if a financial
institution has near a 100 percent
approval rate because all ‘‘applications’’
have already been vetted earlier in the
process, the financial institution’s stated
definition of an application likely does
not reflect its actual practices. Proposed
comment 103(a)–3 would provide that
the commentary accompanying existing
§§ 1002.2(f) and 1002.9 is generally
applicable to the proposed definition of
‘‘covered application,’’ except as
provided otherwise in proposed
§ 1002.103(b).
Proposed comments 103(a)–4 through
–6 would address how a financial
institution reports multiple covered
credit transaction requests at one time
or a request for a credit transaction that
results in the origination of multiple
covered credit transactions. Proposed
comment 103(a)–4 would provide that if
an applicant makes a request for two or
more covered credit transactions at one
time, the financial institution reports
each request for a covered credit
transaction as a separate covered
application. The Bureau believes the
proposed approach would further the
purposes of section 1071 by better
capturing demand for credit, including
demand for different covered credit
transactions at the same time. The
Bureau also believes that the simplicity
of this approach would reduce data
reporting errors compared to potential
alternatives, for example, alternatives in
which the financial institution may
sometimes report such requests as a
single covered application or, in other
circumstances, as multiple covered
applications. Finally, the Bureau
believes that concerns about duplicative
information requests would be mitigated
by permitting financial institutions to
reuse certain previously collected data,
as set forth in proposed § 1002.107(c)(2).
In response to SERs’ feedback, proposed
comment 103(a)–5 would address the
circumstance where an initial request
for a single covered credit transaction
results in the origination of multiple
covered credit transactions. Similarly,
in response to the SBREFA Panel’s
recommendations, proposed comment
103(a)–6 would address requests for
multiple lines of credit at one time,
proposing that such requests would be
reported based on the procedures used
by the financial institution for the type
of credit account.
Proposed comment 103(a)–7 would
address how a financial institution
would report applications where there
is a change in whether the applicant is
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requesting a covered credit transaction.
If the applicant initially requests a
covered credit transaction, but during
the application process is offered and
accepts instead a product that is not
reportable, the Bureau is proposing to
designate this circumstance as not a
covered application, due in part to
concerns that reporting in this scenario
could affect data quality. For example,
reporting on product types that are not
covered credit transactions (for
example, leases) could raise data quality
questions if there are not appropriate
fields to capture the terms of those
transactions. Despite these concerns, the
Bureau is also considering whether
capturing such transactions in the 1071
data could be useful to identifying
potential steering or other forms of
discrimination, therefore furthering the
purposes of section 1071. As noted
below, the Bureau seeks comment on
whether to require full or limited
reporting in these circumstances. If an
applicant initially requests a product
that is not a covered credit transaction,
but during the application process
decides to seek instead a product that is
a covered credit transaction, the
application is a covered application and
must be reported.
The Bureau seeks comment on its
proposed definition of a covered
application in § 1002.103(a) and
associated commentary. The Bureau
also seeks comment on the advantages
and disadvantages of collecting data on
incomplete or withdrawn applications,
as well as how collection would or
would not further the purposes of
section 1071. In addition, the Bureau
seeks comment on reporting of multiple
lines of credit on a single credit account,
including how financial institutions
internally consider multiple lines of a
credit on a single account and the
Bureau’s proposed approach in
comment 103(a)–6.
As noted above, the Bureau also seeks
comment on how a financial institution
should report applications where there
is a change in whether the request for
credit involves a covered credit
transaction. Specifically, the Bureau
seeks comment on the advantages and
disadvantages of requiring full or
limited reporting where an applicant
initially seeks a product that is a
covered credit transaction, but
ultimately is offered and accepts a
product that is not reportable. For
example, whether in those
circumstances the financial institution
should report limited data points related
to the transaction (such as whether the
applicant is a small business; whether
the applicant is a women-owned
business or a minority-owned business;
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the principal owners’ race, sex, and
ethnicity; number of principal owners;
gross annual revenue; and loan type
reported as ‘‘Non-reportable credit
product’’ or something similar). The
Bureau is particularly interested in
receiving comments on the utility of
such data to identify potential steering
or other forms of discrimination, the
effect on data quality, and other factors
related to the purposes of section 1071.
Alternatives Considered
The Bureau considered several other
options for defining ‘‘application.’’ First,
the Bureau considered triggering 1071
collection and reporting based on a
‘‘completed application,’’ which is
defined in existing § 1002.2(f) as an
application in which the creditor has
received ‘‘all the information that the
creditor regularly obtains and
considers’’ in evaluating similar
products. The Bureau is not proposing
to use the definition of ‘‘completed
application’’ in existing § 1002.2(f) for
its definition of covered application in
subpart B, as doing so would exclude
incomplete applications and many
withdrawn applications that may reflect
demand for credit and potential
discrimination during the application
process. While some commenters noted
that use of this definition would provide
uniformity in the data across financial
institutions and product types, the
Bureau is concerned about the loss of
data on incomplete and withdrawn
applications. Although some
commenters suggested that the
‘‘completed application’’ definition
could result in more accurate and
complete data because it is collected
later in the application process, the
Bureau believes that this benefit can
largely be obtained under the current
proposal by requiring financial
institutions to report, where available,
verified applicant-provided information,
as set forth in proposed § 1002.107(b).
Although some SERs and other
stakeholders urged the Bureau to define
an application based on when there is
sufficient information to render a credit
decision, as pointed out by another SER,
such a definition may not be as effective
in furthering the purposes of 1071. For
example, it would capture few to no
incomplete applications and a smaller
share of withdrawn applications.
Moreover, as discussed above, in certain
situations—depending on a financial
institution’s application procedures—
the definition of a covered application
in proposed § 1002.103(a) may align
with the point where there is enough
information to render a credit decision.
The Bureau also considered defining
‘‘covered application’’ as a set of
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specific data points that, if collected,
would trigger a duty to collect and
report 1071 data. The Bureau is not
proposing this approach for a few
reasons. First, this approach would
introduce another regulatory definition
of ‘‘application,’’ 336 which could cause
confusion and hinder compliance.
Second, this approach could require
financial institutions to alter their
existing practices, resulting in burden.
Third, this approach could lead some
financial institutions to intentionally
delay the gathering of one or more data
points until after a credit decision was
made in order to avoid triggering 1071
obligations. Last, this approach may be
difficult to execute given that financial
institutions use different data points in
underwriting based on product type,
lending model, exposure, and other
factors.
103(b) Circumstances That Are Not
Covered Applications
SBREFA Proposal Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
stated it was considering clarifying
circumstances that would not be
reportable under section 1071, even if
certain of those circumstances would
otherwise be considered an
‘‘application’’ under existing § 1002.2(f).
Specifically, those circumstances were:
(1) Inquiries/prequalifications; (2)
reevaluation, extension, and renewal
requests, except requests for additional
credit amounts; and (3) solicitations and
firm offers of credit.337
Reevaluation, extension, or renewal
requests on an existing business credit
account, unless the request seeks
additional credit amounts. Several SERs
supported the Bureau’s proposal under
consideration to exclude renewals
unless additional credit is requested;
one SER also supported excluding
solicitations.338 Several SERs urged the
Bureau to exclude line increases as a
distinct type of application, explaining
that financial institutions may not
require a new application for such
requests and that underwriting a line
increase request is substantively distinct
from underwriting a request for new
credit because a line increase
336 Although certain regulations define an
‘‘application’’ as a set of specific data points (e.g.,
name, income, property address, estimated property
value, etc.), many of the data points in those
regulations are specific to the mortgage context and
would not be applicable to small business lending.
These regulations also do not relate to data
collection. See, e.g., Regulation X § 1024.2(b) and
Regulation Z § 1026.2(a)(3).
337 SBREFA Outline at 22–24.
338 The SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 24–25.
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extensively relies on past performance
data and prior relationships. Due to
these differences, one SER suggested
that including line increases may skew
1071 data, causing misinterpretations.
The SBREFA Panel recommended the
Bureau seek comment on whether to
include line increases as a separate
reportable application.339 The SBREFA
Panel also recommended that the
Bureau seek comment on how financial
institutions currently handle increases
in lines of credit.340
A number of other industry
stakeholders also supported the
Bureau’s proposal under consideration
to exclude reevaluations, extensions,
and renewal requests (except requests
for additional credit amounts). The
commenters stated that such collection
would be duplicative since financial
institutions would also be reporting data
on the original application (perhaps in
the same reporting year). The
commenters also noted that extension
requests are often short term and
granted without a full application
process, that requiring reporting could
lead to fewer financial institutions
offering extensions due to the added
collection and reporting burden
(particularly for open-ended credit), and
that providing an exemption would be
consistent with HMDA reporting. One
commenter sought exclusion of rate
adjustments. Community group
commenters opposed exclusion of
reevaluations, renewals, and extensions.
Several industry commenters opposed
1071 collection and reporting on
reevaluations, extensions, or renewals
that seek additional credit amounts.
These commenters stated that 1071
collection and reporting should focus on
data collected at the time of origination,
that collecting data repeatedly from the
same borrowers would add burden, and
that collecting data for line increases
would make it difficult for financial
institutions to provide timely approvals.
One commenter suggested only
reporting on additional credit amounts
if the original note is replaced. Other
industry commenters—while not
explicitly opposing such collection—
suggested the Bureau further consider
whether increases or renewals with
additional credit amounts should be an
‘‘application’’ for purposes of the rule.
The commenters noted that such
increases/renewals are typically more
streamlined than a standard application
given the financial institution already
has the applicant’s information in its
possession, and that the Bureau should
carefully balance burden (which could
339 Id.
at 45–46.
340 Id.
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affect how such requests could be
processed) with benefit (obtaining
additional data on the same applicant).
One industry representative supported
collection on requests that include
additional credit amounts. Another
commenter sought clarification on what
would be reported in such
circumstances: The newly advanced
funds or the entire outstanding amount.
Inquiries and prequalification
requests. Several SERs urged the Bureau
not to require reporting on
prequalifications or inquiries. These
SERs explained that they encounter a
high number of inquiries from rate
shoppers asking about qualification
requirements and potential rates, many
of which are abandoned or otherwise do
not progress to a completed
application.341 A significant number of
other industry commenters also
supported the Bureau’s proposal under
consideration to exclude inquiries and
prequalifications. These commenters
noted that such inquiries could include
countless informal interactions that
would be difficult to collect in a
consistent manner and that may lead to
misleading or erroneous data. The
commenters also stated that collection
would be duplicative and impose
significant burden without
countervailing benefits. Community
group commenters expressed support
for collecting data on inquiries and
prequalifications to identify
discrimination that occurs before an
application is submitted.
Solicitations and firm offers of credit.
A number of industry commenters
supported exclusion of solicitations and
firm offers of credit. One commenter
noted that excluding such data would
avoid duplicative steps and be
consistent with the purposes of section
1071.
Proposed Rule
Proposed § 1002.103(b) would
identify certain circumstances that are
not covered applications—even if they
otherwise would be considered an
application under existing § 1002.2(f).
Specifically, the Bureau is proposing
that a covered application does not
include (1) reevaluation, extension, or
renewal requests on an existing business
credit account, unless the request seeks
additional credit amounts; and (2)
inquiries and prequalification requests.
As discussed below, solicitations and
firm offers of credit would also not be
‘‘covered applications’’ under the
proposed definition. The Bureau is also
proposing comments 103(b)–1 through
–5 to provide additional guidance and
341 Id.
at 24–25.
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examples of circumstances that do and
do not trigger 1071 collection and
reporting as a covered application. For
example, proposed comment 103(b)–4
clarifies that the term ‘‘covered
application’’ does not include
evaluations or reviews of existing
accounts initiated by the financial
institution.
Reevaluation, extension, or renewal
requests on an existing business credit
account, unless the request seeks
additional credit amounts. The Bureau
is proposing to exclude from the
definition of a ‘‘covered application’’
requests by borrowers to modify the
terms or duration of an existing
extension of credit, other than (as
explained below) requests for additional
credit amounts. The Bureau believes
that requests to modify the terms or
duration of an existing extension of
credit, which occur with high frequency
in the small business lending space,
may add complexity and burden for
financial institutions, while potentially
providing limited additional
information relevant to the purposes of
section 1071. Moreover, broadly
including requests to modify the terms
or duration of existing extensions of
credit might affect the quality of the
data absent additional flags to
distinguish the transactions from new
originations. The Bureau is also
concerned about the impact of adding
1071 collection and reporting
requirements to what are otherwise
streamlined evaluations, particularly
given the limited additional data that
would be gained from such reporting.
The Bureau also notes that Regulation C
takes a similar approach by excluding
reporting of loan modifications.342
In contrast, the Bureau is not
proposing to exclude requests for
additional credit amounts (such as line
increases or new money on existing
facilities). That is, reporting would be
required for requests for additional
credit amounts. The Bureau believes
that capturing requests for additional
credit amounts will further the purposes
of section 1071, particularly the
community development purpose, as it
would more accurately capture demand
for credit. Although several SERs and
other commenters opposed reporting on
new credit amounts—due to the
potentially streamlined nature of such
reviews (which may differ from
underwriting of new applications) and
concerns about duplicative reporting—
the Bureau believes these factors do not
outweigh the potential community
development benefits of reporting and
collection. Moreover, the Bureau
342 See
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believes that concerns about duplicative
reporting would be mitigated by
proposed § 1002.107(c)(2), which would
permit a financial institution to reuse
certain data points under certain
circumstances. In addition, under
proposed § 1002.107(a)(7) and (8), when
reporting a covered application that
seeks additional credit amounts on an
existing account, the financial
institution would only report the
additional credit amount sought (and
approved or originated, as applicable),
and not the entire credit amount
extended. A request to withdraw
additional credit amounts at or below a
previously approved credit limit
amount on an existing open-end line of
credit would not be a covered
application as the request falls within
the terms of a previously approved
covered credit agreement.
Inquiries and prequalification
requests. Existing Regulation B
recognizes that before a consumer or
business requests credit in accordance
with the procedures used by a creditor
for the type of credit requested, a
creditor may provide a prospective
applicant with information about credit
terms. Existing Regulation B comments
2(f)–3 and 9–5 refer to these situations
as inquiries and prequalification
requests. Generally, an inquiry occurs
when a consumer or business requests
information about credit terms offered
by a creditor; a prequalification request
generally refers to a request by a
consumer or business for a preliminary
determination on whether the
prospective applicant would likely
qualify for credit under a creditor’s
standards or for what amount.343 Under
existing Regulation B comments 2(f)–3
and 9–5, an inquiry or prequalification
request may become an ‘‘application’’
that triggers adverse action notification
requirements if the creditor evaluates
information about the consumer or
business, decides to decline the request,
and communicates this to the consumer
or business; otherwise, such inquiries
and prequalification requests are
generally not considered applications
under existing Regulation B. As
explained in existing comment 2(f)–3,
343 See also Regulation C comment 2(b)–2
(describing prequalification requests). In addition, a
preapproval as described in existing comment 2(f)–
5.i of Regulation B is an example of an application
under existing Regulation B. Under that comment,
a preapproval occurs when a creditor reviews a
request under a program in which the creditor, after
a comprehensive analysis of an applicant’s
creditworthiness, issues a written commitment
valid for a designated period of time to extend a
loan up to a specified amount. If a creditor’s
program does not provide for giving written
commitments, requests for preapprovals are treated
as prequalification requests.
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whether the inquiry or prequalification
request becomes an application depends
on how the creditor responds to the
consumer or business, not on what the
consumer or business says or asks.
Regulation C excludes all
prequalification requests from HMDA
reporting, even if the prequalification
request becomes an application under
existing Regulation B.344 Regulation C
does not address reporting of inquiries
more generally.
The Bureau is proposing to exclude
inquiries and prequalification requests
as a ‘‘covered application,’’ even if the
inquiry or prequalification request may
become an ‘‘application’’ under existing
§ 1002.2(f) that may trigger notification
requirements. The Bureau agrees with
SERs and other commenters that
requiring data collection for all inquiries
and prequalifications could create
operational challenges given that such
interactions may be voluminous and
typically occur before a financial
institution has the relevant data or
processes in place for tracking requests
for credit. The Bureau is likewise
concerned that requiring the collection
of 1071 data for these requests could
pose data accuracy issues, given the
often informal nature of these
interactions, which may raise the risk of
missing, unavailable, or erroneous data.
In addition, reporting of inquiries and
prequalifications could be duplicative if
the applicant subsequently applies for
credit in accordance with the
procedures designated by the financial
institution.
The Bureau also has concerns about
requiring reporting of inquiries and
prequalification requests only in
situations that would otherwise be
treated as an ‘‘application’’ under
existing Regulation B—i.e., when the
financial institution evaluates
information about the consumer or
business, decides to decline the request,
and communicates this to the consumer
or business. The Bureau is concerned
that the logistics of reporting an inquiry
or prequalification only in certain
circumstances—if the institution
evaluates the information, declines the
request, and communicates it to the
business—would be operationally
challenging for financial institutions
and could lead to data distortion as only
denials would be captured. In these
circumstances, a financial institution
may prefer reporting all inquiries and
prequalifications, which could lead to
some of the challenges identified above.
The Bureau is also considering the
market effects of requiring reporting
only for certain inquiries and
344 See
Regulation C comment 2(b)–2.
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prequalification requests, including
whether it would cause financial
institutions to restrict such interactions
or services.
The Bureau, however, remains
concerned about potential
discrimination that may occur in these
early interactions with a financial
institution. In particular, the Bureau is
concerned about excluding data on
inquiries and prequalification requests
when the financial institution evaluates
information about a business and
declines the request, which may be
useful for identifying potential
prohibited discouragement of or
discrimination against applicants or
prospective applicants.
On balance, the Bureau believes it is
appropriate to interpret ‘‘application’’ as
used in section 1071 to exclude
inquiries and prequalification requests
given the considerations identified
above, including the timing and often
informal nature of such interactions, the
operational challenges of implementing
such a definition, and related concerns
about the reliability of the data.
Although the Bureau is proposing to
exclude inquiries and prequalification
requests from the definition of ‘‘covered
application,’’ the Bureau notes that the
relevant analysis of whether an inquiry
or prequalification request is reportable
focuses on how the financial institution
structures, processes, and responds to
such requests, not what they are called.
For example, if a financial institution
has a formalized process to screen
businesses requesting credit and deny
those it considers ineligible, a request
for credit that goes through that process
may be a ‘‘covered application,’’ even if
the financial institution labels the
review a ‘‘prequalification’’ request or
an ‘‘inquiry.’’
The Bureau further notes that requests
for credit that meet the proposed
definition of ‘‘covered application’’
would be reportable, even if the
application was preceded by an inquiry
or prequalification request. For
example, if a business initially seeks
information about potential credit
offerings, the financial institution
responds, and then the business submits
an application for a covered credit
transaction following the financial
institution’s procedures, the application
would be reportable. If, on the other
hand, the business asks about potential
credit offerings, but then chooses not to
submit an application, there is no
covered application.
Finally, the Bureau notes that
inquiries and prequalification requests
where the institution evaluates the
information, declines the request, and
communicates it to the business or
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consumer, are ‘‘applications’’ under
existing Regulation B, and are thus
subject to its requirements regarding
‘‘applications,’’ including its adverse
action notification requirements and
nondiscrimination provisions. In no
way are the exclusions in proposed
§ 1002.103(b) intended to repeal,
abrogate, annul, impair, change, or
interfere with the scope of the term
application in existing § 1002.2(f) as
applicable to existing Regulation B.
Solicitations and firm offers of credit.
Proposed comment 103(b)–4 would
clarify that the term covered application
does not include solicitations and firm
offers of credit; like other reviews or
evaluations initiated by the financial
institution, these communications do
not involve an applicant requesting
credit, and so are not ‘‘covered
applications.’’ Excluding solicitations
and firm offers of credit is also
consistent with the language of ECOA
section 704B(b)(1), which provides that
an application in response to a
solicitation by a financial institution
could be an application under section
1071, but the text is silent on
solicitations without any applicant
response. Thus, consistent with the
statutory language, a solicitation or firm
offer of credit may become a ‘‘covered
application’’ under the proposed
definition if an applicant responds to
the solicitation or offer by requesting a
covered credit transaction.
In conclusion and for the reasons
identified above, the Bureau believes its
proposed exclusion of inquiries and
prequalification requests is reasonable.
Similarly, the Bureau believes its
proposed exclusion of reevaluation,
extension, or renewal requests on an
existing business credit account, unless
the request seeks additional credit
amounts, is a reasonable interpretation
of an ‘‘application’’ as used in section
1071 for the reasons described above,
including that the original extension of
credit would be collected and reported
and further reporting would yield
limited additional data. The Bureau also
believes its proposed treatment of
solicitations and firm offers of credit is
a reasonable interpretation of an
‘‘application’’ as used in section 1071,
as discussed above.
The Bureau seeks comment on its
proposed definition of a covered
application in § 1002.103(b) and
associated commentary. The Bureau
also seeks comment on whether instead
to define a ‘‘covered application,’’
consistent with existing Regulation B, to
include inquiries or prequalification
requests where the financial institution
evaluates information about the
business, decides to decline the request,
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and communicates this to the business.
Related to this alternative approach, the
Bureau further seeks comment on
whether additional data fields may be
necessary in order to distinguish
prequalification requests and inquiries
from other reported applications. In
addition, if the Bureau were to require
reporting of declined inquiries or
prequalification requests (as described
above), the Bureau seeks comment on
whether financial institutions would
want the option to report all
prequalification requests and inquiries,
to allow for a comparison with denials.
In addition, the Bureau seeks
comment on whether, alternatively, to
define a ‘‘covered application’’
consistent with Regulation C, which (as
discussed above) does not require a
financial institution to report
prequalification requests, even if those
requests may constitute applications
under existing Regulation B for
purposes of adverse action notices, but
does not address reporting of inquiries
more generally. Related to this
alternative approach, the Bureau also
seeks comment on whether greater
clarity could be achieved by defining,
for purposes of proposed subpart B
only, inquiries as requests for
information about loan terms that do not
become applications under existing
Regulation B, and prequalification
requests as requests that may become
applications under existing Regulation
B. In addition, the Bureau also seeks
comment on the frequency with which
financial institutions accept
prequalification requests (as described
in Regulation C comment 2(b)–2, but
with respect to prospective business
applicants) and what data are collected
in connection with such
prequalification requests, as well as
potential effects on the market if some
or all prequalification requests were
reportable under section 1071.
Consistent with the SBREFA Panel’s
recommendation, the Bureau also seeks
comment on whether to include line
increase requests as a ‘‘covered
application’’ and information on how
financial institutions currently process
requests for a line of credit increase. In
addition to line increases, the Bureau
also seeks comment on financial
institution practices related to other
types of requests for additional credit
amounts, and whether such requests
should be captured in 1071 data.
Lastly, the Bureau notes that
Regulation C requires the reporting of
assumptions for HMDA,345 but the
Bureau does not have information on
whether assumptions are similarly used
in the small business lending context.
The Bureau seeks comment on this
issue, including how an assumption in
small business lending might be
structured (for example, whether it is
typically a modification of an existing
extension of credit or a new extension
of credit), the frequency of assumptions
in the small business lending context,
and whether reporting of assumptions
for small business lending would
further the purposes of section 1071.
Section 1002.104 Covered Credit
Transactions and Excluded Transactions
104(a) Covered Credit Transaction
ECOA section 704B(b) requires
financial institutions to collect and
report information regarding any
application for ‘‘credit’’ made by
women-owned, minority-owned, or
small businesses. Although the term
‘‘credit’’ is not specifically defined in
section 1071, ECOA defines ‘‘credit’’ as
‘‘the right granted by a creditor to a
debtor to defer payment of debt or to
incur debts and defer its payment or to
purchase property or services and defer
payment therefor.’’ 346 As noted above
in the section-by-section analysis of
§ 1002.102(d), existing Regulation B
further defines ‘‘business credit’’ as
‘‘extensions of credit primarily for
business or commercial (including
agricultural) purposes,’’ with some
exclusions.347 As discussed in detail
below, the Bureau is proposing to
require that covered financial
institutions report data for all
applications for transactions that meet
the definition of business credit unless
otherwise excluded. Proposed
§ 1002.104(a) would define the term
‘‘covered credit transaction’’ as an
extension of business credit that is not
an excluded transaction under proposed
§ 1002.104(b). Loans, lines of credit,
credit cards, and MCAs (including such
credit transactions for agricultural
purposes and HMDA-reportable
transactions) would all fall within the
scope of this proposed rule, which
would cover the majority of products
that small businesses use to obtain
financing.348 As such, the Bureau
believes that the inclusion of these
products in the Bureau’s 1071 rule is
important to fulfilling the purposes of
section 1071. Pursuant to this approach,
the Bureau notes that the products
discussed below do not constitute an
exhaustive list of covered credit
transactions; other types of business
56403
credit not specifically described below
would nevertheless constitute covered
credit transactions unless excluded by
proposed § 1002.104(b).
Proposed § 1002.104(b), in turn,
would state that the requirements of
subpart B do not apply to trade credit,
public utilities credit, securities credit,
and incidental credit. Associated
commentary would make clear that the
term ‘‘covered credit transaction’’ also
does not cover factoring, leases,
consumer-designated credit used for
business purposes, or credit secured by
certain investment properties.
For the reasons set forth below, the
Bureau is proposing § 1002.104
pursuant to its authority under ECOA
section 704B(g)(1) to prescribe such
rules and issue such guidance as may be
necessary to carry out, enforce, and
compile data under section 1071.
In the SBREFA Outline, the Bureau
stated that it was considering proposing
that a covered product under section
1071 is one that meets the definition of
‘‘credit’’ under ECOA and is not
otherwise excluded from collection and
reporting requirements.349 Specifically,
the Bureau stated that it was
considering proposing that covered
products under section 1071 would
include term loans, lines of credit, and
credit cards. The Bureau stated that
term loans, lines of credit, and credit
cards meet the definition of ‘‘credit’’
under ECOA and these products
collectively make up the majority of
business financing products used by
small businesses and are an essential
source of financing for such
businesses.350 The Bureau also proffered
in the SBREFA Outline that the
inclusion of these products in the
Bureau’s 1071 rule is important to
fulfilling the purposes of section
1071.351 The Bureau also stated in
SBREFA Outline that it was considering
proposing that the following products
not be covered by the 1071 rule:
consumer credit used for business
purposes; leases; trade credit; factoring;
and MCAs.352
SERs and other stakeholders
providing feedback on the SBREFA
Outline generally supported the
Bureau’s proposal under consideration
to include term loans, lines of credit,
and credit cards as covered products
under section 1071.353 Many
stakeholders (including roughly half the
SERs) urged the Bureau to pursue
349 SBREFA
350 Id.
Outline at 19–20.
at 20.
351 Id.
352 Id.
345 See
Regulation C comment 2(j)–5 (discussing
when assumptions should be reported as home
purchase loans).
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346 15
U.S.C. 1691a(d); see also § 1002.2(j).
347 12 CFR 1002.2(g).
348 See White Paper at 21–22.
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353 The SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 22–23.
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expansive product coverage in order to
adequately capture small businesses’
experiences with obtaining financing,
especially for women-owned and
minority-owned small businesses. Many
SERs and other stakeholders advocated
for including MCAs within the scope of
the eventual 1071 rule; some SERs and
stakeholders also advocated for
including factoring, and in some cases
leases as well, in order to capture the
full landscape of small business
financing. Multiple stakeholders
expressed concern that the exclusions
under consideration for certain products
(e.g., MCAs) would disproportionately
burden traditional lenders who do not
offer such products.
As discussed below, the Bureau
proposes that the 1071 rule cover loans,
lines of credit, credit cards, and MCAs.
The Bureau also explains below that
‘‘covered credit transaction’’ would
encompass agricultural-purpose credit
and HMDA-reportable transactions.
Loans, lines of credit, and credit
cards. As noted above, stakeholders
generally presume and support the
coverage of loans, lines of credit, and
credit cards. These products are
commonly offered to small business
applicants (making up almost 60
percent of the aggregate dollar volume
of various financial products used by
small businesses).354 The Bureau is not
proposing definitions for loans, lines of
credit, and credit cards because the
Bureau believes these products are
generally and adequately covered by the
proposed definition of ‘‘credit’’ in
proposed § 1002.102(i).355
The Bureau seeks comment on its
proposed approach to covered credit
transactions and particularly on
whether it should define loans, lines of
credit, and credit cards, and, if so, how.
Merchant cash advances. MCAs are a
form of financing for small businesses
that purport to be structured as a sale of
potential future income. MCAs vary in
form and substance, but under a typical
MCA, a merchant receives a cash
advance and promises to repay it plus
some additional amount or multiple of
the amount advanced (e.g., 1.2 or 1.5,
the ‘‘payback’’ or ‘‘factor’’ ‘‘rate’’). The
merchant promises to repay by either
pledging a percentage of its future
revenue, such as its daily credit and
debit card receipts (the ‘‘holdback
354 See
id. at 21 fig. 2.
noted in the section-by-section analysis of
proposed § 1002.107(a)(5) below, the Bureau
distinguishes between secured and unsecured loans
and lines of credit when financial institutions
report the type of credit product being applied for.
The Bureau does not believe that this distinction
has relevance to whether these products constitute
‘‘credit.’’
355 As
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percentage’’), or agreeing to pay a fixed
daily withdrawal amount to the MCA
provider until the agreed upon payment
amount is satisfied. MCA contracts often
provide for repayment directly through
the merchant’s card processor and/or
via ACH withdrawals from the
merchant’s bank account.356 MCAs
constitute the primary product under an
umbrella that the Bureau refers to as
‘‘sales-based financing’’; generally,
transactions wherein a financial
institution extends funds to a business
and repayment is based on the
business’s anticipated sales, revenue, or
invoices.357
The Bureau understands that the
MCA market is generally dominated by
nondepository lenders not subject to
Federal safety and soundness
supervision or reporting requirements.
The Bureau also understands that MCA
providers may not be required to obtain
State lending licenses. As a result,
information on MCA lending volume
and practices is limited. The Bureau
notes, however, that California recently
enacted a law that brings providers of
commercial financing options,
including factoring and MCAs, into the
California Financing Law (CFL), which
will impose disclosure requirements.358
356 This description is based on the Bureau’s
review of a sample of MCA contracts that the
Bureau believes fairly represent typical MCA
contracts in the market. The Bureau’s review
comports with observations made by industry and
community groups regarding MCAs.
357 As stated below, the Bureau is not proposing
to specifically define sales-based financing in the
1071 rule because the Bureau believes these
products are covered by the proposed definition of
‘‘credit’’ in proposed § 1002.102(i). New York and
California laws have recently sought to define salesbased financing. New York law, for example,
defines ‘‘sales-based financing’’ as ‘‘a transaction
that is repaid by the recipient to the provider, over
time, as a percentage of sales or revenue, in which
the payment amount may increase or decrease
according to the volume of sales made or revenue
received by the recipient.’’ N.Y. Fin. Serv. 801(j).
New York’s definition of sales-based financing also
encompasses a true-up mechanism where the
financing is repaid as a fixed payment but provides
for a reconciliation process that adjusts the payment
to an amount that is a percentage of sales or
revenue. Id. California law uses a similar definition.
See 10 Cal. Code Reg. 2057(a)(22) (defining salesbased financing as ‘‘a commercial financing
transaction that is repaid by a recipient to the
financer as a percentage of sales or income, in
which the payment amount increases and decreases
according to the volume of sales made or income
received by the recipient’’ and including ‘‘a true-up
mechanism’’).
358 The new law does not go so far as to amend
the CFL to require factors or MCA providers to be
licensed, but it does impose first-in-the-nation
disclosure requirements in connection with these
products similar to those imposed under TILA. See
Cal. S.B. 1235 (Sept. 30, 2018), https://leginfo.
legislature.ca.gov/faces/billTextClient.xhtml?bill_
id=201720180SB1235. The law will be
implemented through regulations, which have not
been finalized yet. See State of Cal. Dep’t of Bus.
Oversight (DBO), Draft Regulations (July 26, 2019),
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New York also enacted a law that would
impose similar disclosure requirements
upon certain New York commercial
financing providers, including MCA
providers.359
Although the Bureau’s 2017 White
Paper estimated the MCA market
constituted less than 1 percent of the
aggregate dollar volume of various
financial products used by small
businesses in the U.S. in 2014,360 the
Bureau finds that more recent evidence
suggests the industry may now be much
larger. For example, the 2020 Federal
Reserve Banks’ survey of firms with 1–
499 employees (‘‘employer firms’’)
found that 8 percent of such businesses
applied for and regularly used MCAs.361
Moreover, on August 18, 2019, the trade
website deBanked reported that
according to an investment bank’s
projections, ‘‘the MCA industry will
have more than doubled its small
business funding to $19.2 billion by
year-end 2019, up from $8.6 billion in
2014.’’ 362
Based on stakeholder feedback and
available data, the Bureau understands
that MCAs are often used by merchants
due to the speed and ease with which
they can be obtained,363 particularly for
merchants unable to obtain financing
from more traditional sources.364
According to the 2020 Federal Reserve
Banks’ report regarding firms owned by
people of color (both small employer
firms and non-employer firms), Blackowned firms, Hispanic-owned firms,
and Asian-owned firms were more
likely to have applied for MCAs (14
percent, 10 percent, and 10 percent
https://dbo.ca.gov/wp-content/uploads/sites/296/
2019/07/SB-1235-Draft-Regulations-7-26-19.pdf.
359 N.Y. S.B. S5470B (Dec. 23, 2020), https://
legislation.nysenate.gov/pdf/bills/2019/S5470B.
360 See White Paper at 21 fig. 2, 22 fig. 3.
361 Fed. Reserve Banks, Small Business Credit
Survey—2021 Report on Employer Firms, at 24
(Feb. 3, 2021), https://www.fedsmallbusiness.org/
medialibrary/FedSmallBusiness/files/2021/2021sbcs-employer-firms-report (2021 Small Business
Credit Survey). Starting in 2017, the Federal
Reserve Banks began to gather specific data on
MCAs for its annual reports on small business
financing for employer firms—in the 2017 report,
the survey found that 7 percent of such businesses
applied for and regularly used MCAs. Fed. Reserve
Banks, Small Business Credit Survey—2017 Report
on Employer Firms, at 9 (Apr. 11, 2017), https://
www.fedsmallbusiness.org/medialibrary/
fedsmallbusiness/files/2018/sbcs-employer-firmsreport.pdf (2017 Small Business Credit Survey).
362 Paul Sweeney, Gold Rush: Merchant Cash
Advances Are Still Hot, deBanked (Aug. 18, 2019),
https://debanked.com/2019/08/gold-rushmerchant-cash-advances-are-still-hot/.
363 See 2021 Small Business Credit Survey at 26
(reporting that 84 percent of surveyed credit
applicants were approved for an MCA, as compared
to a 43 percent approval rate for personal loans).
364 See id. at 22 (noting that only 7 percent of
‘‘high credit risk’’ applicants obtained all the
financing sought).
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respectively) than white-owned firms (7
percent).365 The Bureau believes that
this report supports stakeholders’
assertions that minority-owned
businesses are more likely to use MCAs.
The Bureau believes that the higher
frequency of MCA use among minorityowned businesses coupled with reports
of problematic provider practices lends
credence to many stakeholders’ claims
that MCAs may raise fair lending
concerns. The FTC released a Staff
Perspective in February 2020 discussing
its concerns with the MCA industry 366
and noting the industry’s tendency to
‘‘cater to higher-risk businesses or
owners with low credit scores—
typically offering them higher-cost
products.’’ 367 The FTC has also filed
enforcement actions against MCA
providers and their principals, in one
case alleging that they misrepresented
the terms of MCAs that they provided,
and then used ‘‘unfair collection
practices, including sometimes
threatening physical violence, to compel
consumers to pay.’’ 368 The FTC recently
obtained a settlement that requires an
MCA provider to pay more than $9.8
million to settle charges that it took
money from businesses’ bank accounts
without permission and deceived them
about the amount of financing business
owners would receive and other features
of its financing products.369 Moreover,
the Bureau understands that the default
rate amongst small businesses that use
MCAs is relatively high—5 to 15 percent
according to one estimate (compared
with a 2 percent default rate on SBA
loans).370 The Bureau believes this high
default rate may be explained by the fact
that the typical MCA holdback
365 Small Business Credit Survey of Firms Owned
by People of Color at 30.
366 Fed. Trade Comm’n, ‘Strictly Business’ Forum,
Staff Perspective, at 6–8 (Feb. 2020), https://
www.ftc.gov/system/files/documents/reports/staffperspective-paper-ftcs-strictly-business-forum/
strictly_business_forum_staff_perspective.pdf.
367 See id. at 2.
368 Press Release, Fed. Trade Comm’n, New YorkBased Finance Companies Deceived Small
Businesses, Non-Profits and Seized Their Personal
and Business Assets (June 10, 2020), https://
www.ftc.gov/news-events/press-releases/2020/06/
new-york-based-finance-companies-deceived-smallbusinesses. See also Press Release, Fed. Trade
Comm’n, FTC Alleges Merchant Cash Advance
Provider Overcharged Small Businesses Millions
(Aug. 3, 2020), https://www.ftc.gov/news-events/
press-releases/2020/08/ftc-alleges-merchant-cashadvance-provider-overcharged-small.
369 Press Release, Fed. Trade Comm’n, Cash
Advance Firm to Pay $9.8M to Settle FTC
Complaint It Overcharged Small Businesses (Apr.
22, 2021), https://www.ftc.gov/news-events/pressreleases/2021/04/cash-advance-firm-pay-98msettle-ftc-complaint-it-overcharged.
370 Kevin Voigt, It’s the Wild West Out There:
NerdWallet Special Report, NerdWallet (Oct. 13,
2016), https://www.nerdwallet.com/blog/smallbusiness-special-report-mca/.
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percentage—10 to 20 percent of gross
receipts or revenues—may be onerous
for already cash-strapped small
businesses.371 The Bureau also
understands that it is not uncommon for
small businesses that use MCAs to
obtain new MCAs from other MCA
providers (more than a quarter of such
businesses, by one account); 372 they
also may use one MCA to pay off
another. Firms that take on added debt
loads in this way (a process known as
‘‘stacking’’) ‘‘may not fully recognize the
costs involved, which could potentially
jeopardize the financial health of their
businesses.’’ 373
As small businesses struggle with the
COVID–19 pandemic, the Bureau is
seeing more reports of MCA providers
employing aggressive collection
practices, such as ‘‘pursuing legal
claims against owners that freeze their
bank accounts and . . . pressing their
family members, neighbors, insurers,
distributors—even their customers.’’ 374
Given the fact that 84 percent of the
credit applicants surveyed by the
Federal Reserve Banks were approved
for an MCA 375 and the fact that it
appears significantly more difficult to
obtain credit as a ‘‘high credit risk’’
applicant during the COVID–19
pandemic,376 the Bureau believes that
vulnerable small businesses are
371 See Bd. of Governors of the Fed. Reserve Sys.,
Browsing to Borrow: ‘‘Mom & Pop’’ Small Business
Perspectives on Online Lenders, at 9 (June 2018),
https://www.federalreserve.gov/publications/files/
2018-small-business-lending.pdf (Board Small
Business Perspectives) (noting that when asked
‘‘about the toughest part of running their
businesses, most participants cited the challenges of
managing their cash flow’’); id. at 5 (noting that
‘‘[s]ome observers have argued that the owner’s loss
of control over cash flow puts some small
businesses at risk’’). The Bureau also notes that
many MCA providers believe that they are not
subject to State usury laws.
372 See Opportunity Fund, Unaffordable and
Unsustainable: The New Business Lending, at 3
(May 2016), https://www.leg.state.nv.us/App/
InterimCommittee/REL/Document/13129 (stating
that ‘‘[m]ore than a quarter of the businesses in our
dataset had loans outstanding with multiple
alternative lenders’’).
373 Board Small Business Perspectives at 6.
374 Gretchen Morgenson, FTC official: Legal ‘loan
sharks’ may be exploiting coronavirus to squeeze
small businesses, NBC News (Apr. 3 2020), https://
www.nbcnews.com/business/economy/ftc-officiallegal-loan-sharks-may-be-exploiting-coronavirussqueeze-n1173346.
375 See 2021 Small Business Credit Survey at 26.
376 Compare id. at 22 (noting that only 7 percent
of ‘‘high credit risk’’ applicants obtained all the
financing sought), with Fed. Reserve Banks, Small
Business Credit Survey—2020 Report on Employer
Firms, at 12 (Apr. 7, 2020), https://www.fedsmall
business.org/medialibrary/FedSmallBusiness/files/
2020/2020-sbcs-employer-firms-report (reporting
that 23 percent of ‘‘high credit risk’’ applicants
obtained all the financing sought) (2020 Small
Business Credit Survey).
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56405
increasingly seeking MCAs to support
their pandemic recovery.
In its SBREFA Outline, the Bureau
stated that it was considering proposing
that MCAs not be a covered product
under section 1071 since including
them may add additional complexity or
reporting burden given the unique
structure of the transactions.377
During and following the SBREFA
Panel meetings, many SERs advocated
for including MCAs within the scope of
the 1071 rule due, in part, to their
widespread use by small businesses in
the same way as traditional loans. In
response to the SBREFA Outline, many
other stakeholders, including
community groups and industry
representatives, urged the inclusion of
MCAs for one or more of the following
reasons:
• MCAs are widely used by small
businesses and have a rapidly growing
market share.
• MCAs are often advertised as loans
even though MCA providers have been
strongly opposed to labeling their
products as loans.
• The complexity of MCAs is not a
good reason to exclude them from
coverage.
• Minority-owned small businesses
disproportionately use MCAs.
• Excluding the largely unregulated
MCA industry would create unequal
regulatory burdens for entities that may
compete for the same small business
clients.
• MCAs should be considered
‘‘credit’’ for the purposes of section
1071.
• Small businesses do not distinguish
these products from other forms of
financing.
• Some MCA providers engage in
harmful practices and should be subject
to oversight.
The Bureau observes that, throughout
the development of the 1071 rule, MCAs
have been the focus of significant
attention and a unique source of nearconsensus among a diverse array of
stakeholders—almost all of whom
advocated for covering MCAs in the
1071 rule.378 The only commenters that
have supported the exclusion of MCAs
from the 1071 rule were MCA providers
or trade associations representing MCA
providers. These stakeholders argue that
MCAs do not meet the definition of
377 SBREFA
Outline at 22.
instance, of the substantive responses to
the 2017 RFI, comments authored or co-authored by
dozens of stakeholders (including community and
business groups, industry, and trade associations)
expressed explicit support for requiring the
reporting of MCAs (and additional letters expressed
support for covering ‘‘fintech’’ or ‘‘alternative
online’’ products more generally).
378 For
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credit under ECOA or State law and are
instead much like traditional factoring
arrangements, which are generally
understood not to be credit.
Potential coverage of MCAs under the
1071 rule has also drawn the attention
of government entities seeking to
regulate the industry. For example, in
response to the SBREFA Outline, the
California Department of Financial
Protection and Innovation submitted a
comment letter stating that ‘‘nearly all
the data points would be just as easy for
an MCA company to report as any other
financial institution.’’ In addition, FTC
staff submitted a comment letter in
response to the Bureau’s Request for
Information on the Equal Credit
Opportunity Act and Regulation B 379
noting that the FTC has brought many
actions protecting small businesses but
that detecting illegal conduct in this
space can be challenging, particularly
with regard to MCAs. The FTC comment
letter urges the Bureau to remind small
business lenders that whether a
particular law applies depends on
actual facts and circumstances and not
solely on how one party chooses to
characterize the transaction. FTC staff
also recommends the Bureau help small
businesses through data collection,
collecting complaints, and education.
Upon further consideration and in
light of stakeholder feedback provided
during the SBREFA process, the Bureau
is proposing to cover MCAs as
reportable under 1071. The Bureau
believes that the statutory term ‘‘credit’’
in ECOA is ambiguous as to whether it
covers sales-based financing products
like MCAs, and existing Regulation B
offers no further clarity except to note
in commentary that factoring, as ‘‘a
purchase of accounts receivable,’’ is not
covered by ECOA or Regulation B.380
Based on its review of typical MCA
arrangements and its expertise with
respect to the nature of credit
transactions, the Bureau believes that
the better reading of the term ‘‘credit’’
is that it encompasses MCAs and other
types of sales-based financing. As noted
above, ECOA defines ‘‘credit’’ to mean
‘‘the right granted by a creditor to a
debtor to defer payment of debt or to
incur debts and defer its payment or to
purchase property or services and defer
payment therefor.’’ The Bureau is thus
not proposing to specifically define
MCAs or other sales-based financing in
the 1071 rule because the Bureau
believes these products are covered by
the proposed definition of ‘‘credit’’ in
379 85
FR 46600 (Aug. 3, 2020).
comment 9(a)(3)–3.
380 Existing
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§ 1002.102(i). Nor does the Bureau
believe that MCAs should be excluded
from the rule as a species of factoring (as
defined in proposed comment 104(a)–2),
because MCAs are not based on
accounts receivable from ‘‘goods that
the recipient has supplied or services
that the recipient has rendered.’’
As an initial matter, the Bureau
believes that MCAs do not constitute
factoring within the meaning of the
existing commentary to Regulation B or
the definition in proposed comment
104(b)–1, discussed in greater detail
below. In factoring transactions, entities
receiving financing sell their legal right
to payment from a third party for goods
supplied or services rendered, and that
right exists at the time of the transaction
itself; the provider of funds seeks
payment directly from the third party,
and the transaction between the
recipient and the provider of funds is
complete at the time of the sale. In other
words, the recipient of the financing has
no remaining payment obligation,
meaning that no payment is deferred. In
contrast, at the time of the advance in
an MCA, the recipient of the financing
has no existing rights to payment that it
can transfer. The transaction thus
constitutes only a promise by the
‘‘seller’’ to transfer funds to the ‘‘buyer’’
once they materialize at a later date. The
Bureau believes that the ECOA
definition of credit, by referring to the
right to ‘‘defer’’ payments, necessarily
invokes this temporal consideration.
Furthermore, the Bureau interprets
ECOA’s definition of credit as making
dispositive whether one party has
granted another the right to repay at
some time subsequent to the initial
transaction, without consideration of
factors such as the existence of recourse
or analysis of who bears the risk of loss.
MCA providers grant such a right: They
advance funds to small businesses and
grant them the right to defer repayment
by allowing them to repay over time.
Additionally, as a practical matter, the
Bureau understands that MCAs are
underwritten and function like a typical
loan (i.e., underwriting of the recipient
of the funds; repayment that
functionally comes from the recipient’s
own accounts rather than from a third
party; repayment of the advance itself
plus additional amounts akin to interest;
and, at least for some subset of MCAs,
repayment in regular intervals over a
predictable period of time).
Finally, the Bureau believes that the
inclusion of MCAs in the Bureau’s 1071
rule is important to fulfilling both the
fair lending and the business and
community development purposes of
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section 1071.381 The Bureau also
believes that including MCAs would
create a more level playing field across
financial institutions that provide cash
flow financing to small businesses as
well as create a data set that better
reflects demand for such financing by
the smallest and most vulnerable
businesses.
The Bureau seeks comment on its
proposed approach to covered credit
transactions, and in particular, on
whether it should define MCAs and/or
other sales-based financing transactions,
and if so, how.
Agricultural-purpose credit. In the
SBREFA Outline, the Bureau did not
expressly address credit used for
agricultural purposes, although such
credit is generally covered by the broad
definition of credit under ECOA and
agricultural businesses are included in
section 1071’s definition of small
business.382 Based on questions from
SERs about the Bureau’s intended
approach, however, the SBREFA Panel
recommended that the Bureau address
in the proposed rule whether it intends
to cover agricultural loans in the
eventual 1071 rule.383 Moreover, in a
July 2019 report, the U.S. Government
Accountability Office (GAO) discussed
its finding that information on the
amount and types of agricultural credit
to socially disadvantaged farmers and
ranchers (SDFRs) 384 is limited, and
suggested that the 1071 rulemaking may
be a way to engage in ‘‘additional data
collection and reporting for
nonmortgage loans.’’ 385
381 ECOA
section 704B(a).
section 704B(h)(2) (defining a small
business as having the same meaning as the term
‘‘small business concern’’ in section 3 of the Small
Business Act (15 U.S.C. 632)’’). Section 704B(h)(2)
defines small business by reference to the Small
Business Act definition of a small business concern,
which includes independently owned and operated
‘‘enterprises that are engaged in the business of
production of food and fiber, ranching and raising
of livestock, aquaculture, and all other farming and
agricultural related industries.’’ 15 U.S.C. 632(a)(1).
383 SBREFA Panel Report at 44.
384 The U.S. Department of Agriculture (USDA)
defines SDFRs as members of certain racial and
ethnic minority groups and women. According to
the GAO, USDA regulations further define SDFRs
as belonging to the following groups: American
Indians or Alaskan Natives, Asians, Blacks or
African Americans, Native Hawaiians or other
Pacific Islanders, Hispanics, and women. See Gov’t
Accountability Off., Agricultural Lending:
Information on Credit and Outreach to Socially
Disadvantaged Farmers and Ranchers is Limited, at
2 (2019), https://www.gao.gov/assets/710/
700218.pdf (GAO Report). The Bureau notes that
those five categories align with the Bureau’s
proposed categories used in the definition of
‘‘minority individual’’ in proposed § 1002.102(l).
385 GAO Report at 16.
382 ECOA
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According to the 2017 Census of
Agriculture,386 there are about 3.4
million farmers and ranchers
(‘‘producers’’) working on 2 million
farming and ranching operations
(‘‘farms’’) in the United States. The U.S.
Department of Agriculture (USDA)
Economic Research Service found that
family farms (where the majority of the
business is owned by the operator and
individuals related to the operator) of
various types together accounted for
nearly 98 percent of U.S. farms in
2019.387 Small family farms (less than
$350,000 in gross cash farm income
(GCFI)) accounted for 90 percent of all
U.S. farms and large-scale family farms
($1 million or more in GCFI) make up
about 3 percent of farms but 44 percent
of the value of production.388
According to the 2019 Annual Report
of the Farm Credit Administration, most
agricultural lending (approximately 83
percent) is done by either commercial
banks or the Farm Credit System (FCS),
a network of government-sponsored
entities (GSEs) regulated by the Farm
Credit Administration, an independent
government agency.389 The USDA’s
Farm Service Agency accounts for a
small share (3 percent) of agricultural
credit through direct loans and
guarantees of loans made by private
lenders.390
The GAO found that, using 2015–
2017 USDA survey data, SDFRs
represented an estimated 17 percent of
primary producers in the survey, but
accounted for only an estimated 8
percent of total outstanding agricultural
debt.391 Loans to purchase agricultural
real estate accounted for most of SDFRs’
outstanding debt (67 percent).392 Farms
with minority or women primary
producers 393 are, on average, smaller
and bring in less revenue than farms
386 The Census of Agriculture is conducted by the
USDA every five years and provides a detailed
picture of farms and the people who operate them.
See generally U.S. Dep’t of Agric., 2017 Census of
Agriculture (Apr. 2019), https://www.nass.
usda.gov/Publications/AgCensus/2017/Full_Report/
Volume_1,_Chapter_1_US/usv1.pdf.
387 Econ. Research Serv., U.S. Dep’t of Agric.,
Farming and Farm Income (updated May 10, 2021),
https://www.ers.usda.gov/data-products/ag-andfood-statistics-charting-the-essentials/farming-andfarm-income/.
388 Id.
389 Farm Credit Admin., 2019 Annual Report of
the Farm Credit Administration, at 18 (2019),
https://www.fca.gov/template-fca/about/
2019AnnualReport.pdf.
390 Id.
391 GAO Report at 16. ‘‘The primary producer is
the individual on a farm who is responsible for the
most decisions. Each farm has only one primary
producer.’’ Id. at 5.
392 Id. at 2.
393 ‘‘Producers’’ are individuals involved in farm
decision-making. A single farm may have more than
one producer.
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with a non-SDFR primary producer (i.e.,
a white male)—while SDFRs
represented 30 percent of all farms, they
operated 21 percent of total farm land
and accounted for 13 percent of the
market value of agricultural products
sold in 2017.394
The share of minority representation
in farming, particularly that of Black
farmers, has declined sharply over the
last 100 years.395 The number of female
producers has increased significantly
over the last 100 years but remains
relatively small compared to male farm
producers.396 Based on the disposition
of numerous lawsuits alleging
discrimination against minority
farmers,397 the Bureau believes that
credit discrimination may play a role in
this decline. The GAO cites SDFR
advocacy groups, which have said some
SDFRs face actual or perceived unfair
treatment in lending or may be
dissuaded from applying for credit
because of past instances of alleged
discrimination.398 In addition, the GAO
cites SDFR advocacy groups, lending
industry representatives, and Federal
officials in stating that SDFRs are more
likely to operate smaller, lower-revenue
farms, have weaker credit histories, or
394 See
GAO Report at 7.
1910, approximately 893,370 Black farmers
operated approximately 41.1 million acres of
farmland, representing approximately 14 percent of
farmers. U.S. Census Bureau, 1910 Census: Volume
5 (Agriculture), Statistics of Farms, Classified by
Race, Nativity, and Sex of Farmers, at 298 (1910),
https://www2.census.gov/library/publications/
decennial/1920/volume-5/06229676v5ch04.pdf. In
2017, of the country’s 3.4 million total producers,
only 45,508 of them (1.3 percent) are Black and they
farm on only 4.1 million acres (0.5 percent of total
farmland); by comparison, 95 percent of U.S.
producers are white and own 94 percent of
farmland. U.S. Dep’t of Agric., 2017 Census of
Agriculture, at 62, 72 (Apr. 2019), https://www.nass.
usda.gov/Publications/AgCensus/2017/Full_Report/
Volume_1,_Chapter_1_US/usv1.pdf.
396 In 1910, women farmers represented
approximately 4 percent of farm workers. See U.S.
Census Bureau, 1910 Census: Volume 5
(Agriculture), Statistics of Farms, Classified by
Race, Nativity, and Sex of Farmers, at 340 (1910),
https://www2.census.gov/library/publications/
decennial/1920/volume-5/06229676v5ch04.pdf. As
of 2017, women account for approximately 36
percent of farmers. See U.S. Dep’t of Agric., 2017
Census of Agriculture, at 62 (Apr. 2019), https://
www.nass.usda.gov/Publications/AgCensus/2017/
Full_Report/Volume_1,_Chapter_1_US/usv1.pdf.
397 See, e.g., Order, In re Black Farmers
Discrimination Litig., No. 08–mc–0511 (D.D.C. filed
Aug. 8, 2008), https://blackfarmercase.com/
Documents/2008.08.08%20%20PLF%20Consolidation%20Order_0.pdf; Pigford
v. Glickman, 206 F.3d 1212 (D.C. Cir. 2000). See
also Garcia v. Vilsack, 563 F.3d 519 (D.C. Cir.
2009); Love v. Connor, 525 F. Supp. 2d 155 (D.D.C.
2007); Keepseagle v. Veneman, No. 99–CIV–03119,
2001 U.S. Dist. LEXIS 25220 (D.D.C. Dec. 12, 2001).
398 GAO Report at introductory highlights.
Additionally, the GAO cited these sources as noting
that some SDFRs may not be fully aware of credit
options and lending requirements, especially if they
are recent immigrants or new to agriculture. Id.
395 In
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lack clear title to their agricultural land,
which can make it difficult for them to
qualify for loans.399 The Bureau
understands that determining the
‘‘creditworthiness’’ of a farmer is often
a judgmental process in which lending
decisions are de-centralized and involve
weighing many discretionary factors,
the Bureau believes that there are
heightened fair lending risks in
agricultural lending.
In light of the above, the Bureau
believes that covering agricultural credit
in its 1071 rule is important for both of
section 1071’s statutory purposes, and is
not proposing to define covered credit
in a way that would exclude agricultural
credit from the rule. The Bureau seeks
comment on the potential costs and
complexities associated with covering
such credit.
HMDA-reportable transactions. By
adopting Regulation C’s definition of
dwelling and its commentary regarding
investment properties, the Bureau seeks
to ensure consistency and minimize
compliance burdens for financial
institutions that must also report credit
transactions covered by HMDA (that is,
HMDA-reportable transactions). Based
on Bureau calculations using the 2019
HMDA data, the Bureau found that close
to 2,000 lenders and around 530,000
applications indicated a ‘‘business or
commercial purpose’’ and around
500,000 applications were used for an
‘‘investment’’ (as defined by the
occupancy code) purpose. Of those
applications, around 50,000 were for 5+
unit properties. The overall number of
applications the Bureau expects to be
reported annually under the proposed
rule is around 26 million. Thus, the
Bureau anticipates a relatively small but
not insignificant overlap regarding real
estate investment loans between HMDA
and 1071.
The Bureau has considered excluding
all transactions that were also reportable
under HMDA, but believes such an
exclusion would add complexity to data
analysis. The Bureau understands that
requiring lenders to find and delete
from databases that supply their 1071
submission only those transactions that
also appear in HMDA may require a
separate scrub of the data and create
additional compliance burden, as well
as compliance risk if HMDA-reportable
transactions are not deleted from a 1071
submission. For example, if the Bureau
were to exclude HMDA reportable
transactions from 1071 and a small
business wants to purchase a 5+
dwelling unit property (that the
financial institution would need to
know is HMDA reportable), the
399 Id.
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financial institution would have to
make sure it is not collecting protected
demographic information on principal
owners, even though that information
must be collected for every other type of
loan that same business might apply for.
The Bureau also believes that it may not
be possible to identify loans in the
HMDA data that, but for this exclusion,
would be reported under 1071 because
the financial institution would need to
know which HMDA applications are for
small businesses versus large
businesses. Moreover, excluding
HMDA-reportable applications could
mean that a financial institution that is
below the HMDA reporting threshold
would not report these loans at all.
Further, in addition to not being able
to distinguish which applications are
from small and not large businesses, the
Bureau believes that excluding all
transactions that were also reportable
under HMDA may be at odds with the
statutory purposes of section 1071. The
following information will not be
collected for applications only reported
under HMDA: (1) The principal owner’s
race, sex, or ethnicity where the
applicant is not a natural person; (2)
minority-owned and women-owned
business status; (3) gross annual
revenue; and (4) other 1071 data points
such as pricing, NAICS code, and
number of workers. The Bureau is
concerned that not collecting this
information would run contrary to
section 1071’s fair lending and business
and community development purposes.
For applications that would be
reported under both HMDA and 1071
(generally, business credit secured by
dwellings, with the exception of credit
secured by 1–4 individual dwelling
units that the applicant or one or more
of the applicant’s principal owners does
not, or will not, occupy), the Bureau
seeks comment on whether it should
require such applications to be flagged
as such when reported under subpart B.
The Bureau believes that for data
integrity and analysis purposes, it may
be helpful to know if a loan is in both
datasets and a dual reporting flag may
help ensure any data analysis is not
double-counting certain applications.
104(b) Excluded Transactions
Proposed § 1002.104(b) would
provide that the requirements of subpart
B do not apply to trade credit, public
utilities credit, securities credit, and
incidental credit. Proposed comments
104(b)–1 and –2 would make clear that
the term covered credit transaction also
does not cover factoring and leases. The
proposed treatment of each of these
types of transactions is discussed in
detail below. Proposed comments
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104(b)–3 and –4 would clarify that the
term covered credit transaction does not
include consumer-designated credit or
credit secured by certain investment
properties because, as discussed in
detail below, such transactions are not
business credit. The Bureau also
discusses its proposed treatment of
extensions of credit made to
governments or governmental
subdivisions, agencies, or
instrumentalities and certain purchases
of covered credit transactions. Finally,
the Bureau discusses its proposed
exclusions for trade credit, public
utilities credit, securities credit, and
incidental credit.
The Bureau seeks comment on
whether it should permit financial
institutions to voluntarily collect
applicants’ protected demographic
information (that is, the applicant’s
minority-owned business status and
women-owned business status, and the
ethnicity, race, and sex of the
applicant’s principal owners) for
applications for some or all of the types
of transactions that the Bureau is
proposing not to cover, and to report
those applications to the Bureau
pursuant to proposed § 1002.109.
Factoring. In traditional factoring
arrangements, a business in need of
financing sells all or a portion of its
accounts receivable (existing but unpaid
invoices) to another business, known as
a ‘‘factor.’’ The factor then receives
payments on the accounts receivable
from the business’s debtors or customers
directly, and not from the business that
had entered into the factoring
transaction. If the business has sold only
a portion of its invoices, then once the
account debtors pay their invoices to the
factor, the factor remits the remainder of
the balance to the business after
deducting a fee (specifically, a discount
applied to the sold accounts receivable
usually stated on a percentage basis).
The Bureau understands that like the
market for MCAs, the factoring market
is generally dominated by
nondepository lenders not subject to
Federal safety and soundness
supervision or reporting requirements.
The Bureau also understands that
generally, factors may not be required to
obtain State lending licenses. As a
result, information on factoring volume
and practices is limited. The Bureau
notes, however, that the California and
New York disclosure laws mentioned
above cover factoring.400
400 See Cal. S.B. 1235 (Sept. 30, 2018), https://
leginfo.legislature.ca.gov/faces/billTextClient.
xhtml?bill_id=201720180SB1235; N.Y. S.B. S5470B
(July 23, 2020), https://legislation.nysenate.gov/pdf/
bills/2019/S5470B.
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The Bureau’s 2017 White Paper
estimated the factoring market as
constituting around 8 percent of the
number of accounts used by small
businesses in the U.S. in 2014.401 Based
on more recent evidence, the Bureau
believes the industry has not
significantly grown. For example, the
2017 and 2020 Federal Reserve Banks’
surveys of firms with 1–499 employees
(‘‘employer firms’’) found that 4 percent
of such businesses applied for and
regularly used factoring.402 In the 2020
Small Business Credit Survey of
Employer Firms, this figure dropped to
3 percent of employer firms.403
In the SBREFA Outline, the Bureau
stated that it was considering excluding
factoring from coverage under the 1071
rule.404 As a general matter, the Bureau
received fewer comments from
stakeholders regarding factoring
compared to some other products,
though some SERs did advocate for
including factoring. Moreover, several
stakeholders (representing both
community group and industry
perspectives) argued that factoring
should be covered under section 1071:
First, factoring is widely used by small
businesses, particularly very small
businesses, who are more likely to face
heightened challenges accessing
business credit; second, both New York
and California have passed disclosure
laws covering factoring and exclusion
would potentially lead to a regulatory
advantage for lenders offering highercost, less-transparent credit products.
A community group commenter
stated that the Bureau should require
the reporting of these agreements
regardless of whether there is a credit
agreement incident to the factoring
agreement under Regulation B (this
concept is discussed in more detail
below). A few commenters that
supported the proposed exclusion under
consideration of factoring did so on the
basis that factoring is not ‘‘credit’’ under
ECOA. Commenters did not raise fair
lending concerns or concerns about
predatory practices related to factoring.
An existing comment in Regulation B
(comment 9(a)(3)–3) provides that
‘‘[f]actoring refers to a purchase of
accounts receivable, and thus is not
subject to [ECOA or Regulation B].’’
Existing Regulation B does not offer a
definition for ‘‘accounts receivable.’’
However, if there is a ‘‘credit extension
incident to the factoring arrangement,’’
401 White
Paper at 21 fig. 2, 22 fig. 3.
Small Business Credit Survey; 2017
Small Business Credit Survey.
403 See 2021 Small Business Credit Survey at 24.
404 SBREFA Outline at 22.
402 2020
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Regulation B’s notification rules 405
apply, as do other relevant sections of
ECOA and Regulation B.406 The Bureau
understands that the Board’s treatment
of credit extensions incident to factoring
arrangements—as a type of credit but
one entitled to exemptions from certain
requirements—was motivated by its
reading of congressional intent related
to the Women’s Business Ownership
Act of 1988,407 which amended ECOA
to extend notification and record
retention requirements to business
credit. In its proposed rule on this issue,
the Board explained that it was treating
credit extensions incident to factoring
arrangements differently from other
forms of business credit based on
‘‘evidence of congressional intent that
the amendments should not apply to
. . . certain types of business credit
(such as applications for trade credit
and credit incident to factoring
arrangements).’’ 408 Based on the
Bureau’s work to date and conversations
with industry stakeholders, the Bureau
understands that purported factoring
arrangements may take various forms,
including longer-term or revolving
transactions that appear to have credit
or credit-like features, and the Bureau
believes that a subset of such
arrangements may constitute credit
incident to the factoring arrangement,
particularly if they involve goods or
services that have not been supplied or
rendered.
The Bureau is proposing to not cover
factoring under the 1071 rule. Modeled
on the definitions set forth in the New
York and California commercial
financing disclosure laws,409 proposed
comment 104(b)–1 would provide that
factoring is an accounts receivable
purchase transaction between
businesses that includes an agreement
to purchase, transfer, or sell a legally
enforceable claim for payment for goods
405 See existing § 1002.9(a)(3)(ii) (requiring a
creditor to notify an applicant, within a reasonable
time (as opposed to within 30 days for credit sought
by consumers and businesses with gross revenues
of $1 million or less in preceding fiscal year), orally
or in writing, of the action taken).
406 Comment 9(a)(3)–3.
407 Public Law 100–533, 102 Stat. 2689 (1988).
408 54 FR 29734, 29736 (July 14, 1989); see also
134 Cong. Rec. H9282–89 (daily ed. Oct 3, 1988)
(explaining that the committee recognizes that some
forms of commercial loan transactions and
extensions of credit may ‘‘require specialized
rules,’’ and that, for example, the committee
believes that loans and credit extensions incidental
to trade credit, factoring arrangements, and
sophisticated asset-based loans should continue to
be exempted from the record retention and
automatic notification requirements).
409 See Cal. S.B. 1235 (Sept. 30, 2018), https://
leginfo.legislature.ca.gov/faces/
billTextClient.xhtml?bill_id=201720180SB1235;
N.Y. S.B. S5470B (July 23, 2020), https://legislation.
nysenate.gov/pdf/bills/2019/S5470B.
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that the recipient has supplied or
services that the recipient has rendered
but for which payment has not yet been
made. Proposed comment 104(b)–1
would also clarify that an extension of
business credit incident to a factoring
arrangement is a covered credit
transaction and that a financial
institution shall report such a
transaction as an ‘‘Other sales-based
financing transaction’’ under proposed
§ 1002.107(a)(5).
The Bureau believes that, as discussed
with respect to MCAs above, a
traditional factoring agreement, as
described in proposed comment 104(b)–
1, is not credit under ECOA because the
provider of the funds does not grant the
recipient the right to defer payment.
Instead, the provider of funds seeks
payment directly from a third party, and
the transaction between the recipient
and the provider of funds is complete at
the time of the sale. The Bureau also
believes that treating factoring as credit
under the 1071 rule could create
inconsistencies and compliance
concerns related to existing Regulation
B, which currently states that factoring
(as a purchase of accounts receivable) is
not subject to ECOA. Moreover, while a
few commenters did suggest covering
factoring as part of a broader effort to
adequately capture small businesses’
experiences with obtaining financing,
the Bureau notes that commenters did
not raise particular fair lending
concerns related to factoring. The
Bureau is proposing a more detailed
description of what constitutes factoring
in proposed comment 104(b)–1 because
it is concerned that the existing
Regulation B commentary regarding
factoring may not provide sufficient
clarity for purposes of collecting and
reporting data under section 1071 as it
does not offer a definition for ‘‘accounts
receivable.’’ Proposed comment 104(b)–
1 would state that it is not intended to
repeal, abrogate, annul, impair, or
interfere with any existing
interpretations, orders, agreements,
ordinances, rules, or regulations
adopted or issued pursuant to existing
comment 9(a)(3)–3.
The Bureau seeks comment on its
proposed approach to factoring. The
Bureau also seeks comment on how the
subset of purported factoring
arrangements that may in fact be credit
(i.e., those that are revolving in nature
or that cover anticipated receivables)
should be reported under the 1071 rule.
Specifically, the Bureau seeks comment
on whether such arrangements should
be reported as credit extensions incident
to factoring (and thus reported ‘‘other
sales-based financing’’) or as MCAs.
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56409
Leases. A leasing transaction
generally refers to an agreement in
which a lessor transfers the right of
possession and use of a good or asset to
a lessee in return for consideration.410
Under a ‘‘true’’ or ‘‘operating’’ lease, a
lessee (the user) makes regular
payments to a lessor (the owner) in
exchange for the right to use an asset
(such as equipment, buildings, motor
vehicles, etc.).
Leases are not expressly addressed in
ECOA or Regulation B. The Bureau has
never opined on whether ECOA and
Regulation B apply to leases, and the
Board made only one statement about
the applicability of ECOA and
Regulation B to leases, in the preamble
to a final rule under ECOA. In that 1985
statement, the Board responded to the
Ninth Circuit’s opinion in Brothers v.
First Leasing,411 which concluded that
consumer leasing falls under ECOA.412
The Board stated that it believes that
‘‘Congress did not intend the ECOA,
which on its face applies only to credit
transactions, to cover lease transactions
unless the transaction results in a ‘credit
sale’ as defined in the Truth in Lending
Act and Regulation Z.’’ 413 The Board
then noted that it would continue to
monitor leasing transactions and take
further action as appropriate.414 The
Bureau is unaware of any such further
actions taken by the Board.
The Bureau understands that many
financial institutions (such as
equipment finance companies) offer
both loans and leases to their small
business customers and some financial
institutions comply with Regulation B
for their leases as well as their loans as
a matter of course. Lessor stakeholders
have told Bureau staff that from their
perspective, as well as that of their
customers, loans and leases are
indistinguishable. The Bureau
understands that this is particularly true
of ‘‘financial’’ or ‘‘capital’’ leases, as
defined under article 2A of the UCC,415
which closely resemble (and according
to some stakeholders, in some cases are
indistinguishable from) term loans. The
Bureau understands that financial leases
410 See
UCC Art. 2A–103(1)(j) (defining a ‘‘lease’’).
F.2d 789 (9th Cir. 1984).
412 50 FR 48018, 48020 (Nov. 20, 1985).
413 Id.
414 Id. Since then, courts have gone both ways on
the issue. Compare Ferguson v. Park City Mobile
Homes, No. 89–CIV–1909, 1989 WL 111916, at *5
(N.D. Ill. Sept. 18, 1989) (leases are ‘‘credit’’ under
ECOA), with Laramore v. Ritchie Realty Mgmt. Co.,
397 F.3d 544, 547 (7th Cir. 2005) (leases are not
‘‘credit’’ under ECOA).
415 The Bureau notes that the UCC separately
defines a ‘‘consumer lease.’’ See UCC 2A–103(1)(e).
The Bureau’s analysis regarding leases does not
apply to leases primarily for a personal, family, or
household purpose.
411 724
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are treated like assets on buyers’ balance
sheets, whereas operating leases are
treated as expenses that remain off the
balance sheet. The Bureau understands
that the ownership characteristics of a
financial lease also resemble those of a
loan—the financial lease term is the
substantial economic life of the asset (as
evidenced by a one dollar purchase
option at the end of the lease term and/
or lack of residual financial obligations
at the end of the lease term) and the
lessee claims both interest and
depreciation on their taxes. The Bureau
understands that for some financial
institutions, reporting loans but not
leases may require added cost and effort
to separate them in databases. The
Bureau also understands that because
depository institutions currently report
both loan and lease activity to other
regulators in their Call Reports, they
may prefer to maintain a consistent
approach for section 1071.
In its SBREFA Outline, the Bureau
stated that it was considering proposing
that leases not be a covered product
under section 1071 unless the product
is a credit sale.416 The Bureau stated
that for purposes of section 1071, it was
considering proposing a definition of
‘‘credit sale’’ similar to the Regulation Z
definition of that term as a transaction
in which the lessor is a creditor and the
lessee (i) agrees to pay as compensation
for use a sum substantially equivalent
to, or in excess of, the total value of the
property and services involved; and (ii)
will become (or has the option to
become), for no additional consideration
or for nominal consideration, the owner
of the property upon compliance with
the agreement.417
In response to the SBREFA Outline,
several stakeholders argued that leases
should be covered in an eventual 1071
rule, one noting that leasing products
make up 13 percent of the small
business financing market share in
dollar terms. A few other stakeholders
stated that leases should not be covered.
For example, a trade association stated
that (1) given the unique structure of the
transactions, including leases would
add unnecessary, additional complexity
and reporting burdens, and that (2)
unlike credit, in a lease, the lessee does
not have an ownership interest in the
leased property and that this difference
could lead to data integrity issues.
The Bureau is proposing to not cover
leases under the 1071 rule. Drawing
from the UCC definition of ‘‘lease,’’ 418
416 SBREFA
Outline at 21.
Regulation Z § 1026.2(16).
418 UCC 2A–103(1)(j) (‘‘ ‘Lease’ means a transfer of
the right to possession and use of goods for a term
in return for consideration, but a sale, including a
417 See
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which was adopted by the New York
and California commercial financing
disclosure laws,419 proposed comment
104(b)–2 would provide that the term
covered credit transaction does not
cover leases, and that a lease, for
purposes of proposed subpart B, is a
transfer from one business to another of
the right to possession and use of goods
for a term, and for primarily business or
commercial (including agricultural)
purposes, in return for consideration. It
would further state that a lease does not
include a sale, including a sale on
approval or a sale or return, or a
transaction resulting in the retention or
creation of a security interest.
The Bureau considered several other
approaches to covering leasing,
including referring to Regulation Z’s
definition of ‘‘credit sale.’’ The Bureau
understands that financial institutions
focused on offering leases and loans for
business purposes are generally not
familiar with the Regulation Z
definition of ‘‘credit sale,’’ given that
Regulation Z applies only to consumer
credit.420 The Bureau thus believes that
referring to the Regulation Z definition
of ‘‘credit sale’’ could create confusion
and would not align with current
industry practices. The Bureau
understands that such financial
institutions offering leases primarily for
business or commercial (including
agricultural) purposes are more
accustomed to applying the UCC
definitions of ‘‘lease’’ 421 and ‘‘finance
lease,’’ 422 and/or the generally accepted
accounting principles (GAAP) rules
issued by the Financial Accounting
Standards Board (FASB) governing
‘‘operating,’’ ‘‘capital,’’ and ‘‘finance’’
leases.423 The Bureau believes that
drawing from the UCC definition of
lease will lead to more consistency with
financial institutions’ current practices.
Nearly all U.S. jurisdictions have
sale on approval or a sale or return, or retention or
creation of a security interest is not a lease. Unless
the context clearly indicates otherwise, the term
includes a sublease.’’).
419 See Cal. S.B. 1235 (Sept. 30, 2018), https://
leginfo.legislature.ca.gov/faces/billTextClient.
xhtml?bill_id=201720180SB1235; N.Y. S.B. S5470B
(July 23, 2020), https://legislation.nysenate.gov/pdf/
bills/2019/S5470B.
420 See Regulation Z § 1026.2(a)(12) (defining
‘‘consumer credit’’ as ‘‘credit offered or extended to
a consumer primarily for personal, family, or
household purposes’’) and 1026.3(a)(1) (excluding
extensions of credit ‘‘primarily for a business,
commercial or agricultural purpose’’).
421 Id.
422 UCC 2A–103(1)(g).
423 See Fin. Acct. Standards Bd., Accounting
Standards Update: Leases (Topic 842), No. 2016–
02 (Feb. 2016), https://www.fasb.org/jsp/FASB/
Document_C/DocumentPage?cid=
1176167901010&acceptedDisclaimer=true.
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adopted Article 2A of the UCC,424 and
the Bureau understands that virtually
every form of lease used by major
leasing companies provides that it is
governed by the laws of one of the
jurisdictions that has adopted Article
2A.
Based on its review of businesspurpose leases and its expertise with
respect to the meaning of ‘‘credit,’’ the
Bureau believes that the better reading
of the term ‘‘credit’’ is that it does not
encompass such leases. In the businesspurpose context, the Bureau
understands that in a true lease, the
lessor retains title and will receive the
property back after the conclusion of the
lease term, without any expectation by
either party that, for example,
ownership of the property will be
transferred or that payments made
pursuant to the lease agreement
constitute anything other than payments
in exchange for the temporary use of the
property. As a result, the Bureau does
not believe that in the business-purpose
context a true lease transaction involves
the right to incur debt and defer its
payment, defer payment of a debt, or
defer payment for goods or services.
The Bureau is aware that there are
other types of leases with characteristics
that bear some resemblance to forms of
credit like credit sales, such as a
contemplated transfer of ownership at
the end of the lease term. The Bureau
is not proposing at this time to parse
whether different types of leases might
424 See Ala. Code 7–2A–101 et seq.; Alaska Stat.
45.12.101 et seq.; Ariz. Rev. Stat. 47–2A101 et seq.;
Ark. Code Ann. 4–2A–101 et seq.; Cal. Com. Code
10101 et seq.; Choctaw Tribal Code 26–2A–101 et
seq.; Colo. Rev. Stat. 4–2.5–101 et seq.; Conn. Gen.
Stat. 42a–2A–101 et seq.; DC Code 28:2A–101 et
seq.; Del. Code Ann. tit. 6, 2A–101 et seq.; Fla. Stat.
680.1011 et seq.; Ga. Code Ann. 11–2A–101 et seq.;
Haw. Rev. Stat. 490:2A–101 et seq.; Idaho Code 28–
12–101 et seq.; 810 Ill. Comp. Stat. 5/2A–101 et
seq.; Ind. Code 26–1–2.1–101 et seq.; Iowa Code
554.13101 et seq.; Kan. Stat. Ann. 84–2a–101 et
seq.; Ky. Rev. Stat. Ann. 355.2A–101 et seq.; Mass.
Gen. Laws ch. 106, 2A–101 et seq.; Md. Code Ann.,
Com. Law 2A–101 et seq.; Me. Stat. tit. 11, 2–1101
et seq.; Mich. Comp. Laws 440.2801 et seq.; Minn.
Stat. 336.2A–101 et seq.; Miss. Code Ann. 75–2A–
101 et seq.; Mo. Rev. Stat. 400.2A–101 et seq.; Mont.
Code Ann. 30–2A–101 et seq.; N.C. Gen. Stat. 25–
2A–101 et seq.; N.D. Cent. Code 41–02.1–01 et seq.;
N.H. Rev. Stat. Ann. 382–A:2A–101 et seq.; N.J.
Stat. Ann. 12A:2A–101 et seq.; N.M. Stat. Ann. 55–
2A–101 et seq.; N.Y. UCC Law 2–A–101 et seq.;
Neb. Rev. Stat. UCC 2A–101 et seq.; Nev. Rev. Stat.
104A.2101 et seq.; Ohio Rev. Code Ann. 1310.01 et
seq.; Okla. Stat. tit. 12A, 2A–101 et seq.; Or. Rev.
Stat. 72A.1010 et seq.; Pa. Cons. Stat. 2A101 et seq.;
R.I. Gen. Laws 6A–2.1–101 et seq.; S.C. Code Ann.
36–2A–101 et seq.; S.D. Codified Laws 57A–2A–101
et seq.; Tenn. Code Ann. 47–2A–101 et seq.; Tex.
Bus. & Com. Code Ann. 2A.101 et seq.; Utah Code
Ann. 70A–2a–101 et seq.; V.I. Code Ann. tit. 11A,
2A–101 et seq.; Va. Code Ann. 8.2A–101 et seq.; Vt.
Stat. Ann. tit. 9A, 2A–101 et seq.; W. Va. Code 46–
2A–101 et seq.; Wash. Rev. Code 62A.2A–101 et
seq.; Wisc. Stat. 411.101 et seq.; Wyo. Stat. Ann.
34.1–2.A–101 et seq.
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constitute ‘‘credit’’ but notes that
proposed comment 104(b)–2’s definition
of lease would not include a sale,
including a sale on approval or a sale or
return, or a transaction resulting in the
retention or creation of a security
interest. The Bureau seeks comment on
whether there are types of leases, or
leases with certain characteristics, that
should be excluded from proposed
comment 104(b)–2 and thus treated as
reportable under 1071. Based on the
practical difficulty cited by some
stakeholders of distinguishing leases
from loans, the Bureau also seeks
comment on whether financial
institutions should be permitted to
voluntarily report lease transactions.
Consumer-designated credit. In the
SBREFA Outline, the Bureau stated that
it was considering proposing that the
1071 rule not cover products designated
by the creditor as consumer purpose
products.425 In response, several SERs
asserted that consumer-designated
credit is often an important source of
financing for small businesses
(particularly for women-owned and
minority-owned small businesses, and
sole proprietorships), and ideally
should be included within the scope of
the eventual 1071 rule. One SER stated
that consumer-designated credit used
for business purposes should be
included in an eventual 1071 rule if
trends show increasing usage. However,
these SERs acknowledged the potential
complexity and burden of trying to
identify the intended use of consumerdesignated credit, such as whether a
consumer’s home equity line of credit
will be used for a business purpose.
Several SERs supported excluding
consumer-designated credit. One SER
asserted that including consumer credit
would not support the purposes of
section 1071. Another SER stated that
including consumer-designated credit
used for business purposes would
double their cost of complying with an
eventual 1071 rule. The SBREFA Panel
recommended that the Bureau continue
to explore the potential costs to
financial institutions associated with
reporting consumer-designated credit
used for business purposes in the 1071
rule as well as the implications of
including such credit in a small
business lending data set.426 The Panel
also recommended that the Bureau seek
comment in the proposed rule on how
best to define consumer-designated
credit in the event the Bureau
determines that an exclusion for such
products is appropriate.427
425 SBREFA
426 SBREFA
427 Id.
Outline at 20–21.
Panel Report at 44.
at 45.
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Many non-SER stakeholders
supported the proposed exclusion under
consideration of consumer-designated
credit from section 1071 for one or more
of the following reasons: First, that
financial institutions should be able to
rely on the applicant’s stated purpose
for the use of funds and institutions
would not know, nor should they be
expected to know, if a borrower instead
starts or invests in a business using the
proceeds of a personal loan. Second,
that this approach would greatly
simplify the regulatory effort necessary
to define and identify business uses of
consumer products. Third, that
inclusion of consumer credit could
vastly expand the scope of the data
collected beyond usefulness and also
greatly increase the costs of compliance.
One credit union trade association
stakeholder stated that the Bureau
should adopt a clearer definition of
consumer-designated credit and that it
should clarify that it will not challenge
a credit union’s judgment when
designating a consumer or business
purpose for credit.
The Bureau is proposing that the 1071
rule not cover products designated by
the creditor as consumer purpose
products (consumer-designated credit).
Proposed comment 104(b)–3 would
make clear that the term covered credit
transaction does not include consumerdesignated credit used for business
purposes, because such transactions are
not business credit. Proposed comment
104(b)–3 would provide that a
transaction qualifies as consumerdesignated credit if the financial
institution offers or extends the credit
primarily for personal, family, or
household purposes. For example, an
open-end credit account used for both
personal and business purposes is not
business credit for the purpose of
proposed subpart B unless the financial
institution designated or intended for
the primary purpose of the account to be
business-related.
The Bureau understands that some
small business owners may use
consumer-designated credit in order to
finance their small businesses—such as
taking out a home equity line of credit
or charging business expenses on their
personal credit cards. Nonetheless, the
Bureau believes it is appropriate to
interpret section 1071 as not applying to
this type of credit. Most notably, ECOA
section 704B(b) directs financial
institutions to collect data in the case of
an application ‘‘for credit for womenowned, minority-owned, or small
business’’ (emphasis added). The statute
thus applies only to applications for
credit for a business; at the time of an
application for consumer-designated
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56411
credit, however, the application is not
for a business. Several policy reasons
also support this approach. First, the
Bureau is concerned about financial
institutions’ ability to consistently
identify when consumer-designated
credit is being used for business
purposes. Inconsistent reporting across
financial institutions could lead to data
quality concerns. Credit sought by
consumers for both personal and
business purposes could be particularly
difficult to separate into reportable and
non-reportable portions. The Bureau
believes the proposal to define business
credit to exclude consumer-designated
credit will simplify compliance by
obviating the need for financial
institutions to identify and distinguish
business uses of consumer-purpose
credit products. Second, not including
consumer-designated credit used for
business purposes within the scope of
this rulemaking would make it clear that
the applications reported will all be
seeking credit to use for business
purposes, which supports 1071’s
directive to collect and report data in
the case of an application for credit for
a business. Third, not covering
consumer-designated credit used for
business purposes would provide
certainty to financial institutions that
offer only consumer-designated credit
that they would not be subject to this
proposal’s data collection and reporting
requirements.
As recommended by the SBREFA
Panel, the Bureau seeks comment on
this proposed interpretation, including
how the Bureau has defined the scope
of consumer-designated credit. The
Bureau also seeks comment on whether
it should permit financial institutions to
voluntarily report consumer-designated
credit when they have reason to believe
the credit might be used for business
purposes.
Credit secured by certain investment
properties. In the SBREFA Outline, the
Bureau did not expressly discuss
treatment of real estate-secured loans
used for investment purposes. Based on
questions from SERs about the Bureau’s
intended approach, however, the
SBREFA Panel recommended that the
Bureau address in the proposed rule
whether it intends to cover real estatesecured investment loans in the 1071
rule.428 One SER had asked that the
Bureau clarify whether loans covering
1–4 family properties used for
investment purposes are business loans
under section 1071, and several SERs
recommended that the Bureau cover real
estate investment loans (for both nonowner occupied residential property
428 Id.
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and commercial property) under section
1071. Several other SERs sought to
distinguish certain types of real estate
investment loans; one SER remarked, for
example, that owning a single nonowner occupied residential property as
an investment may be more of a
‘‘hobby’’ but owning multiple properties
could be considered a business.
A number of other stakeholders
suggested that the Bureau should
exclude at least some real estate
investment loans under section 1071. A
few stakeholders stated that the Bureau
should consider an exemption for loans
that are reported under another
regulatory framework, such as HMDA
and/or CRA because the effort of
collecting and reporting information
regarding such real estate loans would
not be worth the added burden given
the availability of alternative data
sources. A few stakeholders argued that
Congress did not intend to include real
estate investment loans within the scope
of section 1071. One such stakeholder
stated that this intention is evident
because many of the proposed loan
purpose categories reflect a desire to
collect data regarding credit offered to
businesses which offer a product or
service. One stakeholder seeking
exclusion of certain real estate loans
explained that most commercial real
estate loans are made to borrowers as
investments and not for operating their
business. A few stakeholders suggested
that the Bureau should only treat as
reportable loans secured by owneroccupied commercial real estate where
the primary source of repayment is the
cash flow from the ongoing business
operations. One stakeholder noted that
because commercial real estate loans
made to investors are typically made to
business entities with complex
ownership structures, their inclusion
under 1071 would create additional
hurdles for lenders seeking to determine
the principal owners.
Based on this feedback as well as its
general knowledge regarding both
consumer and commercial real estate
lending, the Bureau understands that
many financial institutions use their
consumer mortgage lending channels to
process credit applications secured by
1–4 family residential property and
used for investment purposes, while
applications for credit secured by 5+
unit multifamily properties or rental
portfolio loans secured by more than
four 1–4 unit residential properties are
generally processed through commercial
mortgage lending channels. The Bureau
also understands that loans made
through consumer mortgage lending
channels are often made pursuant to the
guidelines of Fannie Mae, Freddie Mac,
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the Federal Housing Administration
(FHA), and the Department of Veterans
Affairs (VA), and are likely already
reported under HMDA.
In light of the feedback received and
the Panel’s recommendation, the Bureau
is proposing that the 1071 rule not cover
credit secured by certain investment
properties, because such credit may not
always be primarily for business or
commercial purposes. Specifically,
proposed comment 104(b)–4 would
explain that a covered credit transaction
does not include an extension of credit
that is secured by 1–4 individual
dwelling units that the applicant or one
or more of the applicant’s principal
owners does not, or will not, occupy.
The Bureau is not proposing to exclude
credit secured by owner-occupied
dwellings; for example, those secured
by a dwelling occupied by a business’s
sole proprietor/principal owner. The
Bureau is thus proposing to exclude real
estate investment loans only in certain
limited circumstances (such as when
credit is secured by non-owner
occupied 1–4 dwelling units and not 5+
dwelling units). As discussed above in
the section-by-section analysis of
proposed § 1002.102(j), the Bureau is
proposing to define ‘‘dwelling’’ to have
the same meaning as Regulation C
§ 1003.2(f). Similarly, proposed
comment 104(b)–4, which would
address what does and does not
constitute an investment property, is
modeled on Regulation C’s comment
4(a)(6)–4.
The Bureau is proposing a definition
of ‘‘covered credit transaction’’ that does
not cover certain real estate investment
loans in the scope of a ‘‘covered credit
transaction’’ pursuant to its authority
under ECOA section 704B(g)(1) to
prescribe such rules and issue such
guidance as may be necessary to carry
out, enforce, and compile data under
section 1071. The Bureau believes that
its exclusion of credit secured by certain
investment properties will better
capture lending to true small businesses
(as opposed to consumers seeking to
diversify their investments) and will
also better align with financial
institution lending practices. The
Bureau understands that it may not
always be easy for financial institutions
to distinguish between businesspurpose real estate investment loans
and consumer-purpose real estate
investment loans; however, covering all
such loans would likely include some
percentage of consumer-purpose loans
in the 1071 rule, which could be
contrary to section 1071’s business and
community development purpose.
The Bureau seeks comment on its
proposed approach for credit secured by
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certain investment properties, including
whether it is appropriate to consider
credit not to be business credit when it
is secured by 1–4 individual dwelling
units that the applicant or one or more
of the applicant’s principal owners does
not, or will not, occupy; and, if not,
whether a different number of dwelling
units in the property securing the credit
would be an appropriate way to make a
distinction between business and
consumer-designated credit. The Bureau
also solicits comment on whether to
permit financial institutions to
voluntarily report real estate investment
loan transactions that are secured by
non-owner occupied 1–4 dwelling units.
Government credit. The existing
definition of business credit in
§ 1002.2(g) excludes public utilities
credit, securities credit, incidental
credit, and government credit (that is,
extensions of credit made to
governments or governmental
subdivisions, agencies, or
instrumentalities—not extensions of
credit made by governments), as defined
in existing § 1002.3(a) through (d), from
certain aspects of existing Regulation
B.429 For the purpose of proposed
subpart B, the Bureau is proposing
complete exclusions for public utilities
credit, securities credit, and incidental
credit from the definition of a covered
credit transaction in proposed
§ 1002.104(b), as discussed below.
However, the Bureau is not proposing
to exclude government credit, as
defined in existing § 1002.3(d)(1) to
mean ‘‘extensions of credit made to
governments or governmental
subdivisions, agencies, or
instrumentalities.’’ The Bureau believes
that an express exclusion for extensions
of credit made to governments or
governmental subdivisions, agencies, or
instrumentalities is not necessary
because such governmental entities
would not constitute small businesses
under the proposed rule.430 The Bureau
seeks comment on its approach to
government credit.
Certain purchases of covered credit
transactions. In the SBREFA Outline,
the Bureau did not expressly discuss
treatment of loan purchases, but the
Bureau sought feedback on any products
that should or should not be covered by
429 As explained in existing comment 3–1, under
§ 1002.3, procedural requirements of Regulation B
do not apply to certain types of credit. The
comment further states that all classes of
transactions remain subject to § 1002.4(a) (the
general rule barring discrimination on a prohibited
basis) and to any other provision not specifically
excepted.
430 Government entities are not ‘‘organized for
profit’’ and are thus not a ‘‘business concern’’ under
proposed § 1002.106(a).
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the Bureau’s eventual 1071 rule.431
Several SERs voiced support for
generally aligning small business
lending reporting requirements for
financial institutions with the approach
taken for HMDA reporting in the
Bureau’s Regulation C. One SER
stressed that imposing section 1071
requirements for loan buyers, who play
an important role in assisting CDFIs but
do not make credit decisions, might risk
their continued participation. Feedback
from other stakeholders was limited,
although a few stakeholders suggested
that the Bureau should generally
exclude purchased loans. The Panel did
not provide a specific recommendation
on this topic.
The Bureau believes that this
feedback may be based in part on the
requirements that apply to HMDA,
where Regulation C requires financial
institutions to report purchases of
covered loans under HMDA.432 This
requirement is based on statutory
language that contemplates data
collection for loan purchases.433 As
discussed in the section-by-section
analysis of proposed § 1002.103, ECOA
section 704B(b) requires that financial
institutions collect, maintain, and report
to the Bureau certain information
regarding ‘‘any application to a financial
institution for credit.’’ For covered
financial institutions, the definition of
‘‘application’’ will trigger data
collection and reporting obligations
with respect to covered credit
transactions. Under proposed subpart B,
purchasing a loan does not, in itself,
generate an obligation for a covered
financial institution to report small
business lending data. Rather, a
reporting obligation may arise on the
basis of making a final credit decision
on an application. (See the section-bysection analysis of proposed
§ 1002.109(a)(3) for additional
information.) The Bureau also notes the
corollary point that selling a covered
loan would not, in itself, obviate an
existing obligation of a covered financial
institution to report small business
lending data for that application,
pursuant to proposed comment 107(a)–
1.i.
Because under this proposal
purchasing a loan does not, in itself,
generate an obligation for a covered
financial institution to report small
business lending data regarding the
underlying application, the Bureau is
not proposing a specific exclusion for
these purchases.
The Bureau seeks comment on its
proposal not to expressly exclude the
purchase of covered credit transactions
in the proposed rule’s regulatory text or
commentary.
Certain purchases of covered credit
transactions—pooled loans. In the
SBREFA Outline, the Bureau did not
expressly discuss treatment of pooled
loan purchases, but the Bureau sought
feedback on any products that should or
should not be covered by the Bureau’s
eventual 1071 rule.434 A CDFI SER that
occasionally participates in pooled loan
purchases recommended that the
Bureau ensure that reporting obligations
for such pooled loans are clear.
The Panel did not provide a specific
recommendation on this topic. The
Bureau believes that this feedback may
be based in part on the requirements
that apply to HMDA, where Regulation
C requires financial institutions to
report purchases of covered loans under
HMDA.435 This requirement is based on
statutory language that contemplates
data collection for loan purchases.436
However, Regulation C exempts from
these general reporting requirements
‘‘[t]he purchase of an interest in a pool
of closed-end mortgage loans or openend lines of credit’’ 437 As discussed in
the section-by-section analysis of
proposed § 1002.103 above, ECOA
section 704B(b) requires that financial
institutions collect, maintain, and report
to the Bureau certain information
regarding ‘‘any application to a financial
institution for credit.’’ For covered
financial institutions, the definition of
‘‘application’’ (or, as used in this
proposed rule, ‘‘covered application’’)
will trigger data collection and reporting
obligations with respect to covered
credit transactions. Under this proposed
subpart, the purchase of an interest in
a pool of loans does not, in itself,
generate an obligation for a covered
financial institution to report small
business lending data. There is thus no
need to propose a similar exclusion in
this proposed subpart.
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434 SBREFA
431 SBREFA
Outline at 19–20.
432 See Regulation C § 1003.4(a) (stating that a
financial institution ‘‘shall collect data regarding
. . . covered loans that it purchases for each
calendar year’’).
433 See 12 U.S.C. 2803(a)(1) (stating that
institutions ‘‘shall compile and make available . . .
the number and total dollar amount of mortgage
loans which were (A) originated (or for which the
institution received completed applications), or (B)
purchased by that institution’’).
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Outline at 19–20.
Regulation C § 1003.4(a) (stating that a
financial institution ‘‘shall collect data regarding
. . . covered loans that it purchases for each
calendar year’’).
436 See 12 U.S.C. 2803(a)(1) (stating that
depository institutions ‘‘shall compile and make
available . . . the number and total dollar amount
of mortgage loans which were (A) originated (or for
which the institution received completed
applications), or (B) purchased by that institution’’).
437 12 CFR 1003.3(c)(4).
435 See
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56413
The Bureau believes that requiring
covered financial institutions to collect
and maintain data related to the
purchase of an interest in a pool of
covered credit transactions would do
little to further the purposes of section
1071. The Bureau generally believes that
a pooled loan purchase would arise after
a final credit decision on the relevant
loans has already been made (e.g., after
the loans were originated) and therefore
the Bureau believes that the purchaser
of an interest in a pool of loans would
understand that there would be no
section 1071 obligation. Section 1071
would already capture the lending
information of the loans in this pool, as
the application for each origination in
the pool would already be reported
(assuming it was originated by a covered
financial institution and otherwise
satisfies the requirements of proposed
subpart B). For clarity, however, the
Bureau is stating here that no reporting
obligations arise from purchasing an
interest in a pool of covered credit
transactions, including credit-backed
securities or real estate investment
conduits. The Bureau believes that this
clarification, similar to Regulation C
comment 3(c)(4)–1, will assist covered
financial institutions in understanding
the scope of their obligations.
The Bureau seeks comment on its
proposal not to expressly exclude the
purchase of an interest in a pool of
covered credit transactions in the
proposed rule’s regulatory text or
commentary.
Certain purchases of covered credit
transactions—partial interests in a
covered credit transaction. In the
SBREFA Outline, the Bureau did not
specifically solicit feedback on a
financial institution’s obligation to
report the purchase of a partial interest
in a covered credit transaction (such as
through participation loans, where
multiple financial institutions fund a
single origination); however, the Bureau
did receive some feedback on this issue.
One SER noted that there was some
uncertainty with respect to how the
Bureau intended to treat loan
participations. This SER urged the
Bureau not to discourage smaller credit
unions in rural markets, who the SER
stated may be likely to take part in loan
participations, from helping their
communities. The Panel did not provide
a specific recommendation on this
topic. Several other stakeholders also
requested that the Bureau exempt
participation loans.
The Bureau believes that this
feedback may be based in part on the
requirements that apply to HMDA,
where Regulation C requires financial
institutions to report purchases of
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covered loans under HMDA.438 This
requirement is based on statutory
language that contemplates data
collection for loan purchases.439
However, Regulation C exempts from
these general reporting requirements
‘‘[t]he purchase of a partial interest in a
closed-end mortgage loan or open-end
line of credit’’ 440 As discussed in the
section-by-section analysis of proposed
§ 1002.103 above, ECOA section 704B(b)
requires that financial institutions
collect, maintain, and report to the
Bureau certain information regarding
‘‘any application to a financial
institution for credit.’’ For covered
financial institutions, the definition of
‘‘application’’ (or, as used in this
proposed rule, ‘‘covered application’’)
will trigger data collection and reporting
obligations with respect to covered
credit transactions. Under this subpart,
a partial purchase of a loan does not, in
itself, generate an obligation for a
covered financial institution to report
small business lending data. There is
thus no need to propose a similar
exclusion in this subpart.
The Bureau believes that this
approach, combined with proposed
§ 1002.109(a)(3), provides sufficient
clarity for financial institutions that
choose to take part in loan
participations. For example, Financial
Institution A receives an application for
a covered credit transaction and
approves the loan, and then Financial
Institution A elects to organize a loan
participation agreement where Financial
Institutions B and C agree to purchase
a partial interest. This is a covered
credit transaction for Financial
Institution A, but it is not a covered
credit transaction for Financial
Institutions B and C. The Bureau
believes that this approach differs from
how loan participations are reported by
banks and savings associations under
the CRA. That is, under the CRA, if the
loan originated by Financial Institution
A met the definition of a small business
loan, then if any (or all) of the financial
institutions were CRA loan reporters the
loans may be reported under the
CRA.441
438 See Regulation B § 1003.4(a) (stating that a
financial institution ‘‘shall collect data regarding
. . . covered loans that it purchases for each
calendar year’’).
439 See 12 U.S.C. 2803(a)(1) (stating that
depository institutions ‘‘shall compile and make
available . . . the number and total dollar amount
of mortgage loans which were (A) originated (or for
which the institution received completed
applications), or (B) purchased by that institution’’).
440 12 CFR 1003.3(c)(8).
441 See, e.g., 12 CFR 228.21(f) (stating that when
assessing the record of a nonminority-owned and
nonwomen-owned bank, the Board considers loan
participation as a factor).
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The Bureau believes that the purposes
of section 1071 counsel towards the
broad collection of small business
lending by financial institutions. The
Bureau is further unaware of any reason
why data with respect to such lending
should not be collected because more
than one financial institution holds an
interest in a covered product.
Conversely, the Bureau does not believe
that requiring reporting by each
financial institution with a partial
interest in a covered credit transaction
would further section 1071’s purposes,
and is concerned that having a single
loan reported by multiple financial
institutions could compromise the
quality of the section 1071 dataset. Read
in conjunction with proposed
§ 1002.109(a)(3), however, the Bureau
believes that the covered credit
transactions at issue here will
nonetheless generally be reported by
one covered financial institution, the
financial institution that sold portions
of the loan to other participants.
The Bureau seeks comment on its
proposal not to expressly exclude the
purchase of a partial interest in a
covered credit transaction in the
proposed rule’s regulatory text or
commentary. In particular, the Bureau
solicits comment on how this proposed
exclusion may differ from reporting
obligations under the CRA, and if the
Bureau adopted another approach, how
overlapping reporters or data might be
flagged to avoid double-counting certain
information.
Trade credit. Under existing
Regulation B, trade credit refers to a
‘‘financing arrangement that involves a
buyer and a seller—such as a supplier
who finances the sale of equipment,
supplies, or inventory; it does not apply
to an extension of credit by a bank or
other financial institution for the
financing of such items.’’ 442 Thus, trade
credit typically involves a transaction in
which a seller allows a business to
purchase its own goods without
requiring immediate payment, and the
seller is not otherwise in the financial
services business. Businesses offering
trade credit generally do so as a means
to facilitate the sale of their own goods
and not as a stand-alone financing
product.
Most of the notification requirements
of existing Regulation B do not apply to
trade credit transactions.443 In a typical
trade credit transaction, the seller is not
otherwise in the financial services
business.444 The Bureau’s White Paper
estimated that trade credit represents
9(a)(3)–2.
§ 1002.9(a)(3)(ii).
444 See comment 9(a)(3)–2.
approximately 21 percent of the
aggregate dollar volume of various
financial products used by small
businesses.445 The Bureau understands
that there are tens of thousands of
merchants and wholesalers that extend
credit to small businesses solely in
connection with sale of goods and
services by these trade creditors.
In its SBREFA Outline, the Bureau
stated that it was considering proposing
that trade credit not be a covered
product under section 1071.446 The
Bureau stated that trade credit can be
offered by entities that are themselves
very small businesses and that the
Bureau was concerned that these
entities, in particular, may incur large
costs relative to their size to collect and
report 1071 data in an accurate and
consistent manner.447
The Bureau only received a few
comments regarding its proposal under
consideration to exclude trade credit. A
few stakeholders suggested that trade
credit should be covered. One
commenter noted that trade credit is
used for a significant number of
agricultural finance transactions
(equipment financing and input
financing for row crop farmers) and
suggested that the Bureau should
monitor this sector of the agricultural
finance industry. A trade association
stated that the exclusion of trade credit
should apply not only to the seller of
inventory and businesses facilitating the
sale of inventory, but also its affiliates
and facilitators because these entities
generally provide financing only for the
seller’s products and not for competing
or unrelated products. The trade
association cautioned that the collection
and publication of data, if applied to
such an affiliate, could significantly
impact the seller’s ability to maintain
trade secrets, as these data would
provide competitors a comprehensive
insight into the seller’s distribution and
wholesale strategies, and it would also
create a substantial risk to the
applicants themselves due to privacy
concerns.
The Bureau is proposing to not cover
trade credit in its 1071 rule. Proposed
§ 1002.104(b)(1) would define trade
credit as a financing arrangement
wherein a business acquires goods or
services from another business without
making immediate payment to the
business providing the goods or
services. Proposed comment 104(b)(1)–1
would provide that an example of trade
credit is one that involves a supplier
that finances the sale of equipment,
442 Comment
445 White
443 See
446 SBREFA
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Outline at 21.
447 See id.
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supplies, or inventory. Proposed
comment 104(b)(1)–1 would provide
that an extension of business credit by
a financial institution other than the
supplier for the financing of such items
is not trade credit. Proposed comment
104(b)(1)–2 would clarify that the
definition of trade credit under existing
comment 9(a)(3)–2 applies to relevant
provisions under existing Regulation B,
and that proposed § 1002.104(b)(1) is
not intended to repeal, abrogate, annul,
impair, or interfere with any existing
interpretations, orders, agreements,
ordinances, rules, or regulations
adopted or issued pursuant to existing
comment 9(a)(3)–2.
The Bureau is proposing a definition
of ‘‘covered credit transaction’’ that
excludes trade credit pursuant to its
authority under ECOA section
704B(g)(1) to prescribe such rules and
issue such guidance as may be
necessary to carry out, enforce, and
compile data under section 1071. While
trade credit constitutes ‘‘credit’’ within
the meaning of proposed § 1002.102(k),
the Bureau believes that trade credit is
categorically different from products
like loans, lines of credit, credit cards,
and MCAs and that there are several
reasons to exclude it from coverage.
Trade credit is not a general-use
business lending product—that is, trade
creditors generally extend credit as a
means to facilitate the sale of their own
goods, rather than offering it as a standalone financial product. The Bureau
believes that while trade creditors might
meet the definition in section 1071 of a
financial institution, they are not
financial services providers that manage
compliance with regulatory
requirements associated with making
extensions of credit. The Bureau
understands that trade credit can be
offered by entities that are themselves
very small businesses; the Bureau
continues to be concerned that these
entities, in particular, may incur large
costs relative to their size to collect and
report 1071 data in an accurate and
consistent manner.448 Taken together,
the Bureau is concerned that requiring
trade credit to be reported under
proposed subpart B may lead to
significant data quality issues. The
Bureau is also concerned that the fixed
costs of coming into compliance with its
1071 rule could lead these businesses to
448 See Leora Klapper et al., The Review of
Financial Studies, Trade Credit Contracts, at 838–
67 (vol. 25, issue 3, 2012), https://academic.
oup.com/rfs/article/25/3/838/1616515, and Justin
Murfin & Ken Njoroge, The Review of Financial
Studies, The Implicit Costs of Trade Credit
Borrowing by Large Firms, at 112–45 (vol. 28, issue
1, 2015), https://academic.oup.com/rfs/article/28/1/
112/1681329.
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reduce or cease offering trade credit to
their small business customers, which
would run contrary to the community
development purpose of section 1071.
The Bureau notes that its proposed
definition of trade credit in
§ 1002.104(b)(1) is focused on the
business providing the goods or services
being financed. It thus does not extend
to affiliates and facilitators of trade
creditors that provide financing, even if
only for the trade creditor’s products
and not for competing or unrelated
products. Provided that they otherwise
meet the definition of a covered
financial institution in proposed
§ 1002.105(b), such affiliates and
facilitators must collect and report data
under the 1071 rule. The Bureau
believes that, unlike trade creditors
themselves, such affiliates and
facilitators offer stand-alone credit
products in the same way as other
financial institutions. As such, the
Bureau does not have the same concerns
about data quality or market exit by
affiliates and facilitators that it does
about trade creditors themselves.
The Bureau seeks comment on its
proposal to exclude trade credit from
the 1071 rule and on its proposed
definition of trade credit.
Public utilities credit. As noted above,
the existing definition of business credit
in § 1002.2(g) excludes public utilities
credit, securities credit, incidental
credit, and government credit, as
defined in existing § 1002.3(a) through
(d), from certain procedural
requirements of existing Regulation B.
For the purpose of proposed subpart B,
the Bureau is proposing complete
exclusions for public utilities credit
from the definition of a covered credit
transaction in proposed § 1002.104(b).
In the SBREFA Outline, the Bureau
did not expressly discuss treatment of
public utilities credit transactions.
However, the Bureau sought feedback
on any products that should or should
not be covered by the Bureau’s eventual
1071 rule, and did not receive any
feedback specific to public utilities
credit.
Proposed § 1002.104(b)(2) would
exclude public utilities credit, as
defined in existing § 1002.3(a)(1).
Existing § 1002.3(a)(1) states that the
term public utilities credit refers to
extensions of credit that involve public
utility services provided through pipe,
wire, or other connected facilities, or
radio or similar transmission (including
extensions of such facilities), if the
charges for service, delayed payment,
and any discount for prompt payment
are filed with or regulated by a
government unit. Several existing
Regulation B requirements do not apply
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to public utilities credit transactions.449
Existing comment 3(a)–1 explains that
the definition applies only to credit for
the purchase of a utility service, such as
electricity, gas, or telephone service.
Credit provided or offered by a public
utility for some other purpose—such as
for financing the purchase of a gas
dryer, telephone equipment, or other
durable goods, or for insultation or other
home improvements—would not be
excepted under proposed
§ 1002.104(b)(2) but may be excepted if
it constitutes trade credit under
proposed § 1002.104(b)(1), or in the case
of financing for certain home
improvements, for example, if it does
not constitute an extension of business
credit under proposed § 1002.104(a).
Existing comment 3(a)–2 states in part
that a utility company is a creditor
when it supplies utility service and bills
the user after the service has been
provided.
The Bureau is proposing a definition
of ‘‘covered credit transaction’’ that
excludes public utilities credit pursuant
to its authority under ECOA section
704B(g)(1) to prescribe such rules and
issue such guidance as may be
necessary to carry out, enforce, and
compile data under section 1071. The
Bureau believes that excluding public
utilities credit from the 1071 rule is
reasonable for the same reasons as the
Board enumerated when it adopted
exemptions from certain procedural
requirements under subpart A.
Specifically, the Bureau is concerned
that covering public utilities credit
under 1071 could require ‘‘substantial
changes in the forms and procedures of
public utilities companies. Costs
associated with such changes would, in
all likelihood, be passed along to [small
business owners].’’ 450 The Bureau notes
that many of the policies and
procedures of public utilities companies
are separately regulated at the State and
Municipal levels by public service
commissions, and at the Federal level
by the Federal Energy Regulatory
Commission. The Bureau also believes
that public utilities credit is akin to
trade credit and thus is proposing to
exclude it from coverage under subpart
B for the same reasons.
The Bureau seeks comment on its
proposal to exclude public utilities
credit.
Securities credit. As noted above, the
existing definition of business credit in
§ 1002.2(g) excludes public utilities
credit, securities credit, incidental
credit, and government credit, as
defined in existing § 1002.3(a) through
449 See
450 40
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FR 49298, 49305 (Oct. 22, 1975).
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Federal Register / Vol. 86, No. 193 / Friday, October 8, 2021 / Proposed Rules
(d), from certain procedural
requirements of existing Regulation B.
For the purpose of proposed subpart B,
the Bureau is proposing complete
exclusions for securities credit from the
definition of a covered credit
transaction in proposed § 1002.104(b).
In the SBREFA Outline, the Bureau
did not expressly discuss treatment of
securities credit transactions, but the
Bureau sought feedback on any products
that should or should not be covered by
the Bureau’s eventual 1071 rule. The
Bureau did not receive any feedback
specific to securities credit.
Proposed § 1002.104(b)(3) would
exclude securities credit, as defined in
existing § 1002.3(b)(1). Existing
§ 1002.3(b)(1) states that the term
securities credit refers to extensions of
credit subject to regulation under
section 7 of the Securities Exchange Act
of 1934 or extensions of credit by a
broker or dealer subject to regulation as
a broker or dealer under the Securities
Exchange Act of 1934. Several existing
Regulation B requirements do not apply
to securities credit transactions.451
The Bureau is proposing a definition
of ‘‘covered credit transaction’’ that
excludes securities credit pursuant to its
authority under ECOA section
704B(g)(1) to prescribe such rules and
issue such guidance as may be
necessary to carry out, enforce, and
compile data under section 1071. The
Bureau is proposing to exclude
securities credit to foster consistency
with existing Regulation B.
The Bureau seeks comment on its
proposal to exclude securities credit.
Incidental credit. As noted above, the
existing definition of business credit in
§ 1002.2(g) excludes public utilities
credit, securities credit, incidental
credit, and government credit, as
defined in existing § 1002.3(a) through
(d), from certain procedural
requirements of existing Regulation B.
For the purpose of proposed subpart B,
the Bureau is proposing complete
exclusions for incidental credit from the
definition of a covered credit
transaction in proposed § 1002.104(b).
In the SBREFA Outline, the Bureau
did not expressly discuss treatment of
incidental credit transactions, but the
Bureau sought feedback on any products
that should or should not be covered by
the Bureau’s eventual 1071 rule. The
Bureau did not receive any feedback
specific to incidental credit.
Proposed § 1002.104(b)(4) would
exclude incidental credit, as defined in
existing § 1002.3(c)(1), but without
regard to whether the credit is consumer
credit, as defined in existing § 1002.2(h).
Existing § 1002.3(c)(1) states that
incidental credit refers to extensions of
consumer credit other than the types
described in § 1002(a) and (b): (i) That
are not made pursuant to the terms of
a credit card account; (ii) that are not
subject to a finance charge (as defined
in Regulation Z § 1026.4); and (iii) that
are not payable by agreement in more
than four installments. A number of
existing Regulation B requirements do
not apply to ‘‘incidental credit’’
(referring to extensions of consumer
credit).452 Existing comment 3(c)–1
explains that if a service provider (such
as a hospital, doctor, lawyer, or
merchant) allows the client or customer
to defer the payment of a bill, this
deferral of debt is credit for purposes of
the regulation, even though there is no
finance charge and no agreement for
payment in installments. Because of the
exceptions provided by existing
§ 1002.3, however, these particular
credit extensions are excepted from
compliance with certain procedural
requirements as specified in § 1002.3(c).
The Bureau is proposing a definition
of ‘‘covered credit transaction’’ that
excludes incidental credit pursuant to
its authority under ECOA section
704B(g)(1) to prescribe such rules and
issue such guidance as may be
necessary to carry out, enforce, and
compile data under section 1071. The
Bureau believes that the Board’s
reasoning with respect to incidental
credit’s limited exception under existing
Regulation B is equally applicable and
relevant here. The Board sought to
minimize burdens on businesses that
‘‘permit their customers to defer
payment of debt as a convenience and
are not in the business of extending
credit.’’ 453 The Board cited the example
of doctors and dentists that permit their
patients to defer payment of fees and
who are extending credit as incidental
to their principal activity of health
care.454 The Board also noted that
‘‘[s]mall neighborhood businesses such
as drugstores and grocery stores
frequently permit their customers to
postpone payment on an informal basis
not associated with a formal credit
plan.’’ 455 The Bureau believes that
incidental credit, as described above, is
akin to trade credit and thus is
proposing to exclude it from coverage
under subpart B for the same reasons.
The Bureau seeks comment on its
proposal to exclude incidental credit.
452 See
453 40
§ 1002.3(c).
FR 49298, 49304 (Oct. 22, 1975).
454 Id.
451 See
§ 1002.3(b).
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455 Id.
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Section 1002.105 Covered Financial
Institutions and Exempt Institutions
ECOA section 704B(h)(1) defines the
term ‘‘financial institution’’ as ‘‘any
partnership, company, corporation,
association (incorporated or
unincorporated), trust, estate,
cooperative organization, or other entity
that engages in any financial activity.’’
The Bureau is proposing to define a
financial institution in § 1002.105(a)
consistent with that statutory language.
The Bureau is proposing to define a
covered financial institution in
§ 1002.105(b) as a financial institution
that originated at least 25 covered credit
transactions from small businesses in
each of the two preceding calendar
years. Only those financial institutions
that meet this loan-volume threshold in
the definition of a covered financial
institution would be required to collect
and report small business lending data
pursuant to proposed subpart B.
The Bureau’s proposed definitions
reflect the broad nature of the data
collection specified in section 1071,
while recognizing the risks that
financial institutions with the lowest
volume of small business lending might
reduce or cease their small business
lending activity because of the fixed
costs of coming into compliance with
this rule.
The Bureau is proposing § 1002.105 to
implement ECOA section 704B(h)(1)
and pursuant to its authority under
704B(g)(1) to prescribe such rules and
issue such guidance as may be
necessary to carry out, enforce, and
compile data pursuant to section 1071.
The Bureau is also proposing
§ 1002.105(b) pursuant to its authority
under 704B(g)(2) to conditionally or
unconditionally exempt any financial
institution or class of financial
institutions from the statute’s
requirements, as the Bureau deems
necessary or appropriate to carry out the
purposes of section 1071. The Bureau is
proposing these provisions and
proposing to use its exemption authority
under 704B(g)(2) for the reasons set
forth below.
105(a) Financial Institution
Background
ECOA section 704B(h)(1) defines the
term ‘‘financial institution’’ as ‘‘any
partnership, company, corporation,
association (incorporated or
unincorporated), trust, estate,
cooperative organization, or other entity
that engages in any financial activity.’’
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SBREFA Proposals Under Consideration
and Feedback Received
At SBREFA, the Bureau stated it was
considering proposing a general
definition of ‘‘financial institution’’
consistent with the section 1071
definition.456 The Bureau noted that
Regulation B, which implements ECOA,
has not otherwise defined this term.
SERs generally did not express
concern regarding the general definition
of a ‘‘financial institution’’ under
consideration, although one SER
expressed concern at the broad reach of
what might be considered a financial
activity.457 The SBREFA Panel did not
provide any recommendations on the
definition of a financial institution.
Feedback on the definition of ‘‘financial
institution’’ from other stakeholders was
likewise nearly universally positive,
with most opining that a definition that
encompasses all small business lenders
would be appropriate.
Proposed Rule
Proposed § 1002.105(a) would define
a financial institution as any
partnership, company, corporation,
association (incorporated or
unincorporated), trust, estate,
cooperative organization, or other entity
that engages in any financial activity.
This proposed definition restates the
statute and is the same definition that
the Bureau stated it was considering
proposing in the SBREFA Outline.458
The Bureau believes that this definition
reflects the broad nature of small
business lending data collection
specified in section 1071. Under such a
definition, the rule’s data collection and
reporting requirements would apply to
a variety of entities that engage in small
business lending, including depository
institutions (i.e., banks, savings
associations, and credit unions),459
online lenders, platform lenders, CDFIs,
lenders involved in equipment and
vehicle financing (captive financing
456 SBREFA
Outline at 10.
SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 18–20.
458 SBREFA Outline at 10.
459 For purposes of this notice of proposed
rulemaking, the Bureau is using the term depository
institution to mean any bank or savings association
defined by the Federal Deposit Insurance Act, 12
U.S.C. 1813(c)(1), or credit union defined pursuant
to the Federal Credit Union Act, as implemented by
12 CFR 700.2. The Bureau notes that the DoddFrank Act defines a depository institution to mean
any bank or savings association defined by the
Federal Deposit Insurance Act; there, that term does
not encompass credit unions. 12 U.S.C.
5301(18)(A), 1813(c)(1). To facilitate analysis and
discussion, the Bureau is referring to banks and
savings associations together with credit unions as
depository institutions throughout this notice,
unless otherwise specified.
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457 The
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companies and independent financing
companies), commercial finance
companies, governmental lending
entities, and nonprofit, nondepository
lenders.
As noted above, one SER expressed
concern at the broad reach of this
definition. But the broad scope of what
may be considered a ‘‘financial activity’’
in the proposed definition of financial
institution is not the principal
determinative factor as to whether small
business lending data collection and
reporting is required; the proposed
definition of a covered financial
institution, the proposed definition of a
covered application, and the proposed
definition of a covered credit
transaction, among others, all would
impose limits on what entities could be
subject to this proposed rule’s data
collection and reporting requirements.
Proposed comment 105(a)–1 would
provide a non-exhaustive list of
examples of entities that may fit within
the definition of a financial institution.
This proposed comment would make
clear that nonprofit and governmental
entities, governmental subdivisions, or
governmental agencies, among others,
who conduct financial activity fit within
the definition of a financial institution.
The definition of the term ‘‘financial
institution’’ in ECOA section 704B(h)(1)
includes the phrase ‘‘or other entity.’’
That term readily encompasses
governments and government entities.
Even if the term were ambiguous, the
Bureau believes—based on its expertise
and experience—that interpreting it to
encompass governments and
government entities would promote the
purposes of section 1071. For example,
the Bureau believes that it will be
helpful to identify the business and
community development needs of
women-owned, minority-owned, and
small businesses by collecting lending
data from both a county-run assistance
program for establishing new businesses
and financial institutions that operate
nationwide, like online lenders. The
Bureau also believes that the terms
‘‘companies’’ or ‘‘corporations’’ under
the definition of ‘‘person,’’ on their face,
cover all companies and corporations,
including government-owned or
-affiliated companies and corporations.
And even if those terms were
ambiguous, the Bureau believes—based
on its expertise and experience—that
interpreting them to cover governmentowned or -companies and corporations
would promote the purposes of section
1071. The Bureau emphasizes that the
list of examples of entities in proposed
comment 105(a)–1 is not exhaustive and
that other entities not specifically
described would nonetheless fit within
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56417
the definition of a financial institution
under proposed § 1002.105(a). For
example, the Bureau believes that an
organization offering insurance
premium financing, where the
organization provides short-term loans
to businesses to pay for property and
casualty insurance, is included within
the definition of proposed § 1002.105(a),
even though this specific business
model is not described in proposed
comment 105(a)–1.
Proposed comment 105(a)–2 would
refer to proposed § 1002.101(a) to
reiterate the statutory exclusion for
motor vehicle dealers.
The Bureau seeks comment on this
proposed definition of a financial
institution, and generally requests
comment on whether additional
clarification is needed.
105(b) Covered Financial Institution
Background
The Bureau has received requests to
adopt exemptions from section 1071
collection and reporting requirements
for financial institutions that do not
frequently engage in small business
lending. Reasons cited have included
encouraging market entry, ensuring data
quality, alleged lack of materiality of
data from smaller lenders that rarely
make small business loans, and lack of
capacity by the lenders sufficient to
justify small business lending as a line
of business in light of the cost of
complying with an eventual 1071 rule.
SBREFA Proposals Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
stated that it was considering, in light of
section 1071’s statutory purposes,
proposing to exempt financial
institutions from any collection and
reporting requirements based on either
or both a size-based and/or activitybased threshold. In the SBREFA
Outline, the Bureau set forth several
alternative thresholds under
consideration for such an exemption.460
There was a diversity of perspectives
with respect to the Bureau’s approaches
under consideration regarding potential
exemptions.461 While some SERs
stressed the need for expansive lender
coverage to fulfill section 1071’s
purposes, others suggested that such
purposes could be fulfilled by the
Bureau collecting and reporting data
from only the largest lenders. SERs also
offered varying opinions regarding the
exemption metrics and thresholds under
460 SBREFA
Outline at 11–13.
SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 18–20.
461 The
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consideration, with some SERs favoring
activity-based exemptions and others
preferring an asset-based approach.
SERs uniformly supported clear,
predictable collection and reporting
exemption thresholds.
The SBREFA Panel recommended
that the Bureau continue to explore
whether either or both a size-based or
activity-based test might be appropriate
to determine whether a financial
institution must collect and report 1071
data or should be exempt, given section
1071’s statutory purposes.462 The
SBREFA Panel also recommended that
the Bureau continue to explore whether
the fixed costs of coming into
compliance with an eventual 1071 rule
might cause certain financial
institutions to reduce or cease lending
to small businesses, as it considers the
possible exemptions for financial
institutions based on size and/or
activity, along with any alternative
approaches.463
Feedback from other stakeholders
generally was in support of exempting
certain financial institutions from 1071
collection and reporting obligations.
Most feedback in support of pursuing
exemptions focused on the potential
burden of a new regulatory regime, with
some stakeholders cautioning that
collection and reporting obligations
could lead to an increase in the cost of
credit. A few stakeholders connected
these potential costs with section 1071’s
purpose to identify community
development needs and opportunities
(chiefly arguing that costs might lead to
higher costs of lending or lower lending
volume), or otherwise expressed a
general belief that some exemptions
were consistent with statutory purposes.
Several stakeholders, mostly community
groups, urged caution with respect to
the extent of any such exemptions,
arguing that significant data limitations
would run contrary to the general
purposes of section 1071.
Activity-based exemption. In the
SBREFA Outline, the Bureau stated that
it was considering whether only
financial institutions that engage in a
certain amount of small business
lending activity should be required to
collect and report 1071 data.464 The
Bureau explained that in light of 1071’s
potentially broad application to
financial institutions, an activity-based
test to determine reporting
responsibility might be appropriate. In
particular, the Bureau expressed
concern that financial institutions with
the lowest volume of small business
462 Id.
at 43.
463 Id.
464 SBREFA
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Outline at 12–13.
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lending might reduce or cease their
small business lending activity because
of the fixed costs of coming into
compliance with an eventual 1071 rule.
The Bureau stated that this result could
be contrary to the community
development purpose of section 1071.
The Bureau specifically mentioned
three possible activity-based threshold
levels, each defined by a financial
institution’s annual number of small
business loans originated or the
financial institution’s annual total dollar
value of small business loans originated.
(That is, if either measurement is
exceeded, then the financial institution
must collect and report 1071 data.)
Those three possible activity-based
threshold levels were: Originations of at
least 25 loans or $2.5 million (Option 1
Exemption Threshold); originations of at
least 50 loans or $5 million (Option 2
Exemption Threshold); and originations
of at least 100 loans or $10 million
(Option 3 Exemption Threshold). These
possible activity-based thresholds could
be based on the financial institution’s
lending as of the end of the last calendar
year, or the end of each of the last two
calendar years. An activity-based
exemption could apply to depository
and nondepository institutions alike.
Some SERs advocated for an activitybased exemption. Several of these SERs
preferred an annual 25-loan threshold
(with at least one expressing support
specifically for the Option 1 Exemption
Threshold). One SER preferred the
Option 2 Exemption Threshold, while
another preferred the Bureau’s Option 3
Exemption Threshold. Another SER
recommended setting a threshold of
more than 100 small business
applications (rather than originations)
for two consecutive years. These SERs
emphasized a general need for thorough
data reporting from a wide variety of
lenders, and cautioned that in many
smaller and rural markets, larger
exemptions might result in little or no
data collection given that many lenders
in those markets make very few small
business loans annually.
One SER suggested setting an activitybased threshold based on loan portfolio
size rather than annual originations.
Another SER suggested that the Bureau
consider exempting certain financial
institutions using a location test similar
or identical to what is used for HMDA,
which does not apply to institutions
that do not have a home or branch office
in a Metropolitan Statistical Area.
There was no uniformity in the
feedback from other stakeholders with
respect to an activity-based exemption
and its potential level. Many
commenters, including lenders, trade
associations, and community groups,
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expressed support for the Option 1
Exemption Threshold, although most
explicitly supported only the 25-loan
threshold. On the other hand, a few
comments advocated for versions of the
Option 3 Exemption Threshold and
many comments urged the Bureau to
adopt a threshold higher than the
Option 3 Exemption Threshold.
Commenters who advocated for higher
thresholds consisted of lenders and
trade associations.
Size-based exemption. In the SBREFA
Outline, the Bureau stated that it was
concerned that the smallest financial
institutions might reduce or cease their
small business lending activity because
of the fixed costs of coming into
compliance with an eventual 1071 rule,
which could be contrary to the
community development purpose of
section 1071.465 Specifically, the Bureau
considered whether depository
institutions with assets under a given
threshold should be exempt from
collecting and reporting small business
lending data.
The Bureau stated that it was
considering proposing to exempt
depository institutions with assets
under a given threshold from section
1071’s data collection and reporting
requirements. The Bureau postulated
that this size-based approach could
provide a straightforward exemption for
very small depository institutions and
avoid the need for those entities to
measure or monitor their small business
lending activity in order to determine
whether they would be exempt from the
Bureau’s 1071 rule. In particular, the
Bureau considered possible asset-based
exemption threshold levels of $100
million (Option A Exemption Level) and
$200 million (Option B Exemption
Level). For purposes of this exemption,
the Bureau considered proposing that a
depository institution measure assets as
of the end of the last calendar year, or
the end of both of the last two calendar
years. The Bureau asked SERs whether
there were alternative approaches to a
size-based exemption that the Bureau
should consider.
SERs did not suggest size-based
exemptions other than an asset-based
metric that would apply to depository
institutions. A few SERs advocated that
the Bureau should consider initially
exempting lenders other than ‘‘large’’
financial institutions (which, one SER
suggested, might be defined for
depository institutions as those having
more than $1 billion in assets). These
SERs stated that this approach would
capture the vast majority of small
business loans while avoiding imposing
465 Id.
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undue regulatory burden on smaller
lenders, who might be less capable of
absorbing such costs. They suggested
that the Bureau might later consider
whether to expand section 1071 data
collection and reporting requirements to
smaller financial institutions after first
analyzing the available data. Several
SERs cautioned that some financial
institutions, particularly small
nondepository lenders, might cease
lending to small businesses if the
eventual 1071 rule’s one-time costs are
too high.
One SER stated that a $200 million
asset-based exemption would be helpful
to small depository lenders, and others
suggested that a threshold of $600
million was appropriate. Another SER
countered, however, that they were
unaware of data to support an assetbased exemption larger than $100
million. Some SERs expressly opposed
an asset-based exemption; one SER
cautioned that an exemption based
solely on asset size would be
inadvisable because many lenders do
not hold their loans on their balance
sheet. Another SER stated that adopting
an asset-based exemption would risk
excluding the collection of nearly all
small business lending data in certain
regions.
Input from other stakeholders was
split. Many stakeholders supported a
size-based exemption (typically an
asset-based exemption), contending that
small depository institutions faced
substantial compliance costs and
presented a lower likelihood of fair
lending violations. Small depository
institutions were also particularly
concerned about data security issues.
However, a number of other
stakeholders counseled against a sizebased exemption, arguing that
exemptions should be based instead on
lending activity, and that size-based
exemptions risked under-reporting in
important markets. In addition, some
stakeholders noted that because there
was no ready equivalent size-based
measurement for nondepository
institutions, including an asset-based
exemption in the 1071 rule would put
other small financial institutions at a
cost disadvantage.
Combined exemption. The Bureau
stated that it was exploring whether to
combine the size- and activity-based
approaches.466 Under a combined
approach, a financial institution would
be required to collect and report 1071
data if it exceeds either: (1) A given
annual number of small business loans
originated; or (2) annual total small
business lending, measured in dollars.
466 Id.
at 13.
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However, depository institutions with
assets under a given asset threshold
would be exempt from reporting,
regardless of the number or dollar value
of small business loans they originated
during the relevant time period.
At least one SER supported a
combined size-based and activity-based
exemption. Some SERs also suggested
other possible bases for setting
exemption thresholds. For example,
several SERs suggested that the Bureau
focus on the number of small business
loans that would be covered or
excluded, rather than the number of
financial institutions, in setting an
exemption threshold. One SER
suggested setting a threshold based on
loan portfolio size rather than annual
originations. As discussed above,
another SER suggested that the Bureau
consider exempting certain financial
institutions using a location test similar
or identical to what is used for HMDA,
which does not apply to institutions
that do not have a home or branch office
in a Metropolitan Statistical Area.
Alternative exemptions. The Bureau
did not express that it was considering
other collection and reporting
exemptions. However, the Bureau did
request feedback on alternative
approaches. In particular, the Bureau
asked whether there were certain types
of financial institutions, such as
governmental lending entities or
nonprofit nondepository lenders, that
the Bureau should consider not
including within 1071’s data collection
and reporting requirements.
One credit union SER requested that
the Bureau exempt all credit unions
from section 1071 data collection and
reporting requirements, asserting that
credit unions had not displayed what
they characterized as a ‘‘pattern of
unfair lending.’’ In contrast, another
SER cautioned against providing
exemptions for particular types of
financial institutions, noting the risk of
missing important lending data. A few
SERs, particularly CDFIs, strongly
preferred that all lenders, including
nonprofit and government lenders, be
subject to section 1071 data collection
and reporting requirements. One SER
asserted that disparities exist in many
forms of small business lending,
including the SBA’s 7(a) Loan Program,
State lending programs, and funds
distributed through the recent
Coronavirus Aid, Relief, and Economic
Security Act (CARES Act).467 Another
SER stated that in certain parts of the
country, such as the Midwest, Farm
Credit System loans are available to
small businesses, and thus Farm Credit
467 Public
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56419
institutions are in competition with
other lenders and should be covered
entities. One SER stated that the Bureau
should consider exempting
nondepository, nonprofit Native CDFIs
because section 1071 data collection
and reporting requirements might
impose significant compliance costs and
privacy concerns.468 The SBREFA Panel
recommendations did not directly
address this topic, although the Panel
did recommend that the Bureau
continue to consider alternative
approaches to exemptions.469
Feedback from other stakeholders
included a variety of suggestions for
other types of financial institutions that
the Bureau should consider exempting.
These suggestions were made by
financial institutions (or their trade
associations) to describe either
themselves or portions of their
membership. The Bureau received this
feedback pertaining to CDFIs, credit
unions, minority depository
institutions, financial institutions in
rural areas or low- and moderate-income
areas, financial institutions that would
themselves be small businesses under
the rule, and motor vehicle dealers.
Conversely, some stakeholders
encouraged the Bureau not to provide
any such categorical exemptions. One
stakeholder also urged the Bureau not to
exempt government or nonprofit
lenders, arguing that they were an
important element of achieving broad
coverage in 1071 data.
Proposed Rule—Activity-Based
Exemption
Proposed § 1002.105(b) would define
a covered financial institution as a
financial institution that originated at
least 25 covered credit transactions for
small businesses in each of the two
preceding calendar years. This proposed
definition adopts the portion of the
Option 1 Exemption Threshold based on
number of originations discussed at
SBREFA, using the two consecutive year
approach that was also described at
SBREFA. The Bureau believes this
definition will facilitate compliance by
describing which financial institutions
are required to collect and report small
business data. The Bureau is also
proposing commentary to accompany
proposed § 1002.105(b). The Bureau’s
468 Native CDFIs are organizations certified as
community development financial institutions that
primarily serve a Native Community and are
therefore eligible for Financial Assistance and
Technical Assistance awards provided by the
Native American CDFI Assistance Program. CDFI
Fund, Fostering Economic Self-Determination for
Your Native Community, https://www.cdfifund.gov/
sites/cdfi/files/documents/cdfi7205_fs_ni_
updatedfeb20.pdf (last visited Aug. 12, 2021).
469 SBREFA Panel Report at 43.
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rationale for proposing this exemption,
and for not proposing any others, is
discussed in detail below.
In general, the Bureau believes that
fulfilling the purposes of section 1071
necessitates collecting small business
lending data from all sizes and types of
financial institutions (other than those
with a low volume of lending activity),
particularly given the variety of entities
identified in ECOA section 704B(h)(1).
The Bureau is proposing to exempt
certain financial institutions from its
small business lending data collection
rule because it remains concerned that
financial institutions with the lowest
volume of small business lending might
reduce or cease their small business
lending activity due to the fixed costs of
coming into compliance with the 1071
rule. A reduction in access to credit
would run contrary to the community
development purpose of section 1071.
Section 1071 describes its community
development purpose as ‘‘enabl[ing]
communities, governmental entities,
and creditors to identify business and
community development needs and
opportunities of women-owned,
minority-owned, and small
businesses.’’ 470 In the Bureau’s view,
such business and community
development opportunities cannot be
appropriately identified if the 1071 rule
unduly eliminates those opportunities
by reducing access to credit, which, as
explained below, supports the Bureau’s
use of its exemption authority under
704B(g)(2) here. Feedback from SBREFA
showed that a broad array of financial
institutions, trade associations,
community groups, and others share the
Bureau’s concern about the risk of
reducing access to small business credit,
particularly with respect to financial
institutions that infrequently lend to
small businesses.
The Bureau is proposing § 1002.105(b)
pursuant to its authority under ECOA
section 704B(g)(1) to prescribe such
rules and issue such guidance as may be
necessary to carry out, enforce, and
compile data pursuant to section 1071
and its authority under 704B(g)(2) to
adopt exceptions to any requirement of
section 1071 and, conditionally or
unconditionally, exempt any financial
institution or class of financial
institutions from the requirements of
470 ECOA
section 704B(a).
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section 1071, as the Bureau deems
necessary or appropriate to carry out the
purposes of section 1071.
The Bureau believes that an activitybased threshold would provide a simple
basis for financial institutions that
infrequently lend to small businesses to
determine whether they have conducted
sufficient lending activity as to be
required to collect and report data under
proposed subpart B. With respect to
setting an activity-based threshold,
feedback favored using only
originations. SERs uniformly supported
clear, predictable collection and
reporting exemption thresholds. With
respect to feedback from other
stakeholders, nearly all of the comments
that expressed support for the Option 1
Exemption Threshold provided support
only for the 25-loan metric, and not the
total lending metric (and several
comments explicitly urged the Bureau
not to adopt the $2.5 million lending
threshold). The Bureau believes that
furnishing a dual activity-based
threshold, under which infrequent
lenders must ascertain both
measurements to determine whether
reporting may be required, would cut
against the goal of simplifying the rule
as lenders would then have to track two
metrics, not one. The Bureau believes
that a dual threshold would create more
regulatory complexity as, among other
things, the resulting rule would have to
address issues such as how lines of
credit and credit cards are meant to be
counted towards the dollar volume
threshold. (For example, should the rule
use the maximum amount that could be
extended or something else, like an
average of the amount actually
outstanding? If the former, how should
changes in the limit be treated?) In
contrast, tracking total annual small
business originations does not entail
such complexity.
In particular, the Bureau believes that
a primary advantage of an activity-based
threshold—ease of compliance—would
be undermined if the Bureau were to
implement a complex, dual threshold
eligibility test. The Bureau wishes to
ensure that infrequent lenders are not
incurring significant undue compliance
costs, particularly while not reporting
data. In general, tracking two thresholds
is more complex than tracking one. And
of these two thresholds, the Bureau
believes that tracking total originations
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is simpler than tracking total lending.
The Bureau believes it is also more
likely that financial institutions are
already tracking total originations. The
Bureau believes that proposing an
activity-based threshold that employs
data already generally collected by
financial institutions could mitigate the
risk that section 1071, when
implemented, would result in reduced
access to credit.
The Bureau is thus proposing to set
the loan-volume threshold at 25 covered
credit transactions from small
businesses in each of the past two years.
This proposal is based, in part, on
feedback received at SBREFA. As
mentioned above, several SERs
recommended an annual 25-loan
threshold and many comments,
including those from lenders, trade
associations, and community groups,
expressed support for the Option 1
Exemption Threshold, with most
explicitly supporting just the 25-loan
threshold and not total lending.
The Bureau continues to consider
whether this loan-volume threshold
should be set at a different level, such
as 50 or 100 originations, as described
in the SBREFA Outline.471 The Bureau
notes that there was also substantial
support for a much higher loan-volume
threshold than 25 originations. In
addition to the SER feedback discussed
above, several stakeholders advocated
for 100 loans and many others
advocated for an even higher threshold.
However, at least to this point, the
Bureau is not convinced, based on the
feedback from SERs and other
stakeholders, that higher thresholds
would be more necessary or appropriate
to carry out the purposes of section
1071. Rather, such advocacy focused
either on concerns that lower thresholds
would not exempt a particular financial
institution or type of financial
institution, such as community banks,
or that higher thresholds would not
substantially diminish overall data
collection.
Supporters of the 25-loan threshold
and supporters of the 100-loan
threshold each argued that such a
threshold would be similar to that used
in HMDA. The Bureau’s 2015 HMDA
Rule set the closed-end loan threshold
471 SBREFA
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at 25 originated loans for each of the
two preceding calendar years.472
However, in 2020, the Bureau increased
the threshold to 100 closed-end loans,
effective the same year.473 The Bureau
set the HMDA threshold pursuant to its
authority to provide adjustments or
exceptions that it judges as necessary
and proper to effectuate the purposes of
HMDA or to facilitate compliance with
HMDA. In the present case, with respect
to institutional coverage thresholds, the
Bureau does not believe a direct
comparison with HMDA is instructive
because of differences in the relevant
statutory authorities and between home
mortgages and small business loans.
The Bureau also considered how its
proposed threshold of 25 covered credit
transactions for small businesses (and
the other thresholds under
consideration at SBREFA) might affect
overall collection and reporting of 1071
data from banks and credit unions,
based on data as of 2019. Table 1 below
provides the Bureau’s estimated share of
depository institutions, estimated share
of small business loans from those
institutions (measured in total number
of loans), and estimated share of small
business credit from those institutions
(measured in dollars) that would be
covered by a loan-volume threshold of
25, 50, or 100 small business loans. The
Bureau estimates that a depository
institution is covered for a particular
loan-volume threshold as of 2019 if the
estimated number of originations for
that institution exceeded the threshold
in both 2017 and 2018. Given the
limitations of the source data, the
Bureau cautions that these estimates are
not intended to provide a complete
sense of the possible consequences of
adopting each particular threshold.
Nonetheless, the Bureau is providing
estimates based on these data because it
is the best information currently
available to the Bureau. Moreover, the
Bureau emphasizes that these estimates
apply only to depository institutions.
This information is based on FFIEC and
Credit Union Call Reports, as well as
Community Reinvestment Act
submissions.474 Under these data
collections, banks report small loans
made to businesses and farms
(regardless of the borrower’s size).
Credit unions report commercial loans
over $50,000 made to members (also,
regardless of the borrower’s size). The
Bureau is unable to determine the
degree to which these data provide an
adequate proxy for the applications
from small businesses that would be
subject to 1071 reporting. The
methodologies and assumptions used to
produce these estimates are further
documented in part VII.D below and in
more detail in its Supplemental
estimation methodology for institutional
coverage and market-level cost
estimates in the small business lending
data collection notice of proposed
rulemaking released concurrently with
this proposal.475
472 See 80 FR 66127 (Oct. 28, 2015). The Bureau
also provided a higher threshold of 100 for openend lines of credit. Id.
473 See 85 FR 28364 (May 12, 2020).
474 On the bank Call Report and in the
Community Reinvestment Act data, for small bank
and small farm loans, banks report on business
loans with original amounts of $1 million or less
and farm loans with original amounts of $500,000
or less. For lines of credit or loan commitments,
banks report the size of the line of credit or
commitment when it was most recently approved.
Banks include loans guaranteed by the SBA and
other government entities in their small loans to
businesses. Banks do not report loans to nonprofit
organizations in this category. Thus, these data
collections would include loans made to purchase,
for example, individual vehicles and pieces of
equipment for the nation’s largest businesses.
475 This document is available at https://
www.consumerfinance.gov/data-research/researchreports/supplemental-estimation-methodologiessmall-business-lending-data-collection-nprm/.
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Table 1 above shows that as the loanvolume threshold rises, the estimated
share of depository institutions subject
to section 1071 decreases substantially.
Likewise, the estimated share of small
business loans and small business credit
captured by the rule would also
decrease, although those decreases are
less pronounced. The Bureau has no
information for nondepository
institutions such that the Bureau could
provide similar estimates for comment.
The Bureau requests in response to this
proposal such information and data that
might bear on any activity-based
exemption for nondepository
institutions.476 477 478
The Bureau notes that the above
estimates represent small business
lending data prior to the COVID–19
pandemic and ensuing policy responses.
The Bureau is keenly aware that many
financial institutions, including those
that may not have historically
participated actively in small business
lending, served their communities by
becoming participating lenders in the
SBA’s Paycheck Protection Program.
This program ended on May 31, 2021.
The Bureau expects that by the time its
1071 rule is finalized and implemented,
lending activity conducted pursuant to
the SBA’s Paycheck Protection Program
will not be determinative of whether a
given financial institution qualifies as a
covered financial institution under the
1071 rule. The Bureau will continue to
monitor the market and consider what
other adjustments, if any, may be
needed to ensure that, to the best of the
Bureau’s ability, the 1071 rulemaking is
informed by up-to-date and accurate
information about the small business
lending market.
The Bureau seeks comment on its
proposed 25 originations threshold
incorporated into the definition of a
covered financial institution. The
Bureau also solicits comment on
whether this threshold should
alternatively be set at 50 or 100 covered
credit transactions.
The Bureau is proposing to define a
covered financial institution using a
loan-volume threshold that must be
achieved in each of the two preceding
calendar years. SERs provided relatively
little feedback directly on the
measurement period, but broadly
476 There were 10,525 depository institutions as
of December 31, 2019, including 112 credit unions
that are not federally insured.
477 Based on FFIEC Call Report data, there were
5,177 banks and savings associations as of
December 31, 2019.
478 Based on the 2019 NCUA Call Report data,
there were 5,348 credit unions as of December 31,
2019, including 112 credit unions that are not
federally insured.
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expressed a desire for clear, predictable
collection and reporting thresholds. The
Bureau received substantial feedback
advocating for a two-year approach, but
little feedback asking for a one-year
threshold period. A few stakeholders
also expressed interest in a
measurement period longer than two
years.
The Bureau acknowledges that a loanvolume threshold based on a two-year
period could create some operational
complexity for some financial
institutions. To be sure that it was not
a covered financial institution, a
financial institution would need to
maintain records sufficient to show total
small business originations for both
years of the threshold period. The
Bureau believes that two years is not a
prohibitively long time, although it is
possible that infrequent lenders may
have smaller staff or fewer resources to
reliably track such information for 1071
purposes. The Bureau believes that a
two-year threshold period is advisable
to eliminate uncertainty surrounding
data collection responsibilities. Under
this proposal, a financial institution that
may not frequently lend to small
businesses, but that experiences an
unusual and unexpectedly high lending
volume in a single year would not be a
covered financial institution. As
discussed in part VII below, in order to
comply with the Bureau’s proposed
1071 rule, a financial institution may
need to undertake substantial one-time
costs that include operational changes,
such as staff training, information
technology changes, and develop
policies and procedures. Therefore, the
Bureau believes that it is appropriate to
propose a two-year threshold period to
provide more stability around reporting
responsibilities. Regulations that
implement HMDA and the Community
Reinvestment Act provide similar
periods to determine coverage.
The Bureau notes that employing a
two-year approach would delay
reporting for new, potentially active
entrants. For example, under this
proposal a large lender that enters the
market and originates hundreds or even
thousands of small business loans in its
first two calendar years of lending
would not report its covered
applications. That is, under the Bureau’s
proposal, this financial institution
would not be required to collect and
report 1071 data on its covered
applications for small businesses in
those first two years, although the
institution could choose to voluntarily
collect and report data. The Bureau has
concerns, however, about triggering data
collection and reporting requirement
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based on lenders’ estimates of their
projected future volume.
The proposed two-year threshold
period may pose other considerations
for financial institutions that conduct
small business lending activity near the
proposed 25 small business originations
threshold. See the section-by-section
analysis of proposed § 1002.5(a)(4)
above for a discussion of proposed
§ 1002.5(a)(4)(viii), which would allow a
financial institution to collect ethnicity,
race, and sex information pursuant to
proposed subpart B for a covered
application under certain circumstances
during the second year of the threshold
period. See the section-by-section
analysis of proposed § 1002.114(c)
below for discussion of additional
flexibility that the Bureau is proposing
regarding measuring lending activity
prior to the rule’s compliance date.
The Bureau is proposing to set the
activity-based threshold based on small
business originations, rather than
applications. The statutory language of
1071 generally applies to applications;
however, the Bureau believes that using
small business originations for purposes
of defining a covered financial
institution is the better approach. The
Bureau expects that financial
institutions track their small business
application volumes in various ways,
but whether an origination resulted is a
clear and readily identifiable metric.
The Bureau is concerned that
attempting to use an exemption metric
based on applications would impose
new obligations on financial institutions
solely for purposes of determining
whether or not they are subject to this
rule. As discussed above, the Bureau
believes that proposing an activitybased threshold that employs data
already generally collected by financial
institutions could mitigate the risk that
section 1071, when implemented,
would result in reduced access to credit.
In addition, even those financial
institutions that track total applications
now may not do so in a way that fully
aligns with how the Bureau is proposing
to define covered applications for
purposes of proposed subpart B. Using
originations is also consistent with the
Bureau’s Regulation C. In addition, the
Bureau received limited feedback
advocating for the use of applications to
set the activity-based threshold.
Proposed comment 105(b)–1 would
clarify the meaning of a preceding
calendar year for purposes of the
proposed activity-based exemption. See
the section-by-section analysis of
proposed § 1002.114(c)(2) below for
additional discussion regarding
measuring lending activity prior to the
rule’s compliance date. Proposed
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comment 105(b)–2 would emphasize
that a financial institution qualifies as a
covered financial institution based on
total covered credit transactions
originated for small businesses, rather
than covered applications received from
small businesses. Proposed comment
105(b)–3 would explain that whether a
financial institution is a covered
financial institution depends on its
particular small business lending
activity in the two preceding calendar
years, and that the obligations of a
covered financial institution is an
annual consideration for each year that
data may be compiled and maintained
under proposed § 1002.107(a).
The Bureau is proposing to clarify in
§ 1002.105(b) that for purposes of
defining a covered financial institution,
if more than one financial institution
was involved in the origination of a
covered credit transaction, only the
financial institution that made the final
credit decision approving the
application shall count the origination.
The Bureau believes that providing this
clarifying language would assist
financial institutions in understanding
which transactions count towards the
loan-volume threshold. This approach is
consistent with the Bureau’s proposed
§ 1002.109(a)(3).
Proposed comments 105(b)–4 and –5
would explain when a financial
institution is a covered financial
institution following a merger or
acquisition. These proposed comments
are largely consistent with the Bureau’s
approach to reporting obligations
surrounding a merger under Regulation
C,479 with modifications to reflect the
nature of the small business lending
market and to provide additional
clarifications.
Proposed comment 105(b)–6 would
clarify that Regulation B (including
proposed subpart B) generally does not
apply to lending activities that occur
outside the United States.
Finally, proposed comment 105(b)–7
would address financial institutions that
do not qualify as covered financial
institutions but may nonetheless wish to
voluntarily collect and report small
business lending data. This proposed
comment would reiterate that proposed
§ 1002.5(a)(4)(vii) through (ix) permits a
creditor that is not a covered financial
institution under proposed
§ 1002.105(b) to voluntarily collect and
report information regarding covered
applications in certain circumstances. If
a creditor is voluntarily collecting
applicants’ protected demographic
information for covered applications, it
shall do so in compliance with
479 See
Regulation C comments 2(g)–3 and –4.
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proposed §§ 1002.107, 1002.108,
1002.111, 1002.112, and 1002.114 as
though it were a covered financial
institution. Proposed comment 105(b)–7
would further state that if a creditor is
voluntarily reporting those covered
applications to the Bureau, it shall do so
in compliance with proposed
§§ 1002.109 and 1002.110 as though it
were a covered financial institution.
The Bureau seeks comment on its
proposed definition of a covered
financial institution, which uses a loanvolume threshold of 25 covered credit
transactions from small businesses. The
Bureau continues to consider whether
this loan-volume threshold should be
changed to a different threshold, such as
50 or 100 originations from small
businesses, and seeks feedback and data
related to any of these three potential
thresholds. In addition, the Bureau
seeks comment on whether an activitybased threshold should be based on the
total number of small business
applications, rather than originations.
The Bureau also requests comment on
whether additional clarification is
needed for this proposed definition.
Alternatives Considered—Size-Based
Exemption and Combined Exemptions
The Bureau is not proposing to define
a covered financial institution on the
basis of the size of the financial
institution, as measured by total assets
for depository institutions or some other
metric. Likewise, the Bureau is not
proposing to define a covered financial
institution with reference to the
financial institution’s size in
combination with its small business
lending activity.
For the reasons discussed above, the
Bureau believes that proposing an
exemption based on a financial
institution’s recent small business
lending activity would be appropriate to
carry out the purposes of section 1071.
The Bureau believes that in comparison
to a size-based exemption, an activitybased exemption is a more compelling
basis for exempting certain financial
institutions from coverage in light of
section 1071’s community development
purpose. As previously stated, the
Bureau is concerned that certain
financial institutions might reduce or
cease their small business lending
activity because of the fixed costs of
coming into compliance with this rule,
and that a reduction in access to credit
would run contrary to the community
development purpose of section 1071.
However, the Bureau is persuaded that
small business lending activity holds a
more direct relationship to a given
financial institution’s role in the small
business lending market than a more
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general measurement of the financial
institution’s size as measured in total
assets. Using a size-based metric would
present a much rougher proxy for the
risk that a financial institution may
reduce or eliminate its small business
lending activities as a result of the onetime costs of coming into compliance
with this rule.
The Bureau also believes that
proposing an activity-based exemption
is a superior approach to proposing a
size-based exemption because an
exemption based on asset size would
apply only to depository institutions.
The Bureau is unaware of a similar size
metric for nondepository institutions,
and SERs and other stakeholders who
provided feedback on the SBREFA
Outline were not able to offer one. A
size-based exemption approach might
therefore risk distorting the collected
data and create an uneven playing field.
As noted above, other stakeholders
explained that because there was no
readily available equivalent size-based
measurement for nondepository
institutions, including an asset-based
exemption might risk presenting a cost
disadvantage for other small financial
institutions. Moreover, exempting
proportionately more depository
institutions than nondepository
institutions may present demographic
data collection concerns. A recent small
business credit survey revealed racial
disparities in applications under the
SBA’s Paycheck Protection Program: the
data showed white-owned firms were
most likely to apply for a loan through
a small bank (defined as under $10
billion in assets), while Black-owned
firms were three times as likely as
white-owned firms to apply for a loan
through an online lender.480 The Bureau
is concerned that collecting data under
different standards for depository
institutions versus nondepository
institutions would run contrary to the
purposes of section 1071 and
undermine the utility of the data, as
well as the purposes of the Bureau,
which are, in part, ‘‘to implement and,
where applicable, enforce . . .
consistently’’ Federal laws including
ECOA.481
The Bureau also considered whether
proposing a size-based exemption, on
the basis of total assets for depository
institutions, would be appropriate in
combination with the above-discussed
activity-based exemption. The Bureau is
not persuaded that proposing such an
additional exemption would be
necessary or appropriate to carry out the
480 Small Business Credit Survey of Firms Owned
by People of Color at 14.
481 12 U.S.C. 5511(a).
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purposes of section 1071. In particular,
the Bureau considered two types of
depository institutions that might be
exempt by virtue of a size-based
exemption:
• An Active Small Depository
Institution (ASDI), meaning any
depository institution smaller than a
particular asset size that lends at or
above a given activity-based threshold,
and
• An Inactive Small Depository
Institution (ISDI), meaning any
depository institution smaller than a
particular asset size that lends below a
given activity-based threshold.
In examining the case for ASDIs and
ISDIs, the Bureau believes that an
additional, asset-based exemption may
provide a slightly less costly means of
ascertaining exemption status for a
small number of ISDIs, but such an
exemption would eliminate small
business lending data from a moderate
share of ASDIs that would otherwise
provide valuable data in fulfilling both
of section 1071’s purposes.
Using the same data that were
compiled for the activity-based
exemption analysis, the Bureau
estimates that under its proposed 25
originations threshold approximately
6,300 to 6,500 depository institutions
would not be covered financial
institutions, and therefore would be
exempt from collection and reporting.
The Bureau further estimates that
proposing an asset-based exemption of
$200 million would result in
approximately 1,300 to 1,500 additional
depository institutions not reporting (all
of which, by definition, are ASDIs),
while 5,200 to 5,400 depository
institutions would already have been
exempt, but have a somewhat lower-cost
method of ascertaining this information
(e.g., ISDIs).482
Table 2 below indicates the estimated
number of ASDIs that would report
under various loan-volume thresholds,
by asset size. As shown in Table 2, if the
Bureau proposed an asset-based
exemption of $100 million in addition
to the proposed activity-based
exemption of 25 originated covered
credit transactions for small businesses,
500 to 592 more depository institutions
would not be covered financial
institutions, although these institutions
originated more than 25 covered credit
transactions for small businesses in each
of the previous two years. Likewise, if
the Bureau proposed an asset-based
exemption of $200 million in addition
to the proposed 25-originations activitybased exemption, 1,299 to 1,466 more
depository institutions would not be
covered financial institutions, although
these institutions originated more than
25 covered credit transactions for small
businesses in each of the previous two
years.
Of the estimated 5,200 to 5,400 ISDIs,
as defined by a 25 originations
threshold and $200 million asset
threshold, about 4,200 are credit unions
and about 1,000 or 1,200 are banks.
Furthermore, the vast majority of these
ISDI credit unions (88 percent) had
either no small business originations in
2017 and 2018 or fewer than 10 small
business originations in 2017 and 2018
(97 percent).483 The Bureau believes
that it is likely that these institutions
would be able to determine that they do
not meet a loan-volume threshold
almost as easily as they can determine
that they do not meet an asset-based
threshold. Only 34 credit unions with
assets below $200 million had between
10 and 25 small business originations in
both 2017 and 2018. The Bureau
estimates that as many as 1,200 banks
and 34 credit unions would benefit from
a simpler method of determining
exemption status. However, as stated
above, the Bureau believes that such
cost savings likely would still be
minimal.
The Bureau therefore believes that
providing an additional, asset-based
exemption might provide a somewhat
less costly means of ascertaining
exemption status for some ISDIs,
although this number may be relatively
modest. However, the tradeoff of
providing a simpler exemption for some
depository institutions is that a $200
million asset-based exemption would
increase the overall percent of exempt
depository institutions by some 13
percentage points by also extending to
ASDIs. The Bureau estimates that these
ASDIs accounted for between 171,000
and 226,000 originations in 2019, or
about 2 percent of total covered
originations under the 25 originations
threshold. Exempting additional
depository institutions by adding an
asset-based exemption would curtail
482 For the purposes of this analysis, the Bureau
assumes that the alternative proposal would have
been that a depository institution would be required
to report its small business lending activity for 2019
if it had more originations than the loan-volume
threshold in 2017 and 2018 and had assets over the
asset-based threshold on December 31, 2018. The
Bureau further assumes that if two institutions
merged in 2019 then the resulting institution would
be required to report if the sum of the separate
institutions’ assets on December 31, 2018 exceeded
the asset-based threshold. Of the 10,525 depository
institutions that existed at the end of 2019, 6,687
either didn’t exist at the end of 2018 or had merger
adjusted assets below $200 million.
483 However, it is possible that these credit unions
have originated loans to small businesses with
values below $50,000. Credit unions report
commercial loans over $50,000 made to members
(regardless of the borrower’s size).
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both the volume of and possible variety
of data, and the Bureau is concerned
that exempting ASDIs would detract
from the utility of 1071 data in carrying
out the purposes of section 1071 by
removing important data from
disclosure and review.
The Bureau also considered feedback
from SERs and other stakeholders who
suggested that the Bureau exempt
lenders other than ‘‘large’’ financial
institutions, such as depository
institutions with more than $1 billion in
assets, and then potentially extend the
rule to smaller lenders at a later time.
These SERs and stakeholders argued
that this approach would capture the
vast majority of small business loans
while avoiding imposing undue
regulatory burden on smaller lenders,
who might be less capable of absorbing
such costs. However, the Bureau is not
currently persuaded that capturing
lending data only from large financial
institutions would be necessary or
appropriate to carry out section 1071’s
statutory purposes.
Supporters of collecting data only
from large depository institutions argue
that such depository institutions may be
more capable of absorbing compliance
costs. However, the Bureau is concerned
that data collection from only large
depository institutions may not provide
adequate data for community
development purposes, as there may be
demographic disparities among
applications by the type (and size) of
financial institution. Likewise, data
collection from only large depository
institutions would not allow the Bureau
to conduct fair lending analyses for
other types of financial institutions. In
general, the Bureau believes that
appropriately carrying out the purposes
of section 1071 necessitates collecting
small business lending data from all
sizes and types of financial institutions
(other than those with the lowest
volume of lending activity), particularly
given the variety of entities identified in
section 704B(h)(1), discussed above. See
the section-by-section analysis of
proposed § 1002.114 below, however,
for further discussion of a possible
tiered compliance date based on the size
of the financial institution.
Therefore, for the reasons described
above, Bureau is not proposing an assetbased exemption to the definition of a
covered financial institution.
Alternative Considered—Other
Exemptions
The Bureau is not proposing to adopt
alternative exemptions or exceptions to
the definition of covered financial
institution, other than the loan-volume
threshold as described above.
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As discussed above, the Bureau
believes that, in light of the text and
purposes of section 1071, the Bureau
should generally adopt the posture that
all manner of small business lenders
should be subject to reporting. Feedback
from SERs and others generally did not
provide compelling policy reasons or
legal arguments for exempting entire
classes of financial institutions.
Moreover, the Bureau believes that most
policy arguments that were raised in
this context are better addressed
through potential activity-based
considerations.
With respect to government lenders,
the Bureau has not identified, nor did
SERs or other stakeholders provide,
policy or legal rationales for excluding
government lenders from data
collection. To the contrary, a few SERs,
particularly CDFIs, strongly preferred
that all lenders, including government
entities, be subject to section 1071 data
collection and reporting requirements;
one stakeholder likewise urged the
Bureau not to exempt government
lenders. The Bureau believes that
collecting information on small business
lending by government entities furthers
the purposes of section 1071. Moreover,
the Bureau believes, as described above
in the discussion of proposed comment
105(a)–1, that government entities are
included within the phrase ‘‘other
entity’’ in the ECOA section 704B(h)(1)
definition of ‘‘financial institution.’’ For
example, the Bureau believes that it will
be helpful to identify the business and
community development needs of
women-owned, minority-owned, and
small businesses by collecting lending
data from both an online lender and a
county-run assistance program for
establishing new businesses.
For the same reasons, the Bureau does
not believe that exempting not-for-profit
lenders from data collection is
consistent with the purposes of section
1071. The Bureau believes that
organizations exempt from taxation
pursuant to 26 U.S.C. 501(c) play a
crucial role in lending to small
businesses, particularly those that are
women- or minority-owned, in certain
communities.
Those providing feedback generally
argued for categorical exemptions
because, they said, certain financial
institutions (1) would encounter
difficulty absorbing compliance costs;
(2) are integral to a community’s lending
needs; and/or (3) employ business
methods or offer products not
conducive to data collection and
reporting. With respect to compliance
costs, the Bureau believes that directly
considering a financial institution’s
activity is a more appropriate way to
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address this concern. With respect to a
financial institution’s lending
importance for a community or region
(such as low income or rural), the
Bureau believes that such arguments
emphasize the importance of collecting
and analyzing such data to further the
purposes of section 1071 rather than
justify an exemption. Finally, with
respect to considering the particularities
of certain business models, the Bureau
is persuaded that it can most
appropriately address such concerns by
considering potentially modified
reporting rules for particular business
models and specific products. See the
section-by-section analyses of proposed
§§ 1002.104(b) and 1002.109(a)(3). The
Bureau is proposing comment 105(a)–1,
discussed above, consistent with the
considerations discussed here.
Therefore, for the reasons described
above, the Bureau is not proposing to
define a covered financial institution by
providing alternative exemptions or
exceptions. The Bureau seeks comment
on this approach, including data or
information that might bear upon any
such alternative exemptions in light of
section 1071’s purposes.
Section 1002.106 Business and Small
Business
ECOA section 704B(h)(2) defines the
term ‘‘small business’’ as having the
same meaning as ‘‘small business
concern’’ in section 3 of the Small
Business Act.484 The Bureau is
proposing to define a small business
consistent with the statutory language.
In particular, the Bureau is proposing to
define a small business concern to have
the same meaning as the term ‘‘small
business concern’’ in 15 U.S.C. 632(a),
as implemented by 13 CFR 121.101
through 121.107. Notwithstanding the
size standards set forth in 13 CFR
121.201, for purposes of proposed
subpart B, the Bureau is proposing that
a business is a small business if and
only if its gross annual revenue for its
preceding fiscal year is $5 million or
less. The Bureau is seeking SBA
approval for this alternate small
business size standard pursuant to the
Small Business Act.485
The Bureau believes it may be
instructive for financial institutions to
first consider whether an applicant may
be a business under proposed
§ 1002.106(a), and then to consider, if
the applicant is a business, whether the
business is small under § 1002.106(b).
Furthermore, the Bureau believes that
these proposed definitions implement
the statutory language of section 1071
484 15
485 15
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while reflecting the need for a wide
variety of financial institutions to apply
a simple, broad definition of a small
business that would be practical across
the many product types, application
types, technology platforms, and
applicants in the market.
For the reasons set forth below, the
Bureau is proposing § 1002.106 to
implement ECOA section 704B(h)(2)
and pursuant to its authority under
ECOA section 704B(g)(1) to prescribe
such rules and issue such guidance as
may be necessary to carry out, enforce,
and compile data under section 1071.
106(a) Business
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Background
ECOA section 704B(h)(2) defines the
term ‘‘small business’’ as having the
same meaning as ‘‘small business
concern’’ in section 3 of the Small
Business Act.486 The Small Business
Act provides a general definition of a
‘‘small business concern,’’ authorizes
SBA to establish detailed size standards
for use by all agencies, and permits an
agency to request SBA approval for a
size standard specific to an agency’s
program. The SBA’s regulations define a
‘‘business concern’’ as ‘‘a business
entity organized for profit, with a place
of business located in the United States,
and which operates primarily within the
United States or which makes a
significant contribution to the U.S.
economy through payment of taxes or
use of American products, materials or
labor.’’ 487
SBREFA Proposals Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
stated it was considering proposing to
define ‘‘small business’’ by crossreferencing the SBA’s general definition
of ‘‘small business concern’’ but
adopting a simplified size standard for
purposes of its section 1071 rule.488
Thus, the Bureau explained that it was
considering a proposal under which
financial institutions would not be
required to collect and report 1071 data
for not-for-profit applicants, because
they are not ‘‘organized for profit’’ and
are thus not a ‘‘business concern.’’ The
Bureau explained that a business
concern may take a number of different
legal forms, including a sole
proprietorship, partnership, LLC,
corporation, joint venture, trust, or
cooperative.489 The Bureau explained
that, because the definition is limited to
American businesses, if the Bureau
486 15
U.S.C. 632.
CFR 121.105.
488 SBREFA Outline at 14–18.
489 13 CFR 121.105(b).
487 13
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adopted this definition for purposes of
1071, loans to foreign companies would
be outside the scope of 1071 data
collection and reporting requirements.
Feedback from stakeholders regarding
the proposal under consideration
focused primarily on how the Bureau
might define a business size standard,
addressed below.490 The Bureau did
receive limited feedback, however,
suggesting that the Bureau consider
certain modifications or adjustments to
the definition of a business concern,
such as clarifying that the term does not
include foreign-owned entities, certain
trusts, and certain real estate holding
companies.
Proposed Rule
Proposed § 1002.106(a) would define
a business as having the same meaning
as the term ‘‘business concern or
concern’’ in 13 CFR 121.105. This
proposed definition is consistent with
ECOA section 704B(h)(2), which defines
the term ‘‘small business’’ as having the
same meaning as ‘‘small business
concern’’ in section 3 of the Small
Business Act.491 The SBA has issued 13
CFR 121.105, ‘‘How does SBA define
‘business concern or concern,’’’
pursuant to the Small Business Act. The
Bureau refers to the entirety of that
section for additional information. In
particular, the Bureau notes that this
definition includes elements such as
being ‘‘a business entity organized for
profit’’ that has ‘‘a place of business
located in the United States’’ and
‘‘operates primarily within the United
States or . . . makes a significant
contribution to the U.S. economy.’’ 492
The Bureau is not providing
interpretations of this SBA regulation in
proposed subpart B because the Bureau
believes that existing SBA
interpretations are responsive to the
general questions posed at SBREFA.493
The Bureau seeks comment on this
proposed definition of a business, and
generally seeks comment on whether
additional clarification is needed.
490 The SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 20–22.
491 15 U.S.C. 632.
492 13 CFR 121.105(a)(1).
493 See, e.g., 13 CFR 121.105(b), which states that
a business concern may be in the legal form of an
individual proprietorship, partnership, limited
liability company, corporation, joint venture,
association, trust or cooperative, except that where
the form is a joint venture there can be no more
than 49 percent participation by foreign business
entities in the joint venture. Thus, for example,
financial institutions would not be required to
collect and report data under proposed subpart B
for not-for-profit applicants, because they are not
‘‘organized for profit’’ and are thus not a ‘‘business
concern.’’
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106(b) Small Business
Background
Section 1071 data collection
purposes, requirements, and potential
impacts. A key component of the
Bureau’s fair lending work under the
Dodd-Frank Act is to ensure fair,
equitable, and nondiscriminatory access
to credit for both individuals and their
communities.494 Section 1071 of the
Dodd-Frank Act, which amended
ECOA, requires financial institutions to
collect and report to the Bureau data
regarding applications for credit for
women-owned, minority-owned, and
small businesses. ECOA section
704B(h)(2) states that ‘‘[t]he term ‘small
business’ has the same meaning as the
term ‘small business concern’ in section
3 of the Small Business Act (15 U.S.C.
632).’’ Section 1071 was adopted for the
dual statutory purposes of facilitating
fair lending enforcement and enabling
communities, governmental entities,
and creditors to identify business and
community development needs and
opportunities of women-owned,
minority-owned, and small
businesses.495
As set forth in section 1071, the data
that financial institutions would be
required to collect and report to the
Bureau include, among other things, the
gross annual revenue of the business in
the preceding fiscal year, the type and
purpose of the loan, the census tract for
the applicant’s principal place of
business, and the race, sex, and
ethnicity of the principal owners of the
business.496 ECOA section 704B(f)(2)(C)
further provides that information
compiled and maintained under the
statute shall be ‘‘annually made
available to the public generally by the
Bureau, in such form and in such
manner as is determined by the Bureau,
by regulation.’’ The Bureau believes that
the collection and subsequent
publication of robust and granular data
pursuant to section 1071 regarding
credit applications for small businesses,
including those that are women- and
minority-owned, will provide muchneeded transparency to an otherwise
opaque market and better ensure fair,
equitable, and nondiscriminatory access
to credit.
The Bureau understands that access to
fair, equitable, and nondiscriminatory
credit is crucial to the success of small
businesses. Small businesses—
including women-owned and minorityowned small businesses—need access to
credit to smooth out business cash flows
494 See
12 U.S.C. 5493(c)(2)(A).
section 704B(a).
496 ECOA section 704B(e)(2).
495 ECOA
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and to enable entrepreneurial
investments that take advantage of, and
sustain, opportunities for growth. The
market these businesses turn to for
credit is vast, varied, and complex.
Overall, small businesses have many
options when it comes to financing,
including a wide range of products and
providers. Yet market-wide data on
credit to small businesses remains very
limited, particularly with respect to
applicants’ protected demographic
information at the core of section 1071.
The Bureau believes that a section 1071
rulemaking would provide data that
could serve as a significant resource for
financial institutions, community
groups, policy makers, and small
businesses.
SBA size standards. The Small
Business Act permits the Small
Business Administrator to prescribe
detailed size standards by which a
business concern may be categorized as
a small business, which may be based
on the number of employees, dollar
volume of business, net worth, net
income, a combination of these, or other
appropriate factors.497
As implemented by the SBA, these
size standards generally hinge on
average annual receipts or the average
number of employees of the business
concern and are customized industryby-industry across 1,057 6-digit NAICS
codes. Specifically, the SBA typically
uses two primary measures of business
size for size standards purposes: (i)
Average annual gross receipts 498 for
businesses in services, retail trade,
agricultural, and construction
industries, and (ii) average number of
employees for businesses in all
manufacturing, most mining and
utilities industries, and some
transportation, information and research
and development industries. To
measure business size, the SBA also
uses financial assets for certain financial
industries, and for the petroleum
refining industry, it uses refining
capacity and employees. The SBA’s size
standards are used to establish
eligibility for a variety of Federal small
business assistance programs, including
for Federal government contracting and
business development programs
designed to assist small businesses in
obtaining Federal contracts and for
SBA’s loan guarantee programs, which
497 15
U.S.C. 632(a)(2)(A) and (B).
SBA recently changed its regulations on
the calculation of average annual receipts for all of
SBA’s receipts-based size standards, and for other
agencies’ proposed receipts-based size standards,
from a three-year averaging period to a five-year
averaging period, outside of the SBA Business Loan
and Disaster Loan Programs. 84 FR 66561 (Dec. 5,
2019).
498 The
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provide access to capital for small
businesses that are unable to qualify for
and receive conventional loans
elsewhere. Under the Small Business
Jobs Act of 2010 (Small Business
Act),499 the SBA is required to review
all size standards no less frequently
than once every five years.500 The Small
Business Act further provides that no
Federal agency may prescribe a size
standard for categorizing a business
concern as a small business concern
unless certain conditions are met,
including approval by the SBA’s
Administrator.501
The SBA’s rule governing its
consideration of other agencies’ requests
for approval of alternate size standards
requires that the agency seeking to
adopt an alternate size standard consult
in writing with the SBA’s Division Chief
for the Office of Size Standards in
advance of issuing an NPRM containing
the proposed alternate size standard.502
The Bureau has met this requirement.
After issuing an NPRM, the agency must
provide a copy of the published NPRM
to the Division Chief for the Office of
Size Standards, and the agency cannot
adopt a final rule including its alternate
size standard until the size standard has
been approved by the SBA’s
Administrator.503
Market considerations. A wide variety
of financial institutions, with varying
levels of sophistication and experience,
extend credit to small businesses. As
proposed, section 1071 applies to
abroad range of financial institutions.
Banks and credit unions that serve a
breadth of customers typically organize
their commercial lending operations
into segments based on a combination of
risk, underwriting, product offering, and
customer management factors that are
appropriate to each segment. The three
most frequent organizational groupings
are retail/small business, middle
market, and large corporate banking.
Commercial customers are generally
assigned based on their revenue
potential and aggregate credit exposure,
with smaller accounts assigned to the
retail/small business banking area. The
overwhelming preponderance of small
businesses are generally found in the
retail/small business banking group,
which may also conduct consumer
banking.
Today, the distinguishing
characteristic that many larger financial
institutions (principally banks with $10
billion or more in assets) use to assign
499 Public
Law 111–240, 124 Stat. 2504 (2010).
U.S.C. 632 note.
501 15 U.S.C. 632(a)(2)(C).
502 13 CFR 121.903(a)(2).
503 13 CFR 121.903(a)(5).
500 15
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small businesses into the retail/small
business banking group is gross annual
revenue. While cut-offs vary by
financial institution, the most common
demarcations categorize small/retail
customers as those below $5 million, or
up to $10 million, in gross annual
revenue. The maximum amount of a
retail/small business banking term loan
or credit line is typically $5 million or
less.
Financial institutions that do not
conduct SBA lending generally do not
collect or consider the number of
employees of a small business applying
for credit, but they often capture gross
annual revenue information, including
for regulatory compliance purposes.
Specifically, retail/small business
lenders routinely collect applicants’
gross annual revenue information
because notification requirements under
existing Regulation B vary for business
credit applicants depending on whether
or not they ‘‘had gross revenues of $1
million or less in [their] preceding fiscal
year.’’ 504 For a business applicant with
gross annual revenues of $1 million or
less, a creditor must provide a
notification following an adverse action,
such as a credit denial, that is generally
similar to that provided to a consumer
in both substance and timing.505 As a
result, small business lenders often
adopt compliance management systems
similar to those found among consumer
lenders.
The Bureau believes it is important
for a financial institution to be able to
quickly determine at the beginning of
the application process whether an
applicant is a ‘‘small business’’ for
purposes of the 1071 rule. Financial
institutions generally cannot inquire
about an applicant’s protected
demographic information (including the
race, sex, and ethnicity of an applicant’s
principal owners) without being legally
required to do so.506 As discussed in the
Overview of this part V, this proposal
will only require (and thus only permit)
such inquiries for small businesses.
While the Bureau is proposing to allow
financial institutions flexibility in when
they seek this protected demographic
information, the Bureau believes that
financial institutions generally have the
best chance of obtaining it, and
supporting the purposes of section 1071,
if they ask for it in the earlier stages of
the application process. As a result, a
504 12
CFR 1002.9(a)(3)(i).
The notification requirements for
applicants with gross annual revenues in excess of
$1 million are generally more flexible in substance
and also do not impose a firm deadline for
provision of a Regulation B notification. 12 CFR
1002.9(a)(3)(ii).
506 See 12 CFR 1002.5(a).
505 Id.
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financial institution may need to know,
even before the application is initiated,
which application path the applicant
must follow—a 1071-governed or a non1071-governed application path.
Early feedback. From very early on in
its discussions with stakeholders
regarding section 1071, the Bureau has
received feedback focused primarily on
how the Bureau might define a business
size standard. For example, in response
to the Bureau’s 2017 RFI, many
stakeholders expressed concern about
the difficulties in determining the
appropriate NAICS code for businesses
and in applying the NAICS-based
standards in determining whether a
business loan applicant is a small
business. Commenters who addressed
the issue of a small business definition
were universally in favor of the Bureau
adopting something less complex than
the SBA’s size standards based on 6digit NAICS codes. Commenters noted
that the use of these standards is
relatively complex and would introduce
burdens for the 1071 rule with limited
benefit. There was broad support in this
particular context for a simpler
definition of small business, particularly
echoing the 2017 RFI’s mention of gross
annual revenue as a threshold
delineation defining a small business. In
addition to revenue, number of
employees, loan amount, total exposure
of the business, or some combination of
those factors were also mentioned as
possible bases for alternate size
standards. While community groups
supported a simpler definition, some
cautioned that whatever definition the
Bureau chooses must cover most small
businesses in order to comport with
congressional intent.
SBREFA Proposals Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
stated that it believed that using a
simpler, more straightforward approach
to the size standard aspect of the ‘‘small
business’’ definition was a better
approach for purposes of its 1071
rule.507 The Bureau further stated that
such an approach would assist both
financial institutions and applicants
seeking to quickly understand whether
a business is ‘‘small’’ and to employ a
workable size standard for small
business data collection without
navigating the potential complexities of
determining the appropriate 6-digit
NAICS code, and then the relevant size
standard based on that NAICS code, for
each applicant.
The Bureau stated in the SBREFA
Outline that it was considering three
507 SBREFA
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alternative approaches to determining
whether an applicant business is
small.508 These three approaches,
described in more detail below, would
have used: (1) Only gross annual
revenue (‘‘SBREFA First Alternative
Approach’’); (2) either the number of
employees or average annual receipts/
gross annual revenue, depending on
whether the business is engaged in
either manufacturing/wholesale or
services (‘‘SBREFA Second Alternative
Approach’’); or (3) size standards across
13 industry groups that correspond to 2digit NAICS code industry groupings
(‘‘SBREFA Third Alternative
Approach’’).
Under the SBREFA First Alternative
Approach, the Bureau considered
proposing a size standard using the
gross annual revenue of the applicant
business in the prior year, with a
potential ‘‘small’’ threshold of $1
million or $5 million.
Under the SBREFA Second
Alternative Approach, the Bureau
considered proposing a size standard of
a maximum of 500 employees for
manufacturing and wholesale industries
and a maximum of $8 million in gross
annual revenue for all other industries.
The Bureau selected 500 employees as
a potential threshold for manufacturing
and wholesale industries because that
figure is the most common of the SBA’s
employee-based size standards. The
Bureau selected $8 million for all other
industries because that figure is the
most common size standard threshold
for average annual receipts. The Bureau
stated that it was considering using
gross annual revenue, rather than the
SBA’s average annual receipts, for
consistency with the 1071 statutorily
required gross annual revenue data
point.
Under the SBREFA Third Alternative
Approach, the Bureau considered
proposing a size standard using gross
annual revenue or the number of
employees based on a size standard in
each of 13 2-digit NAICS code categories
that applies to the largest number of
firms within each 2-digit NAICS code
category.509 Applying the SBA’s 2019
size standards, the third alternative
508 Id.
509 Specifically, under this approach, the Bureau
first considered the total number of employer firms
in each NAICS 6-digit industry, based on U.S.
Census Bureau data. U.S. Census Bureau, 2017
Statistics of U.S. Businesses (2017), https://
www.census.gov/data/datasets/2017/econ/susb/
2017-susb.html. Next, within each NAICS 2-digit
industry, the Bureau determined how many unique
size standards are applied within that 2-digit
industry and the total number of employer firms to
which each unique standard is applied. The
simplified standard for each NAICS 2-digit industry
is the one that applies to the largest number of firms
within that industry.
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would result in eight different size
standards across the 13 categories.
The Bureau stated it was not planning
to propose requiring that financial
institutions verify information provided
by applicants necessary for determining
whether an applicant is small,
regardless of the Bureau’s approach to a
small business size standard. Rather, the
Bureau was considering proposing that
a financial institution would generally
report the information as provided by
the applicant. However, if the financial
institution verifies such information for
its own purposes, it would report the
verified information to the Bureau.
SERs generally preferred a simple
small business definition and expressed
concern that the SBA’s approach to
defining a small business—which bases
classification on an applicant’s 6-digit
NAICS code—is relatively complex. The
Bureau discusses the concerns with
respect to the potential complexity of
gathering NAICS codes in the sectionby-section analysis of proposed
§ 1002.107(a)(15) below, and the Bureau
discusses the concerns with respect to
the potential complexity using NAICS
codes to determine small business status
below.
Nearly all SERs expressed some
familiarity with the SBA’s small
business definition. More than half the
SERs currently gather an applicant’s
NAICS code as a routine part of the
application process, because NAICS
codes are used for SBA loans and for
CDFI Fund reporting. One SER also uses
this information for tracking the
concentration of its loans across certain
industries. Some SERs gather NAICS
codes from applicants’ tax documents or
business credit reports and others rely
on information provided directly by the
applicants; these SERs emphasized the
importance of permitting reliance on
applicant self-reported data.
One SER remarked that it would be
critical for the purposes of section 1071
to have sectoral industry information
about applicants in some form, such as
NAICS codes, in order to ensure
meaningful data. The Bureau discusses
the independent value of NAICS codes,
and related comments from SERs
regarding certain difficulties and
challenges surrounding collecting
NAICS codes from applicants, in the
section-by-section analysis of proposed
§ 1002.107(a)(15) below. Another SER
expressly opposed using NAICS codes
to determine whether an applicant is a
small business for purposes of section
1071. A few SERs stated that they did
not think it would be particularly costly
to collect NAICS codes for all of their
small business loans, and one SER
described the SBA’s classification
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approach as precise and not very
burdensome.
Some SERs supported the SBREFA
First Alternative Approach for defining
a small business, which would use an
applicant’s gross annual revenue with a
potential ‘‘small’’ threshold of $1
million or $5 million. Several SERs
were supportive of this simple approach
but thought the potential threshold
should be higher. For most SERs, nearly
all their small business customers had
less than $5 million in gross annual
revenue; most are under $1 million.
Several SERs remarked that a $1 million
gross annual revenue threshold would
be too low, noting that it would exclude
many businesses defined by SBA
regulations as ‘‘small’’; some of these
SERs said that a $5 million gross annual
revenue threshold would be acceptable.
Some SERs advocated for higher
revenue thresholds, such as $8 million
or $10 million. One SER cautioned that
a small business definition based only
on gross annual revenue would not
account for regional variations in
business size. One SER specifically
suggested that the Bureau align its small
business definition with the $1 million
standard used by certain supervisory
agencies for CRA reporting (which
requires the reporting of loans in
original amounts of $1 million or less to
businesses and, if known, identification
of whether the business’s gross annual
revenue is $1 million or less). However,
this SER also supported other versions
of the SBREFA First Alternative
Approach and SBREFA Second
Alternative Approach if the Bureau did
not adopt the CRA approach. Relatedly,
there were some concerns about
capturing revenue information from
small businesses. Some SERs do not
collect these data now, or do not do so
across all lending products. SERs also
expressed a concern that some
applicants likely would not know their
gross annual revenue as a precise dollar
amount. See the section-by-section
analysis of proposed § 1002.107(a)(14)
below for a discussion of the gross
annual revenue data point.
Some SERs supported the Bureau’s
SBREFA Second Alternative Approach,
which would distinguish between
applicants in manufacturing and
wholesale industries (500 employees)
and all other industries ($8 million in
gross annual revenue). These SERs
stated that while this approach was still
relatively simple, it would nonetheless
capture most relevant data. One SER
noted a discrepancy between the
thresholds, stating that a manufacturer
with 500 employees would be much
larger than a business with $8 million
in gross annual revenue. Some SERs
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expressed concerns about how to collect
data on the number of employees,
particularly regarding how part-time
and seasonal employees, and
contractors, would be counted. One SER
suggested that a small business be
defined as having less than $10 million
in annual revenue and 50 or fewer
employees. Another SER emphasized
the importance of including collection
and reporting requirements for
applicants with very few or no
employees on payroll, stating that most
minority-owned and women-owned
small businesses have no employees.
One SER opposed the SBREFA Second
Alternative Approach, stating that it
would be too complex and potentially
confusing.
One SER also supported the SBREFA
Third Alternative Approach as closest to
the SBA approach, stating that it reflects
the SBA’s substantially different
definitions of a small business across
different industries. This SER stated that
the SBREFA First and Second
Alternative Approaches would exclude
many SBA-qualified small businesses.
Other SERs also stated that this 2-digit
NAICS code alternative was
significantly less complex and prone to
less human error than the SBA
definition using 6-digit NAICS codes.
On the other hand, one SER stated that
the SBREFA Third Alternative
Approach would be the most costly and
difficult to implement compared to the
other two alternatives under
consideration.
The SBREFA Panel recommended
that the Bureau seek to adopt a
definition of ‘‘small business’’ that is
easy for small business applicants to
understand and straightforward for
financial institutions to implement,
while still collecting comprehensive
data regarding lending to small
businesses.510 The SBREFA Panel also
recommended that the Bureau continue
to explore how information that small
financial institutions may or may not
currently collect from small business
applicants (specifically, gross annual
revenue, number of employees, and
NAICS code) might inform the potential
selection of an alternative for a ‘‘small
business’’ size standard.511 The SBREFA
Panel also recommended that the
Bureau continue to explore ways to
minimize burden on both the small
financial institutions collecting NAICS
code information as well as the small
business applicants who need to
provide it, for example the possibility of
510 SBREFA
PO 00000
collecting the 2-digit NAICS code rather
than the 6-digit code.512
Feedback on the SBREFA materials
from stakeholders other than SERs
showed broad support for the Bureau
pursuing a simplified version of the
SBA small business definition, focusing
chiefly on the size standard. A diverse
array of stakeholders requested that the
Bureau provide a simplified small
business definition, including a wide
variety of lenders, trade associations,
and community groups. However, at
least one commenter explicitly urged
the Bureau to adopt the SBA definition.
Reasons for supporting a simpler
definition included that it might lower
compliance costs (and therefore, the
commenters noted, the cost of credit), it
would obviate the need for financial
institutions to understand or track the
SBA size standards, and a more
complex definition might impact data
consistency or quality (either because
financial institutions might incorrectly
report data, or because the data itself
might not lend itself to analysis).
Several stakeholders voiced concern
with respect to the SBA’s detailed
approach to categorizing the applicant’s
business, arguing that NAICS codes
were developed for procurement,
contained too many categories, and
were not familiar to many financial
institutions and applicants.
Stakeholders offered varying levels of
support for the Bureau’s proffered size
standard alternatives, although in
general there was more support for a
standard using only gross annual
revenue. Many stakeholders, including a
variety of trade associations, supported
the SBREFA First Alternative Approach;
a few explicitly opposed it. Those
voicing support generally preferred the
simplicity of the approach; some
stakeholders noted that a definition
using gross annual revenue aligned with
how lenders typically consider an
applicant’s size for other purposes.
Stakeholders suggested that the Bureau
select a specific revenue limit for small
businesses including $500,000, $1
million, $5 million, and $8 million.
Some stakeholders expressing support
for a $8 million revenue limit noted that
it would better capture small businesses
in wholesale and manufacturing, while
allowing the Bureau to adopt a single,
uniform standard. Stakeholders
opposing the SBREFA First Alternative
Approach generally expressed concern
with using gross annual revenue, either
citing concerns about its accuracy or
because they said a uniform gross
annual revenue standard would not
account for regional variation among
Panel Report at 44.
511 Id.
Frm 00075
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businesses or reflect the SBA’s general
approach to distinguishing businesses
by industry. One stakeholder generally
expressed concern that the SBREFA
First Alternative Approach might
exclude too many small business
applicants from the 1071 rule.
Several stakeholders, mostly
community groups, supported the
SBREFA Second Alternative Approach;
several comments from industry
opposed the approach. Those in support
of the SBREFA Second Alternative
Approach characterized it as providing
a balance between simplicity and
providing results more closely aligned
with the more comprehensive SBA
approach, which distinguishes
businesses by industry. Some
stakeholders expressed concern with
respect to distinguishing the nature of
the applicant’s business (e.g., whether it
was engaged in manufacturing or
wholesale), and others thought that
there may be difficulties accurately
measuring the number of employees.
A few stakeholders supported the
SBREFA Third Alternative Approach,
while several explicitly opposed it.
Supporters of the SBREFA Third
Alternative Approach praised how
closely the alternative aligned with the
SBA’s definition, while those in
opposition criticized it as overly
complex. In particular, those opposing
this approach were concerned that it
would still require financial institutions
to have a close working knowledge of
NAICS codes.
A few stakeholders advocated that the
Bureau consider adopting a small
business definition that incorporated
loan size. Some of these stakeholders
suggested that the Bureau consider
aligning this definition with standards
in the CRA. One stakeholder suggested
that the Bureau define a small business
as one with gross annual revenue of $1
million where the business has
requested a loan of $1 million or less.
Proposed Rule
Proposed § 1002.106(b) would define
a small business as having the same
meaning as the term ‘‘small business
concern’’ in 15 U.S.C. 632(a), as
implemented in 13 CFR 121.101
through 121.107. The Bureau believes
that adopting existing statutory and
regulatory small business definitions,
which are widely understood and
already the subject of notice and
comment, is consistent with the
purposes of section 1071 and will
facilitate compliance. Proposed
§ 1002.106(b) would further state that,
notwithstanding the size standards set
forth in 13 CFR 121.201, for purposes of
proposed subpart B, a business is a
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small business if and only if its gross
annual revenue, as defined in proposed
§ 1002.107(a)(14), for its preceding fiscal
year is $5 million or less. This proposed
definition largely adopts the SBREFA
First Alternative Approach with a
threshold of $5 million. The Bureau
believes this proposed definition
implements the statutory language of
section 1071 while reflecting a need for
financial institutions to apply a simple,
broad definition of a small business.
The Bureau is seeking SBA approval for
this alternate small business size
standard pursuant to the Small Business
Act.513
Proposed comments 106(b)–1 and
106(b)–2 would clarify the obligations of
covered financial institutions when new
information may arise that could change
the determination of whether an
applicant is a small business, which in
turn gives rise to requirements under
proposed subpart B and/or prohibitions
under existing Regulation B. The Bureau
acknowledges that a financial
institution’s understanding of an
applicant’s gross annual revenue may
change as the institution proceeds
through underwriting. Proposed
comment 106(b)–1 would explain that if
a financial institution initially
determines an applicant is a small
business as defined in proposed
§ 1002.106 based on available
information and obtains data required
by proposed § 1002.107(a)(18) through
(20), but the financial institution later
concludes that the applicant is not a
small business, the financial institution
may process and retain the data without
violating ECOA or this regulation if it
meets the requirements of proposed
§ 1002.112(c)(3). Proposed comment
106(b)–2 would explain that if a
financial institution initially determines
that the applicant is not a small
business as defined in proposed
§ 1002.106, but then later concludes the
applicant is a small business, the
financial institution shall endeavor to
compile, maintain, and report the data
required under proposed § 1002.107(a)
in a manner that is reasonable under the
circumstances.
Proposed comment 106(b)–3 would
explain that a financial institution may
rely on an applicant’s representations
regarding gross annual revenue (which
may or may not include an affiliate’s
revenue) for purposes of determining
small business status under
§ 1002.106(b).
For the reasons discussed above in the
section-by-section analysis of proposed
§ 1002.106(a), the Bureau is proposing
to define a small business as having the
513 15
PO 00000
U.S.C. 632(a)(2)(C).
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same meaning as the term ‘‘small
business concern’’ in 15 U.S.C. 632(a),
as implemented in 13 CFR 121.101
through 121.107. However, for reasons
discussed in detail below, the Bureau is
proposing that notwithstanding the size
standards set forth in 13 CFR 121.201,
for purposes of subpart B, a business is
a small business if and only if its gross
annual revenue, as defined in proposed
§ 1002.107(a)(14), for its preceding fiscal
year is $5 million or less. Generally, the
Bureau believes that adopting this gross
annual revenue standard from the
SBREFA First Alternative Approach is
consistent with the purposes of section
1071 and addresses the concerns that
the Bureau has heard with respect to
determining whether applicants are
small businesses for purposes of
complying with section 1071,
particularly with respect to the concerns
regarding determining the applicant’s
NAICS code, and the implications
thereof. Due to concerns expressed by
other stakeholders, which are described
above, and upon its own further
consideration as discussed in this
section-by-section analysis under
Alternatives Considered below, the
Bureau is not proposing the $1 million
gross annual revenue standard from the
SBREFA First Alternative Approach.
The Bureau seeks comment on this
proposed definition of a small business,
including the $5 million gross annual
revenue size standard, as well as
whether additional clarification is
needed for any aspect of this proposed
definition. The Bureau also seeks
comment on whether another variation
of the proposed size standard would
better serve the purposes of section
1071, such as a lower revenue size
standard or a higher one, potentially at
the $8 million or $10 million level. The
Bureau also seeks comment on whether,
in addition to the above-described gross
annual revenue-based size standard, a
small business definition that also
included any business that was
furnished a loan pursuant to an SBA
program (regardless of the applicant’s
gross annual revenue) would further the
purposes of 1071.
Similarly, the Bureau seeks comment
on whether the SBREFA Second
Alternative Approach at $8 million
gross annual revenue or 500 employees
(depending on the type of business)
would align more closely with section
1071’s purposes. Likewise, the Bureau
seeks comment on whether a variation
of the proposed size standard, such as
using an applicant’s average gross
annual revenue averaged over two or
five years, would better serve the
purposes of section 1071. In addition,
the Bureau seeks comment on defining
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a small business consistent with the
entirety of existing SBA regulations,
including any advantages or
disadvantages that using such a
definition might pose specifically in the
context of this rulemaking. Specifically,
the Bureau seeks comment on how the
proposed size standard would fit in
with a financial institution’s current
lending or organization practices. If the
financial institution is an SBA lender,
the Bureau seeks comment on whether
the proposed size standard would
introduce additional difficulties or
challenges.
In order to keep pace with changes to
the SBA’s own size standards and the
potential impact of future inflation, the
Bureau is considering whether it might
update its proposed $5 million gross
annual revenue size standard over time
(perhaps at the end of a calendar year
in order to allow financial institutions
to use the same threshold consistently
throughout the year). The Bureau seeks
comment on how this should be done
and the frequency at which it should
occur.
Alternatives Considered
Gross annual revenue of $1 million.
Under the SBREFA First Alternative
Approach, the Bureau considered
proposing a size standard using the
gross annual revenue of the applicant
business in the prior year, with a
potential ‘‘small’’ threshold of $1
million or $5 million.514 However, upon
further consideration, the Bureau is
concerned that the $1 million threshold
considered under the SBREFA First
Alternative Approach likely would not
satisfy the SBA’s requirements for an
alternative size standard across
industries and would exclude too many
businesses designated as small under
the SBA’s size standards.
Loan size. The Bureau considered
defining a small business based at least
in part on loan size. For example, one
SER suggested that the Bureau align its
small business definition with the $1
million standard for revenue and loan
size used by certain supervisory
agencies for CRA reporting. The Bureau
also considered that under the FFIEC
Call Report collections, banks report
small loans made to businesses and
farms. Through the Credit Union Call
Report, credit unions report commercial
loans over $50,000 made to members.
The Bureau believes that such
potential definitions do not bear a
sufficient relationship to the size of the
business or its operations. The abovementioned Call Report data, for
example, is reported regardless of the
514 SBREFA
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size of the business. Thus, such Call
Reports would capture lending
information regarding small loans
furnished to businesses that may be
dominant in their field. Likewise, under
a definition similar to the CRA,
application data for businesses with low
revenue that may be applying for large
loans would be excluded. The Bureau
does not believe that adopting such an
approach would further the purposes of
section 1071. The Bureau also received
some stakeholder feedback cautioning
against using the CRA definition based
on loan size, because such a definition
would exclude substantial portions of
small business lending.
Existing SBA size standards. As
discussed above, the Bureau is seeking
approval from the SBA to use a $5
million gross annual revenue alternative
size standard in defining a ‘‘small
business’’ for purposes of this
rulemaking, as the Bureau does not
believe the SBA’s size standards are
suitable for this data collection initiative
and prefers to establish a more
appropriate small business definition
limited to the section 1071 rulemaking.
The Bureau believes that requiring
application of existing SBA size
standards for the section 1071 rule
could result in many financial
institutions having to undergo
operational and/or compliance
management system changes. The
Bureau believes that it will reduce
burden for financial institutions,
particularly those without sophisticated
compliance management systems or
familiarity with SBA lending, to comply
with a gross annual revenue size
standard for the section 1071 small
business definition that better aligns
with current lending practices.
If the Bureau were to adopt a small
business definition using the existing
SBA size standards that vary by
industry based on 6-digit NAICS codes,
financial institutions would only be able
to request an applicant’s protected
demographic information further along
in the application process, once they
have obtained the multiple pieces of
data that would be necessary to
determine whether the applicant is
small and, therefore, the 1071 process
applies. The Bureau is concerned that
this delay would make it more difficult
for financial institutions to collect
applicants’ protected demographic
information that is important to both of
section 1071’s statutory purposes. The
Bureau is particularly concerned about
financial institutions’ ability to collect
these data for applications that are
withdrawn or closed for incompleteness
early in the application process. These
data collection considerations differ
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from those applicable to SBA lending
programs, whereby a lender often
cannot (and should not) make an
accurate eligibility determination for an
SBA loan until later in the application
process, often after a loan has already
been initially decisioned and after the
lender has collected information related
to size, time in business, and other data.
In order to allow financial institutions
to quickly determine whether the
section 1071 rule applies, the Bureau is
seeking to minimize complexity for
financial institutions in determining
whether a covered application is
reportable because the applicant
business is a small business—a
necessary determination for the 1071based collection of any other
information. The Bureau believes that
the section 1071 rule would benefit
from a universal, easy-to-apply
reporting trigger that does not need to be
supported by additional documentation
or research. Such a reporting trigger
must be easily understood by small
business owners who may be
completing an application online, or by
the tens of thousands of customer-facing
personnel who take small business
applications in an industry with a
typical annual turnover rate of 10 to 20
percent. The Bureau believes that a
gross annual revenue reporting trigger
will facilitate better compliance with
1071 requirements because it aligns
with current lending and organizational
practices.
The Bureau is concerned that
requiring financial institutions to rely
on the SBA’s existing size standards for
purposes of the section 1071 data
collection and reporting requirements
would pose risks to the efficient
operation of small business lending.
Based on the overwhelmingly consistent
feedback the Bureau has received from
stakeholders on this issue, the Bureau
believes that using the SBA’s existing
size standards for the purposes of
section 1071—wherein the financial
institution must quickly determine the
appropriate 6-digit NAICS code for
businesses and then apply a variety of
standards, including potentially
gathering information to determine five
years of the applicant’s average annual
receipts or employee information—
would not align with current lending
and organizational practices.
Application of the existing size
standards, at the beginning of the
application process, could slow down
the application process, particularly at
institutions that are often able to render
credit decisions in a matter of minutes;
the Bureau is concerned that financial
institutions may be compelled to raise
the cost of credit or originate fewer
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covered credit transactions as a result.
Such an outcome could needlessly
affect access to credit for small
businesses. Eliminating credit
opportunities or reducing access to
credit to small businesses, including
women-owned and minority-owned
small businesses, in this way would
conflict with the statutory purpose of
section 1071 to ‘‘enable communities,
governmental entities, and creditors to
identify business and community
development needs and opportunities of
women-owned, minority-owned, and
small businesses.’’ 515
The Bureau expects that many
financial institutions, for efficiency, will
bifurcate their business credit
application procedures based on an
initial determination of whether the
application will be subject to section
1071. The Bureau therefore believes that
many financial institutions will not
proceed with taking applicant
information until the financial
institution is able to determine that the
applicant is small (in which case,
section 1071 will require the financial
institution to collect and report the
applicant’s protected demographic
information) or that the applicant is not
small (where ECOA generally prohibits
the financial institution from collecting
protected demographic information). If
this process requires determining the
correct NAICS code for the applicant,
and in many cases, requesting five years
of average annual receipts or employee
information from the applicant, the
Bureau believes that businesses seeking
access to credit will encounter, at a
minimum, otherwise avoidable delays
in processing applications.
The Bureau believes that the $5
million gross annual revenue standard it
is proposing is a more efficient and
appropriate measure of applicant size
for purposes of determining whether
small business lending data collection is
required pursuant to section 1071. The
Bureau understands that the SBA
generally bases business concern size
standards on average annual receipts or
the average number of employees of the
business concern, as customized
industry-by-industry across 1,057 6digit NAICS codes. The SBA typically
uses two primary measures of business
size for size standards purposes: (i)
Average annual gross receipts 516 for
515 ECOA
section 704B(a).
Bureau understands that the SBA recently
changed its regulations on the calculation of
average annual receipts for all of SBA’s receiptsbased size standards, and for other agencies’
proposed receipts-based size standards, from a
three-year averaging period to a five-year averaging
period, outside of the SBA Business Loan and
Disaster Loan Programs. 84 FR 66561 (Dec. 5, 2019).
516 The
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businesses in services, retail trade,
agricultural, and construction
industries, and (ii) average number of
employees 517 for businesses in all
manufacturing industries, most mining
and utilities industries, and some
transportation, information, and
research and development industries.518
The Bureau understands that SBA’s size
standards are used to establish
eligibility for a variety of Federal small
business assistance programs, including
for Federal government contracting and
business development programs
designed to assist small businesses in
obtaining Federal contracts and for
SBA’s loan guarantee programs, which
provide access to capital for small
businesses that are unable to qualify for
and receive conventional loans
elsewhere. The Bureau notes that the
size standard used under section 1071
would only be used to determine
whether small business lending data
collection is required pursuant to
section 1071, and would have no
bearing on eligibility for Federal small
business assistance. Moreover, the
Bureau believes it is far more likely that
an applicant will be able to readily
respond to a question regarding its gross
annual revenue for the preceding fiscal
year—something already contemplated
by existing Regulation B for all business
credit to determine whether notice
requirements apply 519—than offer the
closest metric currently in use by SBA
regulations, which is generally average
annual receipts for the previous five
fiscal years.520 Furthermore, use of this
gross annual revenue standard would be
efficient, as a financial institution is
statutorily required to collect and report
gross annual revenue by ECOA section
704B(e)(2)(F).
The Bureau believes that section 1071
differs from other programs that may
have been contemplated pursuant to the
Small Business Act’s provisions
pertaining to the establishment of size
standards. First and most notably, the
rulemaking contemplated by section
1071 is not a ‘‘program’’ in the
traditional sense of a procurement or
other Federal assistance program; the
rule would not confer a direct benefit or
advantage to the small business
applicant or financial institution in
517 Generally, the average number of employees of
the business concern is used (including the
employees of its domestic and foreign affiliates)
based upon numbers of employees for each of the
pay periods for the preceding completed 12
calendar months. See 13 CFR 121.106(b)(1).
518 To measure business size, the SBA also uses
financial assets for certain financial industries, and
for the petroleum refining industry, it uses refining
capacity and employees.
519 See 12 CFR 1002.9(a)(3).
520 13 CFR 121.104(a) and (c).
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terms of contract, procurement, loan
guaranty, or government backed
debenture. Rather, financial institutions
will be contributing information about
credit applications for businesses
identified as small under section 1071—
information that will be valuable to the
Bureau, financial institutions,
policymakers, and other stakeholders,
including small businesses. Second,
unlike other such alternative size
standard requests, the Bureau notes that
a size standard under section 1071
would apply to businesses across all
sectors applying for financing, rather
than a particular industry or sector. And
third, the Bureau believes that arriving
at a simplified size standard is an
essential element to this ‘‘program,’’ as
more complex approaches may limit
opportunities for small businesses by
reducing access to credit.
Section 1071 is also unique in that
Congress specified that the data
collection regime include a particular
form of revenue for the businesses at
issue. As discussed in the section-bysection analysis of proposed
§ 1002.107(a)(14) below, section 1071
requires a financial institution to collect
‘‘the gross annual revenue of the
business in the last fiscal year of the
women-owned, minority-owned, or
small business loan applicant preceding
the date of the application.’’ 521 The
Bureau considered whether under
section 1071 a financial institution
should have to apply two different
revenue-based rules (first, one for
determining whether the business is
small under the existing SBA size
standards and therefore section 1071
data must be collected and reported;
and, second, if the business is small,
another for reporting the business’s
gross annual revenue in the last fiscal
year), or whether applying only one
revenue-based rule for section 1071
could be sufficient. The Bureau believes
that requiring financial institutions to
apply both would be unnecessarily
confusing and burdensome, and would
also increase potential for errors in data
collection. The Bureau does not believe
it is appropriate to use only average
annual receipts, given the language of
section 1071. Moreover, as discussed
below, section 1071 amends ECOA,
which already incorporates gross annual
revenue as implemented under existing
Regulation B.
ECOA section 704B(e)(2)(G) requires a
financial institution to collect and
report the race, sex, and ethnicity of the
principal owners of the business.
Existing Regulation B generally
prohibits a creditor from inquiring about
521 Id.
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such protected demographic
information in connection with a credit
transaction unless otherwise required by
Regulation B, ECOA, or other State or
Federal law, regulation, order, or
agreement.522 Thus, in order to avoid
potential liability under ECOA and
existing Regulation B, a financial
institution must accurately determine
that a business credit application is
subject to section 1071 before inquiring
about the applicant’s protected
demographic information. The Bureau
does not believe the SBA’s existing size
standards allow for the quick and
accurate determination of small
business status required for this 1071
data collection initiative. Specifically,
the Bureau does not believe this
determination can be quickly and
accurately made if, as required under
the SBA’s existing size standards, the
financial institution must determine the
appropriate NAICS code for the
business and then apply the NAICSbased size standards to determine
whether a business loan applicant is a
small business.
As discussed above, SERs and other
stakeholders have expressed concern to
the Bureau about the difficulties in
determining the appropriate NAICS
code for businesses and in applying the
NAICS-based size standards. They
generally preferred a simple small
business definition and expressed
concern that the SBA’s approach to
defining a small business—which bases
classification on an applicant’s 6-digit
NAICS code—is relatively complex in
this context. The Bureau believes that
removing a NAICS-based small business
determination as a step in determining
small business status will both facilitate
compliance and better achieve the
purposes of section 1071. The Bureau
understands that one reason that SERs
and others expressed a strong desire for
a simple approach to determining
whether an applicant is small is that
this initial determination may drive the
application process. To comply with
section 1071 requirements, financial
institutions may use a different
application process, or different or
additional application materials, with
applicants for business credit that are
small businesses than they do with
applicants that are not small businesses.
Thus, quickly and accurately
determining whether an applicant is a
small business at the outset of the
application process may be a crucial
522 Existing § 1002.5(a)(2). ECOA states that it is
not discrimination for a financial institution to
inquire about women-owned or minority-owned
business status, or the race, sex, and ethnicity of
principal owners pursuant to section 1071. 15
U.S.C. 1691(b)(5).
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step, one that financial institutions
would benefit from being able to
seamlessly accomplish. Considering the
requirements and prohibitions in ECOA
with respect to protected demographic
information, the Bureau understands the
import that financial institutions have
placed on both the speed and accuracy
of this determination.
As discussed in the section-by-section
analysis of proposed § 1002.107(a)(15)
below, the Bureau believes that NAICS
codes possess considerable value for
section 1071’s fair lending purpose as
well as its business and community
development purpose beyond being
necessary for determining whether an
applicant is a small business under the
SBA’s size standards. The Bureau is
therefore proposing that financial
institutions be required to collect and
report NAICS codes as one of the data
fields for applications subject to section
1071. However, the Bureau believes that
gathering NAICS code information at
some point during the application
process, while still the subject of some
concern for financial institutions, is a
different consideration from requiring
NAICS information as a necessary step
to beginning an application (and
correctly determining which type of
application to initiate).
The Bureau also believes that this
simplified alternative size standard will
provide largely consistent reporting
results, as compared to adopting the full
SBA size standards. The Bureau used
data from the U.S. Census’s 2012
Statistics of U.S. Businesses (SUSB) and
the U.S. Department of Agriculture’s
2012 Census of Agriculture to analyze
how each of the Bureau’s contemplated
alternative approaches would change
the number of businesses defined as
‘‘small’’ relative to the SBA
definition.523 If all NAICS
classifications and size assessments
could be done correctly, applying the
SBA’s full 6-digit NAICS code-based
size standards would result in complete
coverage of small businesses as defined
by the SBA—all applications by small
businesses would be reported (other
than those made to financial institutions
that qualify for an exemption) and no
applications made by non-small
businesses would be reported. The
Bureau estimates that 270,000
businesses that would be small under
523 The 2012 SUSB is the most recent Census
product to have categories of revenue and
employees granular enough to conduct this
analysis. The Bureau constructed the 2012
equivalents of the second and third alternatives due
to the vintage of the SUSB data available and used
the SBA’s 2012 size standards for the analysis. The
2012 SUSB only covers employer firms or
businesses with at least one employee.
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the SBA’s existing size standards (out of
7.2 million small employer businesses
and farms) would not be covered by the
Bureau’s proposed $5 million gross
revenue standard. The Bureau further
estimates that the Bureau’s proposed
rule would cover some 77,000
businesses that would not be small
under the SBA size standards. The
Bureau believes that such variation with
respect to the SBA’s current size
standards is an appropriate trade-off for
the reasons described herein.
The Bureau notes, however, that a $5
million gross annual revenue alternative
size standard would affect some
industries more than others. That is,
applications for small businesses would
be reported to the Bureau less from
some industries than others. In general,
there will be a larger proportion of
businesses whose applications would
not be reported in industries with a
higher revenue-based size standard. The
industries most affected by this are the
retail trade and construction industries.
Other industries that would be
disproportionately affected may include
manufacturing, wholesale trade, health
care and social assistance, and
professional, scientific, and technical
services. The Bureau received little
public feedback with respect to such
concerns, although the Bureau seeks
comment with respect to any potential
effects on particular subsets of
applicants that may be
disproportionately included or excluded
on the basis of a gross annual revenue
standard (such as those subject to
employee-based size standards),
particularly in light of section 1071’s
purposes.
The Bureau also believes that a
simplified size standard will be
important for financial institutions that
may not frequently engage in small
business lending in determining
whether they are covered under the
1071 rule. As discussed in the sectionby-section analysis of proposed
§ 1002.105(b), the Bureau is proposing
to mandate section 1071 small business
lending data collection only from those
financial institutions that originated at
least 25 covered credit transactions from
small businesses in each of the two
preceding calendar years. Those
financial institutions that do not
frequently lend to small businesses will
be seeking to track precisely how many
covered credit transactions for small
businesses they have originated. The
Bureau believes that it is important to
empower financial institutions to
quickly ascertain whether a covered
credit transaction was furnished to a
small business, such that infrequent
lenders can continue to monitor
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whether section 1071 compliance is
required.
Average gross annual revenue. The
Bureau considered proposing an
approach that would use an average
gross annual revenue calculated over an
averaging or ‘‘lookback’’ period instead
of using the gross annual revenue for the
preceding fiscal year. This alternative
approach would be similar to the SBA
approach of using a five-year annual
receipts average. The Bureau
understands that the SBA expects the
five-year average to: (i) Enable some
mid-size businesses currently
categorized above their corresponding
size standards to gain or regain small
business status and thereby qualify for
participation in Federal assistance
intended for small businesses, and (ii)
allow some advanced and larger small
businesses close to their size thresholds
to lengthen their small business status
for a longer period and thereby continue
their participation in Federal small
business programs.524 However, because
the 1071 rule is not connected to
eligibility for participation in any
Federal programs for small business
loans, grants, procurement, or
otherwise, the Bureau believes that
allowing financial institutions to
consider applicants’ gross annual
revenue for the preceding fiscal year is
sufficient for 1071 purposes. The
Bureau also notes that using gross
annual revenue for the preceding fiscal
year is consistent with the notification
requirements of existing Regulation B
and the Bureau’s approach in proposed
§ 1002.107(a)(14) regarding the gross
annual revenue data point. The Bureau
believes that using this measure instead
of an average will better align with
current lending practices and will
simplify determinations regarding 1071
reporting status.
Section 1002.107
Reportable Data
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Background
ECOA section 704B(e) requires
financial institutions to ‘‘compile and
maintain’’ records of information
provided by applicants ‘‘pursuant to a
request under subsection (b),’’ and
requires them to ‘‘itemiz[e]’’ such
information to ‘‘clearly and
conspicuously disclose’’ a number of
data points; 525 the Bureau refers to
524 See
84 FR 66561, 66562 (Dec. 5, 2019).
discussed in greater detail above in E.2 of
the Overview to this part V, the Bureau interprets
the phrase ‘‘pursuant to a request under subsection
(b)’’ in section 1071 as referring to all of the data
points contemplated by ECOA section 704B(e), not
525 As
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these as statutory data points. Section
704B(e)(2)(H) provides the Bureau with
authority to require ‘‘any additional data
that the Bureau determines would aid in
fulfilling the purposes of [section
1071]’’; the Bureau refers to data points
adopted under this authority as
discretionary data points. The stated
statutory purposes of 1071 are twofold:
(1) To facilitate enforcement of fair
lending laws; and (2) to enable
communities, governmental entities,
and creditors to identify business and
community development needs and
opportunities of women-owned,
minority-owned, and small
businesses.526 The Bureau notes that
‘‘discretionary’’ in this context means
discretionary for the Bureau to adopt,
not discretionary for financial
institutions to comply with.
The 1071 data collected and reported
by financial institutions would
generally be made available to the
public unless the Bureau decides to
delete or modify certain data to advance
a privacy interest.527 As discussed
below in part VI, the Bureau is
proposing to use a balancing test to
determine what data should be deleted
or modified, but does not intend to
apply the balancing test until financial
institutions have reported at least a full
year of 1071 data to the Bureau. The
Bureau notes that the utility of 1071
data to particular groups of data users
will depend on the specific data
collected and the form, manner, and
extent to which the Bureau makes such
data available to the public.
The users of data from the Bureau’s
proposed 1071 rule could include the
Bureau itself; other Federal agencies
including the prudential banking
regulators; Congress; State and local
governments; community, consumer,
and civil rights groups; researchers and
academics; financial institutions; small
businesses; and small business trade
organizations. The comprehensive data
that would be collected under the
Bureau’s rule is not available elsewhere,
though some aggregate information for
some loans to businesses—but not
applications—exists in other sources.
For example, there are several datasets
on loans to businesses by depository
institutions. The FFIEC Call Report data
provide information on banks’ and
savings associations’ total outstanding
number and amount of loans to
businesses for loans under $1 million
and farms for loans under $500,000. The
CRA requires banks and savings
merely whether the applicant is a minority-owned,
women-owned, or small business.
526 ECOA section 704B(a).
527 ECOA section 704B(e)(4), (f).
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associations with assets over a specified
threshold ($1.322 billion as of 2021) to
report data on loans to businesses with
origination amounts of $1 million or
less and loans to farms with origination
amounts of $500,000 or less. NCUA Call
Reports include information on credit
unions’ outstanding and originated
commercial loans to members over
$50,000. Though the Bureau and other
agencies with supervisory jurisdiction
can currently approximate some 1071
data through requests during
examinations of individual institutions,
the agencies would only have access to
data from a relatively small number of
such institutions at any one time and
the data obtained would not be uniform
among institutions. The availability of
uniform 1071 data across different types
of financial institutions should
significantly improve agencies’ ability to
focus limited supervisory resources on
institutions with higher fair lending
risk. Section 1071 data may also provide
insight into how well the market is
meeting the credit needs of small
businesses in general, as well as
women- and minority-owned small
businesses in particular, and could
potentially be used to identify market
opportunities.
The Bureau has received feedback
relevant to the 1071 rulemaking from a
variety of sources, including through the
SBREFA process as well as the Bureau’s
1071 Symposium and the 2017 RFI on
small business lending. This feedback
addressed, among other things, the
potential inclusion of discretionary data
points in the 1071 rulemaking, which is
discussed further below. By discussing
these potential discretionary data points
under consideration in the SBREFA
Outline, the Bureau obtained helpful
feedback on costs and benefits from the
SERs and other stakeholders to inform
the Bureau’s decision-making for
purposes of this NPRM.
SBREFA Proposals Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
explained its understanding of the data
points enumerated in section 1071.528
The Outline noted that ECOA section
704B(b) requires financial institutions to
inquire whether an applicant for credit
is a women-owned, minority-owned, or
small business. In addition, the statute
states that the information compiled and
maintained by a financial institution
under section 704B(e)(1) shall be
itemized in order to clearly and
conspicuously disclose a number of
particular items that are enumerated in
the statute. In the Outline, the Bureau
528 SBREFA
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stated that it was considering proposing
to require all of these data points.529
The Bureau also discussed in the
SBREFA Outline its proposals under
consideration regarding data points
adopted pursuant to its discretionary
data points authority under ECOA
section 704B(e)(2)(H).530 The Bureau
explained that it was considering
proposing to require that financial
institutions report discretionary data
points regarding pricing, time in
business, NAICS code, and number of
employees.
SERs provided feedback on nearly all
aspects of the data points under
consideration, including certain
feedback applicable to all data points.531
Regarding data points generally, most
SERs requested that the Bureau make
the collection and reporting of data
points as simple as possible. Two SERs
stated that collecting and reporting the
statutory data points would not pose
any issues because they collect them
now. A number of SERs urged the
Bureau to require collection and
reporting of a number of data points
based only on information as provided
by the applicant. One SER stated that
the Bureau should be aware that, as
with HMDA reporting, the cost of
collecting and reporting the data points
will include expensive data quality
scrubs in order to avoid negative
examination findings. Another SER
stated that it will be challenging to
standardize the data so reporting can be
automated, and that this will likely
require significant training and a
tremendous amount of human
intervention.
Furthermore, some SERs expressed
concern about asking applicants to
provide certain information (in
particular the race, sex, and ethnicity of
principal owners), as they believed that
applicants would feel uncomfortable
providing, or even being asked about,
that information, and that if applicants
are denied credit they might feel it was
because of the protected demographic
information they provided. One SER
stated that the collection of 1071 data
could seem like an intrusion of privacy
by the financial institution, particularly
to minority borrowers. The SER stated
that prospective applicants may decide
to seek financing elsewhere. Another
SER stated that some prospective
applicants’ distrust of the Federal
government (and concern over how
1071 data might be used) might
529 Id.
at 24–36.
at 33.
531 The SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 25–30.
530 Id.
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adversely impact their ability to lend to
the communities they serve. Other SERs
that currently collect this information
(for example, because they are CDFIs or
SBA lenders) indicated that they
generally do not have difficulty
collecting demographic information
from borrowers.
Several SERs suggested that the
Bureau develop a system to assist in the
collection of applicants’ protected
demographic information, and possibly
other applicant-provided 1071 data, that
would avoid the need for financial
institutions to request and store
sensitive information about applicants.
One SER suggested that this system
could also permit applicants to input
their addresses for geocoding.
SERs also provided detailed feedback
on the discretionary data points that the
Bureau was considering. One SER stated
that the cost of collecting and reporting
the discretionary data points under
consideration would be significant, and
another SER stated that the Bureau
should include as few data points as
possible to avoid unnecessary costs.
Another SER stated that the Bureau
should finalize a rule with just the
statutorily required data points and
avoid adding any discretionary data
points. That SER suggested that if the
Bureau does include discretionary data
points, the Bureau could consider
providing an exemption from
discretionary data point collecting and
reporting for certain small 1071
reporters, similar to the partial data
point exemption approach taken under
HMDA.532
Other SERs favored the inclusion of
some or all of the discretionary data
points. Two SERs stated their support
for the inclusion of all four
discretionary data points under
consideration. One of these SERs
suggested that the Bureau also collect
information regarding the way the
application was taken (in person, by
phone, or online) in order to monitor
possible discouragement of applicants.
The other SER suggested that the Bureau
also collect credit score information.
Stakeholders commenting on the
statutory data points and data points in
general largely echoed the SERs’
concerns. Industry commenters
suggested that the method of collection
be as clear and simple as possible, that
the cost burden be taken into account,
and that the Bureau not require
verification of applicant-provided
information. Community groups largely
supported the Bureau’s proposals under
consideration for the statutory data
532 See
PO 00000
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56435
points, and emphasized the importance
of the new 1071 data collection regime.
A large majority of industry
stakeholders commenting on the
SBREFA Outline opposed the collection
of any discretionary data points, stating
that including them would be overly
burdensome and unnecessary. Industry
commenters argued that the 1071 rule
would be very burdensome in any case,
requiring new software and onerously
different business processes, and adding
data points would only increase that
burden. Some commenters stated that
collecting and reporting the
discretionary data points would
increase compliance obligations and
costs, and likely impact credit costs and
availability for small business
customers. Some commenters were
concerned about the discretionary data
points being made public without
contextual information, potentially
leading to damaging misinterpretations.
One stakeholder stated that unnecessary
discretionary data points would add to
the already significant privacy concerns
of financial institutions and borrowers.
Several commenters suggested that the
Bureau consider an incremental
approach to expanding the data
collection in the future should the
statutory fields not be sufficient to
accomplish the original intent of 1071.
Several other stakeholders suggested
that if the Bureau includes discretionary
data points, it should provide an
exemption from reporting them for
smaller financial institutions.
Community groups and several
community development lenders
supported mandatory reporting of the
discretionary data points under
consideration, saying that they would
help achieve section 1071’s purposes.
One stakeholder stated that the
discretionary data points under
consideration relate to underwriting
decisions and must be accounted for so
credit providers cannot—as they said
HMDA reporters have done for years—
hide behind data not collected as
justification for their lending disparities.
A community development lender
supported the collection of the
discretionary data points, but suggested
that the Bureau not collect number of
employees. Some stakeholders
suggested additional discretionary data
points.
Regarding data points in general, the
SBREFA Panel recommended that the
Bureau consider proposing in the NPRM
that applicant-provided data points be
self-reported by the applicant only,
without an obligation for the financial
institution to verify the information
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provided by the applicant.533 Regarding
the discretionary data points, the
SBREFA Panel recommended that if
time in business, number of employees,
and NAICS code become part of the
proposal, the Bureau continue to
explore ways to minimize the burden to
small financial institutions of collecting
and reporting such data; and with
respect to NAICS code specifically, the
burden on small business applicants
who need to provide the information.534
As to pricing, the Panel recommended
that if this data point becomes part of
the proposal, the Bureau seek comment
on potential methods for avoiding
misinterpretations of disparities.535
Proposed Rule
The Bureau is proposing to adopt the
statutory data points largely consistent
with its proposals under consideration
at SBREFA, but with certain changes as
discussed in the section-by-section
analyses of the individual data points
below. Consistent with its approach
under consideration in the SBREFA
Outline,536 the Bureau is proposing
discretionary data points relating to
pricing, time in business, NAICS code,
and number of workers. In addition,
based on feedback from SERs and other
stakeholders and in the course of
developing the proposed rule, the
Bureau identified several additional
data points that it believes would be
important to the quality and
completeness of the 1071 data collected
and would aid significantly in
furthering the purposes of section 1071.
The proposed rule would adopt
additional discretionary data points
regarding application method,
application recipient, denial reasons,
and number of principal owners. In
addition, the Bureau is relying on ECOA
section 704B(e)(2)(H), as well as its
authority under 704B(g)(1), to make
certain clarifications to the statutory
data points. These data points are all
discussed in detail in the section-bysection analyses of proposed
§ 1002.107(a)(1) through (21) below.
The Bureau continues to believe that
discretionary data points for pricing,
time in business, NAICS code, and
number of workers would serve the
purposes of 1071, improve the utility of
the data for stakeholders, and
potentially reduce the occurrence of
misinterpretations or incorrect
conclusions based on analysis of an
otherwise more limited data set. The
Bureau also believes that discretionary
533 SBREFA
Panel Report at 46.
534 Id.
data points for application method,
application recipient, denial reasons,
and number of principal owners would
help to achieve these goals more
effectively.
In proposing these discretionary data
points, the Bureau considered the
additional operational complexity and
potential reputational harm that
collecting and reporting discretionary
data points could impose on financial
institutions. The Bureau has sought to
respond to industry concerns regarding
discretionary data points by proposing a
limited number of discretionary data
points that would offer the highest value
in light of 1071’s statutory purposes. For
this reason, the Bureau is not proposing
certain additional discretionary data
points suggested by SERs and other
stakeholders such as credit score or
applicant’s business structure (see the
discussion below). In addition, the
Bureau has not chosen to take an
incremental approach to adding data
points, as one stakeholder suggested, or
permitting collecting and reporting of
discretionary data points to be phased
in over time. The Bureau believes the
information from the proposed
discretionary data points would further
section 1071’s purposes for the reasons
stated above, and should be collected
and reported as soon as possible. In
addition, data from these discretionary
data points would be an important part
of the privacy balancing test analysis
that would be conducted after the first
year of 1071 data is received.537 The
Bureau will consider industry concerns
about potential reputational harm that
collecting and reporting discretionary
data points could impose on financial
institutions when it conducts the
privacy balancing test analysis.
In regard to the specific method by
which a financial institution would
collect the 1071 data points, the
proposed rule would require a covered
financial institution to compile and
maintain data regarding covered
applications from small businesses, and
require that the data be compiled in the
manner prescribed for each data point
and as explained in associated Official
Interpretations (included in this
proposed rule) and the Filing
Instructions Guide (FIG) that the Bureau
anticipates later providing on a yearly
basis. The proposed rule would then
explain that the data compiled shall
include the items described in proposed
§ 1002.107(a)(1) through (21). The
Official Interpretations, sometimes
referred to as official comments or
official commentary, provide important
guidance on compliance with the
535 Id.
536 SBREFA
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19:49 Oct 07, 2021
537 See
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regulation and are discussed in this
preamble in relation to each data point
as well as other regulatory provisions.
The FIG would provide instructions on
the operational methods for compiling
and reporting data, including which
codes to report for different required
information. The FIG would be updated
yearly, as is the FIG that is used with
HMDA compilation and reporting.538
The Bureau notes that some of the
details contained in the proposed
regulatory text and commentary may
also be appropriate for inclusion in the
FIG, and it anticipates that it may
choose to relocate some such details to
the FIG when issuing the final rule. For
example, proposed § 1002.107(a)(1)
addresses the unique identifier data
point. A portion of proposed comment
107(a)(1)–1 would explain that the
unique identifier must not exceed 45
characters, and may only include
standard numerical and/or alphabetical
characters and cannot include dashes,
other special characters, or characters
with diacritics. At the final rule stage,
the Bureau might consider removing
those details from the commentary and
addressing them instead in the FIG, in
order to preserve flexibility in how the
submission platform is ultimately
designed and implemented.
Proposed comment 107(a)–1 would
provide general guidance on complying
with § 1002.107(a), and would explain
that: (i) A covered financial institution
reports the data even if the credit
originated pursuant to the reported
application was subsequently sold by
the institution; (ii) a covered financial
institution annually reports data for
covered applications for which final
action was taken in the previous
calendar year; and (iii) a financial
institution reports data for a covered
application on its small business
lending application register for the
calendar year during which final action
was taken on the application, even if the
institution received the application in a
previous calendar year. The Bureau
believes that these operational
instructions would clarify a financial
institution’s collection and reporting
requirements and so facilitate
compliance. The Bureau also believes
that these instructions would help to
ensure the accuracy and consistency of
the data collected and reported.
The Bureau crafted the proposed rule
in consideration of the concerns and
input of the SERs and other
stakeholders. First, the proposed rule
would generally not require a financial
538 See generally Fed. Fin. Insts. Examination
Council, The Home Mortgage Disclosure Act,
https://ffiec.cfpb.gov/ (last visited July 28, 2021).
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institution to verify applicant-provided
information, as discussed more fully in
the section-by-section analysis of
proposed § 1002.107(b) below, and has
limited the discretionary data points to
those that the Bureau believes would be
most useful for the purposes of section
1071. In addition, the Bureau has
considered the costs, including data
quality scrubs, automation and training,
that would be imposed by the collection
and reporting of the statutory and
discretionary data points; these are
discussed in detail in part VII below.
The Bureau has attempted to craft the
collection and reporting requirements to
be as clear and operationally
manageable as possible, and requests
comment on potential methods for
increasing clarity and manageability.
In regard to concerns from SERs and
other stakeholders about being required
to collect applicants’ protected
demographic information for purposes
of section 1071, the Bureau notes that
several SERs reported collecting this
kind of information currently (because
they are CDFIs, or because they are
participating in certain SBA or similar
loan guarantee programs). In addition,
the Bureau crafted the proposed rule to
provide flexibility for financial
institutions in the collection and
reporting of this information. The
Bureau is also not proposing an
exemption for small financial
institutions from reporting the
discretionary data points, as suggested
by some SERs and commenters. As
explained in the section-by-section
analysis of proposed § 1002.105(b)
above, certain institutions with limited
small business loan originations would
be exempt from 1071 collection and
reporting obligations. Furthermore, the
Bureau is concerned that the usefulness
of the data collected would be reduced
if the data set is incomplete for some
financial institutions. Finally, the
Bureau is not proposing at this time to
establish a Federal collection system for
protected demographic or other
information for use with 1071 reporting
that would avoid the need for financial
institutions to request and store this
information about applicants, as
suggested by several SERs.
The Bureau seeks comment on its
proposed approach to the collection and
reporting of the 1071 data points,
including the specific requests for input
above and in the section-by-section
analysis of each of the proposed data
points below.
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Proposed Rule—Other Discretionary
Data Points Considered But Not
Proposed
As mentioned above, SERs and other
stakeholders suggested some additional
data points for the Bureau’s
consideration, and the Bureau
considered others in the development of
this proposed rule. Because of the
operational complexities likely to be
posed by each of these potential data
points, as well as the reasons explained
below, the Bureau has chosen not to
propose to include any of the following
data points in the 1071 rule.
Nonetheless, the Bureau seeks comment
on whether the following potential data
points or any others would further the
purposes of section 1071 and thus
should be considered for inclusion in
the final rule.
• Type of business/entity structure
(sole proprietorship, C-corp, LLC,
partnership, etc.). This information
could be useful in providing context to
the race, sex, and ethnicity data
regarding applicants’ principal owners.
However, the Bureau believes that
collecting the number of principal
owners, as proposed in
§ 1002.107(a)(21), would better serve
this purpose.
• Credit score. Collecting credit score
and other credit information could be
particularly useful for the fair lending
purpose of section 1071. However,
because of the different types of scores
and different situations in which a
financial institution would or would not
access scores, the Bureau believes that
this data point could be quite
complicated and involve complex subfields, which could pose operational
difficulties for financial institutions in
collecting and reporting this
information. These complexities could
also make it difficult for data users to
understand and interpret credit score
data.
• Credit reporting information,
including whether credit information
was accessed. This data point could also
be complicated and involve complex
sub-fields, making it difficult for
financial institutions to collect and
report. As with credit score, these
complexities could also make it difficult
for data users to understand and
interpret these data. In addition, it is not
clear that this information would be
useful without also collecting credit
score.
• Percentage ownership of each
principal owner and percentage
ownership by women and by minorities.
This information could be useful in
providing context to the ethnicity, race,
and sex data regarding applicants’
PO 00000
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56437
principal owners. However, the Bureau
is concerned that requesting this type of
percentage data could be confusing to
applicants and could result in
inconsistent responses across applicants
and institutions. The Bureau believes
that collecting the number of principal
owners, as proposed in
§ 1002.107(a)(21), would better serve
this same purpose.
• Whether the applicant has an
existing relationship with the financial
institution and the nature of that
relationship. This information could
provide additional context for a
financial institution’s credit decision,
and thus could be useful for both of
section 1071’s statutory purposes.
However, the Bureau believes that the
usefulness of the data collected may not
justify the additional operational
complexity of identifying and tracking
such relationships for reporting.
• Customer number, and/or unique
(but anonymous) identification number
for applicants or associated persons for
tracking of multiple applications. This
information could be useful to track
multiple applications by a single small
business within a particular financial
institution, whether submitted at one
time or over the course of the year.
However, the Bureau believes that the
potential difficulties posed by requiring
the reporting of this information—
particularly for applications that have
been withdrawn or abandoned—would
not be warranted in light of the utility
of the data.
107(a)(1) Unique Identifier
Background
ECOA section 704B(e)(2)(A) requires
financial institutions to collect and
report ‘‘the number of the application
. . . .’’ Regulation C includes a similar
reporting requirement for a universal
loan identifier (ULI),539 though some
insured credit unions and depositories
whose lending activity falls below
applicable thresholds are partially
exempt and only need to report a nonuniversal loan identifier (NULI).540 Both
the ULI and the NULI use only
alphanumeric characters, and do not
allow use of identifying information
about the applicant or borrower in the
identifier. The ULI is ‘‘unique’’ in the
national HMDA reporting market
because it uses a unique legal entity
identifier (LEI) for the reporting
institution and then the identifier is
required to be unique within that
539 12
540 12
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CFR 1003.3(d)(5).
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institution.541 The ULI must be no more
than 45 characters and the NULI must
be no more than 22 characters.542
SBREFA Proposals Under Consideration
and Feedback Received
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The Bureau stated in the SBREFA
Outline that it was considering
proposing that financial institutions
report an alphanumeric application or
loan number of no more than 45
characters that is unique, within the
financial institution, to the referenced
extension (or requested extension) of
credit and that remains uniform through
the application and origination stages of
the process.543 The financial institution
would assign this number to an
application, and the number would be
reported as the application number if
the credit applied for was not
originated. The same number would be
reported as the loan number if the credit
applied for was originated. The
application/loan number would not
include any identifying information
about the applicant. The Bureau stated
that it was considering proposing a
structure for the method of assigning
and reporting the application/loan
number under section 1071 to follow
HMDA/Regulation C formatting and
other requirements, which might reduce
initial software development costs.
SERs reported varied practices with
respect to assigning application and
loan numbers.544 Some SERs stated they
do not assign application numbers;
some of those SERs indicated, however,
that they do assign loan numbers at or
before origination. Two SERs reported
tracking applications and loans using an
identification number assigned to the
customer. One SER expressed concern
about reporting actual loan numbers to
the Bureau due to potential identity
theft, and requested that the Bureau
permit financial institutions to generate
a new application/loan number
specifically for 1071 reporting purposes.
One SER stated that if an applicant
requests more than one type of credit
product, a separate application/loan
number is assigned to each product
request, while other SERs indicated they
541 12 CFR 1003.4(a)(1)(i)(A), (B)(2). The NULI is
only required to be unique within the annual loan/
application register in which the covered loan or
application is included. 12 CFR 1003.3(d)(5)(ii).
542 The ULI length limit is included in the
Bureau’s yearly Filing Instructions Guide. See
Bureau of Consumer Fin. Prot., Filing instructions
guide for HMDA Data collected in 2021 (2021),
https://s3.amazonaws.com/cfpb-hmda-public/prod/
help/2021-hmda-fig.pdf. The limit for the NULI is
in Regulation C § 1003.3(d)(5).
543 SBREFA Outline at 26.
544 SBREFA Panel Report at 26–27.
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use a single application number even if
multiple products are requested.
The SBREFA Panel recommended
that in the NPRM the Bureau consider
proposing to permit financial
institutions to report ‘‘dummy’’
application/loan numbers assigned
specifically for 1071 reporting purposes,
rather than the numbers they use
internally.545
Feedback from other stakeholders
echoed many of the SERs’ concerns,
making clear that many lenders do not
assign numbers at the application stage
and others assign them at various points
in the process. One commenter
explained that being required to assign
an application number early would
disrupt its procedures. Another
commenter stated that the Bureau
should provide flexibility in this data
point to account for the wide range of
practices.
Proposed Rule
The Bureau is proposing to require
that financial institutions report an
alphanumeric identifier starting with
the LEI of the financial institution. This
unique alphanumeric identifier would
be required to be unique within the
financial institution to the specific
covered application, and would be
required to be usable to identify and
retrieve the specific file corresponding
to the application for or extension of
credit. The Bureau is also proposing
commentary with additional details, as
discussed below.
This proposed unique identifier
requirement closely follows the
SBREFA Outline approach for this data
point, with certain adjustments and
clarifications. First, the Bureau has
chosen to propose the more precise term
of ‘‘unique identifier,’’ instead of
‘‘application/loan number,’’ which was
the term used in the SBREFA Outline.
In addition, the Bureau had stated that
its approach in the SBREFA Outline
would follow Regulation C formatting
and other requirements, but did not
explicitly discuss the use of ‘‘dummy’’
numbers, as is done with HMDA.546 For
clarity, the Bureau is including language
in proposed comment 107(a)(1)–1 that
would explain that the identifier does
not have to be the number that the
financial institution uses for the
application internally. Proposed
comment 107(a)(1)–1 would also
provide the formatting requirements for
the unique identifier. The Bureau is
proposing an identifier of 45 characters
545 Id.
at 45.
546 SBREFA
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or fewer, as is currently required for
HMDA.
The Bureau notes that the SBREFA
Outline language could be read to
suggest that the financial institution
must assign a number to an application
and then keep that number uniform
throughout its subsequent processing of
the application; this is not what was
intended. The Bureau is making clear in
the proposal that the unique identifier
would not need to stay ‘‘uniform’’
throughout the application and
subsequent processing. Proposed
comment 107(a)(1)–1 would explain
that the financial institution may assign
the unique identifier at any time prior
to reporting the application. Proposed
comment 107(a)(1)–1 would also
explain that refinancings or applications
for refinancing must be assigned a
different identifier than the transaction
that is being refinanced.
Proposed comment 107(a)(1)–2 would
make clear that the unique identifier
must not include any directly
identifying information regarding the
applicant or persons (natural or legal)
associated with the applicant. The
Bureau is aware that internal
identification numbers assigned by the
financial institution to the application
or applicant could be considered
directly or indirectly identifying
information, and requests comment on
this issue. The Bureau also notes that,
as discussed in part VI.C.6.i, due to
privacy risks the Bureau is proposing to
not publish the unique identifier data
field in unmodified form; the Bureau is
seeking comment on potential
modifications to or deletion of this data
field in the published application-level
1071 data.
Proposed comment 107(a)(1)–2 would
also cross-reference proposed
§ 1002.111(c) and related commentary,
which prohibit any personally
identifiable information concerning any
individual who is, or is connected with,
an applicant, in records retained under
proposed § 1002.111.
As stated above, the Bureau is
proposing to require that the unique
identifier begin with the financial
institution’s LEI; this requirement was
not stated in the SBREFA Outline.
Pursuant to proposed
§ 1002.109(b)(1)(vi), any covered
financial institution that does not
currently use an LEI would be required
to obtain and maintain an LEI in order
to identify itself when reporting the
1071 data. Including the financial
institution’s LEI in the unique
identifiers that it assigns to its
applications should not cause extra
operational difficulty once the
programming to do so has been
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implemented. The Bureau believes that
including the LEI will increase the
specificity and usefulness of the
identifier and the record it identifies.
Although a ‘‘check digit’’ is required for
the HMDA ULI, the Bureau is not
proposing to require its use in the 1071
unique identifier. The Bureau believes
that, based on its current expectations
for a 1071 reporting platform, a check
digit would be unnecessary.
The Bureau’s proposal is intended to
avoid the potential problems identified
by SERs during the SBREFA process.
The method proposed would
accommodate different institutions’
numbering systems because the unique
identifier can be created separately from
that internal system. The Bureau’s
proposed approach would also alleviate
the identity theft concerns raised with
respect to reporting actual loan
numbers, though the Bureau is unlikely
to release the unique identifier data
reported to the Bureau publicly in any
case. In regard to the issue of requests
by the same applicant for more than one
credit product at the same time, the
Bureau proposes to treat those as
separate applications. See the sectionby-section analysis of proposed
§ 1002.103 above.
The Bureau seeks comment on its
proposed approach to the unique
identifier data point. In addition, the
Bureau requests comment on the use of
the LEI in the unique identifier and the
possible use of a check digit.
107(a)(2) Application Date
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Background
ECOA section 704B(e)(2)(A) requires
financial institutions to collect and
report the ‘‘date on which the
application was received.’’
SBREFA Proposal Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
stated it was considering proposing that
financial institutions report the
application date using either (i) the date
shown on a paper or electronic
application form; or (ii) the day on
which a credit request becomes an
‘‘application.’’ 547 The Bureau
considered proposing that application
date be reported with a day, month, and
year. The Bureau also considered
proposing that financial institutions
have a grace period of several days on
either side of the date reported to reduce
the compliance burden of pinpointing
an exact date on which an application
was received.
Most SERs stated that application date
would not be difficult to report, though
547 Id.
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some suggested different triggers for the
reporting of application date.548 This
feedback overlapped with feedback on
the definition of an application. Several
SERs suggested the date an application
is completed and submitted for
underwriting review should be the
triggering date. Several other SERs
expressed support for reporting the date
based on when a credit memorandum is
generated. One SER suggested that each
financial institution be permitted to
develop its own process for reporting
application date, so long as it is done
consistently. Another SER expressed
concern with reporting application date
as a general matter, explaining that a
date is not currently recorded in their
system as a matter of practice. Instead
of application date, that SER suggested
that financial institutions report the date
they make a decision on the loan.
Several SERs were strongly in favor of
the Bureau providing a grace period of
several days on either side of the date
reported to reduce compliance burden.
Other stakeholders to comment on
this data point were generally in favor
of the proposal under consideration,
and particularly the grace period, which
they expressed would reduce the
compliance burden of pinpointing an
exact date. One stakeholder suggested a
7-day grace period. One financial
institution suggested that application
date be assigned up through and
including at closing in order to
accommodate financing requests outside
normal business hours.
The SBREFA Panel recommended
that the Bureau seek comment on how
best to define ‘‘application date’’ in light
of how it decides to propose defining an
‘‘application.’’ 549
Proposed Rule
The Bureau is proposing to require
reporting of application date in
§ 1002.107(a)(2) as the date the covered
application was received by the
financial institution or the date on a
paper or electronic application form.
Proposed § 1002.107(a)(2) is consistent
with the Bureau’s proposal under
consideration in the SBREFA Outline,
with revised language for clarity.
Proposed comments 107(a)(2)–1 and –2
would clarify the need for a financial
institution to take a consistent approach
when reporting application date, and
provide guidance on how to report
application date for indirect
applications. In light of SER and other
stakeholder feedback 550 supportive of
548 SBREFA
Panel Report at 27.
at 45.
550 SER feedback primarily directed at how to
define an application under section 1071, rather
549 Id.
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permitting a grace period for reporting
the date of application, the Bureau is
proposing a safe harbor in
§ 1002.112(c)(4), which would provide
that a financial institution does not
violate proposed subpart B if it reports
on its small business lending
application register an application date
that is within three calendar days of the
actual application date pursuant to
proposed § 1002.107(a)(2).
The Bureau seeks comment on its
proposed approach to collecting
application date in § 1002.107(a)(2) and
associated commentary. As
recommended by the SBREFA Panel,
the Bureau also seeks comment on how
best to define this data point in light of
the Bureau’s proposed definition of
‘‘covered application’’ in § 1002.103.
107(a)(3) Application Method
ECOA section 704B(e)(2)(H)
authorizes the Bureau to require
financial institutions to compile and
maintain ‘‘any additional data that the
Bureau determines would aid in
fulfilling the purposes of [section
1071].’’ The Bureau believes that
application method data will aid in
fulfilling the purposes of section 1071,
as explained below.
The Bureau did not address the
method of application as a potential
data point under consideration in the
SBREFA Outline. However, during the
SBREFA process, one CDFI SER
suggested collecting information
regarding the way an application was
taken (in person, by phone, or online) in
order to monitor for possible
discouragement of applicants.551
Relatedly, several SERs that took
applications for credit primarily or
entirely online asserted that such
channels were less likely to result in
discrimination and more likely to
increase access to credit to womenowned and minority-owned small
businesses.
In light of this feedback during the
SBREFA process, pursuant to its
authority under ECOA section
704B(e)(2)(H), and for the reasons set
forth below, the Bureau is proposing to
require financial institutions to collect
and report application method.
Proposed § 1002.107(a)(3) would define
this data point as the means by which
the applicant submitted the covered
application directly or indirectly to the
financial institution. The Bureau is also
proposing commentary to accompany
proposed § 1002.107(a)(3).
than the date reported for that application, are
discussed in connection with the section-by-section
analysis of proposed § 1002.103(a) above.
551 SBREFA Panel Report at 30.
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The Bureau believes that data on
application method would improve the
market’s understanding of how
applicants apply for credit which, in
turn, would facilitate fair lending
enforcement, including helping
determine whether certain application
methods are more or less likely to be
associated with violations of fair
lending laws. This proposed data field
would also permit comparisons across
financial institutions for a given
application method. In addition, data on
application method supports 1071’s
statutory purposes by assisting with an
understanding of the business and
community development needs of a
particular geographic region. For
instance, application method may help
users of 1071 data analyze the extent to
which financial institutions may be
providing access to credit online or by
telephone in ‘‘credit deserts’’ where
financial institutions do not have
branch operations.
The Bureau also believes that
collecting data on application method
will aid in analysis of multiple 1071
data points collected and reported by
financial institutions, including the
ethnicity, race, and sex of applicants’
principal owners. First, these data will
assist the Bureau and other data users in
identifying whether applicants are more
or less likely to provide this (and other)
1071 information in different
application channels. This information
may also assist in determining whether
a financial institution has procedures to
collect applicant-provided data at a time
and in a manner that is reasonably
designed to obtain a response, as would
be required by proposed
§ 1002.107(c)(1).
Finally, data on application method
would assist in analyzing data reported
under, and assessing compliance with,
proposed § 1002.107(a)(20), which
requires financial institutions to collect
principal owners’ ethnicity and race via
visual observation or surname in certain
circumstances. Having application
method reporting will allow the Bureau
and other data users to determine, for
example, which applications could be
subject to data collection via visual
observation or surname (because the
financial institution met with the
applicant in person) and, together with
information reported under proposed
§ 1002.107(a)(20), which of those
applications did and did not have
information collected that way.
Proposed comment 107(a)(3)–1 would
clarify that a financial institution
complies with proposed § 1002.107(a)(3)
by reporting the means by which the
applicant submitted the application
from one of the following options: in-
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person, telephone, online, or mail.
Proposed comment 107(a)(3)–1 would
explain how financial institutions are to
choose which application method to
report, including via a ‘‘waterfall
approach’’ when they have contact with
an applicant in multiple ways.
Proposed comment 107(a)(3)–1.i
would provide that an financial
institution reports the application
method as ‘‘in-person’’ if the financial
institution, or another party acting on
the financial institution’s behalf, meets
with the applicant in person (for
example, in a branch office, at the
applicant’s place of business, or via
electronic media with a video
component). Proposed comment
107(a)(3)–1.ii would provide that a
financial institution reports the
application method as ‘‘telephone’’ if
the financial institution, or another
party acting on the financial
institution’s behalf, did not meet with
the applicant in person as described in
proposed comment 1002.107(a)(3)–1.i
but communicated with the applicant
by telephone or via electronic media
without a video component.
Proposed comment 107(a)(3)–1.iii
would provide that a financial
institution reports the application
method as ‘‘online’’ if it, or another
party acting on the financial
institution’s behalf, did not meet with
the applicant in person and did not
communicate with the applicant by
telephone as described in proposed
comments 1002.107(a)(3)–1.i and ii but
communicated with the applicant
through an online application,
electronic mail, text message, and/or
some other form of online
communication. Proposed comment
107(a)(3)–1.iv would provide that a
financial institution reports the
application method as ‘‘mail’’ if the
financial institution, or another party
acting on the financial institution’s
behalf, did not meet with the applicant
in person and did not communicate
with the applicant by telephone, as
described in proposed comments
1002.107(a)(3)–1.i and ii, but
communicated with the applicant in
writing via United States mail, courier
or overnight service, or hand-delivery
(including hand-delivery of documents
via an overnight drop box or at a teller
window).
Proposed comment 107(a)(3)–2 would
provide guidance on what application
method a financial institution would
report for interactions with applicants
both online and by mail. In short, a
financial institution would report
application method based on the
method by which it, or another party
acting on its behalf, requested the
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ethnicity, race, and sex of the
applicant’s principal owners pursuant
to proposed § 1002.107(a)(20). Proposed
comment 107(a)(3)–2 also would
provide separate examples of when the
application method should be reported
as ‘‘online’’ and ‘‘mail.’’
The Bureau seeks comment on its
proposed approach to this data point.
107(a)(4) Application Recipient
ECOA section 704B(e)(2)(H)
authorizes the Bureau to require
financial institutions to compile and
maintain ‘‘any additional data that the
Bureau determines would aid in
fulfilling the purposes of [section
1071].’’ Although the Bureau did not
address application recipient as a
potential data point under consideration
in the SBREFA Outline, the Bureau
believes that application recipient data
would aid in fulfilling the purposes of
section 1071, as explained below.
Financial institutions employ a wide
variety of lending models in extending
credit to small businesses. During the
SBREFA process, the Bureau explored
section 1071’s requirement to collect
and report certain data for any
‘‘application to a financial institution
for credit,’’ which could be read as
applying to more than one financial
institution when an intermediary
provides the application to another
financial institution that takes final
action on the application.552 See the
section-by-section analysis of proposed
§ 1002.109(a)(3) below for a discussion
of proposed reporting obligations where
multiple financial institutions are
involved in a covered credit transaction.
Financial institutions, of course, may
receive applications for credit directly
from small businesses—depending on
the institution, applications may be
submitted online, by telephone, by mail,
or in person at a branch location, the
applicant’s place of business, or some
other place. In addition, some financial
institutions may receive applications
routed to them through third parties,
such as brokers or vehicle or equipment
dealers. Some financial institutions
issue credit cards branded for particular
retailers, for which applications are
taken in person at the retailer’s store
locations. Some brokers and dealers
may send applications to a single
financial institution, while others may
send them to multiple financial
institutions at the same time. In these
types of application scenarios involving
third parties, the financial institution
may not directly interact with the
552 ECOA
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applicant at all during the application
process.
In the SBREFA Outline, the Bureau
noted the wide array of small business
lending models operating today. The
Bureau noted that certain section 1071
requirements might apply to
intermediaries in the application
chain.553 As discussed in the section-bysection analysis of proposed
§ 1002.109(a)(3) below, several SERs
voiced support for aligning reporting
requirements for financial institutions
that are not the lender of record with the
approach taken for HMDA reporting in
the Bureau’s Regulation C. The Bureau
did not receive feedback from SERs on
whether data concerning the existence
of intermediaries should be collected.
Other stakeholders did urge the Bureau,
however, to provide clear rules for
lenders that work with partners,
including when lenders should, and
need not, collect 1071 data.
Stakeholders also urged the Bureau to
provide clear rules that would work for
a broad array of business models,
including lenders working with partners
and agents.
The Bureau believes that information
regarding how an application is
received would enhance small business
lending data and further the purposes of
section 1071. Pursuant to its authority
under ECOA section 704B(e)(2)H), the
Bureau is thus proposing
§ 1002.107(a)(4), which would require
financial institutions to collect and
report the application recipient,
meaning whether the applicant
submitted the covered application
directly to the financial institution or its
affiliate, or whether the applicant
submitted the covered application
indirectly to the financial institution via
a third party. Proposed comment
107(a)(4)–1 would clarify that if a
financial institution is reporting actions
taken by its agent consistent with
proposed comment 109(a)(3)–3, then the
agent is considered the financial
institution for the purposes of proposed
§ 1002.107(a)(4).
The Bureau believes that collecting
data on application recipient, in
combination with application method,
as discussed above, would improve the
market’s understanding of how small
businesses interact with financial
institutions when applying for credit
which, in turn, would facilitate fair
lending analysis, including identifying
risks in small business lending.
Information about application method
and whether the application was
submitted directly or indirectly also
would promote the community and
553 SBREFA
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business development purposes of the
statute by improving the public’s
understanding of the structure of small
business lending originations across the
market, the methods by which credit is
originated for particular groups or
underserved markets, and trends over
time (for example, to the extent
applicant preferences shift from inperson to online interactions). It will
also be helpful for the Bureau and data
users to know the relationship between
the covered financial institution and the
applicant in the context of certain other
collected and reported data.
The Bureau also believes that
collecting and reporting information on
the application recipient may facilitate
fair lending analysis because particular
business models may provide more or
less reliable information with respect to
the ethnicity, race, and sex of the
principal owners of the applicant. In
addition, the Bureau believes that
collecting and reporting information on
the application recipient may assist
with an understanding of the business
and community development needs of
an area or applicant. For instance, the
proposed collection of application
recipient may help users of 1071 data
understand whether financial
institutions making credit decisions are
directly interacting with the applicant
and/or generally operate in the same
community as the applicant. Finally, the
Bureau expects that financial
institutions know and track how they
receive applications for credit from
small businesses and thus does not
believe that this data point should be
difficult for financial institutions to
collect and report.
The Bureau seeks comment on its
proposed approach to this data point.
107(a)(5) Credit Type
Background
Section 1071 requires financial
institutions to collect and report ‘‘the
type and purpose of the loan or other
credit being applied for.’’ 554 (The credit
purpose data point is addressed in
proposed § 1002.107(a)(6).) For HMDA
reporting, Regulation C requires
numerous data points that indicate the
type of credit applied for or originated:
the type of guarantees used; lien order;
loan term; the presence of
nontraditional contract terms including
balloon, interest only, and negative
amortization payments; variable rate
information; open-end status; and
reverse mortgage status.555 Section 1071
provides no additional information or
details regarding what aspects of credit
type should be collected and reported.
SBREFA Proposals Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
stated it was considering proposing that
financial institutions report the loan/
credit type data point via three subcomponents: (1) Type of Loan Product
(chosen from a specified list); (2) Type
of Guarantee (chosen from a specified
list); and (3) Loan Term (in months, or
using ‘‘Not Applicable’’ for products
that do not have a loan term and for
applications that did not specify a loan
term). The SBREFA Outline included
lists of types of loan product and types
of guarantees.556
The Bureau explained in the SBREFA
Outline that a separate category for the
presence of a guarantee was included in
recognition of the fact that a guaranteed
loan is often made as a counteroffer for
either a requested loan by the applicant
or because the applicant does not
qualify for a conventional loan.557
Having guarantee status captured as a
feature of loan type therefore would
provide useful information. The Bureau
also noted that some borrowers
specifically request a government
guaranteed loan program and/or receive
a loan from a financial institution that
only participates in such a program.558
For reporting when an application
requests more than one type of loan
product, the Bureau stated in the
SBREFA Outline that it was considering
whether to propose that (1) financial
institutions choose up to three items
from the subcomponent lists for the
Loan Type data point if there is only
one application and multiple products/
guarantees/terms were asked for; or (2)
financial institutions report separate
applications/originations for each loan
type requested or originated. The
Bureau explained that financial
institutions would be able to choose
more than one guarantee for originated
or approved but not accepted credit. For
loan product and loan term, however,
financial institutions would report only
one of each subcomponent on originated
credit or credit approved but not
accepted.559
A number of SERs requested certain
products be added to the ‘‘product type’’
list; this feedback generally aligned with
feedback regarding product coverage
(see the section-by-section analysis of
proposed § 1002.104 above). Two SERs
suggested that line increases should be
556 SBREFA
554 ECOA
section 704B(e)(2)(B).
555 Regulation C § 1003.4(a)(2), (14), (25), (27),
(28), (37), and (38).
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557 Id.
558 Id.
559 Id.
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excluded. Some SERs requested that the
Bureau permit multiple types of
guarantees to be selected for a single
application, and one SER suggested that
FHA guarantees be added to the
guarantee list. One SER explained that
government guarantees and personal
guarantees are different—the
government guarantee being a credit
enhancement and a personal guarantee
being a form of collateral.
The SBREFA Panel recommended
that the Bureau consider modifying the
product type and guarantee lists in
accordance with the various suggestions
made by SERs. The Panel also
recommended that the Bureau seek
comment on how financial institutions
currently handle increases in lines of
credit and how best to require reporting
of this data point for multiple lines of
credit within the same account.560
The Bureau also received feedback
from other stakeholders regarding this
data point. A community group
commenter stated that the three data
fields making up this data point are
appropriate choices because each is
necessary separately and in combination
to help determine whether lenders are
responding to the needs for credit by
offering affordable and sustainable
products to traditionally underserved
small businesses. Commenters
requesting that additional products be
covered by the rule, such as MCAs,
likewise said those products would
need to be added to the loan product
list. Another commenter stated that the
Bureau should also expand the number
of guarantees that a financial institution
can select because creditors will
sometimes stack four or five guarantees
on a single loan product.
One commenter stated that the ‘‘type
and purpose of the financing’’ are fluid
in the application process, and the
Bureau should make it clear that highlevel, general, or categorical information
is sufficient for these data points. Other
commenters appreciated the inclusion
of ‘‘other,’’ ‘‘unknown,’’ and ‘‘other/
unknown’’ in the field lists to facilitate
compliance. One commenter asked that
the Bureau provide clear guidance on
how this data point should be reported,
and another stated that reporting this
data point should not be costly if it is
defined simply and left unchanged.
Treatment of multiple products
requested at the same time. Regarding
how a single request for multiple loan/
credit products should be reported,
some commenters supported reporting
separate applications while others
supported requiring reporting as a single
application. One commenter suggested
560 SBREFA
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that the Bureau should accommodate
both approaches. Another commenter
remarked that if a business is applying
for multiple products, the basic
information is going to be the same, the
only difference would be which product
is funded. This same commenter
suggested that if multiple applications
are reported, that will overinflate the
data points as the business does not
have three separate applications, but
only one application for different
products. This commenter further
pointed out that there are instances
where a business is only applying for a
loan but ends up liking the terms of a
line of credit, and asked whether that
change in decision would become a new
application.
Proposed Rule
The Bureau is proposing in
§ 1002.107(a)(5) to require that financial
institutions collect and report the
following information regarding the
type of credit applied for or originated:
(i) The credit product; (ii) The type or
types of guarantees that were obtained
for an extension of credit, or that would
have been obtained if the covered credit
transaction were originated; and (iii)
The length of the loan term, in months,
if applicable. These aspects of credit
type are discussed in turn below. This
proposal is consistent with the approach
presented in the SBREFA Outline, and
would require the financial institution
to choose the credit product and
guarantee(s) from a specified list. (These
lists are provided in the commentary
accompanying proposed
§ 1002.107(a)(5).) The lists include
choices for ‘‘Other’’ and ‘‘Not provided
by applicant and otherwise
undetermined,’’ as appropriate, to
facilitate compliance. Based on the
feedback from SERs and other
stakeholders, and consistent with the
SBREFA Panel’s recommendation to
consider modifying the product type
and guarantee lists in accordance with
the suggestions made by SERs, the
Bureau has updated the lists to reflect
additional credit products and types of
guarantees. The Bureau is also
proposing to use the term ‘‘credit type’’
for this data point, rather than the
SBREFA Outline term ‘‘loan/credit
type,’’ for clarity and consistency with
terminology used elsewhere in the
proposal.
The Bureau believes that it is
reasonable to interpret the statutory
term ‘‘credit type’’ to comprise the
proposed three data fields, because they
are critical to understanding the nature
of small business credit applied for and
provided, as explained below. For the
reasons discussed herein, the Bureau
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believes that the subcategories of credit
product (including collateral), guarantee
type, and loan term would aid in
fulfilling the purposes of section 1071.
Financial institutions generally have all
of the information required for this data
point when they process applications
(and the reporting regime would be
sufficiently flexible when they do not),
so the Bureau does not believe there is
anything in this approach that would
impose particular operational difficulty.
Additionally, the Bureau believes it is
reasonable to interpret type of credit
‘‘applied for’’ to include the type of
credit actually originated when an
application results in an extension of
credit.
The Bureau seeks comment on its
proposed approach to the credit type
data point, including the lists of
products and guarantees proposed and
the other specific requests for input
below.
Credit product. The first data field the
Bureau is proposing to include in the
credit type data point is the credit
product (i.e., a commonly understood
category of small business lending like
term loans or lines of credit) which the
Bureau considers to be an integral part
of the statutory requirement to collect
credit type. The Bureau believes
information about the various products
sought by applicants would further the
purposes of section 1071 by
demonstrating, for example, how small
businesses of different sizes or in
different sectors choose to pursue, or
ultimately access, different forms of
credit.
The Bureau distinguishes between
secured and unsecured term loans and
lines of credit in its list of credit
products because it believes that
whether a term loan or line of credit is
collateralized can have such a
significant effect on things like approval
rates and pricing that secured and
unsecured products fundamentally
differ in kind. For this reason, the
Bureau believes that including
information on the use of collateral in
the credit product data field will help
data users to avoid inaccurate
interpretations of 1071 data. The Bureau
believes that whether a loan is secured
or unsecured will be part of an
application or loan file and, as a result,
should not be operationally difficult to
report once a financial institution’s 1071
compliance system is set up.
Proposed comment 107(a)(5)–1 would
present the instructions for collecting
and reporting credit product and the
proposed list of credit products from
which financial institutions would
select. Proposed comment 107(a)(5)–1
would explain that a financial
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institution complies with
§ 1002.107(a)(5)(i) by selecting the credit
product requested from the list provided
in the comment. It would also explain
that if an applicant requests more than
one credit product, the financial
institution reports each credit product
requested as a separate application.
The issue of how to collect and report
multiple products applied for at the
same time affects several data points,
but is most salient for credit type. The
Bureau believes that requiring a separate
application to be reported for each
credit product requested would yield
more complete and useful data, and that
a financial institution should not
experience operational difficulties in
copying the relevant information,
identical for most data points, to
separate lines in the small business
lending application register. This issue
is discussed more fully in the sectionby-section analysis of proposed
§ 1002.103(a), which also addresses the
Bureau’s proposed approach to multiple
lines of credit within the same account.
The Bureau intends the list of credit
products provided in proposed
comment 107(a)(5)–1 to align with the
most common types of credit products
in small business lending. As explained
above, the list for credit product
included in the SBREFA Outline has
been amended based on SER and
stakeholder input, as well as other
considerations. Specifically, ‘‘Merchant
cash advance’’ and ‘‘Other sales-based
financing transaction’’ have been added
to the list to correspond with their
inclusion as covered credit transactions
under proposed § 1002.104. See the
section-by-section analysis of proposed
§ 1002.104 above for a more complete
discussion of products covered by and
excluded from the Bureau’s proposal.
Proposed comment 107(a)(5)–6 would
explain when ‘‘other sales-based
financing transaction’’ is used for
reporting.
Proposed comment 107(a)(5)–1 would
also explain that if the credit product for
an application does not appear on the
list of products provided, the financial
institution selects ‘‘other’’ as the credit
product and reports the specific product
via free-form text. The Bureau believes
that allowing financial institutions to
choose ‘‘other’’ when the credit product
for the application does not appear on
the provided list would facilitate
compliance. In addition, collecting this
information on ‘‘other’’ credit products
would assist the Bureau in monitoring
product trends and key developments in
the small business lending market,
which the Bureau could use to inform
any future iterations of the list.
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Proposed comment 107(a)(5)–2 would
explain that, pursuant to proposed
§ 1002.107(c)(1), a financial institution
is required to maintain procedures
reasonably designed to collect
applicant-provided data, which
includes credit product. However, if a
financial institution is nonetheless
unable to collect or otherwise determine
credit product information because the
applicant does not indicate what credit
product it seeks and the application is
denied, withdrawn, or closed for
incompleteness before a credit product
is identified, the proposed comment
would explain that the financial
institution reports that the credit
product is ‘‘not provided by applicant
and otherwise undetermined.’’ This
option is similar to the ‘‘unknown’’
response under consideration during
SBREFA, but has been revised to more
accurately reflect the situations in
which the response would be
appropriate. The Bureau believes that
permitting use of this response would
facilitate compliance and enhance the
quality of data collected. As discussed
above, commenting stakeholders
supported the flexibility afforded by this
kind of response.
Proposed comment 107(a)(5)–3 would
explain how a financial institution
reports a transaction that involves a
counteroffer. The comment would state
that if a financial institution presents a
counteroffer for a different credit
product than the product the applicant
had initially requested, and the
applicant does not agree to proceed with
the counteroffer, a financial institution
reports the application for the original
credit product as denied pursuant to
proposed § 1002.107(a)(9). If the
applicant agrees to proceed with
consideration of the financial
institution’s counteroffer, the financial
institution reports the disposition of the
application based on the credit product
that was offered, and does not report the
original credit product applied for. The
Bureau believes that, in the complex
circumstances created by counteroffers,
the meaning of the type of credit
‘‘applied for’’ is ambiguous, and it is
reasonable to interpret the credit
product ‘‘applied for’’ to mean the credit
product considered via the applicant’s
response to the counteroffer. For a
discussion of the Bureau’s proposed
treatment of counteroffers more
generally, see the section-by-section
analysis of proposed § 1002.107(a)(9)
below.
The Bureau notes that, under its
proposal, line increases would be
reportable so that the small business
lending market can be tracked
accurately. See the section-by-section
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analysis of proposed § 1002.103(a)
above for additional details. However,
the Bureau is not proposing that line
increases be included as a separate item
in the credit product list.
The Bureau seeks comment on its
proposed approach to this data field,
including the appropriateness and
usefulness of the products included in
the list, whether there are other
products that should be added, and the
proposed treatment of counteroffers.
The Bureau also seeks comment on how
financial institutions currently handle
increases in lines of credit and whether
a line increase should be considered a
credit product, and on whether an
overdraft line of credit should be
considered a product separate from a
line of credit and thus added to the
product list.
Type of guarantee. The second data
field the Bureau is proposing to include
in the credit type data point is
guarantee. The Bureau considers the
guarantee obtained for an extension of
credit to be part of the credit ‘‘type’’
because it is fundamental to the nature
of the transaction in that it meaningfully
impacts terms such as interest rates,
such that guarantee information could
help to explain potential disparities in
outcomes and reduce inaccurate
conclusions, aiding in fulfilling the fair
lending purpose of section 1071.
Indeed, in common parlance, small
business credit transactions are often
referred to using the name of the
guarantee (e.g., ‘‘a 7(a) loan,’’ referring
to the SBA 7(a) guarantee). Because
various types of guarantees are available
for different credit products, the Bureau
believes that guarantee type should
constitute a separate data field within
the credit type data point, so that data
users can conduct separate analyses
with respect to credit product and
guarantees, and to avoid excessive
complexity in the credit product data
field. Information on the distribution of
government loan guarantees (such as
those provided in SBA programs) across
different geographic areas and applicant
groups should allow a better
understanding of how those programs
function on the ground, aiding in
fulfilling the business and community
development purpose of section 1071.
As with collateral, information on
guarantees is generally a part of an
application or loan file and should not
be operationally difficult to report once
a financial institution’s 1071
compliance system is set up.
Proposed comment 107(a)(5)–4 would
present the instructions for collecting
and reporting type of guarantee and the
proposed list of guarantees from which
financial institutions would select.
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Proposed comment 107(a)(5)–4 would
explain that a financial institution
complies with § 1002.107(a)(5)(ii) by
selecting the type or types of
guarantee(s) obtained for an originated
covered credit transaction, or that
would have been obtained if the covered
credit transaction were originated, from
the list provided in the comment.
The Bureau intends the list of
guarantee types provided in proposed
comment 107(a)(5)–4 to align with the
most common types of guarantees used
in small business lending. As explained
above, the list for guarantee type
included in the SBREFA Outline has
been amended based on SER and
stakeholder input. Specifically, ‘‘FHA
insurance’’ and ‘‘Bureau of Indian
Affairs guarantee,’’ which the Bureau
believes are often used with small
business credit, have been added.
Proposed comment 107(a)(5)–4 would
also explain that the financial
institution may select, if applicable, up
to a maximum of five guarantees for a
single application or transaction. In the
SBREFA Outline, the Bureau stated that
it was considering allowing financial
institutions to report more than one
guarantee for an application or
originated credit.561 The Bureau
understands that small business credit
may have more than one guarantee,
such as an SBA guarantee and a
personal guarantee, and believes that
more complete information can be
collected by requiring as many as five to
be reported.
Proposed comment 107(a)(5)–4 would
also explain that if the type of guarantee
for an application or originated
transaction does not appear on the list
of guarantees provided, the financial
institution selects ‘‘other guarantee,’’
and reports the type of guarantee as freeform text. As with credit product, the
Bureau believes that allowing financial
institutions to choose ‘‘other’’ when a
guarantee for the application does not
appear on the provided list will
facilitate compliance. In addition,
collecting this information on ‘‘other’’
guarantee types would assist the Bureau
in monitoring trends in usage of other
types of guarantees and key
developments in the small business
lending market, which the Bureau could
use to inform any future iterations of the
list.
Finally, proposed comment 107(a)(5)–
4 would provide that if no guarantee is
obtained or would have been obtained
if the covered credit transaction were
originated, the financial institution
selects ‘‘no guarantee.’’ Because a small
business credit transaction does not
561 SBREFA
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always involve use of a guarantee, the
Bureau is not proposing to include ‘‘not
provided by applicant and otherwise
undetermined’’ as an option. If no
guarantee is identified for an
application, the financial institution
would report ‘‘no guarantee.’’
In regard to the distinction one SER
made between government and personal
guarantees, the Bureau notes that the
proposed rule would identify them as
separate options within the data field,
thereby allowing data users to analyze
them independently.
The Bureau seeks comment on its
proposed approach to this data field,
including the appropriateness and
usefulness of the items listed, and
whether there are other guarantees that
should be added. The Bureau also seeks
comment on whether five is the
appropriate upper limit for reporting
guarantees.
Loan term. The third data field the
Bureau is proposing to include in the
credit type data point is the loan term.
As with the consumer lending market,
the pricing and sustainability of closedend credit transactions for small
businesses are associated with term
length, and without awareness of the
term of the loan, data users will have
less of an understanding of the types of
credit being made available to
applicants. Credit with a one-month
term may differ not just in degree but in
kind from credit with a 60-month term.
The Bureau thus believes that the length
of the loan term is a fundamental
attribute of the type of credit that
applicants are seeking such that it
should be treated as a separate data field
within credit type. As with other
elements of the credit type data point,
loan term information would allow data
users to reduce inaccurate conclusions
or misinterpretations of the 1071 data,
aiding in fulfilling both the fair lending
and business and community
development purposes of section 1071.
Likewise, the loan term will be part of
the application or loan file and should
not be operationally difficult to report
once a financial institution’s 1071
compliance system is set up.
Proposed comment 107(a)(5)–5 would
present the instructions for collecting
and reporting loan term. Specifically, it
would explain that a financial
institution complies with proposed
§ 1002.107(a)(5)(iii) by reporting the
number of months in the loan term for
the covered credit transaction, and that
the loan term is the number of months
after which the legal obligation will
mature or terminate. The comment
would further explain how to measure
the loan term and the possible use of
rounding.
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Proposed comment 107(a)(5)–5 would
also make clear that if a credit product,
such as a credit card, does not have a
loan term, the financial institution
reports loan term as ‘‘not applicable.’’
The financial institution also reports
‘‘not applicable’’ if the application is
denied, withdrawn, or determined to be
incomplete before a loan term has been
identified. The Bureau believes that
permitting the use of ‘‘not applicable’’
in these situations would facilitate
compliance and aid in the collection of
appropriate data. The Bureau believes
that the proposed regulatory text and
commentary described above would
alleviate many of the concerns of the
SERs and other commenting
stakeholders regarding the credit type
data point. The credit product and
guarantee type lists have been updated
using their input and continued Bureau
consideration. Multiple types of
guarantees would be permitted by the
proposal, and FHA guarantees have
been added to the list.
The Bureau believes the statutory
term ‘‘type . . . of the loan’’ to be
ambiguous, and reasonably interprets
the term to include the credit product,
any guarantee obtained, and the term of
a closed-end loan because an accurate
and useful record of the ‘‘type’’ of loan
or credit would include those data
fields. In the alternative, ECOA section
704B(e)(2)(H) authorizes the Bureau to
require inclusion of ‘‘any additional
data that the Bureau determines would
aid in fulfilling the purposes of [section
1071],’’ and for the reasons discussed
above, the Bureau has also determined
that the subcategories of credit product
(including collateral), guarantee type,
and loan term would aid in fulfilling
those purposes.
The Bureau seeks comment on its
proposed approach to this data field.
107(a)(6) Credit Purpose
Background
Section 1071 requires financial
institutions to collect and report ‘‘the
type and purpose of the loan or other
credit being applied for.’’ 562 (The credit
type data point is addressed in proposed
§ 1002.107(a)(5).)
SBREFA Proposals Under Consideration
and Feedback Received
The Bureau stated in the SBREFA
Outline that it was considering
proposing that financial institutions
report the loan/credit purpose data
point by choosing one or more purposes
from a specified list. In addition to
several specific business purposes, the
list included choices for ‘‘Other’’ or
562 ECOA
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‘‘Unknown’’ to facilitate compliance.
The Bureau also explained that it was
considering proposing that financial
institutions be allowed to choose up to
three purposes when the applicant
indicates more than one purpose.563
Some SERs stated that they collect
information on loan/credit purpose,
although the information they collect
may be different from that in the loan/
credit purpose list in the SBREFA
Outline.564 One SER did, however,
suggest that the Bureau’s purposes list
was similar to their list. Some SERs
made suggestions of additional loan/
credit purposes to add to the list,
including for inventory loans,
agricultural loans, and contract
financing. One SER requested that the
Bureau clarify whether this data point is
intended to capture the purpose of the
loan or the type of collateral. Another
SER recommended combining the
categories of motor vehicle finance and
equipment finance, explaining that
certain financing can span both
categories (such as for a truck and a
trailer as a combined purchase). One of
the SERs expressed concern about
possible confusion regarding credit with
multiple purposes, and another SER
suggested that the Bureau provide clear
instructions on this data point. Another
SER suggested that the Bureau explain
how a line of credit should be reported
if there can be multiple lines for
different purposes all within the same
account.
The SBREFA Panel recommended
that the Bureau consider modifying the
loan/credit purpose lists in accordance
with the various suggestions made by
SERs.565
Like the SERs, the other stakeholders
who provided feedback on the SBREFA
Outline stated that they often collect
loan purpose information from
applicants, but that the specific loan
purposes they use differ somewhat from
those listed in the SBREFA Outline.
Stakeholders supported the inclusion of
‘‘other’’ and ‘‘unknown’’ in the list of
purposes, and one suggested that the
Bureau add ‘‘Not Applicable’’ for
products, such as credit cards, that do
not have a specific purpose. As with the
SERs, these stakeholders requested
clarifications and several changes to the
loan purposes list. One commenter
stated that financial institutions should
not have to present the entire list to
applicants where a loan product’s terms
do not allow the loan to be used for one
or more of the specified purposes. That
same commenter suggested that
563 SBREFA
564 SBREFA
565 Id.
Outline at 28.
Panel Report at 27.
at 45.
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financial institutions should be allowed
to include additional purposes not on
the list, and in the instance an applicant
selects an additional purpose, the
financial institution would include it as
‘‘other’’ unless the selected purpose
squarely fits within, or is a subset of, a
purpose specified on the Bureau’s list.
Proposed Rule
The Bureau is proposing in
§ 1002.107(a)(6) to require that financial
institutions collect and report the
purpose or purposes of the credit
applied for or originated. The Bureau’s
proposed approach aligns with the
SBREFA Outline approach, with certain
adjustments. First, the Bureau is
proposing to use the term ‘‘credit
purpose’’ for this data point, rather than
‘‘loan/credit purpose,’’ for clarity and
consistency with terminology used
elsewhere in the proposal. In addition,
the proposal would provide a more
complete description of the purposes
listed, which would clarify the relation
between the purpose of the credit and
the form of collateral used. The proposal
also reflects other changes to the list of
purposes presented in the SBREFA
Outline, as explained below.
Proposed comment 107(a)(6)–1 would
present instructions for collecting and
reporting credit purpose and would
provide the proposed list of credit
purposes from which financial
institutions would select.
The proposed list is similar to the list
in the SBREFA Outline although,
consistent with the SBREFA Panel’s
recommendation, the Bureau has made
adjustments based on SERs’ suggestions,
as well as those of other stakeholders
and its own further consideration. First,
the items on the SBREFA list that
described types of collateral, such as
commercial real estate, have been
updated to more clearly reflect that the
financial institution is collecting and
reporting the purpose of the loan, and
not the form of collateral, though the
form of collateral may be referred to in
describing that purpose. In addition, the
listed purposes involving real estate
now differentiate between dwelling and
non-dwelling real estate. The Bureau
believes that this distinction would help
in collecting more precise and useful
data. To facilitate compliance the
Bureau is also proposing to add ‘‘not
applicable’’ to the purposes list for use
when an application is for a credit
product that generally has
indeterminate or numerous potential
purposes, such as a credit card.
Proposed comment 107(a)(6)–5 would
also explain the use of ‘‘not applicable’’
as a response. In addition to the changes
described above, the proposed list of
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purposes also reflects small
nonsubstantive edits for clarity.
Proposed comment 107(a)(6)–2 would
explain that if the applicant indicates or
the financial institution is otherwise
aware of more than one purpose for the
credit applied for or originated, the
financial institution would report those
purposes, up to a maximum of three,
using the list provided, in any order it
chooses. Since an applicant may have
more than one purpose for a credit
transaction, the Bureau believes it is
appropriate to require collection and
reporting of more than one credit
purpose for this data point in that
situation. The Bureau believes that
having financial institutions report up
to three purposes would provide useful
and substantive data. The Bureau also
believes that allowing financial
institutions discretion as to the order of
the purposes would facilitate
compliance.
Proposed comment 107(a)(6)–3 would
explain that if a purpose of the covered
credit transaction does not appear on
the list of purposes provided, the
financial institution reports ‘‘other’’ as
the credit purpose and reports the
purpose as free-form text. The Bureau
believes that allowing financial
institutions to choose ‘‘other’’ when a
credit purpose for the application does
not appear on the provided list would
facilitate compliance. In addition,
collecting this information on ‘‘other’’
credit purposes would assist the Bureau
in monitoring trends in this area and
key developments in the small business
lending market, which the Bureau could
use to inform any future iterations of the
list. For efficiency and to facilitate
compliance, proposed comment
107(a)(6)–3 would also explain that if
the application has more than one
‘‘other’’ purpose, the financial
institution chooses the most significant
‘‘other’’ purpose, in its discretion, and
reports that ‘‘other’’ purpose. The
comment would then explain that a
financial institution reports a maximum
of three credit purposes, including any
‘‘other’’ purpose reported.
Proposed comment 107(a)(6)–4 would
explain that, pursuant to proposed
§ 1002.107(c)(1), a financial institution
shall maintain procedures reasonably
designed to collect applicant-provided
information, which includes credit
purpose. However, if a financial
institution is nonetheless unable to
collect or determine credit purpose
information, the financial institution
would report that the credit purpose is
‘‘not provided by applicant and
otherwise undetermined.’’ The Bureau
believes that permitting use of this
response would facilitate compliance
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and enhance the quality of data
collected.
In order to facilitate compliance, the
Bureau is also proposing comments
107(a)(6)–6 and –7. Proposed comment
107(a)(6)–6 would clarify that, as
explained in proposed comment 104(b)–
4, subpart B does not apply to an
extension of credit that is secured by 1–
4 individual dwelling units that the
applicant or one or more of the
applicant’s principal owners does not,
or will not, occupy. Proposed comment
107(a)(6)–7 would clarify the collection
and reporting obligations of financial
institutions with respect to the credit
purpose data point, explaining that the
financial institution would be
permitted, but not required, to present
the list of credit purposes provided in
comment 107(a)(6)–1 to the applicant.
Proposed comment 107(a)(6)–7 would
further explain that the financial
institution would also be permitted to
ask about purposes not included on the
list provided in proposed comment
107(a)(6)–1. Finally, proposed comment
107(a)(6)–7 would clarify that if an
applicant chooses a purpose or purposes
that are similar to purposes on the list
provided, but uses different language,
the financial institution would report
the purpose or purposes from the list
provided. The Bureau believes that
minimizing use of free-form text here
would improve the usefulness of the
data collected and facilitate compliance.
The Bureau believes that, with the
modifications discussed above, the list
of credit purposes provided in proposed
comment 107(a)(6)–1 appropriately
aligns with the purposes of credit
sought in the small business credit
market. As explained above, the Bureau
has clarified the distinction between the
purpose of the credit and the collateral
involved, as one SER suggested. In
addition, the Bureau believes that the
explanations and instructions in the
proposed commentary accompanying
§ 1002.107(a)(6) should reduce any
confusion as to how a financial
institution would comply when an
application involves multiple purposes,
and in other situations. In regard to the
SER comment about multiple lines of
credit for different purposes within the
same account, see the discussion of
‘‘covered application’’ in the section-bysection analysis of proposed
§ 1002.103(a) above.
The Bureau seeks comment on its
proposed approach to the credit purpose
data point. In addition, the Bureau seeks
comment on whether there are any
purposes that should be added to or
modified on its proposed list including,
in particular, on the potential usefulness
of including ‘‘agricultural credit’’ and
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‘‘overdraft line of credit’’ in the credit
purposes list. Finally, the Bureau
requests comment on whether further
explanations or instructions with
respect to this data point would
facilitate compliance.
107(a)(7) Amount Applied For
Background
Section 1071 requires financial
institutions to collect and report ‘‘the
amount of the credit or credit limit
applied for, and the amount of the credit
transaction or the credit limit
approved.’’ 566
The Bureau notes that for HMDA,
Regulation C § 1003.4(a)(7) requires
reporting of ‘‘the amount of the covered
loan or the amount applied for, as
applicable,’’ which requires reporting of
the amount applied for only when the
credit is not originated. Because section
1071 uses the conjunction ‘‘and’’ rather
than ‘‘or,’’ the Bureau reads section
1071 to require collection and reporting
of the amount applied for regardless of
whether the application is ultimately
approved or originated. (The amount
approved or originated data point is
addressed in proposed § 1002.107(a)(8).)
SBREFA Proposals Under Consideration
and Feedback Received
The Bureau stated in the SBREFA
Outline that it was considering
requiring financial institutions to report
the amount applied for data point using
the initial amount of credit or credit
limit requested by the applicant at the
application stage, or later in the process
but prior to the financial institution’s
evaluation of the credit request.567 The
Bureau further explained in the
SBREFA Outline that this method
would not require reporting of amounts
discussed before an application is made
to a financial institution, but would
capture the initial amount requested at
the application stage or later, and would
reflect the amount of the request that
was evaluated by the financial
institution in making a credit decision.
In addition, if the applicant did not
request a particular amount, but the
financial institution underwrote the
application as being for a specific
amount, the financial institution would
report the amount considered for
underwriting. If the particular product
applied for would not involve a specific
amount requested or underwritten, the
financial institution would report ‘‘Not
Applicable’’ for this data point. Finally,
the Bureau suggested in the SBREFA
Outline 568 that when an applicant
566 ECOA
section 704B(e)(2)(C).
Outline at 28–29.
responds to a ‘‘firm offer’’ that specifies
an amount, which may occur in
conjunction with a pre-approved credit
solicitation, the amount applied for
would generally be the amount of the
firm offer.
Because of the relationship between
the amount applied for and the amount
approved or originated data points, the
following summary of SER feedback
includes input on both.569 One SER
articulated the importance of capturing
data on both the amount applied for and
the amount approved, stating that both
data points were necessary to identify
potentially discriminatory practices,
such as discouragement, in the lending
process. Another SER explained that the
amount applied for could change during
the iterative application process,
particularly with a business that may
not have previously had a banking
relationship with the financial
institution, but that the amount
generally stayed consistent through
underwriting. Other SERs asserted that
differences between the amounts
requested and approved were frequent,
for a variety of reasons. One SER stated
that they notify applicants of a
preliminary offered amount, which
often changes after documentation and
underwriting. One example offered was
that disparities between the amount
applicants applied for and the amount
the lenders approved may be
attributable to collateral being assessed
at a different value than the amount the
applicants initially requested. Some
SERs also remarked that differences in
these amounts were often attributable to
financial institutions acting as
counselors or advisors to small
businesses, including start-ups, and
going back and forth until arriving at an
amount that is appropriate given the
customer’s needs.
One SER (who supported reporting
the amount initially applied for and the
amount approved) strongly opposed
reporting counteroffers, stating that
negotiation is quite prevalent in small
business lending. Another SER
suggested that the Bureau use ranges for
reporting the amount applied for, rather
than specific numbers, and that the
Bureau allow a financial institution to
report ‘‘not applicable’’ if an applicant
does not specify an amount requested.
A SER also suggested there could be
other potential complexities in
capturing data on credit amount/limit
the applicant applied for and credit
amount/limit the lender approved, such
as simultaneous or grouped financings
involving multiple products, different
sub-limits for each product or loan, and
567 SBREFA
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a general credit limit for an entire
facility. SERs asked that these data
points be captured in a manner that took
these complexities into account.
The SBREFA Panel recommended
that the Bureau seek comment on
potential methods for avoiding
misinterpretations of disparities
between the credit amount/limit applied
for and the credit amount/limit
approved.570
The Bureau also received feedback
from other stakeholders regarding this
data point. Industry stakeholders
providing feedback on the SBREFA
Outline emphasized that arriving at an
applied for amount is a complex,
iterative process and that the reporting
requirement should be flexible. One
stakeholder suggested that the Bureau
propose to require reporting of the
amount of the request that was
evaluated by the financial institution in
making the credit decision. That
stakeholder echoed the comments of
others when it explained that the
amount of credit requested can change
a great deal in formulating an
application. The stakeholder further
explained that some borrowers request a
specific amount immediately, others
may not arrive at a number until after
two or three sessions, and still others
may float multiple numbers during
several conversations, trying to gauge a
loan officer’s reaction. Another
stakeholder commented that an
applicant’s stated credit desires can be
arbitrary and that comparing the initial
amount requested against the amount
approved could be misleading and is
not a reliable measure of the health or
efficacy of small business lending. Other
stakeholders stated that an applicant
will often or usually state a specific
amount early on, but that the amount
will usually change during the process
for various appropriate reasons. One
stakeholder explained that small
business loans generally are not a quick
affair and require substantial review by
and interaction between the lender and
borrower, and business credit that it is
uncommon for a small business
applicant’s requested credit amount to
stay the same from application to
underwriting. One trade association
stated that many small businesses will
request a much higher loan amount than
what is ultimately approved after
evaluation of collateral, particularly in
transactions involving real estate or
equipment, and that for start-ups and
sole proprietorships a lack of
sophistication can also lead to initial
requests being unrealistic. That trade
association further explained that in
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these cases, the financial institution will
work with the applicant to arrive at a
more reasonable amount, which could
take place over a period of weeks or
months. The trade association then
recommended that the Bureau allow
reporting of an amount that is
determined at a later stage than the first
request. Finally, another industry
stakeholder requested that the Bureau
propose to allow reporting of the
applied for amount using ranges of
numbers, stating that applicants often
request credit this way.
A community group stakeholder
stated that the Bureau should require
financial institutions to report the initial
amount requested at the time of
application, explaining that the amount
of credit requested is important for the
purposes of section 1071, which it
described as including enforcing fair
lending laws and assessing whether
credit needs are met.
Two stakeholders supported the use
of ‘‘not applicable’’ when the credit
product does not have a specific amount
or limit, and another stakeholder said
that no ‘‘applied for’’ credit limit should
be required for open-end products. Two
other stakeholders requested that the
Bureau allow the use of ‘‘not
applicable’’ whenever an applicant does
not request a specific amount.
Proposed Rule
The Bureau is proposing in
§ 1002.107(a)(7) to require that a
financial institution collect and report
‘‘the initial amount of credit or the
initial credit limit requested by the
applicant.’’ Proposed comment
107(a)(7)–1 would explain that a
financial institution is not required to
report credit amounts or limits
discussed before an application is made,
but must capture the amount initially
requested at the application stage or
later. In addition, proposed comment
107(a)(7)–1 would state that if the
applicant does not request a specific
amount, but the financial institution
underwrites the application for a
specific amount, the financial
institution reports the amount
considered for underwriting as the
amount applied for. Finally, proposed
comment 107(a)(7)–1 would instruct
that if the applicant requests an amount
as a range of numbers, the financial
institution reports the midpoint of that
range.
The Bureau is aware that there could
be complexity in pinpointing the
specific initial amount requested by an
applicant in the fluid process of a small
business credit application, which the
Bureau acknowledges could make this
data point difficult for financial
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institutions to collect and report.
Nonetheless, the statute requires that
the amount applied for be reported, and
that information could be important for
both of section 1071’s statutory
purposes. The Bureau believes that its
proposed regulatory text and
commentary, described above, would
provide a flexible compliance regime for
this data point that would accommodate
different business practices. A financial
institution would not be required to
report amounts discussed before the
application is made, which would
accommodate preliminary informal
interactions. In addition, the proposed
comment’s instruction on how to report
this data point when the applicant
requests a range of numbers would
facilitate compliance in that situation
and yield data that would be
comparable to the other data collected
for this data point (i.e., specific numbers
and not ranges of numbers). The Bureau
believes that more precise information
will be more useful and should not
create extra difficulty for financial
institutions to collect.
Furthermore, proposed comment
107(a)(7)–1 would address the method
for reporting when no initial amount is
requested by the applicant—that is, the
financial institution reports the amount
considered for underwriting as the
amount applied for. The Bureau
believes that this method would aid
compliance and yield appropriate data
by avoiding the need to report a
preliminary number when a financial
institution’s business practices do not
result in there being such a number to
report. The Bureau understands that a
specific amount is often not required by
many financial institutions for products
such as credit cards, as the financial
institution assigns the credit limit as
part of the credit evaluation process.
The SER and stakeholder feedback
from SBREFA suggest that mandating
reporting of an amount applied for in all
cases could impose undue compliance
burden and complicate Regulation B
compliance for entities that do not, for
certain products, currently require that
the borrower request a specific credit
amount or credit limit as part of the
financial institution’s application
process. In light of the complexities and
concerns described by the SERs and
other stakeholders, and the Bureau’s
understanding that sometimes there is
no amount underwritten to, the Bureau
believes that the amount applied for
data point should avoid interfering with
this arrangement by allowing use of
‘‘not applicable’’ in certain instances.
Thus, proposed comment 107(a)(7)–2
would explain that if the particular
product applied for does not involve a
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specific amount requested or
underwritten, the financial institution
reports that the requirement is ‘‘not
applicable.’’
In addition to situations in which no
amount applied for is requested by the
financial institution or underwritten to
and the amount applied for would be
‘‘not applicable,’’ as described above,
the Bureau understands that there may
be situations where the financial
institution requests an amount applied
for but the applicant nonetheless does
not provide one. To address this
situation, proposed comment 107(a)(7)–
2 would explain that, in compliance
with proposed § 1002.107(c)(1), a
financial institution shall maintain
procedures reasonably designed to
collect applicant-provided information,
which includes the credit amount
initially requested by the applicant.
However, if a financial institution is
nonetheless unable to collect or
otherwise determine the amount
initially requested, the financial
institution reports that the amount
applied for is ‘‘not provided by
applicant and otherwise
undetermined.’’ The Bureau believes
that providing the reporting flexibilities
in proposed comment 107(a)(7)–2, along
with the proposed reporting of the
amount presented for underwriting
when appropriate, would facilitate
compliance by accommodating different
business practices and would also allow
for collection of useful data.
Proposed comment 107(a)(7)–3 would
provide instructions for reporting the
amount applied for in regard to firm
offers. ‘‘Firm offers’’ involve
solicitations to small businesses when
they have been pre-approved for a term
loan, line of credit, or credit card.571
Proposed comment 107(a)(7)–3 would
explain that when an applicant
responds to a ‘‘firm offer’’ that specifies
an amount or limit, which may occur in
conjunction with a pre-approved credit
solicitation, the financial institution
reports the amount applied for as the
amount of the firm offer, unless the
applicant requests a different amount. If
the firm offer does not specify an
amount or limit and the applicant does
not request a specific amount, the
amount applied for is the amount
underwritten by the financial
institution. The Bureau believes that
when the applicant knows the amount
of the pre-approval before responding,
that figure could appropriately be
considered as the amount applied for.
The Bureau understands that financial
institutions often provide an amount in
571 See 15 U.S.C. 1681a(l); see also Regulation B
comment 12(b)(7)–1 (describing offers of credit).
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such solicitations. But if no amount
appears in the pre-approved solicitation,
the Bureau considers that an applicant
responding to the firm offer has not
requested a specific amount, and
reporting of the amount underwritten
would be appropriate. The Bureau’s
proposal follows the SBREFA Outline’s
approach under consideration for
handling firm offers, and the SERs and
other stakeholders did not object to this
method. The Bureau seeks comment,
however, on whether it should handle
reporting of the amount applied for in
connection with firm offers in a
different manner than as set forth in this
proposed comment, such as by requiring
reporting of ‘‘not applicable’’ in
situations where the firm offer does not
specify an amount or limit and the
applicant does not request one.
Proposed comment 107(a)(7)–4 would
explain that when reporting a covered
application that seeks additional credit
amounts on an existing account, the
financial institution reports only the
additional credit amount sought, and
not any previous amounts sought or
extended. The Bureau believes that this
comment would facilitate compliance
by providing clear guidance on
reporting in this situation, and that
avoiding double reporting of previous
amounts would result in more
appropriate and useful data. The Bureau
notes that a request to withdraw
additional credit amounts at or below a
previously approved credit limit
amount on an existing open-end line of
credit would not be a covered
application, and so proposed comment
107(a)(7)–4 would not apply to such a
situation.
The Bureau believes that the proposed
regulatory text and commentary
described above would alleviate many
of the concerns of the SERs and other
stakeholders providing feedback on the
SBREFA Outline. The Bureau notes that
the proposal would accommodate
different business practices and the
often fluid nature of amounts applied
for in small business lending. In regard
to concerns about disparities between
the amount applied for and the amount
approved or originated, section 1071
requires the collection and reporting of
the amount applied for, which is
important for both of section 1071’s
statutory purposes.
The Bureau seeks comment on its
proposed approach to the amount
applied for data point. The Bureau also
requests comment on how best to
require reporting of amount applied for
in situations involving multiple
products or credit lines under a single
credit limit. The Bureau also requests
comment on potential methods for
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avoiding misinterpretations of
disparities between the amount applied
for and the amount approved or
originated. Finally, the Bureau requests
comment on its proposed approach to
reporting when a range of numbers is
requested.
107(a)(8) Amount Approved or
Originated
Background
Section 1071 requires financial
institutions to collect and report ‘‘the
amount of the credit or credit limit
applied for, and the amount of the credit
transaction or the credit limit
approved.’’ 572 (The amount applied for
data point is addressed in proposed
§ 1002.107(a)(7).) As explained in the
section-by-section analysis of proposed
§ 1002.107(a)(7) above, the Bureau reads
section 1071 to require collection and
reporting of the amount or limit applied
for as well as the amount of the credit
transaction or credit limit approved.
SBREFA Proposals Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
explained that it was considering
proposing that financial institutions
report (1) the amount of the originated
loan for a closed-end origination; (2) the
amount approved for a closed-end loan
application that is approved but not
accepted; and (3) the amount of the
credit limit approved for open-end
products (regardless of whether the
open-end product is originated or
approved but not accepted).573 In light
of the potential meaning of the statutory
language, the Bureau explained that it
was considering proposing different
standards for closed-end and open-end
products. In addition, the financial
institution would report ‘‘Not
Applicable’’ for this data point for
applications that are denied, closed for
incompleteness, or withdrawn by the
applicant before a credit decision is
made.
The relevant SBREFA Panel Report
section summarized feedback on both
the amount applied for and the amount
approved data points. For ease of
reading, the Bureau has included the
discussion of both above in the sectionby-section analysis of proposed
§ 1002.107(a)(7). The following
summary focuses more on the amount
approved or originated data point. One
SER articulated the importance of
capturing data on both the amount
applied for and the amount approved,
stating that both data points were
necessary to identify practices, such as
572 ECOA
section 704B(e)(2)(C).
Outline at 23.
573 SBREFA
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discouragement, in the lending process.
Other SERs asserted that differences
between the amounts requested and
approved were frequent, for a variety of
reasons. One SER stated that they notify
applicants of a preliminary offered
amount, which often changes after
documentation and underwriting. One
example offered was that disparities
between the amount applicants applied
for and the amount the lenders
approved may be attributable to
collateral being assessed at a different
value than the amount the applicants
initially requested.
One SER (who supported reporting
the amount initially applied for and the
amount approved) strongly opposed
reporting counteroffers, stating that
negotiation is quite prevalent in small
business lending.574 Another SER also
suggested there could be other potential
complexities in capturing data on credit
amount/limit the applicant applied for
and credit amount/limit the lender
approved, such as simultaneous or
grouped financings involving multiple
products, different sub-limits for each
product or loan, and a general credit
limit for an entire facility. SERs asked
that these data points be captured in a
manner that took these complexities
into account.
As noted in the feedback summary
above, the SBREFA Panel
recommendation addressed both the
amount applied for and the amount
approved data points. The Panel
recommended that the Bureau seek
comment on potential methods for
avoiding misinterpretations of
disparities between the credit amount/
limit applied for and the credit amount/
limit approved.575
Few of the stakeholders who provided
written feedback on the SBREFA
Outline objected to the reporting
method under consideration for amount
approved/originated. One commenter
asked that this data point be reported
using ranges of numbers rather than
specific amounts, in order for it to be
uniform with the method it suggested
for the amount applied for data point.
Other commenters pointed out possible
confusion as to the definitions of closedend and open-end credit. In addition,
commenters stated that sometimes
applicants are provided more than one
approval amount, and one commenter
suggested that in such cases the Bureau
should require reporting of the highest
approval amount when the credit is
approved but not accepted.
574 The SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 27–28.
575 Id. at 46.
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Proposed Rule
The Bureau is proposing in
§ 1002.107(a)(8) that the amount
approved or originated data point be
collected and reported as follows: (i) For
an application for a closed-end credit
transaction that is approved but not
accepted, the financial institution
collects and reports the amount
approved by the financial institution;
(ii) for a closed-end credit transaction
that is originated, the financial
institution collects and reports the
amount of credit originated; and (iii) for
an application for an open-end credit
transaction that is originated or
approved but not accepted, the financial
institution collects and reports the
amount of the credit limit approved.
The Bureau’s proposal follows the
SBREFA Outline approach for this data
point, with certain adjustments and
clarifications. First, for clarity the
proposed rule refers to this data point as
‘‘amount approved or originated.’’ In
addition, the Bureau is proposing
comment 107(a)(8)–2 to explain that
when a financial institution presents
multiple approval amounts from which
the applicant may choose, and the credit
is approved but not accepted, the
financial institution reports the highest
amount approved. The Bureau believes
that reporting the highest amount
approved when credit is approved but
not accepted, as addressed in this
proposed comment, would most
accurately reflect the amount of credit
that was made available to the applicant
in this situation.
Proposed comment 107(a)(8)–1 would
provide general instructions for the
amount approved or originated data
point, explaining that a financial
institution would comply with
proposed § 1002.107(a)(8) by reporting
the amount approved or originated for
credit that is originated or approved but
not accepted. For applications that the
financial institution, pursuant to
proposed § 1002.107(a)(9), reports as
denied, withdrawn by the applicant, or
incomplete, the financial institution
would report that the amount approved
or originated is ‘‘not applicable.’’ The
Bureau believes that these instructions
and providing for reporting of ‘‘not
applicable’’ in certain circumstances
will facilitate compliance for this data
point and elicit accurate and
appropriate data.
Proposed comments 107(a)(8)–3 and
–4 would provide specific instructions
for identifying and reporting the amount
approved or originated for closed-end
transactions, including refinancings.
The Bureau believes that the
instructions provided would facilitate
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compliance and elicit accurate and
useful data.
Proposed comment 107(a)(8)–5 would
provide instructions regarding
counteroffers and the amount approved
or originated data point, explaining that
if an applicant agrees to proceed with
consideration of a counteroffer for an
amount or limit different from the
amount for which the applicant applied,
and the covered credit transaction is
approved and originated, the financial
institution reports the amount granted.
Proposed comment 107(a)(8)–5 would
further explain that if an applicant does
not agree to proceed with consideration
of a counteroffer or fails to respond, the
institution reports the action taken on
the application as denied and reports
‘‘not applicable’’ for the amount
approved or originated. The proposed
comment would then provide a
reference to proposed comment
107(a)(9)–2, which discusses the action
taken data point in relation to
counteroffers. For a more complete
discussion of how the proposed rule
would treat reporting obligations for
applications involving counteroffers, see
the section-by-section analysis of
proposed § 1002.107(a)(9) below (action
taken).
Most of the SER feedback on the
amount approved or originated data
point focused on its relation to the
amount applied for data point. That
issue is discussed in the section-bysection analysis of proposed
§ 1002.107(a)(7) above (amount applied
for). One SER also expressed concern
about reporting counteroffers in relation
to the amount approved or originated
data point. The Bureau believes that, as
explained above, proposed comment
107(a)(8)–5 provides an appropriate and
manageable method for reporting
amount approved or originated in
counteroffer situations. Other
stakeholders asked that the Bureau take
into account the complexity of multiple
product or account situations. The
Bureau has done so in relation to its
treatment of covered applications,
discussed in the section-by-section
analysis of proposed § 1002.103(a)
above. In regard to the comment
concerning confusion between closedend and open-end credit, the Bureau is
proposing to define these terms clearly
in the regulatory text at proposed
§ 1002.102(e) and (n). As for the
suggestion that the amount approved or
originated data point be reported using
ranges of numbers (for consistency with
its request to report the amount applied
for data point using ranges), the Bureau
is not proposing to have financial
institutions report the amount applied
for using ranges of numbers, though it
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does seek comment on this possibility
in the section-by-section analysis of
proposed § 1002.107(a)(7) above.
The Bureau reads the statutory
language ‘‘the amount of the credit
transaction or the credit limit approved’’
to require the amount of the credit limit
approved to be reported for open-end
applications, and the amount of the
credit transaction to be reported for
closed-end applications. The Bureau
believes the phrase ‘‘the amount of the
credit transaction or the credit limit
approved’’ to be ambiguous in regard to
closed-end transactions because the
most common meaning of the word
‘‘transaction’’ in the context for closedend credit transactions would be an
originated loan. Thus, the Bureau
reasonably interprets the statute as
requiring reporting of the amount
originated for closed-end credit
transactions. In the alternative, section
1071 authorizes the Bureau to include
any ‘‘additional data that the Bureau
determines would aid in fulfilling the
purposes of [section 1071].’’ The Bureau
has determined that for closed-end
credit transactions that are originated,
reporting of the amount originated
would aid in fulfilling the enforcement
of fair lending laws, by indicating the
credit that had been provided to
different types of applicants in actual
transactions. The Bureau has also
determined that reporting of the amount
originated for closed-end credit
transactions would aid in fulfilling the
business and community development
purpose of section 1071 by providing a
more complete and accurate picture of
the credit actually being provided to
different businesses and communities.
In addition, in the alternative, the
Bureau believes that it is appropriate to
use its exception authority under ECOA
section 704B(g)(2) to require the amount
originated, rather than the amount
approved, for originated closed-end
credit transactions, because collecting
data on the amount approved instead of
the amount originated for a closed-end
transaction would compromise the
utility and quality of the data being
reported, thus inhibiting the fair lending
and business and community
development purposes of section 1071.
Similarly, the Bureau has determined
that for closed-end credit that is
approved but not accepted, the amount
approved would aid in fulfilling the
purposes of section 1071. Primarily,
reporting of the amount approved for
closed-end credit would aid in fulfilling
the enforcement of fair lending laws, by
indicating the credit that had been
offered to different types of applicants
when the transaction does not close and
there is no amount originated to report.
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Reporting of the amount approved for
closed-end credit would also aid in
fulfilling the business and community
development purpose of section 1071 by
providing a more complete picture of
the credit being offered to different
businesses and communities.
The Bureau seeks comment on its
proposed approach to the amount
approved or originated data point,
including on the specific requests for
input above. As recommended by the
SBREFA Panel and explained in the
section-by-section analysis of proposed
§ 1002.107(a)(7) above, the Bureau
requests comment on potential methods
for avoiding misinterpretations of
disparities between the credit amount or
limit applied for and the credit amount
or limit originated or approved and on
the possible use of ranges of numbers
for reporting the amount applied for and
amount approved or originated data
points. In addition, the Bureau requests
comment on whether it would be useful
and appropriate to require reporting of
the amount approved as well as the
amount originated for originated closedend credit transactions.
107(a)(9) Action Taken
Background
ECOA section 704B(e)(2)(D) requires
financial institutions to report the ‘‘type
of action taken’’ on an application.
SBREFA Proposal Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
stated it was considering proposing five
categories for reporting ‘‘action taken’’:
Loan originated, application approved
but not accepted, application denied,
incomplete application (closed or
denied), and application withdrawn by
the applicant.576
Action taken categories in general.
Most SERs were supportive of the action
taken categories under consideration.577
Several SERs stated that the categories
align with information they currently
collect. One SER explained that a single
application could pass through all of
these stages and expressed concern that
identifying the right category to report
may be subjective and questioned by
examiners or auditors after the fact.
Another SER asked for additional clarity
on the difference between denied
applications and incomplete
applications. This SER also suggested
adding a category for lenders to indicate
if an applicant is rate shopping. The
SBREFA Panel recommended that the
576 SBREFA
Outline at 29–30.
SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 28–29.
Bureau further clarify the circumstances
in which each of the action taken
categories should be used.578
Of the other stakeholders that
provided feedback on this issue, several
supported the action taken codes set
forth in the SBREFA Outline. One
industry commenter stated that the data
point would generally not be difficult or
expensive to report and two
commenters reported currently tracking
some similar (though not identical)
fields. One community group
commenter underscored the importance
of collecting action taken codes
(including approvals and denials) in
order to track demand for credit and
identify potential discrimination. The
commenter also noted current available
data (Community Reinvestment Act data
and surveys) on small business lending
provides limited information on supply
and demand. The commenter stated that
capturing incomplete and withdrawn
applications was important as it may
reflect discouragement or
discriminatory treatment, and that the
approved but not accepted category
could reflect less favorable pricing or
loan terms. Two industry commenters
suggested the Bureau further simplify
the action taken categories by
eliminating the approved but not
accepted and incomplete categories, and
including only originated, abandoned,
and denied categories. One stakeholder
suggested adding a field for other
circumstances, such as rate shopping.
Several community group commenters
suggested the action taken categories be
expanded to include all the HMDA
action taken categories.
Treatment of counteroffers. In
response to a question in the SBREFA
Outline about whether counteroffers
should be separately identified in the
1071 data set, several SERs discussed
the frequency of counteroffers in small
business lending and the potential
utility of capturing counteroffers in
1071 data. One SER expressed concern
with reporting each adjustment in the
application process because, they said,
not all counteroffers are memorialized
in writing. In the context of discussions
on the amount approved data point, a
SER strongly opposed reporting
counteroffers, stating that negotiation is
quite prevalent in small business
lending. The SBREFA Panel
recommended the Bureau seek comment
on whether to capture counteroffers in
1071 data, and if so, the best method for
doing so.579
Other stakeholders also commented
on counteroffers. Several industry
577 The
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commenters stated that counteroffers
should not be reported. The commenters
noted that there are often multiple
rounds of back-and-forth
communications in small business
lending, that capturing counteroffers is
unnecessary as the information is
practically captured in the loan decision
and other 1071 data (such as loan
amount approved), and that
counteroffers are not necessary to show
the availability of credit. If reported,
several industry commenters suggested
use of a data flag to simplify reporting,
avoid reporting of potentially numerous
counteroffers in a single application,
and avoid the additional costs for
financial institutions to conduct edits
and validity checks on each separate
counteroffer. Another industry
representative also urged that if
counteroffers are reported, they should
be considered a single application. No
community groups commented on this
topic.
Proposed Rule
The Bureau is proposing in
§ 1002.107(a)(9) to require reporting of
the action taken by the financial
institution on the covered application,
reported as originated, approved but not
accepted, denied, withdrawn by the
applicant, or incomplete. As discussed
above, most SERs and other
stakeholders were generally supportive
of these categories. In addition, the
Bureau is proposing to categorize all
incomplete applications as a single
category of ‘‘incomplete’’; while this
proposed approach is not consistent
with Regulation C comments 4(a)(8)(i)–
4 and –6, the Bureau is concerned about
potential errors in the data if financial
institutions report incomplete denials
separate from notices of incompleteness.
There may also be some benefit for fair
lending analysis to reserve the denied
category solely for credit-related
denials, rather than denials that are
based on incompleteness. As noted
below, the Bureau seeks comment on
reporting the ‘‘incomplete’’ action taken
category.
In response to commenter
suggestions, the Bureau considered
removing or combining several action
taken categories. For example, the
Bureau considered eliminating the
approved but not accepted category;
however, because the Bureau believes
data collected under this category
would reflect demand for credit, the
Bureau is retaining this category in its
proposal. The Bureau also considered
removing the category of incomplete
applications. However, because the
Bureau believes capturing data on
incomplete applications is essential to
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identifying potential discrimination and
discouragement during the application
process, the Bureau is retaining this
action taken category as well. Finally,
the Bureau considered combining the
incomplete and withdrawn categories,
since both actions reflect an applicant’s
inability or affirmative decision not to
proceed with the request for credit.
However, the Bureau is retaining
incomplete and withdrawn as separate
categories, as a high incidence of
incomplete applications could signal an
issue with the level of assistance
provided by the financial institution (for
example, not providing reasonable
support or assistance to ensure an
applicant satisfies all credit conditions;
or providing more support to some
applicants than others). As noted below,
the Bureau seeks comment on this issue.
The Bureau is not proposing
additional action taken categories
beyond what was considered in the
SBREFA Outline. Although some
commenters suggested the Bureau
expand the action taken codes to those
currently used in Regulation C
(including preapprovals or purchased
loans), the Bureau does not believe
those additional fields would be
appropriate or necessary in the context
of section 1071 given the diversity of
processes and other complexities in the
small business lending space and
because section 1071, unlike HMDA,
does not expressly reference loan
purchases.
The Bureau also considered, but is not
proposing, adding an action taken
category or flag for counteroffers. As
noted by certain SERs and other
commenters, it would be potentially
infeasible to capture all of the proposed
1071 data fields for every back-and-forth
counteroffer with an applicant, and
attempting to do so would likely lead to
confusion and data errors. The Bureau
also agrees with commenter feedback
that, even without a counteroffer flag or
field, the proposed section 1071 data
fields would capture many of the terms
of accepted counteroffers (such as
pricing, guarantee, etc.), as well as the
amount initially requested by the
applicant. Thus, the Bureau believes the
addition of a counteroffer flag or field
would provide limited useful
information beyond what would be
captured under the current proposal.
Moreover, while a counteroffer flag or
field might be useful as a screening tool
for potential discrimination (for
example, if women-owned businesses or
minority-owned businesses are
provided counteroffers or denied at a
higher rate than male- or non-Hispanic
white-owned businesses), a flag alone
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56451
would lack any specificity to provide
further fair lending analysis.
Following the SBREFA Panel’s
recommendation and feedback from
other stakeholders, proposed comment
107(a)(9)–1 would provide additional
clarity on when a financial institution
should select each of the proposed
action taken codes. The financial
institution identifies the applicable
action taken code based on final action
taken on the covered application.
Proposed comment 107(a)(9)–2 would
provide instructions for reporting action
taken on covered applications that
involve a counteroffer, along with
examples. The Bureau’s proposed
treatment of counteroffers aligns with
how counteroffers are treated under
existing § 1002.9 notification
procedures. Specifically, proposed
comment 107(a)(9)–2 would state that if
a financial institution makes a
counteroffer to grant credit on terms
other than those originally requested by
the applicant and the applicant declines
to proceed with the counteroffer or fails
to respond, the institution reports the
action taken as a denial on the original
terms requested by the applicant. If the
applicant agrees to proceed with
consideration of the financial
institution’s counteroffer, the financial
institution reports the action taken as
the disposition of the application based
on the terms of the counteroffer. This
proposed approach to reporting
counteroffers also aligns with how they
are reported under Regulation C.580
Proposed comment 107(a)(9)–3 would
discuss reporting action taken for
rescinded transactions. Proposed
comment 107(a)(9)–4 would clarify that
a financial institution reports covered
applications on its small business
lending application register for the year
in which final action is taken. Finally,
proposed comment 107(a)(9)–5 would
provide guidance for reporting action
taken if a financial institution issues an
approval that is subject to the applicant
meeting certain conditions.
The Bureau seeks comment on
proposed § 1002.107(a)(9) that would
require reporting of action taken and the
associated commentary. The Bureau
also specifically seeks comment on
whether the ‘‘withdrawn by applicant’’
category should be merged with the
‘‘incomplete’’ category for purposes of
reporting action taken. The Bureau
seeks comment as well on whether the
Bureau’s proposal to categorize all
incomplete applications as a single
category of ‘‘incomplete’’ (closed or
denied) should instead be reported
consistent with the approach in
580 Regulation
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Regulation C, which provides separate
categories for denials (including on the
basis of incompleteness) and files closed
for incompleteness (if the financial
institution sent a written notice of
incompleteness). In addition, the
Bureau seeks comment on whether
counteroffers that are not accepted, such
as a credit offer for a lower credit
amount than requested, should be
reported as ‘‘approved but not
accepted’’ rather than ‘‘denied,’’ in
order to reflect the availability of credit.
As recommended by the SBREFA Panel,
the Bureau also seeks comment on
whether to specifically capture
counteroffers in section 1071 data, and
if so, whether to use a counteroffer flag
in the data or some other method.
107(a)(10) Action Taken Date
In addition to requiring financial
institutions to collect and report the
type of action they take on an
application, as discussed in the sectionby-section analysis of proposed
§ 1002.107(a)(9) above, ECOA section
704B(e)(2)(D) requires financial
institutions to collect and report the
‘‘date of such action.’’
In the SBREFA Outline, the Bureau
indicated that it was considering
proposing that the action taken date be
reported with a day, month, and year,
and requested feedback on potential
challenges financial institutions may
have in identifying such date for each of
the action taken categories.581 The
Bureau received limited comments on
this data point during the SBREFA
process.582 One SER suggested that the
Bureau provide a grace period of several
days before and after the action taken
date. Another SER recommended that
the date assigned as the action taken
date be to the best of the financial
institution’s knowledge or belief given
the uncertainty in assigning a particular
date. The Bureau received similar
feedback from other stakeholders. Two
industry stakeholders suggested that a
grace period or tolerance be provided to
ease compliance burden, similar to the
tolerance under consideration for the
‘‘application date’’ data point. One
stakeholder recommended that the
action taken date for approved and
denied loans be the exact date such
actions occurred.
Proposed § 1002.107(a)(10) would
require action taken date to be reported
as the date of the action taken by the
financial institution. Proposed
comments 107(a)(10)–1 through –5
would provide additional details on
how to report the action taken date for
581 SBREFA
582 SBEFA
Outline at 30.
Panel Report at 28–29.
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each of the action taken categories in
proposed § 1002.107(a)(9). For example,
proposed comment 107(a)(10)–1 would
explain that for denied applications, the
financial institution reports either the
date the application was denied or the
date the denial notice was sent to the
applicant.
The Bureau notes that its proposed
approach for this data point largely
mirrors the Regulation C approach for
action taken date in § 1003.4(a)(8)(ii)
and related commentary, with
modifications to align with the action
taken categories in proposed
§ 1002.107(a)(9). Regarding the request
from a SER and other stakeholders to
adopt a grace period for the action taken
date data point, the Bureau believes that
a grace period or tolerance to report the
action taken date would not be
necessary, in light of the flexibility
already provided in proposed comments
107(a)(10)–1 through –5. Further, the
Bureau believes that financial
institutions generally already have
policies and procedures in place to
capture the date an action is taken in the
normal course of their business
operations.
Proposed comment 107(a)(10)–4
would explain that for covered credit
transactions that are originated, a
financial institution generally reports
the closing or account opening date.
That proposed comment also states that
if the disbursement of funds takes place
on a date later than the closing or
account opening date, the institution
may, alternatively, use the date of initial
disbursement.
The Bureau seeks comment on its
proposed approach to the action taken
date data point.
In addition, for originated
transactions, the Bureau is considering
whether the date the application was
approved should be captured in
addition to, or instead of, the date of
closing or account opening. The Bureau
is also considering whether the date of
closing or account opening should be
reported separately from the date of
disbursement of funds (for term loans)
or funds availability (for lines of credit).
Having these dates reported separately
would permit the Bureau and other data
users to determine the length of time
elapsed between when an application is
approved, when the closing occurred or
the account was opened, and when the
applicant actually received the loan
funds or access to funds. Specifically,
the Bureau is concerned that a lengthy
gap between the loan approval date and
the date the funds are made available to
applicants could have adverse effects
particularly on certain types of small
businesses. For example, in agricultural
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lending where planting and harvesting
seasons fall within certain time frames,
if loan proceeds are not provided within
a certain period of time after the
financial institution receives and
approves an application, the loan
proceeds may no longer be of maximum
value to the applicant. The Bureau seeks
comment on whether it should adopt
data points to capture application
approval date and/or the date funds are
disbursed or made available.
107(a)(11) Denial Reasons
Background
ECOA section 704B(e)(2)(H)
authorizes the Bureau to require
financial institutions to compile and
maintain ‘‘any additional data that the
Bureau determines would aid in
fulfilling the purposes of [section
1071].’’ In addition to requiring
financial institutions to collect and
report the action taken date for denied
applications, as discussed in the
section-by-section analysis of proposed
§ 1002.107(a)(10) above, the Bureau is
proposing to require financial
institutions to collect and report the
principal reason or reasons an
application was denied. The Bureau
believes that collection of denial reason
information would aid in fulfilling the
purposes of section 1071, as explained
below.
SBREFA Proposal Under Consideration
and Feedback Received
In the SBREFA Outline, as part of its
discussion regarding the action taken
data point, the Bureau requested
feedback on whether financial
institutions would prefer to report
denial reasons to help explain the
decision on an application, and if so,
whether reporting denial reasons should
be mandatory or optional.583
When asked whether they would
prefer reporting denial reasons to help
explain the decision on an application,
some SERs expressed concern about
reporting denial reasons.584 These SERs
asserted that requiring lenders to report
reasons for denial could add more
burden than benefit, may not be useful
given the number of possible reasons for
a denial, might not shed light on the
actual reasons for a denial, may be
difficult to standardize for uniform
reporting, would require additional
processes to ensure accurate reporting,
and may present heightened privacy
concerns. One SER expressed a
preference to report denial reasons.
Feedback received from other
stakeholders was mixed. Stakeholders
583 SBREFA
584 SBREFA
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opposing reporting denial reasons
expressed concerns about the privacy of
applicants’ information if such data
were released to the public. For
example, they asserted that if denial
reasons were released to the public,
such information would make it easy to
identify applicants from small
communities and expose an applicant’s
sensitive business information like
insufficient cashflow. One stakeholder
mentioned that denial reasons may
encompass multiple reasons and would
therefore be burdensome to collect and
store.
Stakeholders in favor of optional
(rather than mandatory) reporting of
denial reasons asserted that reporting
this information would be unnecessary
and burdensome and may further push
small and mid-size financial institutions
out of small business lending, and
suggested that, if included in the rule,
reporting not be made mandatory (that
is, financial institutions would be
permitted but not required to report
such information, at the financial
institution’s discretion). One
stakeholder suggested that rural
community banks under $1 billion be
exempted from reporting denial reasons
due to data privacy concerns.
Finally, stakeholders in favor of
mandatory reporting of denial reasons
asserted that such data provide
regulators and the public with
important—and currently unavailable—
data necessary to uncover fair lending
issues and identify underwriting factors
that need to be addressed. They stressed
that the collection of denial data (via the
action taken data point) accompanied by
robust denial reasons will provide small
business applicants with useful and
actionable information. In addition,
commenters noted that these data will
help identify barriers to credit for small
businesses and provide deeper insight
into the reasons why credit is denied.
The SBREFA Panel did not make any
recommendations related to denial
reasons.
Proposed Rule
Proposed § 1002.107(a)(11) would
require reporting of the principal reason
or reasons the financial institution
denied the covered application.
Proposed comment 107(a)(11)–1 would
explain that a financial institution
complies with proposed
§ 1002.107(a)(11) by reporting the
principal reason or reasons it denied the
application, indicating up to four
reasons. The financial institution
reports only the principal reason or
reasons it denied the application, even
if there are fewer than four reasons. The
proposed comment provides an example
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to illustrate. The proposed comment
would also state that reasons reported
must accurately describe the principal
reason or reasons the financial
institution denied the application.
Finally, the proposed comment provides
a list of denial reasons from which
financial institutions would select the
principal reason or reasons for denying
a covered application.
Proposed comment 107(a)(11)–1 also
explains that a financial institution
reports the denial reason as ‘‘other’’
where none of the enumerated denial
reasons adequately describe the
principal reason or reasons it denied the
application, and the institution reports
the denial reason or reasons as free-form
text. The Bureau believes that allowing
financial institutions to choose ‘‘other’’
in this situation would facilitate
compliance. In addition, collecting
information on ‘‘other’’ denials would
assist the Bureau in monitoring trends
in this area and key developments in the
small business lending market, which
the Bureau could use to inform any
future iterations of the list.
Proposed comment 107(a)(11)–2
would clarify that a financial institution
complies with proposed
§ 1002.107(a)(11) by reporting that the
requirement is not applicable if the
action taken on the application,
pursuant to proposed § 1002.107(a)(9),
is not a denial, and provides an
example.
The Bureau notes that its proposed
approach for this data point largely
mirrors the Regulation C approach for
denial reasons in § 1003.4(a)(16) and
related commentary, with modifications
to align with the reasons applications
are denied in the small business lending
(rather than residential mortgage
lending) context.
Pursuant to its authority under ECOA
section 704B(e)(2)(H), the Bureau
believes that data regarding denial
reasons would further the purposes of
section 1071 by allowing data users to
better understand the rationale behind
denial decisions, help identify potential
fair lending concerns, and provide
financial institutions with data to
evaluate their business underwriting
criteria and address potential gaps as
needed. In addition, robust data on
application denial reasons across
applicants, financial institutions,
products, and communities could help
target limited resources and assistance
to applicants and communities, thus
furthering section 1071’s community
development purpose. With respect to
fair lending compliance, denial reasons
data would help data users analyze
potential denial disparities.
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With regard to the potential
additional compliance burdens SERs
and other commenters referenced, the
Bureau believes that, as a practical
matter, most financial institutions are
already documenting the principal
reason or reasons for the denial in an
adverse action notice, or should be
prepared to do so if requested.585
However, the Bureau recognizes that if
a financial institution is not currently
covered by existing adverse action
notice requirements under Regulation B,
it may face greater challenges in
reporting this information than financial
institutions that currently provide
adverse action notifications. The
concerns raised by SERs and other
stakeholders regarding the privacy
implications of denial reasons are
addressed in part VI.C.viii below.
The Bureau also believes that
exempting certain financial institutions
from the requirement to report denial
reasons, or permitting financial
institutions to report denial reasons
voluntarily, would not be appropriate
given the need for consistent and
meaningful data to further the purposes
of section 1071. In addition, the Bureau
considered gaps in the existing small
business lending data and notes that
available survey data are often not
representative across the industry, does
not provide timely information, and
does not cover all entities involved in
small business lending.586 The Bureau
notes that the 2015 HMDA Final Rule
added mandatory reporting of denial
reasons to Regulation C because the
Bureau recognized that the collection of
denial reason data could facilitate more
efficient and less burdensome fair
lending examinations.587
Finally, the Bureau is aware that
certain stakeholders are concerned that
reporting denial reason data may result
in fair lending actions against financial
institutions for potential discriminatory
585 Existing § 1002.9(a)(3) requires creditors to
provide the specific reasons for action taken or to
notify business credit applicants of their right to
request the reasons for denying an application or
taking other adverse action.
586 See 2020 Small Business Credit Survey. The
survey provides baseline data on the financing and
credit positions of small firms in 2020. It delivers
information on small business financing needs,
decisions, and outcomes to policymakers, lenders,
and service providers. However, the survey is not
representative because it surveys only employer
firms (with less than 500 employees) and is subject
to the firms’ self-reporting. Also, only aggregate
denial reasons are provided, and further
breakdowns are unavailable. In addition, the survey
provides a very limited list of denial reasons to
survey respondents that may not correspond to
denial reasons from financial institutions. See also
Fed. Deposit Ins. Corp., Small Business Lending
Survey (2018), https://www.fdic.gov/bank/
historical/sbls/section5.pdf.
587 See 80 FR 66127, 66204–05 (Oct. 28, 2015).
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disparities. The Bureau, however,
believes that including denial reasons in
1071 data might actually reduce this
risk, as it would allow financial
institutions to point to potentially
legitimate reasons for disparities.
The Bureau seeks comment on its
proposed approach to this data point,
including regarding whether the denial
reason categories listed and explained
in proposed comment 107(a)(11)–1
sufficiently cover the common credit
denial reasons in the small business
lending industry. If not, the Bureau
seeks input on other denial reason
categories to consider including in the
proposed list of denial reasons. The
Bureau also requests further comment
on the potential utility of denial reason
data as well as on the potential burdens
to industry in reporting denial reasons,
in light of the denial reason categories
it is proposing and the data’s ability to
aid in fulfilling the purposes of section
1071.
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Background
ECOA section 704B(e)(2)(H)
authorizes the Bureau to require
financial institutions to compile and
maintain ‘‘any additional data that the
Bureau determines would aid in
fulfilling the purposes of [section
1071].’’ The Bureau believes that pricing
data would serve to further both the fair
lending purpose and the business and
community development purpose of
1071. The majority of small businesses
are run by a single owner without
extensive financial experience or expert
staff to navigate the commercial credit
marketplace, which lacks many of the
Federal protections found in consumer
lending.588 Heightened risks to fair
lending and small business
development may arise from different
pricing for the same products and the
selective marketing of higher-priced or
even predatory and unsustainable
products. Because price-setting is
integral to the functioning of any
market, any analysis of the small
business lending market—including to
enforce fair lending laws or identify
community and business development
opportunities—would be less
meaningful without this information.
Research conducted for the
Department of Commerce has found that
minority-owned businesses tend to pay
higher interest rates on business loans
588 For example, TILA’s standardized disclosure
requirements and limits on linking compensation to
loan terms, including pricing, do not apply to
business loans. See, e.g., 15 U.S.C. 1639b,
Regulation Z § 1026.36 (TILA’s prohibition on
basing loan originator compensation on loan terms).
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than those that are not minorityowned,589 and a recent report by the
Federal Reserve Bank of Atlanta found
that minority-owned firms more
frequently applied for potentially
higher-cost credit products, and were
also more likely to report challenges in
applying for credit such as being offered
high interest rates.590 In addition,
research conducted for the SBA has
found that Black- and Hispanic-owned
businesses were less likely to have
business bank loans and more likely to
use more expensive credit card
financing.591 The 2020 Small Business
Credit Survey by a collaboration of
Federal Reserve Banks found that small
business applicants to nonbank lenders,
such as online lenders and finance
companies, were more likely to report
high interest rates or unfavorable terms
than applicants to depository
institutions.592 To the extent that the
recovery from the COVID–19 pandemic
and resulting economic crisis is still
ongoing when the Bureau’s final 1071
rule becomes effective, and in regard to
economic emergencies affecting small
business access to credit that may occur
in the future, tracking pricing in this
segment of the market is particularly
important.
The Bureau believes pricing data are
important because the statutory data
points alone offer (1) limited insight
into underwriting disparities and (2) no
insight into predatory prices or pricing
disparities. For example, they might
show that a particular market segment is
expanding and apparently filling an
important need, but this could actually
be an area with predatory conduct.
Pricing information would allow the
Bureau and others to understand the
situation more accurately. Data
collection without pricing information
589 U.S. Dep’t of Com., Minority Business
Development Agency, Disparities in Capital Access
between Minority and Non-Minority-Owned
Businesses: The Troubling Reality of Capital
Limitations Faced by MBEs, at 3, 5, 21, 36–37
(2010), https://archive.mbda.gov/page/executivesummary-disparities-capital-access-betweenminority-and-non-minority-businesses.html.
590 Fed. Reserve Bank of Atlanta, Report on
Minority Owned Firms: Small Business Credit
Survey (Dec. 2019), https://www.fedsmall
business.org/medialibrary/fedsmallbusiness/files/
2019/20191211-ced-minority-owned-firmsreport.pdf.
591 Alicia Robb, Financing Patterns and Credit
Market Experiences: A Comparison by Race and
Ethnicity for U.S. Employer Firms, at 47 (2018)
(prepared for Off. of Advocacy, Small Bus. Admin.),
https://www.sba.gov/sites/default/files/Financing_
Patterns_and_Credit_Market_Experiences_
report.pdf.
592 However, the survey noted that online lenders
tended to receive applications with lower credit
scores so applicant risk could play a role in higher
interest rates for nonbank lenders. See 2020 Small
Business Credit Survey at 15.
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could have the unintended consequence
of incentivizing irresponsible lending,
as providers seeking to increase
representation of underserved groups
could be encouraged to adopt high-cost
models of lending.
Without information on pricing, data
users would be unable to screen for fair
lending pricing risks, and regulators
would be less able to focus their
enforcement and supervision resources
appropriately on situations of greater
possibility for questionable activities. In
addition, if potential discriminatory
conduct is monitored effectively in
regard to loan approvals, but not in
regard to pricing, industry compliance
systems may focus solely on approvals
and denials and ignore potential pricing
disparities. Having pricing data
available under 1071 would also
increase transparency and help
demonstrate to lenders where business
opportunities exist to offer credit to
underserved markets. In addition, it
could demonstrate to small businesses
the availability of more affordable
credit.
SBREFA Proposal Under Consideration
and Feedback Received
At SBREFA, the Bureau stated that it
was considering proposing to include
pricing of originated credit and credit
that is approved but not accepted as a
discretionary data point because it
could further the fair lending purpose of
section 1071 by enhancing the ability to
effectively and efficiently enforce fair
lending laws. In addition, the Bureau
stated that pricing data could add value
in promoting market transparency and
new product development
opportunities, thus furthering the
business and community development
purpose of section 1071. The Bureau
also stated that a pricing data point
could be reported on the basis of annual
percentage rate (APR), total cost of
credit (TCC), interest rate and total fees,
or some other pricing metric. The
SBREFA Panel recommended that, if
pricing were to be part of this proposal,
the Bureau seek comment on potential
methods for avoiding misinterpretations
of disparities in pricing data.593
During the SBREFA process, SERs
provided various comments on the
inclusion of pricing data in the rule.594
Feedback relevant to a specific pricing
data point is discussed in the sectionby-section analysis of proposed
§ 1002.107(a)(12)(i) through (vi) below.
Immediately below, the Bureau
593 SBREFA
594 Id.
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addresses feedback relevant to reporting
pricing information in general.
Some SERs urged the Bureau to
require submission of a pricing metric,
stating, for example, that pricing data
are essential to understanding the
operation of the market and the nature
of credit extended. Some SERs
supported use of APR as a pricing
metric, including several who stated
that they currently calculate APR. One
SER (a CDFI) stated that they disclose
APR to applicants now, and that if they
are able to easily collect and report this
data point without additional cost and
burden, other FIs should be able to do
the same. Several SERs supported the
use of APR to enable comparisons of
pricing across various small business
lending products, and suggested the
Bureau look to State-mandated and
Truth in Lending Act APR disclosures
for guidance on methodologies. One
SER supported the use of APR as the
metric if lenders and not the Bureau did
the calculation. Another SER suggested
the Bureau collect detailed pricing
information, including APR, but ‘‘hold
harmless’’ the reporting financial
institutions to ensure the accuracy of
the data. Conversely, at least two SERs
opposed using APR as a pricing metric;
one cited the burden associated with
making that calculation and the other
said pricing information based on APR
would be confusing to small business
owners. Several SERs supported
reporting pricing information as interest
rate and fees. Two SERs preferred using
TCC. One SER suggested that the Bureau
consider allowing financial institutions
to choose which pricing metric they
prefer to report.
A large majority of industry
stakeholders opposed inclusion of any
discretionary data points, and they were
particularly concerned about a pricing
data point. Several stakeholders stated
that a pricing data point would be
complex and costly to implement across
various product types. One stakeholder
was concerned about contracts that
bundle services with credit, stating that
pricing data would not capture the true
economics of the transaction. Several
stakeholders were worried about
reputational risk because pricing could
be publicly reported without contextual
information such as the nature of the
collateral, credit scores, size of down
payment, compensating deposit
balances, bundled services, etc., that
would explain the pricing variations.
One commenter opposed including
pricing data, but said that if the Bureau
chose to do so it should also allow
voluntary submission of some of this
contextual information. One stakeholder
stated that pricing of commercial loans
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is often complex and cannot be
adequately analyzed with the limited
factors proposed, which may lead to
erroneous conclusions and have severe
negative impacts on the financial
industry from regulatory and
reputational risk standpoints. A
community bank stakeholder
commented that community banks price
risk on a case-by-case basis and asserted
that if this ability to price risk
appropriately is restricted by
uninformed fair lending guidelines, the
Bureau risks removing a large number of
community banks from existence. The
bank went on to opine that this could
further reduce the ability of thousands
of small businesses to access credit.
Another bank stated that pricing data
alone would provide an incomplete
picture that could be easily distorted to
suit the political agenda of the user.
That bank was also concerned about
disparate impact analysis or similar
tools being used because this could be
unfair to the bank or its borrowers
considering the small data set that the
reported data of this small bank
represents. Another stakeholder
summed up these industry concerns,
stating that pricing is simply too varied
across the spectrum of the industry to
include in the 1071 process without
sowing confusion among lenders,
borrowers, and the general public,
stifling lending activity, and introducing
numerous unintended consequences.
Several SERs, along with industry
stakeholders, were concerned about the
Bureau potentially making public
pricing data and felt that this choice
could be costly and challenging to carry
out. They further asserted that bad
outcomes could result from unjustified
fair lending concerns, such as
distortions to the market through
interference with risk-based pricing.
Many SERs, along with other industry
stakeholders, noted that pricing is
complex, often unique to the applicant’s
situation, and may involve extra
services bundled with the loan. Without
adequate context, therefore, pricing data
could lead to inaccurate interpretations
of the collected data and unfair
reputational damage. One SER stated
that the market for small business credit
is price competitive and accordingly
pricing information is unnecessary for
section 1071. Another SER said that
pricing for some products may reflect
more than just the cost of the loan and
may be high relative to other credit
products if the covered financial
institution is a supportive lender
working with less established or higher
credit risk applicants over a period of
time. Similarly, the SBREFA Panel
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Report recommended that the Bureau
seek comment in the proposed rule on
potential methods for avoiding
misinterpretations of disparities in
pricing.595
Community groups, as well as some
community development lenders,
strongly favored inclusion of
discretionary data points in general, and
were particularly interested in having
pricing data reported to help achieve
1071’s purposes. One stakeholder stated
that pricing information is a critical fair
lending tool and would allow
regulators, advocates, and industry to
conduct fair lending reviews and
monitor the market for emerging highcost products. That commenter also
stated that the eventual inclusion of
pricing data in HMDA has been critical
in identifying disparate pricing among
protected classes. Another stakeholder
suggested that a data collection regime
designed to further fair lending
enforcement cannot ignore information
about whether high-cost lenders are
targeting business owners of color or
women-owned businesses, or if lenders
are charging more to their female
borrowers or customers of color. One
community group stated that without
pricing data lenders flooding
neighborhoods of color with high-cost
loans would be seen as adequately
serving otherwise underserved markets.
Another commenter stated that MCAs
have extremely high effective APRs, and
added that if section 1071 data
collection indicates that access to
capital is improving but is blind to
whether that capital is provided at 30
percent APR or 300 percent APR,
Congress’s intent will not be
accomplished.
Regarding 1071’s business and
community development purpose
specifically, one stakeholder stated that
merely by providing price transparency
the Bureau could encourage the
development of successful lending
models because policymakers,
community organizations, investors,
banks seeking partnerships, and others
would be able to see, for the first time,
which business models are successful at
reaching minority-owned, womenowned, and other underserved small
businesses. That commenter went on to
state that transparency would also
attract investment capital and
partnerships into models that work, and
could lead to a market-based model and
a pro-innovation approach to regulation.
One community development lender
that supported inclusion of a pricing
data point encouraged the Bureau to
identify one consistent pricing metric
595 Id.
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that financial institutions must report
on and added that because this could
create reporting challenges, especially
for smaller institutions, the Bureau
should ensure there is clear guidance
and consistency on the pricing data
point. Of the pricing metrics asked
about in the SBREFA Outline, a majority
of the community groups and
community development lenders who
supported inclusion of a pricing data
point preferred use of APR, though
some suggested the Bureau also require
reporting of rate and fees with the APR,
as well as rate spread as reported under
HMDA. One community development
lender stated that APR is the only
established metric that enables informed
comparisons of the cost of capital over
time and between products of different
dollar amounts and term lengths. That
lender went on to state that APR is the
metric that people know and expect,
because it is the legally required
standard for mortgages, auto loans,
credit cards, student loans and personal
loans, including short-term loans. The
lender further explained that small
businesses seeking financing from
CDFIs or mission-based lenders are
informed about their true cost of capital
through an APR disclosure, and if it can
easily collect and report this data point
without additional burdens and costs,
other small business lenders should be
able to. Some commenters who favored
APR suggested that the Bureau start
with the recent disclosure methods
adopted in California and New York,
and that the Bureau use those methods
for pricing of MCAs and factoring
specifically.
Industry stakeholders stated that APR
would be complicated and costly to
implement, and that if it is used the
Bureau should provide clear guidance,
with one stakeholder suggesting the
Bureau follow the Regulation Z method,
which sets out instructions for
calculating APR. Another stakeholder
stated that for some products, such as
inventory financing, APR would be
meaningless. Some industry
stakeholders suggested the Bureau use
other metrics—one requested TCC,
another requested rate and fees, and a
third asked that the Bureau allow
reporting of a single fixed fee as an
option.
Finally, some SERs and industry
stakeholders also expressed privacyrelated concerns regarding public
disclosure of pricing information. The
Bureau addresses these comments in
part VI below regarding privacy
considerations involving publication of
the 1071 data.
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The Bureau is proposing, in
§ 1002.107(a)(12), to require financial
institutions to report certain pricing
information for covered credit
transactions. Specifically, proposed
§ 1002.107(a)(12)(i)(A) would require
financial institutions to report the
interest rate that is or would be
applicable to the covered credit
transaction; proposed
§ 1002.107(a)(12)(ii) would require
financial institutions to report the total
origination charges for a covered credit
transaction; proposed
§ 1002.107(a)(12)(iii) would require
financial institutions to report the
broker fees for a covered credit
transaction; proposed
§ 1002.107(a)(12)(iv) would require
financial institutions to report the total
amount of all non-interest charges that
are scheduled to be imposed over the
first annual period of the covered credit
transaction; proposed
§ 1002.107(a)(12)(v) would require
financial institutions to report, for an
MCA or other sales-based financing
transactions, the difference between the
amount advanced and the amount to be
repaid; and proposed
§ 1002.107(a)(12)(vi) would require
financial institutions to report
information about any prepayment
penalties applicable to the covered
credit transaction.
Proposed comment 107(a)(12)–1
would clarify that, for applications that
the financial institution reports as
denied, withdrawn by the applicant, or
incomplete, the financial institution
reports pricing information as ‘‘not
applicable.’’ Proposed § 1002.107(a)(12)
would apply only to credit transactions
that either have been originated or have
been approved by the financial
institution but not accepted by the
applicant. The Bureau believes that
pricing information is generally
available for these transactions because
the financial institution would generally
have to determine the price to approve
(or originate) the transaction. But other
applications—like those that are denied,
withdrawn by the applicant, or
incomplete—would likely have
terminated too early in the application
process for pricing information to be
generally available.
The Bureau is proposing to require
financial institutions to report pricing
data generally as interest rate and fees
rather than APR, TCC, or another single
pricing metric that attempts to combine
multiple aspects of the cost of credit.
The Bureau believes that interest rate
and fees provide greater utility to data
users than the formula-based pricing
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metrics described above, which will aid
in fulfilling the purposes of section
1071. Separately enumerating the
interest rate and certain general
categories of fees will allow 1071 data
users to more precisely analyze the
components of a credit transaction’s
price. For example, 1071 data users
could identify potentially
discriminatory price disparities within
upfront fees charged to borrowers at
origination that may not be visible in a
single pricing metric. Similarly,
information about which components of
a transaction’s price may be relatively
more expensive would allow users to
better identify business and community
development initiatives because they
would be able to target their initiative at
the particular component, such as the
interest rate, that appears to be most
responsible for the relatively high price
of the transaction.
The diversity of products in the
commercial lending space may also
undermine the utility of APR or other
single pricing metrics. Many MCAs, for
example, lack either a defined term or
a periodic payment amount. Thus,
financial institutions would have to
estimate these terms to calculate an
APR.
The Bureau also believes that the
interest rate and fees may be less
burdensome for financial institutions to
report than other single pricing metrics.
These alternative pricing metrics
involve complex calculations that may
be difficult for financial institutions to
perform accurately. And, as noted
above, certain types of commercial
financing would require financial
institutions to assume or estimate parts
of the pricing formula, further
increasing complexity. The interest rate
and fees, in contrast, are typically listed
in the credit contract for a particular
transaction.
The Bureau acknowledges that some
financial institutions currently calculate
APR for commercial financing
transactions, or will do so in the future,
either as a best practice or to comply
with State disclosure laws. In
developing the pricing data points in
proposed § 1002.107(a)(12), the Bureau
has reviewed definitions and concepts
found in Regulation Z, such as the
definition of ‘‘finance charge’’ in
§ 1026.4. Regulation Z also forms the
basis for many parts of State commercial
financing disclosure laws. The Bureau
does not intend to achieve a wholesale
incorporation of § 1026.4 into proposed
§ 1002.107(a)(12), with interpretations
of one regulation necessarily controlling
the meaning of the other regulation. In
fact, as discussed below, in many places
perfect alignment between proposed
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§ 1002.107(a)(12) and Regulation Z
would not be feasible or desirable. But
proposed § 1002.107(a)(12) adopts many
concepts from Regulation Z. The Bureau
believes that this similarity may limit
burden for financial institutions that are
calculating APR for other purposes.
Regarding State commercial financing
disclosures, the Bureau understands
that the disclosures under development
in New York and California 596 rely
upon Regulation Z definitions, such as
the finance charge. These States have
not fully implemented their disclosures
at the time of this notice and may
change their standards in the future. In
addition, other States might adopt new
commercial financing disclosures with
different definitions and methodologies.
The Bureau will continue to monitor
regulatory developments in the small
business lending market, and seeks
comment on ways to reduce burden on
financial institutions with respect to
overlaps or conflicts between State law
disclosure requirements and the
Bureau’s proposal.
As a general matter, the Bureau
believes that 1071 data can provide
value to users without reflecting every
factor that influences pricing. For
comparison, HMDA data have a long
history of utility for fair lending
purposes even though they alone
generally do not offer proof of
compliance with fair lending laws.597
This proposed rule includes several
important factors that influence pricing,
such as the credit product, the type of
guarantee, and the credit purpose. These
data points will help users avoid
improper comparisons when examining
the 1071 data. The Bureau seeks
comment on its proposed approach to
this data point, as well as regarding
596 Cal. S.B. 1235 (Sept. 30, 2018), https://leginfo.
legislature.ca.gov/faces/billTextClient.xhtml?bill_
id=201720180SB1235; 2020 N.Y. Sess. Laws ch.
369. The New York and California commercial
financing disclosure laws are discussed in more
detail below in relevant provisions.
597 For example, the FFIEC cautions users of
HMDA data that ‘‘HMDA data are generally not
used alone to determine whether a lender is
complying with fair lending laws.’’ Bureau of
Consumer Fin. Prot., FFIEC Announces Availability
of 2020 Data on Mortgage Lending (2021), https://
www.consumerfinance.gov/about-us/newsroom/
ffiec-announces-availability-of-2020-data-onmortgage-lending/; see also Bureau of Consumer
Fin, Prot., Data Point: 2019 Mortgage Market
Activity and Trends, at 36 (2020), https://
files.consumerfinance.gov/f/documents/cfpb_2019mortgage-market-activity-trends_report.pdf
(explaining that when examiners for the Federal
banking agencies evaluate an institution’s fair
lending risk, they analyze HMDA price data, loan
application outcomes, and explanatory factors, in
conjunction with other information and risk factors,
which can be drawn directly from loan files or
electronic records maintained by lenders, in
accordance with the Interagency Fair Lending
Examination Procedures).
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additional information that could help
reduce misinterpretations of disparities
in pricing, including modifications to
the pricing information in proposed
§ 1002.107(a)(12). For example, the
Bureau seeks comment on whether more
information about the nature of the
collateral securing the loan is necessary
to understanding pricing data, such as
total origination charges, applicable to a
particular transaction.
Proposed Rule—107(a)(12)(i) Interest
Rate
Proposed § 1002.107(a)(12)(i)(A)
would require financial institutions to
report the interest rate that is or would
be applicable to the covered credit
transaction. If the interest rate is
adjustable, proposed
§ 1002.107(a)(12)(i)(B) would require the
submission of the margin, index value,
and index name that is or would be
applicable to the covered credit
transaction at origination.598
Proposed comment 107(a)(12)(i)–1
would clarify that if a covered credit
transaction includes an initial period
with an introductory interest rate, after
which the interest rate adjusts, a
financial institution complies by
reporting information about the interest
rate applicable after the introductory
period. Proposed comment
107(a)(12)(i)–2 would explain that a
financial institution reports the interest
rate applicable to the amount of credit
approved or originated reported in
proposed § 1002.107(a)(8) if a covered
credit transaction includes multiple
interest rates applicable to different
credit features. Lastly, proposed
comment 107(a)(12)(i)–3 lists a number
of indices to report and directs that if
the index used does not appear on the
list of indices provided, the financial
institution reports ‘‘other’’ and provides
the name of the index via free-form text.
The Bureau believes that allowing
financial institutions to choose ‘‘other’’
when an index that does not appear on
the provided list is used would facilitate
compliance. In addition, collecting this
information on ‘‘other’’ indices would
assist the Bureau in monitoring trends
in this area and key developments in the
small business lending market, which
the Bureau could use to inform any
future iterations of the list.
The Bureau is proposing to collect the
interest rate on the covered credit
598 It should be noted that not all covered credit
transactions include an interest rate. Proposed
§ 1002.107(a)(12)(v) would apply to certain covered
credit transactions that do not include an interest
rate. The discussion of proposed
§ 1002.107(a)(12)(iv) below also addresses other
covered credit transactions that may not include an
interest rate.
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transaction because this information
furthers both the fair lending purpose
and the business and community
development purpose of section 1071 by
allowing regulators, advocates, and
industry to conduct fair lending reviews
and monitor the market for emerging
high-cost products. In addition, the
availability of this pricing metric would
provide pricing transparency and could
encourage the development of
successful lending models because
policymakers, community
organizations, investors, banks seeking
partnerships, and others would be able
to see which business models are
successful at reaching minority-owned,
women-owned, and other underserved
small businesses.
As discussed above, research has
found that minority-owned businesses
tend to obtain, or be offered, higher
interest rates on business credit. The
collection of interest rate (along with
fees) will allow the Bureau, other
government agencies, and other data
users to have insight into the existing
market, monitor the market for
potentially troubling trends, and
conduct fair lending analyses that
adequately take into account this
important metric.
As discussed above, during the
SBREFA process, several SERs
supported the use of APR as a pricing
metric. The Bureau notes that certainState level commercial lending
disclosures, notably California and New
York, require the disclosure of APR.599
Because the interest rate must be known
to calculate APR, the Bureau believes
that proposed § 1002.107(a)(12)(i) may
impose little burden on financial
institutions that already include the
interest rate on such disclosures
required by State law, as well as on the
contract between the financial
institution and the applicant.
Proposed § 1002.107(a)(12)(i)(B)
would provide that, for adjustable
interest rates based upon an index, a
financial institution must report the
margin, index value, and index name
that is or would be applicable to the
covered credit transaction at origination.
Just as the disclosure of the interest rate
for fixed rate transactions will allow
data users to ascertain the interest rate
applicable to the covered credit
transaction throughout its cycle, the
Bureau believes that these three
elements will allow data users to do the
same for adjustable rate transactions
based upon an index and improve the
599 Cal. S.B. 1235 (Sept. 30, 2018), https://leginfo.
legislature.ca.gov/faces/billTextClient.xhtml?bill_
id=201720180SB1235; 2020 N.Y. Sess. Laws ch.
369.
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utility of such data. Proposed comment
107(a)(12)(i)–4 would clarify that a
financial institution complies with
proposed § 1002.107(a)(12)(i)(B) by
reporting the index value at the time the
application is approved by the financial
institution. The Bureau seeks comment
on whether the index value should be
reported based on a different time
period or if at the time of approval is the
most appropriate measure.
The Bureau seeks comment on
proposed § 1002.107(a)(12)(i) and its
commentary, including whether a
different measure of pricing would
provide more accurate data, whether
additional information about pricing
(for example, amortization type or
adjustment frequency) would provide
beneficial data to help ascertain fair
lending risk and further the business
and community development purpose
of section 1071, and whether there are
additional indices that should be
included in the list from which
financial institutions choose to report
the applicable index on adjustable rate
transactions.
The Bureau also seeks comment on
whether there may be covered credit
transactions where the interest rate may
change after origination based on factors
such as if the borrower maintains an
account at the financial institution or if
some other condition is met, and if so,
whether additional commentary would
be helpful to provide more guidance on
which rate to report in that
circumstance.
Proposed Rule—107(a)(12)(ii) Total
Origination Charges
Proposed § 1002.107(a)(12)(ii) would
require financial institutions to report
the total origination charges for a
covered credit transaction. Total
origination charges are the total amount
of all charges payable directly or
indirectly by the applicant and imposed
directly or indirectly by the financial
institution at or before origination as an
incident to or a condition of the
extension of credit, expressed in dollars.
Proposed comment 107(a)(12)(ii)–1
would clarify that charges imposed
uniformly in cash and credit
transactions are not reportable.
Proposed comment 107(a)(12)(ii)–2
would provide guidance on reporting
charges imposed by third parties.
Proposed comment 107(a)(12)(ii)–3
would clarify that broker fees are
included in the total origination
charges.600 Proposed comment
107(a)(12)(ii)–4 would provide guidance
600 For more information on broker fees, see the
section-by-section analysis of proposed
§ 1002.107(a)(12)(iii) below.
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on reporting charges for other products
or services paid at or before origination.
And proposed comment 107(a)(12)(ii)–5
would list examples of reportable
charges.
The Bureau understands that financial
institutions charge a variety of fees
when originating credit for small
business applicants. For example,
financial institutions may charge fees
for processing an application, for
underwriting, for filing a UCC–1
statement, for obtaining an appraisal, for
obtaining a guarantee through a Federal
agency program, and for other activities
related to origination. Depending on the
financial institution and the credit
product, similar fees may take different
names. One financial institution may
describe a charge as an origination fee,
while another describes a similar charge
as an underwriting or documentation
fee. Proposed § 1002.107(a)(12)(ii)
would provide information about the
total amount of all upfront fees charged
for originating and extending credit,
regardless of how such fees are
denominated.
Information about the total origination
charges would benefit 1071 data users
by giving them relatively granular
pricing data. Much of the research on
access to credit in the small business
lending environment has lacked
information about upfront fees,601 or has
used less granular pricing metrics.602
Proposed § 1002.107(a)(12)(ii) would
enable users to examine the
contribution upfront costs make to the
price of credit in the small business
lending market. For example, users
could analyze pricing disparities
specifically in upfront costs charged to
borrowers or borrowers in certain
communities. Users could also look at
total origination charges to better
understand the relationship between the
elements of credit pricing such as by
examining the trade-offs between the
interest rate and the upfront charges.
Empowering users to engage in this
level of analysis would aid in fulfilling
the fair lending and business and
601 See, e.g., Minority Bus. Dev. Agency, U.S.
Dep’t of Com., Disparities in Capital Access
between Minority and Non-Minority-Owned
Businesses: The Troubling Reality of Capital
Limitations Faced by MBEs, at 3, 5, 21, 36–37
(2010), https://archive.mbda.gov/page/executivesummary-disparities-capital-access-betweenminority-and-non-minority-businesses.html.
602 See, e.g., Opportunity Fund, Unaffordable and
Unsustainable: The New Business Lending on Main
Street (2016), https://aofund.org/news/
unaffordable-and-unsustainable-new-businesslending/ (analyzing 150 alternative loans (i.e., from
nondepository lenders or marketplaces, generally
obtained online) to small businesses and finding an
average APR of 94 percent).
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community development purposes of
the statute.
In developing the total origination
charges data point, the Bureau
considered definitions and concepts in
existing regulations. In particular,
Regulation Z § 1026.4 contains a
measure of the cost of credit: The
finance charge. Regulation Z § 1026.4
defines the finance charge as ‘‘any
charge payable directly or indirectly by
the consumer and imposed directly or
indirectly by the creditor as an incident
to or a condition of the extension of
credit.’’ The finance charge appears in
numerous regulatory provisions
governing consumer financial services,
such as disclosures to borrowers in
certain mortgage transactions,603 and
calculation of the APR.604
Proposed § 1002.107(a)(12)(ii)’s
description of total origination charges
is similar to Regulation Z’s definition of
the finance charge. As with the finance
charge, proposed § 1002.107(a)(12)(ii)
would exclude charges imposed
uniformly in cash and credit
transactions.605 Proposed
§ 1002.107(a)(12)(ii) would use a similar
test for including fees and amounts
charged by someone other than the
financial institution.606 And proposed
§ 1002.107(a)(12)(ii) adopts the same
approach toward including broker fees
in the total origination charges that
Regulation Z takes toward including
mortgage broker fees in the finance
charge.607 With respect to charges for
other products or services that the
applicant pays at or before origination,
proposed comment 107(a)(12)(ii)–4
would explain that such charges are
included in the total origination charges
only if the financial institution requires
the purchase of such other product or
service. Regulation Z does not adopt a
uniform approach to services bundled
with the credit transaction. But charges
or premiums for credit insurance or debt
cancellation coverage are included in
the finance charge if the creditor
requires the purchase of such additional
services.608
Proposed § 1002.107(a)(12)(ii),
however, differs in important ways from
Regulation Z’s definition of the finance
charge. First, proposed
§ 1002.107(a)(12)(ii) is narrower than
the finance charge. The finance charge
includes certain credit costs that are
603 See
Regulation Z § 1026.38(o)(2).
appendix J to Regulation Z.
605 Compare proposed comment 107(a)(12)(ii)–1,
with Regulation Z comment 4(a)–1.
606 Compare proposed comment 107(a)(12)(ii)–2,
with Regulation Z § 1026.4(a)(1).
607 Compare proposed comment 107(a)(12)(ii)–3,
with Regulation Z § 1026.4(a)(3).
608 Regulation Z § 1026.4(d)(1) and (3).
604 See
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imposed after a financial institution
originates a transaction, such as interest
and time-price differential.609 Proposed
§ 1002.107(a)(12)(ii), on the other hand,
is limited to charges at or before
origination, because other proposed
pricing data points, such as the interest
rate and initial annual charges, capture
information about the cost of credit over
the life of the transaction. Second,
within its scope, proposed
§ 1002.107(a)(12)(ii) is more
comprehensive than the finance charge.
The finance charge excludes many
upfront costs of obtaining credit. For
example, the finance charge excludes
application fees charged to all
applicants for credit, and numerous fees
in transactions secured by real
property.610 Proposed
§ 1002.107(a)(12)(ii) contains no similar
exclusions. The Bureau believes that
many of the upfront fees omitted from
the finance charge, such as application
fees, are typical of small business credit
transactions, and therefore including
such charges helps data users to
understand pricing in the small
business lending market. Additionally, a
measure of origination charges with
numerous exclusions may encourage
financial institutions to shift costs to the
excluded fees, where they would be
hidden from users of the 1071 data.
Finally, proposed § 1002.107(a)(12)(ii) is
simpler than the Regulation Z definition
of finance charge, which the Bureau
believes may improve the likelihood
that the information is accurately
reported.
As discussed above, during the
SBREFA process, some SERs supported
use of APR as a pricing metric,
including several who stated that they
currently calculate APR. Several SERs
supported the use of APR to enable
comparisons of pricing across various
small business lending products, and
suggested the Bureau look to Statemandated and Truth in Lending Act
APR disclosures for guidance on
methodologies. Of the pricing metrics
asked about in the SBREFA Outline, a
majority of the community groups and
community development lenders who
supported inclusion of a pricing data
point preferred use of APR, though
some suggested the Bureau also require
submission of rate and fees with the
APR, as well as rate spread as reported
under HMDA. Some commenters who
favored APR suggested that the Bureau
start with the recent disclosure methods
adopted in California and New York,
and that the Bureau use those methods
609 Id.
§ 1026.4(b)(1).
§ 1026.4(c)(1) (application fees) and (7)
(real-estate related fees).
610 Id.
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for pricing of MCAs and factoring
specifically. As discussed above, the
Bureau is proposing to require financial
institutions generally to report interest
rate and fees, rather than APR. But in
developing proposed
§ 1002.107(a)(12)(ii)’s definition of total
origination charges, the Bureau has
adapted certain language and concepts
from Regulation Z’s definition of the
finance charge. Because the finance
charge must be known to calculate APR,
including the APR that would be
disclosed under California and New
York law,611 the Bureau believes that
proposed § 1002.107(a)(12)(ii) may
impose less burden on financial
institutions and improve the likelihood
that the information is accurately
reported as compared to a measure of
total origination charges that had no
similarity to the finance charge.
For the reasons given above, proposed
§ 1002.107(a)(12)(ii) would require
financial institutions to report the total
amount of all charges payable directly
or indirectly by the applicant and
imposed directly or indirectly by the
financial institution at or before
origination as an incident to or a
condition of the extension of credit,
expressed in dollars. Proposed
§ 1002.107(a)(12)(ii) would apply to
credit transactions that either have been
originated or have been approved by the
financial institution but not accepted by
the applicant. The Bureau seeks
comment on proposed
§ 1002.107(a)(12)(ii) and its
commentary. For example, the Bureau
seeks comment on whether concepts
and guidance adapted from Regulation
Z, such as proposed comment
107(a)(12)(ii)–1 on comparable cash
transactions, are applicable in the small
business lending context such that they
should be incorporated as drafted. The
Bureau also seeks comment on whether
to enumerate certain types of charges
separately in the 1071 data, and whether
to include or exclude certain types of
charges in the total origination charges.
Proposed Rule—107(a)(12)(iii) Broker
Fees
Proposed § 1002.107(a)(12)(iii) would
require financial institutions to report
the broker fees for a covered credit
transaction. Broker fees are the total
amount of all charges included in the
611 The New York and California disclosure laws
currently add various costs to the Regulation Z
finance charge depending on the credit product. See
Cal. Dep’t of Fin. Prot. & Innovation, Proposed
Commercial Financing Disclosures (S.B. 1235) (Apr.
7, 2021), https://dfpi.ca.gov/wp-content/uploads/
sites/337/2021/04/2021-04-07-SB-1235-WithRedlines-FINAL-for-Publication.pdf; 2020 N.Y.
Sess. Laws ch. 369, 801(e).
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total reportable origination charges that
are fees paid by the applicant directly to
a broker or to the financial institution
for delivery to a broker, expressed in
dollars.
Proposed comment 107(a)(12)(iii)–1
would provide an example of reporting
different types of broker fees. Proposed
comment 107(a)(12)(iii)–2 would clarify
that financial institutions would use a
‘‘best information readily available’’
standard regarding fees paid directly to
a broker by an applicant.
The Bureau believes that small
business loan brokers are an important
part of the small business lending
market, and may feature more
prominently in certain financing
arrangements, such as MCAs. The
existence of brokers creates
opportunities for potential practices that
inflate the cost of small business credit.
For example, compensation that is tied
to the terms of a loan may encourage
brokers to steer applicants to financial
institutions offering less favorable
terms. Because of the potential risks
involved in multi-party business
arrangements, the FFIEC’s Interagency
Fair Lending Examination Procedures
emphasize the importance of
understanding the role that brokers play
in a financial institution’s lending
process.612 These risks may be
heightened in the small business
lending market because applicants lack
the substantive protections afforded to
consumer credit applicants, such as the
prohibition on basing loan originator
compensation on the terms of a
transaction.613
Accordingly, proposed
§ 1002.107(a)(12)(iii) would provide
information about the broker fees
associated with a transaction. Although
broker fees are included in proposed
§ 1002.107(a)(12)(iii)’s definition of total
origination charges, separately
enumerating the total broker fees would
allow users to better understand the role
that brokers play in the price of small
business credit. For example, users
could analyze whether broker fees
specifically appear to be creating fair
lending risk or higher prices for certain
612 Fed. Fin. Insts. Examination Council,
Interagency Fair Lending Examination Procedures,
at 3 (2009), https://www.ffiec.gov/PDF/fairlend.pdf
(instructing examiners to consider an institution’s
organization of its credit decision-making process,
including identification of the delegation of
separate lending authorities and the extent to which
discretion in pricing or setting credit terms and
conditions is delegated to various levels of
managers, employees, or independent brokers or
dealers and an institution’s loan officer or broker
compensation program).
613 Regulation Z § 1026.36 (implementing TILA’s
prohibition on basing loan originator compensation
on loan terms).
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communities. Empowering users to
engage in this level of analysis would
aid in fulfilling the fair lending and
business and community development
purposes of the statute.
The Bureau believes, however, that
financial institutions may have
difficulty reporting broker fees that an
applicant pays directly to a broker.
Proposed comment 107(a)(12)(iii)–2
would clarify that a financial institution
would rely on the best information
readily available to the financial
institution at the time final action is
taken. Information readily available
could include, for example, information
provided by an applicant or broker that
the financial institution reasonably
believes regarding the amount of fees
paid by the applicant directly to the
broker. The ‘‘best information readily
available’’ standard is used in reporting
certain HMDA data under Regulation
C,614 and the Bureau believes it may
also be appropriate for reporting fees
paid directly to a broker by an
applicant.
For the reasons given above, proposed
§ 1002.107(a)(12)(iii) would require
financial institutions to report the total
amount of all charges included in
proposed § 1002.107(a)(12)(ii) that are
fees paid by the applicant directly to a
broker or to the financial institution for
delivery to a broker, expressed in
dollars. Proposed § 1002.107(a)(12)(iii)
would apply to credit transactions that
either have been originated or have been
approved by the financial institution but
not accepted by the applicant. The
Bureau seeks comment on proposed
§ 1002.107(a)(12)(iii) and its
commentary, including on the
knowledge that financial institutions
might have about direct broker fees and
the challenges of reporting such
information.
Proposed Rule—107(a)(12)(iv) Initial
Annual Charges
Proposed § 1002.107(a)(12)(iv) would
require financial institutions to report
the total amount of all non-interest
charges that are scheduled to be
imposed over the first annual period of
the covered credit transaction,
expressed in dollars.
Proposed comment 107(a)(12)(iv)–1
would provide an example of how to
calculate the amount to report. Proposed
comment 107(a)(12)(iv)–2 would
highlight that a financial institution
should exclude interest expenses from
the initial annual charges reported.
Proposed comment 107(a)(12)(iv)–3
would note that a financial institution
614 See Regulation C comments 4(a)(31)–4 and
4(a)(32)–5.
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should not include any charges for
events that are avoidable by the
applicant, including for example,
charges for late payment, for exceeding
a credit limit, for delinquency or
default, or for paying items that
overdraw an account. Proposed
comment 107(a)(12)(iv)–4 would
provide examples of initial annual
charges that may be scheduled to be
imposed during the initial annual
period, including monthly fees, annual
fees, and other similar charges. Finally,
proposed comment 107(a)(12)(iv)–5
would clarify that a financial institution
complies with the provision by
reporting as the default the highest
amount for a charge scheduled to be
imposed, and provides an example of
how to calculate the amount reported
when the scheduled fee to be imposed
may be reduced based upon a specified
occurrence.
The Bureau understands that there are
a variety of ways that small business
loans may be structured. This could
include whether there is an interest rate
imposed on the transaction, whether
there are finance charges, and whether
there are a myriad of other fees that may
be scheduled to be paid or are
contingent upon some occurrence. In
addition, the Bureau understands from
its market monitoring activity that
covered credit transactions may include
scheduled fees that encompass a
substantial part of the cost of the
covered credit product, and without
knowledge of those fees, the cost of the
credit would be misleading. The Bureau
believes that proposed
§ 1002.107(a)(12)(iv) would enable data
users to have a more accurate
understanding of the cost of the covered
credit transaction than if the data lacked
information about scheduled fees.
As noted above, the Bureau believes
that there may be small business loans
that do not include an interest rate, but
do include a monthly finance charge
that is imposed on the covered credit
transaction.615 If the financial
institution were only required to report
the interest rate on these types of
transactions, the true cost of credit
would be wholly inaccurate because the
monthly finance charge would not be
reported. In addition, small business
loans, like consumer loans, may include
a number of other fees, such as annual
fees and other similar charges. The
information collected and reported
under proposed § 1002.107(a)(12)(iv)
would allow data users to have a more
615 Proposed comment 107(a)(12)(iv)–2 would
clarify that financial institutions should not report
the interest scheduled to be imposed in the first
year under proposed § 1002.107(a)(12)(iv).
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complete picture of the cost of the
covered credit transaction and promote
market transparency, thus furthering the
business and community development
purpose of section 1071. In addition,
this pricing data could further the fair
lending purpose of section 1071 as it
could enhance the ability to effectively
and efficiently enforce fair lending laws.
Proposed § 1002.107(a)(12)(iv) would
provide that a financial institution only
report charges scheduled to be imposed
over the first annual period of the
covered credit transaction. The Bureau
believes that by only requiring
scheduled charges to be reported (rather
than the submission of all potential
charges, some of which could be
speculative), the data reported will be
more accurate than if a financial
institution had to make an educated
guess as to what charges will be
imposed over the first annual period.
Proposed § 1002.107(a)(12)(iv) would
not require a financial institution to
itemize the charges reported thereunder.
The Bureau believes that requiring
charges to be itemized could add a
considerable amount of complexity for
financial institutions in collecting and
reporting the initial annual charges,
given the range of fees that could be
charged and the variations in how they
might be imposed. The Bureau seeks
comment on the likelihood that FIs
would schedule charges in the second
year of a covered credit transaction and
beyond specifically in an effort to avoid
reporting the charges for purposes of
1071.
A financial institution complies with
proposed § 1002.107(a)(12)(iv) by not
including charges for events that are
avoidable by the applicant; this
restriction is explained more fully in
proposed comment 107(a)(12)(iv)–3,
which would provide examples of types
of avoidable charges. As noted above,
the Bureau believes that the accuracy of
the data reported is enhanced by only
including charges that are scheduled to
be imposed and not including potential
charges that are contingent upon an
action (or inaction) by the borrower. The
Bureau also believes that only requiring
financial institutions to report such
charges for the first year, and not the life
of the loan, will minimize any burden
associated with reporting the data. This
information should be included in the
contract and, at most, would require a
simple calculation to arrive at the total
charges for the initial annual period. An
example of how to calculate the initial
annual charges for the first annual
period is found in proposed comment
107(a)(12)(iv)–1. The Bureau also seeks
comment on how it should treat
situations where the applicant has
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informed the financial institution that it
expects to regularly incur ‘‘avoidable
charges,’’ for example where an
applicant intends to pay late each
month, such that a late fee, which
would otherwise be an avoidable charge
and not reportable under this provision,
is in effect no longer contingent.
Specifically, the Bureau seeks comment
on whether such charges should be
reported as a scheduled charge.
Proposed comment 107(a)(12)(iv)–5
would provide additional explanation
about what amount to report when the
financial institution provides a discount
on the charge if certain conditions are
met. The Bureau understands that some
financial institutions may provide a
discount on specific charges when
certain conditions are met. For example,
a financial institution may provide a
discount on a monthly charge if the
borrower maintains a checking account
at the financial institution. In such a
circumstance, proposed
§ 1002.107(a)(12)(iv) would require the
financial institution to report the nondiscounted amount to maintain
consistency across the data that is
reported by all financial institutions.
The collection of initial annual
charges was not discussed during the
SBREFA process. However, during that
process several SERs remarked that
pricing is complex and often unique to
the applicant’s situation, and may
involve extra services bundled with the
loan, and without adequate context
pricing data could lead to inaccurate
interpretations and reputational damage
to financial institutions. The Bureau
believes that the submission of initial
annual charge data will help to decrease
the likelihood of inaccurate
interpretations and provide additional
context by giving a more complete
picture of the pricing of each covered
credit transaction.
For the reasons given above, proposed
§ 1002.107(a)(12)(iv) would require
submission of the total amount of all
non-interest charges that are scheduled
to be imposed over the first annual
period of the covered credit transaction,
expressed in dollars. The Bureau seeks
comment on proposed
§ 1002.17(a)(12)(iv) and its commentary,
including whether to include or exclude
certain types of charges as reportable
under initial annual charges.
Proposed Rule—107(a)(12)(v)
Additional Cost for Merchant Cash
Advances or Other Sales-Based
Financing
Proposed § 1002.107(a)(12)(v) would
require financial institutions to report
additional cost data for MCAs or other
sales-based financing transactions.
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Specifically, this cost is the difference
between the amount advanced and the
amount to be repaid, expressed in
dollars. Proposed comment
107(a)(12)(v)–1 would provide an
example of the difference between the
amount advanced and the amount to be
repaid for an MCA.
As discussed above, the Bureau is
proposing several data points to provide
information on pricing in the small
business lending market. These pricing
data points would provide information
about the interest rate and fees
applicable to a covered credit
transaction. Some types of commercial
financing, however, contain pricing
terms that are difficult to reflect in data
points about a transaction’s interest rate
and fees. For example, under a typical
MCA, a merchant receives a cash
advance and promises to repay it (plus
some additional amount) to the MCA
provider. MCA providers generally do
not provide an interest rate, and while
they may charge fees at origination or
during the first year, the majority of an
MCA’s cost comes from the additional
amount repaid by the merchant on top
of the cash advance. This additional
amount may be expressed as a multiple
of the amount advanced in the form of
a factor rate or percentage, or it may be
derived by comparing the total payback
amount to the amount actually
advanced. This additional amount is
typically not characterized as interest,
so it would not be reported under
proposed § 1002.107(a)(12)(i). Nor is
this additional amount characterized as
a fee charged at origination or scheduled
to be imposed during the first year after
the transaction, so it would not be
reported under proposed
§ 1002.107(a)(12)(ii) or (iv). Without an
additional pricing data point to capture
this additional amount due, users
attempting to analyze MCA pricing for
fair lending or business and community
development purposes would miss most
of the cost of credit associated with
these transactions. Therefore, the
inclusion of this data point would aid
in fulfilling the fair lending and
business and community development
purposes of the statute.
At the same time, the Bureau believes
that information about the additional
amount repaid by the merchant would
impose relatively low burden on
financial institutions. A typical MCA
contract lists the amount of future
revenue purchased and the purchase
price. A financial institution could
determine the additional amount repaid
by computing the difference between
these two numbers.
For the reasons discussed above,
proposed § 1002.107(a)(12)(v) would
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require financial institutions to report,
for an MCA or other sales-based
financing transaction, the difference
between the amount advanced and the
amount to be repaid, expressed in
dollars. Proposed § 1002.107(a)(12)(v)
would apply to credit transactions that
either have been originated or have been
approved by the financial institution but
not accepted by the applicant. The
Bureau seeks comment on proposed
§ 1002.107(a)(12)(v) and proposed
comment 107(a)(12)(v)–1, including
whether to require additional pricing
information for MCAs, and whether
MCAs could be structured in ways that
evade the proposed reporting
requirement, such as by omitting or
making variable the amount to be
repaid.
Proposed Rule—107(a)(12)(vi)
Prepayment Penalties
Proposed § 1002.107(a)(12)(vi)(A)
would require financial institutions to
report whether the financial institution
could have included a prepayment
penalty under the policies and
procedures applicable to the covered
credit transaction. Proposed
§ 1002.107(a)(12)(vi)(B) would require
financial institutions to report whether
the terms of the covered credit
transaction include a charge imposed
for paying all or part of the transaction’s
principal before the date on which the
principal is due. Proposed comment
107(a)(12)(vi)–1 would provide
additional information on how to
determine whether the applicable
policies and procedures allow a
financial institution to include
prepayment penalties in the loan
agreement.
The Bureau understands, through its
market monitoring function, that small
business loan contracts may include
prepayment penalties and the penalties
can be sizable and structured as a
percent of the remaining outstanding
balance. The Bureau also understands
that there may be concern among
stakeholders, including community
groups, that certain small business
applicants may be steered toward loans
containing prepayment penalty terms.
The collection of data regarding which
contracts contain a prepayment penalty
and whether a prepayment penalty
could have been imposed on specific
contract types allows the data to be
analyzed for fair lending purposes to see
if certain groups may be steered into
contracts containing prepayment
penalties. Assuming that prepayment
penalty data would be part of the
publicly available data, from a market
competition standpoint, financial
institutions may want to know how
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frequently their competitors are
utilizing prepayment penalties. Thus,
these data could help further the
business and community development
purpose of section 1071 by promoting
market transparency and new product
development opportunities.
Proposed § 1002.107(a)(12)(vi)(A)
would require financial institutions to
report whether the financial institution
could have included a prepayment
penalty under the policies and
procedures applicable to the covered
credit transaction, while proposed
§ 1002.107(a)(12)(vi)(B) would require
financial institutions to report whether
the terms of the covered credit
transaction actually include a
prepayment penalty term. The
provisions would allow data users to
determine what percentage of covered
credit transactions could contain a
prepayment penalty term, what
percentage of such transactions actually
contain the term, and, together with
other data points, the demographic
profile of borrowers whose contracts do
and do not include the term. The
Bureau believes the two provisions
work together to allow data users to
better determine whether certain
borrowers are being steered towards
covered credit transactions containing
prepayment penalty terms.
Proposed comment 107(a)(12)(vi)–1
would elaborate on the requirement to
report whether financial institutions
could have included a prepayment
penalty in the covered credit transaction
to clarify that the applicable policies
and procedures are those that the
financial institutions follows when
evaluating applications for the specific
credit type and credit purpose
requested. The Bureau believes this
provision will ensure that similar credit
products are being analyzed together
and minimize the possibility that
potential fair lending risk is incorrectly
identified.
For the reasons given above, proposed
§ 1002.107(a)(12)(vi)(A) would require
financial institutions to report whether
the financial institution could have
included a prepayment penalty under
the policies and procedures applicable
to the covered credit transaction.
Proposed § 1002.107(a)(12)(vi)(B) would
require financial institutions to report
whether the terms of the covered credit
transaction include a charge imposed
for paying all or part of the transaction’s
principal before the date on which the
principal is due.
The Bureau seeks comment on
proposed § 1002.107(a)(12)(vi) and its
commentary, including whether to
enumerate other types of contingent
charges separately in the 1071 data to
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more accurately reflect the cost of
covered credit transactions. The Bureau
also seeks comment on whether there
are alternative data that would provide
similar insight into whether certain
borrowers are being steered into covered
credit transactions containing
prepayment penalty terms or other
similar contingent terms.
107(a)(13) Census Tract
Background
Section 1071 requires financial
institutions to collect and report ‘‘the
census tract in which is located the
principal place of business of the . . .
applicant.’’ 616 This provision is similar
to Regulation C, which requires
reporting of the census tract in certain
circumstances if the property securing
the loan (or proposed to secure the loan,
if the transaction was not originated) is
in a county with a population of more
than 30,000.617 Under Regulation C, the
financial institution generally finds the
census tract by geocoding using the
address of the property. Geocoding is
the process of using a particular
property address to locate its
geographical coordinates and the
corresponding census tract.
CRA reporting of business loans by
depository institutions also requires
reporting of census tract. The Bureau
understands that CRA allows reporting
of a census tract based on the address
or location where the proceeds of the
credit will be principally applied.618
SBREFA Proposals Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
explained that it was considering
proposing that financial institutions
report a census tract based on an
address collected in the application, or
during review or origination of the
loan.619 The financial institution would
use the address where the loan proceeds
will principally be applied, if that
address is known to the financial
institution, which the Bureau believes
would be more useful to carry out the
community development and fair
lending purposes of section 1071. For
example, if a financial institution makes
a loan to a small business to buy or
improve commercial real estate, the
location of the real estate is more
relevant to section 1071’s statutory
purposes than the location of the main
office. If the financial institution does
616 ECOA
section 704B(e)(2)(E).
C § 1003.4(a)(9)(ii)(C). Regulation C
also requires reporting of the property address for
all applications.
618 See 2015 FFIEC CRA Guide at 16.
619 SBREFA Outline at 30–31.
617 Regulation
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not possess that information, the
financial institution would use the
location of the small business
borrower’s main office or headquarters.
If that, too, is unknown, the financial
institution could use another business
address associated with the application.
The financial institution would also
report which of these address types it is
using, unless that information is
unknown: (1) The address where the
loan proceeds will principally be
applied; or (2) the location of the small
business borrower’s main office or
headquarters; or (3) some other business
address, including those for which the
financial institution is unsure about the
nature of the address.
In response to the SBREFA Outline,
SERs explained that they generally
capture the main office address of small
business applicants, which for sole
proprietors is frequently a home
address; the address where the loan
proceeds will be used is typically
captured for commercial real estate
transactions.620 Some of the SERs stated
that they do not know the proceeds
address, and one suggested that for
simplicity the Bureau should use the
business address only.
A number of SERs explained that they
have experience geocoding addresses to
obtain census tract information—such
as for CDFI Fund reporting, voluntary
CRA reporting, or for reporting mortgage
loans under HMDA—though some did
not. Some SERs suggested that a
requirement to report a geocoded census
tract for financial institutions that do
not do so now would impose costs on
the financial institution and possibly
the borrower. One SER stated that few
nondepository institutions collect or are
even familiar with census tract data.
One SER recommended following the
format used for CRA reporting of census
tract information, rather than the
slightly different format used under
HMDA. Another SER suggested that the
Bureau provide simple instructions for
reporting census tract and employ less
burdensome geocoding requirements
than exist for HMDA. Several SERs
explained that they use a free service
available through the FFIEC to convert
addresses they receive from applicants
to census tract data. A few SERs
suggested that the Bureau should
provide or support a Federal
government-sponsored system for the
secure batch processing of address data
to convert to census tract information
that could be used to satisfy geocoding
requirements across multiple reporting
regimes including 1071.
620 SBREFA
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The SBREFA Panel recommended
that the Bureau seek comment on the
feasibility and ease of using existing
Federal services to geocode addresses in
order to determine census tract for 1071
reporting purposes (such as what is
offered by the FFIEC for use in reporting
HMDA data).621
Stakeholders commenting on the
SBREFA Outline explained that
financial institutions do not currently
collect census tract information unless
they need to report it as a CDFI, or for
CRA or HMDA. Some commenters
stated that they use the free FFIEC tool
for geocoding, though one commenter
pointed out that this service does not
allow batch processing. One commenter
requested that financial institutions be
given a safe harbor if the tool used
provides an incorrect coding. The
comments, like the SER feedback, did
not suggest a problem with the waterfall
approach in the SBREFA Outline. There
were concerns about proceeds locations
not having addresses, and proceeds
addresses being unknown to the
financial institution, but the waterfall
would allow them to simply use another
address. One commenter stated that not
requiring a specific type of address
would help avoid burdening financial
institutions. Another commenter stated
that it had no reason to ask applicants
about the proceeds address, and one
requested that the Bureau make clear
that a financial institution has no
obligation to ask about the proceeds or
headquarters address if it does not do so
now. Several commenters stated that
allowing use of the proceeds address
was helpful, and would further section
1071’s purposes and reduce burden by
allowing use of the same data as
reported under CRA. Two commenters
stated that the Bureau should align this
data point with the CRA, and one of
these, a community development
organization, stated that the CRA
method for reporting census tract was
easier than the HMDA method. This
commenter provided statistical evidence
suggesting that the CRA method also
yielded more complete data than the
HMDA method.
Proposed Rule
The Bureau is proposing
§ 1002.107(a)(13) to require financial
institutions to collect and report the
census tract data point using a
‘‘waterfall’’ approach, which closely
aligns with the Bureau’s proposal under
consideration in the SBREFA Outline.
The proposed rule would require a
financial institution to collect and
report the census tract in which is
621 Id.
at 46.
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located: (i) The address or location
where the proceeds of the credit applied
for or originated will be or would have
been principally applied; or (ii) If the
information in (i) is unknown, the
address or location of the main office or
headquarters of the applicant; or (iii) If
the information in both (i) and (ii) is
unknown, another address or location
associated with the applicant. In
addition, the proposed rule would
require that the financial institution also
indicate which one of the three types of
addresses or locations listed in (i), (ii),
or (iii) the census tract is based on.
Although the proposed rule does not
specifically require it, the Bureau
assumes that financial institutions or
their vendors would generally use a
geocoding tool to convert the
appropriate address to a census tract
number.
The Bureau believes that its proposed
reporting method for the census tract
data point leverages existing industry
information collection practices and
would result in useful information to
further section 1071’s purposes while
avoiding imposing much additional
burden on financial institutions. The
waterfall method in the proposed
regulation would achieve these goals by
allowing a financial institution to report
an address it already has, with no
further investigation; allowing a
financial institution to avoid further
investigation when it is unsure about
the nature of the address reported; and
allowing CRA reporters to report the
same address for 1071 as they do for
CRA; 622 while also increasing the
likelihood of the proceeds address being
reported. The Bureau considers the
census tract of the proceeds address to
be particularly useful for both the fair
lending and business and community
development purposes of 1071.
First, the proposed approach would
require a financial institution to report
the census tract of the proceeds address
if it is available, but would not require
a financial institution to ask about it
specifically. Financial institutions
would be able to apply the waterfall
approach to the addresses they are
currently collecting; they would not be
required to specifically ask for the
proceeds or headquarters addresses. In
addition, the proposed method would
allow a financial institution to report
that it is unsure about the nature of the
622 As explained above, the Bureau understands
that CRA allows reporting of a census tract based
on the address or location where the proceeds of the
credit will be principally applied. The Bureau also
believes that CRA reporting on this data point is
reasonably flexible, and a financial institution
would be able to coordinate the two compliance
regimes to report the same census tract.
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address if it has no information as to the
nature or function of the business
address it possesses. This provision
should address potential concerns about
reporters spending time on complex,
fact-specific questions and
unintentionally misreporting this data
point when financial institution staff
have to determine what kind of address
they are reporting based on insufficient
information. The Bureau believes that
this option would be particularly
helpful if the application were denied or
withdrawn early in the application
process before the nature of any address
provided by the applicant is clear.
Proposed comment 107(a)(13)–1
would provide general instructions on
using the waterfall reporting method,
with examples for guidance. The Bureau
believes that this comment would
facilitate compliance and seeks
comment on whether any additional
instructions or examples would be
useful.
Proposed comment 107(a)(13)–2
would explain that a financial
institution complies with proposed
§ 1002.107(a)(13) by identifying the
appropriate address or location and the
type of that address or location in good
faith, using appropriate information
from the applicant’s credit file or
otherwise known by the financial
institution. The comment would also
make clear that a financial institution is
not required to investigate beyond its
standard procedures as to the nature of
the addresses or locations it collects.
The Bureau believes that this guidance
strikes the right balance by allowing
flexibility in reporting, and also
requiring appropriate good faith
compliance in exercising that flexibility,
thereby yielding quality data.
Proposed comment 107(a)(13)–3
would explain that pursuant to
proposed § 1002.107(c)(1), a financial
institution shall maintain procedures
reasonably designed to collect
applicant-provided information, which
includes at least one address or location
for an applicant for census tract
reporting. However, the comment would
further explain that if a financial
institution is nonetheless unable to
collect or otherwise determine any
address or location for an application,
the financial institution reports that the
census tract information is ‘‘not
provided by applicant and otherwise
undetermined.’’ Based on the Bureau’s
understanding of how financial
institutions currently define an
application under their internal
procedures, the Bureau believes it is
highly unlikely that a financial
institution would not obtain some type
of address for the applicant.
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Nonetheless, the Bureau is proposing to
permit financial institutions to report
this data point using the ‘‘not provided
by applicant and otherwise
undetermined’’ response in order to
facilitate compliance in those rare
instances when the financial institution
does not have the data requested. The
reference in the comment to proposed
§ 1002.107(c)(1) would make clear,
however, that a financial institution
must maintain procedures reasonably
designed to collect at least one address.
As with the previous comment, the
Bureau believes that this comment
would strike the right balance by
facilitating compliance and also
emphasizing the requirement to collect
appropriate data.
The Bureau is proposing a safe harbor
in § 1002.112(c)(1), which would state
that an incorrect entry for census tract
is not a violation of ECOA or subpart B
if the financial institution obtained the
census tract by correctly using a
geocoding tool provided by the FFIEC or
the Bureau. Proposed comment
107(a)(13)–4 would cross-reference that
provision.623 See the section-by-section
analysis of proposed § 1002.112(c)(1)
below for additional discussion of this
safe harbor.
The Bureau notes that section 1071’s
description of the census tract data
point refers to the census tract for the
applicant’s ‘‘principal place of
business.’’ 624 The Bureau considers the
waterfall approach in proposed
§ 1002.107(a)(13) to be a reasonable
interpretation of the undefined statutory
term ‘‘principal place of business,’’
which the Bureau understands not to
have a standard definition, and thus
believes to be ambiguous. First, the
Bureau believes that the address or
location of the main office or
headquarters of the applicant fits easily
into one of the common meanings of
‘‘principal place of business.’’ In
addition, the Bureau expects that,
generally, the address where the loan
proceeds will be applied will also be the
main office or headquarters address.625
623 Proposed comment 112(c)(1)–1 would explain
that ‘‘this safe harbor provision does not extend to
a financial institution’s failure to provide the
correct census tract number for a covered
application on its small business lending
application register, as required by
§ 1002.107(a)(13), because the FFIEC or Bureau
geocoding tool did not return a census tract for the
address provided by the financial institution. In
addition, this safe harbor provision does not extend
to a census tract error that results from a financial
institution entering an inaccurate address into the
FFIEC or Bureau geocoding tool.’’
624 ECOA section 704B(e)(2)(E).
625 According to U.S. Census 2017 SUSB data,
there are 5,976,761 firms with fewer than 500
employees (which will be used, for this purpose, as
a rough proxy for a ‘‘small business’’); those firms
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The primary exception to this principle
would be in the case of credit intended
for purchase, construction/, or
refinancing of real estate; under these
circumstances, the Bureau reasonably
interprets the term ‘‘principal place of
business’’ to mean, in essence, the
principal location for business activities
relating to the extension of credit at
issue. Although ‘‘another address or
location associated with the applicant’’
may not always be the principal place
of business of the applicant, the Bureau
considers this information to be the
financial institution’s best option for
reporting data on the principal place of
business when the nature of a location
is unknown.
In the alternative, section 1071
authorizes the Bureau to include any
‘‘additional data that the Bureau
determines would aid in fulfilling the
purposes of [section 1071].’’ The Bureau
has determined that requiring reporting
of the proceeds address would aid in
fulfilling both the fair lending and
business and community development
purposes of section 1071 by providing
more useful information on the location
of the credit activity for fair lending
analysis and understanding where the
business and community development
is occurring. Requiring reporting of
another address or location associated
with the applicant when both the
proceeds address and the main office or
headquarters address are not available
would provide location data when
otherwise none would be present, thus
also aiding in fulfilling both the fair
lending and business and community
development purposes of section 1071
by providing more useful information
on the location of the lending for fair
lending analysis and understanding
where the business and community
development is likely occurring. In
addition, requiring data on the nature of
the address reported would aid in
collectively have 6,512,802 establishments (i.e.,
locations). This means that, at most, approximately
9 percent of firms with fewer than 500 employees
could have more than one location. See U.S. Census
Bureau, 2017 SUSB Annual Datasets by
Establishment Industry, https://www.census.gov/
programs-surveys/susb/data/tables.html (last
visited Aug. 27, 2021). According to the U.S.
Census Bureau’s Non-employer Statistics, there are
25,701,671 non-employer firms (regardless of
revenue size). Non-employer firms account for
fewer than 4 percent of all sales, though, and the
vast majority are sole proprietorships. While not
impossible, the Bureau believes it is very unlikely
that non-employer firms would have more than one
location. See U.S. Census Bureau, All Sectors:
Nonemployer Statistics by Legal Form of
Organization and Receipts Size Class for the U.S.,
States, and Selected Geographies: 2017 (2017),
https://data.census.gov/cedsci/table?q=
NONEMP2017.NS1700NONEMP&tid=
NONEMP2017.NS1700NONEMP&hidePreview=
true.
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fulfilling both the fair lending and
business and community development
purposes of section 1071 by facilitating
accurate analyses of the data reported.
Also, in the alternative, the Bureau
believes it would be appropriate to use
its exception authority under 704B(g)(2)
to provide that financial institutions
would not report the ‘‘main office or
headquarters address’’ in certain
situations because the Bureau believes
that the proceeds address and ‘‘another
address or location associated with the
applicant’’ would carry out the purposes
of section 1071 more appropriately than
requiring the main office or
headquarters address in every situation.
As discussed above, some SERs
explained that they generally collect the
main office address of the small
business, which for sole proprietorships
will often be a home address, and are
generally not aware of the proceeds
address. The Bureau’s proposed
waterfall approach accommodates this
situation by allowing financial
institutions to report census tract using
the address that they have. In regard to
SERs’ concerns about the potential
burden of geocoding addresses to obtain
census tract, the Bureau notes that there
does not appear to be a viable
alternative to collecting and reporting
the statutorily required census tract data
without geocoding. While several SERs
are already geocoding applicants’
addresses, some SERs were concerned
about the burden associated with
geocoding for HMDA and one expressed
a preference for the CRA method of
geocoding, as did several other
stakeholders. Accordingly, the Bureau
seeks comment on the difference
between geocoding for HMDA and for
CRA, and any specific advantages or
disadvantages associated with
geocoding under either method. In
regard to a Federal government tool
capable of batch processing for
geocoding of addresses, the Bureau is
considering the utility of such a tool.
The Bureau notes that the proposed rule
would provide a safe harbor for use of
such a Bureau tool, if created, as well as
for the currently existing FFIEC tool. As
the SBREFA Panel recommended, the
Bureau seeks comment on the feasibility
and ease of using existing Federal
services to geocode addresses in order to
determine census tract for 1071
reporting purposes (such as what is
offered by the FFIEC for use in reporting
HMDA data).
The Bureau seeks comment on its
proposed approach to the census tract
data point. In addition to the specific
requests for input above, the Bureau
notes that the waterfall method is
intended to allow CRA reporters to
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provide the same data for both reporting
regimes, but requests comment on
whether the proposed method would
achieve this goal and, if not, whether
and how this data point should be
further coordinated with CRA.
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Background
Section 1071 requires financial
institutions to collect and report ‘‘the
gross annual revenue of the business in
the last fiscal year of the . . . applicant
preceding the date of the
application.’’ 626
SBREFA Proposal Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
stated that it was considering proposing
that financial institutions report the
gross annual revenue of the applicant
during its last fiscal year.627 The Bureau
stated that if a financial institution
verifies gross annual revenue and bases
its credit decision on that amount, the
financial institution would report the
verified amount. If the financial
institution does not verify gross annual
revenue, it would report the amount
provided by the applicant.
Many SERs indicated that they collect
gross annual revenue information,
although they differed in how much
they seek to verify this information.628
Several SERs requested clarification
regarding how gross annual revenue
would be reported for startups and other
young businesses. A few SERs stated
that they do not capture gross annual
revenue at all or collect it only in
limited circumstances. One of these
SERs stated that collecting gross annual
revenue would be challenging; others
suggested they could likely estimate
gross annual revenue based on
information they do collect.
Several SERs explained that they
collect gross annual revenue using
different methods and forms of
verification for different types of credit.
SERs advocated for allowing gross
annual revenue to be reported as
provided by the applicant, without an
obligation for the financial institution to
verify that information. A few SERs
suggested that applicants often cannot
provide accurate gross annual revenue
information, although one SER
suggested that in its experience
applicants are generally able to provide
reasonable estimates of gross annual
revenue. Several SERs preferred
reporting ranges rather than precise
values. Several SERs also remarked that
626 ECOA
section 704B(e)(2)(F).
Outline at 31.
628 SBREFA Panel Report at 29.
most businesses take advantage of tax
filing extensions and thus typically do
not have complete financial information
for the prior year until many months
later, and asked how that situation
should be addressed when requesting
applicants’ gross annual revenue for the
prior fiscal year.
The SBREFA Panel recommended
that, in light of SER feedback supporting
the Bureau’s proposal under
consideration to not require financial
institutions to verify gross annual
revenue information, the Bureau
proceed with that approach in the
proposal. The SBREFA Panel also
recommended that the Bureau explore
the timing of tax and revenue reporting
and seek comment in the proposal on
how that timing can best be coordinated
with the collection and reporting of this
data point.629
The Bureau also received feedback
from other stakeholders. Although one
stakeholder commented that gross
annual revenue is a consistent measure,
simple to define, and easily computed,
other stakeholders were concerned
about the complexity and difficulty of
reporting a specifically defined revenue
number. One stakeholder stated that
gross annual revenue was difficult to
precisely define given differences in
accounting and tax practices both across
and within business subsectors. Two
commenters suggested that reporting
this data point would be complicated by
the question of whether a business uses
cash flow or accrual accounting. Other
stakeholders requested the reporting of
revenue ranges rather than specific
values, and one of these commenters
suggested that reporting a specific
number may discourage some borrowers
from applying. Another stakeholder
explained that sometimes an application
is denied or withdrawn before the
revenue information is collected. One
stakeholder stated that allowing
flexibility in the collection and
reporting of this data point would be
very important.
With regard to whether the revenue of
affiliates is included in the gross annual
revenue they collect and whether that
information is used for underwriting
purposes, stakeholders reported that
some collect this information and some
do not, depending on the application
and specific product. One commenter
stated that it does not collect such
information unless the affiliate will be
liable on the loan. Two stakeholders
stated that the Bureau must require
inclusion of affiliate revenue to make
sure that a given business truly is small.
627 SBREFA
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Many stakeholders stated that they
generally verify the income information
using profit and loss statements, taxes,
bank statements, and ‘‘third-party
technology solutions.’’ Some stated that
they do not verify revenue information
for specific products, such as credit
cards, and that sometimes it is difficult
to verify the revenue of a particular
applicant, as tax information can be
complex or dated. Stakeholders
overwhelmingly supported the Bureau’s
proposal under consideration not to
require verification of revenue, and one
stakeholder objected to requiring the
reporting of verified information even
when the lender has verified the
revenue.
Stakeholders also expressed concern
about collecting gross annual revenue
for start-ups and very small businesses
that might not have useable or clear
information. One stakeholder explained
that its members may obtain and rely on
applicant bank statements for a
specified time period, and so should be
permitted to extrapolate annual revenue
based on partially reported revenue.
Proposed Rule
Proposed § 1002.107(a)(14) would
require reporting of the gross annual
revenue of the applicant for its
preceding full fiscal year prior to when
the information is collected. The Bureau
is proposing to require reporting of a
specific value for gross annual
revenue—rather than a range, for which
some SERs and stakeholders expressed
a preference—to simplify the reporting
of gross annual revenue information for
financial institutions and because it
believes that a precise value would be
more useful for 1071 data users,
including the Bureau.
Consistent with the SBREFA Panel’s
recommendation and feedback from
SERs and other stakeholders, proposed
comment 107(a)(14)–1 would clarify
that a financial institution need not
verify gross annual revenue information
provided by the applicant to comply
with proposed § 1002.107(a)(14). The
proposed comment would explain that
the financial institution may rely on
statements of or information provided
by the applicant in collecting and
reporting gross annual revenue. The
proposed comment would also state,
however, that if the financial institution
verifies the gross annual revenue
provided by the applicant it must report
the verified information. The Bureau
believes that a requirement to verify
gross annual revenue could be
operationally difficult for many
financial institutions, particularly in
situations in which the financial
institution does not collect gross annual
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revenue currently. The Bureau also does
not believe, at this time, that such a
requirement is necessary in fulfilling
either of section 1071’s statutory
purposes. However, the Bureau does
believe that reporting verified revenue
when the financial institution already
possesses that information would not be
operationally difficult, and would
enhance the accuracy of the information
collected.
Proposed comment 107(a)(14)–1
would also provide specific language
that a financial institution could use to
ask about an applicant’s gross annual
revenue and would explain that a
financial institution could rely on the
applicant’s answer. The Bureau believes
this language would facilitate
compliance for financial institutions
that currently do not collect gross
annual revenue, collect it only in
limited circumstances, or would
otherwise find its collection
challenging, as some SERs and other
stakeholders suggested.
Overall, the Bureau believes that this
approach in proposed comment
107(a)(14)–1—clarifying that a financial
institution need not verify applicantprovided gross annual revenue
information, and providing language
that a financial institution may use to
ask for such information—should
reduce the complexity and difficulty of
collecting gross annual revenue
information that some SERs and
stakeholders expressed concern about.
The Bureau believes that situations
could arise in which the financial
institution has identified that an
applicant is a small business for the
purposes of proposed § 1002.106(b)
through, for example, an initial
screening question asking whether the
applicant’s gross annual revenue is
below $5 million, but then the specific
gross annual revenue amount could not
be collected. Therefore, the Bureau is
proposing comment 107(a)(14)–2, which
would first clarify that pursuant to
proposed § 1002.107(c)(1), a financial
institution shall maintain procedures
reasonably designed to collect
applicant-provided information,
including the gross annual revenue of
the applicant. The proposed comment
would then state that if a financial
institution is nonetheless unable to
collect or determine the specific gross
annual revenue of the applicant, the
financial institution reports that the
gross annual revenue is ‘‘not provided
by applicant and otherwise
undetermined.’’ The Bureau believes
that permitting this reporting flexibility
would reduce the complexity and
difficulty of reporting gross annual
revenue information, particularly when
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an application has been denied or
withdrawn early in the process and the
gross annual revenue could not be
collected.
Proposed comment 107(a)(14)–3
would clarify that a financial institution
is permitted, but not required, to report
the gross annual revenue for the
applicant that includes the revenue of
affiliates as well. The proposed
comment would state that, for example,
if the financial institution does not
normally collect information on affiliate
revenue, the financial institution reports
only the applicant’s revenue and does
not include the revenue of any affiliates
when it has not collected that
information. The Bureau believes that
permitting, but not requiring, a financial
institution to include the revenue of
affiliates will carry out the purposes of
section 1071 while reducing undue
burden on financial institutions in
collecting gross annual revenue
information. Proposed comment
107(a)(14)–3 would conclude by
explaining that in determining whether
the applicant is a small business under
proposed § 1002.106(b), a financial
institution may rely on an applicant’s
representations regarding gross annual
revenue, which may or may not include
affiliates’ revenue. The Bureau notes
that proposed comment 106(b)–3 would
follow the same approach to affiliate
revenue for purposes of determining
whether an applicant is a small business
under proposed § 1002.106(b). The
Bureau believes that this operational
equivalence between proposed
§ 1002.107(a)(14) and proposed
§ 1002.106(b) would facilitate
compliance and enhance the
consistency of 1071 data.
As mentioned above, some SERs
suggested they might be able to estimate
gross annual revenue using information
that they now collect, and one
stakeholder suggested that it could
extrapolate annual revenue based on
partially reported revenue. The Bureau
does not currently believe that
estimation or extrapolation would be
likely to result in sufficiently accurate
data for reporting under proposed
§ 1002.107(a)(14). For example, a
seasonal business’s bank statements for
its busy season would likely yield an
inflated gross annual revenue when
extrapolated to a full year. In addition,
the Bureau believes that the language
presented in proposed comment
107(a)(14)–1 would provide a
manageable method for collecting full
gross annual revenue when a financial
institution does not do so now.
Nonetheless, the Bureau seeks comment
on whether financial institutions should
be permitted to estimate or extrapolate
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gross annual revenue from partially
reported revenue or other information,
and how such estimation or
extrapolation would be carried out. The
Bureau also notes that estimation or
extrapolation of gross annual revenue is
sufficient for the purposes of
determining small business status under
proposed § 1002.106(b), subject to the
requirement under proposed comment
107(a)(14)–1 that a financial institution
must report verified gross annual
revenue information if available.
The Bureau seeks comment on its
proposed approach to the gross annual
revenue data point, as well as the
specific requests for comment above. As
the SBREFA Panel recommended, the
Bureau also seeks comment on how the
timing of tax and revenue reporting can
best be coordinated with the collection
and reporting of gross annual revenue.
In addition, the Bureau seeks comment
on the effect of cash flow versus accrual
accounting on reporting of gross annual
revenue.
107(a)(15) NAICS Code
ECOA section 704B(e)(2)(H)
authorizes the Bureau to require
financial institutions to compile and
maintain ‘‘any additional data that the
Bureau determines would aid in
fulfilling the purposes of [section
1071].’’ The Bureau is proposing in
§ 1002.107(a)(15) to require that
financial institutions collect and report
an applicant’s 6-digit NAICS code. The
Bureau believes that 6-digit NAICS code
data would aid in fulfilling the purposes
of section 1071, as explained below.
As described above, the SBA
customizes its size standards on an
industry-by-industry basis using 1,057
6-digit NAICS codes. The first two digits
of a NAICS code broadly capture the
industry sector of a business. The third
digit captures the industry’s subsector,
the fourth captures the industry group,
the fifth captures the industry code, and
the sixth captures the national industry.
The NAICS code thus becomes more
specific as digits increase and the 6-digit
code is the most specific. In its SBREFA
Outline, the Bureau stated that it was
considering proposing that financial
institutions collect and report NAICS
code as an important metric for fair
lending analysis (allowing separation of
dissimilar types of businesses to limit
misinterpretations of the data) and
assessing community development
impacts (allowing better measurement
of community development impact).630
As described in detail in the sectionby-section analysis of proposed
§ 1002.106(b) above, SERs and other
630 SBREFA
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stakeholders expressed concern about
the difficulties in determining the
appropriate NAICS code for businesses
and in applying the NAICS-based
standards in determining whether a
business loan applicant is a small
business.631 In addition, several SERs
stated that correctly classifying an
applicant’s NAICS code can be difficult,
as the business may change over time,
codes may have overlapping definitions,
small businesses often do not know
their NAICS code or may operate in
multiple NAICS sectors, and
classifications may be prone to human
error. Another SER noted that NAICS
codes classifications could be subject to
change based on SBA rulemaking, and
thus financial institutions would need
to track such developments. Other SERs
stated that the 2-digit NAICS code is
significantly less complex and prone to
less human error than the SBA
definition using 6-digit NAICS codes.
The SBREFA Panel recommended
that the Bureau continue to explore
ways to minimize burden on both the
small financial institutions collecting
NAICS code information as well as the
small business applicants who need to
provide it, for example the possibility of
collecting the 2–NAICS code rather than
the 6-digit code.632
Proposed § 1002.107(a)(15) would
require financial institutions to collect
and report a 6-digit NAICS code
appropriate for the applicant’s business.
Proposed comment 107(a)(15)–1 would
provide general background on NAICS
codes and would state that a financial
institution complies with proposed
§ 1002.107(a)(15) if it uses the NAICS
codes in effect on January 1 of the
calendar year covered by the small
business lending application register
that it is reporting. Proposed comment
107(a)(15)–2 would clarify that, when a
financial institution is unable to collect
or determine the applicant’s NAICS
code, it reports that the NAICS code is
‘‘not provided by applicant and
otherwise undetermined.’’
The Bureau is also proposing that
financial institutions be permitted to
rely on NAICS codes obtained from the
applicant or certain other sources,
without having to verify that
information itself. Specifically,
proposed comment 107(a)(15)–3 would
clarify that, consistent with proposed
§ 1002.107(b), a financial institution
may rely on applicable applicant
information or statements when
compiling and reporting the NAICS
code and would provide an example of
an applicant providing a financial
631 SBREFA
632 Id.
Panel Report at 31.
at 46.
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institution with the applicant’s tax
return that includes the applicant’s
reported NAICS code. Proposed
comment 107(a)(15)–4 would provide
that a financial institution may rely on
a NAICS code obtained through the
financial institution’s use of business
information products, such as company
profiles or business credit reports,
which provide the applicant’s NAICS
code.
The Bureau believes that NAICS
codes would considerably aid in
fulfilling both section 1071’s fair
lending purpose and its business and
community development purpose, even
if having NAICS code is not necessary
for determining whether an applicant is
a small business under the Bureau’s
proposed alternative size standard. The
Bureau believes that capturing 6-digit
NAICS codes in the 1071 data would
facilitate enforcement of fair lending
laws. For example, financial institutions
often designate certain industries as
high-risk, such as industries that have
high rates of businesses leaving the
market or that deal primarily in cash
transactions. The 6-digit NAICS codes
would help ensure that users are
comparing applicants with similar
profiles, thereby controlling for factors
that might provide non-discriminatory
explanations for disparities in credit
and pricing decisions. Moreover, NAICS
codes would be useful for identifying
business and community development
needs and opportunities of small
businesses, which may differ widely
based on industry, even controlling for
other factors. For example, 6-digit
NAICS codes would help data users
identify industries where small
businesses face challenges accessing
credit and understand how small
businesses in different industries use
credit. Furthermore, disclosing NAICS
codes would provide for consistency
and compatibility with other public
datasets related to small business
lending activity, which generally use
NAICS codes. This ability to synthesize
1071 data with other datasets would
help the public use the data in ways that
advance both the business and
community development and fair
lending purposes of section 1071.
The Bureau believes that collecting
the full 6-digit NAICS code (as opposed
to the 2-digit sector code) would better
enable the Bureau and other
stakeholders to drill down and identify
whether disparities arise at a sector
level or more specifically at a U.S.
National Industry level and would also
enable the collection of better
information on the specific types of
businesses that are accessing, or
struggling to access, credit. For example,
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a wide variety of businesses, including
those providing car washes, footwear
and leather goods repair, and nail
salons, all fall under the 2-digit sector
code 81: Other Services (except Public
Administration). Without 6-digit NAICS
codes, all of these business types would
be combined into one analysis,
potentially masking different
characteristics and different outcomes
across these business types.
The Bureau recognizes that, under its
proposal, all financial institutions
subject to reporting would need to gain
familiarity with the NAICS code system,
refer to NAICS classifications for all
relevant applications, and report NAICS
codes to the Bureau. To address
commenter concerns related to the
complexity of determining a correct
NAICS code, the Bureau is proposing (1)
a safe harbor to indicate that an
incorrect NAICS code entry is not a
violation of subpart B if the first two
digits of the NAICS code are correct and
the financial institution maintains
procedures reasonably adapted to
correctly identify the subsequent four
digits (see proposed § 1002.112(c)(2));
(2) permitting a financial institution to
rely on applicable applicant information
or statements when compiling and
reporting the NAICS code (see proposed
comment 107(a)(15)–3); and (3)
permitting a financial institution to rely
on a NAICS code obtained through the
financial institution’s use of business
information products, such as company
profiles, business credit reports, or
NAICS identification tools (see
proposed comment 107(a)(15)–4). The
proposed NAICS-specific safe harbor
would be available to financial
institutions in addition to the general
bona fide error exemption under
proposed § 1002.112(b). See the sectionby-section analysis of proposed
§ 1002.112(c)(2) below for a detailed
discussion of the proposed safe harbor.
The Bureau seeks comment on its
proposal to collect 6-digit NAICS codes
together with the safe harbor described
in proposed § 1002.112(c)(2). The
Bureau also seeks comment on whether
requiring a 3-digit NAICS code with no
safe harbor would be a better
alternative.
107(a)(16) Number of Workers
Background
ECOA section 704B(e)(2)(H)
authorizes the Bureau to require
financial institutions to compile and
maintain ‘‘any additional data that the
Bureau determines would aid in
fulfilling the purposes of [section
1071].’’ The Bureau believes that data
providing the number of persons
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working for a small business applicant
would aid in fulfilling the business and
community development purpose of
section 1071. These data would allow
users to better understand the job
maintenance and creation that small
business credit is associated with and
help track that aspect of business and
community development.
SBREFA Proposal Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
stated that it was considering proposing
that financial institutions collect and
report the number of employees of the
applicant. The Bureau stated that it was
considering proposing that if the
financial institution verifies the number
of employees provided by the applicant,
the financial institution would report
the verified number. On the other hand,
if the financial institution does not
verify the number of employees, it
would report the number provided by
the applicant.
Many SERs indicated that they do not
collect number of employees.633 One of
these SERs stated that they do not
support the inclusion of this data point
in an eventual 1071 rule, although they
could collect this information. Several
SERs suggested that there could be
particular complexities in accurately
capturing this information, particularly
regarding how part-time and seasonal
employees and contractors should be
counted. Some SERs stated that they
collect number of employees but do not
verify that information.
The SBREFA Panel recommended
(with respect to both the time in
business and number of employees data
points), that if these data points become
part of the proposal, the Bureau
continue to explore ways to minimize
the burden to small financial
institutions of collecting and reporting
these data points.634
A large majority of industry
stakeholders commenting on the
SBREFA Outline opposed the inclusion
of any of the discretionary data points,
including number of employees. One
trade association stated that this data
point would frustrate small business
applicants, particularly if they have to
apply full-time employee calculation
formulas. Several stakeholders
discussed the difficulty of defining a
number of employees data point,
suggesting that complex rules would be
necessary for how to count part-time
and seasonal employees, as well as
contractors. Another commenter
suggested that verifying this information
633 Id.
634 Id.
at 31.
at 46.
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would be extremely difficult. Industry
commenters also explained that most
financial institutions do not collect this
information now, and several pointed
out that these data are not useful for
evaluating credit risk. Another stated
that number of employees is not a
meaningful figure across industries,
given the use of contractors and parttime employees. One commenter
pointed out that the many sole
proprietorships and non-employee firms
mean that this number will often be
zero. One financial institution stated
that it does collect this information
now, but does not verify it.
Community groups were strongly in
favor of including a number of
employees data point. One group stated
that the number of employees data
would help provide a greater
understanding of microbusinesses,
typically defined in terms ranging from
less than five to ten employees, one or
more of whom is the owner. Another
suggested that the Bureau collect the
total number of employees and number
of owners separately, which it said
would avoid the problem found in PPP
data where owners mistakenly reported
themselves as employees. This same
commenter stated that user testing and
guidance would be necessary to ensure
that the number of employees is
reported accurately and consistently.
However, one community development
fund that supported the collection of the
other discretionary data points opposed
collection of the number of employees.
This stakeholder stated that there is
little research support for direct job
creation/retention as the primary impact
of small business assistance, and that
the scholarly consensus suggests the
economic impacts of small firms are
related to their capacity to improve local
entrepreneurial networks and create
ecosystems that are desired and sought
out by bigger firms. The commenter
then stated that by having covered
financial institutions report on job
counts, the Bureau would be implicitly
reinforcing the inaccurate notion that
employment is a key dimension of small
business assistance.
Proposed Rule
Proposed § 1002.107(a)(16) would
require financial institutions to report
the number of non-owners working for
the applicant. Although some SERs and
other stakeholders questioned the
usefulness of employment data for
1071’s purposes, the Bureau continues
to believe that this information would
be particularly helpful in fulfilling the
business and community development
purpose of section 1071. Information on
the number of workers should help data
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users assess community development
impacts by allowing better
understanding of the number of jobs
affected. In addition, in order to avoid
mistaken over-reporting of workers, the
proposed regulation would make clear
that only non-owners would be reported
as workers.
Proposed comment 107(a)(16)–1
would discuss the collection of the
number of workers. As discussed above,
several SERs and other stakeholders
suggested that there could be particular
complexities in accurately capturing
this information, particularly regarding
how part-time and seasonal workers and
contractors should be counted. To help
alleviate these concerns, the proposed
comment would state that in collecting
the number of workers from an
applicant, the financial institution
would explain that full-time, part-time,
and seasonal workers, as well as
contractors who work primarily for the
applicant, would be counted as workers,
but principal owners of the business
would not. If asked, the financial
institution would explain that
volunteers would not be counted as
workers. This treatment of part-time,
seasonal, contract, and volunteer
workers would follow the SBA’s method
for counting employees,635 with minor
simplifications. The Bureau believes
that this guidance would allow financial
institutions that originate SBAguaranteed loans to use the same
number of workers data for both the
loan guarantee program and 1071
reporting. The Bureau seeks comment
on whether further modifications to the
number of workers data point are
needed to facilitate this operational
simplification.
Proposed comment 107(a)(16)–1
would also explain that workers for
affiliates of the applicant would only be
counted if the financial institution were
also collecting the affiliates’ gross
annual revenue. The Bureau believes
that this coordination between these
two data points would facilitate
compliance and yield more consistent
data.
The proposed comment would further
explain that the financial institution
may rely on statements of or
information provided by the applicant
in collecting and reporting number of
workers, but if the financial institution
verifies the number of workers provided
by the applicant, it must report the
verified information. This guidance
would address the concerns raised
about the difficulty of verification. The
Bureau believes that allowing financial
institutions to rely on applicant635 See
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provided information will sufficiently
safeguard accuracy such that the
resulting data will aid in fulfilling the
purposes of 1071. However, the Bureau
also believes that reporting the verified
number of workers when the financial
institution already possesses that
information would not be operationally
difficult, and would enhance the
accuracy of the information collected.
Finally, proposed comment
107(a)(16)-1 would also provide sample
language that a financial institution
could use to ask about the number of
workers, if it does not collect the
number of workers by another method.
The Bureau understands that, as
discussed above, financial institutions
engaged in SBA lending are already
collecting employee information to
apply the SBA’s size standards.
However, SBA lending represents only
a small percentage of the small business
credit market. Given the difficulty for
financial institutions in potentially
requesting this information of all
applicants, the Bureau provides the
sample language in the proposed
comment, which implements the
simplified version of the SBA definition
presented earlier in the proposed
comment. The Bureau believes that
permitting use of the model question
would facilitate compliance. The
Bureau seeks comment on this method
of collection, and on the specific
language proposed.
Proposed comment 107(a)(16)–2
would first clarify that a financial
institution shall maintain procedures
reasonably designed to collect
applicant-provided information,
including the number of workers of the
applicant. The proposed comment
would then state that if a financial
institution is nonetheless unable to
collect or determine the number of
workers of the applicant, the financial
institution reports that the number of
workers is ‘‘not provided by applicant
and otherwise undetermined.’’ The
Bureau believes that this approach
would reduce the burden on financial
institutions that are unable to collect or
determine the number of workers of the
applicant, particularly when an
application is denied or withdrawn
early in the application process.
The Bureau seeks comment on its
proposed approach to the number of
workers data point, as well as on the
specific requests for comment above.
The Bureau also seeks comment on
whether financial institutions collect
information about the number of
workers from applicants using
definitions other than the SBA’s, and
how the collection of this data point
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could best be integrated with those
collections of information.
107(a)(17) Time in Business
Background
ECOA section 704B(e)(2)(H)
authorizes the Bureau to require
financial institutions to compile and
maintain ‘‘any additional data that the
Bureau determines would aid in
fulfilling the purposes of [section
1071].’’ The Bureau believes that data
providing the time in business of a
small business applicant would aid in
fulfilling both the business and
community development and fair
lending purposes of section 1071, as
explained below.
SBREFA Proposal Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
stated that it was considering proposing
to include as a discretionary data point
time in business of the applicant (as of
the date of application), expressed in
years, or months if less than one year.636
The Bureau stated that time-in-business
information could help explain
differences in underwriting risk among
small business applicants and thus
avoid misinterpretation of the section
1071 dataset by distinguishing
potentially riskier new businesses from
less risky established businesses. Timein-business information could also
provide a better measurement of
community development effects, in
terms of number of start-ups or other
relatively new businesses seeking and
obtaining financing. The Bureau stated
that a financial institution may choose
to verify the time in business provided
by an applicant as part of its normal
course of business. If the financial
institution does not verify the time in
business provided by the applicant, the
financial institution would report the
time in business provided by the
applicant. If the financial institution
does verify the time in business
provided by the applicant, it would
report the verified information.
Many SERs currently collect time-inbusiness information, explaining that
time-in-business information is valuable
for measuring risk in underwriting.637
However, some SERs collect this
information on their application forms
or keep it as part of a general narrative
in a credit memorandum about the
application, but do not retain it as a
specific data field in their systems.
Some SERs capture time-in-business
information by recording the year, or
month/day/year, of incorporation;
636 SBREFA
637 SBREFA
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56469
others capture it as the number of years
the applicant has been in business. One
SER stated that they do not support the
inclusion of time in business as a data
point in the NPRM, although they could
collect this information.
Several SERs stated that they use
State incorporation filings to determine
or verify time in business. Some SERs
explained that they view a business as
a start-up if it has been in business
either less than two or less than three
years. For one SER, time in business is
relevant for the specific line of business
for which financing is sought, rather
than the length of time the applicant has
been in some business generally.
Another SER suggested that the Bureau
use ranges for time-in-business
reporting, similar to a suggested method
for collecting and reporting gross annual
revenue.
The SBREFA Panel recommended
(with respect to both the time in
business and number of employees data
points), that if these data points become
part of the proposal, the Bureau
continue to explore ways to minimize
the burden to small financial
institutions of collecting and reporting
these data points.638
Community group stakeholders
supported the inclusion of the time-inbusiness data point, stating that startups and younger businesses often face
challenges accessing credit, and having
time-in-business data would be
especially critical to exploring gender
and racial disparities and fostering
equitable access to affordable loan
capital. Two industry stakeholders
supported inclusion, stating that time in
business is a key underwriting factor
and could explain credit disparities.
One community group stakeholder
agreed, stating that time in business and
other discretionary data points must be
accounted for so credit providers
cannot, as they said HMDA reporters
have done for years, hide behind data
not collected as justification for their
lending disparities.
A large majority of industry
stakeholders opposed all discretionary
data points, including time in business.
One industry stakeholder focused
specifically on the time-in-business data
point, stating that there are too many
variables in the data point to be easily
and clearly defined for collection. That
stakeholder provided examples of
complications in collection of the data
point, such as (1) the time the entity has
existed or existed under the current
ownership, (2) how much experience
the owners have had in this business or
closely related fields, (3) if the
638 Id.
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experience is in closely related fields
how close must they be, (4) whether the
entity has history but is being purchased
using loan funds by ownership with
little experience, and (5) whether
industry should report how long the
existing management structure has been
in place. It then requested that the
Bureau drop this data point or make the
options very simple.
Industry stakeholders reported
different ways that they currently
collect and use time-in-business
information. Stakeholders report that
the information is not universally
collected and may be collected using
different formats, even within a single
institution. A trade association
suggested that reporting time in
business should be optional. One
stakeholder said that it verifies the data
using Secretary of State or other thirdparty information, and that an applicant
that does not meet the time-in-business
requirement for a product may be
automatically rejected. Two other
stakeholders stated that they focus on
the overall experience of the ownership
or management, rather than the age of
the business.
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Proposed Rule
Proposed § 1002.107(a)(17) would
require a financial institution to collect
and report the time the applicant has
been in business, described in whole
years, as relied on or collected by the
financial institution. Proposed
§ 1002.107(a)(17) would require the data
be reported in whole years, rather than
ranges of time, as suggested by a SER
and a stakeholder, because a financial
institution would have a definite
number of years if it collects this
information, and the Bureau believes
that would make the data more granular
and useful.
The Bureau continues to believe that
time in business would likely advance
both statutory purposes of 1071.
Research illustrates, and commenters
have emphasized, the role that start-ups
and new businesses play in the business
ecosystem and in promoting important
community development aims, such as
creating new jobs.639 Financial
institutions often have special credit
policies regarding start-ups and other
young businesses, including whether
the institution will extend credit to
639 See, e.g., Small Bus. Admin., 2018 Small
Business Profiles, at 1–2 (2018), https://
www.sba.gov/advocacy/2018-small-businessprofiles-states-and-territories?utm_
medium=email&utm_source=govdelivery; John
Haltiwanger et al., Who Creates Jobs? Small versus
Large versus Young, The Review of Economics and
Statistics, 95(2), at 347–61 (2013), https://
direct.mit.edu/rest/article/95/2/347/58100/WhoCreates-Jobs-Small-versus-Large-versus-Young.
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start-ups at all, the type(s) of credit
products start-ups and new businesses
can apply for, and the amount of credit
for which they can be approved. Studies
generally show that start-ups experience
greater difficulty in accessing credit,640
and one community group stakeholder
made the same point. In addition, one
study suggested that Black- and
Hispanic-owned firms are underrepresented in terms of firms that have
external financing, have lower levels of
liquidity in their early years, and have
higher rates of exiting the market within
the first three years.641 In regard to the
facilitation of fair lending analyses,
time-in-business data would provide a
useful control in fair lending analyses to
identify similarly situated applicants
and eliminate some false positives,
while also allowing monitoring of
potential disparate treatment of
minority- and women-owned start-ups
and relatively new businesses. In
addition, many SERs reported that timein-business information is valuable for
measuring risk in underwriting, and
they did not limit this observation to
start-ups and new businesses. The
Bureau also believes that collecting
time-in-business information generally,
rather than in the first few years, would
provide useful data for understanding
the relative maturity of small businesses
in different communities.
The Bureau believes that time-inbusiness data would benefit data users,
including financial institutions,
policymakers, and communities. Such
data would allow data users to better
identify the proportion of small
businesses seeking credit that are startups or relatively new businesses, the
type(s) of credit that is offered and
provided to start-ups and newer
businesses, the geographic makeup of
those businesses, the types of financial
institutions that are reaching such
businesses, and where communities
might focus business development
efforts. The data may also aid
policymakers in addressing issues
impacting the growth of small start-ups.
The data, particularly as to unmet
demand, could help interested financial
640 For example, a Federal Reserve Bank of New
York report, based on data from the 2016 Small
Business Credit Surveys that included information
from 12 Federal Reserve Banks, provides statistics
on how start-ups are less likely to receive credit as
compared to mature businesses, even with
comparable credit scores. See Fed. Reserve Bank of
N.Y., Small Business Credit Survey: Report on Startup Firms, at iv (2017), https://www.newyorkfed.org/
medialibrary/media/smallbusiness/2016/SBCSReport-StartupFirms-2016.pdf.
641 J.P. Morgan Chase, Small Business Owner
Race, Liquidity and Survival (July 2020), https://
www.jpmorganchase.com/content/dam/jpmc/
jpmorgan-chase-and-co/institute/pdf/institutesmall-business-owner-race-report.pdf.
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institutions identify lending
opportunities to reach more start-ups
and new businesses, promoting both
business and community development.
In addition, as some of the
stakeholders suggested, the Bureau
believes that the inclusion of time-inbusiness data could help mitigate the
concerns of data misrepresentation. For
example, data indicating that a small
business applicant is a start-up with
little experience or financial history
could provide a legitimate business
explanation for why the financial
institution denied the application or
approved it for less credit than was
applied for. Therefore, time-in-business
data may help to explain the credit
decision made by a financial institution,
which may address any concerns of data
misrepresentation.
The Bureau is not proposing to make
this data field optional, as suggested by
a trade association. The Bureau is
concerned that, if it were to do so, very
little data would be reported.
As explained above, the SBREFA
Panel recommended that the Bureau
explore ways to minimize the burden on
small financial institutions of collecting
and reporting the time-in-business data
point. SERs and industry stakeholders
reported different ways that they
currently collect and use time-inbusiness information, reporting that the
information is not universally collected
and may be collected using different
formats, even within a single institution.
The Bureau believes that by allowing
financial institutions to report the time
in business that they relied on in
making their credit decisions, the
burden on the financial institution (of
any size) could be reduced, while the
resulting information would still aid in
fulfilling the purposes of section 1071.
Although industry commenters
overwhelmingly expressed concern
about the burden associated with any
discretionary data points as a general
matter, the Bureau believes that time-inbusiness information can be made
relatively easy for financial institutions
to collect if the Bureau leverages the
methods currently in use by individual
financial institutions. As the SERs and
stakeholders explained, many or
possibly most financial institutions
already collect time-in-business
information for underwriting purposes
or to determine general eligibility,
though the format and specific
information collected vary by
institution 642 and may relate to owner
642 Of a limited sample of application forms the
Bureau reviewed from a variety of types of financial
institutions, a majority of forms contained some
type of time-in-business field. When the Bureau
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or management experience rather than
business longevity. Therefore, the
Bureau is proposing that financial
institutions that collect time-in-business
information be required to report the
time in business that they relied on (or
would have relied on, for applications
that were withdrawn prior to a credit
decision) in making the credit decision.
If the financial institution collects timein-business information that reflects
owner or management experience rather
than business longevity, the financial
institution would report time in
business using the number it collects
and relies on reflecting owner or
management experience. If the financial
institution relies on verified
information, it reports the verified
information. If it does not verify the
information, it reports the unverified
information. Requiring reporting of time
in business ‘‘relied on’’ should avoid
requiring financial institutions that
collect some version of this information
to change their practices or add extra
procedures to collect the Bureau’s
version of time in business. In addition,
the Bureau believes that collecting the
actual information used by the financial
institution to evaluate the application
would aid fair lending analysis.
Furthermore, the Bureau does not
believe that the variations among the
data collected by individual institutions
would interfere with the business and
community development purpose of
1071, because the information would
still be useful in identifying new
ownership, management, and
businesses that may face credit
challenges.
In addition to providing some
financial institutions with the ability to
avoid duplicative information gathering
by simply reporting the time in business
relied on, the proposed data point
would also facilitate compliance for
financial institutions that do not
currently collect or rely on time-inbusiness information by allowing them
to use the specific question provided in
proposed comment 107(a)(17)–4, as
explained below. The Bureau believes
that permitting these two proposed
methods for collection and reporting
should accommodate different
institutional practices and reduce
operational difficulty for financial
institutions in reporting this data point.
looked at lenders that have undergone a small
business fair lending exam from the Bureau, a few
(but not the majority) maintained data on time in
business in their existing systems. Examples of
time-in-business reference points include time of
formation or registration, time under current
ownership, and history of financial records,
recorded as either month and year or just year.
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In order to clarify the potential use of
the two methods (relied on or collected)
of reporting for the time-in-business
data point, proposed comment
107(a)(17)–1 would provide guidance on
how to report using either method. The
proposed comment would explain that,
regardless of which method is used, the
financial institution must report the
time in business in whole years, or
indicate if a business has not begun
operating yet, or has been in operation
for less than a year. The Bureau believes
that this reporting format would inform
data users of the maturity of the
applicant businesses and signal which
are start-ups.
Proposed comment 107(a)(17)–1
would further explain that when the
financial institution relies on an
applicant’s time in business as part of a
credit decision, it reports the time in
business relied on in making the credit
decision. However, the comment would
further explain that proposed
§ 1002.107(a)(17) would not require the
financial institution to rely on an
applicant’s time in business in making
a credit decision. The Bureau believes
that this guidance would make clear
that the requirement to collect and
report applicants’ time in business
would not change the financial
institution’s internal business practices.
A financial institution would only be
required to report the time in business
relied on in making the credit decision
if the financial institution actually does
rely on an applicant’s time in business
in making its credit decision.
Proposed comment 107(a)(17)–1
would also explain that the financial
institution may rely on statements or
information provided by the applicant
in collecting and reporting time in
business; however, pursuant to
proposed § 1002.107(b), if the financial
institution verifies the time in business
provided by the applicant, it must
report the verified information. This
guidance would apply whether the
financial institution relies on the time in
business in making its credit decision or
not, although the Bureau believes that
verification would be very uncommon
when the financial institution is not
relying on the information. The Bureau
believes that allowing financial
institutions to rely on applicantprovided information will sufficiently
safeguard accuracy such that the
resulting data will aid in fulfilling the
purposes of 1071. However, the Bureau
also believes that reporting the verified
time in business when the financial
institution already possesses that
information would not be operationally
difficult, and would enhance the
accuracy of the information collected
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and ensure that it was the information
that the financial institution relied on in
making the credit decision.
Proposed comment 107(a)(17)–2
would provide instructions on how to
report the time in business relied on in
making the credit decision. The
proposed comment would state that
when a financial institution evaluates
an applicant’s time in business as part
of a credit decision, it reports the time
in business relied on in making the
credit decision. For example, the
proposed comment would further
explain, if the financial institution relies
on the number of years of experience
the applicant’s owners have in the
current line of business, the financial
institution reports that number of years
as the time in business. Similarly, if the
financial institution relies on the
number of years that the applicant has
existed, the financial institution reports
the number of years that the applicant
has existed as the time in business.
Proposed comment 107(a)(17)–2 would
then conclude by stating that a financial
institution reports the length of business
existence or experience duration that it
relies on in making its credit decision,
and is not required to adopt any
particular definition of time in business.
The Bureau believes that this proposed
comment would provide useful
guidance on how a financial institution
complies with § 1002.107(a)(17) when it
relies on time in business and would
help such financial institutions avoid
unnecessary compliance difficulties by
reporting information that they already
possess.
Proposed comment 107(a)(17)–3
would state that a financial institution
relies on an applicant’s time in business
in making a credit decision if the time
in business was a factor in the credit
decision, even if it was not a dispositive
factor. The comment would provide the
example that if the time in business is
one of multiple factors in the financial
institution’s credit decision, the
financial institution has relied on the
time in business even if the financial
institution denies the application
because one or more underwriting
requirements other than the time in
business are not satisfied. The Bureau
believes that this guidance would help
financial institutions to understand how
to comply correctly with proposed
§ 1002.107(a)(17).
Proposed comment 107(a)(17)–4
would clarify that if the financial
institution does not rely on time in
business in considering an application,
pursuant to proposed § 1002.107(c)(1) it
shall still maintain procedures
reasonably designed to collect
applicant-provided information, which
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includes the applicant’s time in
business. The proposed comment would
explain that in collecting time in
business from an applicant, the
financial institution complies with
proposed § 1002.107(a)(17) by asking for
the number of years that the applicant
has been operating the business it
operates now. The proposed comment
would further explain that when the
applicant has multiple owners with
different numbers of years operating
that business, the financial institution
collects and reports the greatest number
of years of any owner. As discussed
above, the Bureau believes that
providing this clear instruction on how
to collect the time in business when a
financial institution does not do so now
would avoid the potential complications
and difficulties described by the SERs
and industry stakeholders in collecting
this data point. In addition, the Bureau
notes that, as would be made clear in
proposed comment 107(a)(17)–1, a
financial institution would not need to
verify an applicant’s response to the
inquiry. Proposed comment 107(a)(17)–
4 would then conclude by making clear
that the financial institution does not
need to comply with the instruction if
it collects and relies on the time in
business by another method in making
the credit decision.
Proposed comment 107(a)(17)–5
would explain that pursuant to
proposed § 1002.107(c)(1) a financial
institution shall maintain reasonable
procedures to collect information
provided by the applicant, which
includes the time in business of the
applicant, but if the financial institution
is unable to collect or determine the
time in business of the applicant, the
financial institution reports that the
time in business is ‘‘not provided by
applicant and otherwise
undetermined.’’ The Bureau believes
that permitting use of this response
would facilitate compliance,
particularly in situations in which the
application is denied or withdrawn
early in the application process.
The Bureau seeks comment on its
proposed approach to this data point.
The Bureau also seeks comment on
whether time-in-business information
may be less relevant or collectable for
certain products or situations (such as
retailer-branded credit cards acquired at
point of sale) and whether reporting
‘‘not applicable’’ should be allowed in
those instances. In addition, the Bureau
seeks comment on whether there should
be an upper limit on time in business—
for example, to allow reporting of ‘‘over
20 years’’ for any applicant of that
duration, rather than requiring reporting
of a specific number of years.
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107(a)(18) Minority-Owned Business
Status
Background
ECOA section 704B(b) requires
financial institutions to inquire whether
applicants for credit are minority-owned
businesses and to maintain a record of
the responses to that inquiry separate
from the applications and
accompanying information. Section
704B(c) provides that applicants for
credit may refuse to provide information
requested pursuant to 704B(b). The
Bureau is proposing § 1002.107(a)(18) to
address how a financial institution
would collect and report an applicant’s
minority-owned business status.
SBREFA Proposal Under Consideration
and Feedback
In the SBREFA Outline, the Bureau
stated that it was considering proposing
that financial institutions be permitted
to collect and report minority-owned
business status solely based on
applicant self-reporting and that the
Bureau was not considering requiring
reporting based on visual observation
and/or surname.643 The Bureau also
stated that it was considering proposing
that the right to refuse under ECOA
section 704B(c) apply to the financial
institution’s specific inquiries regarding
minority-owned business status as well
as women-owned status and the
principal owners’ race, sex, and
ethnicity
Several SERs supported this approach
and urged the Bureau to require
collection and reporting of minorityowned business status based only on the
information the applicant provides (i.e.,
self-reporting).644 SERs also expressed
concerns about the difficulties and costs
that may be associated with collecting
minority-owned business status on
some basis other than applicant selfreporting. For example, although many
SERs indicated that they review some
ownership information about applicants
in order to obtain guarantees or for other
reasons, most of those SERs said that
they do not review the accrual of net
profits and losses and some said that
they do not review information related
to who controls an applicant. One SER
said that determining ownership is
relatively straightforward, but the issue
of control can be subjective. One SER
said that it would not be able to
determine who controlled an applicant
and that an applicant would need to
self-report that information. Another
SER noted that some small business
applicants do not have simple
643 SBREFA
644 SBREFA
PO 00000
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Panel Report at 26.
Frm 00118
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ownership structures. A different SER
stated that some financial institutions
do not meet in person with all of the
owners of small business applicants.
Other industry stakeholders providing
feedback on the SBREFA Outline also
supported collection and reporting of
minority-owned business status based
only on applicant self-reporting and
noted several challenges with reporting
this data point based on visual
observation and/or surname. Some
industry commenters stated that it
would not be possible to report
minority-owned business status based
on visual observation and/or surname in
at least some circumstances. Others
expressed concerns about the cost and
time required to do so. One industry
commenter noted that the tracking of
ownership and other information
needed to report based on visual
observation and/or surname would be
laborious. Another commenter noted
that some financial institutions do not
obtain the information necessary to
make the determinations that would
underlie a visual observation
requirement (i.e., information about
ownership, control, etc.). One
commenter specifically noted that the
statute only requires financial
institutions to ‘‘inquire’’ about minorityowned business status. Conversely, a
community group opposed reporting
based only on applicant self-reporting.
Some commenters stated that
financial institutions should not be
required to collect or report this
information at all, or that they should
not be required to collect or report it in
certain situations, such as when a trust
or other entity owns or controls an
applicant.
Some SERs and a few other
commenters said that the Bureau should
create a tool or otherwise arrange for
applicants to self-report, at least,
demographic information (namely,
minority-owned business status and
women-owned business status as well
as the ethnicity, race, and sex of
principal owners) directly to the Bureau
or to a third-party that maintains a
database of such information.
Some SERs were concerned that, if
notified of their right to refuse,
applicants may not provide protected
demographic information, thus limiting
the usefulness of 1071 data. One SER
and several other commenters similarly
agreed with the Bureau’s proposal under
consideration to limit the right to refuse
to applicants’ protected demographic
information only. However, three
commenters opined that the Bureau’s
approach was too limited and that the
right to refuse should apply to small
business status as well as other data
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points. Several SERs requested that the
Bureau provide sample language for use
in any disclosure and collection forms
in which an applicant’s right to refuse
is stated, so that applicants understand
why lenders are requesting protected
demographic information and how the
information will be used. Two SERs
asked that the Bureau provide sample
language in English as well as in other
languages, such as Spanish.
The SBREFA Panel recommended
that the Bureau consider creating
sample data collection forms that, to the
extent possible, simply and clearly
explain the information being requested
for purposes of this data point. The
SBREFA Panel recommended that the
Bureau consider developing sample
disclosure language that financial
institutions may use to provide some
context as to why applicants are being
asked to provide protected demographic
information, in order to encourage
applicants to respond. It also said that
the Bureau should additionally consider
providing these sample data collection
forms in other languages, such as
Spanish.645
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Proposed Rule
Consistent with its approach during
the SBREFA process, proposed
§ 1002.107(a)(18) would require
financial institutions to collect and
report whether an applicant is a
minority-owned business. Proposed
§ 1002.107(a)(18) would also require
financial institutions to collect and
report whether minority-owned
business status is being reported based
on previously collected data pursuant to
proposed § 1002.107(c)(2). It would also
require that when the financial
institution requests minority-owned
business status from an applicant, the
financial institution inform the
applicant that the financial institution
cannot discriminate on the basis of the
applicant’s minority-owned business
status, or on whether the applicant
provides this information. Finally,
proposed § 1002.107(a)(18) would refer
to proposed appendix F for additional
details regarding how financial
institutions are required to collect and
report minority-owned business status.
Proposed appendix F would include a
requirement that a financial institution
inform an applicant that the applicant is
not required to respond to the financial
institution’s questions regarding the
applicant’s minority-owned business
status and women-owned business
status, and a prohibition on financial
institutions requiring applicants to
645 Id.
at 45.
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provide this information.646 Consistent
with the SBREFA Panel’s
recommendation, proposed appendix E,
which is a sample data collection form,
would include a question about
minority-owned business status and
related information to assist applicants
with responding to the question.647
Proposed comment 107(a)(18)–1
would clarify that a financial institution
would be required to ask an applicant
if it is a minority-owned business for
each covered application unless the
financial institution is permitted to
report minority-owned business status
based on previously collected data.
Additionally, the financial institution
would be required to permit an
applicant to refuse to answer the
financial institution’s inquiry and to
inform the applicant that it is not
required to provide the information. The
financial institution would report the
applicant’s response, its refusal to
answer the inquiry (such as when the
applicant indicates that it does not wish
to provide the requested information),
or its failure to respond (such as when
the applicant fails to submit a data
collection form) to the inquiry. See
proposed appendix F for additional
instructions on how the Bureau
proposes that financial institutions
collect and report minority-owned
business status.
Proposed comment 107(a)(18)–2
would explain that a financial
institution must inform the applicant
that the financial institution cannot
discriminate on the basis of an
applicant’s minority-owned business
status or on whether the applicant
provides the information. It would also
clarify that a financial institution may
combine this non-discrimination notice
regarding minority-owned business
status with the similar nondiscrimination notices that a financial
institution is required to provide when
requesting women-owned business
status and a principal owner’s ethnicity,
race, and sex if a financial institution
requests minority-owned business
status, women-owned business status,
and/or a principal owner’s ethnicity,
race, and sex in the same data collection
form or at the same time.
Proposed comment 107(a)(18)–3
would explain how, pursuant to
646 Proposed appendix G would include a similar
requirement to notify applicants that they are not
required to provide information regarding principal
owners’ ethnicity, race, and sex and a similar
prohibition on financial institutions requiring that
applicants provide such information.
647 The Bureau seeks additional comment
regarding foreign language forms and notices in the
section-by-section analysis of proposed appendix E
below.
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proposed § 1002.111(b), financial
institutions must record an applicant’s
response regarding minority-owned
business status pursuant to proposed
§ 1002.107(a)(18) separate from the
application and accompanying
information. This proposed comment
would also provide examples of how
responses could be recorded separately
from the application and accompanying
information.
Proposed comment 107(a)(18)–4
would state that pursuant to proposed
§ 1002.107(c)(1), a financial institution
shall maintain procedures reasonably
designed to collect applicant-provided
information, which includes the
applicant’s minority-owned business
status. However, if a financial
institution does not receive a response
to its inquiry, the financial institution
would report that the applicant’s
minority-owned business status is ‘‘not
provided by applicant.’’
Proposed comment 107(a)(18)–5
would state that notwithstanding
proposed § 1002.107(b) (regarding
verification of applicant-provided
information), a financial institution
would report the applicant’s response,
its refusal to answer the inquiry, or its
failure to respond to the inquiry
pursuant to proposed § 1002.107(a)(18),
even if the financial institution verifies
or otherwise obtains an applicant’s
minority-owned business status for
other purposes. Moreover, as proposed
in the instructions in appendix F, a
financial institution would not be
required or permitted to verify the
applicant’s response to the financial
institution’s inquiry pursuant to
proposed § 1002.107(a)(18) regarding
minority-owned business status.
Proposed comment 107(a)(18)–6
would clarify that a financial institution
does not report minority-owned
business status based on visual
observation, surname, or any basis other
than the applicant’s response to the
inquiry that the financial institution
makes to satisfy § 1002.107(a)(18) or, if
the financial institution is permitted to
report based on previously collected
data, on the basis of the applicant’s
response to the inquiry that the
financial institution previously made to
satisfy § 1002.107(a)(18).
Proposed comment 107(a)(18)–7
would clarify that a financial institution
may report minority-owned business
status based on previously collected
data if the financial institution is
permitted to do so pursuant to proposed
§ 1002.107(c)(2) and its commentary.
Consistent with its approach during
the SBREFA process, the Bureau is not
proposing that financial institutions
collect or report minority-owned
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business status based on visual
observation, surname, or any method
other than an applicant-provided
response to a specific inquiry asked for
purposes of proposed § 1002.107(a)(18).
Similarly, the Bureau is not proposing
that financial institutions be permitted
or required to verify an applicant’s
response. Although the Bureau is
proposing that financial institutions
collect and report a principal owner’s
ethnicity and race based on visual
observation and/or surname in certain
circumstances, the Bureau believes that
there would be additional complexities
and difficulties with attempting to
collect and report minority-owned
business status based on visual
observation and/or surname. Some of
these additional difficulties arise
because the financial institution may
need to determine who controls the
applicant as well as who owns the
applicant and who realizes the net
profits and losses. Other difficulties
arise from the fact that the financial
institution would need to know how
each natural person it meets with in
person fits into the ownership structure
of the applicant as well as its control
and profit structures. For example, it
would not be sufficient to know
whether a natural person is an owner.
The financial institution also would
need to know what percentage of the
ownership interest and control the
natural person held and, if that
ownership was not more than 50
percent, the institution would need to
know who owned and controlled the
remainder of the applicant. An
additional complication, specific to this
data point, arises when the financial
institution is not able to visually
observe absent owners. In these cases,
the financial institution may not be able
to determine if the business is a
minority-owned business. Thus, even if
a financial institution has an in-person
meeting with one or more natural
persons associated with an applicant, it
may be difficult or impossible for the
financial institution to determine if an
applicant is a minority-owned business.
The Bureau seeks comment on its
proposed approach to this data point,
including the proposed methods of
collecting and reporting the data. The
Bureau also requests comment on
whether additional clarification
regarding any aspect of this data point
is needed. In particular, the Bureau
seeks comment on whether applicants
are likely to have difficulty
understanding and determining the
information they are being asked to
provide and, if so, how the Bureau may
mitigate such difficulties.
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107(a)(19) Women-Owned Business
Status
Background
ECOA section 704B(b) requires
financial institutions to inquire whether
applicants for credit are women-owned
businesses and to maintain a record of
the responses to that inquiry separate
from the applications and
accompanying information. Section
704B(c) provides that applicants for
credit may refuse to provide information
requested pursuant to 704B(b). The
Bureau is proposing § 1002.107(a)(19) to
address how a financial institution
would collect and report an applicant’s
women-owned business status.
SBREFA Proposal Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
stated that it was considering proposing
that financial institutions be permitted
to collect and report women-owned
business status solely based on
applicant self-reporting and that the
Bureau was not considering requiring
reporting based on visual observation
and/or surname.648 The Bureau also
stated that it was considering proposing
that the right to refuse under ECOA
section 704B(c) apply to the financial
institution’s specific inquiries regarding
minority-owned business status as well
as women-owned status and the
principal owners’ race, sex, and
ethnicity.
As with collecting and reporting
minority-owned business status, several
SERs supported this approach and
urged the Bureau to require collection
and reporting of women-owned
business status based only on the
information the applicant provides (i.e.,
self-reporting).649 SERs also expressed
concerns about the difficulties and costs
that may be associated with collecting
women-owned business status on some
basis other than applicant self-reporting.
For example, although many SERs
indicated that they review some
ownership information about applicants
in order to obtain guarantees or for other
reasons, most of those SERs said that
they do not review the accrual of net
profits and losses and some said that
they do not review information related
to who controls an applicant. One SER
said that determining ownership is
relatively straightforward, but the issue
of control can be subjective. One SER
said that it would not be able to
determine who controlled an applicant
and that an applicant would need to
self-report that information. Another
648 SBREFA
649 SBREFA
PO 00000
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Panel Report at 26.
Frm 00120
Fmt 4701
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SER noted that some small business
applicants do not have simple
ownership structures. A different SER
stated that some financial institutions
do not meet in person with all of the
owners of small business applicants.
As with collecting and reporting
minority-owned business status, other
industry stakeholders providing
feedback on the SBREFA Outline also
supported collection and reporting of
women-owned business status based
only on applicant self-reporting and
noted several challenges with reporting
this data point based on visual
observation and/or surname. Some
industry commenters stated that it
would not be possible to report womenowned business status based on visual
observation and/or surname in, at least,
some circumstances. Others expressed
concerns about the cost and time
required to do so. One industry
commenter noted that the tracking of
ownership and other information
needed to report based on visual
observation and/or surname would be
laborious. Another commenter noted
that some financial institutions do not
obtain the information necessary to
make the determinations that would
underlie a visual observation
requirement (i.e., information about
ownership, control, etc.). One
commenter specifically noted that the
statute only requires financial
institutions to ‘‘inquire’’ about womenowned business status. Conversely, a
community group opposed reporting
based only on applicant self-reporting.
Some commenters stated that
financial institutions should not be
required to collect or report this
information at all, or that they should
not be required to collect or report it in
certain situations, such as when a trust
or other entity owns or controls an
applicant.
Some SERs and a few other
commenters said that the Bureau should
create a tool or otherwise arrange for
applicants to self-report, at least,
demographic information (namely
women-owned business status and
minority-owned business status as well
as the ethnicity, race, and sex of
principal owners) directly to the Bureau
or to a third-party that maintains a
database of such information.
Some SERs were concerned that, if
notified of their right to refuse,
applicants may not provide protected
demographic information, thus limiting
the usefulness of 1071 data. One SER
and several other commenters similarly
agreed with the Bureau’s proposal under
consideration to limit the right to refuse
to applicants’ protected demographic
information only. However, three
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commenters opined that the Bureau’s
approach was too limited and that the
right to refuse should apply to small
business status as well as other data
points. Several SERs requested that the
Bureau provide sample language for use
in any disclosure and collection forms
in which an applicant’s right to refuse
is stated, so that applicants understand
why lenders are requesting protected
demographic information and how the
information will be used. Two SERs
asked that the Bureau provide sample
language in English as well as in other
languages, such as Spanish.
The SBREFA Panel recommended
that the Bureau consider creating
sample data collection forms that, to the
extent possible, simply and clearly
explain the information being requested
for purposes of this data point.650 The
SBREFA Panel recommended that the
Bureau consider developing sample
disclosure language that financial
institutions may use to provide some
context as to why applicants are being
asked to provide protected demographic
information, in order to encourage
applicants to respond.651 It also
recommended that the Bureau should
consider providing these sample data
collection forms in other languages,
such as Spanish.652
Proposed Rule
Consistent with its approach during
the SBREFA process, proposed
§ 1002.107(a)(19) would require
financial institutions to collect and
report whether an applicant is a womenowned business. Proposed
§ 1002.107(a)(19) would also require
financial institutions to collect and
report whether women-owned business
status is being reported based on
previously collected data pursuant to
proposed § 1002.107(c)(2). It would also
require that when the financial
institution requests women-owned
business status from an applicant, the
financial institution inform the
applicant that the financial institution
cannot discriminate on the basis of the
applicant’s women-owned business
status, or on whether the applicant
provides this information. Finally,
proposed § 1002.107(a)(19) would refer
to proposed appendix F for additional
details regarding how financial
institutions are required to collect and
report women-owned business status.
Proposed appendix F would include a
requirement that a financial institution
inform an applicant that the applicant is
not required to respond to the financial
650 Id.
at 45.
651 Id.
652 Id.
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institution’s questions regarding the
applicant’s women-owned business
status and minority-owned business
status, and a prohibition on financial
institutions requiring applicants to
provide this information. Consistent
with the SBREFA Panel’s
recommendation, proposed appendix E,
which is a sample data collection form,
would include a question about womenowned business status and related
information to assist applicants with
responding to the question.
Proposed comment 107(a)(19)–1
would clarify that a financial institution
would be required to ask an applicant
if it is a women-owned business for
each covered application unless the
financial institution is permitted to
report women-owned business status
based on previously collected data.
Additionally, the financial institution
would be required to permit an
applicant to refuse to answer the
financial institution’s inquiry and to
inform the applicant that it is not
required to provide the information. The
financial institution would report the
applicant’s response, its refusal to
answer the inquiry (such as when the
applicant indicates that it does not wish
to provide the requested information),
or its failure to respond (such as when
the applicant fails to submit a data
collection form) to the inquiry. See
proposed appendix F for additional
instructions on how the Bureau
proposes that financial institutions
collect and report women-owned
business status.
Proposed comment 107(a)(19)–2
would explain that a financial
institution must inform the applicant
that the financial institution cannot
discriminate on the basis of an
applicant’s women-owned business
status or on whether the applicant
provides the information. It would also
clarify that a financial institution may
combine this non-discrimination notice
regarding women-owned business status
with the similar non-discrimination
notices that a financial institution is
required to provide when requesting
minority-owned business status and a
principal owner’s ethnicity, race, and
sex if a financial institution requests
minority-owned business status,
women-owned business status, and/or a
principal owner’s ethnicity, race, and
sex in the same data collection form or
at the same time.
Proposed comment 107(a)(19)–3
would explain how, pursuant to
proposed § 1002.111(b), financial
institutions must record an applicant’s
response regarding women-owned
business status pursuant to proposed
§ 1002.107(a)(19) separate from the
PO 00000
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Sfmt 4702
56475
application and accompanying
information. This proposed comment
would also provide examples of how
responses could be recorded separately
from the application and accompanying
information.
Proposed comment 107(a)(19)–4
would state that pursuant to proposed
§ 1002.107(c)(1), a financial institution
shall maintain procedures reasonably
designed to collect applicant-provided
information, which includes the
applicant’s women-owned business
status. However, if a financial
institution does not receive a response,
the financial institution would report
that the applicant’s women-owned
business status is ‘‘not provided by
applicant.’’
Proposed comment 107(a)(19)–5
would state that notwithstanding
proposed § 1002.107(b) (regarding
verification of applicant-provided
information), a financial institution
would report the applicant’s response,
its refusal to answer the inquiry, or its
failure to respond to the inquiry
pursuant to proposed § 1002.107(a)(19),
even if the financial institution verifies
or otherwise obtains an applicant’s
women-owned business status for other
purposes. Moreover, as proposed in the
instructions in appendix F, a financial
institution would not be required or
permitted to verify the applicant’s
response to the financial institution’s
inquiry pursuant to proposed
§ 1002.107(a)(19) regarding womenowned business status. Thus, for
example, under the principle articulated
in proposed comment 107(a)(19)–5, a
financial institution could not second
guess an applicant’s decision to
determine whether it is a women-owned
business for purposes of proposed
§ 1002.107(a)(19) based on the gender
identity of the principal owners. The
Bureau seeks comment on whether it
would be useful to expressly codify this
application of the principle in the
commentary.
Proposed comment 107(a)(19)–6
would clarify that a financial institution
does not report women-owned business
status based on visual observation,
surname, or any basis other than the
applicant’s response to the inquiry that
the financial institution makes to satisfy
proposed § 1002.107(a)(19) or, if the
financial institution is permitted to
report based on previously collected
data, on the basis of the applicant’s
response to the inquiry that the
financial institution previously made to
satisfy proposed § 1002.107(a)(19).
Proposed comment 107(a)(19)–7
would clarify that a financial institution
may report women-owned business
status based on previously collected
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data if the financial institution is
permitted to do so pursuant to proposed
§ 1002.107(c)(2) and its commentary.
Consistent with its approach during
the SBREFA process, the Bureau is not
proposing that financial institutions
collect or report women-owned business
status based on visual observation,
surname, or any method other than an
applicant-provided response to a
specific inquiry asked for purposes of
proposed § 1002.107(a)(19). Similarly,
the Bureau is not proposing that
financial institutions be permitted or
required to verify an applicant’s
response. Although the Bureau is
proposing that financial institutions
collect and report a principal owner’s
ethnicity and race based on visual
observation and/or surname in certain
circumstances, the Bureau believes that
there would be additional complexities
and difficulties with attempting to
collect and report women-owned
business status based on visual
observation and/or surname. Some of
these additional difficulties arise
because the financial institution may
need to determine who controls the
applicant as well as who owns the
applicant and who realizes the net
profits and losses. Other difficulties
arise from the fact that the financial
institution would need to know how
each natural person it meets with in
person fits into the ownership structure
of the applicant as well as its control
and profit structures. For example, it
would not be sufficient to know
whether a natural person is an owner.
The financial institution also would
need to know what percentage of the
ownership interest and control the
natural person held and, if that
ownership was not more than 50
percent, the institution would need to
know who owned and controlled the
remainder of the applicant. An
additional complication, specific to this
data point, arises when the financial
institution is not able to visually
observe absent owners. In these cases,
the financial institution may not be able
to determine if the business is a womenowned business. Thus, even if a
financial institution has an in-person
meeting with one or more natural
persons associated with an applicant, it
may be difficult or impossible for the
financial institution to determine if an
applicant is a women-owned business.
The Bureau seeks comment on its
proposed approach to this data point,
including the proposed methods of
collecting and reporting the data. The
Bureau also requests comment on
whether additional clarification
regarding any aspect of this data point
is needed. In particular, the Bureau
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seeks comment on whether applicants
are likely to have difficulty
understanding and determining the
information they are being asked to
provide and, if so, how the Bureau may
mitigate such difficulties.
107(a)(20) Ethnicity, Race, and Sex of
Principal Owners
Background
ECOA section 704B(e)(2)(G) requires
financial institutions to compile and
maintain certain information, including
the race, sex, and ethnicity of an
applicant’s principal owners. However,
section 1071 does not set out what
categories should be used when
collecting and reporting this
information. The Bureau is proposing
§ 1002.107(a)(20) to address how a
financial institution would collect and
report the ethnicity, race, and sex of an
applicant’s principal owners. See the
section-by-section analysis of proposed
§ 1002.102(o) above for a discussion of
the definition of a principal owner.
SBREFA Proposal Under Consideration
and Feedback
In the SBREFA Outline, the Bureau
stated that it was considering proposing
that financial institutions use the
aggregate race, sex, and ethnicity
categories from Regulation C when
requesting that applicants provide race,
sex, and ethnicity information of
principal owners.653
SERs were generally supportive of
aligning the race, sex, and ethnicity
categories used for reporting
demographic information about
principal owners in 1071 with the
aggregate categories used in Regulation
C for HMDA.654 However, one SER
stated that the Bureau should consider
revisiting the use of male and female as
categories for sex because gender is not
binary. Additionally, some other
stakeholders, including community
groups and a trade association, were
opposed to using the HMDA aggregate
categories for reporting race and
ethnicity. Generally, these commenters
opposed the use of the aggregate
categories because, they said, those
categories could mask discrimination
and do not provide sufficient detail or
context. These commenters generally
supported use of the HMDA
disaggregated subcategories for
reporting a principal owner’s race and
ethnicity.
Additionally, in the SBREFA Outline,
the Bureau stated that it was
considering proposing that the
collection and reporting of a principal
653 SBREFA
654 SBREFA
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Panel Report at 29–30.
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owner’s race, sex, and ethnicity be
based solely on applicant self-reporting.
The Bureau stated in the SBREFA
Outline that it anticipated that requiring
reporting based on visual observation
and/or surname could create
unwarranted compliance burdens in the
context of small business lending,
although the Bureau sought feedback on
the potential challenges, costs, and
benefits of implementing such a
requirement. The Bureau also stated in
the SBREFA Outline that it was
considering developing a sample data
collection form to assist industry in
collecting this information and to
communicate an applicant’s right to
refuse to provide such information.655
SERs generally supported applicants’
self-reporting of principal owners’ race,
sex, and ethnicity and strongly preferred
that financial institutions not be
required to report based on visual
observation and/or surname. Some SERs
said financial institutions should not be
required to ‘‘guess’’ the race, sex, and
ethnicity of principal owners,
remarking, among other things, that
doing so is both extremely difficult and
ineffective, and that collecting
demographic information based on
visual observation makes staff
uncomfortable. Another SER said that
reporting demographic information
based on visual observation and/or
surname is likely to introduce both error
and bias to the process. One SER stated
that financial institutions do not always
meet with all principal owners of a
business in person and that financial
institutions occasionally meet with a
manager or officer who might not be a
principal owner. Conversely, another
SER stated that when relying on
applicants to self-report demographic
information, there are higher rates of
non-FEFF responses in the business
lending context compared to consumer
residential lending. This SER suggested
that the Bureau will need to account for
this disparity.
Other industry and trade association
stakeholders that commented on the
SBREFA Outline also generally
supported applicants’ self-reporting of
principal owners’ race, sex, and
ethnicity and strongly preferred that
financial institutions not be required to
report this information based on visual
observation and/or surname. Some of
these commenters noted that some
financial institutions might not know
who a business’s principal owners are,
might not collect the information
necessary to determine who they are, or
might not meet in person with principal
owners. Others asserted that reporting
655 SBREFA
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based on visual observation and/or
surname increases the cost and time to
process a small business loan, may
result in inaccurate data, and may create
awkward situations or customer
disputes. One trade association argued
that the statute only requires financial
institutions to ‘‘inquire’’ about a
principal owner’s race, sex, and
ethnicity. However, two community
groups stated that financial institutions
should be permitted or required to
report based on visual observation and/
or surname when an applicant does not
provide the information, and a CDFI
stated that financial institutions should
be required to report race, sex, and
ethnicity based on visual observation
and/or surname only when an applicant
does not provide the information and
does not refuse to provide the
information.
Two industry commenters suggested
that the Bureau create a tool or
otherwise arrange for applicants to selfreport, at least, demographic
information (namely minority-owned
business status and women-owned
business status as well as the race, sex,
and ethnicity of principal owners)
directly to the Bureau or to a third-party
that maintains a database of such
information.
Some SERs were concerned that, if
notified of their right to refuse,
applicants may not provide protected
demographic information, thus limiting
the usefulness of 1071 data. One SER
and several other commenters similarly
agreed with the Bureau’s proposal under
consideration to limit the right to refuse
to applicants’ protected demographic
information only. However, three
commenters opined that the Bureau’s
approach was too limited and that the
right to refuse should apply to small
business status as well as other data
points. Several SERs requested that the
Bureau provide sample language for use
in any disclosure and collection forms
in which an applicant’s right to refuse
is stated, so that applicants understand
why lenders are requesting protected
demographic information and how the
information will be used. Two SERs
asked that the Bureau provide sample
language in English as well as in other
languages, such as Spanish.
One trade association requested that
reporting of a principal owner’s race,
sex, and ethnicity not be required in
certain situations, such as when a
principal owner is a trust or another
entity.
Some SERs and other commenters
requested that the Bureau develop a
form to assist financial institutions with
collecting the race, sex, and ethnicity of
principal owners. One SER suggested
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developing a sample data collection
form similar to the one used for HMDA
data collection and including the same
disclosures. One commenter noted that
the use of a model form may increase
the uniformity and consistency of
reporting such demographic
information. Another commenter
suggested that any model form should
include an explanation of why the
financial institution is requesting the
information and a statement of the
applicant’s right to refuse to provide the
information.656
The SBREFA Panel recommended
that, in order to assist both small
financial institutions and small business
applicants, the Bureau consider creating
sample data collection forms that, to the
extent possible, simply and clearly
explain the information being requested
for purposes of this data point. The
Panel also recommended that the
Bureau additionally consider providing
such sample data collection forms in
other languages, such as Spanish.657
Proposed Rule
Proposed § 1002.107(a)(20) would
require financial institutions to collect
and report the ethnicity, race, and
sex 658 of the applicant’s principal
owners as well as whether this
information is being reported based on
previously collected data pursuant to
proposed § 1002.107(c)(2). It would also
require financial institutions to report
whether the ethnicity and race are being
reported by the financial institution on
the basis of visual observation or
surname. Proposed § 1002.107(a)(20)
would require financial institutions to
collect and report ethnicity, race, and
sex data as prescribed in proposed
appendix G. Proposed appendix G
would include a requirement that a
financial institution inform an applicant
that the applicant is not required to
respond to the financial institution’s
questions regarding its principal
owners’ ethnicity, race or sex and would
also include a prohibition on financial
institutions requiring applicants to
provide this information. Proposed
§ 1002.107(a)(20) would also require
that when the financial institution
requests ethnicity, race, and sex
information from an applicant, the
financial institution inform the
656 For additional information related to SBREFA
feedback on the right to refuse, see the section-bysection analyses of proposed § 1002.107(a)(18) and
(19) above.
657 SBREFA Panel Report at 46.
658 While ECOA section 704B(e)(2)(G) uses ‘‘race,
sex, and ethnicity,’’ the Bureau has reordered them
to ‘‘ethnicity, race, and sex’’ for purposes of this
proposal, so that they appear alphabetically and for
consistency with how they appear in Regulation C.
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applicant that the financial institution
cannot discriminate on the basis of a
principal owner’s ethnicity, race, or sex,
or on whether the applicant provides
this information. Consistent with the
SBREFA Panel’s recommendation, the
Bureau is proposing a sample data
collection form that financial
institutions could use to collect
ethnicity, race, and sex information. See
proposed appendix E.
Proposed Rule—Collecting Ethnicity,
Race, and Sex, In General
Proposed comment 107(a)(20)–1
would clarify how a financial institution
collects ethnicity, race, and sex
information. It would state that unless a
financial institution is permitted to
report ethnicity, race, and sex
information based on previously
collected data pursuant to proposed
§ 1002.107(c)(2), a financial institution
must ask an applicant to report its
principal owners’ ethnicity, race, and
sex for each covered application and
that the financial institution must
permit an applicant to refuse to answer
the financial institution’s inquiry. It
would require financial institutions to
inform the applicant that it is not
required to provide the information.
Proposed comment 107(a)(20)–1 would
further clarify that the financial
institution must report the applicant’s
responses, its refusal to answer the
inquiries, or its failure to respond to the
inquiries, and explain that in certain
situations, discussed in proposed
comments 107(a)(20)–7 and –8 and in
appendix G, a financial institution may
also be required to report one or more
principal owners’ ethnicity and race
(but not sex) based on visual
observation and/or surname. Proposed
comment 107(a)(20)–1 would crossreference proposed appendix G for
additional instructions.
Proposed comment 107(a)(20)–2
would explain that a financial
institution must inform the applicant
that the financial institution shall not
discriminate on the basis of a principal
owner’s ethnicity, race, or sex or on
whether the applicant provides that
information. It would also clarify that a
financial institution may combine this
non-discrimination notice with the
similar non-discrimination notices that
a financial institution would be required
to provide when requesting minorityowned business status and womenowned business status if a financial
institution requests minority-owned
business status, women-owned business
status, and/or a principal owner’s
ethnicity, race, and sex in the same data
collection form or at the same time.
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Proposed comment 107(a)(20)–3
would explain how, pursuant to
proposed § 1002.111(b), financial
institutions must record applicants’
responses regarding a principal owner’s
ethnicity, race, and sex pursuant to
§ 1002.107(a)(20) separate from the
application and accompanying
information. This proposed comment
would also provide examples of how
responses could be recorded separately
from the application and accompanying
information.
Proposed comment 107(a)(20)–4
would clarify that a financial institution
would be required to maintain
procedures reasonably designed to
collect applicant-provided information,
including the ethnicity, race, and sex of
an applicant’s principal owners
pursuant to proposed § 1002.107(c)(1).
However, if a financial institution is
nonetheless unable to collect the
principal owners’ ethnicity, race, or sex
from the applicant and if the financial
institution is not required to report the
principal owners’ ethnicity and race
based on visual observation and/or
surname, the financial institution would
report that the principal owner’s
ethnicity, race, or sex (as applicable) is
‘‘not provided by applicant.’’
Proposed comment 107(a)(20)–12
would clarify that a financial institution
would neither be required nor permitted
to verify the ethnicity, race, or sex
information that the applicant provides
for purposes of proposed
§ 1002.107(a)(20), even if the financial
institution verifies or otherwise obtains
the ethnicity, race, or sex of the
applicant’s principal owners for other
purposes. Thus, for example, under the
principle articulated in proposed
comment 107(a)(20)–12, a financial
institution could not second guess an
applicant’s decision to provide sex
information for the applicant’s principal
owners for purposes of § 1002.107(a)(20)
based on the gender identity of the
principal owners. The Bureau solicits
comment on whether it would be useful
to expressly codify this application of
the principle in the commentary.
Additionally, the proposed comment
would explain that, if an applicant
refuses to respond to the inquiry
pursuant to proposed § 1002.107(a)(20)
or fails to respond to this inquiry, the
financial institution would report that
the applicant declined to provide the
information or did not respond to the
inquiry (as applicable), unless the
financial institution is required to report
ethnicity and race based on visual
observation and/or surname. Finally,
the proposed comment would explain
that the financial institution does not
report ethnicity, race, or sex pursuant to
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proposed § 1002.107(a)(20) based on
information that the financial institution
collects for other purposes.
Proposed comment 107(a)(20)–5
would explain that generally an
applicant determines its principal
owners and decides whether to provide
information about principal owners. It
would further state that, nonetheless, a
financial institution may be required to
report ethnicity and race information
based on visual observation and/or
surname and may need to determine if
a natural person with whom the
financial institution meets in person is
a principal owner. It would explain how
a financial institution determines who is
a principal owner in the event that the
financial institution may be required to
report ethnicity and race information
based on visual observation and/or
surname. It would also provide
examples of how the financial
institution can make that determination
and note that the financial institution is
not required to verify any responses
regarding whether a natural person is a
principal owner.
The Bureau seeks comment on these
general aspects of collecting and
reporting principal owners’ ethnicity,
race, and sex, including comments on
the challenges that financial institutions
may have implementing them.
Proposed Rule—Collecting Ethnicity
and Race Using Aggregate Categories
and Disaggregated Subcategories
The Bureau is proposing that financial
institutions request principal owners’
ethnicity and race using both aggregate
categories as well as disaggregated
subcategories.
With respect to ethnicity data
collection, the Bureau is proposing to
use the same aggregate categories (i.e.,
Hispanic or Latino and Not Hispanic or
Latino) and disaggregated subcategories
as are used in Regulation C. With
respect to race data collection, the
Bureau is proposing to use the same
aggregate categories as are used in
Regulation C: American Indian or
Alaska Native; Asian; Black or African
American; Native Hawaiian or Other
Pacific Islander; and White. Regulation
C also has disaggregated subcategories
for the Asian race category and the
Native Hawaiian or Other Pacific
Islander race category. In addition, with
respect to the American Indian or
Alaska Native race category, Regulation
C invites an applicant to provide the
name of a principal or enrolled tribe.
Similar to HMDA, the Bureau is
proposing to invite an applicant to
provide the name of a principal or
enrolled tribe for each principal owner
with respect to the Indian or Alaska
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Native race category and to adopt the
disaggregated subcategories used in
HMDA for the Asian race category and
the Native Hawaiian and Other Pacific
Islander race category. In addition, the
Bureau is proposing to add
disaggregated subcategories for the
Black or African American race
category, which are not used when
collecting data pursuant to Regulation
C.
OMB has issued standards for the
classification of Federal data on
ethnicity and race.659 OMB’s
government-wide standards provide a
minimum standard for maintaining,
collecting, and presenting data on race
and ethnicity for all Federal reporting
purposes. These standards have been
developed to provide ‘‘a common
language for uniformity and
comparability in the collection and use
of data on race and ethnicity by Federal
agencies.’’ 660 The OMB standards
provide the following minimum
categories for data on ethnicity and race:
Two minimum ethnicity categories
(Hispanic or Latino; Not Hispanic or
Latino) and five minimum race
categories (American Indian or Alaska
Native; Asian; Black or African
American; Native Hawaiian or Other
Pacific Islander; and White). The
aggregate categories for ethnicity and
race in Regulation C, which the Bureau
is proposing to use in subpart B,
conform to the OMB standards.
In addition to the minimum data
categories for ethnicity and race, the
OMB Federal Data Standards on Race
and Ethnicity provide additional key
principles. First, self-identification is
the preferred means of obtaining
information about an individual’s
ethnicity and race, except in instances
where observer identification is more
practical.661 Second, the collection of
greater detail is encouraged as long as
any collection that uses more detail is
organized in such a way that the
additional detail can be aggregated into
the minimum aggregate categories for
data on ethnicity and race. More
detailed reporting, which can be
aggregated to the minimum categories,
may be used at the agencies’ discretion.
Lastly, Federal agencies must produce
as much detailed information on
ethnicity and race as possible; however,
Federal agencies shall not present data
on detailed categories if doing so would
659 Off. of Mgmt. & Budget, Revisions to the
Standards for the Classification of Federal Data on
Race and Ethnicity, 62 FR 58782, 58782–90 (Oct.
30, 1997) (OMB Federal Data Standards on Race
and Ethnicity).
660 See id.
661 See id.
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compromise data quality or
confidentiality standards.662
Although OMB received comments
requesting the creation of a separate
Arab or Middle Eastern ethnicity
category prior to the adoption of the
OMB Federal Data Standards on Race
and Ethnicity in 1997, OMB accepted
the Interagency Committee’s
recommendation not to include one in
the 1997 minimum standards for
reporting of Federal data on race and
ethnicity. OMB noted that while it was
adopting the Interagency Committee’s
recommendation, it believed additional
research was needed to determine the
best way to improve data on this
population group.663
In 2017, OMB requested comment on
the Federal Interagency Working Group
for Research on Race and Ethnicity’s
(Working Group’s) proposals to update
the OMB Federal Data Standards on
Race and Ethnicity.664 The Working
Group proposed adding a Middle
Eastern or North African classification
to the Federal Data Standards on Race
and Ethnicity and to issue specific
guidelines for the collection of detailed
data for American Indian or Alaska
Native, Asian, Black or African
American, Hispanic or Latino, Native
Hawaiian or Other Pacific Islander, and
White groups.665 The Working Group
also considered whether race and
ethnicity should be collected using
separate questions versus a combined
question.
In considering what to propose that
financial institutions collect and report
with respect to the ethnicity and race of
the applicant’s principal owners, the
Bureau believes it is also important to
consider the data standards that the U.S.
Census Bureau (Census Bureau) uses in
the Decennial Census. The definition of
Hispanic or Latino origin used in the
2010 and 2020 Census questionnaire
refers to a person of Cuban, Mexican,
Puerto Rican, South or Central
American, or other Spanish culture or
origin regardless of race.666 The 2010
and 2020 Census disaggregated the
Hispanic or Latino ethnicity into four
categories (Mexican, Mexican American,
662 See
id.
FR 58782 (Oct. 30, 1997).
664 82 FR 12242 (Mar. 1, 2017).
665 See OMB Federal Data Standards on Race and
Ethnicity.
666 See U.S. Census Bureau, 2010 Official
Questionnaire, https://www.census.gov/history/pdf/
2010questionnaire.pdf (2010 Census Official
Questionnaire), and U.S. Census Bureau, 2020
Official Questionnaire, https://www2.census.gov/
programs-surveys/decennial/2020/technicaldocumentation/questionnaires-and-instructions/
questionnaires/2020-informationalquestionnaire.pdf (2020 Census Official
Questionnaire).
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or Chicano; Puerto Rican; Cuban; and
Another Hispanic, Latino or Spanish
origin) and included an area where
respondents could provide (i.e., write
in) a specific Hispanic, Latino, or
Spanish origin group as additional
information.667
The 2010 and 2020 Census
questionnaires listed three of OMB’s
five aggregate race categories (American
Indian or Alaska Native; Black or
African American; and White).
Although the questionnaires do not list
the aggregate race categories for Asian or
for Native Hawaiian or Other Pacific
Islander, they do list the related
disaggregated subcategories for the
Asian race category (i.e., Asian Indian,
Chinese, Filipino, Japanese, Korean,
Vietnamese, Other Asian), and for the
Native Hawaiian and Other Pacific
Islander race category (i.e., Native
Hawaiian, Chamorro,668 Samoan, Other
Pacific Islander). These questionnaires
also included three areas where
respondents could write in a specific
race: A specific Other Asian race, a
specific Other Pacific Islander race, or
the name of an enrolled or principal
tribe in the American Indian or Alaska
Native category.669 Additionally, the
2020 Census allowed respondents to
write in a specific origin for the White
category and for the Black or African
American category. For respondents
who did not identify with any of the
five minimum OMB race categories, the
Census Bureau included a sixth race
category—Some Other Race—on the
2010 and 2020 Census questionnaires.
Respondents could also select one or
more race categories and write-in
options.670
On February 28, 2017, the Census
Bureau released its 2015 National
Content Test: Race and Ethnicity
Analysis Report. The National Content
Test (NCT) provided the U.S. Census
Bureau with empirical research to
contribute to the planning for the
content of the 2020 Census’ race/
ethnicity questions. The report
presented findings to the Census Bureau
Director and executive staff on research
conducted to assess optimal design
elements that could be used in
question(s) on race and ethnicity. It
noted that Americans view ‘‘race’’ and
‘‘ethnicity’’ differently than in decades
past and that a growing number of
667 See 2010 Census Official Questionnaire and
2020 Census Official Questionnaire.
668 The questionnaire for the 2010 Census
included ‘‘Guamanian or Chamorro,’’ but the
questionnaire for the 2020 Census included only
‘‘Chamorro.’’
669 See 2010 Census Official Questionnaire and
2020 Census Official Questionnaire.
670 See id.
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people find the current race and
ethnicity categories confusing, or they
wish to see their own specific group
reflected on the Census questionnaire.
The NCT’s research found that there
have been a growing number of people
who do not identify with any of the
official OMB race categories, and that an
increasing number of respondents have
been racially classified as ‘‘Some Other
Race.’’ This was primarily because of
reporting by Hispanics who did not
identify with any of the OMB race
categories, but it also noted that
segments of other populations, such as
Afro-Caribbean and Middle Eastern or
North African populations, did not
identify with any of the OMB race
categories.671 The 2015 National
Content Test: Race and Ethnicity
Analysis Report concluded that optimal
design elements that may increase
reporting, decrease item non-response,
and improve data accuracy and
reliability include: (1) A combined race
and ethnicity question with detailed
checkbox options; (2) a separate
‘‘Middle Eastern or North African’’
response category; and (3) instructions
to ‘‘Mark all that apply’’ or ‘‘Select all
that apply’’ (instead of ‘‘Mark [X] one or
more boxes’’).672
As discussed above, the Census
Bureau did not ultimately incorporate
these design elements into the
questionnaire for the 2020 Decennial
Census. Instead, the questionnaire
continued to ask about ethnicity and
race in two separate questions. While
the questionnaire did not provide
detailed check box options for the White
race category or for the Black or African
American race category, the
questionnaire did add write-in options
and noted examples. For White, it noted
examples of German, Irish, English,
Italian, Lebanese, and Egyptian. For
Black or African American, it noted
examples of African American,
Jamaican, Haitian, Nigerian, Ethiopian,
and Somali.673 Nonetheless, as
discussed below, the Bureau is
requesting comment on whether the
approach and design elements set forth
in the 2015 National Content Test: Race
and Ethnicity Report Analysis (whether
in whole or in part) would improve data
collection that otherwise furthers
section 1071’s purposes, improve selfidentification of race and ethnicity by
applicants and response rates, or impose
671 U.S. Census Bureau, 2015 National Content
Test: Race and Ethnicity Analysis Report, Executive
Summary, at ix (Feb. 28, 2017), https://
www2.census.gov/programs-surveys/decennial/
2020/program-management/final-analysis-reports/
2015nct-race-ethnicity-analysis.pdf.
672 Id. at 83–85.
673 See 2020 Census Official Questionnaire.
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burdens on financial institutions
collecting and reporting this
information.
Consistent with its approach during
the SBREFA process, the Bureau is
proposing that financial institutions
must permit applicants to provide a
principal owner’s ethnicity and race
using the aggregate categories used for
HMDA data collection. The Bureau also
believes that aligning the aggregate
ethnicity and race categories for 1071
data collection with the HMDA data
collection will promote consistency and
may reduce potential confusion for
applicants, financial institutions, and
other users of the data. As noted above,
the feedback received on the SBREFA
Outline generally showed that SERs and
commenters favored such consistency.
However, the Bureau is also
proposing that applicants must be
permitted to provide a principal owner’s
ethnicity and race using the
disaggregated subcategories used in
HMDA data collection. With respect to
ethnicity data collection, the Bureau is
proposing that applicants must be
permitted to provide a principal owner’s
ethnicity using the disaggregated
subcategories used in HMDA data
collection. For race data collection, the
Bureau is proposing that applicants
must be permitted to provide a principal
owner’s race using the disaggregated
subcategories for the Asian race category
and the Native Hawaiian or Other
Pacific Islander race category. Unlike
HMDA, the Bureau is also proposing
that applicants must be permitted to
provide a principal owner’s race using
disaggregated subcategories for the
Black or African American race
category. Lastly, similar to HMDA, the
Bureau is proposing to invite an
applicant to provide the name of a
principal or enrolled tribe for each
principal owner with respect to the
American Indian or Alaska Native race
category.
This portion of proposed
§ 1002.107(a)(20) differs from the
Bureau’s SBREFA approach. The Bureau
is proposing use of disaggregated
subcategories for 1071 data collection,
in part, for consistency with existing
HMDA reporting requirements.
Moreover, based on feedback received
during the SBREFA process from SERs
and other stakeholders, the Bureau
believes that collection and reporting
using disaggregated subcategories could
be beneficial when attempting to
identify potential discrimination or
business and community development
needs in particular communities. While
the Bureau recognizes that disaggregated
data may not be useful in analyzing
potential discrimination where financial
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institutions do not have a sufficient
number of applicants or borrowers
within particular subgroups to permit
reliable assessments of whether
unlawful discrimination may have
occurred, disaggregated data on
ethnicity and race may help identify
potentially discriminatory lending
patterns in situations in which the
numbers are sufficient to permit such
fair lending assessments. Additionally,
as suggested in the 2015 National
Content Test: Race and Ethnicity Report
Analysis, the use of disaggregated
subcategories may increase response
rates.
Nonetheless, the Bureau
acknowledges the concerns that some
SERs and other stakeholders raised
regarding the collection and reporting of
disaggregated data. In particular, the
Bureau understands that including the
disaggregated subcategories for four
principal owners may make data
collection more difficult in certain
situations, such as for applications
taken solely by telephone or for paper
applications taken at retail locations.
Given these concerns, the Bureau seeks
comment on whether an
accommodation should be made for
certain application scenarios, for
example by permitting financial
institutions to collect ethnicity and race
information using only the aggregate
categories or to permit financial
institutions to collect ethnicity, race,
and sex information on only one
principal owner in those scenarios.
Additionally, the Bureau notes that
FinCEN’s CDD rule excludes from
certain of its requirements point-of-sale
transactions for the purchase of retail
goods or services up to a limit of
$50,000.674 For the reasons discussed in
more detail in the section-by-section
analysis of proposed § 1002.107(c)(1)
below, the Bureau is not proposing to
take this approach for the 1071 rule
given the different purposes and
requirements of the CDD rule (as well as
FinCEN’s related customer
identification program (CIP) rule) 675
674 31 CFR 1010.230(h)(1)(i). The CDD exclusion
for certain POS transactions is based on the ‘‘very
low risk posed by opening such accounts at [a]
brick and mortar store.’’ Fin. Crimes Enf’t Network,
U.S. Dep’t of Treasury, Guidance: Frequently Asked
Questions Regarding Customer Due Diligence
Requirements for Financial Institutions, at Q 29
(Apr. 3, 2018), https://www.fincen.gov/sites/default/
files/2018-04/FinCEN_Guidance_CDD_FAQ_
FINAL_508_2.pdf.
675 FinCEN’s CIP rule does not include a point of
sale exclusion. While the rule permits verification
of customer identity information within a
reasonable time after an account is opened, the
collection of required customer information must
occur prior to account opening. See 31 CFR
1020.220(a)(2)(i)(A) and (ii). For credit card
accounts, a bank may obtain identifying
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and section 1071. Nonetheless, the
Bureau seeks comment on whether
covered applications taken at retail
locations, such as credit cards and lines
of credit with a credit limit under a
specified amount (such as $50,000),
should be excepted from some or all of
the requirement to obtain principal
owners’ ethnicity, race, and sex
information. For example, should
financial institutions only be required to
ask about principal owners’ sex along
with aggregate race and ethnicity
categories (but not disaggregated
subcategories), or to ask about only one
principal owner’s ethnicity, race, and
sex for such applications?
The Bureau seeks comment on its
proposed use of the HMDA aggregate
categories, the HMDA disaggregated
subcategories (including the ability to
provide additional information if an
applicant indicates that a principal
owner is Other Hispanic or Latino,
Other Asian, or Other Pacific Islander),
and the addition of disaggregated
subcategories for the Black or African
American category. Additionally, the
Bureau seeks comment regarding
whether it would be helpful or
appropriate to provide additional
clarification or to pursue a different
approach regarding the ability of a
principal owner to identify as Other
Hispanic or Latino, Other Asian, or
Other Pacific Islander or to provide
additional information if a principal
owner is Other Hispanic or Latino,
Other Asian, or Other Pacific Islander.
The Bureau also seeks comment on
whether any additional or different
categories or subcategories should be
used for 1071 data collection, and
whether the collection and reporting of
race and ethnicity should be combined
into a single question for purposes of
1071 data collection and reporting. The
Bureau further seeks comment on
whether an additional category for
Middle Eastern or North African should
be added and, if so, how this category
should be included and defined. In
addition, the Bureau seeks comment on
whether disaggregated subcategories
should be added for the aggregate White
category, and if so, what disaggregated
subcategories should be added and
whether the applicant should be
permitted to write in or otherwise
provide other disaggregated
subcategories or additional information.
The Bureau seeks comment on whether
the approach and design elements set
forth in the 2015 National Content Test:
Race and Ethnicity Report Analysis
information about a customer from a third-party
source prior to extending credit to the customer. 31
CFR 1020.220(a)(2)(i)(C).
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would improve data collection or
otherwise further section 1071’s
purposes, as well as whether it would
pose any particular burdens or
challenges for financial institutions
collecting and reporting this
information. Finally, the Bureau seeks
comment on whether, similar to data
collection pursuant to Regulation C,
financial institutions should be limited
to reporting a specified number of
aggregate categories and disaggregated
subcategories and, if so, whether such a
limitation should be described in the
sample data collection form.
Proposed comment 107(a)(20)–6
would explain that applicants must be
permitted to provide a principal owner’s
ethnicity using aggregate categories and
disaggregated subcategories and would
also list the aggregate categories and
disaggregated subcategories that
applicants must be permitted to use.
Proposed comment 107(a)(20)–6 would
also explain that applicants must be
permitted to select one, both, or none of
the aggregate categories and as many
disaggregated subcategories as the
applicant chooses, even if the applicant
does not select the corresponding
aggregate category. Proposed comment
107(a)(20)–6 would state that, if an
applicant provides ethnicity
information for a principal owner, the
financial institution reports all of the
aggregate categories and disaggregated
subcategories provided by the applicant,
and it would provide an example. The
proposed comment would state that a
financial institution must also permit
the applicant to refuse to provide
ethnicity information for one or more
principal owners and explain how a
financial institution reports ethnicity
information if an applicant declines to
provide the information or fails to
respond. Finally, the proposed comment
would explain how a financial
institution reports ethnicity information
if an applicant has fewer than four
principal owners, and it would provide
an example.
Proposed comment 107(a)(20)–7
would explain that applicants must be
permitted to provide a principal owner’s
race using aggregate categories and
disaggregated subcategories and would
also list the aggregate categories and
disaggregated subcategories that
applicants must be permitted to use.
Proposed comment 107(a)(20)–7 would
also explain that applicants must be
permitted to select one, more than one,
or none of the aggregate categories and
as many disaggregated subcategories as
the applicant chooses, even if the
applicant does not select the
corresponding aggregate category.
Proposed comment 107(a)(20)–7 would
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explain that, if an applicant provides
race information for a principal owner,
the financial institution reports all of
the aggregate categories and
disaggregated subcategories provided by
the applicant, and it would provide an
example. The proposed comment would
state that a financial institution must
also permit the applicant to refuse to
provide race information for one or
more principal owners and explains
how a financial institution reports race
information if an applicant declines to
provide the information or fails to
respond. Finally, the proposed comment
would explain how a financial
institution reports race information if an
applicant has fewer than four principal
owners, and it would provide an
example.
Proposed Rule—Collecting Sex
Federal, State, and local government
agencies have been moving to providing
options for designating sex beyond the
binary options of male or female. At the
Federal level, for example, the
Department of State has announced that
it is planning to offer the option of a
new gender marker for non-binary,
intersex, and gender non-conforming
persons. It will be available for
passports and Consular Reports of Birth
Abroad as an alternative to male or
female.676 The Food and Drug
Administration includes the gender
options female, male, intersex,
transgender, and ‘‘prefer not to
disclose’’ on certain patient forms.677 A
number of States and the District of
Columbia, as well as some local
governments, offer an alternative sex or
gender designation to male and female
(e.g., ‘‘X’’) on government-issued
documents and forms such as drivers’
licenses and identification cards, and in
some cases birth certificates.678
676 See U.S. Dep’t of State, Proposing Changes to
the Department’s Policies on Gender on U.S.
Passports and Consular Reports of Birth Abroad
(June 30, 2021), https://www.state.gov/proposingchanges-to-the-departments-policies-on-gender-onu-s-passports-and-consular-reports-of-birthabroad/.
677 See Food & Drug Admin., MedWatch forms
FDA 3500 and 3500A (Sept. 12, 2018) (approved
under OMB No. 0910–0291), https://www.fda.gov/
media/76299/download and https://www.fda.gov/
media/69876/download.
678 See, e.g., Cal. S.B. 179, Gender identity:
female, male or nonbinary (Oct. 16, 2017), https://
leginfo.legislature.ca.gov/faces/
billTextClient.xhtml?bill_id=201720180SB179;
State of California Dep’t of Motor Vehicles, Driver’s
License or ID Card Updates, https://
www.dmv.ca.gov/portal/driver-licensesidentification-cards/updating-information-on-yourdriver-license-or-identification-dl-id-card/ (last
visited July 23, 2021); Colo. Dep’t of Revenue,
Change of Sex Designation, https://
drive.google.com/file/d/1PeYZd7U43
ar6Flg8lFAT1Etg1EPdLVUy/view; State of
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56481
The Supreme Court’s opinion last
year in Bostock v. Clayton County
concluded that sex discrimination
encompasses sexual orientation
discrimination and gender identity
discrimination, and that these forms of
discrimination necessarily involve
consideration of sex.679 It reached this
conclusion in the context of Title VII of
the Civil Rights Act of 1964, as
amended,680 which prohibits sex
discrimination in employment.681
Following the issuance of the Supreme
Court’s opinion and building on a 2016
letter the Bureau sent to an advocacy
organization,682 the Bureau issued an
interpretive rule clarifying that ECOA’s
and Regulation B’s prohibition on
discrimination based on sex protects
against discrimination based on sexual
orientation, gender identity, actual or
perceived nonconformity with sex based
or gender-based stereotypes, and the sex
of people associated with the
applicant.683 Other Federal agencies
have similarly clarified that other
statutes that protect against
Connecticut Dep’t of Motor Vehicles, Gender
Designation on a License or Identification Card,
https://portal.ct.gov/-/media/DMV/20/29/B-385.pdf;
District of Columbia Dep’t of Motor Vehicles,
Procedure For Establishing or Changing Gender
Designation on a Driver License or Identification
Card (June 13, 2017), https://dmv.dc.gov/sites/
default/files/dc/sites/dmv/publication/attachments/
DC%20DMV%20Form%20Gender%20SelfDesignation%20English.pdf, DC Driver License or
Identification Card Application (Jan. 2019), https://
dmv.dc.gov/sites/default/files/dc/sites/dmv/
publication/attachments/DMV%20BOE
%20Application_2-25-19.pdf; Maine Bureau of
Motor Vehicles, Gender Designation Form (Nov. 4,
2019), https://www1.maine.gov/sos/bmv/forms/
GENDER%20DESIGNATION%20FORM.pdf; State
of Nevada Dep’t of Motor Vehicles, Name Changes,
https://dmvnv.com/namechange.htm; State of New
Jersey Dep’t of Health, Off. of Vital Statistics and
Registry, Request Form and Attestation (REG–L2) to
Amend Sex Designation to Reflect Gender Identity
on a Birth Certificate—Adult (Feb. 2019), https://
www.nj.gov/health/forms/reg-l2_1.pdf; 2019 N.J.
Sess. Law Serv. ch. 271; New Mexico Motor Vehicle
Div., Request for Sex Designation Change, https://
realfile.tax.newmexico.gov/mvd10237.pdf; New
Mexico Dep’t of Health, Request to Change Gender
Designation on a Birth Certificate (Oct. 2019),
https://www.nmhealth.org/publication/view/form/
5429/; Virginia Dep’t of Motor Vehicles, Driver’s
License and Identification Card Application (July 1,
2021), https://www.dmv.virginia.gov/webdoc/pdf/
dl1p.pdf; Washington State Dep’t of Licensing,
Change of Gender Designation (Nov. 2019), https://
www.dol.wa.gov/forms/520043.pdf; New York City
Dep’t of Homeless Services, Off. of Policy,
Procedures and Training, Transgender, Non-binary,
and Intersex Clients (July 15, 2019), https://
www1.nyc.gov/assets/dhs/downloads/pdf/dhs_
policy_on_serving_transgender_non_binary_and_
intersex_clients.pdf.
679 See Bostock, 140 S. Ct. 1731.
680 42 U.S.C. 2000e et seq.
681 Bostock, 140 S. Ct. 1731.
682 See Letter from Bureau of Consumer Fin. Prot.,
to Serv. & Advocacy for GLBT Elders (SAGE) (Aug.
30, 2016), https://files.consumerfinance.gov/f/
documents/cfpb_sage-response-letter_2021-02.pdf.
683 86 FR 14363 (Mar. 16, 2021).
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discrimination based on sex protect
against discrimination based on sexual
orientation and gender identity.684
Some other Federal agencies have also
begun to re-consider how they collect
information on sex by including
questions about sexual orientation and
gender identity as part of questions
about sex. For example, the Census
Bureau released the Household Pulse
Survey,685 which asked questions about
sex assigned at birth, current gender
identity, and sexual orientation.
Specifically, the Household Pulse
Survey includes the following three
questions:
1. What sex were you assigned at birth, on
your original birth certificate? (A respondent
could provide a response of male or female.)
2. Do you currently describe yourself as
male, female or transgender? (A respondent
also could provide a response of ‘‘none of
these.’’)
3. Which of the following best represents
how you think of yourself?
In response to the third question, a
respondent would select from the following
responses: (1) Gay or lesbian; (2) Straight,
that is not gay or lesbian; (3) Bisexual; (4)
Something else; or (5) I don’t know.
Other Federal agencies and initiatives
have encouraged sexual orientation and
gender identity data collection in health
care settings.686
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684 See, e.g., 86 FR 32637 (June 22, 2021)
(Department of Education interpreting Title IX of
the Education Amendments of 1972); 86 FR 27984
(May 25, 2021) (Department of Health and Human
Services interpreting section 1557 of the Affordable
Care Act); Memorandum from Jeanine M. Worden,
Acting Assistant Secretary for Fair Housing and
Equal Opportunity, Implementation of Executive
Order 13988 on the Enforcement of the Fair
Housing Act (Feb. 11, 2021), https://www.hud.gov/
sites/dfiles/PA/documents/HUD_Memo_
EO13988.pdf (Department of Housing and Urban
Development interpreting the Fair Housing Act).
685 U.S. Census Bureau, Phase 3.2 Household
Pulse Survey (undated), https://www2.census.gov/
programs-surveys/demo/technical-documentation/
hhp/Phase_3.2_Household_Pulse_Survey_FINAL_
ENGLISH.pdf.
686 See, e.g., Off. of Disease Prevention & Health
Promotion, Healthy People (2020), https://
www.healthypeople.gov/2020/topics-objectives/
topic/lesbian-gay-bisexual-and-transgender-health;
Off. of the Nat’l Coordinator of Health Info. Tech.,
2021 Interoperability Standards Advisory (2021),
https://www.healthit.gov/isa/sites/isa/files/inlinefiles/2021-ISA-Reference-Edition.pdf; Ctrs. for
Disease Control & Prevention, Collecting Sexual
Orientation and Gender Identity Information (Apr.
1, 2020), https://www.cdc.gov/hiv/clinicians/
transforming-health/health-care-providers/
collecting-sexual-orientation.html.
Additionally, on April 1, 2021, the Department of
Health and Human Services’ Administration for
Community Living (ACL) published a notice of its
submission of a revised National Survey of Older
Americans Act Participants for OMB review and
clearance. ACL proposed to revise the existing
survey to add a new rotating module on COVID–
19. In response to an earlier notice related to the
survey, ACL received a comment asking it to
include survey response options that include
‘‘transgender’’ or ‘‘other’’ with a write-in option. In
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In light of the Bureau’s recent ECOA
interpretive rule, the continued
evolution of categories used for sex data
collection purposes at the Federal, State,
and local government levels, and
feedback on the SBREFA Outline, the
Bureau is proposing to collect
information about sex for purposes of
section 1071 more expansively than was
under consideration in the SBREFA
Outline. Specifically, the Bureau is
proposing adding an option for ‘‘I prefer
to self-describe’’ (with the ability of the
applicant to write in or otherwise
provide additional information) for the
principal owner’s sex to accompany the
existing ‘‘male,’’ ‘‘female,’’ and ‘‘I do not
wish to provide this information’’
options currently used on the HMDA
sample data collection form.
Proposed comment 107(a)(20)–8
would explain that an applicant must be
permitted to provide a principal owner’s
sex using one or more of the following
categories: Male, Female, and/or that the
principal owner prefers to self-describe
their sex. It would further explain that,
if an applicant indicates that a principal
owner prefers to self-describe their sex,
the financial institution would be
required to permit the applicant to
provide additional information about
the principal owner’s sex. The financial
institution would report to the Bureau
the additional information provided by
the applicant as free-form text.
Proposed comment 107(a)(20)–8
would state that a financial institution
must permit an applicant to select as
many categories as the applicant
chooses and that the financial
institution reports the category or
categories selected by the applicant,
including any additional information
provided by the applicant, or reports
that the applicant refused to provide the
information or failed to respond. It
would clarify that a financial institution
is not permitted to report sex based on
visual observation, surname, or any
basis other than the applicant-provided
information. Finally, proposed comment
107(a)(20)–8 would explain how a
financial institution would report sex if
an applicant has fewer than four
principal owners, provide an example,
and direct financial institutions to
proposed appendix G for additional
information on collecting and reporting
a principal owner’s sex.
response to comments it received on an earlier
notice, ACL indicated that it was supporting an ad
hoc panel that would be reviewing measures and
methodological issues related to measuring sex as
a non-binary construct, gender identity, and sexual
orientation. ACL indicated that it expected the
panel to produce a consensus report in December
2021, and that ACL anticipated using the report as
a basis for testing new survey questions. 86 FR
17153 (Apr. 1, 2021).
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The Bureau seeks comment on its
proposed approach to requesting
information about a principal owner’s
sex, including the opportunity for selfidentification (by allowing the applicant
to write in or otherwise provide
additional information). The Bureau
also seeks comment on whether the
sample data collection form should list
examples from which the applicant
could choose when a principal owner
self-identifies and an applicant writes in
or otherwise provides additional
information about the principal owner’s
sex, such as ‘‘intersex,’’ ‘‘non-binary,’’
or ‘‘transgender.’’ The Bureau also seeks
comment on whether, alternatively, sex
should be collected solely via the ‘‘I
prefer to self-describe’’ option (with the
ability to write in or otherwise provide
additional information)—that is,
without male and female being listed as
options. The Bureau also seeks
comment on whether applicants should
be restricted from designating more than
one category for a principal owner’s sex
(e.g., from selecting both ‘‘Female’’ and
‘‘I prefer to self-describe’’).
The Bureau also seeks comment on
whether financial institutions should be
required to ask separate questions
regarding sex, sexual orientation, and
gender identity and, if so, what
categories should be offered for use in
responding to each question. For
example, the Bureau requests comment
on whether the sample data collection
form should include the three questions
and related responses (described above)
from the Pulse Household Survey
questionnaire, or a check box for
‘‘Principal owner identifies as LGBTQ+’’
with an accompanying space for
providing additional information. The
Bureau also seeks comment on whether
it should adopt a data point to collect
an applicant’s lesbian, gay, bisexual,
transgender, or queer plus (LGBTQ+)owned business status, similar to the
way it is proposing to collect minorityowned business status and womenowned business status as discussed in
the section-by-section analysis of
proposed § 1002.107(a)(18) and (19)
above. The Bureau also seeks comment
on whether including such questions
would improve data collection or
otherwise further section 1071’s
purposes, as well as whether it would
pose any particular burdens or
challenges for industry.
In addition, to ensure that a financial
institution’s representation of
nondiscrimination on the basis of sex
information provided by the applicant is
consistent with the protections afforded
under ECOA and Regulation B, the
Bureau seeks comment on whether
ambiguity exists for any responses that
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an applicant might reasonably use to
self-describe a principal owner’s sex for
purposes of section 1071 (for example,
intersex status) and if clarification may
be needed.
Finally, the Bureau also requests
information on Federal, State, and local
government initiatives, as well as
private sector initiatives, involving the
use of sex categories other than male
and female and the inclusion of
questions regarding sexual orientation
and gender identity in demographic
information.
Proposed Rule—Collecting Ethnicity
and Race via Visual Observation or
Surname in Certain Circumstances
The Bureau is proposing that financial
institutions be required to collect and
report at least one principal owner’s
ethnicity and race based on visual
observation and/or surname in certain
circumstances. Specifically, a financial
institution would be required to report
at least one principal owner’s ethnicity
and race based on visual observation
and/or surname if the financial
institution meets in person with one or
more of the applicant’s principal owners
and the applicant does not provide
ethnicity, race, or sex information for at
least one principal owner in response to
the financial institution’s inquiry
pursuant to proposed § 1002.107(a)(20).
Although the Bureau indicated in the
SBREFA Outline that it was not
considering proposing that financial
institutions report a principal owner’s
race, sex, and ethnicity based on visual
observation and/or surname, the Bureau
asked SERs to provide feedback about
the potential challenges, costs, and
benefits of implementing such a
requirement for applicants who do not
self-report the information. The Bureau
also asked SERs to provide feedback
about how those potential challenges
and costs would change if reporting
based on visual observation and/or
surname was required only if the
applicant is a sole proprietor but not if
the applicant is an entity. Although
many SERs and commenters opposed
reporting ethnicity, race, or sex on the
basis of visual observation and/or
surname, some other commenters said
that financial institutions should be
required to report based on visual
observation and/or surname in certain
circumstances. Additionally, one SER
specifically noted that the Bureau
would need to account for lower selfreporting rates than are achieved for
HMDA reporting. Consistent with this
feedback, the Bureau notes that
demographic response rates in the
SBA’s Paycheck Protection Program
(PPP) data are much lower when
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compared to ethnicity, race, and sex
response rates in HMDA data.687 For
instance, roughly 71 percent of
respondents in the PPP data did not
provide a response for race, compared to
only 14.7 percent in the HMDA data.
Roughly 66 percent of respondents in
the PPP data did not provide a response
for ethnicity, compared to only 14.3
percent in the HMDA data.688
Without a visual observation and/or
surname collection requirement, the
Bureau believes that meaningful
analysis of the 1071 principal owner
race and ethnicity data could be
difficult, significantly undermining
section 1071’s fair lending purpose.
Comprehensive and accurate collection
and reporting of data is also vital to
section 1071’s business and community
development purpose. Historically, one
challenge under HMDA has been the
reluctance of some applicants to
voluntarily provide requested
demographic information, such as race
and ethnicity. The requirement in
Regulation C to collect race, sex, and
ethnicity on the basis of visual
observation or surname is an important
tool to address that challenge, and the
Bureau believes that the requirement
has resulted in more robust response
rates in the HMDA data. The Bureau has
considered the feedback in response to
the SBREFA Outline and this related
information and has determined that not
proposing a requirement to report based
on visual observation and/or surname
could diminish the utility of the 1071
data.
Accordingly, the Bureau has
determined that the appropriate
approach to further section 1071’s
purposes is to propose to require that
financial institutions collect at least one
principal owner’s race and ethnicity
(but not sex) on the basis of visual
observation and/or surname when the
applicant does not provide ethnicity,
race or sex information for at least one
principal owner and the financial
institution meets in person with one or
more principal owners. In other words,
a financial institution would not be
required to collect race and ethnicity via
visual observation and/or surname if the
applicant provides any demographic
information regarding any principal
owner. The Bureau is concerned that,
687 Small Bus. Admin., Paycheck Protection
Program Weekly Reports 2021, Version 11, at 9
(effective Apr. 5, 2021), https://www.sba.gov/sites/
default/files/2021-04/PPP_Report_Public_210404508.pdf. PPP data was taken from 2021 loans for
which the collection form for principal owner
demographics was included on the PPP application
itself and, for most of that time, was featured on the
first page of the application.
688 Id.
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for applicants with multiple principal
owners, the financial institution may
not be able to determine whether the
applicant has provided the demographic
information, for example the sex, of the
principal owner who meets in person
with the financial institution or for
another principal owner. The Bureau
seeks comment on this proposed
approach. The Bureau also seeks
comment on whether a financial
institution should be required to collect
a principal owner’s ethnicity and/or
race via visual observation and/or
surname if the applicant has only one
principal owner, the applicant does not
provide the principal owner’s
information, and the financial
institution meets in person with the
principal owner. In this situation, the
financial institution would be able to
‘‘match’’ any demographic information
that the applicant provides with the
correct the principal owner because
there is only one principal owner.
Proposed comment 107(a)(20)–9
would explain that a financial
institution is required to report ethnicity
and race (but not sex) based on visual
observation and/or surname in certain
circumstances. The proposed comment
would explain that if a financial
institution meets in person with one or
more of an applicant’s principal owners
and the applicant does not provide
ethnicity, race, or sex information for at
least one principal owner, the financial
institution must report at least one
principal owner’s ethnicity and race
(but not sex) based on visual
observation, surname, or a combination
of both visual observation and surname.
It would further explain that a financial
institution is not required to report
based on visual observation and/or
surname if the principal owner only
meets in person with a third party
through whom the applicant is
submitting an application to the
financial institution and would provide
an example.
Proposed comment 107(a)(20)–10
would clarify that a financial institution
meets with a principal owner in person
if an employee or officer of the financial
institution or one of its affiliates has a
meeting or discussion with the
applicant’s principal owner about an
application and can visually observe the
principal owner. The proposed
comment would also provide examples
of situations where the financial
institution meets in person with a
principal owner and where it does not.
The Bureau requests comment on this
approach and whether additional or
different examples are necessary.
Proposed comment 107(a)(20)–11
would clarify that a financial institution
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uses only aggregate categories when
reporting ethnicity and race based on
visual observation and/or surname and
would direct financial institutions to
proposed appendix G for additional
information on collecting and reporting
ethnicity and race based on visual
observation and/or surname. However,
the Bureau requests comment on
whether financial institutions should be
permitted, but not required, to use the
disaggregated subcategories (in addition
to the required aggregate categories)
when reporting race and ethnicity based
on visual observation and/or surname.
In addition to the specific matters
identified above, the Bureau seeks
comment on its proposed approach to
this data point, the proposed methods of
collecting and reporting the data, and
requests comment on whether
additional clarification regarding any
aspect of this data point is needed.
107(a)(21) Number of Principal Owners
ECOA section 704B(e)(2)(H)
authorizes the Bureau to require
financial institutions to compile and
maintain ‘‘any additional data that the
Bureau determines would aid in
fulfilling the purposes of [section
1071].’’ The Bureau believes that
collection of the number of principal
owners of an applicant would aid in
fulfilling the purposes of section 1071,
as explained below.
The Bureau did not address the
number of principal owners as a
potential data point under consideration
in the SBREFA Outline, although it did
seek feedback on several questions
related to the number of applicants’
principal owners.689 To facilitate
collection of the ethnicity, race, and sex
of applicants’ principal owners
pursuant to proposed § 1002.107(a)(20),
the Bureau is proposing that financial
institutions collect and report the
number of an applicant’s principal
owners.
Section 1071 uses the term ‘‘principal
owner’’ but does not define it. Proposed
§ 1002.102(o) would define a principal
owner as a natural person who directly
owns 25 percent or more of the equity
interests of a business. Thus, under this
proposed definition, it is possible that
an applicant would have no principal
owners or between one and four
principal owners.
As explained in proposed comment
107(a)(21)–1, a financial institution
would be able to collect an applicant’s
number of principal owners by
requesting the number of principal
owners from the applicant or by
determining the number of principal
689 SBREFA
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owners from information provided by
the applicant or that the financial
institution otherwise obtains. If the
financial institution asks the applicant
to provide the number of its principal
owners pursuant to proposed
§ 1002.107(a)(21), the financial
institution must provide the definition
of principal owner set forth in proposed
§ 1002.102(o). If permitted pursuant to
proposed § 1002.107(c)(2), a financial
institution could report an applicant’s
number of principal owners based on
previously collected data.
The Bureau believes that an applicant
is likely to know how many principal
owners it has and should not have
significant difficulties or objections to
providing this basic piece of
information. Moreover, the Bureau
understands that financial institutions
are already obtaining information about
principal owners. Further, this
additional information would aid in
fulfilling the purposes of section 1071 as
it may provide necessary context for
other data points. For example, if an
applicant reports the ethnicity, race, and
sex for one principal owner, having the
total number of principal owners would
permit the Bureau and other data users
to know whether that owner’s
demographics represents the
demographics of the entirety of the
applicant’s principal ownership or
merely one quarter of it. This
information would help data users in
fulfilling both the fair lending and
business and community development
purposes of section 1071.
Proposed comment 107(a)(21)–2
would clarify the relationship between
the proposed requirement to collect and
report the number of principal owners
in proposed § 1002.107(a)(21) with the
proposed requirement to report verified
information in proposed § 1002.107(b).
The proposed comment would state that
the financial institution may rely on an
applicant’s statements in collecting and
reporting the number of the applicant’s
principal owners. The financial
institution would not be required to
verify the number of principal owners
provided by the applicant, but if the
financial institution verifies the number
of principal owners, then the financial
institution would be required to report
the verified number of principal owners.
Proposed comment 107(a)(21)–3
would state that pursuant to proposed
§ 1002.107(c)(1), a financial institution
is required to maintain procedures
reasonably designed to collect
applicant-provided information, which
includes the applicant’s number of
principal owners. However, if a
financial institution is nonetheless
unable to collect or determine the
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number of principal owners of the
applicant, the financial institution
would report that the number of
principal owners is ‘‘not provided by
applicant and otherwise
undetermined.’’
The Bureau seeks comment on its
proposed approach to this data point.
The Bureau also seeks comment on
whether the Bureau should instead, or
additionally, require collection and
reporting of similar information about
owners (rather than principal owners).
For example, should the Bureau require
that financial institutions collect and
report the number of owners that an
applicant has that are not natural
persons, in order to obtain a more
complete picture of the applicant’s
ownership structure?
107(b) Verification of ApplicantProvided Information
ECOA section 704B(e)(1) provides
that ‘‘[e]ach financial institution shall
compile and maintain, in accordance
with regulations of the Bureau, a record
of the information provided by any loan
applicant pursuant to a request under
[section 704B(b)].’’ 690 Section 1071 does
not impose any requirement for a
financial institution to verify the
information provided by an applicant.
In the SBREFA Outline, the Bureau
did not include a general statement
about the issue of verification of
applicant-provided data points. For
certain data points such as time in
business, however, the Outline did
explain that the Bureau was considering
proposing that if the financial
institution did not verify the
information provided by the applicant,
the financial institution would report
the information provided by the
applicant. If the financial institution did
verify the information provided by the
applicant, the Outline explained that
the financial institution would report
the verified information. The Outline
did not state that the Bureau was
considering proposing that a financial
institution would be required to verify
any of the applicant-provided data
points.
As explained in the section-by-section
analysis of proposed § 1002.107(a)
above, a number of SERs urged the
Bureau to require collection and
reporting of a number of data points
based only on information as provided
by the applicant.691 No SERs stated that
they thought verification should be
generally required. The industry
stakeholders who commented on this
issue asked that the Bureau not require
690 ECOA
section 704B(e)(1).
Panel Report at 26.
691 SBREFA
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verification of applicant-provided
information. The Bureau did not receive
any comments on this issue from
community group stakeholders.
The Bureau is proposing in
§ 1002.107(b) that unless otherwise
provided in subpart B, the financial
institution would be able to rely on
statements of the applicant when
compiling data unless it verifies the
information provided, in which case it
would be required to collect and report
the verified information. Proposed
comment 107(b)–1 would explain that a
financial institution may rely on
statements made by an applicant
(whether made in writing or orally) or
information provided by an applicant
when compiling and reporting data
pursuant to the 1071 rule for applicantprovided data; the financial institution
would not be required to verify those
statements. Proposed comment 107(b)–1
would further explain, however, that if
the financial institution does verify
applicant statements for its own
business purposes, such as statements
relating to gross annual revenue or time
in business, the financial institution
would report the verified information.
The comment would go on to explain
that, depending on the circumstances
and the financial institution’s
procedures, certain applicant-provided
data could be collected without a
specific request from the applicant. For
example, gross annual revenue could be
collected from tax return documents. In
addition, the proposed comment would
make clear that applicant-provided data
are the data that are or could be
provided by the applicant, including
those in proposed § 1002.107(a)(5)
through (7), and (13) through (21).
Finally, proposed comment 107(b)–1
would provide a cross reference to
proposed comment 107(c)(2)–3, which
would discuss the possible reuse of
certain previously collected data.
The Bureau believes that requiring
verification of applicant-provided data
points would greatly increase the
operational burden of the 1071 rule, and
that relying on applicant-provided data
would ensure sufficient accuracy to
carry out the purposes of section 1071.
As discussed above, section 1071 does
not speak to verification; rather it refers
only to compiling and maintaining a
record of certain information provided
by an applicant. However, the Bureau
believes that requiring financial
institutions to collect and report (for the
1071 rule) information that they have
already verified would not add
operational difficulty, and would
enhance the accuracy and usefulness of
the data, thereby furthering the
purposes of section 1071. The Bureau is
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implementing this requirement
pursuant to its authority under ECOA
section 704B(g)(1) to prescribe rules in
order to carry out, enforce, and compile
data pursuant to section 1071, and as an
interpretation of the statutory phrase
‘‘compile and maintain’’ in ECOA
section 704B(e)(1). In the Bureau’s view,
the verification that the financial
institution chooses to carry out is part
of compiling and maintaining the
information provided by the applicant,
and this requirement will improve the
quality and usefulness of the resulting
1071 data set.
As discussed above, many SERs and
other stakeholders opposed the
inclusion of a verification requirement,
and the Bureau has taken their input
into account when crafting this
proposed provision.
The Bureau seeks comment on its
proposed approach to verification of the
1071 data points, including the specific
guidance that would be presented in
comment 107(b)–1. The Bureau also
seeks comment on whether financial
institutions should be required to
indicate whether particular data points
being reported have been verified or not.
107(c) Time and Manner of Collection
107(c)(1) In General
Background
Although the definition of
‘‘application’’ triggers a financial
institution’s duty to collect 1071 data,
the application definition does not
necessarily govern when that data must
be collected. The language and structure
of section 1071—which applies to
‘‘applications’’ from ‘‘applicants’’—
indicates that the data must be collected
sometime during the application
process, but does not provide further
detail.692
Financial institutions have expressed
concern about when applicant-provided
data must be collected, and particularly
the timing of collecting applicants’
protected demographic information
(that is, whether the applicant is a
minority-owned business or a womenowned business, and the ethnicity, race,
and sex of the applicant’s principal
owners, pursuant to proposed
§ 1002.107(a)(18) through (20)).
Collecting this protected demographic
information from applicants for
purposes of section 1071 has been a
particular concern for financial
institutions, as financial institutions
currently are generally prohibited from
692 See, e.g., ECOA section 704B(b) (‘‘[I]n the case
of any application to a financial institution . . . .’’)
and 704B(c) (‘‘Any applicant . . . may refuse to
provide any information requested . . . .’’)
(emphases added)).
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collecting such information except in
narrow circumstances.693 As such, its
required collection under section 1071
will be a departure from current practice
for most financial institutions.
SBREFA Proposal Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
stated that it was not currently
considering specifying a particular time
period in which financial institutions
must seek to collect 1071 data from
applicants.694 It also conveyed that it
was seeking to provide financial
institutions discretion and flexibility to
time their 1071 data collection at a point
during the application process that
works best for their processes and
relationships with applicants and to
avoid unnecessary costs, while still
fulfilling section 1071’s purposes. The
Bureau also noted that it had considered
possible alternatives of requiring
financial institutions to collect 1071
data within or by a specified time
period, such as simultaneous with the
triggering of an ‘‘application,’’ before
obtaining a ‘‘completed application,’’ or
before notifying the applicant of action
taken.
Most SERs that addressed the issue of
timing for data collection indicated that
they plan to collect 1071 data, and
particularly applicants’ protected
demographic information (as would be
required under proposed
§ 1002.107(a)(18) through (20)), early in
the application process and likely at the
time an application is initially being
submitted.695 These SERs felt that the
longer they wait to request 1071 data,
the more difficult or infeasible it will be
to gather the information from
applicants. Another SER urged the
Bureau to give financial institutions
flexibility to explore optimal timing for
collection of 1071-required protected
demographic information in order to
maximize the response rate without
discouraging applicants from pursuing
the application. This SER suggested that
protected demographic information
should be collected during the
application process, but before the
application is considered complete. The
SBREFA Panel recommended that the
Bureau seek comment on whether it is
necessary to specify a time period
specifically for the collection of 1071required protected demographic
information, and if so, what would be
the best period to designate.696
693 See
§ 1002.5(b).
Outline at 35–36.
695 SBREFA Panel Report at 32.
696 Id. at 47.
694 SBREFA
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Nearly all industry stakeholders to
comment on this issue supported the
Bureau not specifying a time period,
and instead giving financial institutions
discretion to set their own optimal
timing for the collection of applicantprovided 1071 data. The commenters
noted that given the variety of products,
financial institutions, and business
models in small business lending, a onesize-fits-all approach would be
unworkable and could disrupt financial
institutions’ processes. Some
commenters also highlighted the
complexity of small business lending
applications and stated that flexible
collection would provide greater
simplicity, reduce burden, and allow for
more accurate reporting, particularly
where not all the data points are
available at the time of collection. A few
commenters sought flexibility due to
concerns that if protected demographic
information is collected early on in the
process, an applicant would believe that
information would be used to
discriminate against them. One
commenter suggested looking at
FinCEN’s customer due diligence rule,
which allows for information collection
at the time of closing. Although industry
commenters generally favored
flexibility, several stated they would
likely collect 1071 data as early as
possible in order to ensure data quality
and collection. One stakeholder stated
that applicant-provided data would be
impossible to get if an application is
withdrawn, incomplete, or denied
before the required data are requested.
Another industry commenter suggested
the Bureau allow flexibility, but provide
a safe harbor for financial institutions
that collect applicant-provided data
points on or with the application.
Many of the commenters seeking
flexibility stated that point-of-sale (POS)
applications would be particularly
problematic with a rigid timing
requirement. POS applications include
those private label credit cards or other
products offered through retailers in
which the financial institution itself
does not interact with the applicant at
the time of application. POS
applications are taken in a variety of
different settings and locations, such as
at the checkout line, online, or at
customer service desks. Commenters
urged that they would need additional
flexibility for a POS application to
request 1071 data, such as at some point
reasonably following application
submission. Commenters cited concerns
about the accuracy and completeness of
data collected in a POS application:
Interactions are with retailer’s
employees who may not be able to
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answer questions about the data
collection, interactions often take place
in a public place (which may lead to
erroneous answers or refusals to
answer), and the person submitting a
POS application may not have relevant
knowledge to respond to the 1071required questions, leading to delayed
or abandoned applications. Commenters
also expressed concern that reporting of
POS applications would reflect the
retailer’s lending footprint, not the
financial institution’s, and so lead to
incorrect assumptions about the
financial institution’s lending.
A number of stakeholders, including
community groups and several financial
institutions, urged the Bureau to specify
a time period for the collection of 1071
data, stating that failure to do so would
undermine the accuracy of the data. The
commenters stated that complete
flexibility would result in inconsistent
and unreliable data since financial
institutions would be collecting the data
at different stages of the application
process. The commenters stated that
financial institutions that wait to collect
the data would have difficulty obtaining
applicant-provided information if the
application was withdrawn, incomplete,
or denied. The commenters also noted
that discrimination is likely to occur in
the early stages of the application
process, and would not be captured if
financial institutions are permitted to
delay data collection. One commenter
stated that requiring collection at the
time of application could also promote
non-discriminatory treatment as it
would impress upon lenders and
applicants the need for fair treatment.
An industry commenter stated that not
specifying a time period may lead to
financial institution regulatory paralysis
or confusion about when to collect 1071
data from applicants.
Among commenters that
recommended a specific time period for
collection, many suggested collecting
applicant-provided data at the time of
an application or otherwise ‘‘upfront.’’
One commenter noted that 1071required data could be built into the
application itself. On the other hand,
several commenters suggested 1071 data
should be collected any time before an
application is considered complete or,
one commenter suggested, when
financial institutions know that 1071
collection will be required. The
commenters stated that this would be
the time period during which applicants
are most likely to voluntarily provide
the data, would ensure comparable data
across lenders, and would still provide
financial institutions flexibility to
account for various application
processes. One commenter suggested
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testing and focus groups to determine
optimal timing. Otherwise, the
commenter suggested 1071 data be
collected before a financial institution
disburses funds to the applicant.
Proposed Rule
The Bureau is proposing
§ 1002.107(c)(1), which would require a
covered financial institution to maintain
procedures to collect applicantprovided data under proposed
§ 1002.107(a) at a time and in a manner
that is reasonably designed to obtain a
response. The Bureau agrees with SERs
and other stakeholders about the
benefits of providing a flexible approach
concerning when applicant-provided
data must be collected during the
application process. As noted by some
commenters, given the variety of
application processes in the small
business lending space, requiring 1071
data collection to occur within a narrow
window may affect data quality and
disrupt financial institution practices.
On the other hand, the Bureau believes
that safeguards are necessary to ensure
that financial institutions are not
evading or delaying their obligation to
collect 1071 data in a manner that
detrimentally affects response rates. In
light of these considerations, the Bureau
is proposing an approach that would
maintain flexibility, but require a
financial institution to maintain
procedures to collect applicantprovided data at a time and in a manner
that is reasonably designed to obtain a
response. This proposal thus
implements the flexible approach under
consideration in the SBREFA Outline,
though with additional safeguards.
Proposed comments 107(c)(1)–1 and
–2 would clarify the meaning of
financial institution ‘‘procedures’’ and
reiterate a financial institution’s latitude
to establish procedures concerning the
timing and manner that it collects
applicant-provided data, provided that
those procedures are reasonably
designed to collect the applicantprovided data in proposed
§ 1002.107(a).
Proposed comment 107(c)(1)–3 would
clarify what constitutes ‘‘applicantprovided data’’ in proposed
§ 1002.107(c)(1). The proposed
comment would also clarify that
applicant-provided data does not
include data that is generated or
supplied only by the financial
institution. The Bureau believes this
clarification would address commenter
concerns that certain data points
collected early in the process may not
be as accurate (or available) as data
available at a later time—for example,
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information on action taken is only
available late in the application process.
Proposed comment 107(c)(1)–4 would
provide additional guidance on
financial institutions’ procedures that
are reasonably designed to obtain a
response. As noted in proposed
comment 107(c)(1)–4, a financial
institution would assess on a periodic
basis whether its procedures are
reasonably designed. One way a
financial institution may be able to
assess whether its procedures are
reasonably designed would be, once
1071 data are made publicly available,
to compare its response rate with
similarly situated financial institutions
(for example, those that offer similar
products, use a similar lending model,
or are of a similar size).697 The Bureau
also anticipates that the response rate
will differ depending on the data point:
Some applicant-provided data points
(for example, time in business) may
have a higher response rate than other
applicant-provided data points (such as
a principal owner’s race, sex, and
ethnicity). The key is for a financial
institution to assess on a periodic basis
whether its procedures are reasonably
designed to obtain a response.
Proposed comments 107(c)(1)–5 and
–6 would provide examples of
procedures that generally are and are
not reasonably designed to obtain a
response. Although the inquiry requires
a fact-based determination, the Bureau
believes providing examples and further
guidance of practices that likely are and
are not reasonably designed to obtain a
response would facilitate compliance
and promote best practices. For
example, the Bureau believes that, as a
general matter, once there is a ‘‘covered
application,’’ the earlier a financial
institution seeks to collect applicantprovided information, the greater the
likelihood of obtaining an applicant
response (particularly for covered
applications that are later withdrawn or
left incomplete). Thus, the Bureau
believes that, as a general matter, a
procedure reasonably designed to obtain
a response is one in which a financial
institution requests applicant-provided
data at the time of a covered
application. For example, it could
request these data in connection with a
697 As discussed in greater detail in part VI below,
the Bureau is proposing not to determine what data
to include in the public application-level 1071 data
until after it receives at least one full year of 1071
data reported by financial institutions. Following
the compliance date of the final rule, the Bureau
proposes to issue a policy statement setting forth its
intended modifications and deletions to the public
application-level 1071 data. Of course, the Bureau
acknowledges that the availability and robustness of
a peer analysis would also depend on the extent to
which 1071 data are made publicly available.
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written application form, provided any
collection form requesting applicants’
protected demographic information
pursuant to proposed § 1002.107(a)(18)
through (20) is separate from the
application form and other documents
used to collect other information related
to the application, as would be required
by proposed § 1002.111(b). Collecting
applicant-provided data after a covered
application is submitted—for example,
while the application is being
completed through the submission of
additional documents and
verifications—may be reasonably
designed to obtain a response
depending on the particular financial
institution’s procedures, with earlier
collections more likely to be reasonably
designed. The Bureau believes
providing such compliance examples
would incentivize early collection and
be consistent with the practice many
SERs and other industry commenters
indicated they planned to follow in any
event. While some commenters stated
that an applicant may be reluctant to
respond to early collection due to
concerns that the information may be
used to discriminate against them, the
Bureau believes those concerns can be
addressed through the use of a data
collection form (such as the sample
collection form in proposed appendix E)
that would explain to applicants the
reason the information is being
collected. Moreover, the Bureau notes
that financial institutions regularly
collect data required by HMDA and
Regulation C at the time of application
without significant issue and that the
sample data collection form in
Regulation C similarly provides an
explanation to applicants as to the
reason protected demographic
information is being collected.
Conversely, the Bureau believes that,
as a general matter, it is unlikely that
small business applicants will respond
to data requests that occur simultaneous
with or after notifying an applicant of
action taken on the covered application.
Depending on the particular facts,
however, these procedures may be
reasonably designed to obtain a
response; for example, if the financial
institution has evidence or a reason to
believe that under its procedures the
response rate would be similar to or
better than other alternatives. Although
a fact-based determination, proposed
comment 107(c)(1)–6 would clarify that
such procedures would generally not be
considered ‘‘reasonably designed.’’
Proposed comment 107(c)(1)–7 would
explain that a financial institution
reports updated applicant-provided data
if it obtains more current data during
the application process. Proposed
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comment 107(c)(1)–8 would provide
guidance in the event a financial
institution changes its determination
regarding an applicant’s status as a
small business.
Many industry commenters discussed
the need for additional flexibility
specifically for POS applications. The
Bureau understands that many (though
not all) POS applications, particularly
those for smaller credit amounts or to
purchase particular goods in a store, are
often submitted on-site at POS and
decisioned in real time. Under proposed
§ 1002.107(c)(1) and associated
commentary, the Bureau anticipates that
most financial institutions would
generally collect applicant-provided
1071 data at POS, and not at some later
time after the credit request has been
decisioned and the applicant has left the
store, as suggested by some commenters.
Despite the comments on this issue, the
Bureau is not proposing a different
approach for collecting applicantprovided data specifically for POS
applications. Commenters raised
concerns about retail employees seeking
to collect 1071 required data in a public
setting. However, the Bureau believes
that financial institutions can develop
procedures to accommodate collection
in this setting, including (as discussed
above) by using the sample collection
form developed by the Bureau. The
Bureau also does not believe that any
specialized knowledge is necessary to
collect 1071 data, and so believes that
retail employees can collect the
information. Although it is possible that
the accuracy of the data collected in
POS applications may be more prone to
errors, as some commenters allege, the
Bureau believes that having such data,
even with decreased accuracy, would be
preferable to not having any applicantprovided data for such applications.698
Several industry commenters
suggested the Bureau look to FinCEN’s
customer due diligence (CDD) rule,
which excludes from certain of its
requirements POS transactions to
provide credit products solely for the
purchase of retail goods/services up to
a limit of $50,000.699 The Bureau is not
proposing to take this approach given
the different purposes and requirements
of the CDD rule and section 1071. The
purpose of the CDD rule is to improve
financial transparency and prevent
criminals and terrorists from misusing
companies to disguise their illicit
activities and launder their ill-gotten
698 In order to help identify such transactions, the
Bureau is proposing to collect information about the
application recipient. See proposed
§ 1002.107(a)(4).
699 31 CFR 1010.230(h)(1)(i).
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gains.700 Under the CDD rule, covered
financial institutions must identify and
verify the identity of natural persons
(known as beneficial owners) of legal
entity customers who own, control, and
profit from companies when those
companies open accounts.701 The CDD
exclusion for certain POS transactions is
based on the ‘‘very low risk posed by
opening such accounts at [a] brick and
mortar store.’’ 702 While the CDD rule
(and the customer identification
program (CIP) rule 703) focus on
accounts (including certain originated
loans), obtaining data on denials is
essential to 1071’s purposes. Moreover,
unlike the CDD and CIP rules, which
require covered financial institutions to
collect certain essential information,
section 1071 only requires that financial
institutions seek to collect applicants’
protected demographic information, and
permits applicants to refuse to provide
that information. Given these key
differences, the Bureau is not proposing
to follow the CIP and CDD rules
concerning timing of collection or the
exclusion of certain POS applications.
The Bureau seeks comment on
proposed § 1002.107(c)(1) and
associated commentary. As
recommended by the SBREFA Panel,
the Bureau seeks comment on whether
it is necessary to specify a time period
specifically for the collection of
protected 1071 demographic
information, and if so, what time period
the Bureau should designate. The
Bureau also seeks comment on the
examples set forth in proposed
comments 107(c)(1)–5 and –6, and
whether it would be useful to provide
additional examples of procedures that
are and that are not reasonably designed
to obtain a response. In addition, the
Bureau seeks comment on its proposed
approach for POS applications,
including its proposal that would not
make any particular exceptions for the
timing and manner of 1071 data
collection for POS applications.
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107(c)(2) Previously Collected Data
In the SBREFA Outline, the Bureau
emphasized that it was seeking to
700 See FinCEN, Information on Complying with
the Customer Due Diligence (CDD) Final Rule,
https://www.fincen.gov/resources/statutes-andregulations/cdd-final-rule (last visited Aug. 6,
2021).
701 Id.
702 FinCEN, Guidance, at Q 29 (Apr. 3, 2018),
https://www.fincen.gov/sites/default/files/2018-04/
FinCEN_Guidance_CDD_FAQ_FINAL_508_2.pdf.
703 FinCEN’s CIP rule does not include a point of
sale exclusion. While the rule permits verification
of the identity of the customer within a reasonable
time after the account is opened, the collection of
required customer information must occur prior to
account opening. See 31 CFR 1020.220(a)(2)(i)(A)
and (ii).
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provide financial institutions with
discretion and flexibility in the timing
of 1071 data collection, in light of
considerations including their
relationships with applicants and the
need to avoid unnecessary costs.704 The
Bureau did not specifically discuss
whether a financial institution could
meet its 1071 obligations on a covered
application by reusing certain data it
had previously collected from the same
applicant. In response to the Bureau’s
proposal under consideration
concerning timing of collection of
certain 1071 data, however, a
commenter suggested financial
institutions provide annual certification
of 1071 data where there is an ongoing
customer relationship. The commenter
noted that the data are unlikely to
change within a year, there may be
multiple transactions during that time,
and it would avoid financial institutions
and applicants having to provide the
information during the application
process, saving time and expense.
The Bureau is proposing
§ 1002.107(c)(2), which would permit,
but not require, a financial institution to
reuse previously collected data to satisfy
proposed § 1002.107(a)(13) through (21)
if the data were collected within the
same calendar year as the current
covered application and the financial
institution has no reason to believe the
data are inaccurate. The Bureau believes
that, absent a reason to suspect
otherwise, recently collected 1071 data
are likely to be reliable. Additionally,
the Bureau believes that a flexible
approach giving financial institutions
discretion to reuse these data is
consistent with the approach the Bureau
proposed at SBREFA. Although
proposed § 1002.107(c)(2) would apply
to certain data collected within the same
calendar year, nothing prevents a
financial institution from confirming
with the applicant whether information
collected more than a year ago from the
applicant remains accurate.
Proposed comment 107(c)(2)–1 would
provide an example of how certain
previously collected data can be reused
by a financial institution. Proposed
comment 107(c)(2)–2 would identify the
particular data that can be reused. The
comment would also clarify that other
data required by proposed § 1002.107(a)
could not be reused, as those data points
are specific and unique to each covered
application. Proposed comment
107(c)(2)–3 would clarify instances
where data have not been ‘‘previously
collected’’ and so cannot be reused
under proposed § 1002.107(c)(2).
704 SBREFA
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Proposed comment 107(c)(2)–4 would
provide guidance on when information
is considered collected in the same
calendar year, and so may be reused by
a financial institution in certain
circumstances. In particular, the
proposed comment discusses
applications that span more than one
calendar year.
Proposed comment 107(c)(2)–5 would
provide clarity and an example of when
a financial institution has reason to
believe data may be inaccurate, and so
cannot be reused for a subsequent
covered application. Finally, proposed
comments 107(c)(2)–6 and –7 would
provide guidance on when data
regarding minority-owned business
status, women-owned business status,
and data on the principal owners’
ethnicity, race, and sex may be reused
by a financial institution in a
subsequent covered application.
The Bureau seeks comment on
§ 1002.107(c)(2) and associated
commentary. The Bureau also seeks
comment on whether a period of one
calendar year to reuse certain previously
collected data is appropriate or whether
it should be extended to a longer period
(such as two or three years). In addition,
the Bureau seeks comment on whether
financial institutions should be required
to notify applicants that information
they provide (including, in particular,
minority-owned business status,
women-owned business status, and the
principal owners’ ethnicity, race, and
sex) could be reused for subsequent
applications.
Section 1002.108
Firewall
Background
ECOA section 704B(d) generally
restricts the access of certain
individuals at a financial institution or
its affiliates to certain information
provided by an applicant pursuant to
section 1071. The Bureau calls this
requirement in 704B(d) a ‘‘firewall.’’
More specifically, 704B(d)(1) states that
‘‘[w]here feasible,’’ underwriters and
other officers and employees of a
financial institution or its affiliates
‘‘involved in making any determination
concerning an application for credit’’
cannot have access to any information
provided by the applicant pursuant to a
request under 704B(b). That is, the
statute limits access not only by
underwriters and persons making an
underwriting decision but also by
anyone else involved in making any
determination concerning an
application. However, it does not
expressly define the term ‘‘feasible’’ or
provide clarification regarding what it
means to be involved in making any
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determination concerning an
application for credit.
Additionally, under ECOA section
704B(d)(2), if the financial institution
determines that an underwriter,
employee, or officer involved in making
a determination ‘‘should have access’’ to
any information provided by the
applicant pursuant to a request under
704B(b), the financial institution must
provide a notice to the applicant of the
underwriter’s access to such
information, along with notice that the
financial institution may not
discriminate on the basis of such
information. Section 704B(d)(2) does
not expressly define or describe when
an underwriter, employee, or officer
‘‘should have access,’’ nor does it
explain the relationship, if any, between
when a financial institution determines
that an individual ‘‘should have access’’
under 704B(d)(2) and whether it is
‘‘feasible’’ to implement and maintain a
firewall under 704B(d)(1).
The Bureau believes that ECOA
section 704B(d) contains significant
ambiguities with respect to how
financial institutions, in practical terms,
should determine how to implement a
firewall to limit underwriters’,
employees’, and officers’ access to the
information provided by applicants
pursuant to section 704B(b). Indeed,
based on feedback from SERs and other
commenters, the Bureau believes that in
many instances financial institutions
that find it not ‘‘feasible’’ to implement
and maintain a firewall will be the same
institutions determining that relevant
individuals ‘‘should have access’’ to the
information provided by an applicant
pursuant to 704B(b). The Bureau further
believes that reading these two
provisions in isolation from each other
would result in significant confusion
and challenges, particularly for smaller
financial institutions.
Accordingly, the Bureau believes that
section 1071’s firewall requirement is
best implemented by reading the
‘‘should have access’’ language in ECOA
section 704B(d)(2) in conjunction with
the ‘‘feasibility’’ language in 704B(d)(1).
In 704B(d)(1), if it is feasible to
implement and maintain a firewall, then
underwriters, other employees, and
officers shall not have access to the
information subject to the firewall; but
it is not feasible to implement and
maintain a firewall if an underwriter,
other employee, or officer subject to the
firewall should have access to that
information. If it is not feasible to
implement and maintain a firewall, then
that underwriter, other employee, or
officer who should have access is
permitted to have access so long as the
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financial institution provides a notice to
the applicant.
As discussed in greater detail above in
E.2 of the Overview to this part V, the
Bureau also believes that section 1071 is
ambiguous with respect to the meaning
of ‘‘any information provided by the
applicant pursuant to a request under
subsection (b).’’ On the one hand, ECOA
section 704B(b)(1) directs financial
institutions to inquire whether a
business is ‘‘a women-owned, minorityowned, or small business,’’ so the
phrase could be interpreted as referring
only to those three data points. Section
704B(e), however, indicates that the
scope of 704B(b) is much broader. It
instructs financial institutions that
‘‘information provided by any loan
applicant pursuant to a request under
subsection (b) . . . shall be itemized in
order to clearly and conspicuously
disclose’’ data including the loan type
and purpose, the amount of credit
applied for and approved, and gross
annual revenue, among others. In other
words, 704B(e) designates all of the
information that financial institutions
are required to compile and maintain—
not simply an applicant’s status as a
women-owned, minority-owned, or
small business—as information
provided by an applicant ‘‘pursuant to
a request under subsection (b).’’ But
information deemed provided pursuant
to 704B(b) is subject not only to the
firewall under 704B(d) but also to a
right to refuse under 704B(c) and
separate recordkeeping requirements
under 704B(b)(2). Applying these
special protections to many of the data
points in 704B(e), such as an applicant’s
gross annual revenue or the amount
applied for, would be extremely
difficult to implement because this
information is critical to financial
institutions’ ordinary operations in
making credit decisions.
In order to resolve these ambiguities,
the Bureau believes that the best reading
of the statute is to give different
meanings to the phrase ‘‘any
information provided by the applicant
pursuant to a request under subsection
(b)’’ with respect to ECOA section
704B(e) as opposed to 704B(b)(2), (c),
and (d). As relevant here, with respect
to the firewall in ECOA section 704B(d),
the Bureau interprets the phrase to refer
to the data points in proposed
§ 1002.107(a)(18) (minority-owned
business status) and proposed
§ 1002.107(a)(19) (women-owned
business status), as well as proposed
§ 1002.107(a)(20) (ethnicity, race, and
sex of principal owners). Each of these
data points require financial institutions
to request demographic information that
has no bearing on the creditworthiness
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of the applicant. Moreover, a financial
institution could not inquire about this
demographic information absent section
1071’s mandate to collect and report the
information, and ECOA prohibits a
financial institution from discriminating
against an applicant on the basis of the
information. The Bureau accordingly
believes that the best effectuation of
congressional intent is to apply section
1071’s special-protection provisions to
apply to this demographic information,
regardless of whether the statutory
authority to collect it originates in
704B(b)(1) (women-owned business
status and minority-owned business
status) or 704B(e)(2)(G) (race, sex, and
ethnicity of principal owners). The
Bureau similarly believes that Congress
did not intend these special protections
to apply to any of the other data points
proposed in § 1002.107(a), which the
financial institution is permitted to
request regardless of coverage under
section 1071, which are not the subject
of Federal antidiscrimination law, and
many of which financial institutions
currently use for underwriting
purposes.705
The Bureau is proposing § 1002.108 to
implement ECOA section 704B(d) and,
pursuant to its authority in 704B(g)(1),
to prescribe such rules and issue such
guidance as may be necessary to carry
out, enforce, and compile data pursuant
to section 1071.
SBREFA Proposal Under Consideration
and Feedback
Information subject to the firewall. In
the SBREFA Outline, the Bureau stated
that it was considering proposing that
financial institutions need only limit
access under ECOA section 704B(d) to
an applicant’s responses to the financial
institution’s specific inquiries regarding
women-owned and minority-owned
business status and the ethnicity, race,
and sex of principal owners, but not to
an applicant’s small business status.706
As discussed below, many SERs and
other commenters suggested that
restricting access to protected
demographic information obtained to
comply with section 1071 (i.e.,
minority-owned business status,
women-owned business status, and the
principal owners’ ethnicity, race, and
sex) would be difficult for their
institutions. Although these SERs and
other commenters generally did not
comment on the scope of information
that the Bureau considered proposing be
subject to the firewall (other than to say
705 As explained in the Overview to this part V,
the Bureau is not proposing to require financial
institutions to maintain and report a data point on
small business status.
706 SBREFA Outline at 36–37.
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that liming access would be difficult),
one commenter said that small business
status should not be subject to the
firewall and another commenter said
that it should.
The SBREFA Panel recommended
that the Bureau propose clear guidance
on what information is subject to the
firewall requirement.707
Feasibility of maintaining a firewall.
In the SBREFA Outline, the Bureau also
stated that it was considering how it
might apply the feasibility standard in
ECOA section 704B(d)(1) and asked
several questions related to this
standard.708 Several SERs that take inperson or paper applications or that
have very limited commercial lending
staff stated that it would be costly or
impossible for them to restrict access to
applicants’ protected demographic
information by underwriters and other
persons involved in making
determinations concerning applications
from small businesses.709 In contrast,
several SERs that operate entirely online
said that it would be relatively easy for
them to restrict access to applicants’
protected demographic information.
Another SER said that it could restrict
access to protected demographic
information for applications received
online (though not for paper
applications), but that it would
necessitate an overhaul of its online
system.
Many other stakeholders providing
feedback on the SBREFA Outline said
that it would not be possible to limit
access to applicants’ protected
demographic information or that
attempting to do so would be costly and
time consuming. Some other
commenters suggested that
implementing and maintaining a
firewall would be impossible for all
financial institutions or certain
categories of financial institutions (i.e.,
smaller financial institutions,
community banks, credit unions).
Generally, these commenters requested
exemptions from the firewall
requirement for either all financial
institutions or specific categories of
financial institutions. Generally,
commenters were concerned about the
costs associated with hiring additional
staff, outsourcing additional functions,
or making system changes to implement
and maintain the firewall. However,
some commenters indicated that
financial institutions should not be
required to change their existing
707 SBREFA
Panel Report at 47.
Outline at 36–37.
709 The SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 33–34.
708 SBREFA
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application or other processes to
maintain a firewall and noted that
underwriters and officers who gather
information from small business
applicants also make determinations
regarding such applications.
Commenters noted that implementing a
firewall would necessitate more points
of contact between employees of the
financial institution and an applicant
and would require financial institutions
to reassign job duties and retrain
existing employees.
Importantly, many comments from
SERs and others seemed to reflect
confusion about the intended scope of
the firewall. For example, some SERs
and other commenters seemed to think
that the firewall would prohibit
employees who were generally aware of
an applicant’s business status or of a
principal owner’s ethnicity, race, and
sex, such as due to participation in
outside organizations or activities, from
making any determinations regarding
applications. One commenter remarked
that it would be impossible to comply
with the firewall requirement if a
financial institution required a principal
owner to provide a driver’s license.
Additionally, some SERs and other
commenters requested guidance on the
scope and applicability of the firewall,
indicating that the SBREFA Outline was
not sufficiently clear regarding the
firewall’s scope.
The SBREFA Panel recommended
that the Bureau propose a clear
feasibility standard that takes into
account the costs of establishing and
maintaining a firewall to limit access by
underwriters and other persons.710
Providing a notice in lieu of the
firewall. In the SBREFA Outline, the
Bureau also stated that it was
considering proposing to interpret
ECOA section 704B(d)(2) to permit
financial institutions to give
underwriters, employees, and officers
access to applicants’ responses
regarding women-owned business
status, minority-owned business status
and the principal owners’ race, sex, and
ethnicity when the financial institution
determines that such access is needed
for the underwriter, employee, or officer
to perform usual and regularly assigned
job duties.711 In such circumstances, the
financial institution would need to
comply with the statutory requirement
to provide a notice in lieu of limiting
access. The Bureau also stated in the
SBREFA Outline that the financial
institution could provide the notice to
all small business applicants or the
specific applicant or applicants whose
710 Id.
at 47.
711 SBREFA
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information will or may be accessed.
The Bureau also stated that it was
considering developing sample
disclosure language that financial
institutions could use when providing
the notice under 704B(d)(2) and that the
notice under 704B(d)(2) need not
include language regarding small
business status.
SERs and other stakeholders generally
were supportive of providing a notice to
applicants in lieu of restricting access to
applicants’ protected demographic
information obtained for purposes of the
1071 rule. Several stated that it should
be permissible to provide a disclosure or
notice to meet the firewall requirement,
and others stated that a financial
institution should be permitted to
provide a notice to meet the firewall
requirement if the financial institution
itself determines that establishing and
maintaining a firewall was not feasible.
However, one industry commenter
stated that financial institutions should
not be required to provide a notice to
comply with the firewall requirement,
and one SER said that use of the notice
should be optional. This SER suggested
that requiring the use of a notice may
cause confusion for the applicant and
have the unintended consequence of
causing unfounded claims of
discrimination if the application is
denied. One SER cautioned that many
people do not read notices and
disclosures, and another SER suggested
that financial institutions would not
want to provide a notice because the
loan process already involves too much
paperwork.
Several SERs and several other
stakeholders indicated a preference for
providing a notice to all applicants, not
just those specific applicants whose
protected demographic information was
likely to be accessed by underwriters
and others making decisions regarding
applications.
Several stakeholders supported a
model notice. One SER as well as two
other commenters asked that, if the
Bureau provided sample language or a
model notice, that the Bureau provide it
in English as well as in other languages,
such as Spanish. SERs and other
stakeholders suggested a variety of
statements that they thought should or
should not be included in sample
language or a model notice. They also
provided a variety of suggestions on
combining the notice with other
documents, such as the application,
sample data collection form, or with
other required notices and disclosures.
One SER requested that the Bureau
clarify when a financial institution
would be permitted to provide a notice
in lieu of restricting access to
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applicants’ protected demographic
information. Some stakeholders
requested additional guidance on the
timing and methods for providing a
notice.
The SBREFA Panel recommended
that the Bureau propose to permit
financial institutions to provide a notice
to applicants instead of restricting
access to applicants’ protected
demographic information if it is not
feasible for the financial institution to
restrict such access.712
Proposed Rule
The Bureau is proposing § 1002.108 to
implement the firewall provisions in
ECOA section 704B(d). Proposed
§ 1002.108(a) would provide certain
relevant definitions, proposed
§ 1002.108(b) would state the general
prohibition on access to applicants’
protected demographic information by
certain persons, proposed § 1002.108(c)
would explain the exception to that
prohibition, and proposed § 1002.108(d)
would provide language for the notice
necessary in order to qualify for the
exception. The Bureau is also proposing
commentary. The Bureau’s proposed
approach to § 1002.108 is consistent
with its approach under consideration
during the SBREFA process. The
Bureau’s general rationale for how it
reads the firewall provisions are set
forth in this section-by-section analysis
of proposed § 1002.108 above, under
Background.
Proposed § 1002.108(b) would state
that, unless the exception under
proposed § 1002.108(c) applies, an
employee or officer of a covered
financial institution or a covered
financial institution’s affiliate shall not
have access to an applicant’s responses
to inquiries that the financial institution
makes pursuant to this subpart
regarding whether the applicant is a
minority-owned business under
proposed § 1002.107(a)(18) or a womenowned business under proposed
§ 1002.107(a)(19), and regarding the
ethnicity, race, and sex of the
applicant’s principal owners under
proposed § 1002.107(20), if that
employee or officer is involved in
making any determination concerning
that applicant’s covered application.
Consistent with the SBREFA Panel’s
recommendation, proposed comment
108(b)–1 would clarify the information
that is subject to the prohibition on
access (i.e., the firewall) and provide
examples. First, proposed comment
108(b)–1 would clarify that the
prohibition in proposed § 1002.108(b)
would apply only to an applicant’s
712 SBREFA
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responses to the inquiries that the
covered financial institution makes to
satisfy § 1002.107(a)(18) through (20)
and provide examples. Second,
proposed comment 108(b)–1 would
clarify that the prohibition in proposed
§ 1002.108(b) does not apply to
ethnicity or race information about
principal owners that the financial
institution collects via visual
observation or surname, or to an
applicant’s responses to inquiries
regarding minority-owned or womenowned business status, or principal
owners’ ethnicity, race, or sex, made for
other purposes and provide an example.
It would also clarify that the prohibition
does not apply if an employee or officer
generally knows that an applicant is a
minority-owned business or womenowned business, or knows the ethnicity,
race, or sex of any of the applicant’s
principal owners due to activities
unrelated to the inquiries made to
satisfy the financial institution’s
obligations under subpart B, as well as
provide an example.
In response to SBREFA feedback
requesting additional clarification and
guidance on who would be subject to
the firewall, proposed comment 108(b)–
2 would clarify the scope of persons
subject to the prohibition and provide
examples.
Additionally, the Bureau is proposing
to define the phrase ‘‘involved in
making any determination concerning a
covered application.’’ Proposed
§ 1002.108(a)(1) would define this
phrase to mean participating in a
decision regarding the evaluation of a
covered application, including the
creditworthiness of an applicant for a
covered credit transaction. Thus, an
employee or officer who participates in
such decision would be subject to the
prohibition in proposed § 1002.108(b),
and thus could not have access to an
applicant’s responses to the covered
financial institution’s inquiries under
proposed § 1002.107(a)(18) through (20)
with regard to that covered application,
unless the exception in proposed
§ 1002.108(c) applies.
Proposed comment 108(a)–1 would
provide additional clarification
regarding when an employee or officer
is ‘‘involved in making any
determination concerning a covered
application.’’ In particular, it would
clarify that an employee or officer is
involved in making a determination
concerning a covered application if the
employee or officer makes, or otherwise
participates in, a decision regarding the
evaluation of a covered application or
the creditworthiness of an applicant for
a covered credit transaction. Proposed
comment 108(a)–1 would note that this
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group of employees and officers
includes, but is not limited to,
employees and officers who serve as
underwriters.713 Additionally, it would
explain that the decision that the
employee or officer makes or
participates in must be about a specific
covered application. An employee or
officer would not be involved in making
a determination concerning a covered
application if the employee or officer is
involved in making a decision that
affects covered applications generally,
the employee or officer interacts with
small businesses prior to them
becoming applicants or submitting a
covered application, or the employee or
officer makes or participates in a
decision after the financial institution
has taken final action on the
application, such as decisions about
servicing or collecting a covered credit
transaction.
Consistent with the SBREFA Panel’s
recommendation, proposed
§ 1002.108(c) would state that the
prohibition in proposed § 1002.108(b)
shall not apply to an employee or officer
if a financial institution determines that
it is not feasible to limit that employee’s
or officer’s access to one or more of an
applicant’s responses to the financial
institution’s inquiries under
§ 1002.107(a)(18) through (20) and the
financial institution provides the notice
required under proposed § 1002.108(d)
to the applicant. Proposed § 1002.108(c)
would further state that it is not feasible
to limit access as required pursuant to
proposed § 1002.108(b) if the financial
institution determines that an employee
or officer involved in making any
determination concerning a covered
application should have access to one or
more applicants’ responses to the
financial institution’s inquiries under
proposed § 1002.107(a)(18) through (20).
Proposed comment 108(c)–1 would
clarify that a financial institution is not
required to limit the access of a
particular employee or officer who is
involved in making determinations
concerning covered applications if the
financial institution determines that the
particular employee or officer should
have access to the information collected
713 While ECOA section 704B(d) refers to
underwriters and other officers and employees of a
financial institution, or any affiliate of a financial
institution, who are involved in making any
determination concerning an application, the
Bureau has clarified that underwriters are one
classification or category of employees and officers
who are involved in making a determination
concerning an application. The Bureau has not
separately listed underwriters as subject to the
firewall because doing so is unnecessary given their
inclusion in the larger group of employees and
officers who are involved in making any
determination concerning an application.
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pursuant to proposed § 1002.107(a)(18)
through (20) and the financial
institution provides the notice required
by proposed § 1002.108(d). It would
explain that a financial institution can
determine that several employees and
officers should have access or that all of
a group of similarly situated employees
or officers should have access, but that
a financial institution cannot permit all
employees and officers to have access
simply because it has determined that
one or more employees or officers
should have access. It would also
provide an example.
Proposed § 1002.108(a)(2) would
define the phrase ‘‘should have access’’
to mean that an employee or officer may
need to collect, see, consider, refer to, or
otherwise use the information to
perform that employee’s or officer’s
assigned job duties. Proposed comment
108(a)–2 would explain that a financial
institution may determine that an
employee or officer should have access
for purposes of proposed § 1002.108 if
that employee or officer is assigned one
or more job duties that may require the
employee or officer to collect (based on
visual observation, surname, or
otherwise), see, consider, refer to, or use
information otherwise subject to the
prohibition in proposed § 1002.108(b).
The employee or officer would not have
to be required to collect, see, consider,
refer to or use such information or to
actually collect, see, consider, refer to or
use such information. It would be
sufficient if the employee or officer
might need to do so to perform the
employee’s or officer’s assigned job
duties. This approach is similar to the
approach under consideration during
the SBREFA process, though in
response to feedback received, the
proposed definition would not require
that the assigned job duties be usually
or regularly assigned. Thus, an
employee or officer would not be
subject to the prohibition if the financial
institution determines that the
employee or officer might need to see,
consider, refer to, or otherwise use the
information an applicant provided
pursuant to proposed § 1002.17(a)(18)
through (20) to perform the employee’s
or officer’s assigned job duties, and the
financial institution provides the
required notice to the applicant.
Proposed comment 108(a)–2 would
include an example of when a financial
institution would be able to determine
that an officer should have access and
would state that, if a financial
institution determines that an employee
or officer who is involved in making any
determination concerning a covered
application should have access for
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purposes of § 1002.108, the financial
institution is responsible for ensuring
that the employee or officer only
accesses and uses the protected
information for lawful purposes.
Additionally, proposed comment
108(a)–2 would explain that a financial
institution may determine that all
employees or officers with the same job
description or assigned duties should
have access for purposes of § 1002.108
and provide an example.
Proposed § 1002.108(d) would
describe the notice that a financial
institution is required to provide to
satisfy the exception in proposed
§ 1002.108(c). Proposed § 1002.108(d)
would state that, in order to satisfy the
exception set forth in proposed
§ 1002.108(c), a financial institution
shall provide a notice to each applicant
whose responses will be accessed,
informing the applicant that one or
more employees or officers involved in
making determinations concerning the
covered application may have access to
the applicant’s responses to the
financial institution’s inquiries
regarding whether the applicant is a
minority-owned business or a womenowned business, and regarding the
ethnicity, race, and sex of the
applicant’s principal owners. Proposed
§ 1002.108(d) would also state that the
financial institution shall provide this
notice when making the inquiries
required under § 1002.107(a)(18)
through (20) and together with the
notices required pursuant to
§ 1002.107(a)(18) through (20).
Proposed comment 108(d)–1 would
explain that if a financial institution
determines that one or more employees
or officers should have access pursuant
to proposed § 1002.108(c), then the
financial institution must provide the
required notice to, at a minimum, the
applicant or applicants whose responses
will be accessed by an employee or
officer involved in making
determinations regarding the applicant’s
or applicants’ covered applications. It
would also clarify that, as an alternative,
the financial institution could provide
the required notice to a larger group of
applicants, including all applicants, if it
determines that one or more officers or
employees should have access.
Proposed comment 108(d)–2 would
describe the content of the required
notice. It would state that the notice
must inform the applicant that one or
more employees and officers involved
in making determinations regarding the
applicant’s covered application may
have access to the applicant’s responses
regarding the applicant’s minorityowned business status, its womenowned business status, and its principal
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owners’ ethnicity, race, and sex.
Proposed comment 108(d)–2 would note
that the financial institution may, but is
not required to, provide the notice on its
data collection form. Additionally,
proposed comment 108(d)–2 would
include language for the required notice.
A financial institution would be
required to use the language set forth in
proposed comment 108(d)–2 or
substantially similar language when
providing the notice.
Comment 108(d)–3 would explain
that if a financial institution is
providing the notice required by
proposed § 1002.108(d) orally, it must
provide the notice prior to asking the
applicant if it is a minority-owned
business or women-owned business and
prior to asking for a principal owner’s
ethnicity, race, or sex. It would further
explain that, if the notice required by
proposed § 1002.108(d) is provided on
the same paper or electronic data
collection form as the inquiries about
minority-owned business status,
women-owned business status, and the
principal owners’ ethnicity, race, or sex,
the financial institution would be
required to provide the notice at the top
of the form. If the notice required by
proposed § 1002.108(d) is provided in
an electronic or paper document that is
separate from the data collection form,
the financial institution would be
required to provide the notice at the
same time as the data collection form or
prior to providing the data collection
form. Additionally, proposed comment
108(d)–3 would clarify that the notice
required pursuant to proposed
§ 1002.108(d) must be provided with the
non-discrimination notices required
pursuant to proposed § 1002.107(a)(18)
through (20) and would reference
proposed appendix E for an example.
The Bureau believes that its proposed
approach reflects the feedback from
most SERs and commenters who
preferred to be able to give a notice and
did not want to hire additional staff or
change processes. While some
commenters did not want to provide a
notice, section 1071 requires that a
financial institution provide a specific
notice to an applicant if the financial
institution determines that an employee
or officer should have access to
information otherwise subject to the
firewall requirement. As an alternative
to providing a notice, a financial
institution could take the steps
necessary to establish and maintain a
firewall.
The Bureau seeks comment on its
proposed approach to the firewall
requirement and whether a different
approach might result in a better policy
outcome. The Bureau also seeks
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comment on the scope of the proposed
firewall and the exception. The Bureau
specifically seeks comment on whether
the firewall should apply to information
about principal owners’ ethnicity and
race that is obtained via visual
observation and/or surname. Finally,
the Bureau generally requests comment
on whether additional clarification is
needed regarding the firewall
requirement.
Section 1002.109 Reporting of Data to
the Bureau
Proposed § 1002.109 would address
several aspects of financial institutions’
obligations to report 1071 data to the
Bureau. First, proposed § 1002.109(a)
would require 1071 data to be collected
on a calendar year basis and reported to
the Bureau by June 1 of the following
year, and would address several related
issues. Second, proposed § 1002.109(b)
would detail the information that
financial institutions must provide
about themselves when reporting 1071
data to the Bureau. Finally, proposed
§ 1002.109(c) would address technical
instructions for submitting data to the
Bureau.
The Bureau is proposing § 1002.109 to
implement ECOA section 704B(f)(1) and
pursuant to its authority under
704B(g)(1) to prescribe such rules and
issue such guidance as may be
necessary to carry out, enforce, and
compile data pursuant to section 1071.
The Bureau is also proposing
§ 1002.109(b) pursuant to 704B(e)(2)(H),
which requires financial institutions to
compile and maintain as part of their
1071 data any additional data that the
Bureau determines would aid in
fulfilling the purposes of section 1071.
109(a) Reporting to the Bureau
109(a)(1) Annual Reporting
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Background
ECOA section 704B(f)(1) provides that
‘‘[t]he data required to be compiled and
maintained under [section 1071] by any
financial institution shall be submitted
annually to the Bureau.’’
SBREFA Proposal Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
stated it was considering proposing that
financial institutions collect 1071 data
on a calendar year basis, and that
financial institutions report 1071 data to
the Bureau by a specified time after the
end of each calendar year.714
SERs and other stakeholders
responded to various aspects of the
Bureau’s proposals under consideration
714 SBREFA
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in the SBREFA Outline on reporting
1071 data to the Bureau, including
reporting frequency, reporting period,
and submission date.715
Regarding reporting frequency,
stakeholder comments were split. One
SER suggested that data reporting be
done on a calendar year basis, to avoid
half-year measurements. Some other
stakeholders—including several
industry and trade association
stakeholders, and a community group—
also supported reporting no more or less
frequently than once a year. Other
stakeholders supported reporting on a
more frequent basis than annually. In
that latter group, another SER requested
ongoing data reporting, arguing that
more frequent reporting is less
burdensome by permitting financial
institutions to submit data as
applications are received or loans are
made. Three stakeholders (a community
group, a think tank, and a community
development lender trade association)
also supported reporting more
frequently than annually, especially for
larger financial institutions, arguing that
technology enables near real-time
reporting.
Regarding the reporting period and
submission date, several trade
associations supported collecting data
on a calendar year basis. A community
group suggested an alternative to
calendar-year reporting, specifically a
one-year collection period starting on
July 1 and ending on June 30 the next
year. The group argued that this
alternative schedule would help
financial institutions avoid overlapping
obligations with the calendar year data
collection schedule for HMDA. A SER
cautioned against aligning the annual
reporting dates for section 1071 with the
reporting dates for HMDA, noting that
reporting for both regimes at the same
time could strain resources; other
stakeholders echoed this view. Other
stakeholders requested that the Bureau
coordinate reporting dates with other
Federal agencies, including those
responsible for collecting data from
CDFI Fund participants and banks
subject to CRA reporting.
Regarding reporting 1071 data to the
Bureau, several SERs noted that they
already report much of the data that a
1071 rule would seem likely to require
to the Treasury Department’s CDFI
Fund. One SER requested that the
Bureau coordinate with the CDFI Fund
on consistency of definitions, types of
data collection, and timing of reporting,
and that the agencies should consider
streamlining reporting requirements
through data sharing.
The SBREFA Panel recommended,
regarding this issue as well as other
recordkeeping and reporting issues
addressed in the SBREFA Outline, that
the Bureau seek comment on these
aspects of a 1071 rule, and how best to
implement them in a manner that
minimizes cost and burden to small
financial institutions.716
Proposed Rule
The Bureau is proposing, in
§ 1002.109(a)(1)(i), to require that by
June 1 following the calendar year for
which data are collected and
maintained as required by proposed
§ 1002.107, a covered financial
institution shall submit its small
business lending application register in
the format prescribed by the Bureau.
This approach to reporting frequency
and reporting period is consistent with
both the annual submission schedule
specified in the statute as well as with
the approach under consideration at
SBREFA.
Regarding reporting frequency, while
several stakeholders and one SER
advocated for more frequent reporting
(especially via application programming
interface (API)), annual reporting is
consistent with what ECOA section
704B(f)(1) provides and with HMDA for
most filers.717 The Bureau is concerned
that requiring more frequent reporting
for 1071 data could be unduly onerous
for financial institutions, especially
small financial institutions and those
with lower application volumes.
Further, the Bureau is not proposing
that financial institutions (small or
otherwise) be permitted to submit their
1071 data on a real-time basis. The
Bureau believes that this would add
complexity to the Bureau reporting
system. The Bureau is concerned that
this approach could result in financial
institutions treating the Bureau as their
official recordkeeping system for their
1071 data. Financial institutions that
were required to update or correct their
data as a result of an audit, examination,
or compliance review would need to
make such changes within the Bureau’s
system, requiring the Bureau to develop
an infrastructure that not only accepts
real-time submissions, but also real-time
corrections to prior real-time
submissions. Nonetheless, the Bureau is
continuing to explore ways it might
facilitate or streamline reporting,
particularly for small financial
716 Id.
715 The
SER feedback in this section-by-section
analysis can be found in the SBREFA Panel Report
at 34.
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at 47.
financial institutions with over 60,000
covered loans and applications must file HMDA
data on a quarterly basis. 12 CFR 1003.5(a)(ii).
717 Some
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institutions. See the section-by-section
analysis of proposed § 1002.109(c)
below for additional information.
Regarding the reporting period, the
Bureau believes there are advantages to
having data collected and reported on a
calendar year basis. Calendar year
reporting may facilitate other aspects of
the rule that depend on data that is
typically recorded on a calendar year
basis. For instance, other parts of the
rule look to annual data, such as
proposed § 1002.105(b), which would
use a financial institution’s loan
volumes over the prior two calendar
years to determine coverage. Further,
the Bureau understands that financial
institutions would generally prefer to
have such data collections occur on a
calendar year basis because such an
approach would be generally consistent
with their operations. The Bureau is
concerned that requiring an annual
reporting period other than the calendar
year—such as July 1 to June 30—could
result in additional challenges for
financial institutions in complying with
the rule, which could in turn make
errors in collecting and reporting data to
the Bureau more likely.
As discussed in more detail below in
the section-by-section analysis of
proposed § 1002.114(b) below, the
Bureau is considering whether to
require or permit the initial collection of
data under the eventual 1071 rule to
begin, following an appropriate
implementation period, at some point
during the year rather than on January
1. For example, if the compliance date
were on July 1, 2024, the Bureau would
permit or require all financial
institutions to collect and report data
pursuant to proposed § 1002.109(a) for
the period July 1 to December 31, 2024.
After this initial partial collection year,
financial institutions would collect data
on a calendar year basis.
Regarding the proposed submission
date, several stakeholders (including
community groups) requested a March 1
submission deadline on the grounds
that financial institutions comply with a
March 1 deadline for HMDA despite its
relative complexity compared to 1071.
The Bureau is proposing a June 1
submission deadline to give additional
time for the compliance staff of financial
institutions to dedicate time and
resources focused on preparing a small
business lending application register,
after meeting other reporting obligations
with earlier deadlines, such as under
HMDA or CRA. This may be especially
important for smaller financial
institutions that will rely on the same
staff to comply with other data reporting
regimes and this 1071 rule.
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Proposed § 1002.109(a)(1)(ii) would
require that an authorized
representative of the covered financial
institution with knowledge of the data
submitted certify to the accuracy and
completeness of data submitted
pursuant to proposed § 1005.109(a). A
similar provision exists in Regulation C
(§ 1003.5(a)(i)), and the Bureau believes
it would be appropriate to adopt it here
as well. Based on the Bureau’s
experience with HMDA and Regulation
C, the Bureau believes that having a
specific person responsible for
certifying to the accuracy and
completeness of data is likely to lead to
financial institutions providing better
quality data.
Proposed § 1002.109(a)(1)(iii) would
clarify that when the last day for
submission of data prescribed under
proposed § 1002.109(a)(1) falls on a date
that is not a business day, a submission
is considered timely if it is submitted no
later than the next business day.
The Bureau seeks comment on its
proposed approach to the aspects of
reporting addressed in proposed
§ 1002.109(a), including that the
reporting frequency be annual, that the
reporting period be the calendar year,
and that the submission date be June 1
of the next calendar year. In particular,
the Bureau seeks comment with respect
to proposed § 1002.109(a)(1)(i) on
whether requiring the submission of
small business lending application
registers by June 1 might give rise to
complications for any persons or
entities relying on data from the
registers for other purposes, such as
Federal regulators scheduling
examinations.
109(a)(2) Reporting by Subsidiaries
ECOA section 704B(f)(1) states that
‘‘any’’ financial institution obligated to
report 1071 data to the Bureau must do
so annually; the statute does not
expressly address financial institutions
that are themselves subsidiaries of other
financial institutions. In the SBREFA
Outline, the Bureau did not address this
issue for section 1071 reporting.
Proposed § 1002.109(a)(2) would state
that a covered financial institution that
is a subsidiary of another covered
financial institution shall complete a
separate small business lending
application register. The subsidiary
shall submit its small business lending
application register, directly or through
its parent, to the Bureau. Proposed
comment 109(a)(2)–1 would explain
that a covered financial institution is
considered a subsidiary of another
covered financial institution for
purposes of reporting data pursuant to
proposed § 1002.109 if more than 50
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percent of the ownership or control of
the first covered financial institution is
held by the second covered financial
institution. This proposed provision
mirrors one that exists for HMDA
reporting under Regulation C in
§ 1003.5(a)(2). The Bureau believes that
this proposed provision would help
facilitate compliance with the 1071 rule
by permitting parent financial
institutions to coordinate the reporting
of all their subsidiaries’ small business
lending data together.
The Bureau seeks comment on this
aspect of its proposal. Additionally, the
Bureau seeks comment on proposed
§ 1002.109(a)(2) in light of proposed
§ 1002.105(b), which would define a
covered financial institution as a
financial institution that originated at
least 25 covered credit transactions for
small businesses in each of the two
preceding calendar years. The Bureau
seeks comment on whether this
provision may risk creating ambiguity
with respect to compliance and whether
additional safeguards may be required
to dissuade financial institutions from
creating subsidiaries for the sole
purpose of avoiding the collection and
reporting or section 1071 data. The
Bureau also seeks comment on all other
aspects of this proposal.
109(a)(3) Reporting Obligations Where
Multiple Financial Institutions Are
Involved in a Covered Credit
Transaction
Section 1071’s requirement to collect
and report data for any ‘‘application to
a financial institution for credit’’ could
be read as applying to more than one
financial institution when an
intermediary provides the application to
another institution that takes final
action on the application. It might also
apply in cases where one application is
simultaneously sent to multiple
financial institutions. This broad
reading may serve a useful function,
such as comprehensive reporting by all
financial institutions involved in a
small business lending transaction, but
could also generate duplicative
compliance costs for financial
institutions and potentially detract from
the quality of reported 1071 data,
increasing the risk that certain
applications are reported multiple
times.
At SBREFA, in considering ECOA
section 704B(f)(1), the Bureau stated
that it was considering proposing that in
the situation where more than one party
is involved on the lender side of a single
small business loan or application,
section 1071’s data collection and
reporting requirements would be
limited in the same manner as in
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Regulation C. For HMDA, Regulation C
provides (in § 1003.4(a) and comment
4(a)–3) that if more than one financial
institution was involved in the
origination of a covered loan, the
financial institution that made the final
credit decision approving the
application before closing or account
opening shall report the covered loan as
an origination. If there was an
origination, then the financial
institution making the final credit
decision approving the application
would be responsible for reporting (even
if the financial institution used credit
standards set by another party). If more
than one financial institution approved
a loan, and the loan was purchased after
closing by one of the financial
institutions approving the loan, the
purchaser (such as an assignee) would
report the loan. If there was no
origination and multiple financial
institutions received the same
application, then any financial
institution that made a credit decision
would be responsible for reporting (even
if other financial institution also
reported on the same potential nonoriginated application).
Several SERs voiced support for
aligning reporting requirements for
financial institutions that are not the
lender of record with the approach
taken for HMDA reporting in the
Bureau’s Regulation C. One SER
stressed that imposing section 1071
requirements for loan buyers, who play
an important role in assisting CDFIs but
do not make credit decisions, might risk
their continued participation. Another
CDFI SER explained that the institution
occasionally participates in pooled loan
purchases and recommended that the
Bureau ensure that reporting obligations
for such pooled loans are clear.718 Other
SERs expressed concern in adopting the
Bureau’s approach in Regulation C,
noting the differences between small
business and residential loan products,
and advocated for simpler approaches.
The SBREFA Panel did not provide a
relevant recommendation.
Comments from other stakeholders
included several voicing support for a
HMDA-like approach, praising the
Bureau’s consistent approach and
interest in limiting duplicative
information. However, several
comments advocated against the HMDA
approach, generally by proffering other
ideas rather than criticizing the rules or
outcomes of the HMDA approach.
Alternative suggestions varied, but
included suggesting that data collection
718 See the section-by-section analysis of
proposed § 1002.104(b) above for further discussion
of the proposed treatment of pooled loans.
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and reporting should be required only
for the company most closely
interacting with the loan applicant; if a
financial institution receives a covered
application, then the application should
be subject to reporting, regardless of
outcome; the financial institution that
funded (or would have funded) the loan
should be required to collect and report;
and the financial institution that
conducts the underwriting and
determines whether the small business
credit applicant qualifies for credit
using its underwriting criteria should be
required to report and collect.
Proposed § 1002.109(a)(3) would
provide that only one covered financial
institution shall report each covered
credit transaction as an origination, and
that if more than one financial
institution was involved in an
origination, the financial institution that
made the final credit decision approving
the application shall report the loan as
an origination, if the financial
institution is a covered financial
institution.
Proposed § 1002.109(a)(3) would
further provide that if there was no
origination, then any covered financial
institution that made a credit decision
shall report the application. The Bureau
is aware that under certain lending
models as they operate today, financial
institutions may not always be aware of
whether another financial institution
originated a credit transaction. The
Bureau believes that information on
whether there was an origination should
generally be available, or that lending
models can be adjusted to provide this
information at low cost. For example, if
an applicant applies to Financial
Institutions A and B, and then
withdraws an application with
Financial Institution A, then Financial
Institution A should be able to ascertain
whether the applicant obtained credit
from Financial Institution B.
Proposed comment 109(a)(3)–1 would
provide general guidance on how to
report originations and applications
involving more than one institution. In
short, if more than one financial
institution was involved in the
origination of a covered credit
transaction, the financial institution that
made the final credit decision approving
the application shall report the covered
credit transaction as an origination.
Proposed comment 109(a)(3)–2 would
offer examples illustrating how a
financial institution should report a
particular application or originated
covered credit transaction. Proposed
comment 109(a)(3)–3 would explain
that if a covered financial institution
made a credit decision on a covered
application through the actions of an
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agent, the financial institution reports
the application, and provides an
example. State law determines whether
one party is the agent of another. While
these proposed comments assume that
all of the parties are covered financial
institutions, the same principles and
examples would apply if any of the
parties is not a covered financial
institution.
The Bureau seeks comment on this
aspect of its proposal. In particular, the
Bureau seeks comment with respect to
proposed § 1002.109(a)(3) on whether,
particularly in the case of applications
that a financial institution is treating as
withdrawn or denied, the financial
institution can ascertain if a covered
credit transaction was originated by
another financial institution without
logistical difficulty or significant
compliance cost.
109(b) Financial Institution Identifying
Information
Beginning in 1989, Regulation C
required financial institutions reporting
HMDA data to use a discrete transmittal
sheet to provide information on
themselves separate from the loan/
application registers used to submit
HMDA data.719 The 2015 HMDA final
rule replaced the transmittal sheet
requirement with Regulation C
§ 1003.5(a)(3), which requires that a
financial institution reporting HMDA
data to provide with its submission (i)
its name; (ii) the calendar year the data
submission covers; (iii) the name and
contact information of a person who
may be contacted with questions about
the institution’s submission; (iv) its
appropriate Federal agency; (v) the total
number of entries contained in the
submission; (vi) its Federal Taxpayer
Identification Number; and (vii) its
Legal Entity Identifier (LEI).720 The
Bureau and FFIEC publish information
on financial institutions that report
HMDA data in the HMDA Reporter
Panel, which includes the required
submission information, provided by
financial institutions under
§ 1003.5(a)(3), as well as other data
derived from this information.721
The Bureau is proposing to collect
information regarding financial
institutions that report 1071 data,
similar to the information required
719 See 54 FR 51356, 51361 (Dec. 15, 1989)
(requiring financial institutions to use the
transmittal sheet and loan/application register in
appendix A).
720 80 FR 66128, 66526 (Oct. 28, 2015) (deleting
appendix A and relocating its substantive
requirements to § 1003.5(a)(3)).
721 See Fed. Fin. Insts. Examination Council,
HMDA Reporter Panel, https://www.ffiec.gov/
hmdarawdata/FORMATS/HMDAReporterPanel.pdf
(last visited July 27, 2021).
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under Regulation C. Specifically,
proposed § 1002.109(b) would require
that a financial institution provide the
following information about itself as
part of its submission: (1) Its name; (2)
its headquarters address; (3) the name
and business contact information of a
person who may be contacted with
questions about the financial
institution’s submission; (4) its Federal
prudential regulator, if applicable; (5) its
Federal Taxpayer Identification
Number; (6) its LEI; (7) its Research,
Statistics, Supervision, and Discount
identification (RSSD ID) number, if
applicable; (8) its parent institution
information, if applicable (including the
name, LEI, and RSSD ID number of its
immediate parent entity and topholding parent entity, if applicable); (9)
the type of financial institution, chosen
from a list provided; and (10) whether
the financial institution is voluntarily
reporting 1071 data.
As discussed below, the Bureau
believes it would be appropriate to
require each of these pieces of
information regarding financial
institutions reporting 1071 data. As a
practical matter, the Bureau expects that
this information might be provided by a
financial institution when it initially
sets up an account with the Bureau’s
1071 data submission platform to allow
it to file 1071 data as required by the
rule. Thus, this information might exist
in the Bureau’s 1071 data submission
system and be updated by the financial
institution as needed.
As described in detail below, the
Bureau believes that detailed
information on the financial institutions
reporting 1071 data is necessary to carry
out, enforce, and compile data under
section 1071, pursuant to ECOA section
704B(f)(1) and (g)(1), and would aid in
fulfilling the purposes of section 1071,
pursuant to 704B(e)(2)(H). To analyze
1071 data, the Bureau and other
potential users of the data would need
information on the financial institutions
that are taking covered applications and
making covered credit transactions. Fair
lending analysis is based on a review of
the decisions financial institutions make
on applications. Similarly, an analysis
of the business and community
development needs of a given
community is based on understanding
the volume and geography of the
lending activities of specific financial
institutions.
With the possible exception of the LEI
(in proposed § 1002.109(b)(6) and (8)(ii)
and (v)) in certain circumstances, the
Bureau believes that financial
institutions already have all the
information that would be required of
them under proposed § 1002.109(b), and
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that being required to provide this
information to the Bureau should not
pose any particular difficulties or costs
on financial institutions.
The Bureau seeks comment on its
approach to collecting information on
financial institutions, including each of
the items listed in proposed
§ 1002.109(b)(1) through (10) as well as
whether the Bureau should require the
reporting of any other information on
financial institutions. Additional
requests for comment specific to certain
pieces of information are included
below.
Paragraph 109(b)(1)
During the SBREFA process, in the
context of discussing privacy, some
stakeholders expressed an aversion to
the collection and publication of
information on financial institutions.
Some stakeholders, including SERs and
some larger entities, commented that the
Bureau should not publish the names of
financial institutions reporting 1071
data, asserting that those financial
institutions would face reputational
risks. Some stakeholders even appeared
to suggest that the Bureau not collect the
names of financial institutions at all.
Proposed § 1002.109(b)(1) would
require a financial institution to provide
its name. Regulation C (§ 1003.5(a)(2)(i))
requires financial institutions to provide
their names on their transmittal sheets
when filing HMDA data, and the Bureau
believes that a similar requirement
would be appropriate here.
The Bureau believes that collecting a
financial institution’s name (as well as
all the other identifying information in
proposed § 1002.109(b)) is necessary to
carry out, enforce, and compile data
under section 1071, and would aid in
fulfilling the purposes of section 1071.
For both of section 1071’s statutory
purposes, the identity of the financial
institution taking covered applications
and originating covered credit
transactions is critical. Without
knowing the financial institution’s
name, fair lending enforcement would
not be possible. Analyzing business and
community development needs is much
improved when it is possible to identify
which financial institutions are
operating in specific geographic areas.
There are additional practical
considerations. Examinations for
compliance with section 1071 would be
difficult, if not impossible, without the
name of the financial institution
associated with a specific small
business lending application register.
Further, it would be difficult for the
Bureau to administer a website for 1071
data submissions without creating
logins assigned to specific financial
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institutions. Finally, the Bureau is
proposing in § 1002.110(c) that financial
institutions’ statutory obligation to make
1071 data available to any member of
the public, upon request, pursuant to
ECOA section 704B(f)(2)(B) would be
satisfied by the institutions’ directing
the public to the Bureau’s website for
this information. Without the financial
institution’s name (and other relevant
identifying information), proposed
§ 1002.110(c) would not satisfy this
statutory requirement.
Paragraph 109(b)(2)
Proposed § 1002.109(b)(2) would
require a financial institution to provide
the physical address of its headquarters
location. The headquarters address of a
financial institution would provide
geographic information that would aid
in fulfilling the statutory purposes of
section 1071, including, for instance,
analyses of the connection between a
financial institution’s location and the
business and community development
needs where it operates. It will also help
identify and differentiate financial
institutions, particularly nondepository
financial institutions, that have similar
names.
Paragraph 109(b)(3)
Proposed § 1002.109(b)(3) would
require a financial institution to provide
the name and business contact
information of a person who may be
contacted with questions about the
financial institution’s 1071 data
submission. Regulation C includes a
similar requirement in
§ 1003.5(a)(3)(iii), and the Bureau
believes it would be appropriate to
require such information here. In
general, the Bureau has found, from its
experience with HMDA and Regulation
C, that requiring the name and business
contact information of a person who
may be contacted with questions
generally facilitates communication in
the event that follow-up on a
submission is required.
Paragraph 109(b)(4)
Proposed § 1002.109(b)(4) would
require a financial institution that is a
depository institution to provide the
name of its Federal prudential regulator,
if applicable. Proposed comment
109(b)(4)–1 would explain how to
determine which Federal prudential
regulator (i.e., the OCC, the FDIC, the
Board, or the NCUA) a financial
institution should report. Proposed
comment 109(b)(4)-2 would provide
guidance on when a financial institution
must report a new Federal prudential
regulator, for instance, in the event of a
merger or a change of charter.
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Regulation C includes a similar
provision in § 1003.5(a)(3)(iv), requiring
financial institutions to identify the
appropriate Federal agency. In the
Regulation C context, the purpose of
this requirement is to identify the
agency to which a financial institution
must report its HMDA data—often the
financial institution’s Federal
prudential regulator for depository
institutions, and other agencies for
nondepository institutions.722 Here, the
Bureau believes a requirement to report
a financial institution’s Federal
prudential regulator would be
appropriate for different reasons. The
reporting of a financial institution’s
Federal prudential regulator may enable
analysts to more easily identify other
information about a financial institution
that its Federal prudential regulator may
make publicly available, such as Call
Report data; further, such additional
data may be used to perform analyses of
the characteristics of financial
institution’s 1071 data by regulator.
Nondepository institutions generally do
not have Federal prudential regulators
and would not report one under this
proposed requirement.
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Paragraph 109(b)(5)
Proposed § 1002.109(b)(5) would
require a financial institution to provide
its Federal Taxpayer Identification
Number (TIN). Proposed comment
109(b)(5)–1 would explain when a
financial institution should report a new
Federal TIN in the event that it obtains
a new Federal TIN (for instance, because
the financial institution merges with
another financial institution and adopts
the Federal TIN of the other financial
institution).
Regulation C § 1003.5(a)(3)(iv)
requires financial institutions to report
Federal TIN with their HMDA
submissions, and the Bureau believes
such a requirement would be
appropriate here as well. A financial
institution’s Federal TIN may be used to
identify other publicly available
information on a financial institution,
and combine that data with a financial
institution’s 1071 register to enhance
the types of analysis that can be
conducted to further the two statutory
purposes of section 1071.
Paragraph 109(b)(6)
Proposed § 1002.109(b)(6) would
require a financial institution to provide
its LEI. Proposed comment 109(b)(6)–1
would explain what an LEI is and
would make clear that financial
institutions that do not currently have
an LEI must obtain one, and that
722 12
U.S.C. 2803(h).
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financial institutions have an ongoing
obligation to maintain an LEI in order to
satisfy proposed § 1002.109(b)(6).
An LEI is a unique, 20-digit identifier
issued by an entity endorsed or
otherwise governed by the Global LEI
Foundation. Regulation C requires
financial institutions to obtain and use
an LEI, which facilitates the analysis of
HMDA data and aids in the recognition
of patterns by more precisely identifying
financial institutions and affiliated
companies.723 The LEI also helps
financial institutions that report HMDA
data generate the universal loan
identifier used to identify application or
application-level records in Regulation
C. Similarly, in the 1071 context, a
financial institution’s LEI would also
likely facilitate analyses of 1071 data,724
by helping the Bureau and other
stakeholders better understand a
financial institution’s corporate
structure. The Bureau would also
require, in proposed § 1002.107(a)(1),
financial institutions to use their LEIs to
create unique identifiers for covered
applications. The Bureau believes this,
in turn, would result in more
sophisticated and useful analyses of the
financial institution’s 1071 data.
Paragraph 109(b)(7)
Proposed § 1002.109(b)(7) would
require a financial institution to report
its RSSD ID number, if applicable. An
RSSD ID is a unique identifying number
assigned to institutions, including main
offices and branches, by the Federal
Reserve System. All depository
institutions know and regularly report
their RSSD ID numbers on FFIEC
regulatory forms. RSSD ID would help
users of the 1071 data to link the data
for a particular financial institution to
other regulatory data, including the
connections between a particular
financial institution with others. The
Bureau believes that this additional
information would result in more
sophisticated and useful analyses of the
financial institution’s 1071 data.
Proposed comment 109(b)(7)–1 would
explain what a RSSD ID number is and
how financial institutions that have one
might find it. Financial institutions that
do not have RSSD IDs, typically
nondepository institutions, would not
723 80 FR 66128, 66248 (Oct. 28, 2015) (noting
that, despite the cost, the Bureau believed that the
benefit of all HMDA reporters using an LEI justified
the associated costs by improving the ability to
identify financial institution reporting the data and
link it to its corporate family).
724 Id. (‘‘By facilitating identification, this
requirement will help data users achieve HMDA’s
objectives of identifying whether financial
institutions are serving the housing needs of their
communities, as well as identifying possible
discriminatory lending patterns.’’).
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56497
be required to obtain them, and would
report ‘‘not applicable’’ in that field.
Paragraph 109(b)(8)
Proposed § 1002.109(b)(8) would
require a financial institution to provide
certain information on its parent
entities, if applicable. This information
would include the name, the LEI (if
available), and the RSSD ID (if available)
of the financial institution’s immediate
parent entity and the financial
institution’s top-holding parent entity.
Proposed comments 109(b)(8)–1 and
–2 would provide guidance on how to
identify a financial institution’s
immediate parent entity and a financial
institution’s top-holding parent entity.
Proposed comment 109(b)(8)–3 would
explain that a financial institution
would report its parent entities’ LEIs if
they have them, but that no parent
entity would be required to obtain an
LEI if it did not already have one.
Proposed comment 109(b)(8)–4 would
likewise explain that a financial
institution would report its parent
entities’ RSSD ID numbers if they had
them.
The Bureau believes that the
collection of information on a financial
institution’s structure would further
both of the statutory purposes of section
1071. Data on a financial institution’s
organizational structure that is selfreported would be more accurate than
generating such information from
publicly available sources.725
725 Currently, the Bureau, on behalf of the FFIEC
and HUD, generates and publishes information on
filers including parent company and top holder
information. See Fed. Fin. Insts. Examination
Council, Public Panel—Data Fields with Values and
Definitions, https://ffiec.cfpb.gov/documentation/
2021/panel-data-fields/ (last visited July 27, 2021).
From 1989 to 1998, Regulation C required
financial institutions to report their parent entity
information on transmittal sheets. 54 FR 51356,
51361, 51368 (Dec. 15, 1989) (adding the transmittal
sheet requirement, including parent institution
information, to appendix A to Regulation C); 63 FR
52140, 52141 (Sept. 30, 1998) (stating that the Board
believed that the availability of information from
the FFIEC website makes the continuation of the
requirement for parent company information on the
transmittal sheet unnecessary). In 2002, Regulation
C again required financial institutions to report
parent information on transmittal sheets on the
grounds that data users asserted the importance of
having the parent institution information associated
with the HMDA data itself, rather than in a separate
database provided by the National Information
Center. 67 FR 7221, 7232 (Feb. 15, 2002).
In the 2014 HMDA NPRM, the Bureau proposed
to continue requiring that financial institutions
identify their parent companies. The Bureau stated
that because information about parent companies
was not yet available through the LEI, the Bureau
believed it was necessary to maintain this
requirement to ensure that financial institutions’
submissions can be linked with those of their
corporate parents. 79 FR 51731, 51861 (Aug. 29,
2014). However, required reporting of parent
company information stopped under the 2015
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Better structural information would,
for instance, improve the accuracy of
peer analyses, which would facilitate
fair lending enforcement. Further
analyzing trends over time would be
useful for identifying institutions that
may give rise to fair lending risk. Given
structural changes to institutions over
time, information that enables the
identification of institutions
consistently and accurately over time is
important to this trend analysis.
In addition, the Bureau believes that
information on a financial institution’s
structure would advance the business
and community development purpose
of section 1071 by facilitating the
analysis of whether and how corporate
structure impacts how a financial
institution provides access to credit to
small businesses. In particular, this
structural information could be used to
understand how regulation in one part
of a corporate structure impacts
unregulated entities within the same
corporate group.
Proposed § 1002.109(b)(8) would
result in more accurate and
comprehensive corporate structure
information by requiring financial
institutions to provide not only the
name of one parent entity, but the
immediate parent entity of the financial
institution as well as the top-holding
parent of the financial institution (for
some financial institutions, this would
be a bank holding company). For the
reasons set out in the section-by-section
analyses of proposed § 1002.109(b)(6)
and (7), the reporting of LEI and RSSD
ID of parent entities would improve the
ability of regulators and other
stakeholders to map out more precisely
and fully the often complex networks of
a financial institution’s corporate
structure. This more detailed and
accurate structural data, in turn, may be
used to perform more sophisticated and
useful analyses of the financial
institution’s 1071 data. In addition, this
information will help the Bureau
confirm whether data are appropriately
being reported by financial institutions
on behalf of their subsidiaries pursuant
to proposed § 1002.109(a)(2).
HMDA final rule on the grounds that once the LEI
is fully implemented, parent entity information was
expected to become available. 80 FR 66128, 66248
(Oct. 28, 2015) (citing Fin. Stability Bd., LEI
Implementation Grp., Fourth Progress Notes on the
Global LEI Initiative, at 4 (Dec. 11, 2012), https://
www.financialstabilityboard.org/wp-content/
uploads/r_121211.pdf?page_moved=1)(noting that
the LEI Implementation Group is developing
proposals for additional reference data on the direct
and ultimate parent(s) of legal entities and on
relationship data more generally). However, the
Bureau has subsequently encountered difficulties
using LEI to obtain parent company information,
and thus is proposing here to require that it be
provided directly by financial institutions.
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With respect to proposed
§ 1002.109(b)(8), the Bureau seeks
comment on whether it should require
any other parent entity information to
be provided by financial institutions
reporting 1071 data.
Paragraph 109(b)(9)
Proposed § 1002.109(b)(9) would
require a financial institution to report
the type of financial institution it is,
selecting the applicable type or types of
institution from a list in proposed
comment 109(b)(9)–1. The comment
would also explain that a financial
institution shall select all applicable
types. The list provided in the proposed
comment includes: (i) Bank or savings
association, (ii) minority depository
institution, (iii) credit union, (iv)
nondepository institution, (v) CDFI, (vi)
other nonprofit financial institution,
(vii) Farm Credit System institution,
(viii) government lender, (ix)
commercial finance company, (x)
equipment finance company, (xi)
industrial loan company, (xii) fintech,
and (xiii) other. Proposed comment
109(b)(9)–2 would explain that a
financial institution reports the type of
financial institution as ‘‘other’’ where
none of the enumerated types of
financial institution appropriately
describe the applicable type of financial
institution, and the institution reports
the type of financial institution as freeform text.
The Bureau believes that information
regarding the type of financial
institution reporting 1071 data would
greatly assist in the analysis conducted
by the Bureau and other users of 1071
data. Information providing further
details on types of financial institutions
would help advance the statutory
purposes of section 1071; fair lending
analysts might use this information on
the financial institution type (for
instance, depository institution
compared to nondepository institutions)
as a control variable for their analyses.
The inclusion of this information may
also assist in an assessment of the
business and community development
needs of an area as it may provide
analysts a means of determining what
types of financial institutions serve
certain geographic areas.
In addition, the Bureau believes that
this information, combined with the
parent entity information required by
proposed § 1002.109(b)(8), would offer
more accurate and granular data on
nondepository institutions within the
same corporate group as depository
institutions. Currently, the National
Information Center database, which
contains information on the structure of
corporate groups that contain banks and
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other financial institutions, provides
little information on nondepository
institutions. As set out in the section-bysection analysis of proposed
§ 1002.109(b)(8) above, information on
corporate structure that financial
institutions self-report could fill in
reporting gaps, including more specific
information on financial institution
types.
With respect to proposed
§ 1002.109(b)(9), the Bureau seeks
comment on whether it should consider
removing, modifying, or adding any
types of financial institutions to the list
in proposed comment 109(b)(9)–1,
including in order to manage unique
privacy interests (such as, for example,
whether a category for captive finance
companies that lend to applicants that
share the same branding should be
included on the list). The Bureau further
seeks comment on whether it should
consider defining any of the types of
financial institutions in the proposed
list, in particular whether and how to
define the term ‘‘fintech.’’
Paragraph 109(b)(10)
Proposed § 1002.109(b)(10) would
require a financial institution to indicate
whether it is not a covered financial
institution under proposed
§ 1002.105(a) and is thus voluntarily
reporting covered applications.
The Bureau believes it is important to
be able to specifically identify these
institutions’ transactions in the data set.
If reporting were restricted to only
financial institutions required to report,
the 1071 data would accurately reflect
the overall population of financial
institutions subject to 1071. However,
institutions that do not meet the rule’s
loan-volume thresholds in proposed
§ 1002.105(b) may choose to voluntarily
report 1071 data pursuant to proposed
§ 1002.5(a)(4)(vii) through (ix). Those
institutions that voluntarily report data
may not be representative of all
potential voluntary reporters and may
differ from required reporters. Without
a specific designation, it may not be
possible to distinguish an institution
voluntarily reporting data after a single
year of exceeding the loan-volume
threshold from an institution reporting
because it has already exceeded the
loan-volume threshold in two
consecutive years. The Bureau believes
that users of 1071 data would benefit
from being able to use this information
as a control variable, resulting in better
fair lending as well as business and
community development analyses, to
account for certain differences that may
exist as between required and voluntary
reporters.
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109(c) Procedures for the Submission of
Data to the Bureau
ECOA section 704B(g)(1) authorizes
the Bureau to prescribe rules and issue
such guidance as may be necessary to
carry out, enforce, and compile data
pursuant to section 1071. Section
704B(g)(3) provides for the Bureau to
issue guidance to facilitate compliance
with the requirements of section 1071.
The SBREFA Panel recommended
that the Bureau seek comment on the
recordkeeping and reporting issues
addressed in the SBREFA Outline,726
including how best to implement them
in a manner that minimizes cost and
burden to small financial institutions.
The Panel also recommended that the
Bureau explore ways to streamline
reporting for small financial
institutions.
Proposed § 1002.109(c) would direct
financial institutions to a publicly
available website containing the
Bureau’s Filing Instructions Guide,
which would set out technical
instructions for the submission of data
to the Bureau pursuant to proposed
§ 1002.109. Regulation C § 1003.5(a)(5)
contains a comparable provision, which
directs users to a Bureau website that
sets out instructions for the submission
of HMDA data, and the Bureau believes
a similar approach would be
appropriate here.
The Bureau intends to develop a
system to receive, process, and publish
the data collected pursuant to section
1071 and proposed subpart B. In doing
so, the Bureau will benefit from what it
learned in its multiyear effort in
developing the HMDA Platform,
through which entities file data as
required under HMDA and Regulation
C. The HMDA Platform satisfies
regulatory requirements with an entirely
web-based, open source system,727
using a container-based microservices
approach 728 and modern cloud
architectures. It was designed to be
continuously improved to incorporate
evolving technologies and better serve
HMDA data users.729 Publication of the
HMDA data is designed to meet user
needs and includes, for example, a Data
Browser to filter and download datasets
726 SBREFA
Panel Report at 47.
GitHub, CFPB/HMDA Platform, https://
github.com/cfpb/hmda-platform (last visited July
22, 2021).
728 See DockerHub, HMDA, https://
hub.docker.com/u/hmda (last visited July 22, 2021).
729 On March 22–26, 2021, the Bureau hosted a
HMDA Virtual Tech Sprint to explore other
potential innovations related to HMDA data
submission and publication. See https://
www.consumerfinance.gov/rules-policy/innovation/
cfpb-tech-sprints/home-mortgage-disclosure-acttech-sprint/.
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727 See
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and explore the data using an
interactive map. As it did in developing
the HMDA Platform, the Bureau’s work
in developing the section 1071 data
submission system will focus on
satisfying all legal requirements,
promoting data accuracy, and reducing
burden. Also as with HMDA, the Bureau
anticipates providing a Filing
Instructions Guide and related materials
for financial institutions.
The Bureau seeks comment on this
aspect of the proposal, including the
provision of technical instructions for
data submission via a Bureau website
and how best to implement the
provisions of this section in a manner
that minimizes cost and burden
particularly to small financial
institutions while implementing all
statutory obligations. The Bureau also
seeks comment on ways it could
streamline reporting for small financial
institutions.
Other Reporting Issues
Regulation C § 1003.5(a)(1)(i) provides
that a financial institution shall submit
its annual loan/application register in
electronic format to the appropriate
Federal agency. Regulation C does not
provide for the submission of HMDA
data by unaffiliated third parties
directly on behalf of financial
institutions in the way that a parent
institution may submit HMDA data on
behalf of its subsidiary under
§ 1003.5(a)(2) and comment 5(a)-3. The
Bureau understands from financial
institutions that report HMDA data to
the Bureau that most institutions use
third party software vendors in some
way to help them prepare or submit
their loan/application registers to the
Bureau.
The Bureau seeks comment on
whether it should permit third parties
(such as financial software vendors) to
submit to the Bureau a small business
lending application register on behalf of
a financial institution, including
whether financial institutions should be
required to designate third parties
authorized to submit registers on their
behalf.
Section 1002.110 Publication of Data
Proposed § 1002.110 would address
several issues surrounding publication
of section 1071 data. First, proposed
§ 1002.110(a) would address annual
publication of application-level data on
the Bureau’s website, subject to
deletions or modifications based on the
Bureau’s consideration of privacy
interests. Second, proposed
§ 1002.110(b) would state that the
Bureau may, at its discretion, compile
and aggregate data submitted by
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financial institutions and may publish
such compilations or aggregations as the
Bureau deems appropriate. Third,
proposed § 1002.110(c) would require a
covered financial institution to publish
on its website a statement that its 1071
data, as modified by the Bureau, are or
will be available on the Bureau’s
website. Finally, proposed § 1002.110(d)
would provide when a covered financial
institution shall make the notice
required by proposed § 1002.110(c)
available to the public and how long it
shall maintain the notice on its website.
The Bureau is proposing § 1002.110 to
implement ECOA section 704B(f)(2)(B)
and (C), which require the Bureau to
adopt regulations addressing the form
and manner that 1071 data are made
available to the public, and pursuant to
its authority under 704B(g)(1) to
prescribe such rules and issue such
guidance as may be necessary to carry
out, enforce, and compile data pursuant
to section 1071. The Bureau is also
proposing § 1002.110(b) pursuant to
704B(f)(3), which permits the Bureau, at
its discretion, to compile and aggregate
1071 data, and to publish such aggregate
data.
110(a) Publication of Small Business
Lending Application Registers and
Associated Financial Institution
Information
ECOA section 704B(f)(2)(C) requires
that the Bureau annually make the 1071
data it receives from financial
institutions available to the public in a
such form and in such manner as the
Bureau determines by regulation. The
Bureau addressed this issue in the
SBREFA Outline as part of its
discussion regarding privacy
considerations; 730 SER and other
stakeholder comments regarding privacy
issues are addressed in part VI below.
Proposed § 1002.110(a) would state that
the Bureau shall make available to the
public generally the data reported to it
by financial institutions pursuant to
proposed § 1002.109, subject to
deletions or modifications made by the
Bureau, at its discretion, if the Bureau
determines that the deletion or
modification of the data would advance
a privacy interest. (The Bureau is
proposing to make such determinations
using a balancing test, as discussed in
detail in part VI below.) The Bureau
shall make such data available on an
annual basis, by publishing it on the
Bureau’s website.
The Bureau seeks comment on its
proposed approach to implementing
ECOA section 704B(f)(2)(C).
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110(b) Publication of Aggregate Data
ECOA section 704B(f)(3) provides that
the Bureau may, at its discretion
‘‘compile and aggregate data collected
under this section for its own use’’ and
‘‘make public such compilations of
aggregate data.’’ The Bureau did not
address this issue at SBREFA.
Proposed § 1002.110(b) would state
that the Bureau may, at its discretion,
compile and aggregate data submitted
by financial institutions pursuant to
proposed § 1002.109, and make any
compilations or aggregations of such
data publicly available as the Bureau
deems appropriate. The Bureau believes
that publication of certain such
compilations and aggregations may
provide useful data to the public to
supplement the Bureau’s publication of
application-level data pursuant to
proposed § 1002.110(a). This is
especially true of application-level data
fields that the Bureau may choose, using
its proposed balancing test (described in
parts VI.C.1 and .2 below) to modify or
delete before publication pursuant to
proposed § 1002.110(a).
The Bureau seeks comment on this
aspect of its proposal.
110(c) Statement of Financial
Institution’s Small Business Lending
Data Available on the Bureau’s Website
and 110(d) Availability of Statements
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Background
ECOA section 704B(f)(2)(B) requires
that the data compiled and maintained
by financial institutions shall be ‘‘made
available to any member of the public,
upon request, in the form required
under regulations prescribed by the
Bureau.’’
SBREFA Proposal Under Consideration
and Feedback Received
The Bureau stated in the SBREFA
Outline that it was considering
proposing an approach in which
financial institutions could satisfy this
requirement by referring the public to
the Bureau’s website where 1071 data
would be available.731 Under this
approach, the 1071 data would be
available with any modifications or
deletions required based on the
Bureau’s application of the balancing
test described in part VI below. The
Bureau also stated that it considered
requiring financial institutions to make
their own data available to the public
directly, upon request. However, the
Bureau was concerned that this
approach could involve greater burden
for financial institutions, lead to privacy
risks resulting from errors by individual
financial institutions implementing any
modifications or deletions required by
the Bureau, and be less efficient overall.
One SER and several industry
stakeholders expressed strong support
for the Bureau’s proposal under
consideration that the public be directed
to access 1071 data via the Bureau’s
website, rather than requiring financial
institutions to provide the data
themselves upon request.732 These
stakeholders expressed concern that a
requirement that financial institutions
themselves provide 1071 data to the
public upon request would be
burdensome, adding complexity to the
process, making errors more likely, and
giving rise to data privacy risks. One
community group asserted that the
Bureau should require financial
institutions to provide 1071 data within
30 days of a request from the public
and, absent this, that the Bureau should
make application-level 1071 data
available to the public quarterly rather
than annually.
The SBREFA Panel recommended,
regarding this issue as well as other
recordkeeping and reporting issues
addressed in the SBREFA Outline, that
the Bureau seek comment on these
aspects of a 1071 rule, and how best to
implement them in a manner that
minimizes cost and burden to small
financial institutions.733
Proposed Rule
Proposed § 1002.110(c) would require
that a covered financial institution make
available to the public on its website, or
otherwise upon request, a statement that
the covered financial institution’s small
business lending application register, as
modified by the Bureau pursuant to
proposed § 1002.110(a), is or will be
available on the Bureau’s website. The
Bureau is proposing this approach,
which is consistent with its approach
under consideration at SBREFA, for the
reasons discussed above, including that
this approach would reduce potential
burdens on financial institutions
associated with publishing modified
data, would reduce privacy risks
resulting from errors by individual
financial institutions implementing any
modifications or deletions required by
the Bureau, and would be more efficient
overall. Regulation C (§ 1003.5(c)(1))
implements a similar statutory
requirement regarding the form of data
reporting and requires financial
institutions to direct any public requests
for HMDA data they receive to the
Bureau; 734 the Bureau believes that a
732 SBREFA
Panel Report at 34.
at 47.
734 12 U.S.C. 2803(j)(1).
733 Id.
731 Id.
at 41–42.
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similar provision would be appropriate
here to maintain continuity across
reporting regimes, and because the
Bureau believes that this provision
would help ensure consistent
implementation of any modification or
deletion decisions that the Bureau
determines would advance a privacy
interest.
Proposed § 1002.110(c) would also
state that a financial institution shall
use language provided by the Bureau, or
substantially similar language, to satisfy
this requirement to provide a statement.
Proposed comment 110(c)–1 would
provide model language that financial
institutions can use to comply with
proposed § 1002.110(c). Proposed
comment 110(c)–2 would provide
guidance to financial institutions that
do not have websites.
Proposed § 1002.110(d) would
provide that a covered financial
institution shall make the notice
required by proposed § 1002.110(c)
available to the public on its website
when it submits a small business
lending application register to the
Bureau pursuant to proposed
§ 1002.110(a), and shall maintain the
notice for as long as it has an obligation
to retain its small business lending
application registers pursuant to
proposed § 1002.111(a).
The Bureau seeks comment on its
proposed approach to implementing
ECOA section 704B(f)(3), including how
best to implement proposed
§ 1002.110(c) and (d) in a manner that
minimizes cost and burden particularly
on small financial institutions while
implementing all statutory obligations.
Section 1002.111 Recordkeeping
Proposed § 1002.111 would address
several aspects of the recordkeeping
requirements for 1071 data. First,
proposed § 1002.111(a) would require a
covered financial institution to retain
evidence of its compliance with this
section, which includes a copy of its
small business lending application
register, for at least three years after
submitting the register pursuant to
proposed § 1002.109. Second, proposed
§ 1002.111(b) would require a financial
institution to maintain, separately from
the rest of the application and
accompanying information, an
applicant’s responses to a financial
institution’s inquiries required by ECOA
section 704B(b)(1) (i.e., whether the
applicant is a minority-owned business
or a women-owned business, and
regarding the ethnicity, race, and sex of
the applicant’s principal owners).
Finally, proposed § 1002.111(c) would
require that, in compiling and
maintaining any records under
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proposed §§ 1002.107 and 1002.111(b),
or reporting data pursuant to proposed
§ 1002.109, a financial institution shall
not include personally identifiable
information concerning any individual
who is, or is connected with, an
applicant.
The Bureau is proposing § 1002.111 to
implement ECOA section 704B(f)(2)(A),
which requires financial institutions to
compile and maintain 1071 data for at
least three years; 704B(b)(2), which
requires financial institutions to
maintain a record of the responses to the
inquiry required by 704B(b)(1), separate
from the application and accompanying
information; and 704B(e)(3), which
provides that in compiling and
maintaining 1071 data, a financial
institution may not include personally
identifiable information concerning an
individual who is, or is connected with,
an applicant. The Bureau is also
proposing § 1002.111 pursuant to its
authority under 704B(g)(1) to prescribe
such rules and issue such guidance as
may be necessary to carry out, enforce,
and compile data pursuant to section
1071.
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111(a) Record Retention
ECOA section 704B(f)(2)(A) requires
that information compiled and
maintained under section 1071 be
retained for not less than three years
after the date of preparation. In the
SBREFA Outline, the Bureau stated that
it was considering proposing that a
financial institution retain its 1071 data
for at least three years after they are
submitted to the Bureau.735 The Bureau
received little feedback on this issue; a
few stakeholders opined that the threeyear retention period was acceptable.
The SBREFA Panel recommended,
regarding this issue as well as other
recordkeeping and reporting issues
addressed in the SBREFA Outline, that
the Bureau seek comment on these
aspects of a 1071 rule, and how best to
implement them in a manner that
minimizes cost and burden to small
financial institutions.736
Proposed § 1002.111(a) would require
that a financial institution retain a copy
of its small business lending application
register for three years after the register
is submitted to the Bureau pursuant to
proposed § 1002.109. This proposed
approach is consistent with the
approach that the Bureau considered
proposing at SBREFA. By way of
comparison, under Regulation C,
financial institutions must retain the
loan/application registers that they
735 SBREFA
736 SBREFA
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submit to the Bureau for three years.737
This reflects the requirement in HMDA
itself that a LAR be retained for three
years after it is made available.738
Proposed comment 111(a)–1 would
provide examples of what evidence of
compliance with the proposed provision
is likely to include. Proposed comment
111(a)–2 would require that a creditor
that is voluntarily, under
§ 1002.5(a)(4)(vii) and (viii), collecting
information pursuant to subpart B but is
not required to report that data to the
Bureau, complies with proposed
§ 1002.111(a) by retaining evidence of
compliance with subpart B for at least
three years after June 1 of the year
following the year that data was
collected.
The Bureau seeks comment on its
proposed approach to implementing
ECOA section 704B(f)(2)(A), including
how best to implement proposed
§ 1002.111(a) in a manner that
minimizes cost and burden particularly
on small financial institutions while
implementing all statutory obligations.
111(b) Certain Information Kept
Separate From the Rest of the
Application
ECOA section 704B(b)(2) requires
financial institutions to maintain a
record of the ‘‘responses to [the]
inquiry’’ required by 704B(b)(1) separate
from the application and accompanying
information. As discussed below and
consistent with the approach set forth in
E.2 of the Overview to this part V, the
Bureau proposes to interpret the term
‘‘responses to such inquiry’’ in
704B(b)(2) to be the applicant’s
responses to inquiries regarding
protected demographic information—
that is, whether the applicant is a
minority-owned business or a womenowned business, and the ethnicity, race,
and sex of the applicant’s principal
owners.
In the SBREFA Outline, the Bureau
discussed this statutory provision but
did not present a proposal under
consideration to address it. Some SERs
quoted this statutory language in written
feedback, but none provided feedback
on the particular issue of keeping
certain information separate from the
rest of the application. One trade
association stakeholder noted that,
under HMDA and Regulation C, banks
are permitted to inquire about and
collect required data points (which
include information such as the
ethnicity, race, and sex of applicants’
principal owners) on and with the
application. This stakeholder urged the
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C § 1003.5(a)(1).
U.S.C. 2803(j)(6).
Bureau to permit the same for 1071, and
further requested a safe harbor for a
bank that inquires and collects required
data points on or with an application.
The SBREFA Panel recommended,
regarding this issue as well as other
recordkeeping and reporting issues
addressed in the SBREFA Outline, that
the Bureau seek comment on this aspect
of a 1071 rule, and how best to
implement it in a manner that
minimizes cost and burden to small
financial institutions.739
Proposed § 1002.111(b) would state
that a financial institution shall
maintain, separately from the rest of the
application and accompanying
information, an applicant’s responses to
the financial institution’s inquiries to
collect data pursuant to proposed
subpart B regarding whether an
applicant for a covered credit
transaction is a minority-owned
business under proposed
§ 1002.107(a)(18) or a women-owned
business under proposed
§ 1002.107(a)(19), and regarding the
ethnicity, race, and sex of the
applicant’s principal owners under
proposed § 1002.107(a)(20).
Proposed comment 111(b)–1 would
explain that a financial institution may
satisfy this requirement by keeping an
applicant’s responses to the financial
institution’s request pursuant to
proposed § 1002.107(a)(18) through (20)
in a file or document that is discrete or
distinct from the application and its
accompanying information. For
example, such information could be
collected on a piece of paper that is
separate from the rest of the application
form. In order to satisfy the requirement
in proposed § 1002.111(b), an
applicant’s responses to the financial
institution’s request pursuant to
proposed § 1002.107(a)(18) through (20)
need not be maintained in a separate
electronic system, nor need they be
removed from the physical files
containing the application. However,
the financial institution may
nonetheless need to keep this
information in a different electronic or
physical file in order to satisfy the
requirements of proposed § 1002.108.
As discussed in detail above in E.2 in
the Overview of this part V, the Bureau
believes the best reading of the statutory
provisions that mention the inquiry
made under ECOA section 704B(b)(1)—
in 704B(b)(2) as well as in 704B(c)
regarding the right to refuse and 704B(d)
regarding the firewall—is that they refer
to applicants’ responses to the inquiries
regarding minority-owned and womenowned business status in proposed
737 Regulation
738 12
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739 SBREFA
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§ 1002.107(a)(18) and (19), and
regarding the ethnicity, race, and sex of
applicants’ principal owners in
proposed § 1002.107(a)(20). Each of
these three data points require financial
institutions to request demographic
information that has no bearing on the
creditworthiness of the applicant.
Moreover, a financial institution could
not inquire about this demographic
information absent section 1071’s
mandate to collect and report the
information, and ECOA prohibits a
financial institution from discriminating
against an applicant on the basis of the
information. The Bureau accordingly
believes that the best effectuation of
congressional intent is to apply section
1071’s special-protection provisions to
apply to this demographic information,
regardless of whether the statutory
authority to collect it originates in
704B(b)(1) (women-owned business
status and minority-owned business
status) or 704B(e)(2)(G) (race, sex, and
ethnicity of principal owners). The
Bureau similarly believes that Congress
did not intend these special protections
to apply to any of the other applicantprovided data points proposed in
§ 1002.107(a), which the financial
institution is permitted to request
regardless of coverage under section
1071, which are not the subject of
Federal antidiscrimination law, and
many of which financial institutions
currently use for underwriting purposes.
With respect to the stakeholder’s
request that the section 1071 rule mirror
HMDA’s approach to collection of
ethnicity, race, and sex data, the Bureau
notes that there is no requirement in
HMDA that is comparable to ECOA
section 704B(b)(2)’s requirement that
certain information be kept separate
from the application and accompanying
information; Regulation C thus
anticipates that the demographic
information required under HMDA can
be collected as part of the
application.740 The Bureau recognizes
from stakeholder comments identified
in the section-by-section analysis of
proposed § 1002.107(c)(1) above that
there may be potential difficulties in
satisfying the proposed requirements
regarding the time and manner of
collecting applicant-provided data
while not being able to ask for that
information on the application itself.
Proposed comment 111(b)–1 is intended
to clarify, and facilitate compliance
with, the statutory directive that
financial institutions must keep certain
information separate from the credit
application.
The Bureau seeks comment on its
proposed approach to implementing
ECOA section 704B(b)(2), including
how best to implement proposed
§ 1002.111(b) in a manner that
minimizes cost and burden, particularly
on small financial institutions, while
implementing all statutory obligations.
The Bureau also seeks comment on
whether, for financial institutions that
determine that underwriters or other
persons should have access to
applicants’ demographic information
pursuant to proposed § 1002.108(b), it
should likewise waive the requirement
in proposed § 1002.111(b) to keep that
information separate from the
application and accompanying
information.
111(c) Limitation on Personally
Identifiable Information Retained Under
This Section
Background
ECOA section 704B(e)(3) provides
that in compiling and maintaining any
record of information under section
1071, a financial institution may not
include in such record the name,
specific address (other than the census
tract), telephone number, electronic
mail address, or any other personally
identifiable information (PII) concerning
any individual who is, or is connected
with, an applicant.
SBREFA Proposal Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
stated it was considering proposing a
prohibition on including certain PII
about any individuals associated with
small business applicants in the small
business lending application register a
financial institution is required to
compile, maintain, and report to the
Bureau (other than the information
specifically required to be collected and
reported pursuant to section 1071, such
as the ethnicity, race, and sex of
principal owners). The Bureau also
stated that this prohibition would not
apply to PII collected by financial
institutions outside of their specific
1071 data records.741
SERs and other stakeholders offered
limited feedback on this issue.742 One
SER requested clarification on this
statutory provision, specifically asking
whether financial institutions were
permitted to keep PII in their own loanlevel records. A trade association
supported a ban on including PII in the
1071 data. Another stated that the
Bureau should issue a clarifying
provision for excluding PII in compiling
741 SBREFA
740 See
80 FR 66128, 66192–93 (Oct. 28, 2015).
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742 SBREFA Panel Report at 34.
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and maintaining any record of
information from the different stages in
the process (e.g., bank systems,
regulatory submission file). Two
community group stakeholders
supported a prohibition on including
personally identifiable information in
1071 data to reduce potential privacy
concerns surrounding release of 1071
data.
Some stakeholders expressed concern
regarding a different issue related to
data privacy. Federal and State laws
protect the financial and data privacy of
individuals, typically by imposing
obligations on financial institutions to
provide their customers notice and an
opportunity to opt out in advance of the
disclosure of their nonpublic personal
information to unaffiliated third
parties.743 Several industry stakeholders
expressed concern that reporting 1071
data to the Bureau may cause them to
violate other data privacy laws,
including State data privacy laws.
The SBREFA Panel recommended,
regarding this issue as well as other
recordkeeping and reporting issues
addressed in the Outline, that the
Bureau seek comment on these aspects
of a 1071 rule, and how best to
implement them in a manner that
minimizes cost and burden to small
financial institutions.744
Proposed Rule
The Bureau is proposing in
§ 1002.111(c) that in compiling and
maintaining any records under
proposed § 1002.107 or § 1002.111(b), or
reporting data pursuant to proposed
§ 1002.109, a financial institution shall
not include any name, specific address,
telephone number, email address, or
any PII concerning any individual who
is, or is connected with, an applicant,
other than as required pursuant to
proposed § 1002.107 or § 1002.111(b).
The prohibition on the inclusion of PII
in ECOA section 704B(e)(3), which
covers the ‘‘compiling and maintaining
any record of information,’’ implicates
proposed §§ 1002.107, 1002.109, and
1002.111, which together would address
the compilation, maintenance, and
reporting of 1071 data by financial
institutions.
Proposed comment 111(c)–1 would
clarify that the prohibition in proposed
§ 1002.111(c) applies to data compiled
and maintained pursuant to § 1002.107,
data in the small business lending
application register submitted by the
financial institution to the Bureau under
proposed § 1002.109, the version of the
743 See, e.g., Gramm-Leach-Bliley Act, 15 U.S.C.
6801 et seq.; Regulation P, 12 CFR part 1016.
744 SBREFA Panel Report at 47.
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register that the financial institution
maintains under proposed
§ 1002.111(a), and the separate record of
certain information created pursuant to
proposed § 1002.111(b).
Proposed comment 111(c)–2 would
address the types of information
(including PII) that a financial
institution is prohibited from including
in the data it compiles and maintains
pursuant to proposed § 1002.107, in its
records under proposed § 1002.111(b),
or in data reported to the Bureau under
proposed § 1002.109. The examples of
types of PII identified in proposed
comment 111(c)–2 are illustrative and
not exhaustive.
Proposed comment 111(c)–3 would
clarify that the prohibition in proposed
§ 1002.111(c) does not extend to the
application or any other records that the
financial institution maintains. This
comment is intended to address the
request by a SER and another
stakeholder that the Bureau clarify that
this prohibition does not extend more
broadly to a financial institution’s
application or loan-related files.
Proposed comment 111(c)–4 would
clarify that the prohibition in proposed
§ 1002.111(c) does not bar financial
institutions from providing to the
Bureau, pursuant to proposed
§ 1002.109(b)(3), the name and business
contact information of the person who
may be contacted with questions about
the financial institution’s submission.
The Bureau seeks comment on its
proposed approach to implementing
ECOA section 704B(e)(3), including how
best to implement this requirement in a
manner that minimizes cost and burden,
particularly on small financial
institutions, while implementing all
statutory obligations. Regarding
comments by stakeholders that
reporting 1071 data to the Bureau could
give rise to a potential conflict with the
data protection and privacy laws
prohibiting the disclosure of nonpublic
personal information to unaffiliated
third parties, the Bureau notes that such
laws typically provide an exemption for
disclosures made pursuant to Federal
and State law.745 The Bureau seeks
comment on whether the requirements
in this proposed rule could conflict with
other data privacy or data protection
laws, and whether the Bureau might
need to use its preemption authority
under ECOA,746 Regulation B,747 and/or
section 1041(a)(1) of the Dodd-Frank
Act to ensure that financial institutions
do not violate State law in reporting
1071 data to the Bureau. The Bureau
also seeks comment on whether it
should include a provision to preempt
any State data privacy or data protection
laws that would prohibit the collection,
maintenance, and reporting to the
Bureau of 1071 data.
745 See, e.g., Gramm-Leach-Bliley Act section
502(e)(8), 15 U.S.C. 6802(e)(8), and Regulation P
§ 1016.15(a)(7)(i) (stating that the limitations on
disclosing nonpublic personal information to
unaffiliated third parties do not apply if the
information is disclosed to comply with Federal,
State, or local laws, rules and other applicable legal
requirements); California Consumer Privacy Act,
Cal. Civ. Code 1798.145(a)(1) (noting that the
obligations imposed on businesses by CCPA ‘‘shall
not restrict a business’ ability to . . . comply with
federal, state, or local laws’’).
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Section 1002.112
Enforcement
Proposed § 1002.112 would address
several issues related to the enforcement
of violations of the requirements of
proposed subpart B. First, proposed
§ 1002.112(a) would state that a
violation of section 1071 or subpart B of
Regulation B is subject to administrative
sanctions and civil liability as provided
in sections 704 and 706 of ECOA.
Second, proposed § 1002.112(b) would
provide that a bona fide error in
compiling, maintaining, or reporting
data with respect to a covered
application is an error that was
unintentional and occurred despite the
maintenance of procedures reasonably
adapted to avoid such an error. This
proposed provision also addresses the
maintenance of procedures reasonably
adapted to avoid such errors. Third,
proposed § 1002.112(c) would identify
four safe harbors under which certain
errors—namely, certain types of
incorrect entries for census tract, NAICS
code, small business status, and
application date—would not constitute
violations of ECOA or Regulation B.
The Bureau is proposing § 1002.112 to
implement sections 704 and 706 of
ECOA, pursuant to its authority under
ECOA section 704B(g)(1) to prescribe
such rules and issue such guidance as
may be necessary to carry out, enforce,
and compile data pursuant to section
1071 and pursuant to its authority under
704B(g)(2) to adopt exceptions to any
requirement of section 1071 and to
exempt any financial institution or class
of financial institutions from the
requirements of section 1071, as the
Bureau deems necessary or appropriate
to carry out the purposes of section
1071.
A violation of section 1071 is subject
to the enforcement provisions of ECOA,
of which section 1071 is a part. ECOA
contains administrative enforcement
746 15
U.S.C. 1691d(f).
§ 1002.11.
747 Existing
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provisions in section 704,748 and it
provides for civil liability in section
706.749 The enforcement provisions in
existing Regulation B (§ 1002.16(a)(1)
and (2)) cross-reference and paraphrase
these administrative enforcement and
civil liability provisions of ECOA.
Proposed § 1002.112(a) would provide
that a violation of section 1071 or
subpart B of Regulation B is subject to
administrative sanctions and civil
liability as provided in sections 704 and
706 of ECOA, where applicable.
Regarding stakeholder concerns about
private litigants bringing actions for
non-compliance, the Bureau believes
that its administrative enforcement
mechanisms would be appropriate and
adequate to address most instances of
non-compliance by financial
institutions that report 1071 data to the
Bureau, based on its experience with
Regulation C and HMDA. The Bureau
believes that proposed § 1002.112(b)
addresses the concerns raised by
stakeholders that requested that
penalties for non-compliance not be
assessed in the first year that 1071 data
is collected, given the likelihood of
unintentional errors as covered financial
institutions learn how to implement this
rule.
The Bureau seeks comment on its
proposed approach to administrative
enforcement and civil liability.
112(b) Bona Fide Errors
SBREFA Proposal Under Consideration
and Feedback Received
During the SBREFA process, SERs
and other industry stakeholders
expressed concern about private
litigants suing them for non-compliance
with the 1071 rule.750 In addition,
several SERs requested that the Bureau
not assess penalties for the first year of
1071 data collection and reporting, as it
did following the 2015 HMDA final
rule; prior to the compliance date for
that rule, the Bureau issued a policy
statement announcing it would not seek
penalties for errors for the first calendar
year (2018) of data collected under the
amended Regulation C.751 Stakeholders
748 15
U.S.C. 1691c.
U.S.C. 1691e.
750 The SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 34–36.
751 Bureau of Consumer Fin. Prot., CFPB Issues
Public Statement On Home Mortgage Disclosure Act
Compliance (Dec. 21, 2017), https://www.consumer
finance.gov/about-us/newsroom/cfpb-issues-publicstatement-home-mortgage-disclosure-actcompliance/ (noting that the Bureau did not intend
to require data resubmission unless data errors were
material, or assess penalties with respect to errors
for HMDA data collected in 2018 and reported in
2019).
749 15
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asked the Bureau to emulate that
approach for 1071. Other stakeholders
expressed concern about the potential
consequences of committing what they
viewed as technical or inadvertent
errors in collecting or reporting 1071
data. One financial institution
stakeholder suggested that the 1071 rule
adopt or emulate the good faith error
provisions set out in Regulation C,
including § 1003.6(b)(1), which provides
that an error in compiling or recording
data for a covered loan or application is
not a violation of HMDA or Regulation
C if the error was unintentional and
occurred despite the maintenance of
procedures reasonably adapted to avoid
such an error. Stakeholders also referred
to the existing error-related exemptions
in ECOA and Regulation B.752 ECOA’s
civil liability provision states that
creditors will not be liable for acts done
or omitted in good faith in conformity
with any official rule, regulation, or
interpretation thereof by the Bureau.753
Proposed Rule
Proposed § 1002.112(b) would
provide that a bona fide error in
compiling, maintaining, or reporting
data with respect to a covered
application is an error that was
unintentional and occurred despite the
maintenance of procedures reasonably
adapted to avoid such an error. A bona
fide error is not a violation of ECOA or
subpart B. A financial institution is
presumed to maintain procedures
reasonably adapted to avoid errors with
respect to a given data field if the
number of errors found in a random
sample of the financial institution’s
submission for the data field does not
equal or exceed a threshold specified by
the Bureau for this purpose in proposed
appendix H. However, an error is not a
bona fide error if either there is a
reasonable basis to believe the error was
intentional or there is other evidence
that the financial institution did not
maintain procedures reasonably adapted
to avoid such errors.
The Bureau believes that a similar
approach to Regulation C, modified and
combined with the approach taken by
Federal agencies in HMDA
examinations, would be appropriate
here. Regulation C § 1003.6(b)(1)
provides that an error in compiling or
recording data for a covered loan or
application is not a violation of HMDA
or Regulation C if the error was
unintentional and occurred despite the
maintenance of procedures reasonably
adapted to avoid such an error. In an
examination of a financial institution for
752 See,
753 15
e.g., § 1002.16(c).
U.S.C. 1691e(e).
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compliance with Regulation C, a
financial institution may make a certain
number of unintentional errors in a
testing sample of applications for a
given data field in the institution’s loan/
application register (LAR), the HMDA
analog to the small business lending
application register, before it must
resubmit its LAR. These tolerance
thresholds are based on the number of
loans or applications in a LAR as set out
in the HMDA tolerances table in the
FFIEC’s Interagency HMDA examination
procedures.754
For instance, as described in the
HMDA tolerances table, a bank that
submitted 45 applications is subject to
a threshold of three inadvertent errors
per data field based on the review of a
random sample of 30 applications in the
bank’s LAR; a bank that submitted
45,000 applications would be subject to
a threshold of four inadvertent errors
per data field based on a sample of 79
applications. The tolerances thresholds,
as a percentage of the random sample of
applications reviewed, become more
stringent as the number of total
applications rises.
The Bureau would provide a similar
table of thresholds in proposed
appendix H and incorporate it in the
bona fide error provision as set out in
proposed § 1002.112(b). Under this
proposed provision and the table of
thresholds in proposed appendix H,
financial institutions that report a
number of errors equal to or below the
applicable thresholds are presumed to
have in place procedures reasonably
adapted to avoid errors; those that
report a number of errors above the
applicable thresholds are not presumed
to have in place procedures reasonably
adapted to avoid errors. The Bureau
believes that this approach would be
broadly consistent with the approach it
has taken for HMDA.755 The Bureau also
believes that this approach would
address the concerns expressed by
stakeholders regarding liability for some
data reporting errors, especially in the
earlier years of reporting, as processes
are first being implemented. Moreover,
the Bureau believes that this provision
will help to ensure the accuracy of the
data submitted by requiring the
maintenance of appropriate procedures;
at the same time, this provision will
prevent financial institutions from being
subjected to liability for some difficultto-avoid errors that could drive those
754 Fed. Fin. Insts. Examination Council,
Interagency Examination Procedures: HMDA (Apr.
2019), https://files.consumerfinance.gov/f/
documents/cfpb_supervision-and-examinationmanual_hmda-exam-procedures_2019-04.pdf.
755 Home Mortgage Disclosure (Regulation C), 80
FR 66128, 66269 (Oct. 28, 2015).
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institutions from the small-business
lending market. Therefore, the Bureau
believes this provision is necessary to
carry out, enforce, and compile data
pursuant to section 1071, as well as
necessary or appropriate to carrying out
section 1071’s purposes.
Proposed comment 112(b)–1 would
explain that a financial institution is
presumed to maintain procedures
reasonably adapted to avoid errors with
respect to a given data field if the
number of errors found in a random
sample of the financial institution’s
submission for the data field does not
equal or exceed a threshold specified by
the Bureau for this purpose. Proposed
comment 112(b)–1 would also explain
that the Bureau’s thresholds appear in
column C of the table in proposed
appendix H, and that the size of the
random sample shall depend on the size
of the financial institution’s small
business lending application register, as
shown in column A of the table in
appendix H.
Proposed comment 112(b)–2 would
provide that, for purposes of
determining bona fide errors under
§ 1002.112(b), the term ‘‘data field’’
generally refers to individual fields, but
that, with respect to information on the
ethnicity or race of an applicant or
borrower, or co-applicant or coborrower, a data field group may consist
of more than one field. If one or more
of the fields within an ethnicity or race
field group have errors, they count as
one (and only one) error for that data
field group.
Proposed comment 112(b)–3 would
provide that an error that meets the
criteria for one of the four safe harbor
provisions in proposed § 1002.112(c)
would not be counted as an error for
purposes of determining whether a
financial institution has exceeded the
error threshold for a given data field.
The Bureau seeks comment on its
proposed approach to bona fide errors,
including whether the tolerance levels
in proposed appendix H are
appropriate.
112(c) Safe Harbors
Proposed § 1002.112(c) would
establish four safe harbor provisions,
providing that certain types of errors
would not constitute violations of ECOA
or Regulation B. Proposed
§ 1002.112(c)(1) would provide a safe
harbor for an incorrect entry for census
tract obtained by correct use of a
geocoding tool provided by the FFIEC or
the Bureau. Proposed § 1002.112(c)(2)
would provide a safe harbor for an
incorrect NAICS code determined by a
financial institution under certain
circumstances. Proposed
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§ 1002.112(c)(3) would provide a safe
harbor for the collection of applicants’
protected demographic information
pursuant to proposed § 1002.107(a)(18)
through (20) after an initially erroneous
determination that an applicant is a
small business. Proposed
§ 1002.112(c)(4) would provide a safe
harbor for the reporting of an
application date that is within three
calendar days of the actual application
date.
As described in further detail below,
the Bureau is proposing the four safe
harbors established in proposed
§ 1002.112(c) pursuant to its authority
under ECOA and as amended by section
1071. Section 703 of ECOA provides the
Bureau the authority to prescribe
regulations to carry out the purposes of
ECOA, including such adjustments and
exceptions for any class of transactions
that in the judgment of the Bureau are
necessary or proper to effectuate the
purposes of ECOA, to prevent
circumvention or evasion thereof, or to
facilitate or substantiate compliance
therewith. Section 704B(g)(1) provides
that the Bureau shall prescribe such
rules as may be necessary to carry out,
enforce, and compile data pursuant to
section 1071. Section 704B(g)(2)
authorizes the Bureau to adopt
exceptions to any requirement of section
1071 and to exempt any financial
institution or class of financial
institutions from the requirements of
section 1071, as the Bureau deems
necessary or appropriate to carry out the
purposes of section 1071.
112(c)(1) Incorrect Entry for Census
Tract
The Bureau received feedback on the
SBREFA Outline,756 concerning a
provision in Regulation C providing for
a good faith error exemption in
inadvertently selecting the wrong
census tract for a property. In response,
the Bureau is proposing
§ 1002.112(c)(1), which would provide
that an incorrect entry for census tract
is not a violation of ECOA or this
subpart if the financial institution
obtained the census tract by correctly
using a geocoding tool provided by the
FFIEC or the Bureau. Regulation C
§ 1003.6(b)(2) contains a similar
provision, and the Bureau believes a
similar approach would be appropriate
here. Especially in light of the years that
financial institutions have already been
relying on the FFIEC geocoding tool in
the HMDA context, the Bureau believes
financial institutions would be justified
in expecting not to be held liable for
reporting erroneous information
756 SBREFA
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provided by the FFIEC or Bureau.
Additionally, the Bureau believes that
this proposed safe harbor will
ultimately improve the accuracy of the
data submitted by encouraging the use
of reliable FFIEC geocoding tools, and
preventing financial institutions from
being subjected to liability for some
difficult-to-avoid errors that could drive
those institutions either to eschew these
useful tools or exit the small business
lending market. Therefore, the Bureau
believes this provision is necessary to
carry out, enforce, or compile data
pursuant to section 1071, and necessary
or appropriate to carry out section
1071’s purposes.
Proposed comment 112(c)(1)–1 would
explain that the safe harbor provision
under proposed § 1002.112(c)(1) would
not extend to a financial institution’s
failure to provide the correct census
tract number for a covered application
on its small business lending
application register, as required by
proposed § 1002.107(a)(13), because the
FFIEC or Bureau geocoding tool did not
return a census tract for the address
provided by the financial institution. In
addition, proposed comment 112(c)(1)–
1 would explain that this safe harbor
provision would not extend to a census
tract error that results from a financial
institution entering an inaccurate
address into the FFIEC or Bureau
geocoding tool.
The Bureau seeks comment on its
proposed approach to this safe harbor.
112(c)(2) Incorrect Entry for NAICS
Code
As discussed in the section-by-section
analysis of proposed § 1002.107(a)(15)
above, the Bureau is proposing to
require financial institutions to collect
an applicant’s 6-digit NAICS code. A
financial institution would be permitted
to rely on an applicant’s representations
or on other information regarding its
NAICS code as described in proposed
comments 107(a)(15)–3 and –4.
Proposed § 1002.112(c)(2) would apply
when a financial institution does not
rely on such information, but instead
the financial institution identifies the
NAICS code for an applicant and the
identified NAICS code is incorrect.
Specifically, proposed § 1002.112(c)(2)
would provide that the incorrect entry
for that institution-identified NAICS
code is not a violation of subpart B,
provided that the first two digits of the
NAICS code are correct and the
financial institution maintains
procedures reasonably adapted to
correctly identify the subsequent four
digits.
The Bureau is proposing this safe
harbor pursuant to its statutory
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authority under section 704B(g)(1) and
(2). This safe harbor would address
comments from several stakeholders
who stated that correctly classifying an
applicant’s NAICS code can be difficult,
as the business may change over time,
codes may have overlapping definitions,
small businesses often do not know
their NAICS code, and classifications
may be prone to human error. The
Bureau believes that this proposed safe
harbor would also alleviate concerns
about NAICS codes classifications being
subject to change based on SBA
rulemaking (in situations where the
SBA does not change the 2-digit sector
code). The Bureau believes that this
proposed safe harbor will help to ensure
the accuracy of the data submitted by
requiring the maintenance of
appropriate procedures and requiring
that the most crucial first two digits be
correct in every instance; at the same
time, the proposed safe harbor will
prevent financial institutions from being
subjected to liability for some difficultto-avoid errors. Therefore, the Bureau
believes this provision is necessary and
appropriate to carry out section 1071
and its purposes.
The Bureau seeks comment on its
proposed approach to this safe harbor.
As discussed in the section-by-section
analysis of proposed § 1002.107(a)(15)
above, the Bureau seeks comment on its
proposal to collect 6-digit NAICS codes
with the safe harbor described in
proposed § 1002.112(c)(2). The Bureau
also seeks comment on whether
requiring a 3-digit NAICS code with no
safe harbor would be a better
alternative.
112(c)(3) Incorrect Determination of
Small Business Status
Proposed § 1002.112(c)(3) would
provide that a financial institution that
initially determines that an applicant is
a small business, as defined in proposed
§ 1002.106(b), but then later concludes
the applicant is not a small business,
does not violate ECOA or Regulation B
if it collected information pursuant to
subpart B regarding whether an
applicant for a covered credit
transaction is a minority-owned
business or a women-owned business,
and the ethnicity, race, and sex of the
applicant’s principal owners. Proposed
§ 1002.112(c)(3) would further provide
that a financial institution seeking to
avail itself of this safe harbor shall
comply with the requirements of
subpart B as otherwise required
pursuant to proposed §§ 1002.107,
1002.108, and 1002.111 with respect to
the collected information.
The Bureau is proposing this safe
harbor pursuant to its authority under
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section 703(a) of ECOA, which allows
the Bureau to provide for certain
exceptions to Regulation B ‘‘as in the
judgment of the Bureau are necessary or
proper to effectuate the purposes of
[ECOA], to prevent circumvention or
evasion thereof, or to facilitate or
substantiate compliance therewith.’’
The Bureau believes the proposed safe
harbor is needed to address situations
where the financial institution initially
determines that an applicant is a small
business and believes it is required
under the 1071 rule to collect protected
demographic information, but later
concludes that the applicant is not a
small business when it, for example,
obtains updated gross annual revenue
information. In such situations, the
financial institution may be uncertain
about whether it ‘‘may obtain
information required by a regulation’’
under existing § 1002.5(a)(2), which
could deter financial institutions from
complying with the 1071 rule. The
Bureau believes that this safe harbor
would facilitate compliance with ECOA
by eliminating a situation in which
financial institutions might be deterred
from appropriately collecting
applicants’ protected demographic
information due to the possibility that
their understanding of an applicant’s
small business status might change
during the course of the application
process.
Proposed § 1002.112(c)(3) would
make it clear that a financial institution
does not violate the existing Regulation
B general prohibition against inquiring
about the race, national origin, or sex of
an applicant as long as the financial
institution complies with the
requirements of the subpart B, including
the requirements set forth in proposed
§§ 1002.107, 1002.108, and 1002.111
with respect to the collected
information. Proposed comment 106(b)–
1 would clarify that the financial
institution does not report the
application on its small business
lending application register pursuant to
§ 1002.109.
The Bureau seeks comment on its
proposed approach to this safe harbor.
112(c)(4) Incorrect Application Date
Proposed § 1002.107(a)(2) would
require financial institutions to report
application date. In the SBREFA
Outline, the Bureau stated that it was
considering proposing providing
financial institutions a grace period of
several days on either side of the date
reported to reduce the compliance
burden of pinpointing an exact date on
which an application was received.757
757 Id.
at 26.
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As discussed in the section-by-section
analysis of proposed § 1002.107(a)(2)
above, several SERs and other
stakeholders were strongly in favor of
the Bureau providing such a grace
period to reduce compliance burden.
In light of SER and other stakeholder
feedback, proposed § 1002.112(c)(4)
would provide that a financial
institution does not violate proposed
subpart B if it reports on its small
business lending application register an
application date that is within three
calendar days of the actual application
date pursuant to proposed
§ 1002.107(a)(2). The Bureau believes
that this proposed provision will ensure
the level of accuracy needed for the
resulting data to be useful in carrying
out section 1071’s purposes and
minimize the risk that financial
institutions will be held liable for
difficult-to-avoid errors, which might
otherwise affect their participation in
the small business lending market.
Therefore, the Bureau believes this
provision is necessary and appropriate
to carry out section 1071 and its
purposes. The Bureau seeks comment
on its proposed approach to this safe
harbor.
Section 1002.113 Severability
Proposed § 1002.113 would provide
that the provisions of subpart B are
separate and severable from one
another, and that if any provision is
stayed or determined to be invalid, the
remaining provisions shall continue in
effect.
This is a standard severability clause
of the kind that is included in many
regulations to clearly express agency
intent about the course that is preferred
if such events were to occur.
Section 1002.114 Effective Date,
Compliance Date, and Special
Transitional Rules
Proposed § 1002.114 would address
when the proposed rule would be
effective and when financial institutions
would be required to comply with the
rule, as well as how financial
institutions could choose to comply
with the rule during this transitional
period. Proposed § 1002.114(a) would
state that this small business lending
data collection rule would become
effective 90 days after the final rule is
published in the Federal Register.
Proposed § 1002.114(b) would provide
that compliance with the rule would not
be required until approximately 18
months after the final rule is published
in the Federal Register. Proposed
§ 1002.114(c)(1) would permit covered
financial institutions to begin collecting
information pursuant to proposed
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§ 1002.107(a)(18) through (20) beginning
12 months prior to the compliance date.
Proposed § 1002.114(c)(2) would permit
a financial institution to use a different
time period to determine whether it is
a covered financial institution under
proposed § 1002.105(b) as of the
compliance date.
The Bureau is proposing § 1002.114
pursuant to its authority under ECOA
section 704B(g)(1) to prescribe such
rules and issue such guidance as may be
necessary to carry out, enforce, and
compile data pursuant to section 1071.
The Bureau is also proposing
§ 1002.114(c) pursuant to its authority
under section 703(a) of ECOA to
prescribe regulations to carry out the
purposes of ECOA and provide
exceptions as in the judgment of the
Bureau are necessary or proper to
effectuate the purposes of or facilitate or
substantiate compliance with ECOA.
114(a) Effective Date and 114(b)
Compliance Date
Background
Section 1071 does not specify an
implementation period, though
pursuant to ECOA section 704B(f)(1),
financial institutions must report 1071
data to the Bureau on an annual basis.
In the SBREFA Outline, the Bureau
noted that it sought to ensure that
financial institutions have sufficient
time to implement the 1071 rule, and
stated that it was considering proposing
that financial institutions have
approximately two calendar years for
implementation.758
SBREFA Proposal Under Consideration
and Feedback Received
SER and stakeholder feedback
regarding the two-year period for
implementation under consideration
was mixed.759 Some found the two-year
period to be adequate, some requested
more time, and a few urged for less.
Some provided related feedback about
adopting a grace period for data errors
in the first year(s) after the 1071 rule
becomes effective.
A number of stakeholders agreed that
two years was sufficient time to
implement a 1071 rule. SERs generally
supported a two-year implementation
period. Several SERs with completely
online operations felt that two years was
sufficient time to implement the
eventual 1071 rule; some estimated that
they could do it in less time. A large
number of industry stakeholders
(including national and regional trade
758 Id.
at 42.
SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 36–37.
759 The
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associations, community banks, fintech
lenders, and others) accepted a two-year
implementation period as adequate or
said that two years was the minimum
amount of time needed to implement
1071 (though some of these stakeholders
also requested more time, as discussed
below). A few qualified their statements,
however, as dependent on the Bureau
not adopting additional data points
beyond those discussed in the SBREFA
Outline or not making further changes
to the rule once it is finalized.
A number of other stakeholders
argued that two years was inadequate
time to implement a 1071 rule. Some
other SERs that do not have primarily
online operations and do not have
experience with other Federal data
reporting regimes such as HMDA said it
would be hard to project how long
implementation would take, but that it
could potentially take three years or
more. One SER said that two years
would not be enough as currently there
are no data collection vendors for 1071
compliance. Another SER said clear and
concise definitions were important and
expressed frustration that definitive
answers to compliance-related questions
(whether from the Bureau or third-party
vendors) can be hard to come by, which
could stymie implementation efforts.
One SER suggested that it was overly
optimistic for other SERs (mostly CDFIs)
to say they would be able to implement
1071 quickly.
Some of the industry stakeholders
mentioned above requested more time,
up to three years, and suggested that
two years was the bare minimum they
required to implement a 1071 rule,
given the need to create new systems,
policies and procedures, to change their
products as needed, and to train
personnel in compliance. One large
bank trade association stakeholder
requested three years coupled with a
two-year grace period.
Several trade associations
representing community banks and
credit unions asserted that two years
was inadequate for smaller financial
institutions that had no experience with
HMDA or similar reporting regimes.
These commenters suggested tiered
implementation, with larger financial
institutions (or HMDA reporters)
reporting earlier and smaller financial
institutions later. Similarly, two smaller
trade associations asserted that smaller
and mission-based lenders should have
up to three years to implement 1071.
A number of stakeholders argued that
two years was too much time to
implement a 1071 rule. Several
community group stakeholders opposed
a two-year implementation period as too
long and instead supported a one-year
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period. These groups opposed a longer
implementation period on the grounds
that ten years have elapsed since DoddFrank Act was passed and the need for
data to analyze disparities in small
business lending is urgent. A State-level
trade association suggested a one-year
period for larger financial institutions
and a longer period for smaller financial
institutions.
Some stakeholders requested a grace
period associated with the first year of
implementation. A few SERs suggested
that the Bureau adopt a grace period of
some kind during which financial
institutions would not be penalized for
erring in trying to comply with a 1071
regulation. This grace period would be
akin to the first year in which the 2015
revisions to Regulation C were effective,
when examinations were used to
troubleshoot and perfect data reporting
rather than penalize reporters. Two
other industry stakeholders similarly
requested a safe harbor for any data
collection errors for the first one or two
years following the rule’s effective date.
The SBREFA Panel recommended
that the Bureau seek comment on the
sufficiency of a two-year
implementation period, and in
particular what aspects of a 1071 rule
might require more or less time to
implement.760 The Panel further
recommended that the Bureau seek
comment on ways to facilitate
implementation for small financial
institutions, particularly those that have
had no experience with any kind of
Federal data reporting regime.
Proposed Rule
The Bureau is proposing in
§ 1002.114(a) that its small business
lending data collection rule become
effective 90 days after the final rule is
published in the Federal Register. At
that time, the rule would become part of
the Code of Federal Regulations; this
would permit financial institutions to
avail themselves of the special
transitional rule in proposed
§ 1002.114(c)(2), discussed below.
However, pursuant to proposed
§ 1002.114(b), compliance with the final
rule would not be required until
approximately 18 months after the final
rule is published in the Federal
Register.
The Bureau’s proposed approach is a
compromise between the two-year
implementation period under
consideration at SBREFA that a slight
majority of stakeholders found
acceptable and the shorter one-year
implementation period requested by
certain stakeholders. The Bureau
760 Id.
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56507
believes that the statutory purposes of
section 1071 are better served by an
earlier compliance date that would, in
turn, result in earlier publication of data
by the Bureau. The Bureau
acknowledges the preference of various
SERs and other stakeholders for a
compliance period of two or more years
to comply. The Bureau notes, however,
that some SERs and other industry
stakeholders said that they could be
ready in less than two years. The Bureau
agrees with the stakeholders that
asserted that a shorter implementation
period is preferable given the length of
time that has elapsed since the passage
of section 1071 of the Dodd-Frank Act.
The Bureau notes that it does not
anticipate setting the compliance date at
exactly 18 months following publication
of the final rule in the Federal Register.
Rather, the Bureau expects to specify a
date certain for a compliance date,
which it anticipates will be
approximately 18 months after the final
rule is published. Thus, for example, if
the Bureau published the final rule in
June 2023, the Bureau would set the
compliance date at January 1, 2025.
If the final rule were published early
or late in the year, because proposed
§ 1002.114(b) would require compliance
approximately 18 months after
publication of the final rule, the
compliance date would be set in midyear. For instance, if the final rule were
published in the Federal Register in
March 2023, the compliance date would
be in September 2024. Based on this
possibility, the Bureau is considering
whether to permit or require financial
institutions to collect data on a partial
year basis in the remainder of the first
year following the compliance date, as
the section-by-section analysis of
proposed § 1002.109(a)(1) addresses. For
example, if the compliance date were
July 1, 2024, the Bureau would permit
or require all financial institutions to
collect and report data pursuant to
proposed § 1002.109(a) for the period
July 1 to December 31, 2024, and
financial institutions would report that
data by June 1, 2025 (pursuant to
proposed § 1002.109(a)(1)(i)). After
2024, financial institutions would
comply with proposed § 1002.109(a),
which requires the collection of 1071
data on a calendar year basis.
The Bureau believes that permitting
or requiring a partial year collection in
the initial year of compliance would
further the purposes of section 1071 by
expediting the collection and,
potentially, the publication of data to be
used to further the fair lending and
community development purposes of
the statute.
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The Bureau seeks comment on its
proposed effective date of 90 days
following publication of an eventual
final rule and its proposed compliance
date of approximately 18 months after
the publication of its final rule to
implement section 1071. In particular,
the Bureau seeks comment on which
aspects of the Bureau’s proposed rule
might require more or less time to
implement, and ways in which the
Bureau could facilitate implementation
for small financial institutions,
especially those that have had no
experience with other Federal data
reporting regimes. The Bureau further
seeks comment on two alternatives: (a)
Whether the Bureau should adopt a
compliance date of two years after the
publication of the final rule; and (b)
whether the Bureau should adopt
different compliance dates based on the
size of a financial institution (e.g., one
year for large financial institutions, two
years for smaller institutions).
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114(c) Special Transitional Rules
The Bureau is proposing two
transitional rules in § 1002.114(c) to
facilitate the compliance of financial
institutions with subpart B. Proposed
§ 1002.114(c)(1) would permit covered
financial institutions to collect
information regarding applicants’
minority-owned business status,
women-owned business status, and the
race, sex, and ethnicity of applicants’
principal owners under proposed
§ 1002.107(a)(18) through (20) beginning
12 months prior to the compliance date.
Proposed § 1002.114(c)(2) would
provide that to determine if it is a
covered financial institution as of the
compliance date, a financial institution
is permitted to use its originations of
covered credit transactions for small
businesses in the second and third
preceding calendar years (rather than its
originations in the two immediately
preceding calendar years).
The Bureau believes that these
transitional rules are necessary to carry
out, enforce, and compile data pursuant
to section 1071, will carry out the
purposes of ECOA, and are necessary or
proper to effectuate the purposes of
ECOA and facilitate or substantiate
compliance therewith.
114(c)(1) Collection of Information Prior
to the Compliance Date
Proposed § 1002.114(c)(1) would
provide that a financial institution that
will be a covered financial institution as
of the compliance date in proposed
§ 1002.114(b) is permitted, but not
required, to collect information
regarding whether an applicant for a
covered credit transaction is a minority-
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owned business under proposed
§ 1002.107(a)(18), a women-owned
business under proposed
§ 1002.107(a)(19), and the ethnicity,
race, and sex of the applicant’s principal
owners under proposed
§ 1002.107(a)(20) beginning 12 months
prior to the compliance date. A financial
institution collecting such information
pursuant to proposed § 1002.114(c)(1)
must do so in accordance with the
requirements set out in proposed
§§ 1002.107(18) through (20) and
1002.108. The Bureau believes that this
provision would give financial
institutions time to test their procedures
and systems for compiling and
maintaining this information in advance
of actually being required to collect and
subsequently report it to the Bureau.
Under this proposed provision,
financial institutions would have time
to adjust any procedures or systems that
may result in the inaccurate compilation
or maintenance of applicants’ protected
demographic information, the collection
of which is required by section 1071 but
otherwise generally prohibited under
ECOA and Regulation B. (Financial
institutions could of course collect the
other information that would be
required by this proposed rule at any
time, without needing express
permission in Regulation B to do so.)
The Bureau believes that this provision
would facilitate compliance and
improve the quality and accuracy of the
1071 data reported to the Bureau and
therefore is necessary to carry out,
enforce, and compile data pursuant to
section 1071, and will carry out the
purposes of ECOA, and is necessary or
proper to effectuate the purposes of
ECOA and facilitate or substantiate
compliance therewith.
The Bureau seeks comment on the
approach in this proposal.
114(c)(2) Determining Whether a
Financial Institution is a Covered
Financial Institution for Purposes of
This Subpart
Proposed § 1002.114(c)(2) would
provide that for purposes of determining
whether a financial institution is a
covered financial institution under
proposed § 1002.105(b) as of the
compliance date specified in proposed
§ 1002.114(b), a financial institution
would be permitted, but not required, to
use its originations of covered credit
transactions for small businesses in the
second and third preceding calendar
years (rather than its originations in the
two immediately preceding calendar
years). The Bureau believes that this
proposed provision would provide
greater clarity and certainty to financial
institutions as to whether or not they
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would be covered financial institutions
as of the compliance date. This may be
particularly important for those
financial institutions that originate a
volume of covered credit transactions
close to the threshold under proposed
§ 1002.105(b). The Bureau believes this
provision is necessary to carry out,
enforce, and compile data pursuant to
section 1071.
The Bureau seeks comment on the
approach in this proposal.
Appendix E to Part 1002—Sample Form
for Collecting Certain ApplicantProvided Data Under Subpart B
Background
ECOA section 704B(b) requires
financial institutions to inquire whether
applicants are women-owned
businesses, minority-owned businesses,
or small businesses, and to maintain a
record of the responses to that inquiry
separate from the applications and
accompanying information.
Additionally, ECOA section 704B(e)
requires financial institutions to
compile, maintain, and report certain
information, including the ethnicity,
race, and sex of an applicant’s principal
owners. Section 1071 does not set out
what categories should be used when
collecting and reporting this
information.
ECOA section 704B(c) provides that
applicants for credit may refuse to
provide information requested pursuant
to 704B(b), including minority-owned
and women-owned business status.
Under ECOA section 704B(d)(2), if a
financial institution determines that an
underwriter, employee, or officer
involved in making a determination
‘‘should have access’’ to any
information provided by the applicant
pursuant to a request under section
704B(b), the financial institution must
provide a notice of ‘‘the access of the
underwriter to such information,’’ along
with notice that the financial institution
may not discriminate on the basis of
such information.
SBREFA Proposal Under Consideration
and Feedback Received
In the SBREFA Outline, the Bureau
stated that it was considering
developing a sample data collection
form to assist industry in collecting the
principal owners’ ethnicity, race, and
sex and to communicate an applicant’s
right to refuse to provide such
information. The Bureau stated in the
SBREFA Outline that this sample data
collection form would also include the
definition of principal owner and clarify
that it is possible, depending on the
factual circumstances, that no one will
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be identified as a principal owner.761 It
also stated that the Bureau was
considering proposing simplified
applicant-facing materials to aid
industry in collecting minority-owned
business status and women-owned
business status. Specifically, for these
applicant-facing materials and industry
clarifications, the Bureau stated in the
SBREFA Outline that it was considering
proposing the following definitions: (1)
‘‘Ownership’’ to mean directly or
indirectly having an equity interest in a
business (i.e., directly or indirectly,
through any contract, arrangement,
understanding, relationship, or
otherwise, owning an equity interest in
the business); (2) ‘‘control’’ of a business
to mirror the CDD rule, where it means
having significant responsibility to
control, manage, or direct a business;
and (3) the ‘‘accrual of net profit or loss’’
with reference to generally accepted
accounting practices and any applicable
Internal Revenue Service standards.762
Finally, the Bureau stated in the
SBREFA Outline that it was considering
developing model disclosures that
financial institutions could use when
providing the notice under ECOA
section 704B(d)(2).763
Some SERs requested that the Bureau
develop a uniform collection form to
assist financial institutions with the
collection of reporting of minorityowned business status, women-owned
business status, and the race, sex, and
ethnicity of principal owners. One SER
suggested developing a sample data
collection form similar to the one used
for HMDA data collection and including
the same disclosures. One commenter
noted that the use of a model form may
increase the uniformity and consistency
of reporting demographic information.
Another commenter suggested that any
model form should include an
explanation of why the financial
institution is requesting the information
and a statement of the applicant’s right
to refuse to provide the information.
One SER asked that, if the Bureau
provided sample language for the notice
to be provided pursuant to ECOA
section 704B(d)(2), that the Bureau
provide it in English as well as in other
languages, such as Spanish. One SER
stated that sample language for a notice
should include a statement that
underwriter access to demographic
information is not detrimental and that
such access is necessary due to the
small size of the lender.
The SBREFA Panel recommended
that the Bureau consider creating
761 SBREFA
Proposed Rule
Consistent with the SBREFA Panel’s
recommendation, the Bureau is
proposing a sample data collection form
that financial institutions could use to
collect minority-owned business status,
women-owned business status, and
principal owners’ ethnicity, race, and
sex. As suggested in the feedback from
SERs, the proposed sample data
collection form would be similar to the
HMDA data collection form and would
include a notice of the applicant’s right
to refuse to provide the information as
well as an explanation of why the
financial institution is requesting the
information. The sample data collection
form would also include the definitions
of minority individual, minority-owned
business, principal owner, and womenowned business as they would be
defined in proposed § 1002.102(l), (m),
(o), and (s), respectively. Although the
Bureau is not currently proposing a
sample data collection form in Spanish
or any language other than English, the
Bureau requests comment on whether a
sample data collection form in Spanish
or in another language other than
English would be useful to financial
institutions in the context of their 1071
obligations.
Additionally, to aid financial
institutions with the collection of the
information in proposed
§ 1002.107(a)(21), the sample data
collection form would include a
question about the applicant’s number
of principal owners.
Finally, consistent with the SBREFA
Panel’s recommendation, the Bureau is
proposing that the sample data
collection form would include language
that a financial institution could use to
satisfy the notice requirement under
ECOA section 704B(d)(2) if it
Outline at 32.
762 Id.
at 19.
763 Id. at 38.
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sample data collection forms that, to the
extent possible, simply and clearly
explain the information being requested
for purposes of the minority-owned
business data point, the women-owned
business data point, and the principal
owners’ ethnicity, race, and sex data
point. It also said that the Bureau
should additionally consider providing
these sample data collection forms in
other languages, such as Spanish.764
The Panel also recommended that the
Bureau consider developing sample
disclosure language that financial
institutions could use to provide some
context as to why applicants are being
asked to provide demographic
information, in order to encourage
applicants to respond.765
764 SBREFA
765 Id.
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at 43, 47.
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56509
determines that one or more employees
or officers should have access to the
applicant’s protected demographic
information pursuant to proposed
§ 1002.108(b)(2).
The Bureau is proposing appendix E
pursuant to its authority under ECOA
section 704B(g)(1) to prescribe such
rules and issue such guidance as may be
necessary to carry out, enforce, and
compile data pursuant to section 1071,
in order to facilitate compliance with
the statutory requirements to collect
minority-owned and women-owned
business status, and the ethnicity, race,
and sex of principal owners pursuant to
704B(b)(1) and (e)(2)(G). Further, the
Bureau is proposing appendix E
pursuant to its obligation in 704B(g)(3)
to issue guidance to facilitate
compliance with the requirements of
section 1071, including assisting
financial institutions in working with
applicants to determine whether the
applicants are women-owned or
minority-owned businesses.
The Bureau seeks comment on the
proposed sample data collection form,
including the proposed language for the
notice under ECOA section 704B(d)(2).
The Bureau generally requests comment
on whether additional clarification
regarding any aspect of the sample data
collection form or the related notice
provided pursuant to 704B(d)(2) is
needed. The Bureau also seeks comment
on whether the sample data collection
form should identify the Bureau to
applicants as a potential resource in
connection with their applicable legal
rights or for additional information
about the data collection, including
concerns regarding non-compliance. In
addition, the Bureau seeks comment on
whether financial institutions need
additional information on how to adapt
this form for use in digital modes of data
collection, and, if so, what specific
information would be most useful.
Appendix F to Part 1002—Instructions
for Collecting and Reporting Small
Business Applicants’ Minority-Owned
and Women-Owned Business Status
Under Subpart B
ECOA section 704B(b) requires
financial institutions to inquire whether
applicants for credit are women-owned
businesses, minority-owned businesses,
or small businesses and to maintain a
record of the responses to that inquiry
separate from the applications and
accompanying information. However,
section 1071 does not include specific
instructions on how a financial
institution should collect or report such
information.
The Bureau is proposing appendix F
to provide instructions to aid financial
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institutions when collecting minorityowned business status pursuant to
proposed § 1002.107(a)(18) and womenowned business status pursuant to
proposed § 1002.107(a)(19).
The Bureau is proposing appendix F
pursuant to its authority under ECOA
section 704B(g)(1) to prescribe such
rules and issue such guidance as may be
necessary to carry out, enforce, and
compile data pursuant to section 1071,
in order to facilitate compliance with
the statutory requirements to collect
minority-owned and women-owned
business status pursuant to 704B(b)(1).
Further, the Bureau is proposing
appendix F pursuant to its obligation in
704B(g)(3) to issue guidance to facilitate
compliance with the requirements of
section 1071, including assisting
financial institutions in working with
applicants to determine whether the
applicants are women-owned or
minority-owned businesses.
The Bureau seeks comment on the
proposed instructions, and generally
requests comment on whether
additional clarification regarding any
aspect of the proposed instructions is
needed. The Bureau further requests
comment on whether additional or
different instructions are needed for
financial institutions that choose not to
use a paper data collection form to
collect minority-owned business status
or women-owned business status, such
as collecting such information using a
web-based or other electronic data
collection form, or over the telephone.
The Bureau also seeks comment
regarding the challenges faced by both
applicants and financial institutions by
the data collection instructions
prescribed in appendix F and
specifically requests comment on ways
to improve the data collection of
minority-owned business status and
women-owned business status.
Appendix G to Part 1002—Instructions
for Collecting and Reporting Ethnicity,
Race, and Sex of Small Business
Applicants’ Principal Owners Under
Subpart B
ECOA section 704B(e) requires
financial institutions to compile,
maintain, and report certain
information, including the ethnicity,
race, and sex of an applicant’s principal
owners, but does not provide specific
instructions on how a financial
institution should do so.
The Bureau is proposing appendix G
to provide instructions to aid financial
institutions when collecting principal
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owners’ ethnicity, race, and sex
pursuant to proposed § 1002.107(a)(20).
The Bureau is proposing appendix G
pursuant to its authority under ECOA
section 704B(g)(1) to prescribe such
rules and issue such guidance as may be
necessary to carry out, enforce, and
compile data pursuant to section 1071,
to facilitate compliance with the
statutory requirements to collect the
ethnicity, race, and sex of principal
owners pursuant to 704B(e)(2)(G), and
pursuant to 704B(g)(3), which directs
the Bureau to issue guidance designed
to facilitate compliance with the
requirements of section 1071.
The Bureau seeks comment on the
proposed instructions, and generally
requests comment on whether
additional clarification regarding any
aspect of the proposed instructions is
needed. The Bureau further requests
comment on whether additional or
different instructions are needed for
financial institutions that chose not to
use a paper data collection form to
collect, principal owners’ ethnicity,
race, and sex, such as collecting such
information using a web-based or other
electronic data collection form or over
the telephone. The Bureau also seeks
comment regarding the challenges faced
by both applicants and financial
institutions by the data collection
instructions prescribed in appendix G
and specifically requests comment on
ways to improve the data collection of
principal owners’ ethnicity, race, and
sex.
Appendix H to Part 1002—Tolerances
for Bona Fide Errors in Data Reported
Under Subpart B
The Bureau is proposing appendix H,
which would set out a Threshold Table,
as referred to in proposed § 1002.112(b)
and proposed comment 112(b)–1. As
these provisions would explain, a
financial institution is presumed to
maintain procedures reasonably adapted
to avoid errors with respect to a given
data field if the number of errors found
in a random sample of a financial
institution’s data submission for a given
data field do not equal or exceed the
threshold in column C of the Threshold
Table.
Under the Threshold Table in
proposed appendix H, column A would
list the size of the financial institution’s
small business lending application
register in ranges of application register
counts (e.g., 25 to 50, 51–100, 101–130,
etc.). The applicable register count range
would then determine both the size of
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the random sample, under column B,
and the applicable error threshold,
under column C. The error threshold of
column C, as proposed comment
112(b)–1 would explain, identifies the
maximum number of errors that a
particular data field in a financial
institution’s small business lending
application register may contain such
that the financial institution is
presumed to maintain procedures
reasonably adapted to avoid errors with
respect to a given data field. Column D
would be illustrative, showing the error
threshold as a percentage of the random
sample size.
Proposed appendix H would also
include examples of how financial
institutions would use the Threshold
Table.
For the reasons set out in the sectionby-section analysis of proposed
§ 1002.112(b), the Bureau is proposing
appendix H pursuant to its authority
under ECOA section 704B(g)(1) to
prescribe such rules and issue such
guidance as may be necessary to carry
out, enforce, and compile data pursuant
to section 1071, and its authority under
704B(g)(2) to adopt exceptions to any
requirement of section 1071 and to
exempt any financial institution or class
of financial institutions from the
requirements section 1071 as the Bureau
deems necessary or appropriate to carry
out the purposes of section 1071.
The Bureau seeks comment on this
proposed appendix H. In particular, the
Bureau seeks comment on whether the
register count ranges in column A, the
random sample sizes in column B, and
the error thresholds in column C are
appropriate. The Bureau further seeks
comment on whether a covered
financial institution should be required
to correct and resubmit data for a
particular data field, if the institution
has met or exceeded the thresholds
provided in appendix H.
VI. Public Disclosure of 1071 Data
A. Introduction
Section 1071 of the Dodd-Frank Act
amended ECOA to require financial
institutions to collect and report to the
Bureau data about applications for
credit for women-owned, minorityowned, and small businesses, and for
those data to be subsequently disclosed
to the public.766
766 See ECOA section 704B(e)(1), (f)(2) (detailing
requirements for compilation, maintenance, and
publication of information).
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The Bureau is proposing that financial
institutions not compile, maintain, or
submit any name, specific address,
telephone number, email address or any
personally identifiable information
concerning any individual who is, or is
connected with, an applicant, other than
as would be required pursuant to
proposed § 1002.107. Nonetheless,
publication of the data fields proposed
in § 1002.107(a) in an unedited,
application-level format could
potentially affect the privacy interests
and lead to the re-identification of, and
risk of harm to, small businesses, related
natural persons, and financial
institutions.
Section 1071 states that the Bureau
may, ‘‘at its discretion, delete or modify
data collected under [section 1071]
which is or will be available to the
public, if the Bureau determines that the
deletion or modification of the data
would advance a privacy interest.’’ 767
For the reasons discussed below, the
Bureau is proposing to adopt a
balancing test as the method by which
it would implement its ‘‘discretion’’ to
delete or modify data before making the
data available to the public.
However, the Bureau does not yet
have any data under section 1071 and
the Bureau does not believe that there
are any comparable datasets that it
could use as an adequate proxy for 1071
data to which it could apply the
balancing test at this time. The Bureau
is thus setting forth herein a partial
analysis under the balancing test, for
public comment. With several
exceptions, discussed in part VI.C.6
below, the Bureau is not at this time
proposing specific modifications or
deletions for the public applicationlevel 1071 data. After the Bureau
receives at least one full year of 1071
data from financial institutions
following the compliance date of the
final rule, the Bureau intends to issue a
policy statement (informed by
comments received on the partial
analysis in this proposal), in which the
Bureau would set forth its intended
modifications and deletions.
B. Background
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1. SBREFA Outline
In the SBREFA Outline, the Bureau
stated it was considering proposing to
use a balancing test for purposes of
deciding how to exercise its discretion
to modify or delete data prior to
publication.768 The Bureau explained
that data would be modified or deleted
if disclosure of the data in unmodified
section 704B(e)(4).
768 See SBREFA Outline at 40–41.
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2. SBREFA Feedback
The Bureau received feedback on its
privacy proposals under consideration
from SERs and other commenters; 769
the SBREFA Panel also made
recommendations regarding privacy.
Comments related to the design and
implementation of the balancing test
itself are described immediately below.
Comments addressing general issues
related to benefits, privacy risks, and
potential modifications of data fields are
described further below in part VI.C.
Comments addressing the benefits of
specific data fields the Bureau
considered as part of the SBREFA
process are discussed in the section-bysection analysis of proposed
§ 1002.107(a), in part V above.
Comments addressing the privacy risks
and potential modifications of specific
data fields are discussed below in part
VI.C.
With respect to the balancing test
itself, several SERs expressed the view
that it would be difficult to balance
transparency and fairness in the
marketplace with privacy interests. A
SER and another industry commenter
suggested that the balancing test
described in the SBREFA Outline would
not adequately protect privacy interests
because it appeared to be subjective,
769 The SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 34–36.
767 ECOA
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form would pose risks to privacy
interests that are not justified by the
benefits of public disclosure in light of
the statutory purposes of section 1071.
If the risks of disclosing unmodified
data are not justified by the benefits
under the balancing test, the Bureau
explained it would determine whether
modifications could appropriately
diminish the risks. The Bureau further
explained that it was considering
proposing to apply this balancing test to
the privacy interests of non-natural
persons (e.g., small business applicants
or financial institutions), with respect to
protecting sensitive commercial
information, as well as the privacy
interests of natural persons (e.g.,
principal owners), with respect to
protecting personal information.
As an alternative to a balancing test,
the Bureau had considered an approach
in which it would modify data prior to
publication if an identified privacy risk
crosses some significance threshold,
without assessing that risk against the
benefit of disclosure. The Bureau
explained that such an approach,
however, could be inconsistent with the
express disclosure purposes of the
statute.
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dependent on the limitations of agency
expertise, and subject to change. A
community group commenter
maintained that financial institution
privacy did not appear to have been a
concern for Congress in section 1071.
One industry commenter
recommended that the Bureau consider
the alternative approach of not
balancing privacy risks against the
benefits of disclosure because of the
heightened privacy risks in the small
business market (relative to consumer
privacy risks), particularly in
geographies where re-identification risk
is higher. Another industry commenter
expressed the view that excluding
community banks from collection and
reporting would provide a more
straightforward approach to protecting
privacy. On the other hand, a
community group maintained that the
benefits of public disclosure would
always justify any alleged privacy risks.
Commenters also addressed
information security concerns and
potential conflicts with other privacy
laws. Two SERs raised concerns that the
transmission of 1071 data to the Bureau
could give rise to the risk of a data
security breach involving personally
identifiable information or information
that would directly identify a small
business. One SER requested that
financial institutions be held harmless if
there were a data security breach for
which the Bureau was responsible.
Another industry commenter expressed
the concern that some applicants would
be hesitant to provide information in
light of data security concerns. Another
requested that the Bureau describe and
seek comment on its data security
safeguards.
Commenters also addressed
procedural issues surrounding the
implementation of the Bureau’s privacy
analysis. Several industry commenters
requested that the Bureau not bifurcate
the analysis of privacy issues into a
separate notice-and-comment
rulemaking, which was the approach
the Bureau took with respect to data
fields reported under the 2015 HMDA
Final Rule. One commenter stated that
a full explanation of the balancing test
design and its application would help
financial institutions consider potential
reputational risks associated with data
disclosure. One industry stakeholder
stated that the Bureau should take what
the stakeholder described as a
transparent approach to decisions about
public disclosure. Another stakeholder
stated that if privacy issues are raised
after implementation of a rulemaking,
the Bureau should, as the stakeholder
described, promptly limit publication of
data that might be released to the
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public. Other industry commenters
maintained that decisions about
modifications or deletions to protect
privacy should be published following
notice-and-comment rulemaking, rather
than by policy statement.
The SBREFA Panel recommended
that the Bureau offer more detail in the
proposal on the balancing test and its
application to the 1071 data fields.770
The Panel also recommended that the
Bureau seek comment on how it should
design and implement the balancing
test. In addition, the Panel
recommended that the Bureau seek
comment on the range of privacy
concerns articulated by SERs, including
potential re-identification of small
businesses and financial institutions, as
well as the types of harms and
sensitivities the unmodified release of
1071 data could cause to financial
institutions and small business
applicants.771 Finally, the Panel
recommended that the Bureau seek
comment on the potential benefits of
publishing unmodified 1071 data.772
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C. Design, Implementation, and
Application of Balancing Test
In light of the feedback from SERs and
other stakeholders, and for the reasons
below, the Bureau is proposing to adopt
a balancing test, consistent with the test
described in the SBREFA Outline. As
recommended by the SBREFA Panel,
the Bureau is providing additional
detail on the balancing test and how it
would be applied to the proposed 1071
data points; this analysis is in
Preliminary Application of the
Balancing Test in part VI.C.6 below. As
discussed under Implementation of the
Balancing Test in part VI.C.2 below,
however, the Bureau is not proposing
specific modifications or deletions for
most of the proposed data fields because
data required for a statistical analysis of
re-identification risk are not yet
available.
1. Balancing Test Design
Under ECOA section 704B(e)(4), the
Bureau ‘‘may, at its discretion, delete or
modify data collected under this section
which is or will be available to the
public, if the Bureau determines that the
deletion or modification of the data
would advance a privacy interest.’’ 773
Congress thus provided the Bureau with
broad discretion to modify or delete
data prior to public disclosure to
advance privacy interests. The Bureau
continues to believe that a balancing test
770 See
SBREFA Panel Report at 47–48.
id.
772 See id.
773 ECOA section 704B(e)(4).
is a reasonable approach for exercising
this discretion and would effectuate the
purposes of section 1071 better than the
alternative approaches discussed in the
SBREFA Outline and recommended by
some commenters. As recognized by
commenters, exercising this discretion
inherently requires that the Bureau
reconcile competing policy interests. A
balancing test approach would help the
Bureau consider the privacy risks and
benefits of disclosing data fields, tailor
modifications or deletions of data
narrowly to appropriately balance
privacy risks and benefits in the
published data, and establish a decision
framework that is responsive to a broad
set of stakeholder concerns that might
evolve over time. The Bureau intends to
engage with stakeholders, including
through this proposal, to supplement its
own expertise in evaluating privacy
interests for these purposes.
Alternative approaches recommended
by stakeholders are summarized in part
VI.B.2 above. The Bureau is not
proposing approaches that do not
consider the benefits of public
disclosure because it is concerned they
would result in outcomes inconsistent
with the statutory purposes. For
example, deleting all application-level
data from public release and instead
publishing aggregate data would
advance privacy interests but would
substantially undermine the public
disclosure purposes of the statute.
The Bureau also considered the
suggestion that it exercise its discretion
to modify or delete application-level
data prior to publication by exempting
classes of financial institutions from
public disclosure. While this would
address the privacy interests of those
financial institutions and their
customers that might arise in certain
markets, this approach would be too
narrow because privacy concerns that
arise for these persons may also arise for
others, such as small businesses and
natural persons in other markets. The
Bureau is not proposing an approach
that assumes the benefits of disclosure
will always justify risks to privacy
interests. The commenter
recommending this approach did not
provide a basis for such a conclusion
with respect to individual data fields, or
the dataset as a whole.
With respect to the comment that the
Bureau not consider the privacy
interests of financial institutions,
section 1071 generally provides that the
Bureau may delete or modify data if it
determines that doing so ‘‘would
advance a privacy interest.’’ 774 The
771 See
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774 See ECOA section 704B(a) (statutory
purposes), (e)(4) (deletion or modification
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statute does not define the term
‘‘privacy interest,’’ however, and the
Bureau believes it can reasonably be
interpreted broadly, for purposes of
section 1071, to include interests of
non-natural persons with respect to
certain commercial information.
Whether a non-natural person has
cognizable ‘‘privacy interests’’ under the
Constitution or common law is not a
settled legal question across all areas of
the law. Common law recognizes that
businesses have an interest in protecting
sensitive commercial information,
similar to the privacy interests enjoyed
by natural persons.775 Although the
courts have typically described these
interests as property interests, cases
sometimes describe these types of
interests as privacy interests.776 Some
circuits have held that non-natural
persons have constitutionally protected
privacy interests,777 while other circuits
have rejected this notion.778 The
Supreme Court has held that
corporations do not have privacy rights
on par with natural persons,779 and that
corporations do not have ‘‘personal’’
privacy interests; 780 however, it has not
directly addressed the issue of whether
a non-natural person has a cognizable
‘‘privacy interest.’’ The Bureau also
understands that the interests of many
small businesses may be closely tied to
the privacy interests of natural
persons.781
authority), (f)(1) (reporting requirement), (f)(2)(C)
(publication requirement).
775 See, e.g., Carpenter v. United States, 484 U.S.
19, 26 (1987) (‘‘Confidential information acquired
or compiled by a corporation in the course and
conduct of its business is a species of property to
which the corporation has the exclusive right and
benefit . . . .’’) (citation omitted).
776 See, e.g., Kewanee Oil Co. v. Bicron Corp., 416
U.S. 470, 487 (1974) (‘‘A most fundamental human
right, that of privacy, is threatened when industrial
espionage is condoned or is made profitable.’’); E.I.
duPont deNemours & Co. v. Christopher, 431 F.2d
1012, 1016 (5th Cir. 1970) (‘‘Commercial privacy
must be protected from espionage which could not
have been reasonably anticipated or prevented.’’).
777 See, e.g., Tavoulareas v. Wash. Post Co., 724
F.2d 1010, 1023 (D.C. Cir. 1984), vacated on other
grounds, 737 F.2d 1170 (D.C. Cir. 1984).
778 See, e.g., Fleck & Assocs., Inc. v. City of
Phoenix, 471 F.3d 1100, 1105 (9th Cir. 2006).
779 United States v. Morton Salt Co., 338 U.S. 632,
652 (1950) (‘‘[C]orporations can claim no equality
with individuals in the enjoyment of a right to
privacy.’’).
780 FCC v. AT&T, Inc., 562 U.S. 397, 402–407
(2011). In FCC, the Court held that corporations lack
‘‘personal privacy’’ interests under FOIA Exemption
6, which uses the term ‘‘personal privacy.’’ The
Court’s opinion was based on the word ‘‘personal’’
and limited to the notion of ‘‘personal privacy.’’
The Court stated that it was not addressing the
scope of a non-natural person’s ‘‘privacy interests’’
generally under constitutional or common law. Id.
at 407 (‘‘[T]his case does not call upon us to pass
on the scope of a corporation’s ‘privacy’ interests
as a matter of constitutional or common law.’’).
781 See, e.g., Providence J. Co. v. FBI, 460 F. Supp.
778, 785 (D.R.I. 1978) (‘‘While corporations have no
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The Bureau believes it is appropriate
to consider the privacy interests of nonnatural persons under the 1071
balancing test. The proposed 1071 data
points would reveal information about
non-natural persons—including small
businesses and financial institutions—
and Congress did not expressly limit the
privacy interests the Bureau may
consider to those of natural persons. Nor
did Congress expressly limit the privacy
interests the Bureau may consider to
those of applicants or borrowers, as it
did in HMDA.782 Further, courts have
recognized that non-natural persons
have privacy interests in certain
contexts. The Bureau seeks comment on
its interpretation of ‘‘privacy interests’’
under section 1071 and its proposal to
consider the privacy interests of both
financial institutions and non-natural
person applicants.
Several commenters raised concerns
about the information security
implications of reporting data to the
Bureau. While the Bureau’s information
security procedures are outside the
scope of this rulemaking, the Bureau
takes strong measures to mitigate and
address any risks to the security of
sensitive data it receives, consistent
with the guidance and standards set for
Federal information security programs,
and is committed to protecting the
privacy and information security of the
1071 data it receives from financial
institutions. In addition, the Bureau
does not believe a financial institution
could be held legally liable for the
exposure of data due to a breach at a
government agency or for reporting data
to a government agency if the institution
was legally required to provide the data
to the agency and did so in accordance
with other applicable law.
The Bureau acknowledges the
concern raised by some SERs and other
stakeholders that some applicants might
be hesitant to provide information in
light of data security concerns.
However, the Bureau does not believe
that such concerns will broadly
discourage applicants from seeking
credit from financial institutions that
are responsible for reporting data to the
Bureau.
For the reasons described above, the
Bureau proposes to use a balancing test
privacy, personal financial information is protected,
including information about small businesses when
the individual and corporation are identical.’’),
rev’d on other grounds, 602 F.2d 1010 (1st Cir.
1979).
782 For context, the privacy interests that may be
considered under HMDA are limited to the interests
of ‘‘applicants and mortgagors’’ specifically. See 12
U.S.C. 2803(h)(1)(E), (h)(3)(B), (j)(2)(B). In contrast,
section 1071 simply uses the term ‘‘privacy
interest,’’ without qualification. See ECOA section
704B(e)(4).
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to exercise its discretion under ECOA
section 704B(e)(4) to delete or modify
data collected under section 1071 which
is or would be available to the public
where the Bureau determines that the
deletion or modification of the data
would advance a privacy interest.
Specifically, the Bureau proposes to
modify or, as appropriate, delete data
fields from the public application-level
1071 data where the release of the
unmodified data would create risks to
the privacy interests of applicants,
related natural persons, or financial
institutions that would not be justified
by the benefits of such release to the
public in light of the statutory purposes
of section 1071. In such circumstances,
the need to protect the privacy interests
of applicants, related natural persons, or
financial institutions would require that
individual data fields be modified or, as
appropriate, deleted. Considering the
public disclosure of 1071 data as a
whole, the privacy interests of
applicants, related natural persons, or
financial institutions would arise under
the balancing test only where the
disclosure of 1071 data may both
substantially facilitate the reidentification of an applicant or related
natural person, in the data and disclose
information about such persons, or the
identified financial institution, that is
not otherwise public and may be
harmful or sensitive. Thus, disclosure of
an unmodified individual data field
may create a risk to privacy interests if
such disclosure either would
substantially facilitate the reidentification of an applicant or related
natural person; or would disclose
information about applicants or related
natural persons, or an identified
financial institution, that is not
otherwise public and that may be
harmful or sensitive.783 This
interpretation implements ECOA
section 704(e)(4).
Where the publication of unmodified
application-level 1071 data may create
risks to privacy, the proposed balancing
test would require that the Bureau
consider the benefits of disclosure in
light of section 1071’s purposes and,
where these benefits do not justify the
privacy risks the disclosure would
create, modify the public applicationlevel dataset to appropriately balance
the privacy risks and disclosure
783 The Bureau is aware that ‘‘re-identification’’
risk often is used in reference to risks applicable to
natural persons and that identification of a small
business in the public application-level 1071 data
could be characterized as a ‘‘harm’’ or ‘‘sensitivity.’’
However, for the ease of administrability, the
proposed balancing test analyzes risks to both
natural persons and small businesses as reidentification risks.
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benefits. The Bureau would delete the
data field prior to publishing the
application-level dataset if other
modifications would not appropriately
balance the privacy risks and disclosure
benefits. An individual data field would
be a candidate for modification or
deletion under the proposed balancing
test if its disclosure in unmodified form
would create a risk of re-identification
or a risk of harm or sensitivity.
The Bureau’s proposed balancing test
generally resembles the balancing test
adopted in the 2015 HMDA Final
Rule,784 with certain adjustments for the
1071 context. In particular, the Bureau’s
proposed 1071 balancing test would
consider the privacy interests of not just
applicants, but also related natural
persons who might not be applicants
(such as principal owners of a business,
where a legal entity is the applicant), as
well as the privacy interests of financial
institutions reporting 1071 data.
The Bureau’s proposed 1071
balancing test would not specifically
consider the risks that a financial
institution could be identified in the
public application-level 1071 data.
Section 1071 requires financial
institutions to compile and maintain
data and provides that such information
be made available to the public upon
request.785 Accordingly, section 1071
contemplates that the public would
know what application data are
associated with particular financial
institutions. Because the statute directly
contemplates disclosure of a financial
institution’s identity in connection with
the public application-level dataset, the
Bureau proposes to disclose financial
institution identity; the re-identification
risk element of the analysis would not
apply to financial institutions. However,
the Bureau would consider the risk to a
financial institution that the release of
1071 data in unmodified form would
disclose information that may be
harmful or sensitive to a financial
institution.
As recommended by the SBREFA
Panel, the Bureau seeks comment on the
design of its proposed balancing test.
The Bureau also seeks comment on
whether the balancing test should apply
to the privacy interests of natural
persons generally, rather than just those
of natural persons related to applicants.
2. Implementation of the Balancing Test
As noted above, the SBREFA Panel
and other commenters recommended
that the Bureau offer more detail in the
proposal on how the Bureau intends to
implement and apply its balancing test
784 See
785 See
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to the 1071 data fields it is proposing.786
Several industry commenters requested
that the Bureau apply the balancing test
directly in the Bureau’s 1071
rulemaking, rather than after the Bureau
issues a final rule. Because of data
limitations discussed below, the Bureau
is not proposing a full application of the
balancing test to most of the proposed
data points. Instead, the Bureau is
setting forth and seeking comment on its
analysis of the benefits and harms or
sensitivities that could arise with
respect to individual data fields and the
dataset as a whole. The Bureau is not
conducting a full analysis of the risks of
re-identification; the Bureau is
proposing to determine the extent of reidentification risk after it has obtained
a full year of reported 1071 data.
Accordingly, the Bureau is not
proposing specific modifications or
deletions for most of the proposed data
points, but is instead seeking comment
throughout part VI.C.5 and .6 on the
types of techniques it is considering.
The Bureau is not applying the
proposed balancing test fully to the
proposed data fields because the lack of
an existing 1071 dataset, or a
sufficiently similar dataset, materially
limits its ability to analyze reidentification risks. Unlike the
balancing test elements of benefits,
harms, and sensitivities, the Bureau
would analyze the re-identification risk
element, in part, using a statistical
analysis. Specifically, the Bureau would
determine whether a particular
combination of data fields in a dataset
generates a unique set of records that
can be accurately matched to records in
another publicly available dataset
identifying an applicant or a related
natural person.787 Where certain data
fields significantly contribute to reidentification risk, the Bureau can use
this type of analysis to determine what
modifications can be made to the data
fields to reduce re-identification risk—
that is, by reducing the number of
unique combinations produced by data
fields—while maintaining as much data
utility as possible.
However, the absence of an existing
1071 dataset or sufficiently similar data
significantly impedes the Bureau’s
ability to preliminarily determine
whether a proposed 1071 data field,
individually or in combination with
others, would substantially facilitate reidentification, or how specifically to
modify data to reduce that risk. Because
786 See
SBREFA Panel Report at 47.
purposes of this discussion of the
proposed balancing test analysis, the term ‘‘unique’’
can refer to a combination of values for a particular
record or a combination of values shared by a few
records.
787 For
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there does not exist a dataset
sufficiently similar to what would be
published under section 1071, a reidentification analysis of data other than
actual reported 1071 data would not
provide an accurate basis on which the
Bureau could apply the balancing test
and modify or delete the data, as
appropriate.788 Underestimating the
degree to which a 1071 data field,
individually or in combination with
others, facilitates re-identification risk
could unnecessarily increase privacy
risks to an applicant or a related natural
person, while overestimating reidentification risk could unnecessarily
reduce data utility.
In light of these limitations, the
Bureau considered deferring all analysis
under the proposed balancing test until
after the 1071 rule is finalized.
However, the Bureau is concerned that
doing so would reduce opportunities for
public feedback on privacy issues and
their relationship to the general 1071
proposal. Although the Bureau lacks
data that would allow it to perform a
complete re-identification analysis at
this time, it believes there is substantial
value in setting forth its preliminary
analysis under other aspects of the
balancing test. Specifically, the Bureau
has preliminarily analyzed the benefits
and harms or sensitivities associated
with the proposed data fields, the
capacity and motives of third parties to
match proposed 1071 data fields to
other identifiable datasets, and potential
modification techniques it may consider
to address privacy risks. The Bureau’s
preliminary analysis of these aspects of
the balancing test is set forth below. The
Bureau acknowledges that the public
will not have an opportunity to
comment on the Bureau’s intentions
with respect to specific modifications or
deletions for each proposed data field
before a 1071 rule is finalized. However,
the Bureau believes this limitation
outweighs the risks of basing
modifications or deletions on a
potentially inaccurate re-identification
analysis. And while a number of
community groups that provided
feedback on the Bureau’s SBREFA
Outline asserted that privacy risks
788 The Bureau considered whether it could
analyze re-identification risk using data released
under the SBA’s Paycheck Protection Program (PPP)
and U.S. Census data. However, estimating reidentification risk—and making modification and
deletion decisions designed to reduce reidentification risk—based on existing public data
sources would be substantively limited. First, the
more limited scope of the PPP and Census data
makes it difficult to accurately estimate the reidentification risk associated with all of the data
points in the eventual 1071 data. Second, a reidentification analysis using existing PPP and
Census datasets would not cover the same sets of
small businesses that will appear in the 1071 data.
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would be low, they nonetheless
recognized the role played by
modification techniques. The Bureau
agrees that modification techniques
could play an important role in
reducing privacy risks. The Bureau’s
ability to design effective modifications,
however, requires application-level data
that are not currently available.
As noted above, several industry
commenters asserted that privacy
decisions should be finalized by noticeand-comment rulemaking, rather than
by policy statement. The Bureau
believes, however, that a policy
statement would be an appropriate
vehicle for announcing its intentions
with respect to modifications and
deletions of 1071 data. First, under
section 1071, the Bureau may delete or
modify data at its discretion, in contrast
to other provisions in the statute that
require legislative rulemaking.789
Second, the Bureau’s proposed
approach with respect to modifications
and deletions would not impose
compliance obligations on financial
institutions; as discussed in the sectionby-section analysis of proposed
§ 1002.110 above, the Bureau is
proposing to publish application-level
data on its website on behalf of financial
institutions.790
Nonetheless, in the interest of
obtaining public feedback on the
qualitative aspects of its balancing test
analysis, the Bureau is including a
preliminary detailed analysis for each of
the proposed data points, described
under Preliminary Application of the
Balancing Test in part VI.C.6 below.
After the first year of 1071 data is
reported to the Bureau, but before the
Bureau releases the first year of 1071
data to the public, it would publish a
policy statement setting forth its
intentions with respect to modifications
and deletions to the public applicationlevel 1071 data. Before publishing that
policy statement, the Bureau would
conduct a balancing test analysis based
on feedback to this proposal as well as
a quantitative analysis of reidentification risk using reported 1071
data. At this time, the Bureau does not
intend to re-propose its balancing test
analysis for public comment prior to
issuing the policy statement, in the
interest of making data publicly
available in a timely manner.
While the Bureau is seeking public
feedback on its analysis below,
preserving the ability to exercise its
789 Compare ECOA section 704B(e)(4), with ECOA
section 704B(f)(2).
790 Section 1071 requires financial institutions to
compile and maintain data and provides that such
information be made available to the public upon
request. See ECOA section 704B(e), (f)(2)(B).
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discretion to modify or delete data
through policy statements allows the
Bureau to manage the relationship
between privacy risks and benefits of
disclosure more actively. The Bureau
believes this flexibility may be
especially important in the event the
Bureau becomes aware of developments
that might contribute to privacy risks.
The privacy landscape is constantly
evolving, and risks to applicant privacy
created by the publication of the
application-level 1071 data may change
as the result of technological advances
and other external developments. For
example, a new source of publicly
available records may become
accessible, increasing or decreasing
privacy risks under the balancing test,
or the Bureau may discover evidence
suggesting that third parties are using
the 1071 data in unforeseen, potentially
harmful ways. Potential uses of the
application-level 1071 data in
furtherance of the statute’s purposes
may also evolve, such that the benefits
associated with the disclosure of certain
data may increase to an extent that
justifies providing more information to
the public in less modified form. As
recommended by the SBREFA Panel,
the Bureau seeks comment on its
approach described above for
implementing the balancing test.791
3. Disclosure Benefits
In the SBREFA Outline, the Bureau
explained that, under the balancing test
it was considering, data would be
modified or deleted if disclosure in
unmodified form would pose risks to
privacy interests that are not justified by
the benefits of public disclosure in light
of the statutory purposes of section
1071.792 The Bureau sought feedback on
the data points generally, as well as the
benefits of public disclosure to financial
institutions for each of the data points
under consideration.793 Feedback on the
benefits of public disclosure of the data
points under consideration during the
SBREFA process is described in the
applicable section-by-section analysis of
proposed § 1002.107(a)(1) through (21)
in part V above. Feedback on the
benefits of public disclosure of the 1071
dataset as a whole is described below.
Under the proposed balancing test,
the Bureau would consider the benefits
of disclosure of the application-level
1071 data to the public in light of the
statutory purposes of section 1071. As
described above, the 1071 data would be
the most comprehensive dataset
available to analyze trends within the
791 See
SBREFA Panel Report at 24, 33, 48.
SBREFA Outline at 40–41.
793 See id.
U.S. small business lending industry.
The Bureau expects that users of 1071
data would rely on this information to
help achieve the statutory purposes of
section 1071: (1) Facilitating the
enforcement of fair lending laws; and (2)
enabling communities, governmental
entities, and creditors to identify
business and community development
needs and opportunities of womenowned, minority-owned, and small
businesses.794 This would make 1071
data the foremost data source that
governmental entities, researchers,
economists, industry, and community
groups rely on to achieve 1071’s
purposes and to analyze the small
business lending market. The Bureau
received feedback provided by SERs,
other commenters, and the SBREFA
Panel on the potential benefits of
disclosure. Comments related to the
overall benefits of data disclosure, the
fair lending benefits, and business and
community development benefits are
described below.
Some SERs and industry stakeholders
generally supported the public
disclosure of 1071 data to promote the
monitoring of equal access to credit for
small businesses, and narrowing the
information gap between lenders and
borrowers, community groups, and
public officials. A number of SERs
expressed the view that data
transparency in the small business
lending market is critical to advance the
goals of fair lending enforcement and
access to credit for small businesses,
especially those that are minorityowned and women-owned. One SER
stated that the data currently available
are limited, and that section 1071 has
the opportunity to address lending
disparities. The SER also explained that
data transparency and fairness could
address lending practices that tend to
exclude women-owned and minorityowned businesses, exacerbating a racial
wealth gap. An industry stakeholder
supported the public disclosure of 1071
data to promote the monitoring of equal
access to credit for women- and
minority-owned businesses.
Several SERs also underscored the
importance of public disclosure of 1071
data in furthering the 1071 rule’s
business and community development
purpose. One SER stated that the 1071
rule could be a model for the
marketplace and pro-innovation if
implemented with checks and balances.
Another SER said that more
transparency would help governments
and creditors understand what strategies
are successful in reaching womenowned and minority-owned small
792 See
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businesses and shed light on the
marketplace and pricing overall.795
Other SERs emphasized the importance
of publishing pricing information
(specifically captured as APR), together
with product type for understanding the
cost and availability of financing
products to small businesses, the
importance of NAICS codes or other
industry information for determining
which industries are getting funding
generally, and the importance of census
tract or other geographic information for
understanding the extent of lending to
small businesses in low-to-moderate
income neighborhoods.796
However, several industry
commenters expressed the belief that
there were no, or few, benefits to
publishing 1071 data in general, in
addition to raising general concerns
about privacy risks, discussed under
Risks to Privacy Interests in part VI.C.4
below. Several commenters maintained
that the benefits of public disclosure
would be limited due to concerns about
the data points the Bureau was
considering and the absence of other
data points that could, in the view of
these commenters, reduce the risk of
misinterpretation of the data. SERs and
industry commenters also questioned
the benefits associated with individual
data points, as described in the
applicable section-by-section analysis of
proposed § 1002.107(a)(1) through (21)
in part V above.
Community group commenters
supported public disclosure of 1071
data. One commenter expressed the
view that robust data collection would
allow the public to gain a much greater
understanding of gaps in lending to
borrowers in the marketplace, and easily
identify unmet borrowing needs. The
commenter explained that the 1071
dataset would cover more types of loans
from more institutions than existing
CRA data (which had been used for
similar kinds of analyses in the past),
potentially giving the Bureau a
comprehensive view of the small
business lending market. The
commenter also explained that data
collection under the proposal would
build an understanding of the credit
needs and financing outcomes of small
businesses in the lending marketplace
through information from data fields
such as amount applied for, action
taken, and amount approved or
originated. Additionally, several
community group commenters asserted
that transparency through public
disclosure would benefit responsible
financial institutions by allowing them
795 See
794 See
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to distinguish themselves from others
and providing a means for discovering
and addressing problematic practices
earlier.
The Bureau has considered these
comments and the ways in which public
disclosure of the proposed 1071 data
fields would facilitate the enforcement
of fair lending laws. Market
transparency through publication of the
application-level 1071 data would help
to identify potential fair lending
violations and address discrimination in
small business lending. For example,
the ability to compare pricing is a
central outcome in many fair lending
analyses, which often aim to determine
if similarly situated applicants face
higher prices due to a prohibited basis
under ECOA, such as ethnicity, race,
and sex. In supporting the inclusion of
pricing as a discretionary data point,
one community group explained that
collecting data on price would facilitate
enforcement of fair lending laws by
identifying discrimination in lending
through information on whether an
application was approved and at what
price. The 1071 data would also be used
by public officials, researchers, and
community groups to identify
potentially discriminatory lending
patterns and to enforce antidiscrimination statutes. For example,
data on action taken would be used in
fair lending analyses to identify
potential disparities in denial rates
among similarly situated applicants.
Additionally, public disclosure of the
1071 data fields would enable data users
to advocate that financial institutions
maintain robust fair lending policies
and practices and could also increase
the prospect of self-correction when
financial institutions conduct their own
analyses to assess potential fair lending
risks. At the same time, greater
transparency could provide explanatory
context for lending decisions, which
may help protect responsible lenders
from inaccurate assumptions based on
more limited public data.
Moreover, data users, such as
community groups, researchers, and
public officials, would be able to use
1071 data to help determine whether
certain types of credit are
disproportionately available to different
groups. For example, one community
group commenter explained that
because credit cards and other types of
high-interest credit are widely used by
small businesses, information on the
types of credit applied for or originated
could reveal the extent to which
women-owned or minority-owned small
businesses can access term loans or are
served disproportionately by credit
cards or other small business credit
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products that generally carry higher
interest rates. The same commenter also
explained that data users may be able to
use the 1071 data to investigate whether
certain products or businesses are
disproportionately supported by
government guarantee programs in
business and community development
and possibly help to develop more
targeted programs.
The Bureau has also considered the
ways in which publication of the
application-level 1071 data would
promote the business and community
development purpose of 1071. The
Bureau believes that the public
application-level 1071 data would
provide useful and robust data, allowing
data users to appropriately and
efficiently focus resources on particular
areas of need. For example, reporting of
information about rates of denial, and
the associated reasons for denial of a
business credit application, combined
with data fields commonly used to help
make underwriting decisions, such as
gross annual revenue and time in
business, would improve the public’s
ability to generally understand financial
institutions’ decision-making and to
identify underserved areas of the
market. The Bureau also believes that
the public application-level 1071 data
could yield information helpful in
understanding the economic health of
communities. NAICS codes, for
example, could provide information
about rates at which particular types of
businesses are applying for and
receiving credit in general, and which
types of lending products are being
requested, when combined with credit
type. This information would also allow
data users to identify trends in the small
business market that could provide
evidence as to the health of the overall
economy. Understanding these potential
indicators would also help public
officials focus efforts to help creditors
serve the lending needs of communities
and give government officials
information to efficiently distribute
resources to vulnerable small business
applicants. Finally, pricing information,
such as total origination charges for
different types of credit, would also
allow data users to better understand
pricing decisions and the cost of credit
to small businesses. Information about
credit purpose would allow data users
to better understand why small
businesses are using credit, thus helping
communities determine whether
creditors are serving the small business
lending needs of their communities and
also helping public officials to target
public investment to better attract
private investment and innovation. As
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recommended by the SBREFA Panel,
the Bureau seeks comment on its
understanding of the benefits of public
disclosure of the 1071 data described
above.797
4. Risks to Privacy Interests
The Bureau has considered the risks
to privacy that may be created by the
public disclosure of the 1071 data that
would be reported to the Bureau under
the proposal. Based on its analysis to
date, the Bureau believes that public
disclosure of the unmodified
application-level dataset, as a whole,
might create risks to privacy interests
under the 1071 balancing test. As
described in more detail below, this is
due to the presence of unique data fields
in the dataset that the Bureau believes
could create re-identification risk and
the presence of individual data fields
that the Bureau believes would create a
risk of harm or sensitivity. Accordingly,
the Bureau intends to consider whether
modifications or deletions to the public
application-level 1071 data would
reduce these risks to privacy and
appropriately balance them with the
benefits of disclosure for section 1071’s
purposes.
As recommended by the SBREFA
Panel, the Bureau seeks comment on the
range of privacy concerns articulated by
SERs, including potential reidentification of small businesses and
financial institutions, as well as the
types of harms and sensitivities the
unmodified release of 1071 data could
cause to financial institutions and small
business applicants, which are
described further below.798
i. Re-Identification Risk
In the Bureau’s SBREFA Outline, the
Bureau explained that, while
information that directly identifies
natural persons, such as name, address,
date of birth, or Social Security number
would not be collected pursuant to
section 1071 requirements, publication
of 1071 data under consideration in an
unmodified, application-level format
potentially could be used to re-identify
small business applicants and related
natural persons or potentially harm
their privacy interests.799 One SER
stated that there has not been a single
demonstrated incident of reidentification using HMDA data, and
that privacy concerns could be
addressed through modification
techniques. However, many SERs and
several industry stakeholders explained
that 1071 data would facilitate the re797 See
id. at 48.
id. at 47.
799 See SBREFA Outline at 40.
798 See
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identification of natural persons and
businesses, particularly in low-density
geographies, like rural areas. Some
stakeholders stated that it would be
difficult to predict whether reidentification could arise, particularly
as technology evolves.
The Bureau is concerned about two
re-identification scenarios. First, a third
party may use common data fields to
match a 1071 record to a record in
another dataset that contains the
identity of the applicant or related
natural person. The Bureau uses the
term ‘‘adversary’’ when referring to such
third parties.800 Second, an adversary
may rely on pre-existing personal
knowledge to recognize an applicant’s
record in the unmodified 1071 data.
Re-identification based on matching.
Under the first scenario, it may be
possible to match a 1071 record to an
identified dataset, either directly or
through a combination of intermediate
datasets.801 The 1071 data that would be
reported under the proposal, like the
data reported under HMDA and
Regulation C, may contain data fields
that create re-identification risk.802
However, successfully re-identifying a
1071 record would require several steps
and may present a significant challenge.
First, an adversary generally would
have to isolate a record that is unique
within the 1071 data. A 1071 record is
unique when the values of the data
fields associated with it are shared by
zero or few other 1071 records. As
discussed above, the Bureau believes
actual 1071 data are needed to perform
an accurate re-identification analysis.
Thus, the Bureau does not intend to
apply the balancing test until after it has
analyzed re-identification risk with at
least a full year of reported 1071 data.
A 1071 record having unique
combinations of values would not
automatically result in its reidentification; an adversary would also
have to find a record corresponding to
the applicant or related natural person
in another dataset by matching similar
combinations of data fields. Once a 1071
record has been matched to a
800 The term is not intended to indicate that the
adversary’s motives are necessarily malicious or
adverse to the interests of others. See, e.g., Nat’l
Inst. of Standards & Tech., De-Identification of
Personal Information (2015), https://
nvlpubs.nist.gov/nistpubs/ir/2015/NIST.IR.8053.pdf
(using the term ‘‘adversary’’).
801 For purposes of this discussion, an identified
dataset is one that directly identifies a natural or
non-natural person.
802 HMDA data have a large number of records
with unique combinations of data fields. See 84 FR
649, 654 n.33 (Jan. 31, 2019) (citing a 2005 Board
study finding that more than 90 percent of the loan
records in a given year’s HMDA data are unique—
that is, an individual lender reported only one loan
in a given census tract for a specific loan amount).
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corresponding record, an adversary
would possess any additional fields
found in the corresponding record but
not found in the 1071 record, such as,
possibly, the identity of the applicant.
However, even after accomplishing such
a match, an adversary might not have
accurately re-identified the true
applicant to whom the 1071 record
relates. For example, if the
corresponding record is not the only
record in the other dataset that shares
certain data fields with the unique 1071
record, an adversary would have to
make a probabilistic determination as to
which corresponding record belongs to
the applicant.
As described below and addressed
with respect to individual data fields in
part VI.C.6 further below, the Bureau
expects that the census tract and NAICS
code data fields may significantly
contribute to re-identification risk.
Geographic and industry information
are publicly available in a variety of
sources and in a form that directly
identifies businesses or in a way that
could be derived with reasonable
accuracy. This information is also likely
to produce unique instances in the data,
both when used separately and also,
especially, when combined. Other data
fields may result in unique
combinations (particularly when
combined with census tract), but the
Bureau would need actual 1071 data to
analyze their contribution to
uniqueness.
In the 1071 context, the Bureau
believes that particularly relevant
sources of identified data for matching
purposes are UCC filings, property
records, and titles. The Bureau believes
that such filings could pose a serious reidentification risk because of the
availability of information about the
lender, the applicant, and the date of
transaction. The proposed 1071 data
fields in unmodified form would
identify the financial institution as well
as the action taken date or application
date. If the action taken date is on or
near the UCC filing date, for example,
an adversary might be able to use the
date and financial institution on the
UCC filings to identify the applicants of
originated loans in the public
application-level 1071 data. The UCC
filing also typically will have the
address of the borrower. Combinations
of lender, action taken date, and census
tract might result in unique
combinations of data fields that an
adversary could connect to a publicly
available source of information to reidentify the applicant. Therefore, the
Bureau believes identity of the financial
institution and the action taken date
(and application date, which could be a
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proxy for action taken date) may
significantly contribute to reidentification risk. UCC filings may also,
although to a lesser extent, contain
detailed information on the type of loan
and the amount approved.
With respect to 1071 loans secured by
residential and commercial property,
publicly available real estate transaction
records and property tax records would
be particularly relevant sources of
identified data, as the Bureau described
in its proposed policy guidance on the
disclosure of loan-level HMDA data.803
Because some of the data fields in such
public records are also present in the
1071 data, the Bureau believes that the
publication of application-level 1071
data without any modifications would
create a risk that these public records
could be directly matched to a 1071
record to re-identify an applicant. In
addition, a business’s own website,
public directories, or websites that
review businesses typically include the
business’s location, time in business,
and information that could be used to
derive information about the business’s
owners.
UCC filings also frequently include
the name of the lender, the name of the
business, and the date that the filing
was submitted. Though the availability
differs by State, UCC filings are often
searchable in State databases, and are a
source of data frequently mined by data
brokers. UCC statements are often filed
against specific collateral and business
assets generally, especially for products
like general lines of credit. These types
of filings would be available more
broadly than just for loans with very
specific collateral (like equipment or
vehicles). Such filings could pose a
serious re-identification risk because of
the availability of information about the
lender, the applicant, and the date of
transaction.
Identified public data records in loanlevel datasets for programs like the
SBA’s 7(a), 8(a), 504, and PPP programs,
as well as State-level registries of
women-owned and minority-owned
businesses for contracting purposes,
may also contribute to re-identification
risk. These datasets include information
such as loan program guarantee
information, industry or NAICS code,
demographic information about the
business owners, time in business, and
803 See 82 FR 44586, 44593 (Sept. 25, 2017). The
Bureau explained that, although there is variance by
jurisdiction, such records are often available
electronically and typically identify a borrower
through documents such as the mortgage or deed
of trust. These documents typically include the loan
amount, the financial institution, the borrower’s
name, and the property address, and may include
other information.
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number of workers. Time in business
and number of workers could also likely
significantly contribute to reidentification risk, especially in
combination with other data fields like
census tract and NAICS code.
Other publicly available sources of
data similar to those included in the
proposed 1071 data, but only for certain
types of credit, include loan-level
performance datasets made available by
the Government-Sponsored Enterprises
(GSEs). The GSE datasets include
information such as borrower
demographic information, loan program
guarantee information, pricing data,
loan term, loan purpose, and the year of
action taken. Asset-backed securities
datasets for securitized mortgage and
auto loans are made available by the
Securities and Exchange Commission
through the Electronic Data Gathering,
Analysis, and Retrieval (EDGAR)
system. These datasets include
information about the lender, the date of
action taken, pricing data, loan term,
loan amount applied for and approved.
These datasets are available online with
limited restrictions on access. But these
datasets do not include the name of the
borrower; as described above, this
means that an adversary who is able to
match a record in one of these datasets
to a record in the 1071 data would need
to make an additional match to an
identified dataset to re-identify an
applicant. And some of these datasets
contain restrictions on use, such as a
prohibition on attempting to re-identify
borrowers.
Private datasets, which could be made
available in identified or de-identified
form, that could be matched to the 1071
data are also available. For example,
data brokers collect information about
small businesses from a wide range of
sources and sell it for a variety of
purposes, including marketing, identity
verification, and fraud detection.804
These datasets typically include data
collected from commercial, government,
and other publicly available sources and
may contain data about the business,
including industry code, information
about geography, and estimates of gross
annual income, number of workers, and
information about related natural
persons, including the race and
ethnicity of business owners. Some of
these datasets contain restrictions on
use, such as requiring a legitimate
804 See generally Fed. Trade Comm’n, Data
Brokers: A Call for Transparency and
Accountability (May 2014), https://www.ftc.gov/
system/files/documents/reports/data-brokers-calltransparency-accountability-report-federal-tradecommission-may-2014/140527databrokerreport.pdf
(describing the types of products offered and the
data sources used by data brokers).
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business purpose, and some may
prohibit attempts to re-identify
borrowers.
In addition to considering the steps an
adversary would need to complete to reidentify the 1071 data and the various
data sources that may be required to
accomplish re-identification, including
their limitations, the Bureau also has
considered the capacity, incentives, and
characteristics of potential adversaries,
including those that may attempt reidentification for harmful purposes. In
particular, a potential competitor of a
small business or a firm with other
commercial interests may seek
information about a business’s
expansion strategy or financial
condition, including whether it was able
to obtain credit approval. This could be
part of routine market monitoring or to
gain a specific commercial advantage.
These potential adversaries could
possess the resources to use private
datasets in addition to publicly
available records to re-identify the 1071
data. However, the Bureau has
considered the extent to which much of
the commercial benefit to be obtained
by re-identifying the 1071 data may be
more readily available from private
datasets to which these potential
adversaries already have access without
the need for recourse to the 1071 data.
In many cases, information from other
datasets may be timelier than that found
in the 1071 data.805 Furthermore, some
of these potential adversaries may
refrain from re-identifying the 1071 data
for reputational reasons or because they
have agreed to restrictions on using data
from the additional datasets described
above for re-identification purposes.
Additionally, while some academics,
researchers, and journalists might use
de-identified 1071 data, some may be
interested in re-identifying the 1071
data for research purposes. These
persons may differ in their capacity to
re-identify an applicant in the 1071
data. However, as mentioned above,
some private datasets may have
contractual terms prohibiting their use
for re-identification purposes and
therefore these persons may be
restricted from actually using the 1071
data to re-identify applicants. Further,
those academics or journalists with
significant resources may be affiliated
with organizations that have
reputational or institutional interests
that would not be served by reidentifying the 1071 data. These factors
805 Cf. 82 FR 44586, 44594 (Sept. 25, 2017)
(explaining that the delay between action taken and
publication of reported HMDA data ranges from
three to 15 months).
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may reduce the risk of re-identification
by such persons.
The Bureau has considered whether
parties intending to commit identity
theft or financial fraud may have the
incentive and capacity to re-identify the
1071 data. As discussed under Risk of
Harm or Sensitivity in part VI.C.4.ii
below, the Bureau believes that the 1071
data would be of minimal use for these
purposes. Further, these potential
adversaries are not law abiding and may
have easier, albeit illegal, ways to secure
data for these purposes than attempting
to re-identify application-level 1071
data.
Re-identification based on personal
knowledge. In addition to the possibility
of re-identifying applicants through
matching 1071 data to other datasets,
some potential adversaries may be able
to re-identify a particular applicant or
related natural person in the 1071 data
by relying on personal knowledge about
the applicant or natural person. The
unmodified 1071 data would include
location and demographic information,
such as the race, sex, and ethnicity of
principal owners, and industry
information. These types of information
may be likely to be known to a potential
adversary who is familiar with a specific
applicant or related natural person.
Therefore, such a potential adversary
may be able to re-identify a known
applicant or related natural person
without attempting to match a 1071
record to another data source. This
potential adversary could include a
customer, competitor, or person with
other commercial ties to the applicant,
or a neighbor or acquaintance of a
related natural person, and the interest
in re-identification may range from mere
curiosity to the desire to embarrass or
otherwise harm the applicant. These
potential adversaries may possess a high
level of specific knowledge about the
characteristics of a particular applicant
or related natural person. Adversaries
who can re-identify an applicant or
natural person based on personal
knowledge would be able to
complement their existing knowledge
with the full 1071 application-level
data, and therefore could contribute to
risks of harm or sensitivity.
Pre-existing personal knowledge
possessed by such a potential adversary
would be limited to information about
a subset of applicants and related
natural persons. Thus, any reidentification attempt by such an
adversary would likely target or impact
a more limited number of applicants or
natural persons, compared to the large
numbers of applicants or natural
persons who could be re-identified by
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adversaries possessing sophisticated
matching techniques.806
Although the Bureau believes that
location, protected demographic
information, and industry information
may be more likely to be known than
other information in the 1071 data, it is
impossible to predict the exact content
of any pre-existing personal knowledge
that such a potential adversary may
possess. This uncertainty creates
challenges for evaluating the degree to
which individual data fields contribute
to the risk of re-identification by such a
potential adversary. For these reasons,
the discussions of re-identification risk
in the Bureau’s analysis of data points
below generally focus on the risk of reidentification based on matching, not on
personal knowledge. The Bureau seeks
comment on how the Bureau could
assess re-identification risk arising from
adversaries with personal knowledge.
Applications that do not result in
originations. In its final policy guidance
on the disclosure of loan-level HMDA
data, the Bureau explained that the risk
of re-identification to applicants is
significantly lower for applications that
do not result in originated loans.807 The
Bureau explained that the lack of public
information about applications
significantly reduces the likelihood that
an adversary could match the record of
a HMDA loan application that was not
originated to an identified record in
another dataset. The Bureau has not
identified any publicly available
information about applications for
business loans. As discussed under
Implementation of the Balancing Test in
part VI.C.2 above, the Bureau lacks data
necessary to perform a complete reidentification analysis at this time.
However, the unmodified 1071 data
might contain data fields that facilitate
the re-identification of applicants. For
example, the census tract and NAICS
code data fields could result in unique
combinations that an adversary could
use to match to an identified public
record, such as a business directory.808
806 There may be more potential adversaries with
personal knowledge than those with the ability to
do any kind of sophisticated matching to other
datasets, but it is not possible to predict.
807 See 84 FR 649, 658 (Jan. 31, 2019); see also
82 FR 44586, 44593 n.55 (Sept. 25, 2017).
808 In addition, as the Bureau believed in the
HMDA context, some of the information contained
in the unmodified 1071 data for applicants may
permit an adversary to re-identify an applicant
despite the lack of publicly available records. For
example, if an applicant withdraws an application
and obtains a loan secured by the same property
from another institution, it may be possible to link
the 1071 data for the withdrawn application with
the data for the origination, as much of the property
and applicant information would be identical. See
84 FR 649, 658 (Jan. 31, 2019); see also 82 FR
44586, 44593 n.55 (Sept. 25, 2017).
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Overlap between HMDA and 1071
data generally. As noted above in the
section-by-section analysis of proposed
§ 1002.104(a), the Bureau anticipates
that some applications would be
reported under both HMDA and
1071.809 The public loan-level HMDA
dataset contains data fields in addition
to, or that overlap with, the proposed
1071 data fields, and the proposed 1071
data includes data fields that are not
included in the public loan-level HMDA
dataset. The Bureau recognizes that, in
cases of overlap, some 1071 data fields
may require additional analysis with
respect to risks of harm or sensitivity
and re-identification posed by such
overlap. When the Bureau performs a
full re-identification analysis, it intends
to consider the potential for
applications reported under 1071 to be
matched to loans reported under
HMDA. The Bureau seeks comment on
this issue and the implications of
potential re-identification risk and
potential risk of harm or sensitivity for
applications reported under both
section 1071 and HMDA.
ii. Risk of Harm or Sensitivity
In the SBREFA process, the Bureau
sought feedback on the nature and scope
of privacy interests of non-natural
persons (e.g., small business applicants
and financial institutions) and natural
persons (e.g., principal owners of small
businesses) that the Bureau should
consider under its potential balancing
test, including the types of sensitive
commercial information that could be
exposed by publishing the data points
(individually or in combination) under
consideration.810
A number of SERs and other
stakeholders addressed the risk of harm
or sensitivity from the disclosure of
1071 data in unmodified form.811
Several SERs and other stakeholders
stated that the disclosure of 1071 data
could create a risk of harm or sensitivity
for small businesses and related natural
persons. Several SERs stated that public
knowledge of borrowing activity (even
without any other potential harms)
would be very concerning to some small
809 Applications involving certain investment
properties would be excluded from 1071 reporting.
As discussed in the section-by-section analysis of
proposed § 1002.104(b) above, proposed comment
104(b)–4 would exclude an extension of credit that
is secured by 1–4 individual dwelling units that the
applicant or one or more of the applicant’s
principal owners does not, or will not, occupy.
810 See SBREFA Outline at 40–41.
811 In this section, we summarize comments about
harm and sensitivity that relate to the 1071 data
generally. In the individual data field sections
below, we summarize comments about risks of
harm and sensitivity that relate to particular data
fields.
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businesses as some small business
owners consider that information
sensitive or deeply personal. Some
stakeholders stated that the disclosure
of a banking relationship could raise
harm or sensitivity concerns because it
might lead to adverse inferences about
the business’s financial condition. One
SER stated that small business owners
valued their privacy just as much as
consumers. Several industry
commenters stated that 1071 data might
reveal information about a small
business’s strategy or financial
condition, as well as information about
the personal characteristics or financial
conditions of related natural persons,
which the commenters stated could
contribute to identity theft.
Several community group
stakeholders stated, in contrast, that the
risk of harm or sensitivity from
publishing 1071 data would be minimal
because some of the data are already
publicly available. These stakeholders
also stated that financial institutions
likely exaggerate privacy concerns of
small businesses or natural persons.
With respect to concerns that
publication of data could facilitate
targeted marketing of predatory lending
products, a community group stated that
rather than fostering predatory
practices, public disclosure would deter
them by enabling the public to identify
problematic pricing or loan terms and
conditions and prevent them from
becoming more widespread.
In addition to addressing the risks of
harm and sensitivity to small
businesses, several SERs and other
stakeholders addressed potential risks of
harm and sensitivity to financial
institutions from the disclosure of 1071
data. Several SERs stated that 1071 data
could be used to generate marketing
lists and that this would result in
creditors taking other financial
institutions’ customers away. One SER
stated that, because of this, financial
institutions may stop lending to small
businesses in certain markets. In
contrast, two SERs stated that it was
relatively easy to obtain information on
other financial institutions’ small
business lending activity. Two SERs
stated that they were more concerned
about the privacy of small business
applicants or borrowers than the privacy
of financial institutions, but that both
mattered. In addition, one industry
stakeholder expressed concern that
disclosing the type or purpose of
financing and the amount applied for
and approved could facilitate reidentification of borrowers, particularly
in rural areas or small towns. The
commenter also expressed concern that
disclosing this information could harm
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community banks located in such areas.
The commenter stated that this could
happen because small businesses in
such areas are likely to perceive that
this information could cause them to be
re-identified, and that they would
respond by seeking financing with a
large creditor in another town or online,
rather than their community bank.
A few industry commenters expressed
concern that the 1071 data could reveal
information such as a financial
institution’s client lists, terms and
conditions, insights about the financial
institution’s strategy in particular
geographic areas, or, for certain
financial institutions, sensitive supply
management data. A community group
commenter stated that public disclosure
of 1071 data would not have significant
negative effects on competition and
could provide lenders with insights that
could allow them to become more
competitive.
Some SERs expressed concern that
1071 data could be used against
financial institutions in litigation by
class action attorneys or to harm their
public reputations. One SER expressed
concern that public disclosure of 1071
data could cause financial institutions
to face more litigation, which, in the
SER’s view, would increase the cost of
credit for small businesses. Another SER
expressed concern that data users could
misinterpret pricing information. For
example, according to the SER, data
users might infer discrimination based
on higher pricing for an applicant, when
the pricing was in fact unrelated to the
applicant’s race. The SER stated that the
purpose of section 1071 was to help
small businesses and asserted that
releasing full 1071 data would present
an opportunity for third parties to sue
or criticize financial institutions.
Several industry commenters stated
that data about loan terms would be
sensitive because they would invite
criticism of or litigation over disparities
without accounting for various
legitimate business reasons for
disparities and increase compliance
costs. Other industry commenters stated
that publication of 1071 data would lead
financial institutions to artificially
lower prices, standardize underwriting,
or reduce access to credit to limit
exposure to fair lending litigation or
reputational risk. One community group
stated that it did not believe the
purposes of section 1071 required the
Bureau to take into account such
financial institution concerns about
litigation or reputational risk,
compliance costs, or impacts on
underwriting. One industry stakeholder
stated that the Bureau could address
these risks by providing clear guidance
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about how it would use 1071 data in its
fair lending supervisory program.
The Bureau has considered whether,
if an application-level record in the
public 1071 data were to be reidentified, 1071 data reported to the
Bureau would disclose information
about an applicant, related natural
person, or financial institution that is
not otherwise public and may be
harmful or sensitive.812 Specifically, the
Bureau has evaluated whether the 1071
data could be used for harmful purposes
such as fraud or identity theft or the
targeted marketing of products and
services that may pose risks that are not
apparent. The Bureau has also evaluated
whether the 1071 data could cause
competitive harm to small business
applicants or to financial institutions.
Furthermore, even where the disclosure
of the data field is unlikely to lead to
financial or other tangible harms, the
Bureau has evaluated whether certain
1071 data fields may be viewed as
sensitive if associated with a particular
applicant, related natural person, or
financial institution. In evaluating the
potential sensitivity of a data field, the
Bureau has considered whether
disclosure of the data field could cause
dignitary or reputational harm to small
business applicants and related natural
persons. The Bureau has also evaluated
whether disclosure of the data field
could cause reputational harm to
financial institutions.
As discussed above and as noted by
several community group stakeholders,
some identifiable information about
small business lending is currently
available to the general public. Such
information is available both in public
records and in private datasets with
varying barriers to access and
restrictions on use. In evaluating the
risk of harm or sensitivity created by the
publication of the application-level
1071 data, the Bureau’s analysis has
considered the degree to which such
disclosure would increase this risk
relative to the risk that already exists,
absent the public availability of 1071
data. Accordingly, the Bureau has
considered whether the data that would
be reported to the Bureau are typically
publicly available in an identifiable
form. The Bureau has also considered
whether there are any barriers to
accessing such data or restrictions on its
use. In general, the Bureau believes that,
where a data field is already publicly
available, the risk of harm or sensitivity
812 To the extent a section 1071 record could be
associated with an identified applicant or related
natural person, and successfully matched to another
de-identified dataset to re-identify such a dataset,
harmful or sensitive information in that dataset that
is not otherwise public may also be disclosed.
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from the disclosure of that data field in
the 1071 data is reduced.813
In evaluating the risk of harm or
sensitivity created by the publication of
the application-level 1071 data, the
Bureau also has considered the
likelihood that the application-level
1071 data would be re-identified. As
discussed under Re-Identification Risk
in part VI.C.4.i above, the Bureau
generally believes that successful reidentification of application-level 1071
data would require several steps and
may present a significant challenge. To
the extent that the risk that reidentification would be accomplished is
low, the risk of disclosing harmful or
sensitive information would be reduced.
The Bureau agrees with commenters
who stated that the disclosure of 1071
data could potentially create a risk of
harm or sensitivity not only to natural
persons, such as the owner of a small
business that is a sole proprietorship,
but also to non-natural persons. As
discussed under Balancing Test Design
in part VI.C.1 above, when considering
the risk of harm or sensitivity, the
Bureau’s proposed balancing test would
consider the risks to non-natural
persons, including financial
institutions.
The Bureau has considered whether
the 1071 data could be used for harmful
purposes such as fraud or identity theft
or the targeted marketing of products
and services that may pose risks that are
not apparent. As noted above, several
SERs and other stakeholders stated that
the 1071 data could potentially be used
for these purposes. The Bureau’s
preliminary view is that the unmodified
application-level 1071 data would be of
minimal use for purposes of
perpetrating identity theft or financial
fraud against applicants or related
natural persons. The 1071 data would
not include information typically
required to open new accounts in the
name of a small business’s principal
owner, such as Social Security number,
date of birth, place of birth, passport
number, or driver’s license number.
Additionally, the 1071 data would not
include information useful to perpetrate
existing account fraud, such as account
numbers or passwords.814
813 However, where a data field is already
publicly available, disclosing that data field in the
1071 data may enable the matching of 1071 data to
other datasets that may not be controlled by the
Bureau, which could substantially facilitate reidentification or the disclosure of harmful or
sensitive information.
814 As noted above, however, to the extent a
section 1071 record could be associated with an
identified applicant or related natural person and
could also successfully be matched to a deidentified dataset to re-identify such a dataset,
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However, while the Bureau believes
that the unmodified 1071 data would be
of minimal use for perpetrating fraud or
identity theft, the Bureau acknowledges
that almost any information relating to
a small business could, theoretically, be
used for these purposes. As a result, the
unmodified 1071 data could provide at
least some additional data that could be
used for these purposes. For example,
the 1071 data could potentially be used
in a phishing attack against an applicant
by a perpetrator purporting to be the
financial institution, or for knowledgebased authentication purposes.815 While
much information that may be useful for
phishing or knowledge-based
authentication—such as the name of the
financial institution and the date of
action taken—may already be available
from UCC filings, the 1071 data may
contain additional information that may
be useful for such purposes, such as
information about the type of loan and
loan terms. However, some of this
information may also be available from
private data sources. The Bureau also
notes that, based on the Bureau’s
expertise and analysis, the publication
of HMDA data—which contains many
data fields that are similar to data fields
that would be disclosed under section
1071—has not resulted in any
measurable increase in fraud or identity
theft against mortgage applicants.
As several of the SERs and other
stakeholders suggested, the Bureau has
also considered whether the unmodified
application-level 1071 data would
provide information that is not already
public and could be used for the
targeted marketing of products and
services that may pose risks that are not
apparent. Although the 1071 data could
be used to market products and services
that would be beneficial for small
businesses—perhaps increasing
competition among creditors that could
help small businesses receive better
terms—they could also be used to target
potentially vulnerable small businesses
with marketing for products and
services that may pose risks that are not
apparent. While, as a community group
stakeholder stated, the 1071 dataset may
generally be useful for identifying
predatory lending practices in the small
business lending market, the Bureau
believes that the targeted marketing of
products that may pose risks that are not
harmful or sensitive information in that dataset that
is not otherwise public may also be disclosed.
815 Knowledge-based authentication (KBA) is a
method of authentication which seeks to prove the
identity of someone accessing a service, such as an
account at a financial institution. KBA requires the
knowledge of information about someone to prove
that a person attempting to access a service is that
person.
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apparent is a harmful purpose for which
1071 data could potentially be used.
For example, data users might
perceive certain 1071 data to reveal
negative information about an
applicant’s financial condition or
vulnerability to scams relating to debt
relief or credit repair. Information about
a loan might also be used for a practice
known as ‘‘stacking,’’ in which some
creditors have been alleged to obtain
lead lists based on publicly available
information and offer follow-on loans or
advances that add to the debt burden
carried by small businesses. Some
creditors might also use the data for
deceptive marketing practices. However,
the utility of the 1071 data for predatory
marketing practices may be limited by
the delay between action taken on a
loan and publication of the applicationlevel 1071 data.
As several of the SERs and other
stakeholders suggested, the Bureau has
also considered whether the unmodified
1071 data would result in competitive
harm to small business applicants or
related natural persons. The 1071 data,
if re-identified, may disclose some
general information about a small
business’s use of credit that is not
currently available to the general public.
As discussed in the individual data field
sections below, the Bureau
acknowledges that certain 1071 data
points in unmodified form could reflect
negatively on the financial condition of
a business or its owners.
As several of the SERs and other
stakeholders recommended, the Bureau
has also considered whether the
unmodified 1071 data would result in
competitive harm to financial
institutions. As discussed below with
respect to the financial institution
identifying information that would be
reported pursuant to proposed
§ 1002.109(b), the Bureau is proposing
to identify the financial institution in
the public application-level 1071 data.
Therefore, the 1071 data could reveal
general information about a financial
institution’s lending practices that is not
widely available to the general public.
Data fields such as census tract, NAICS
code, credit type, and pricing could
disclose information about where a
financial institution is doing business,
what industries it is doing business
with, what kinds of products it is
offering, and what kinds of prices it is
charging, respectively. Additionally, as
several SERs stated, if a small business
applicant were to be re-identified, a
financial institution’s competitors could
identify the small businesses to which
the financial institution is offering or
providing credit.
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The Bureau acknowledges that the
increased transparency into small
business lending provided by 1071 data
could reveal general information about
a financial institution’s lending
practices that is not widely available to
the general public, and that this
information could be useful to others,
including other financial institutions.
For example, if the 1071 data were reidentified, a financial institution could
potentially offer credit to a particular
small business at a lower price than
they received from another financial
institution. However, the Bureau does
not believe the unmodified applicationlevel 1071 data would include key
inputs for or be detailed enough to
substantially facilitate the reverseengineering of a financial institution’s
proprietary lending models. (For
example, it would not include
information about an applicant’s credit
history.) Financial institution concerns
with disclosure of information about
general lending practices are discussed
in greater detail under Balancing Risks
and Benefits in part VI.C.5 below.
As noted above, an industry
commenter expressed concern that
disclosing information about applicants
in rural areas could lead them to seek
financing elsewhere. However, from the
perspective of a small business, seeking
financing with a lender in another
community would not necessarily
reduce the risk that someone in the
small business’s community may
ultimately re-identify them in the 1071
data because the 1071 data would be
reported with respect to the location of
the business, as discussed in the
section-by-section analysis of proposed
§ 1002.107(a)(13) above (census tract).
As discussed above, with respect to the
concern about re-identification risk to
applicants and related natural persons,
the Bureau would determine the extent
of re-identification risk when it has
obtained a full year of reported 1071
data and would state its intentions, at
that time, about whether certain 1071
data fields should be modified or
deleted prior to public disclosure.
Some SERs expressed the concern,
further detailed above, that 1071 data
could harm financial institutions by
increasing the amount of litigation
against financial institutions. The
Bureau acknowledges this risk, which is
discussed in greater detail under
Balancing Risks and Benefits in part
VI.C.5 below, and in part VI.C.6.xviii
with respect to the application of the
proposed balancing test to financial
institution identifying information.
In addition to considering whether
the disclosure of a data field could lead
to financial or other tangible harms,
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such as those described above, the
Bureau has also considered whether the
1071 data fields might be viewed as
sensitive. As noted above, several SERs
and other stakeholders stated that
disclosure of the unmodified 1071 data
would divulge data that may be
sensitive to applicants, related natural
persons, or financial institutions. In
assessing whether a data field creates a
risk of sensitivity, the Bureau has
evaluated whether its disclosure could
lead to dignitary or reputational harm to
small business applicants or related
natural persons. For example, as several
industry commenters stated, if the 1071
data were re-identified, the data could
reveal information that casts a negative
light on a small business’s financial
condition, such as the fact that a loan
was denied due to a business’s credit
characteristics or cashflow. This
information could be embarrassing to
the small business and its owners.
The Bureau has also evaluated
whether the disclosure of a data field
could cause reputational harm to
financial institutions. As noted above,
some SERs expressed concern that 1071
data could harm a financial institution’s
reputation by leading data users to draw
unfounded inferences about
discrimination. The Bureau notes that
several of the 1071 data fields, if
disclosed in unmodified form, would
help address this concern by serving as
control variables. For example, many
financial institutions consider a small
business’s revenue when assessing the
risk of extending credit. As a result,
disclosing gross annual revenue data
would help ensure that data users who
are evaluating potential disparities in
underwriting or pricing can compare
small businesses with similar revenues,
thereby controlling for a factor that
might provide a legitimate explanation
for some disparities. The Bureau also
notes that it does not expect that 1071
data alone could generally be used to
determine whether a lender is
complying with fair lending laws. The
Bureau expects that, when regulators
conduct fair lending examinations, they
would analyze additional information
before reaching a determination about
an institution’s compliance with fair
lending laws.
In assessing the risk of sensitivity, the
Bureau has also considered general
societal and cultural expectations with
respect to what information is available
to the general public. For example,
disclosing gross annual revenue in
unmodified form could disclose
sensitive information because it could
reflect the financial condition of a small
business or, where a small business is
a sole proprietorship, a natural person.
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This type of information about a
business’s or natural person’s financial
condition is typically not available to
the general public.
The Bureau also acknowledges the
comments stating that some small
businesses and their owners would
consider the very fact that they sought
credit sensitive, or would consider the
disclosure of a banking relationship
sensitive because others may draw
adverse inferences about the small
business’s financial condition. These are
concerns about sensitivity that would
result merely from the re-identification
of the applicant, rather than from the
disclosure of particular data fields. The
Bureau seeks to address these concerns
by mitigating the risk of reidentification, as described under ReIdentification Risk in part VI.C.4.i
above.
The Bureau seeks comment on its
approach to assessing the risks of harm
and sensitivity presented by the
disclosure of unmodified 1071 data.
5. Balancing Risks and Benefits
Under the approach described in the
SBREFA Outline, the Bureau would
delete or modify 1071 data if disclosure
of the data in unmodified form would
pose risks to privacy interests that are
not justified by the benefits of public
disclosure in light of the statutory
purposes of section 1071.816 If the risks
of disclosing unmodified data are not
justified by the benefits under the
balancing test, the Bureau would
determine whether modifications or
deletions could appropriately balance
the risks and benefits. In the SBREFA
Outline, the Bureau explained that it
was considering various approaches that
would appropriately advance privacy
interests while still providing users with
data useful to fulfilling the purposes of
section 1071. The Bureau explained that
these approaches could include various
statistical disclosure limitation
techniques when justified under the
balancing test, such as those that mask
the precise value of data points to
prevent the disclosure of certain data
elements. The Bureau also sought
feedback generally on how it could
mitigate concerns arising from reidentification risk.817
Several community group
commenters stated that the Bureau
should make as much data publicly
available as possible to maximize data
utility. One commenter stated that
privacy concerns could be addressed
through the prohibition on collecting
personally identifiable information and
increasing coverage of 1071 reporters
and products. But this commenter,
several SERs, and many other industry
commenters expressed support for
modifying or deleting the data from the
public application-level 1071 data to
balance privacy risks with the benefits
of public disclosure. Commenters
provided a wide variety of feedback on
what kind of techniques would be
appropriate, including publishing data
in ranges, aggregating data, differential
privacy, and data-swapping.818 In
addition, several industry commenters
recommended that the Bureau reduce
rule coverage to limit harms, such as by
using asset thresholds and exclusions
for types of financial institutions. By
contrast, a community group commenter
recommended that the Bureau expand
the rule’s coverage to increase the
number of observations and reduce reidentification risk. One SER
recommended a process by which
covered financial institutions could
identify certain application records that
might present heightened reidentification risk and trigger further
analysis by the Bureau before full
application-level data are published.819
Another SER suggested that the Bureau
set a minimum sample size before
publishing application-level data for
some rural markets to avoid harm.820
Balancing risks and benefits
generally. As noted previously, the
Bureau intends to apply the proposed
balancing test after it receives the first
year of data reported pursuant to an
eventual 1071 rule. For data fields the
public disclosure of which the Bureau
believes would create risks to privacy
interests of applicants, related natural
persons, or financial institutions, either
because a field increases reidentification risk or poses a risk of
harm or sensitivity, the Bureau intends
to assess these risks against the benefits
of disclosure. Where the Bureau
determines that the disclosure of an
individual data field, alone or in
combination with other fields, would
create risks to privacy that are not
justified by the benefits of disclosure to
1071’s purposes, the Bureau would
consider whether it could appropriately
balance the privacy risks and disclosure
benefits through modification
techniques or whether the field should
be deleted from the public dataset. The
Bureau also would evaluate the risks
and benefits of disclosing a data field in
light of modifications or deletions
considered for other data fields.
818 See
816 See
SBREFA Outline at 41.
817 Id. at 40–41.
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id. at 35.
820 See id.
819 See
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The Bureau is mindful of the
connection between the risk of reidentification and the risk of harm or
sensitivity. To the extent that the risk of
re-identification created by disclosure of
the 1071 data is reduced, the risk of
disclosing harmful or sensitive
information also would be reduced.
Conversely, to the extent that the public
application-level 1071 data would not
disclose information that is harmful or
sensitive, the consequences of reidentification would be reduced. Where
the Bureau determines that modification
of a data field is appropriate, the
Bureau’s consideration of the available
forms of modification for the 1071 data
would also be informed by the
operational challenges associated with
various forms of modification and the
need to make application-level data
available to the public in a timely
manner.
The Bureau is also aware of concerns
raised by SERs and other stakeholders,
described under Risk of Harm or
Sensitivity in part VI.C.4.ii above, that
disclosing the proposed 1071 data in
unmodified form could increase risks of
litigation or reputational harm to
financial institutions, and reveal
information that could cause
competitive harm to financial
institutions. However, in applying the
balancing test, the Bureau generally
intends to give significant weight to the
benefits of disclosure relative to these
risks.
In general, the Bureau believes that
deleting or modifying data because the
data would disclose general information
about a financial institution’s lending
practices—compared with information
that could substantially facilitate, for
example, the reverse-engineering of a
financial institution’s proprietary
lending models—would be inconsistent
with section 1071. As noted above, the
statute directly contemplates disclosure
of financial institution identity in
connection with the public applicationlevel dataset.821 Each of the data fields
prescribed by the statute—with the
exception of the application number—
could provide some insight into a
financial institution’s lending practices.
If the Bureau were to exclude data on
this basis, it would exclude virtually all
of the statutorily required 1071 data
points from the public data. This would
significantly frustrate both of the
statutory purposes of section 1071
because it would prevent the public
from using the data to identify potential
fair lending violations, and it would
prevent communities and creditors from
using the 1071 data to identify business
821 See
ECOA section 704B(f)(2)(B).
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and community development needs and
opportunities of small businesses.822
For example, this information could
benefit more competitive creditors, as
well as small businesses in obtaining
credit at a lower cost.
While the Bureau acknowledges
financial institutions’ concern about the
litigation and reputational risks
involving section 1071 data, the Bureau
does not believe that this concern
justifies the exclusion of data from
public disclosure. One of the statutory
purposes of section 1071 is to facilitate
enforcement of fair lending laws, which
authorize enforcement by parties other
than the Bureau.823 Additionally,
section 1071 contemplates that financial
institutions would make their own
application-level data available to the
public, which necessarily entails their
identification.824
Modification techniques generally. In
light of the purposes of section 1071, the
Bureau intends to modify or delete the
1071 data only as needed under the
balancing test prior to public disclosure.
The Bureau recognizes, as explained by
community groups, that modifications,
to varying degrees, may negatively
impact the utility of the data for the fair
lending and business and community
development purposes of the statute.
However, the proposed balancing test is
designed to ensure that decisions to
modify or delete the public applicationlevel 1071 data take these benefits into
account. Below, the Bureau addresses
general issues related to modification
techniques in the context of this
proposal. These techniques are
discussed in greater detail with respect
to specific data points further below.
Where no specific modification
technique is described with respect to
particular data points, the Bureau has
not identified an obvious modification
technique other than potentially
swapping, suppression, or deletion,
which are discussed below under Other
techniques.
While certain information that
directly identifies applicants or related
natural persons generally would not be
collected under the proposal, the
Bureau does not believe this feature of
the proposal would be sufficient to
eliminate privacy risks that would arise
from publishing the data in unmodified
form, as discussed in greater detail
under Risks to Privacy Interests in part
VI.C.4 above. The Bureau also does not
believe that privacy risks can be
adequately resolved through rule
822 See
ECOA section 704B(a).
e.g., ECOA section 706 (providing for
civil liability).
824 See ECOA section 704B(f)(2).
823 See,
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56523
coverage (e.g., using asset thresholds
and exclusions for types of financial
institutions). While some reidentification risk could be reduced by
increasing the number of loans reported
to the Bureau, the Bureau does not
believe the effects of doing so are
necessarily predictable because reidentification risk depends on the
characteristics of the data. Further,
increasing the number of loans would
not address risks of harm or sensitivity
to re-identified applicants or natural
persons. Suggestions for addressing
privacy risks through exemptions are
discussed under Balancing Test Design
in part VI.C.1 above.
Aggregate data. The Bureau does not
intend to address privacy risks for
application-level 1071 data through
aggregate disclosures at this time. As
discussed in the section-by-section
analysis of proposed § 1002.110(a)
above, and as required by section 1071,
the Bureau is proposing to make
available to the public the information
submitted to it by financial institutions
pursuant to proposed § 1002.109,
subject to deletions or modifications
made by the Bureau. As discussed in the
section-by-section analysis of proposed
§ 1002.110(b) above, and as authorized
by the statute, the Bureau may, at its
discretion, compile and aggregate
information submitted by financial
institutions pursuant to proposed
§ 1002.109, and make any compilations
or aggregations of such data publicly
available as the Bureau deems
appropriate. The Bureau initially
anticipates making the data collected
under section 1071 available at the
application level—with appropriate
potential modifications and deletions—
rather than providing aggregate data
with counts and averages for each data
field. The Bureau may consider
releasing aggregated data in the future,
after it determines whether narrower
modifications or deletions could
address privacy risks. The Bureau
received some suggestions to consider
‘‘differential privacy’’ techniques.825
Such techniques are typically used in
connection with aggregate statistics to
reduce the identifiability of more
granular data. The Bureau seeks
comment on whether differential
privacy techniques might be appropriate
for application-level data.
Recoding. The Bureau intends to
consider various methods to ‘‘recode’’
the proposed data fields as necessary
825 Differential privacy provides a way to measure
the contribution of any one record to the aggregate
statistics disclosed in a way that makes reidentification risk easily quantifiable and allows
those involved in the data production to keep reidentification risk under a certain risk tolerance.
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under the balancing test. Recoding
techniques decrease the number of
distinct categories for a data field. In the
context of the 1071 data fields, recoding
would involve providing the value of a
data field in a higher-level category that
increases the number of records within
a given combination. Some data fields
like census tract and NAICS code have
structures that permit recoding without
developing new 1071-specific recoding
categories. For example, if the Bureau
were to determine that the reidentification risk presented by the
census tract data field does not justify
the benefits of unmodified disclosure,
the Bureau could instead provide
geography at the county level, for
example, since census tracts are
designed to be non-overlapping
subdivisions of a county.
The Bureau also intends to consider
recoding through the use of bins or
intervals of values for data fields that, in
unmodified form, would have
continuous values (such as data fields
for amount applied for, amount
approved, gross annual revenue, or
number of workers). Unmodified
continuous data fields can be highly
identifying, depending on the data field,
but binning these values can reduce the
risk of re-identification substantially.
An additional approach for continuous
data fields would be to top- or bottomcode the data field to prevent extreme
values from being released that may be
particularly identifiable. This approach
could be performed alone or in
conjunction with recoding the data into
intervals.
Other techniques. The Bureau might
also consider ‘‘targeted suppression’’
techniques. Targeted suppression makes
certain values of data points unavailable
for records when a certain combination
of values is held by too few records. The
Bureau might consider, for example,
treating certain values of data points as
‘‘not available’’ if the application is the
only small business application from a
particular census tract. Targeted
suppression can be applied in several
ways. One way would be to remove the
value of a field that makes the record
identifiable. For example, if census tract
and NAICS code identify a record, the
microdata could delete the value of the
NAICS code for any applications that
are in cells deemed sensitive. A second
approach could leave the census tract
and NAICS code but suppress the values
of other data points. This method would
reduce the potential harm if the record
were re-identified. A third approach
could be to remove the record from the
dataset entirely. In general, suppression
is a more common approach for
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aggregate data than for application-level
data.
One drawback to targeted suppression
is that it complicates data analysis for
any end user. For example, with respect
to the public application-level 1071
data, a data user would be presented
with millions of rows, but in certain
rows and for certain data points, values
would be missing.826 Another drawback
is that suppression would need to be
done in a way such that the remaining
unmodified data do not provide a user
with the ability to back out the modified
field, sometimes involving
complementary suppression or deleting
values of other applications to ensure
that the missing value cannot be
reengineered. The Bureau seeks
comment on whether targeted
suppression techniques could preserve
the benefits of the public applicationlevel 1071 data, and, if so, what the
Bureau should consider as the
minimum cell size to implement
targeted suppression.
The Bureau seeks comment on other
modification techniques, such as ‘‘data
swapping’’ (sometimes called
‘‘switching’’). Data swapping involves
finding two records that are similar on
several dimensions and swapping the
values for other data fields between the
two records. In effect, data swapping
would require that the Bureau preserve
certain data fields while swapping
others. Another set of techniques for
addressing privacy risks for continuous
data would involve adding ‘‘random
noise’’ to the reported values. For
example, under ‘‘additive noise
techniques,’’ a random value is added to
the existing value of the data field.
Under ‘‘multiplicative noise
techniques,’’ the true value is multiplied
by a random value. The Bureau seeks
comment on whether such techniques
would preserve the benefits of the
public application-level 1071 data. A
drawback to these approaches is that
data would be released with values that
do not match the true values of the
underlying data.827 Data users would
need to take such modifications into
826 Data users would need to carefully understand
the method behind the modifications and plan
analyses to account for the fact that the suppressed
data would necessarily not reflect all small business
loans in a given year.
827 For example, with respect to the amount
applied for data field, a recoding technique would
release the values of the data field in broad
categories, for instance ‘‘$100,000–$150,000.’’ In
such case, the broader category provides less
information but reflects the true value of the
underlying data. Noise addition, by contrast, would
involve the Bureau manipulating (in a standardized
and documented way) the actual values of loan
amount. An application’s loan amount may be
released as $85,000 in the public dataset when the
true value was $78,000.
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account when performing any
analyses.828
The Bureau has considered the SER
recommendation for allowing financial
institutions to identify records that
might present heightened reidentification risk. The Bureau
appreciates this suggestion but is not
proposing it because privacy risks are
likely common to many types of
applicants, related natural persons, and
financial institutions and such risks
should be addressed in a broader
context, such as through this proposal.
The Bureau’s proposed process for
obtaining public input on the balancing
test is discussed under Implementation
of the Balancing Test in part VI.C.2
above.
6. Preliminary Application of the
Balancing Test to Public ApplicationLevel 1071 Data
As explained above, the Bureau does
not yet have data under section 1071
and does not believe that there are
comparable datasets that it could use as
an adequate proxy for 1071 data to
which it could apply the balancing test
at this time. However, as recommended
by the SBREFA Panel, the Bureau is
providing additional detail on how it
would apply the balancing test to the
1071 data fields as set forth in the
proposal.829
In accordance with the proposed
balancing test described above, privacy
risks may not be justified by the benefits
of disclosure if disclosing the data field
in unmodified form would substantially
facilitate the re-identification of
applicants and related natural persons,
or disclose information about an
applicant, related natural persons, or a
financial institution that is not
otherwise public and may be harmful or
sensitive. The Bureau has proposed
modifications or deletions for the
proposed financial institution
identifying information (other than
contact information for natural persons),
and the proposed use of free-form text
for certain data. The Bureau also is
proposing not to disclose the proposed
unique identifier in unmodified form.
However, because the Bureau is not
conducting a full re-identification
analysis at this time, it has not
determined whether the privacy risks of
disclosing the other proposed data fields
828 Even if, for instance with additive random
noise, the data maintain the underlying average
value, users would need to take into account the
change in the variance associated with the
modification. While the Bureau can provide all the
required information to make these adjustments,
they would require a level of data analysis
sophistication that may not be possessed by all
potential users of the eventual 1071 data.
829 See SBREFA Panel Report at 48.
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in unmodified form in the public
application-level 1071 data would be
justified by the benefits of disclosure.
Accordingly, the Bureau has not yet
determined whether data fields—other
than those for the proposed unique
identifier data point, the proposed
financial institution identifying
information, and the proposed free-form
text that would be used to report some
of the data—should be deleted,
modified, or published in unmodified
form.
The Bureau is setting forth its
preliminary analysis below to provide
transparency and obtain public
feedback. The Bureau seeks comment on
its analysis of the public disclosure
benefits and privacy risks for each data
field. Specifically, the Bureau seeks
comment on the following issues with
respect to each data field, individually
or in combination with others: (1)
Whether there are additional benefits of
unmodified public disclosure in light of
the purposes of the statute; (2) whether
disclosure in unmodified form would
reveal additional information that might
be considered harmful or sensitive by an
applicant, related natural person, or
financial institution; and (3) whether
disclosure in unmodified form would
significantly contribute to the risk that
an applicant or related natural person
might be re-identified. The Bureau seeks
comment on other modification
techniques it could use, and whether
deletion would appropriately balance
the benefits of disclosure with privacy
risks.
i. Unique Identifier
Proposed § 1002.107(a)(1) would
require financial institutions to collect
and report an alphanumeric identifier,
starting with the legal entity identifier of
the financial institution, unique within
the financial institution to the specific
covered application, and which can be
used to identify and retrieve the specific
file or files corresponding to the
application for or extension of credit.
Disclosing the unique identifier in the
public application-level 1071 data in
unmodified form would help data users
conducting fair lending analysis or
seeking to identify business and
community development needs or
opportunities. This data field would
allow data users to run analyses that
quickly compare specific records to
detect trends or disparities. The unique
identifier would also provide data users
a way to identify, distinguish, and
organize credit and application data,
which is invaluable for data processing.
Disclosing the unique identifier in the
1071 data in unmodified form by itself
would likely disclose minimal, if any,
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information about an applicant or
related natural person that may be
harmful or sensitive if such person were
re-identified, or that may be harmful or
sensitive to an identified financial
institution. As noted above, section
1071 prohibits financial institutions
from including in 1071 records certain
personally identifiable information that
directly identifies a natural person
applicant or someone connected with
the applicant.830 In addition the Bureau
is proposing to prohibit financial
institutions from reporting information
that would directly identify a small
business. For these reasons, the Bureau
does not expect that the unique
identifier would be considered harmful
or sensitive.
A few industry stakeholders
expressed concern that small businesses
could be identified if application or loan
numbers were added to UCC filings.
Although publicly available datasets do
not presently include the unique
identifier data field, financial institution
legal entity identifiers are publicly
available, and the Bureau is aware of
rare instances in which a loan number
is included in UCC filings. In addition,
as the Bureau noted in its policy
guidance on the disclosure of loan-level
HMDA data, many jurisdictions
publicly disclose real estate transaction
records in an identified form, and the
Bureau believes many financial
institutions include loan numbers on
these publicly recorded documents.831
The Bureau believes inclusion of the
proposed unique identifier, rather than
application or loan numbers, would
limit the possibility of using application
or loan number to match 1071 data to
those publicly recorded documents,
thus reducing risk of re-identification.
However, there is a risk that, after
financial institutions begin to report
data under section 1071, they may
replace the loan numbers currently
assigned to small business loans with
the unique identifier and, if they do, the
unique identifier could be included on
publicly recorded documents.
Especially considering the uniqueness
of the identifiers, this data field on a
publicly recorded document could be
used to match a 1071 record to an
identified public record directly and
reliably.
In light of these potential reidentification risks, the Bureau proposes
not to publish the proposed unique
identifier data field in unmodified form.
The Bureau seeks comment on whether
there are modifications that would
830 ECOA
section 704B(e)(3).
82 FR 44586, 44599 (Sept. 25, 2017); see
also 84 FR 649, 660 (Jan. 31, 2019).
appropriately balance identified privacy
risks and disclosure benefits. The
Bureau is considering the feasibility of
disclosing a separate unique identifier
that the Bureau could create. The
Bureau is also considering deleting the
data field from the public applicationlevel 1071 data, but seeks comment on
whether the proposed deletion would
create challenges for users of the data
and, if so, how the Bureau could
address those challenges other than by
creating a separate unique identifier.
The Bureau notes that some of the
benefits of the unique identifier in
analyzing the data could be achieved
through the Bureau’s proposed
disclosure of LEI, as discussed in part
VI.C.6.xviii below. The Bureau also
notes that the universal loan identifier
reported to the Bureau under HMDA,
which is similar in function to the
proposed unique identifier, is currently
excluded from the public loan-level
HMDA data.832
The Bureau seeks comment on this
analysis as well as its proposal not to
publish the unique identifier in
unmodified form.
ii. Application Date
Proposed § 1002.107(a)(2) would
require financial institutions to collect
and report the date the covered
application was received by the
financial institution or the date shown
on a paper or electronic application
form.
Disclosing application date in the
public application-level 1071 data in
unmodified form would allow data
users to monitor trends over time in
small business lending. Application
date also would provide a disaggregated
piece of temporal data that can be used
to identify seasonality in small business
lending (for example, when combined
with the pricing data fields to show
interest rates charged to applicants over
a specific date range). In fair lending
analyses, application date would
provide data users with the means to
compare level of service (from
application date to action taken date)
and identify potential disparities on a
prohibited basis between applications.
Application date could also act as a
control for factors that may provide a
legitimate explanation for some
disparities, such as interest rates during
different time periods or differences in
general economic conditions or
institutional practices over time.
By itself, disclosing application date
in the 1071 data in unmodified form
would likely disclose minimal, if any,
information about an applicant or
831 See
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related natural person that may be
harmful or sensitive if such person were
re-identified, or that may be harmful or
sensitive to an identified financial
institution. It is conceivable that an
adversary such as a competitor or other
market participant may find it helpful to
understand when a business is seeking
credit; for example, to better understand
the business’s strategy and cash flow
needs. In addition, marketers and
creditors could use this information to
target products to entities recently in the
market for credit, either to deploy new
funds or to refinance out of a current
loan. However, the Bureau does not
believe that disclosing the application
date would otherwise disclose sensitive
information about a small business or its
owner, or any information that would be
used for harmful purposes. Any utility
of this data field for such purposes
would be curtailed by the time lag in
public release of the 1071 data.
The Bureau has not identified
publicly available datasets that include
data fields an adversary could directly
match to the application date field.
However, an adversary may be able to
infer a likely origination date based on
typical time lags between application,
credit decision, and origination,
potentially enabling matching to other
datasets that record these later dates.
If the Bureau determines that
application date should be modified, the
Bureau may consider disclosing the
application date at a higher level; for
example, disclosing the month and year
but not the specific date. In light of the
potential re-identification risk arising
from this data field, the Bureau seeks
comment on whether there are other
specific modifications it should
consider, and whether deletion would
balance the risks and benefits of
disclosure.
The Bureau seeks comment on this
analysis.
iii. Application Method and Application
Recipient
Proposed § 1002.107(a)(3) would
require financial institutions to collect
and report the means by which the
applicant submitted the covered
application directly or indirectly to the
financial institution. A financial
institution would report whether the
applicant submitted the application in
person, by telephone, by mail, or online.
Proposed § 1002.107(a)(4) would require
financial institutions to collect and
report whether the applicant submitted
the covered application directly to the
financial institution or its affiliate, or
whether the applicant submitted the
covered application indirectly to the
financial institution via a third party.
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Disclosing application method and
whether the application was submitted
indirectly in the public applicationlevel 1071 data would further the fair
lending enforcement purpose of the
statute. Application method information
would allow the public to better
understand the role of the financial
institution as a creditor and would
facilitate pricing analyses by helping the
public identify potential factors in
pricing outcomes. In addition, proposed
§ 1002.107(a)(20) would require the
collection of race or ethnicity
information for the applicant’s principal
owner(s) using visual observation or
surname in certain circumstances. If the
Bureau finalizes this proposal,
application method information would
provide context for the information
collected.
Information about application method
and whether the application was
submitted directly or indirectly also
would promote the community and
business development purposes of the
statute. This information would
improve the public’s understanding of
the structure of small business lending
originations across the market, the
methods by which credit is originated
for particular groups or underserved
markets, and trends over time (for
example, the extent to which applicant
preferences shift from in-person to
online interactions).
Disclosing application method and
whether the application was submitted
directly or indirectly, in unmodified
form, would likely disclose minimal, if
any, information about an applicant or
related natural person that may be
harmful or sensitive if such person were
re-identified. If applicants or related
natural persons were re-identified,
application method is likely to be of
relatively limited utility to an adversary
because it conveys little information
about a natural person’s characteristics
or a business’s financial condition.
While adversaries interested in targeted
marketing could direct future marketing
efforts to a business using the same
application channel, it is likely that
marketing firms already possess
strategic information about the best
methods for establishing contact.
Unmodified disclosure of application
method and whether the application
was submitted indirectly may reveal
information that financial institutions
regard as harmful or sensitive, but, as
discussed under Risk of Harm or
Sensitivity in part VI.C.4.ii above, the
Bureau does not believe that disclosure
would permit the reverse-engineering of
a financial institution’s proprietary
lending models.
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The Bureau has not identified
publicly available datasets that include
data fields an adversary could directly
match to the application method or
application recipient data fields in
unmodified form in the public
application-level 1071 data with respect
to an applicant or related natural
person. While the Bureau’s HMDA data
and the GSE loan-level datasets include
acquisition channel information in loanlevel data, these datasets do not identify
applicants or related natural persons.
Therefore, an adversary would face
challenges in using application method
or application recipient information to
match a section 1071 record to an
identified publicly available record.
However, the Bureau seeks comment on
whether there are other identifiable
application/loan-level datasets that
include this information or whether
HMDA data or the GSE loan-level
datasets could be matched to other
identifiable datasets.
The Bureau seeks comment on this
analysis.
iv. Credit Type
Proposed § 1002.107(a)(5) would
require financial institutions to collect
and report to the Bureau certain
information about the type of credit
applied for or originated. The proposal
would require financial institutions to
report three categories of information
that together constitute the type of
credit. First, the proposal would require
financial institutions to report the type
of credit product.833 Second, the
proposal would require financial
institutions to report the type or types
of guarantees that were obtained for an
extension of credit, or that would have
been obtained if the covered credit
transaction had been originated.834
Third, the proposal would require
financial institutions to report the
833 A financial institution would be required to
select the credit product requested from the
following list: Term loan—unsecured, term loan—
secured, line of credit—unsecured, line of credit—
secured, credit card, merchant cash advance, other
sales-based financing transaction, other, or not
provided by applicant and otherwise undetermined.
A financial institution reporting ‘‘other’’ would be
required to enter the type of credit product as freeform text. The Bureau analyzes free-form text under
the proposed balancing test in part VI.C.6.xix
below.
834 A financial institution would be required to
select the type of guarantee from the following list:
Personal guarantee—owner(s), personal guarantee—
non-owner(s), SBA guarantee—7(a) program, SBA
guarantee—504 program, SBA guarantee—other,
USDA guarantee, FHA insurance, Bureau of Indian
Affairs guarantee, other Federal guarantee, State or
local government guarantee, other guarantee, or no
guarantee. A financial institution reporting ‘‘other
guarantee’’ would be required to enter the type of
guarantee as free-form text. The Bureau analyzes the
free-form text under the balancing test in a separate
subsection below.
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length of the loan term, in months, if
applicable.
Disclosing data about the type of
credit product, type of guarantee, and
loan term in the public application-level
1071 data in unmodified form would
facilitate enforcement of fair lending
laws by allowing data users to
determine whether any disparities in
underwriting or pricing may be due to
differences in these features of a loan.
Disclosing these data would also be
useful for identifying business and
community development needs. These
data would enable the public to
understand whether certain types of
credit are disproportionately available
to certain groups. For example,
information about the presence or lack
of collateral would provide more
information about lending patterns in
different geographic areas and for
different groups of applicants.
Furthermore, each of the credit type
data fields would help the public avoid
misinterpretations of the 1071 data. In
addition, information on the
distribution of government loan
guarantees (such as those provided in
SBA programs) across different
geographic areas and groups of
applicants could provide information
about how those programs function on
the ground, aiding in fulfilling the
business and community development
purpose of section 1071. Information
about the type of guarantee would also
allow communities, governmental
entities, and creditors to monitor the use
of personal guarantees, which carry
additional risk to the guarantors and
businesses. Finally, information about
loan term would provide insights into
the pricing and sustainability of closedend credit transactions.
The Bureau believes that data about
the type of credit product, type of
guarantee, and loan term could disclose
information that may be harmful or
sensitive to applicants or related natural
persons. A business’s competitors could
use these data fields—in conjunction
with the loan amount and pricing data
fields—to draw inferences about the
business’s financial condition based on
whether the business obtained credit on
favorable or unfavorable terms. The type
of guarantee data fields could indicate
heightened credit risk for the
applicant.835 Credit type data also could
be used for targeted marketing of
products and services that may pose
835 For example, the ‘‘SBA guarantee—7(a)
program’’ data field could indicate heightened
credit risk because this program is intended for
businesses that have been unsuccessfully applying
for credit or have had some other difficulty in
accessing credit.
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risks that are not apparent to the
business or related natural persons.
Disclosure of the type of credit
product, type of guarantee, and loan
term in unmodified form may reveal
information that financial institutions
regard as harmful or sensitive, such as
the types of products they offer or the
government programs in which they
participate. However, as discussed
under Risk of Harm or Sensitivity in part
VI.C.4.ii above, the Bureau does not
believe that disclosure of these data
fields would permit the reverseengineering of a financial institution’s
proprietary lending models.
Furthermore, general information about
the types of credit a financial institution
is offering is widely available on
creditor websites and in marketing
materials.
The Bureau is aware that certain
identified datasets include applicationlevel information on the type of credit
product, type of guarantee, or loan term.
Government lending programs, such as
the SBA’s 7(a) and 504 programs,
publish loan-level data that indicate the
term of the loan and whether the loan
is a term loan or a line of credit. In some
States, UCC filings may include some
information related to the type of
collateral. In the Bureau’s view, the
existing public availability of this
information decreases the potential
harm or sensitivity of disclosing
information about the type of credit
product, type of guarantee, and loan
term in the 1071 data.
The Bureau has identified publicly
available datasets that include data
fields an adversary could directly match
to the credit type data fields in
unmodified form in the public
application-level 1071 data with respect
to an applicant or related natural
person. As noted above, information
about the type of credit product, loan
term, and type of collateral is found in
many publicly available datasets,
including data from government lending
programs and, in some States, UCC
filings. Therefore, in many cases, an
adversary could use this information,
combined with other fields, to match a
section 1071 record to an identified
publicly available record.
If the Bureau determines that the type
of guarantee should be modified, the
Bureau may consider disclosing values
that are more general than the values
reported to the Bureau. For example, the
Bureau could disclose ‘‘Federal
guarantee’’ instead of disclosing the
specific program. If the Bureau
determines that the loan term should be
modified, the Bureau may consider
recoding loan term data into bins—for
example, using intervals of two or five
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years—to reduce the potential for reidentification risk.
The Bureau seeks comment on this
analysis.
v. Credit Purpose
Proposed § 1002.107(a)(6) would
require financial institutions to collect
and report to the Bureau the purpose or
purposes of the credit applied for or
originated.836
Disclosing the purpose of the credit in
the public application-level 1071 data in
unmodified form would facilitate
enforcement of fair lending laws.
Because financial institutions may
generally consider credit used for
certain purposes to be riskier than credit
used for other purposes, data about the
purpose of the credit would help ensure
that users can compare applicants with
similar profiles, thereby controlling for
factors that might provide nondiscriminatory explanations for some
disparities in credit and pricing
decisions. Disclosing data about the
purpose of the credit would also be
useful for identifying business and
community development needs and
opportunities of small businesses.
Information about the purpose of the
credit would help the public understand
whether small businesses face barriers
accessing credit that they would be
seeking to use for a particular purpose.
In conjunction with NAICS code and
census tract, information about the
purpose of the credit could help the
public understand whether small
businesses in certain industries or in
certain communities face unique
challenges accessing credit to, for
example, purchase equipment or
expand their businesses.
Disclosing the purpose of the credit in
the 1071 data in unmodified form by
itself would likely disclose minimal, if
any, information about an applicant or
836 A financial institution would be required to
report the credit purpose or purposes by selecting
the purpose or purposes of the covered credit
transaction applied for or originated from the
following list: Purchase, construction/improvement,
or refinance of owner-occupied dwelling(s);
purchase, construction/improvement, or refinance
of non-owner-occupied dwelling(s); purchase,
construction/improvement, or refinance of nondwelling real estate; purchase, construction/
improvement, or refinance of owner-occupied, nondwelling real estate; purchase, refinance, or
rehabilitation/repair of motor vehicle(s) (including
light and heavy trucks); purchase, refinance, or
rehabilitation/repair of equipment; working capital
(includes inventory or floor planning); business
start-up; business expansion; business acquisition;
refinance existing debt (other than refinancings
listed above); line increase; other; not provided by
applicant and otherwise undetermined; or not
applicable. A financial institution reporting ‘‘other’’
would be required to enter the purpose or purposes
as free-form text. The Bureau analyzes free-form
text under the proposed balancing test in part
VI.C.6.xix below.
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related natural person that may be
harmful or sensitive if such person were
re-identified, or that may be harmful or
sensitive to an identified financial
institution. However, information about
the purpose of the credit could be useful
to adversaries such as a small business’s
competitors, potential acquirers, or new
market entrants, since it contains
information about a business’s strategy
and performance, such as whether a
business is expanding or conducting an
acquisition. Nonetheless, this
information would generally not be
detailed enough to cause small
businesses competitive harm. The value
of this information to a small business’s
competitors is also likely to be mitigated
by the delay between the date of action
taken on a loan and the publication of
the application-level 1071 data.
Disclosure of credit purpose in
unmodified form may also reveal
information that financial institutions
regard as harmful or sensitive, such as
information that a financial institution
offers credit that is used for certain
purposes. However, as discussed under
Risk of Harm or Sensitivity in part
VI.C.4.ii above, the Bureau does not
believe that disclosure would permit the
reverse-engineering of a financial
institution’s proprietary lending models.
The Bureau has not identified
publicly available datasets that include
data fields an adversary could directly
match to the credit purpose data fields
in unmodified form in the public
application-level 1071 data with respect
to an applicant or related natural
person. Identified public datasets
pertaining to small business loans
generally do not contain information
about the purpose of the credit.
Therefore, an adversary would have
difficulty using the credit purpose data
fields to match a section 1071 record to
an identified publicly available record
accurately.
The Bureau seeks comment on this
analysis.
vi. Amount Applied for
Proposed § 1002.107(a)(7) would
require financial institutions to collect
and report to the Bureau the initial
amount of credit or the initial credit
limit requested by the applicant.
Disclosing amount applied for in the
public application-level 1071 data in
unmodified form would help facilitate
enforcement of fair lending laws by
allowing data users to control for other
variables in the data. Several industry
representatives expressed concern that
these data could lead to
misinterpretations based on perceived
disparate treatment as opposed to the
complex nature of commercial lending.
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For example, financial institutions may
consider different or additional
underwriting criteria, depending on the
amount applied for. Applications for
large lines of credit might require an indepth cash-flow analysis, while a
smaller line of credit may be
underwritten, in part, based on a
business’s (or business owner’s) credit
scores. In conjunction with amount
approved or originated, this data field
would allow data users to determine the
difference between the amount an
applicant requested, and the amount
approved or originated. This
information would also help data users
identify potentially discriminatory
lending patterns and distinguish them
from legitimate business factors when
combined with other data. This type of
information is important to consider in
fair lending analyses since the amount
applied for may affect the likelihood of
denial or the price of an approved loan.
Amount applied for would also help
data users understand lending
disparities. For example, data users
would be able to identify potential fair
lending violations where certain small
businesses disproportionately receive
less credit than applied for on a
prohibited basis. Finally, the amount
applied for would help communities,
governmental entities, and creditors
monitor the demand for credit.
Specifically, when combined with
NAICS code and census tract, the
amount applied for could help data
users assess the demand for credit in
particular industries and communities
and enable data users to devise
strategies for narrowing or eliminating
potential inequalities.
Disclosing amount applied for in the
1071 data in unmodified form would
likely disclose information about an
applicant or related natural person that
may be harmful or sensitive if such
person were re-identified. Business
owners might view details about the
amount applied for as sensitive,
particularly where they are concerned
about the risk of being re-identified as
an applicant for credit. In addition, the
amount applied for could also lead to
targeted marketing of products or
services that pose risks that are not
apparent, because it could help lenders
target small businesses that received
less credit than they requested with
offers for loans at higher rates or fees.
The amount applied for is generally not
included in other publicly available
data, so it would likely not be useful to
adversaries seeking to match 1071 data
with other publicly available data.
However, the Bureau believes amount
applied for would be useful to an
adversary. For example, a significant
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shortfall between the amount applied
for and the amount approved could be
used either by an applicant’s competitor
or by a consumer, to infer that the
business has a relatively weak financial
position. With information on whether
or not a business is granted a loan, an
adversary might gain insight into the
scale of a business’s objectives based on
the amount applied for and/or
approved. The relative scarcity of this
information at present would also
increase the value to adversaries of reidentification. In addition, as discussed
under Risk of Harm or Sensitivity in part
VI.C.4.ii above, the Bureau does not
believe that disclosure would permit the
reverse-engineering of a financial
institution’s proprietary lending models.
The Bureau has not identified
publicly available datasets that include
data fields an adversary could directly
match to the amount applied for data
field in unmodified form in the public
application-level 1071 data with respect
to an applicant or related natural
person.
If the Bureau determines that the
amount applied for should be modified,
the Bureau may consider recoding the
data into bins. For example, the Bureau
could recode the amount applied for
into bins of $25,000.
The Bureau seeks comment on this
analysis.
vii. Amount Approved or Originated
Proposed § 1002.107(a)(8) would
require financial institutions to collect
and report to the Bureau: (i) For an
application for a closed-end credit
transaction that is approved but not
accepted, the amount approved by the
financial institution; or (ii) for a closedend credit transaction that is originated,
the amount of credit originated; or (iii)
for an application for an open-end credit
transaction that is originated or
approved but not accepted, the amount
of the credit limit approved.
Disclosing amount approved or
originated in the public applicationlevel 1071 data in unmodified form
would allow users to identify
potentially discriminatory lending
patterns in which small business
applicants might be receiving less credit
due to a prohibited basis. These data
would also enable data users to devise
strategies for narrowing or eliminating
these inequalities. Additionally, in
conjunction with amount applied for,
disclosure of these data fields would
allow data users to determine if there is
a difference between the amount
requested and the amount approved or
originated. This information would help
data users identify any potentially
discriminatory lending patterns in
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which small businesses might
disproportionately receive less credit
than what they applied for on a
prohibited basis. As described above,
when combined with the amount
applied for, these data also could
provide significant value as a control in
fair lending analysis. Additionally, due
to the sometimes complex nature of
underwriting in commercial lending,
when combined with credit purpose
these data would allow users to identify
potential discrimination when
comparing loan applications for similar
purposes.
The amount approved or originated
would also be useful for business and
community development purposes.
Disparities with respect to the provision
of credit can significantly impede the
growth of women-owned and minorityowned businesses. When combined
with census tract, these data could help
users understand whether womenowned and minority-owned businesses
are experiencing issues accessing credit
in their communities (separate from the
question of whether potential fair
lending violations are occurring). When
combined with NAICS codes, these data
could help users understand whether
women-owned and minority-owned
businesses in particular industries are
struggling to access credit. In addition,
these data would allow data users to
approximate the size of the small
business lending market.
Like the amount applied for data
field, disclosing amount approved or
originated in the 1071 data in
unmodified form would likely disclose
information about an applicant or
related natural person that might be
harmful or sensitive if such person were
re-identified, or that might be harmful
or sensitive to an identified financial
institution. The Bureau believes that
information about the amount approved
or originated could be useful to
potential adversaries. For example, for
creditors, these data fields would
provide some insight into competitors’
lending practices, particularly when
combined with other data points such as
gross annual revenue, number of
workers, time in business, and pricing.
These data might allow creditors to
make general inferences about the
relative risk appetites of their
competitors. However, as discussed
under Risk of Harm or Sensitivity in part
VI.C.4.ii above, the Bureau does not
believe that disclosure would permit the
reverse-engineering of a financial
institution’s proprietary lending models.
The Bureau has identified publicly
available datasets that include data
fields an adversary could directly match
to the amount approved or originated
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data fields in unmodified form in the
public application-level 1071 data with
respect to an applicant or related natural
person. Credit amount approved or
originated is often widely available in
public datasets, such as loan-level data
for the SBA 7(a) and 504 programs, as
well as property records and UCC
filings. Therefore, in unmodified form,
adversaries would be able to match the
amount of credit approved or originated
to an existing public record.
If the Bureau determines that the
amount approved or originated should
be modified, the Bureau may consider
recoding the data into bins. For
example, the Bureau could recode the
data into bins of $25,000.
The Bureau seeks comment on this
analysis.
viii. Action Taken (Type) and Denial
Reasons
Proposed § 1002.107(a)(9) and (11)
would require financial institutions to
collect and report to the Bureau the
action taken by the financial institution
on the covered application, reported as
originated, approved but not accepted,
denied, withdrawn by the applicant, or
incomplete; and if applicable, for
denied applications, the principal
reason or reasons the financial
institution denied the covered
application.837
Disclosing action taken and denial
reasons in the public application-level
1071 data in unmodified form would
provide important data on credit
outcomes for small businesses,
including women-owned and minorityowned small businesses, that apply for
credit. Data provided by these data
fields would allow data users to
examine the rates of originations,
approvals, denials, and incomplete and
withdrawn applications, and whether
they differ among groups protected
under ECOA. Of the stakeholders that
provided feedback on this issue, several
supported the collection of action taken
and denial reason data in order to track
demand for credit and identify potential
discrimination. Information that credit
was originated or was approved, but not
accepted, would help data users
837 As discussed in the section-by-section analysis
of proposed § 1002.107(a)(12) above, the list of
denial reasons would include the following:
Business credit characteristics, personal credit
characteristics (of business owner(s) or
guarantor(s)), use of loan proceeds (i.e., a nonpermissible purpose), cash flow, collateral
(insufficient or inappropriate or unacceptable), time
in business, government criteria, aggregate exposure
of business and its principal owner(s), unverifiable
information, other, or not applicable. A financial
institution reporting ‘‘other’’ would be required to
enter the denial reason or reasons as free-form text.
The Bureau analyzes free-form text under the
proposed balancing test in part VI.C.6.xix below.
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determine whether there are potential
disparities in the terms and conditions
received by women-owned and
minority-owned small businesses.
Information that an application was
incomplete or withdrawn would
highlight potential issues of
discouragement, level of assistance
disparities, or other discriminatory
treatment that could cause womenowned or minority-owned small
businesses to walk away from the
lending process or otherwise fail to
complete the application. One
commenter stated that capturing
incomplete and withdrawn applications
was important as it may reflect
discouragement or discriminatory
treatment, and that the approved but not
accepted category could reflect less
favorable pricing or loan terms. For
example, when combined with amount
approved or originated, data users could
also identify issues of possible
discouragement where lenders have
potentially under-funded loan
applications from women-owned and
minority-owned businesses.
Denial reasons would help data users
examine reasons for credit denials
particularly for women-owned and
minority-owned businesses. For
example, when combined with action
taken date, denial reasons could help
identify potential denial reasons
disproportionately affecting protected
classes, which may be useful to identify
discrimination and enable data users to
potentially develop strategies for
narrowing or eliminating inequalities.
These data would also be useful as a
way to compare similarly situated
applicants, which could be useful to
both identify and explain potential
disparities. Disclosing action taken and
denial reasons would also be useful for
business and community development
purposes. The type of action taken
would provide insights into the supply
of credit. Data users would be able to
monitor rates of credit denial, which
can provide information on the
willingness of creditors to lend, when
combined with other data. Granular
denial reason codes would also provide
useful actionable information to small
business applicants generally. For
example, where small businesses are
denied loans because of insufficient
collateral, or time in business, data
users could help direct programs and
investment targeted specifically to these
businesses in a particular community.
When combined with census tract,
analysis of denial reasons by
geographical area could help identify
whether small businesses in certain
areas are experiencing higher rates of
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denial and the specific reasons for
denial.
During the SBREFA process,
stakeholders commented that disclosure
of denial reasons would be embarrassing
for applicants and might discourage
them from applying for credit.838
Several industry commenters believed
that reporting reasons for denial would
reveal information that would be very
harmful or sensitive for businesses or
natural persons. The Bureau agrees that
this information could be harmful or
sensitive for applicants or related
natural persons.
Commenters also described
sensitivities associated with originated
loans, such as concerns that some small
business owners could be reluctant to be
perceived as needing credit in the first
place. One industry stakeholder
believed that disclosure of action taken
would allow competitors to reverse
engineer a financial institution’s credit
scoring model. The Bureau does not
believe disclosing the fact that credit
was sought, in and of itself, likely
would be harmful or sensitive to small
businesses because credit is widely used
by small businesses. Furthermore, the
harm or sensitivity of disclosing
information that credit was originated is
mitigated by the publication of
originated loan details in UCC filings,
for instance. Additionally, as discussed
under Risk of Harm or Sensitivity in part
VI.C.4.ii above, the Bureau does not
believe that disclosure of action taken
would permit the reverse-engineering of
a financial institution’s proprietary
lending models.
The Bureau has not identified
publicly available datasets that include
data fields an adversary could directly
match to data fields for denied
applications (and reasons for denial) in
unmodified form in the public
application-level 1071 data with respect
to an applicant or related natural
person. However, at a category level,
these data fields could tell adversaries
which records it may be possible to
match against other databases that
include originated loans, as opposed to
unoriginated loan records that cannot be
matched in this way. Credit denials or
credit offered but not originated are
generally not disclosed to the public.
Specifically, most of these data fields
included in this data point are not
found in publicly available sources of
records that contain the identity of an
applicant; the only data field that would
be consistently available would be for
originated loans. Without such an
identified publicly available record to
match with, there would likely be
838 See
SBREFA Panel Report at 34–35.
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difficulty in attempting to re-identify an
applicant by matching a 1071 record
using these data fields.
However, as discussed under ReIdentification Risk in part VI.C.4.i
above, adversaries may be able to use
other data fields, such as census tract,
NAICS code, and identified public
information, such as business
directories, to determine the identity of
an applicant or related natural person.
Thus, if applicants and related natural
persons could be re-identified, an
adversary could learn information about
application denials for these businesses
and use this information for a variety of
purposes.
The Bureau seeks comment on this
analysis. In light of the potential harm
or sensitivity arising from the disclosure
of application denials and the reasons
for denial, the Bureau seeks comment
on whether there are specific
modifications it should consider, and
whether modifying these data fields by
grouping them, or deleting these data
fields, would appropriately balance the
privacy risks and benefits of disclosure,
in light of the purposes of section 1071.
ix. Action Taken Date
Proposed § 1002.107(a)(10) would
require financial institutions to collect
and report the date of the action taken
by the financial institution.
Disclosing action taken date in the
public application-level 1071 data in
unmodified form would allow data
users to monitor trends over time in
small business lending more precisely
than they could if only the year were
disclosed.839 When combined with
application date, information about the
date of action taken would enable data
users to determine the length of time,
for different groups, between when
businesses applied for credit and when
they received the credit decision. This
information would have benefits for fair
lending analysis, allowing data users to
determine whether certain groups
experience different processing times
(for example, longer processing for
women-owned business, or faster
denials for minority-owned businesses).
The action taken date also would help
ensure that users evaluating potential
disparities in pricing or other terms and
conditions can compare applicants that
obtained loans on similar dates, thereby
controlling for factors that might
provide a legitimate explanation for
some disparities, such as different
market interest rates or different
839 Whether or not the Bureau discloses the date
of action taken, the application-level data will
indicate the year in which action was taken,
because the 1071 data would be disclosed annually
based on the date of action taken.
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institutional practices over different
time periods.
Disclosing action taken date in the
1071 data in unmodified form would
likely disclose minimal, if any,
information about an applicant or
related natural person that may be
harmful or sensitive if such person were
re-identified, or that may be harmful or
sensitive to an identified financial
institution.
The Bureau has identified publicly
available datasets that include data
fields an adversary could directly match
to the action taken date data field in
unmodified form in the public
application-level 1071 data with respect
to an applicant or related natural
person. Public availability of the action
taken date depends on the type of action
taken. For example, the approval date of
originated loans is widely publicly
available in SBA 7(a), 504, and other
program loan-level records that identify
borrowers, and the date of executed
agreements is often available for
property records and UCC filings, which
could be closely related to action taken
date. For originated loans, action taken
date would substantially facilitate
matching with publicly available
datasets that identify borrowers.
Additionally, the 1071 data could
identify the lender as well as the
application date and action taken date.
Where action taken date is on or near
the UCC filing date, for example, an
adversary might be able to use the date
and lender on the UCC filings to
identify the borrowers of originated
loans in the eventual 1071 data. Action
taken date may be less useful in reidentifying applicants of loans that were
not originated because the action taken
date for such loans is rarely publicly
available.
If the Bureau determined that action
taken date should be modified, the
Bureau may consider disclosing the date
at a higher level; for example, disclosing
the month in which action was taken,
but not the specific date. This could
reduce the re-identification risk from
sources such as UCC filings that may
include the specific date of action taken.
In light of the potential re-identification
risk arising from this data field, the
Bureau seeks comment on whether there
are other specific modifications it
should consider and whether deletion
would balance the risks and benefits of
disclosure.
The Bureau seeks comment on this
analysis.
x. Pricing Information
Proposed § 1002.107(a)(12) would
require financial institutions to collect
and report to the Bureau the following
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information regarding the pricing of a
covered credit transaction that is
originated or approved but not accepted,
as applicable: (i) The interest rate; 840 (ii)
total origination charges, defined as the
total amount of all charges payable
directly or indirectly by the applicant
and imposed directly or indirectly by
the financial institution at or before
origination as an incident to or a
condition of the extension of credit; (iii)
broker fees, defined as the total amount
of all origination charges that are fees
paid by the applicant directly to a
broker or to the financial institution for
delivery to a broker; (iv) initial annual
charges, defined as the total amount of
all non-interest charges that are
scheduled to be imposed over the first
annual period of the covered credit
transaction; (v) additional costs for
merchant cash advances or other salesbased financing, defined as, for a
merchant cash advance or other salesbased financing transaction, the
difference between the amount
advanced and the amount to be repaid;
and (vi) prepayment penalties.841
The Bureau believes that these pricing
data fields would serve to further both
the fair lending purpose and the
business and community development
purpose of section 1071. The statutory
data points alone offer limited insight
into underwriting disparities and no
insight into predatory prices or pricing
disparities. For example, the statutory
data points alone might show that a
particular market segment is expanding
and apparently filling an important
need, but this could actually be an area
with predatory conduct. Pricing
information would allow the Bureau
and others to understand the situation
more accurately. Data collection without
840 If the interest rate is fixed, the proposal would
require the financial institution to report the
interest rate that is or would be applicable to the
covered credit transaction. If the interest rate is
adjustable, the proposal would require the financial
institution to report the margin, index value, and
index name that is or would be applicable to the
covered credit transaction at origination. The
proposal would also require the financial
institution to report the index used by selecting the
index used from a specified list. If the index used
does not appear on the list of indices provided, the
financial institution would report ‘‘other’’ and
provide the name of the index as free-form text. The
Bureau analyzes free-form text under the proposed
balancing test in part VI.C.6.xix below.
841 The proposal would require the financial
institution to report whether the financial
institution could have included a charge to be
imposed for paying all or part of the transaction’s
principal before the date on which the principal is
due under the policies and procedures applicable
to the covered credit transaction. The proposal also
would require the financial institution to report
whether the terms of the covered credit transaction
include a charge imposed for paying all or part of
the transaction’s principal before the date on which
the principal is due.
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pricing information could have the
unintended consequence of
incentivizing irresponsible lending, as
providers seeking to increase
representation of underserved groups
could be encouraged to adopt high-cost
models of lending.
Without information on pricing, data
users would be unable to screen for fair
lending pricing risks and prioritize fair
lending enforcement resources. In
addition, if potential discriminatory
conduct is monitored effectively with
regard to loan approvals, but not with
regard to pricing, industry compliance
systems may focus solely on approvals
and denials and ignore potential pricing
disparities. Having pricing data
available in the public application-level
1071 data would also increase
transparency and demonstrate to
responsible lenders where business
opportunities exist to offer credit to
underserved markets. Pricing data could
also help small businesses identify
where credit may be available on better
terms. The Bureau provides additional
analysis of the benefits of the pricing
data fields in the section-by-section
analysis of proposed § 1002.107(a)(12)
above, including proposed
§ 1002.107(a)(12)(i) through (vi).
During the SBREFA process, several
industry commenters expressed concern
that pricing data could lead financial
institutions to artificially flatten prices
or create misperceptions about
disparities among applicants, in light of
the complexity of underwriting
decisions. One industry commenter
stated that pricing data could present
‘‘privacy risk’’ to applicants in rural
communities, without specifying the
nature of the risk. Several SERs stated
that pricing data may be sensitive to
financial institutions. One of these SERs
suggested that even aggregate pricing
information would be commercially
sensitive data for a financial institution.
While acknowledging other SERs’
concerns, a few SERs stated that
information on competitors’ pricing is
relatively easy to obtain now.
The Bureau believes that information
about the interest rates and fees charged
in connection with credit represents
basic information about the features of
a product generally would present low
risk of harm or sensitivity. Disclosure of
pricing data in unmodified form may
reveal information that some applicants
or related natural persons may regard as
harmful or sensitive, such as a reflection
of their perceived credit risk. However,
the Bureau received feedback during the
SBREFA process that multiple factors
contribute to pricing for small business
credit. Disclosure of pricing data in
unmodified form may also reveal
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information that financial institutions
regard as harmful or sensitive, such as
the prices a financial institution charges
for certain types of credit. However, as
discussed under Risk of Harm or
Sensitivity in part VI.C.4.ii above, the
Bureau does not believe that disclosure
of pricing information would permit the
reverse-engineering of a financial
institution’s proprietary lending models.
The Bureau has identified publicly
available datasets that include data
fields an adversary could directly match
to the pricing data fields in unmodified
form in the public application-level
1071 data with respect to an applicant
or related natural person. Identified data
about the interest rate and fees charged
for a given loan are available from a
limited number of publicly available
datasets, such as data for the SBA 7(a)
and 504 programs. Additionally, the
PPP loan program has a uniform 1
percent interest rate.
During the SBREFA process, one
industry stakeholder stated that, if
pricing data are collected, the Bureau
should publish them along with
demographic information only in
aggregate form, such as at an industry or
multi-firm level, rather than the
application level. The commenter stated
that publication of pricing information
along with demographic information
risks creating the perception of potential
fair lending violations that are not based
on adequate analysis. The Bureau notes
that 1071 data alone (including pricing
data) generally could not be used to
determine whether a lender is
complying with fair lending laws. For
example, HMDA data have a long
history of utility for fair lending
purposes even though they alone
generally do not offer proof of
compliance with fair lending laws.
Additionally, in the section-by-section
analysis of proposed § 1002.107(a)(12)
above, the Bureau seeks comment on
additional information that could help
reduce misinterpretations of disparities
in pricing, including modifications to
the pricing information under proposed
§ 1002.107(a)(12).
If the Bureau determines that pricing
data should be modified, the Bureau
may consider recoding the pricing
information data fields into bins. For
example, the Bureau may consider
recoding interest rates into bins of 0.25
percentage points or origination fees
into bins of $500. The Bureau may also
consider top-coding pricing data fields,
which would mask particularly high
values.
The Bureau seeks comment on this
analysis.
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xi. Census Tract
Proposed § 1002.107(a)(13) would
require financial institutions to collect
and report the census tract in which is
located: (1) The address or location
where the proceeds of the credit applied
for or originated will be or would have
been principally applied; or, (2) if this
information is unknown, the address or
location of the main office or
headquarters of the applicant; or, (3) if
this information is also unknown,
another address or location associated
with the applicant. In addition to
reporting the census tract, the financial
institution would be required to
indicate which one of these three types
of addresses or locations the census
tract is based on.
Disclosing census tract data in the
public application-level 1071 data in
unmodified form would aid in fulfilling
both the fair lending and business and
community development purposes of
section 1071 by providing more useful
information on the location of the credit
activity for fair lending analysis and
understanding where the business and
community development is occurring.
With respect to fair lending
enforcement, a measure of geography at
the neighborhood or community level is
necessary to identify redlining—the
illegal practice in which those in a
certain area or neighborhood are denied
access to credit, are charged higher
prices, or are otherwise not given the
same access to credit as those in other
areas, on the basis of race or for some
other prohibited reason. Additionally,
because differences in the level of
competition in the local credit market
may contribute to differences in interest
rates or approval rates for otherwise
similarly situated small businesses,
census tract data would help ensure that
users can compare applicants with
similar profiles, thereby controlling for
factors that might provide nondiscriminatory explanations for some
disparities in credit and pricing
decisions.
The inclusion of a geographic
indicator, such as census tract, that
identifies the appropriate community—
not merely the appropriate county or
State—would further the statute’s
community and business development
purposes. Census tract data would
enable data users to monitor credit
conditions in particular communities
and identify communities that are
underserved by the small business
credit market. In addition, requiring
data on the nature of the address
reported would aid in fulfilling both the
fair lending and business and
community development purposes of
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section 1071 by facilitating accurate
analyses of the data reported.
Disclosing the census tract in the 1071
data in unmodified form would likely
disclose minimal, if any, information
about an applicant or related natural
person that may be harmful or sensitive
if such person were re-identified, or that
may be harmful or sensitive to an
identified financial institution. The
Bureau is aware that, for sole
proprietors, the main office address of
small business applicants is frequently
a home address. However, the actual
street address would not be reported or
disclosed. In addition, small businesses
commonly make their locations
available in the normal course of their
business by disclosing their addresses.
If the address reflects where the
proceeds of the credit will be or would
have been principally applied,
disclosing the census tract may reveal
some information about an applicant’s
business strategy, particularly if paired
with the loan purpose data field. For
example, the data could indicate that a
small business is pursuing or was
pursuing an expansion to a particular
address. However, the value of this
information to a small business’s
competitors is likely to be mitigated by
the delay between the date of action
taken on a loan and the publication of
the application-level 1071 data.
Disclosure of the census tract in
unmodified form may also reveal
information that financial institutions
regard as harmful or sensitive, such as
a financial institution’s trade area.
However, as discussed under Risk of
Harm or Sensitivity in part VI.C.4.ii
above, the Bureau does not believe that
disclosure would permit the reverseengineering of a financial institution’s
proprietary lending models.
During the SBREFA process, several
industry stakeholders stated that
geographic identifiers such as census
tract would have a high potential to
contribute to the re-identification of
businesses or natural persons, especially
in small towns or rural areas, where
only one or two businesses may be
located in a census tract. Several
industry commenters expressed concern
about re-identification risks arising from
the combination of the census tract data
fields with other data fields, noting that
it might be difficult to predict which
data fields could contribute to reidentification. One commenter stated
that tax assessor and UCC records could
be used to re-identify businesses in rural
areas, and that adversaries with
personal knowledge of businesses in
rural areas could learn about a
business’s or natural person’s sensitive
financial characteristics. Some SERs
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stated that the combination of
geographic identifiers and information
about a small business’s industry could
make it easy to re-identify businesses in
remote or rural areas.842 Two industry
stakeholders stated that census tract and
data about the type and purpose of
financing would contribute to the reidentification of businesses or natural
persons. One of these commenters also
stated that combining geographic
identifiers with data on the amount
applied for or approved could
contribute to re-identification. One
industry commenter stated that census
tract, combined with gross annual
revenue and NAICS code, could
facilitate re-identification of applicants
in areas with low populations. A
community group stakeholder stated
that increasing the universe of financial
institutions reporting 1071 data would
mitigate privacy concerns about
disclosing census tract.
The Bureau has identified publicly
available datasets that include data
fields an adversary could directly match
to the census tract data field in
unmodified form in the public
application-level 1071 data with respect
to an applicant or related natural
person. The Bureau expects that, in
most cases, the census tract that
financial institutions would report to
the Bureau would be based on the
address or location of the main office or
headquarters of the applicant, either
because that is where the proceeds of
the credit will be applied or because the
financial institution does not know the
location or address where the proceeds
of the credit will be applied, but does
know the main office or headquarters
address. The Bureau believes that, for
many small businesses, this address or
location is likely to be publicly available
on the internet from sources such as the
business’s website and review websites.
Information about a business’s location
is also likely available from loan-level
data for public loan programs as well as
from private datasets, such as from data
brokers. Therefore, in many cases, the
Bureau believes an adversary could use
the census tract data fields, combined
with other fields, to match a section
1071 record to an identified publicly
available record.
Disclosing the census tract is likely to
produce unique instances in the data—
particularly when combined with the 6digit NAICS code, if the 6-digit NAICS
code is disclosed in unmodified form.
There are currently 73,057 census tracts
and 1,057 6-digit NAICS codes,843
842 See
SBREFA Panel Report at 34–35.
U.S. Census Bureau, 2010 Census Tallies,
https://www.census.gov/geographies/reference843 See
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which produce over 77 million
combinations. With so many possible
combinations, there would likely be
many instances in the 1071 data where
the census tract and 6-digit NAICS code
form a unique combination. Regarding
the comment that increasing the
universe of financial institutions
reporting 1071 data would mitigate
privacy concerns about disclosing
census tract, the Bureau’s proposals
regarding the coverage of the 1071 rule
are addressed elsewhere in this
proposed rule.
During the SBREFA process, several
commenters suggested ways the Bureau
might modify census tract data to
reduce privacy risk. Several industry
commenters recommended that the
Bureau disclose geographical data on
the county or State level to reduce reidentification risk. One SER
recommended the reporting of
geographic data only at the State level
or higher. The SER stated that even
county-level data in some areas could
potentially lead to re-identification of
applicants or borrowers.
A joint comment from a number of
community groups recommended that
the Bureau consider modifying data
with a low number of observations in a
census tract to be reported at the zip
code or county level. One SER
recommended that the Bureau establish
a minimum sample size before
publishing application-level data for
some rural markets to avoid privacy
risks. A community group stakeholder
recommended masking techniques such
as moving data from a census tract with
few observations to a contiguous or
nearby census tract. This commenter
also recommended that the Bureau
consider switching records for similarly
situated applicants between nearby
census tracts to make it impossible to
reconnect individual applicants while
preserving the benefits of the data.
If the Bureau were to modify census
tract, it might consider disclosing a
broader location category, such as
county or State. Census tracts are
defined by the U.S. Census Bureau, and
the next-largest geographic identifier in
the Census Bureau’s hierarchy of
geographic identifiers is county. The
next-largest geographic identifier after
county is State. While likely reducing
re-identification risk substantially,
disclosing the county or State instead of
the census tract would also reduce the
utility of the 1071 data. There are 73,057
files/time-series/geo/tallies.html (last visited Aug.
23, 2021) (2010 Census Tallies) (number of census
tracts); Off. of Mgmt. & Budget, North American
Industry Classification System (NAICS) Updates for
2022, 86 FR 35350, 35352 (July 2, 2021) (number
of 6-digit NAICS codes).
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census tracts, as noted above, but only
3,143 counties,844 suggesting a
significant loss of geographic detail in
modifying census tract. The Bureau
could potentially use a geographic
designation larger than census tract but
smaller than county. However, since the
use of Census Bureau-defined
geographies is widespread, using
modifications that already reflect
standard Census Bureau-defined
geographies significantly improves the
utility of the data to data users.
The Bureau seeks comment on this
analysis. The Bureau seeks comment on
how disclosing the county, State, or
some other geographic identifier—rather
than the census tract—would affect the
benefits of disclosure, the potential for
harm or sensitivity, and the potential for
re-identification of applicants or related
natural persons.
xii. Gross Annual Revenue
Proposed § 1002.107(a)(14) would
require financial institutions to collect
and report to the Bureau the gross
annual revenue of the applicant for its
preceding full fiscal year prior to when
the information is collected.
Disclosing gross annual revenue in
the public application-level 1071 data in
unmodified form would facilitate
enforcement of fair lending laws. Many
creditors use gross annual revenue to
help define whether a business is a
small business and set revenue
thresholds for assigning risk.
Information about gross annual revenue
would help ensure that users who are
evaluating potential disparities in
underwriting or pricing can compare
small businesses with similar revenues,
thereby controlling for a factor that
might provide a legitimate explanation
for some disparities. Disclosing gross
annual revenue would also be useful for
identifying business and community
development needs and opportunities of
small businesses. And because gross
annual revenue is often used as a proxy
for the size of a small business, these
data could allow users to determine the
availability of credit for small
businesses of various sizes—including
the very smallest businesses, which may
face unique challenges accessing credit.
Disclosing gross annual revenue in
the 1071 data in unmodified form
would likely disclose information about
an applicant or related natural person
that may be harmful or sensitive if such
person were re-identified. One SER
stated during the SBREFA process that,
in the case of sole proprietorships, gross
annual revenue can serve as a proxy for
the small business owner’s personal
844 See
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56533
income. The Bureau believes that
disclosing gross annual revenue in
unmodified form would likely disclose
sensitive information because it could
reflect the financial condition of a small
business or, where a small business is
a sole proprietorship, a natural person.
With respect to the risk of harm or
sensitivity to financial institutions,
other creditors might use gross annual
revenue data to learn more about the
types of small businesses with which
their competitors do business. However,
as discussed under Risk of Harm or
Sensitivity in part VI.C.4.ii above, the
Bureau does not believe that disclosure
would permit the reverse-engineering of
a financial institution’s proprietary
lending models.
Gross annual revenue data are likely
to be of interest to potential adversaries.
As described below, gross annual
revenue data are not available on a
widespread basis from identified public
databases. Competitors of the small
business, other commercial entities,
creditors, researchers, or persons with
criminal intent all may have an interest
in using these data to monitor the size
or performance of an applicant that may
be a rival, partner, or target of inquiry,
investigation, or illegal activity.
The Bureau has identified publicly
available datasets that include data
fields an adversary could directly match
to the gross annual revenue data field in
unmodified form in the public
application-level 1071 data with respect
to an applicant or related natural
person. Gross annual revenue data are
available from private databases. Gross
annual revenue data are also available
from data for New York State’s womenand minority-owned business
certification program, in which it is
recoded into bins. However, these data
are not available from identified public
databases on a widespread basis.
During the SBREFA process, a
community group stakeholder
recommended that the Bureau consider
reporting gross annual revenue in
categories rather than specific amounts.
An industry commenter recommended
that the Bureau delete gross annual
revenue from the public applicationlevel 1071 data to protect the privacy of
an applicant or related natural person.
If the Bureau determines that gross
annual revenue should be modified, the
Bureau may consider recoding gross
annual revenue data into bins by, for
example, disclosing the data in ranges of
$25,000. The Bureau may also consider
top-coding gross annual revenue, which
would mask particularly high values,
thereby reducing the identifiability of
application data from businesses with
especially high gross annual revenue.
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The Bureau seeks comment on this
analysis.
xiii. NAICS Code
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Proposed § 1002.107(a)(15) would
require financial institutions to collect
and report to the Bureau a 6-digit North
American Industry Classification
System (NAICS) code appropriate for
the applicant.845
Disclosing 6-digit NAICS codes in the
public application-level 1071 data in
unmodified form would be useful for
identifying business and community
development needs and opportunities of
small businesses. Such business and
community development needs and
opportunities may differ widely based
on industry, even controlling for other
factors. For example, 6-digit NAICS
codes would help data users understand
how small businesses in different
industries use credit as well as identify
industries in which small businesses
face challenges accessing credit.
Furthermore, disclosing NAICS codes
would provide for consistency and
compatibility with other public datasets
related to small business lending
activity, which generally use NAICS
codes. This ability to synthesize 1071
data with other datasets would help the
public use the data in ways that would
advance both the fair lending and
business and community development
purposes of section 1071.
Disclosing 6-digit NAICS codes in the
1071 data in unmodified form would
also facilitate enforcement of fair
lending laws in other ways. Financial
institutions often designate certain
industries as high-risk, such as
industries that have high rates of
businesses leaving the market or that
deal primarily in cash transactions. The
6-digit NAICS codes would help ensure
that users can compare applicants with
similar profiles, thereby controlling for
factors that might provide nondiscriminatory explanations for some
disparities in credit and pricing
decisions. The Bureau also believes that
845 As discussed above in the section-by-section
analysis of proposed § 1002.107(a)(15), the SBA
customizes its size standards on an industry-byindustry basis using 1,057 6-digit NAICS codes. The
first two digits of a NAICS code broadly capture the
industry sector of a business. The third digit
captures the industry’s subsector, the fourth
captures the industry group, and the fifth captures
the industry code. The NAICS code thus becomes
more specific as digits increase and the 6-digit long
code is the most specific. For example, NAICS code
453910 describes a pet supply store, for which the
2-digit industry sector is the 44–45 ‘‘Retail Trade’’
sector. See Small Bus. Admin., Table of Small
Business Size Standards Matched to North
American Industry Classification System Codes,
https://www.sba.gov/sites/default/files/2019-08/
SBA%20Table%20of%20Size%20Standards_
Effective%20Aug%2019%2C%202019_Rev.pdf.
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using the SBA’s 6-digit NAICS codes (as
opposed to the 2-digit code) would
enable the public to identify whether
disparities arise at a sector level and
would provide more specific
information on the types of businesses
that are accessing or struggling to access
credit.846
Including 6-digit NAICS codes in the
public application-level 1071 data in
unmodified form by itself would likely
disclose minimal, if any, information
about an applicant or related natural
person that may be harmful or sensitive
if such person were re-identified, or that
may be harmful or sensitive to an
identified financial institution. The 6digit NAICS codes are unlikely to be
harmful or sensitive to a small business
because information about a small
business’s industry is likely to be
apparent to anyone interacting with it.
Disclosure of the 6-digit NAICS codes in
unmodified form may reveal
information that financial institutions
regard as harmful or sensitive, such as
the industries with which the financial
institution does business. However, as
discussed under Risk of Harm or
Sensitivity in part VI.C.4.ii above, the
Bureau does not believe that disclosure
would permit the reverse-engineering of
a financial institution’s proprietary
lending models.
During the SBREFA process, several
industry commenters stated that NAICS
codes would increase re-identification
risk for small businesses, particularly in
combination with geographic
identifiers, such as census tract. The
Bureau has identified publicly available
datasets that include data fields an
adversary could directly match to the
NAICS code data field in unmodified
form in the public application-level
1071 data with respect to an applicant
or related natural person. A business’s
NAICS code is likely to be publicly
available in loan-level data for public
loan programs such as the 7(a), 8(a), or
PPP programs and in private datasets. In
addition, even where the specific
NAICS code may not be publicly
available, it could be derived with
reasonable accuracy from other public
information that is available for most
businesses, such as business directories,
a business’s website, or from personal
observation by members of the
community where a business is located.
Therefore, in many cases, an adversary
could use 6-digit NAICS codes,
combined with other fields, to match a
846 For example, a wide variety of businesses,
including those providing car washes, footwear and
leather goods repair, and nail salons all fall under
the 2-digit sector code 81: Other Services (except
Public Administration).
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section 1071 record to an identified
publicly available record.
The 6-digit NAICS code data field is
likely to produce unique instances in
the data, especially when combined
with census tract, if census tract is
disclosed in unmodified form. There are
currently 73,057 census tracts and 1,057
6-digit NAICS codes,847 which produce
over 77 million combinations. With so
many possible combinations, there
would likely be many instances in the
1071 data where the census tract and 6digit NAICS code form a unique
combination.
If the Bureau determines that the 6digit NAICS code should be modified,
the Bureau may consider disclosing
NAICS codes at a higher level by
disclosing the 2-digit, 3-digit, or 4-digit
NAICS code instead of the 6-digit code.
Disclosing NAICS code at a higher level
would reduce re-identification risk but
would also reduce the utility of the data.
There are 1,057 6-digit NAICS codes, as
noted above, but there are only 99 3digit subsectors and 20 broad 2-digit
sectors.848 As a result, disclosing NAICS
code at a higher level would reduce the
specificity of the information in the
1071 data about the small business’s
industry.
The Bureau seeks comment on this
analysis. The Bureau specifically seeks
comment on how disclosing the 2-, 3-,
or 4-digit NAICS code—rather than the
6-digit NAICS code—would affect the
benefits of disclosure, the potential
harm and sensitivity, and potential for
re-identification for this data field.
xiv. Number of Workers
Proposed § 1002.107(a)(16) would
require financial institutions to collect
and report to the Bureau the number of
non-owners working for the applicant.
Disclosing number of workers in the
public application-level 1071 data in
unmodified form would be useful for
identifying business and community
development needs and opportunities of
small businesses. This information
would give the public a greater
understanding of how the business and
community development needs and
opportunities of small businesses may
differ based on the number of workers.
The number of workers would help the
public understand, for example, the
extent to which ‘‘non-employer’’
businesses, which do not have
847 See 2010 Census Tallies (number of census
tracts); Off. of Mgmt. & Budget, North American
Industry Classification System (NAICS) Updates for
2022, 86 FR 35350, 35352 (July 2, 2021) (number
of 6-digit NAICS codes).
848 Off. of Mgmt. & Budget, North American
Industry Classification System (NAICS) Updates for
2022, 86 FR 35350, 35352 (July 2, 2021).
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employees besides the owner, and
‘‘microbusinesses,’’ which are typically
defined as having fewer than 10
employees, may face unique challenges
accessing credit or may use credit in
different ways. Identifying the number
of workers would also allow data users
to understand the number of jobs
supported by loans to a business.
Disclosing the number of workers would
also advance the fair lending purpose of
section 1071. This information would
help ensure that users of the 1071 data
who are evaluating potential disparities
in underwriting or pricing can compare
small businesses with a similar number
of workers, thereby controlling for a
factor that might provide a legitimate
explanation for some disparities.
Disclosing number of workers in the
application-level 1071 data in
unmodified form would likely disclose
minimal, if any, information about an
applicant or related natural person that
may be harmful or sensitive if such
person were re-identified, or that may
be harmful or sensitive to an identified
financial institution. Financial
institutions may use data about the
number of workers to learn more about
the types of small businesses with
which their competitors do business.
However, as discussed under Risk of
Harm or Sensitivity in part VI.C.4.ii
above, the Bureau does not believe that
disclosure would permit the reverseengineering of a financial institution’s
proprietary lending models.
Furthermore, information about the
number of workers is also likely to be
publicly available for many businesses.
State registries of businesses may
include information about a business’s
number of workers. Private databases
also commonly include this
information, which is often verified by
the business. Further, loan-level records
from SBA loan programs include a field
for the number of jobs supported by a
loan, which in some instances may
reflect the business’s number of
workers. In the Bureau’s view, the
public availability of this information
decreases any potential sensitivity or
harm of disclosing number of workers in
the application-level 1071 data. At the
same time, the Bureau believes that the
utility of number of workers data in the
public application-level 1071 data to
potential adversaries would be low due
to the widespread public availability of
this information.
The Bureau has identified publicly
available datasets that include data
fields an adversary could directly match
to the number of workers data field in
unmodified form in the public
application-level 1071 data with respect
to an applicant or related natural
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person. As noted above, information
about a business’s number of workers is
found in many publicly available
datasets in which the business’s name is
identified, including State business
registries, commercial databases, and
loan-level records from SBA loan
programs. Therefore, in many cases, an
adversary could use number of workers,
combined with other fields, to match a
section 1071 record to an identified
publicly available record. Data on a
business’s number of workers may
easily produce unique combinations,
particularly when combined with other
data fields in the public applicationlevel 1071 data and particularly for
businesses with higher numbers of
workers, which are more likely to be
unique in the dataset.
If the Bureau determines that the
number of workers data field should be
modified, the Bureau may consider
recoding the data into bins. The Bureau
could also top-code number of workers,
given that larger values in the 1071 data
are more likely to be unique.
The Bureau seeks comment on this
analysis.
xv. Time in Business
Proposed § 1002.107(a)(17) would
require financial institutions to collect
and report to the Bureau the time the
applicant has been in business,
described in whole years, as relied on or
collected by the financial institution.
Disclosing time in business in the
public application-level 1071 data in
unmodified form would advance both
the fair lending and business and
community development purposes of
section 1071. As discussed in greater
detail above in the section-by-section
analysis of proposed § 1002.107(a)(17),
start-ups and new businesses play an
important role in the business
ecosystem, particularly with respect to
job creation. Time in business data
would allow data users to better identify
the proportion of small businesses
seeking credit that are start-ups or
relatively new businesses, the types of
credit that are offered and provided to
start-ups and newer businesses, the
geographic makeup of those businesses,
the types of financial institutions that
are reaching such businesses, and where
communities might focus business
development efforts. The data may also
aid policymakers in addressing issues
impacting the growth of small start-ups.
The data, particularly as to unmet
demand, could help interested financial
institutions identify lending
opportunities to reach more start-ups
and new businesses, promoting both
business and community development.
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Disclosing time in business would
also facilitate the enforcement of fair
lending laws. Because lenders generally
perceive younger businesses as having
higher credit risk, time in business data
would help ensure that users can
compare applicants with similar
profiles, thereby controlling for factors
that might provide non-discriminatory
explanations for some disparities in
credit and pricing decisions.
Disclosing time in business in the
1071 data in unmodified form would
likely disclose minimal, if any,
information about an applicant or
related natural person that may be
harmful or sensitive if such person were
re-identified, or that may be harmful or
sensitive to an identified financial
institution. During the SBREFA process,
one industry commenter recommended
that the Bureau delete time in business
from the public application-level 1071
data, citing general concerns that the
data field could facilitate reidentification and disclose previously
non-public information to
competitors.849 However, while
financial institutions may use time in
business data to learn more about the
types of small businesses with which
their competitors do business, the
Bureau does not believe that disclosure
would permit the reverse-engineering of
a financial institution’s proprietary
lending models, as discussed under Risk
of Harm or Sensitivity in part VI.C.4.ii
above. Information about time in
business is also likely to be publicly
available for many businesses.
Businesses typically disclose their date
of establishment in public registration
filings. Many commercial databases also
include this information. In the
Bureau’s view, the existing public
availability of this information
decreases any potential harm or
sensitivity of disclosing time in business
in the public application-level 1071
data.
The Bureau has identified publicly
available datasets that include data
fields an adversary could directly match
to the time in business data field in
unmodified form in the public
application-level 1071 data with respect
to an applicant or related natural
person. As noted above, information
about time in business is found in many
publicly available datasets, including
State business registries and commercial
databases. Therefore, in many cases, an
adversary could use time in business,
combined with other fields, to match a
section 1071 record to an identified
849 The commenter did not make clear whether it
was referring to competitors of a small business or
competitors of a financial institution.
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publicly available record. Time in
business data may easily produce
unique combinations, particularly when
combined with other data fields in the
public application-level 1071 data, and
particularly for larger time in business
values, which are more likely to be
unique in the dataset.
If the Bureau determines that the time
in business data field should be
modified, it may consider recoding time
in business into bins—for example,
using two- or five-year intervals—to
reduce the identifiability of a specific
length of time in business. The Bureau
could also top-code time in business at
a value such as 25 years, given that
larger values are more likely to be
unique. With regard to the industry
commenter’s recommendation that the
Bureau delete time in business from the
public application-level 1071 data based
on re-identification concerns, the
Bureau’s determination about whether
this field should be modified or deleted
will be based on the re-identification
analysis that it will conduct once it
receives at least a full year of actual data
reported by financial institutions.
The Bureau seeks comment on this
analysis. The Bureau specifically seeks
comment on what intervals the Bureau
should use if it were to recode time in
business into bins and what value the
Bureau should use if it were to top-code
this data field.
xvi. Minority-Owned Business Status
and Women-Owned Business Status
Proposed § 1002.107(a)(18) and (19)
would require financial institutions to
collect and report to the Bureau whether
the applicant is a minority-owned
business or a women-owned business
and whether minority-owned business
status or women-owned business status
is being reported based on previously
collected data pursuant to proposed
§ 1002.107(c)(2).850
Disclosing women-owned and
minority-owned business status in the
public application-level 1071 data in
unmodified form is central to furthering
the fair lending purpose of section 1071
and would promote the business and
community development purpose of the
statute by identifying opportunities for
further development of women-owned
and minority-owned small businesses.
In fair lending analyses, knowing
whether a business is women-owned or
minority-owned would help data users
identify potential discriminatory
lending patterns. Publishing
850 The collection and reporting of women-owned
and minority-owned business status is proposed to
be based on applicants’ self-reporting and would
rely on the meanings of ‘‘ownership’’ and ‘‘control’’
defined in the CDD rule.
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information on women-owned or
minority-owned business status in the
public application-level 1071 data
would help data users examine and
identify potential disparities in small
business lending. For example, when
combined with action taken, data users
would be able to identify if womenowned and minority-owned small
businesses are denied for credit at
disproportionate rates. In addition,
when combined with pricing
information, data users would be able to
identify if women-owned and minorityowned businesses are receiving credit at
higher prices. Additionally, these data
would allow communities,
governmental entities, and creditors to
determine areas where women-owned
and minority-owned small businesses
are underserved relative to other small
businesses and to focus resources to
identify business and community
development opportunities for womenowned and minority-owned small
businesses. Disclosing women-owned
and minority-owned business status
could also help communities,
governmental entities, and creditors
determine whether or not initiatives to
increase access to credit for womenowned and minority-owned businesses
are succeeding.
Disclosing women-owned and
minority-owned business status in the
1071 data in unmodified form would
likely disclose minimal, if any,
information about an applicant or
related natural person that may be
harmful or sensitive if such person were
re-identified, or that may be harmful or
sensitive to an identified financial
institution. While some applicants or
related natural persons may regard this
information as harmful or sensitive, the
Bureau believes this information
generally would present low risk of
harm or sensitivity. The Bureau also
believes that this information already
may be available to the general public,
as discussed in the paragraph below,
and that this information would have
relatively limited utility for adversaries
if an applicant or related natural person
were re-identified.
However, in many cases, an adversary
could use women-owned or minorityowned business status, in combination
with other 1071 data, to match a section
1071 record to an identified publicly
available record. The Bureau has
identified publicly available datasets
that include data fields an adversary
could directly match to the minority- or
women-owned status data fields in
unmodified form in the public
application-level 1071 data with respect
to an applicant or related natural
person. Women-owned business status
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and minority-owned business status is
likely to be publicly available for many
businesses. Many businesses also
publicly register or certify with the SBA
or State or local authorities as a womenowned or minority-owned business to
access government programs. For
example, businesses are identified as
woman or minority-owned in the public
loan-level SBA 7(a) and PPP data, and
demographic status indicators are
available in loan-level 8(a) records.
Additionally, businesses’ websites may
have information about their owners
that could be used to derive womenowned and minority-owned business
status information. Private commercial
databases also often contain this
information, either imported from
public records or estimated using
software based on owner names (or
both).
The Bureau invites comment on this
analysis.
xvii. Ethnicity, Race, and Sex of
Principal Owners and Number of
Principal Owners
Proposed § 1002.107(a)(20) would
require financial institutions to collect
and report to the Bureau the ethnicity,
race, and sex of the applicant’s principal
owner(s); 851 whether ethnicity and race
are being collected by the financial
institution on the basis of visual
observation or surname; 852 and whether
ethnicity, race, or sex are being reported
based on previously collected data
pursuant to proposed § 1002.107(c)(2).
Unless a financial institution is
permitted to report ethnicity, race, and
sex information based on previously
collected data pursuant to proposed
§ 1002.107(c)(2), a financial institution
must ask an applicant about its
principal owners’ ethnicity, race, and
sex for each application. A financial
institution must permit an applicant to
851 Financial institutions would report ethnicity
and race using the aggregate categories and
disaggregated subcategories listed in proposed
comments 107(a)(20)–5 and –6, respectively.
Financial institutions would report sex as described
in proposed comment 107(a)(20)–7, which
prescribes that financial institutions shall report sex
using the following categories: ‘‘Male,’’ ‘‘Female,’’
‘‘I prefer to self-describe’’ (with accompanying freeform text), and ‘‘I do not wish to provide this
information.’’ The Bureau analyzes free-form text
under the proposed balancing test in part VI.C.6.xix
below.
852 Unless a financial institution is permitted to
report ethnicity, race, and sex information based on
previously provided data pursuant to proposed
§ 1002.107(c)(2), a financial institution would be
required to ask an applicant to report its principal
owners’ ethnicity, race, and sex for each
application. In certain situations, discussed in
proposed comments 107(a)(20)–7 and –8 and in
proposed appendix G, a financial institution may
also be required to report the ethnicity and race of
one or more principal owner(s) based on visual
observation and/or surname.
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refuse to answer the financial
institution’s inquiry and report its
refusal to answer the inquiry, or its
failure to respond to the inquiry.
Disclosing the ethnicity, race, and sex
of the applicant’s principal owner(s) in
the public application-level 1071 data in
unmodified form would be central to
furthering the fair lending purpose of
section 1071 and would promote the
business and community development
purpose of the statute by identifying
opportunities for further development of
women-owned and minority-owned
small businesses. In fair lending
analyses, data on the ethnicity, race, and
sex of an applicant’s principal owner(s)
would be used to identify potential risk
of discrimination under fair lending
laws. These data would be essential for
this purpose when analyzed in
conjunction with data fields such as
action taken, credit amount approved or
originated, and pricing. For example,
when combined with the type of action
taken, ethnicity, race, and sex data of an
applicant’s principal owner(s) would
help data users identify whether
women-owned and minority-owned
applicants are denied at higher rates on
a prohibited basis. In addition, as
discussed above with women-owned
and minority-owned business status,
when combined with pricing
information, data on ethnicity, race, and
sex of an applicant’s principal owner(s)
would help data users identify if
women-owned and minority-owned
businesses are receiving credit at higher
prices. In addition, because the Bureau
is proposing to require that financial
institutions report ethnicity and race
using the aggregate categories and
disaggregated subcategories listed in
proposed comments 107(a)(20)–5 and
–6, respectively, such data would enable
data users to identify potential
discrimination or challenges accessing
credit by particular ethnic and racial
minorities.
Data on ethnicity, race, and sex of the
applicant’s principal owner(s) would
also be essential for the business and
community development purpose of
section 1071. These data would allow
communities, governmental entities,
and creditors to determine areas where
women-owned and minority-owned
small businesses are underserved
relative to other small businesses. In
addition, such demographic information
about small business applicants would
allow communities, governmental
entities, and creditors to focus resources
to identify business and community
development opportunities for womenowned and minority-owned small
businesses. For example, in conjunction
with NAICS codes, these data would
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help data users identify challenges
facing women-owned businesses and
businesses owned by individuals from
different ethnic and racial groups in
particular industries. This information
could also help communities and
lenders focus investment and resources
in traditionally underserved
demographic groups.
In general, disclosing the ethnicity,
race, and sex of the applicant’s principal
owner(s) in the 1071 data in unmodified
form would likely disclose minimal, if
any information about an applicant or
related natural person that may be
harmful or sensitive if such person were
re-identified, or that may be harmful or
sensitive to an identified financial
institution. As noted similarly above for
the data fields on women-owned and
minority-owned business status, while
some applicants or related natural
persons may regard this information as
harmful or sensitive, the Bureau
believes this information generally
would present low risk of harm or
sensitivity. The Bureau also notes that
this information may be already
available to the general public, and that
this information would have relatively
limited utility for adversaries if an
applicant or related natural person were
re-identified.
The Bureau has identified publicly
available datasets that include data
fields an adversary could directly match
to the ethnicity, race, and sex of the
applicant’s principal owner(s) data
fields in unmodified form in the public
application-level 1071 data with respect
to an applicant or related natural
person. Information about the ethnicity,
race, and sex of the applicant’s principal
owner(s) is available to the general
public in some datasets.853 For example,
certain State business registries,
including those required to access
women-owned and minority-owned
business programs, provide this
information. Other public record
databases such as for SBA 8(a) and PPP
loan programs also include ethnicity,
race, and sex data alongside the
borrower’s name. Private databases
often include information about the
owners of businesses, which can be
used to estimate ethnicity, race, and sex
based on owner name. Therefore, in
many cases, an adversary could use the
853 Regulation B generally prohibits a creditor
from inquiring about such protected demographic
information in connection with a credit transaction
unless otherwise required by Regulation B, ECOA,
or other State or Federal law, regulation, order, or
agreement. See § 1002.5(a)(2). Relatedly, ECOA
states that it is not discrimination for a financial
institution to inquire about women-owned or
minority-owned business status, or the race, sex,
and ethnicity of principal owners pursuant to
section 1071. 15 U.S.C. 1691(b).
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ethnicity, race, and sex of the
applicant’s principal owner(s),
combined with other fields, to directly
or indirectly match a section 1071
record to an identified publicly
available record.
As discussed in the section-by-section
analysis of proposed § 1002.107(a)(20)
in part V above, the Bureau is proposing
that financial institutions would report
sex as described in proposed comment
107(a)(20)–7, which prescribes that
financial institutions shall report sex
using the following categories: ‘‘Male,’’
‘‘Female,’’ ‘‘I prefer to self-describe’’
(with accompanying free-form text), and
‘‘I do not wish to provide this
information.’’ As such, if finalized, the
Bureau would permit an applicant to
self-describe their sex by selecting ‘‘I
prefer to self-describe’’ with using freefrom text. As discussed in part
VI.C.6.xix below, the Bureau is
proposing to delete free-form text from
the public application-level 1071 data.
However, the Bureau seeks comment on
whether there are additional specific
modifications it should consider with
regard to applicants who choose to selfdescribe their sex.
As discussed in the section-by-section
analysis of proposed § 1002.107(a)(20)
in part V above, the Bureau is seeking
comment in this proposal about the
reporting of sexual orientation and
gender identity of principal owners—
specifically, whether separate questions
regarding sex, sexual orientation, and
gender identity should be asked and, if
so, what categories should be offered on
the sample data collection form for use
by applicants in responding to each
question. The Bureau seeks comment on
whether disclosing that one or more
principal owners of an applicant has
answered any of these questions, and
how, could cause heightened sensitivity
or risk of harm and whether there are
specific modifications the Bureau
should consider if such data points are
included in the final rule.
The Bureau seeks comment on this
analysis.
xviii. Financial Institution Identifying
Information
Proposed § 1002.109(b) would require
a financial institution to provide the
Bureau with certain information with its
submission of its small business lending
application register: (1) Its name; (2) its
headquarters address; (3) the name and
business contact information of a person
who may be contacted with questions
about the financial institution’s
submission; (4) its Federal prudential
regulator, if applicable; (5) its Federal
Taxpayer Identification Number; (6) its
LEI; (7) its RSSD ID, if applicable; (8)
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parent entity information,854 if
applicable; (9) the type of financial
institution that it is, indicated by
selecting the appropriate type or types
of institution from the list provided or
entering free-form text; 855 and (10)
whether the financial institution is
voluntarily reporting covered
applications for covered credit
transactions.
Regulation C requires financial
institutions to report similar
information when submitting their loanlevel HMDA data. Regulation C also
requires financial institutions to report
the calendar year of submission and the
total number of entries in their loanlevel HMDA data. Regulation C does not
require financial institutions to submit
their headquarters address, RSSD ID, or
financial institution type or indicate
whether they are reporting data
voluntarily. With the exception of
contact information for a person who
can be reached about the financial
institution’s submission, the
information financial institutions are
required to submit with their HMDA
submissions under § 1003.5(a)(3) is
publicly available through the FFIEC
website.
Financial institution identifying
information other than individual
contact information. For the reasons
described below, the Bureau
preliminarily determines that the
privacy risks of disclosing the financial
institution identifying information data
fields in unmodified form, other than
data fields containing the information
for the financial institution’s point of
contact for its 1071 data submission
(i.e., the name and business contact
information of a person who may be
contacted with questions about the
submission), would be justified by the
benefits of disclosure for section 1071’s
purposes. As such, the Bureau proposes
to disclose such information to the
public as reported, without
modification. The Bureau seeks
comment on this determination.
854 Parent entity information would include the
name of the immediate parent entity, the LEI of the
immediate parent entity, if available, the RSSD ID
number of the immediate parent entity, if available,
the name of the top-holding parent entity, the LEI
of the top-holding parent entity, if available, and
the RSSD ID number of the top-holding parent
entity, if available.
855 The list would include the following types:
Bank or savings association, minority depository
institution, credit union, nondepository institution,
community development financial institution
(CDFI), other nonprofit financial institution, Farm
Credit System institution, government lender,
commercial finance company, equipment finance
company, industrial loan company, fintech, and
‘‘other’’ (reported as free-form text). The Bureau
analyzes free-form text under the proposed
balancing test in part VI.C.6.xix below.
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Disclosing the financial institution
identifying information, other than
individual contact information, in the
public application-level 1071 data in
unmodified form would facilitate the
enforcement of fair lending laws. The
purposes of section 1071 in large part
concern evaluating the practices of
individual financial institutions and
disclosing their identifying information
allows the public to evaluate their
lending practices. Identifying their
Federal regulator would also facilitate
fair lending enforcement by enabling the
public to communicate with the
regulator in connection with
administrative enforcement of fair
lending laws. Disclosing RSSD ID and
parent institution information would
enable the public to map corporate
relationships for financial institutions,
which is also important for fair lending
enforcement.
Disclosing financial institution
identifying information, including
financial institution type, would enable
the public to evaluate which financial
institutions are reaching underserved
areas of the market and the extent to
which different types of financing is
available from different types of
institutions. And as described more
fully in the section-by-section analysis
of proposed § 1002.109(b) above,
financial institution identifying
information would promote the fair
lending and community and business
development purposes of the statute by
allowing users to identify financial
institutions precisely and draw
appropriate conclusions from the data.
Several SERs and industry
commenters expressed concern that
disclosing financial institution
identifying information would lead to
frivolous litigation and unfounded
reputational risks, and would increase
the cost of credit or limit credit
availability for small businesses.856
Disclosing financial institution
identifying information in the 1071 data
in unmodified form would likely
disclose minimal, if any, information
about an applicant or related natural
person that may be harmful or sensitive
if such person were re-identified. While
some businesses might view their
identification as an applicant as harmful
or sensitive, the Bureau does not believe
revealing the name of the financial
institution would significantly increase
such risks. In addition, this information
is already largely available from other
856 One industry commenter stated that financial
institutions might respond to perceived
reputational risks by eliminating certain product
offerings or modifying underwriting practices in a
way that reduces the overall diversity of small
business products.
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identified public records, such as UCC
filings. For the same reason, the Bureau
does not believe revealing the name of
the financial institution would
significantly increase risk of fraud or
identity theft to businesses or related
natural persons caused by adversaries
impersonating the financial institution.
Disclosing financial institution
identifying information in the 1071 data
in unmodified form would not, by itself,
reveal information that is harmful or
sensitive, given financial institutions’
commercial interests. Additionally,
other public records, such as public
HMDA data, tax records, and
commercial databases disclose Federal
Taxpayer Identification number, RSSD
ID, and LEI.857 Disclosing financial
institution identifying information in
unmodified form may reveal
information that financial institutions
regard as harmful or sensitive, but, as
discussed under Risk of Harm or
Sensitivity in part VI.C.4.ii above, the
Bureau does not believe that disclosure
of the information in the public
application-level 1071 data would
permit the reverse-engineering of a
financial institution’s proprietary
lending models. The Bureau
acknowledges, however, that this
information could, in some
circumstances, lead to reputational risks
and increased costs for financial
institutions, which might be passed on
to their customers in the form of
increased costs or decreased access to
credit.
Several SERs were concerned that
publishing financial institution
identifying information could increase
re-identification risk of applicants and
related natural persons.858 One industry
stakeholder provided feedback that
customers of captive wholesale finance
companies with applicant bases limited
to franchises or licensees of a particular
distributor or manufacturer would face
unique re-identification risks. The
commenter explained that, in many
instances, these applicants may be the
financial institution’s only customer in
a particular State, or one of only a very
small number of customers in the State,
heightening the privacy concerns for
publication of data tied to these
financial institutions.
The Bureau has identified publicly
available datasets that include data
fields an adversary could directly match
857 The FFIEC publishes transmittal sheet
information, including LEI and Federal Taxpayer
Identification number, on its website. Fed. Fin.
Insts. Examination Council, Public Transmittal
Sheet—Schema, https://ffiec.cfpb.gov/
documentation/2020/public-ts-schema/ (last visited
July 23, 2021).
858 See SBREFA Panel Report at 34.
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to financial institution identifying
information data fields in unmodified
form in the public application-level
1071 data with respect to an applicant
or related natural person. Other
identified public records, such as UCC
filings, disclose financial institution
name. Therefore, in many cases, an
adversary could use identifying
financial institution data fields,
combined with other 1071 data fields, to
match a section 1071 record to an
identified public record. Because the
Bureau does not intend to perform a reidentification analysis of the 1071 data
fields until 1071 data are reported, it has
not determined the extent to which
financial institution identifying
information or other data fields could
contribute to record uniqueness.859
With respect to concerns raised
regarding captive wholesale finance
companies, the Bureau acknowledges
that financial institution identifying
information in unmodified form in the
public application-level 1071 data
could, in combination with other data
fields like census tract, NAICS codes,
and credit type or purpose, facilitate reidentification of applicants that have a
common name, without requiring that
adversaries match 1071 records to other
identified datasets. As discussed in the
section-by-section analysis of proposed
§ 1002.104(b) above, the Bureau
proposes to exclude trade credit and
other transactions from the scope of
covered credit transactions. This might
eliminate some transactions involving
such lenders. The Bureau seeks
comment on the circumstances under
which a transaction involving a captive
wholesale finance company would be
covered by the proposal
notwithstanding the exemption.
To the extent there are such
transactions, the Bureau seeks comment
on the instances in which captive
wholesale finance companies lend
exclusively to businesses that are
publicly branded in a way that can be
easily matched to the identity of the
financial institution. As discussed in the
section-by-section analysis of proposed
§ 1002.109(b) above, the Bureau also
seeks comment on whether a final rule
could include certain categories of
financial institution types that would
allow the Bureau to easily identify such
financial institutions in the unmodified
1071 dataset without an applicationlevel analysis. Finally, the Bureau seeks
859 As discussed under Balancing Test Design in
part VI.C.1 above, while the proposed balancing test
would consider the risk of harm or sensitivity to
financial institutions, it would not consider reidentification risk with respect to financial
institutions because the statute contemplates the
disclosure of their identity.
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comment on whether there are
particular modification techniques that
would reduce re-identification risks and
risks of harm or sensitivity for
applicants and related natural persons
who might be re-identified in the public
application-level 1071 data.
The Bureau has considered whether a
modification of the 1071 data available
to the public short of deleting financial
institution identifying information
(other than individual contact
information) would appropriately
balance identified privacy risks and
disclosure benefits of this data field.
Several SERs stated that a solution to
their concerns about financial
institution privacy would be for the
Bureau not to release the names of
financial institutions when publishing
1071 data.860
The Bureau proposes to disclose
financial institution identifying
information, other than individual
contact information, to the public as
reported, without modification. The
Bureau preliminarily determines that
risks to privacy interests from the
disclosure of this data field in
unmodified form would be justified by
the benefits of disclosure for section
1071’s purposes. As described above,
while the Bureau has not conducted a
uniqueness analysis, it is very likely
that disclosure of financial institution
identifying information would
substantially facilitate the reidentification of applicants or related
natural persons. If such persons were reidentified, disclosure of other 1071 data
fields would likely create a risk of harm
or sensitivity. In addition, the disclosure
of other proposed 1071 data fields in
combination with identifying financial
institution name likely would reveal
information that may be harmful or
sensitive to financial institutions. The
Bureau nonetheless determines that
these risks to privacy would be justified
by the benefits of disclosure in light of
section 1071’s purposes.
The Bureau also seeks comment on
this analysis and its proposal to disclose
these fields without modification in the
public application-level 1071 data.
Individual contact information.
Proposed § 1002.109(b)(1)(iii) would
require financial institutions to report
the name and business contact
information of a person who may be
contacted with questions about the
financial institution’s submission. In
contrast to the other financial institution
identifying information described
above, the Bureau preliminarily
determines that the privacy risks of
disclosure in unmodified form of this
860 See
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56539
data field would not be justified by the
benefits of disclosure for section 1071’s
purposes. As such, the Bureau proposes
to delete such information from the
publicly available data. The Bureau
seeks comment on this determination.
Disclosing individual contact
information in the public applicationlevel 1071 data in unmodified form
would enable the public to contact
natural persons at financial institutions
about the technical aspects of a financial
institution’s submission of applicationlevel data. However, the Bureau does
not believe this would promote the fair
lending or community or business
development purposes of section 1071
because the Bureau, not the general
public, will coordinate with this person
to ensure proper submission of data.
Moreover, the person designated by the
financial institution to respond to
questions about the submission might
not necessarily be designated by the
financial institution for engaging with
the general public.
Disclosing individual contact
information in the 1071 data in
unmodified form would likely not
disclose any information about an
applicant or related natural person if
such person were re-identified.
However, disclosing the name and
contact information of natural persons
designated by the financial institution
would disclose information that may be
harmful or sensitive to identified
financial institutions and its employees.
Financial institutions have a legitimate
interest in protecting the identities of
their employees from the public,
consistent with their job functions, and
persons identified for purposes of
questions about the financial
institution’s submission to the Bureau
might not necessarily be responsible for
engaging with the general public.
The Bureau has considered whether a
modification of the 1071 data available
to the public other than exclusion of
individual contact information would
appropriately balance identified privacy
risks and disclosure benefits of this data
field. Because disclosure of this data
field in unmodified form would not
promote the purposes of section 1071
and would likely reveal information that
would be harmful or sensitive to a
financial institution and its employees,
the Bureau does not believe there is a
modification that would appropriately
balance the privacy risks and disclosure
benefits for this data field. Accordingly,
the Bureau preliminarily determines
that deleting individual contact
information would appropriately
balance the privacy risks and disclosure
benefits of this data field.
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The Bureau seeks comment on this
analysis as well as its proposed
deletion.
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xix. Free-Form Text
Proposed § 1002.107(a) would require
financial institutions to use free-form
text to report certain data fields where
a financial institution reports
information that is not included in a list
of data fields provided. Under proposed
§ 1002.107(a)(5), (6), (11), (12), and (20),
free-form text could be used to report
credit type (product and guarantee
information); credit purpose; denial
reasons; pricing (the interest rate index
used); and ethnicity, race, and sex.861
Financial institutions also would have
flexibility in describing identifying
information that would be provided
under proposed § 1002.109(b). Freeform text used to report ethnicity, race,
and sex would be completed based on
information provided by applicants; all
other free-form text would be completed
based on information provided by the
financial institution.
Free-form text would allow the
reporting of any information, including
information that may be harmful or
sensitive to applicants, related natural
persons, and possibly the interests of
financial institutions. Such information
might also create a significant risk of reidentification for applicants or related
natural persons. Given the expected
amount of 1071 data reported each year,
it will not be feasible for the Bureau to
review the free-form text submitted
before publishing the application-level
1071 data. The Bureau believes at this
time that, under the balancing test,
deleting free-form text from the public
application-level 1071 data, other than
with respect to the financial institution
identifying information described in
part VI.C.6.xviii above, would
appropriately balance the benefits of
disclosure with the risks to the privacy
interests of applicants, related natural
persons, and financial institutions.
The Bureau seeks comment on this
analysis as well as its proposed
deletion.
VII. Dodd-Frank Act Section 1022(b)(2)
Analysis
The Bureau is considering the
potential benefits, costs, and impacts of
the proposed rule. The Bureau requests
comment on the preliminary discussion
presented below, as well as submissions
of additional data that could inform the
861 For example, the proposal would require
financial institutions to report credit purpose by
choosing one or more purposes from a specified list.
Financial institutions selecting ‘‘other’’ would be
required to report that other purpose as free-form
text.
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Bureau’s consideration of the benefits,
costs, and impacts of the proposed rule.
In developing the proposed rule, the
Bureau has consulted with or offered to
consult with the prudential regulators
(the Board of Governors of the Federal
Reserve System, the Federal Deposit
Insurance Corporation, the National
Credit Union Administration, and the
Office of the Comptroller of the
Currency), the Department of
Agriculture, the Department of Housing
and Urban Development, the
Department of Justice, the Department
of the Treasury, the Economic
Development Administration, the Farm
Credit Administration, the Federal
Trade Commission, the Financial
Crimes Enforcement Network, the
Minority Business Development
Agency, and the Small Business
Administration regarding, among other
things, consistency with any prudential,
market, or systemic objectives
administered by such agencies.
In the Dodd-Frank Act, which was
enacted ‘‘[t]o promote the financial
stability of the United States by
improving accountability and
transparency in the financial system,’’
Congress directed the Bureau to adopt
regulations governing the collection of
small business lending data. Under
section 1071, covered financial
institutions must compile, maintain,
and submit certain specified data points
regarding applications for credit for
women-owned, minority-owned, and
small businesses, along with ‘‘any
additional data that the Bureau
determines would aid in fulfilling the
purposes of [section 1071].’’ Under the
proposed rule, covered financial
institutions would be required to collect
and report the following data points: (1)
A unique identifier, (2) application date,
(3) application method, (4) application
recipient, (5) credit type, (6) credit
purpose, (7) amount applied for, (8)
amount approved or originated, (9)
action taken, (10) action taken date, (11)
denial reasons, (12) pricing information,
(13) census tract, (14) gross annual
revenue, (15) NAICS code, (16) number
of workers, (17) time in business, (18)
minority-owned business status, (19)
women-owned business status, (20)
ethnicity, race, and sex of principal
owners, and (21) the number of
principal owners.
Under the proposed rule, financial
institutions would be required to report
data on small business credit
applications under section 1071 if they
originated at least 25 covered credit
transactions in each of the two
preceding calendar years. The Bureau is
proposing to define an application as an
oral or written request for a covered
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credit transaction that is made in
accordance with the procedures used by
a financial institution for the type of
credit requested, with some exceptions.
The Bureau is proposing to define the
term covered credit transaction as an
extension of business credit that is not
an excluded transaction. Loans, lines of
credit, credit cards, and merchant cash
advances (including such credit
transactions for agricultural purposes
and those that are also covered by
HMDA 862 (that is, HMDA-reportable
transactions)) would all fall within the
transactional scope of this proposed
rule. The Bureau is broadly proposing to
not cover the following types of
transactions: Factoring, leases,
consumer-designated credit used for
business purposes, credit secured by
certain investment properties, trade
credit, public utilities credit, securities
credit, and incidental credit.
Additionally, the Bureau is proposing
that a business is a small business if and
only if its gross annual revenue for its
preceding fiscal year is $5 million or
less.
A. Statement of Need
Congress directed the Bureau to adopt
regulations governing the collection of
small business lending data.
Specifically, section 1071 of the DoddFrank Act amended ECOA to require
financial institutions to compile,
maintain, and submit to the Bureau
certain data on applications for credit
for women-owned, minority-owned, and
small businesses. Congress enacted
section 1071 for the purpose of
facilitating enforcement of fair lending
laws and enabling communities,
governmental entities, and creditors to
identify business and community
development needs and opportunities of
women-owned, minority-owned, and
small businesses. The Bureau is issuing
this proposed rule to implement the
section 1071 mandate.
Small businesses play a key role in
fostering community development and
fueling economic growth both
nationally and in their local
communities.863 However,
comprehensive data on loans to small
businesses currently are limited. The
largest sources of information on
lending by depository institutions are
the FFIEC and NCUA Call Reports and
reporting under the CRA. Under the
FFIEC Call Report and CRA reporting
regimes, small loans to businesses of
any size are used in whole or in part as
a proxy for loans to small businesses.
The FFIEC Call Report captures banks’
862 12
U.S.C. 2801 et seq.
generally White Paper.
863 See
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and savings associations’ total
outstanding number and amount of
small loans to businesses (that is, loans
originated under $1 million to
businesses of any size; small loans to
farms are those originated under
$500,000) by institution.864 The CRA
requires banks and savings associations
with assets over a specified threshold
(currently $1.305 billion) to report data
on loans to businesses with origination
amounts of $1 million or less; reporters
are asked to indicate whether the
borrower’s gross annual revenue is $1
million or less, if they have that
information.865 Under the CRA, banks
and savings associations report
aggregate numbers and values of
originations at an institution level and
at various geographic levels. The NCUA
Call Report captures credit unions’ total
originations, but not applications, on all
loans over $50,000 to members for
commercial purposes, regardless of any
indicator about the business’s size.866
Some federally funded loan programs,
such as the SBA’s 7(a) or 504 programs
and the CDFI Fund require reporting of
loan-level data, but only for loans that
received support under those programs.
Nondepository institutions do not report
small business lending applications
under any of these reporting regimes.
There are no similar sources of
information about lending to small
businesses by nondepository
institutions.
There are also a variety of nongovernmental data sources, issued by
both private and nonprofit entities, that
cover small businesses and/or the small
business financing market. These
include datasets and surveys published
by commercial data and analytics firms,
credit reporting agencies, trade
associations, community groups, and
academic institutions. See part II.B for
additional information on these sources.
While these non-public sources of data
on small businesses may provide a
useful supplement to existing Federal
sources of small business lending data,
these private and nonprofit sources
often do not have lending information,
864 See
FFIEC Call Report at Schedule RC–C Part
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II.
865 See 2015 FFIEC CRA Guide at 11, 13. Small
business loans are defined for CRA purposes as
loans whose original amounts are $1 million or less
and that were reported on the institution’s Call
Report or Thrift Financial Report (TFR) as either
‘‘Loans secured by nonfarm or nonresidential real
estate’’ or ‘‘Commercial and industrial loans.’’
Small farm loans are defined for CRA purposes as
loans whose origination amounts are $500,000 or
less and were reported as either ‘‘Loans to finance
agricultural production and other loans to farmers’’
or ‘‘Loans secured by farmland.’’
866 See Nat’l Credit Union Admin., Call Report
Form 5300 (June 2020), https://www.ncua.gov/files/
publications/regulations/form-5300-june-2020.pdf.
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may rely on unverified research based
on public internet sources, and/or
narrowly limit use cases for parties
accessing data. Further, commercial
datasets are generally not free to public
users and can be costly, raising equity
issues for stakeholders who cannot
afford access.
Under the proposed rule, covered
financial institutions would be required
to compile, maintain, and submit data
regarding the race, sex, and ethnicity of
the principal owners of the business and
whether a small business is womenowned or minority-owned. No other
source of data comprehensively collects
this type of demographic information on
small business loan applications.
Section 1071 requires financial
institutions to report detailed
application-level data to the Bureau,
and to make it available to the public
upon request. Such information will
constitute a public good that illuminates
the lending activities of financial
institutions and the small business
lending market in general. In particular,
the public provision of application-level
data will: (1) Provide small businesses
and financial institutions with
additional information to improve credit
market outcomes and (2) allow members
of the public, public officials, and other
stakeholders to better assess compliance
with antidiscrimination statutes.
First, the data made public pursuant
to the proposed rule will provide
information that could help to improve
credit outcomes in the small business
lending market. As discussed above,
market-wide data on small business
credit transactions is currently limited.
Neither the public nor private sectors
provide extensive data on credit
products or terms. Small business
owners have access to very little
information on typical rates or products
offered by different lenders. As a result,
small business owners are limited in
their ability to shop for the credit
product that best suits their needs at the
best price. The information made public
pursuant to the proposed rule will
provide extensive data on product types
and credit terms that community
development groups or commercial
services could use to provide better
information to small businesses. For
example, a commercial provider could
provide small businesses with
information on what products lenders
typically offer and at what rates. These
data will allow small business owners to
more easily compare credit terms and
evaluate credit alternatives. By engaging
in more informed shopping, small
business owners may achieve better
credit outcomes.
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Furthermore, financial institutions
can analyze data to understand small
business lending market conditions and
determine how best to provide credit to
borrowers. However, financial
institutions are not able to conduct very
granular or comprehensive analyses
because the data on small business
lending are limited. The data made
public pursuant to the proposed rule
will allow financial institutions to better
understand the demand for small
business credit products and the
conditions under which they are being
supplied by other covered financial
institutions. The data will help enable
institutions to identify potentially
profitable opportunities to extend
credit. Small business owners, as a
result, could benefit from increased
credit availability.
Second, while data made public
pursuant to the proposed rule may not
constitute conclusive evidence of credit
discrimination on its own, the data will
enable members of the public,
regulators, and other stakeholders to
better assess compliance with
antidiscrimination statutes.
Application-level data that include
information on business owners’ race,
sex, and ethnicity, as well as whether
the business is women- or minorityowned, are necessary for the public to
evaluate a lender’s practices for
potential risks of violating
antidiscrimination statutes. However, as
described above, there are currently no
application-level data comprehensive
enough or that contain the required
demographic information to enable the
public to conduct these kinds of
analyses. The data made public
pursuant to the proposed rule will be
comprehensive and contain the
necessary data fields for such analysis.
Users will be able to examine whether,
for example, a lender denies
applications from women- or minorityowned businesses at higher rates than
those that are not or whether these
businesses are charged higher prices.
This kind of transparency can place
appropriate pressure on lenders to
ensure that there is equity in their credit
provision. Additionally, data collected
under the proposed rule will contain the
data fields that allow users to conduct
more accurate fair lending analyses by
comparing applications for credit
products with similar characteristics.
B. Baseline for the Consideration of
Costs and Benefits
The Bureau has discretion in any
rulemaking to choose an appropriate
scope of consideration with respect to
potential benefits and costs and an
appropriate baseline. The Bureau
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interpreted section 1071 to mean that
obligations for financial institutions to
collect, maintain, and submit data ‘‘do
not arise until the Bureau issues
implementing regulations and those
regulations take effect.’’ 867 Accordingly,
this analysis considers the benefits,
costs, and impacts of the major
provisions of the proposed rule against
a pre-section 1071 rule baseline, i.e., the
current state of the world before the
Bureau’s section 1071 rule is
implemented. Under this baseline, the
Bureau assumes that institutions are
complying with regulations that they are
currently subject to, including reporting
data under HMDA and CRA. The
Bureau believes that such a baseline
will also provide the public with better
information about the benefits and costs
of this rule.
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C. Basic Approach of the Bureau’s
Consideration of Benefits and Costs and
Data Limitations
Pursuant to section 1022(b)(2)(A) of
the Dodd-Frank Act,868 in prescribing a
rule under the Federal consumer
financial laws (which include ECOA
and title X of the Dodd-Frank Act), the
Bureau is required to consider the
potential benefits and costs to
‘‘consumers’’ and ‘‘covered persons,’’
including the potential reduction of
access by consumers to consumer
financial products or services resulting
from such rule, and the impact of
proposed rules on covered persons as
described under section 1026 of the
Dodd-Frank Act 869 (i.e., depository
institutions and credit unions with $10
billion or less in total assets), and the
impact on consumers in rural areas.
As mentioned above, section
1022(b)(2)(A) refers to ‘‘consumers’’ and
‘‘covered persons’’; the Dodd-Frank Act
defines the term ‘‘consumer’’ as an
individual or someone acting on behalf
of an individual, while a ‘‘covered
person’’ is one who engages in offering
or providing a ‘‘consumer financial
product or service,’’ which means a
financial product or service that is
provided to consumers primarily for
‘‘personal, family, or household
purposes.’’ 870 In the 1071 rulemaking,
however, the only parties directly
affected by the rule are small businesses
(rather than individual consumers) and
the financial institutions from whom
867 See Letter from Leonard Kennedy, General
Counsel, CFPB, to Chief Executive Officers of
Financial Institutions under Section 1071 of the
Dodd-Frank Act (Apr. 11, 2011), https://
files.consumerfinance.gov/f/2011/04/GC-letter-re1071.pdf.
868 12 U.S.C. 5512(b)(2)(A).
869 12 U.S.C. 5516.
870 12 U.S.C. 5481(4) through (6).
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that data on section 1071 reporting costs
with this level of granularity are
systematically available from any
source. The Bureau has made reasonable
efforts to gather data on section 1071
reporting costs. Through outreach
efforts with industry, community
groups, and other regulatory agencies,
the Bureau has obtained some
information about potential ongoing
operational and one-time compliance
costs, and the discussion below uses
this information to quantify certain
costs of the proposed rule. The Bureau
believes that the discussion constitutes
the most comprehensive assessment to
date of the potential costs of section
1071 reporting by financial institutions.
However, the Bureau recognizes that
these estimations may not fully quantify
the costs to covered financial
institutions, especially given the wide
variation of section 1071 reporting costs
among financial institutions. The
Bureau continues to seek data from
1. Analysis With Respect to Consumers
available sources in order to better
and Covered Persons
quantify the costs to covered financial
The proposed rule implements a data
institutions.
collection regime in which certain
The Bureau categorizes costs required
covered financial institutions must
to comply with the proposed rule into
compile, maintain, and submit data
‘‘one-time’’ and ‘‘ongoing’’ costs. ‘‘Onewith respect to applicants for credit for
time’’ costs refer to expenses that the
small businesses. The rule does not
directly impact consumers or consumers financial institution would incur
in rural areas, as those terms are defined initially and only once to implement
changes required in order to comply
by the Dodd-Frank Act. Some covered
with the requirements of the new rule.
persons, including some that are
‘‘Ongoing’’ costs are expenses incurred
depository institutions or credit unions
as a result of the ongoing reporting
with $10 billion or less in total assets,
requirements of the rule, accrued on an
will be directly affected by the rule not
in their capacity as covered persons (i.e., annual basis. In considering the costs
and impacts of the proposed rule, the
as offerors or providers of consumer
Bureau has engaged in a series of efforts
financial products or services) but in
to estimate the cost of compliance by
their separate capacity as covered
covered entities. The Bureau conducted
financial institutions that offer
a One-Time Cost Survey, discussed in
commercial credit. The costs, benefits,
more detail in part VII.E.1 below, to
and impact of the rule on those entities
learn about the one-time
are discussed below.
implementation costs associated with
2. Costs to Covered Financial
implementing section 1071 and adapted
Institutions
ongoing cost calculations from previous
rulemaking efforts. The Bureau
Regarding the costs to covered
financial institutions, the proposed rule evaluated the potential one-time costs of
implementing the procedures necessary
generally establishes which financial
and the potential ongoing costs of
institutions, transactions, and data
annually reporting under the proposed
points would be covered under section
rule in part VII.F.3 below. The
1071. In order to precisely quantify the
discussion below provides details on
costs to covered financial institutions,
the Bureau’s approach in performing
the Bureau would need representative
these institution-level analyses. The
data on the operational costs that
Bureau realizes that costs vary by
financial institutions would incur to
institution due to many factors, such as
gather and report 1071 data, one-time
costs for financial institutions to update size, operational structure, and product
complexity, and that this variance exists
or create reporting infrastructure in
on a continuum that is impossible to
response to the proposed rule, and
fully represent. In order to conduct a
information on the level of complexity
cost consideration that is both practical
of financial institutions’ business
and meaningful, the Bureau has chosen
models and compliance systems.
an approach that focuses on three
Currently, the Bureau does not believe
they seek credit (rather than covered
persons). Accordingly, a section
1022(b)(2)(A) analysis that considers
only the costs and benefits to individual
consumers and to covered persons
would not meaningfully capture the
costs and benefits of the rule.
Below, the Bureau conducts the
statutorily required analysis with
respect to the rule’s effects on
consumers and covered persons.
Additionally, the Bureau is electing to
conduct this same analysis with respect
to small businesses and the financial
institutions required to compile,
maintain, and submit data fields under
the proposed rule. This discussion relies
on data that the Bureau has obtained
from industry, other regulatory agencies,
and publicly available sources.
However, as discussed further below,
the data limit the Bureau’s ability to
quantify the potential costs, benefits,
and impacts of the proposed rule.
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representative types of financial
institutions. For each type, the Bureau
has produced reasonable estimates of
the costs of compliance given the
limitations of the available data. Part
VII.F.3 below provides additional
details on this approach. More
elaboration is available in the SBREFA
Outline and the SBREFA Panel Report.
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3. Costs to Small Businesses
The Bureau has estimated the costs to
small businesses in addition to those for
covered financial institutions. The
Bureau expects the direct costs of the
proposed rule to small businesses will
be negligible, especially compared to
the overall cost of credit. Therefore, the
Bureau focuses its analysis on whether
and how the Bureau expects financial
institutions to pass on the costs of
compliance with the proposed rule to
small businesses and any possible
effects on the availability of small
business credit. According to economic
theory, in a competitive framework
where financial institutions are profit
maximizers, the affected financial
institutions would pass on to small
business applicants the marginal (i.e.,
variable) cost per application or
origination, and either absorb the onetime and increased fixed costs of
complying with the rule or exit the
market if the one-time and fixed costs
are sufficiently high. As discussed
below, the Bureau estimates that these
costs would be relatively low. Further,
the Bureau received feedback through
the One-Time Cost Survey process on
how creditors might react to increased
compliance costs due to the proposed
rule. The results generally suggest that
covered financial institutions will
generally pass the increased cost of
compliance on to small businesses and
would not exit the market. The Bureau
received similar feedback during the
SBREFA process.
4. Benefits to Small Businesses and
Covered Financial Institutions
Quantifying benefits to small
businesses presents substantial
challenges. As discussed above,
Congress enacted section 1071 for the
purpose of facilitating enforcement of
fair lending laws and enabling
communities, governmental entities,
and creditors to identify business and
community development needs and
opportunities of women-owned,
minority-owned, and small businesses.
The Bureau is unable to readily quantify
any of these benefits with precision,
both because the Bureau does not have
the data to quantify all benefits and
because the Bureau is not able to assess
completely how effective the
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implementation of section 1071 will be
in achieving those benefits. The Bureau
believes that its proposals appropriately
implement the statutory mandate of
section 1071 to effectuate the section’s
stated purposes. As discussed further
below, as a data reporting rule, most
provisions of the proposal would benefit
small businesses in indirect ways.
Nevertheless, the Bureau believes that
the impact of enhanced transparency
would substantially benefit small
businesses. For example, the proposed
rule would facilitate the detection (and
thus remediation) of discrimination;
promote public and private investment
in certain under-served markets; and
promote competitive markets.
Quantifying and monetizing these
benefits would require identifying all
possible uses of section 1071 data,
establishing causal links to the resulting
public benefits, and then quantifying
the magnitude of these benefits. The
Bureau seeks comment on whether there
are additional data sources available
regarding the benefits to small
businesses of the proposed rule. The
Bureau is particularly interested in the
quantifiable impact of increased
transparency on financial institution
behavior, and the need for public and
private investment. The Bureau is
unaware of data that would enable
reliable quantitative estimates of all of
these effects.
Similar issues arise in attempting to
quantify the benefits to covered
financial institutions. Certain benefits to
covered financial institutions are
difficult to quantify. For example, the
Bureau believes that the section 1071
data will reduce the compliance burden
of fair lending reviews for lower risk
financial institutions by reducing the
‘‘false positive’’ rates during fair lending
prioritization by regulators. The Bureau
also believes that data made public
pursuant to the proposed rule will allow
financial institutions to better
understand the demand for small
business credit products and the
conditions under which they are being
supplied by other covered financial
institutions. The Bureau believes that
such benefits to financial institutions
could be substantial. Nevertheless,
quantifying them would require data
that are currently unavailable.
In light of these data limitations, the
discussion below generally provides a
qualitative consideration of the benefits
and impacts of the proposed rule.
General economic principles, together
with the limited data available, provide
insight into these benefits and impacts.
Where possible, the Bureau makes
quantitative estimates based on these
principles and the data that are
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available. The Bureau seeks comment
on the appropriateness of the approach
described above, including additional
data relevant to the benefits to small
businesses and covered financial
institutions.
D. Coverage of the Proposed Rule
The proposed rule provides that
financial institutions (both depository
and nondepository) that meet all the
other criteria for a ‘‘financial
institution’’ in proposed § 1002.105(a)
would only be required to collect and
report section 1071 data if they
originated at least 25 covered credit
transactions in each of the two
preceding calendar years. See proposed
§ 1002.105(b).
As discussed above, market-wide data
on small business lending are currently
limited. The Bureau is unaware of any
comprehensive data available on
originations for all financial institutions,
which would be needed in order to
precisely identify all institutions
covered by the rule. To estimate
coverage of the proposed rule, the
Bureau uses publicly available data for
two groups of financial institutions:
Depository and nondepository
institutions.
To estimate coverage of depository
institutions, the Bureau relies on NCUA
Call Reports to estimate coverage for
credit unions, including for those that
are not federally insured, and FFIEC
Call Reports and the CRA data to
estimate coverage for banks and savings
associations. For the purposes of the
analysis in this part VII, the Bureau
estimates the number of depository
institutions that would have been
required to report in 2019, based on the
estimated number of originations of
covered products for each institution in
2017 and 2018.871 The Bureau accounts
for mergers and acquisitions between
2017 and 2019 by assuming that any
depository institutions that merged in
those years report as one institution.
As discussed above, the NCUA Call
Report captures data on all loans over
$50,000 to members for commercial
purposes, regardless of any indicator
about the business’s size and including
number and dollar value of originations.
For the purposes of estimating the
impacts of the proposed rule, the
Bureau uses the annual number of
originated commercial loans to members
reported by credit unions as a proxy for
the annual number of originated
covered credit transactions under the
871 The Bureau uses 2019 instead of 2020 to
estimate coverage during a year unaffected by
pandemic conditions.
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proposed rule.872 These are the best data
available for estimating the number of
credit unions that may be covered by
the proposed rule. However, the Bureau
acknowledges that the true number of
covered credit unions may be different
than what is presented here. For
example, this proxy may overestimate
the number of credit unions that would
be covered if some commercial loans to
members are not covered because the
member is taking out a loan for a large
business. Alternatively, this proxy may
underestimate the number of credit
unions that would be covered by the
proposed rule if credit unions originate
a substantial number of covered credit
transactions with origination values
under $50,000.
As discussed above, the FFIEC Call
Report captures banks’ and savings
associations’ outstanding number and
amount of small loans to businesses
(i.e., loans originated under $1 million
to businesses of any size; small loans to
farms are those originated under
$500,000). The CRA requires banks and
savings associations with assets over a
specified threshold ($1.322 billion as of
2021) 873 to report loans to businesses in
original amounts of $1 million or less.
For the purposes of estimating the
impacts of the proposed rule, the
Bureau follows the convention of using
small loans to businesses as a proxy for
loans to small businesses and small
loans to farms as a proxy for loans to
small farms.874 These are the best data
available for estimating the number of
banks and savings associations that may
872 For this analysis, the Bureau includes all types
of commercial loans to members except
construction and development loans. This includes
loans secured by multifamily residential property;
loans secured by farmland; loans secured by owneroccupied, non-farm, non-residential property; loans
secured by non-owner occupied, non-farm, nonresidential property; loans to finance agricultural
production and other loans to farmers; commercial
and industrial loans; unsecured commercial loans;
and unsecured revolving lines of credit for
commercial purposes.
873 See Fed. Fin. Insts. Examination Council,
Community Reinvestment Act, 2021 Reporting
Criteria (Dec. 16, 2020), https://www.ffiec.gov/cra/
reporter21.htm.
874 The FFIEC Call Reports do not collect
information on small loans to businesses made for
the purposes of funding multifamily property. In
order to account for these loans in the coverage
estimates, for each bank or savings association, the
Bureau adds the number of multifamily loans
originated for business purposes with origination
amounts under $1 million reported in the HMDA
data to the estimated number of small business
lending originations. While multifamily loans for
business purposes have been reportable in HMDA
data for some time, these loans have only been
identifiable with data fields available since 2018.
For simplicity, the Bureau assumes that a bank or
savings association made the same number of
multifamily loans for business purposes with
origination amounts under $1 million in 2017 as it
did in 2018.
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be covered by the proposed rule.
However, the Bureau acknowledges that
the true number of covered banks and
savings associations may be different
than what is presented here. For
example, this proxy would overestimate
the number of banks and savings
associations covered by the rule if a
significant number of small loans to
businesses and farms are to businesses
or farms that are considered large under
the definition of a small business in the
proposed rule. Alternatively, this proxy
would underestimate the number of
banks and savings associations covered
by the rule if a significant number of
businesses and farms that are small
under the proposed rule take out loans
that are larger than $1 million or
$500,000, for businesses and farms,
respectively.
Although banks and savings
associations reporting under the CRA
are required to report the number of
originations of small loans to businesses
and farms, the Bureau is not aware of
any comprehensive dataset that contains
originations made by banks and savings
associations below the CRA reporting
threshold. To fill this gap, the Bureau
simulated plausible values for the
annual number and dollar value of
originations for each bank and savings
association that falls below the CRA
reporting threshold for 2017, 2018, and
2019.875 The Bureau generated
simulated originations in order to
account for the uncertainty around the
exact number and value of originations
for these banks and saving associations.
To simulate these values, the Bureau
assumes that these banks have the same
relationship between outstanding and
originated small loans to businesses and
farms as banks and savings associations
above the CRA reporting threshold.
First, the Bureau estimated the
relationship between originated and
outstanding numbers and balances of
small loans to businesses and farms for
CRA reporters. Then the Bureau used
this estimate, together with the
outstanding numbers and balances of
small loans to businesses and farms of
non-CRA reporters, to simulate these
plausible values of originations. The
Bureau has documented this
methodology in more detail in its
Supplemental estimation methodology
875 Based on FFIEC Call Report data as of
December 2019, of the 5,177 banks and savings
associations that existed in 2019, only about 11
percent were required to report under CRA. That is,
only about 11 percent of banks and savings
associations had assets below $1.284 billion, the
CRA reporting threshold in 2019. See Fed. Fin.
Insts. Examination Council, 2019 Reporting Criteria,
https://www.ffiec.gov/cra/reporter19.htm (last
visited Aug. 5, 2021).
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for institutional coverage and marketlevel cost estimates in the small
business lending data collection notice
of proposed rulemaking released
concurrently with this proposal.876
Below, the Bureau reports a range of
values for the estimated number of
depository institutions covered under
the proposed rule. The range represents
a 95 percent confidence interval over
the number of credit unions, banks and
savings associations that would be
covered under the proposed rule. The
Bureau presents this range to reflect the
uncertainty associated with the estimate
and notes that the uncertainty is driven
by the lack of data on originations by
banks and savings associations below
the CRA reporting threshold.
The Bureau estimates that about 992
nondepository institutions will be
covered by the proposed rule: About
340 nondepository CDFIs; about 100
MCA providers; about 30 fintech
companies; about 300 commercial
finance companies; about 100
governmental lending entities; about 50
nondepository mortgage providers; and
72 Farm Credit System members.877 See
part II.D above for more detail on how
the Bureau arrived at these estimates.
Based on 2019 data from FFIEC and
NCUA Call Reports and the CRA data,
using the methodology described above,
the Bureau estimates that the number of
depository institutions that would be
required to report under the proposed
rule would be between approximately
4,000 and 4,200. The Bureau estimates
that between 3,600 and 3,800 banks and
savings associations and about 400
credit unions would be required to
report under the proposed rule.
The Bureau has attempted to use the
best available data and methods to
estimate the number of financial
institutions that would be covered by
the proposed rule. The Bureau seeks
comment on whether there are
additional data sources that could
provide better estimates of coverage.
The Bureau also seeks comment on its
Supplemental estimation methodology
for institutional coverage and marketlevel cost estimates in the small
business lending data collection notice
of proposed rulemaking describing the
methods used to estimate coverage.
876 This document is available at https://
www.consumerfinance.gov/data-research/researchreports/supplemental-estimation-methodologiessmall-business-lending-data-collection-nprm/.
877 The Bureau provides estimates for the majority
of nondepository institutions but knows an exact
number of members of the Farm Credit System.
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E. Methodology for Generating Cost
Estimates
The Bureau used previous HMDA
rulemaking estimates as the basis for its
review of 1071 data collection and
reporting tasks that would impose onetime and ongoing costs. In developing
its ongoing cost methodology to
estimate the impacts of its 2015 HMDA
final rule, the Bureau used interviews
with financial institutions to understand
the processes of complying with a
regulation that requires collecting and
reporting credit application data and to
generate estimates of how changes to the
reporting requirements would impact
the ongoing costs of collecting and
reporting mortgage application data.878
To analyze the potential impacts of this
proposed rule, the Bureau adapted its
methodology from its HMDA
rulemaking activities to the small
business lending market.
The Bureau expects that the tasks
required for data collection, checking
for accuracy, and reporting under the
proposed rule would be similar to those
under HMDA. The similarities in data
collection and reporting tasks allowed
the Bureau to leverage its previous
rulemaking experience in its analysis of
the potential impacts of this proposed
rule.
However, there are significant
differences between the home mortgage
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878 Home Mortgage Disclosure (Regulation C), 80
FR 66128, 66269 (Oct. 28, 2015).
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and small business lending market. For
example, small business lending is
generally less automated, and has a
wider variety of products, smaller
volumes, and smaller credit amounts.
The Bureau used the SBREFA process,
research using publicly available
information, and the Bureau’s general
expertise regarding the small business
lending market to determine how these
differences would change the tasks
required for data collection, checking
for accuracy, and reporting.
During the HMDA rulemaking
process, the Bureau identified seven key
aspects or dimensions of compliance
costs with a data collection and
reporting rule: (1) The reporting system
used; (2) the degree of system
integration; (3) the degree of system
automation; (4) the tools for geocoding;
(5) the tools for performing
completeness checks; (6) the tools for
performing edits; and (7) the
compliance program. The Bureau
assumes that financial institutions will
set up their 1071 reporting in a manner
similar to how HMDA reporting was
implemented.879 The Bureau presented
this list of key aspects or dimensions of
compliance costs in its SBREFA
Outline, but did not receive specific
879 For example, the Bureau assumes that
financial institutions will integrate their small
business data management system with their other
data systems the same way that similar institutions
integrated their HMDA management system.
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feedback or suggestions about these
areas of compliance costs.
The Bureau found during the HMDA
rulemaking process that, generally, the
complexity of a financial institution’s
approach across dimensions was
consistent—that is, a financial
institution generally would not use less
complex approaches on some
dimensions and more complex
approaches on others.880 This allowed
the Bureau to classify financial
institutions, including depository
institutions and nondepository
institutions, into three broad tiers
according to the overall level of
complexity of their compliance
operations. Using very similar
assumptions to HMDA, the Bureau’s
estimation of the costs of this proposed
rule also assumed that complexity
across dimensions of a financial
institution’s small business lending data
collection and reporting system is
consistent.
Table 3 below summarizes the typical
approach to those seven key aspects or
dimensions of compliance costs across
three representative types of financial
institutions based on level of
complexity in compliance operations.
Financial institutions that are Type A
have the lowest level of complexity in
compliance operations, while Type B
and Type C have the middle and highest
levels of complexity, respectively.
880 80
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In previous HMDA rulemakings, the
Bureau found that the number of loan
applications received was largely
correlated with overall complexity of
financial institutions’ compliance
operations.882 The Bureau used this
observation from HMDA, in addition to
early outreach to financial institutions
and data from Call Reports and publicly
available data from the CDFI Fund, to
generate assumptions about the number
of annual small business lending
applications processed by each FI type.
The Bureau assumes that Type A FIs
receive fewer than 300 applications per
year, Type B FIs receive between 300
881 The Bureau expects the development of a
market for small business data management systems
similar to HMDA management systems that
financial institutions will license or purchase from
third parties.
882 80 FR 66128, 66270 (Oct. 28, 2015).
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and 2,000 applications per year, and
Type C FIs receive more than 2,000
applications per year. The Bureau
assumes that, for types A and B, one out
of two small business applications will
result in an origination. Thus, the
Bureau assumes that Type A FIs
originate fewer than 150 products per
year and Type B FIs originate between
150 and 1,000 products per year. The
Bureau assumes that Type C FIs
originate one out of three applications
and more than 1,000 per year.883
883 The Bureau chose the 1:2 and 1:3 application
to origination ratios based on two sources of
information. First see Biz2Credit, Small Business
Loan Approval Rates Rebounded in May 2020:
Biz2Credit Small Business Lending Index (May
2020), https://cdn.biz2credit.com/appfiles/
biz2credit/pdf/report-may-2020.pdf, which shows
that, in December of 2019, large banks approved
small business loans at a rate of 27.5 percent, while
small banks and credit unions had approval rates
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The Bureau understands that costs
vary by financial institution due to
many factors, such as size, operational
structure, and product complexity. Due
to data limitations, the Bureau is unable
to capture many of the ways in which
costs vary by institution, and therefore
uses these representative financial
institutions with the above assumptions
for its analysis. In order to aggregate
costs to a market level, the Bureau must
map financial institutions onto its types
using discrete volume categories.
For the ongoing costs discussion in
part VII.F.3.ii below, the Bureau
discusses costs in the context of
representative institutions for ease of
of 49.9 percent and 40.1 percent. Additionally, and
supported by the Bureau’s data from supervisory
exams, the Bureau chose a 33 percent approval rate
as a conservative measure among these estimates for
complex financial institutions (Type C FIs).
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exposition. The Bureau assumes that a
representative Type A FI receives 100
small business credit applications per
year, a representative Type B FI receives
400 applications per year, and a
representative Type C FI receives 6,000
applications per year. The Bureau
further assumes that a representative
Type A FI originates 50 covered credit
transactions per year, a representative
Type B FI originates 200 covered credit
transactions per year, and a
representative Type C FI originates
3,000 covered credit transactions per
year.
The Bureau presented an earlier
version of this cost calculation
methodology in the SBREFA Outline
and during the SBREFA process.884 In
general, SERs provided minimal
feedback on the overall structure of the
categorization of financial institutions
and activities required to collect, check,
and report data under the proposed
rule.885 The Bureau has made two
changes to its methodology in response
to SER feedback. One SER stated that
the methodology would benefit from an
additional category of complexity
between Types B and C. To address this
issue, while the Bureau did not add an
additional category of complexity, it has
increased the number of applications
assumed for Type A FIs and Type B FIs
so that these institutions cover more of
the small business credit market. The
Bureau has adjusted the categories of
applications for Type A FIs and Type B
FIs to 100 and 400 (from 75 and 300,
respectively). Several SERs also
suggested that the ratio of applications
per originated loans used in the
SBREFA Outline was too high. The
Bureau has accordingly updated its
assumptions to assume two applications
per origination (instead of its original
three-to-one ratio) for Type A FIs and
Type B FIs.
The Bureau seeks comment on its
methodologies, as described in this part
VII.E (including parts VII.E.1, VII.E.2,
and VII.E.3 below), for estimating onetime costs of implementation,
estimating ongoing costs of
implementation, and generating marketlevel estimates of one-time and ongoing
costs.
1. Methodology for Estimating OneTime Costs of Implementation of the
Proposed Rule
The Bureau has identified the
following eight categories of one-time
costs that would likely be incurred by
884 SBREFA
Outline at 52–56.
SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 37–38.
885 The
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financial institutions to develop the
infrastructure to collect and report data
under the proposed rule:
1. Preparation/planning
2. Updating computer systems
3. Testing/validating systems
4. Developing forms/applications
5. Training staff and third parties (such as
dealers and brokers)
6. Developing policies/procedures
7. Legal/compliance review
8. Post-implementation review of compliance
policies and procedures
Conversations with financial
institutions have informed the Bureau’s
understanding of one-time costs.
Financial institutions will likely have to
spend time and resources understanding
the regulation, developing the required
policies and procedures for their
employees to follow, and engaging a
legal team to review their draft policies
and procedures. Additionally, financial
institutions may require new
equipment, such as new computer
systems that can store and check the
required data points; new or revised
application forms or related materials to
collect any data that would be required
under the proposed rule that they do not
currently collect, including minorityowned and women-owned business
status and the ethnicity, race, and sex of
applicants’ principal owners, and to
provide any related disclosures required
by the rule. Some financial institutions
mentioned that they may store, check,
and report data using third-party
providers such as Fiserv, Jack Henry,
LaserPro, or Fidelity Information
Systems (FIS), while others may use
more manual methods of data storage,
checking, and reporting using software
applications such as Microsoft Excel.
Financial institutions would also engage
in a one-time training of all small
business lending staff to ensure that
employees understand the new policies
and procedures. After all new policies
and procedures have been implemented
and systems/equipment deployed,
financial institutions will likely
undertake a final internal review to
ensure that all the requirements of the
section 1071 regulation have been
satisfied.
The Bureau presented the one-time
cost categories in the SBREFA Outline
and during the SBREFA process.886 The
SERs generally confirmed that the eight
categories listed above accurately
capture the components of one-time
costs.
The Bureau conducted a survey
regarding one-time implementation
costs for section 1071 compliance
targeted at FIs who extend small
886 SBREFA
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business credit.887 The Bureau
developed the survey instrument based
on guidance from industry on the
potential types of one-time costs
institutions might incur if required to
report under a 1071 rule and tested the
survey instrument on a small set of FIs,
incorporating their feedback prior to
implementation. Estimates from survey
respondents form the basis of the
Bureau’s estimates for one-time costs in
assessing the potential impact of this
proposed rule. The survey was broadly
designed to ask about the one-time costs
of reporting data under a regime that
only includes mandatory data points,
uses a reporting structure similar to
HMDA, uses the Regulation B definition
of an ‘‘application,’’ and uses the
respondent’s own internal small
business definition. The survey was
divided into three sections: Respondent
Information, One-Time Costs, and the
Cost of Credit to Small Entities.
In the Respondent Information
section, the Bureau obtained basic
information about the respondent,
including information on the type of
institution, its size, and its volume of
small business lending. (The Bureau did
not, however, obtain the actual name or
other directly identifying information
about respondents.) The One-Time
Costs section of the survey measured the
total hours, staff costs, and non-salary
expenses associated with the different
tasks comprising one-time costs. Using
the reported costs of each task, the
Bureau estimated the total one-time cost
for each respondent. The Cost of Credit
to Small Entities section dealt with the
respondent’s anticipated response to the
increased compliance costs of being
covered by the rule in order to
understand the impacts of the regulation
on its small business lending activity,
including any anticipated potential
changes to underwriting standards,
volume, prices, product mix, or market
participation.
The Bureau worked with several
major industry trade associations to
recruit their members to respond to the
survey. A total of 105 financial
institutions responded to the survey.
To estimate one-time costs, the
Bureau needed information on a
financial institution’s one-time costs by
category and number of originations. Of
the 105 total respondents, 49 answered
these questions. The Bureau will
henceforth refer to these respondents as
the ‘‘cost estimation sample.’’ Of these
respondents, 42 (86 percent) self887 The One-Time Cost Survey was released on
July 22, 2020; the response period closed on
October 16, 2020. The OMB control number for this
collection is 3170–0032.
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reported that they were a depository
institution (bank or credit union). The
remaining seven (14 percent) were
nondepository institutions. Table 4
presents the self-reported asset size of
the 42 depository institution
respondents in the cost estimation
sample.888
For the purposes of estimating onetime costs, the Bureau distinguishes
between depository institutions and
nondepository institutions. The majority
of nondepository institutions are not
currently subject to any data reporting
requirements, with the notable
exception of nondepository CDFIs. The
Bureau anticipates that covered
financial institutions that are not
currently subject to data reporting
requirements will need to make more
changes to their existing business
operations in order to comply with the
requirements of the new rule. This
expectation is confirmed by the higher
estimated one-time costs for
nondepository institutions relative to
depository institutions discussed in part
VII.F.3.i.
The Bureau categorizes depository
institution respondents in the cost
estimation sample into four groups
according to the respondents’ selfreported total originations. The first
group contains the two depository
institutions that reported fewer than 25
originations; the Bureau assumes these
institutions would not report under the
proposed rule. The second group
contains ten depository institutions that
reported between 25 and 149
originations. The Bureau categorizes
these as Type A DIs (that is, a DI that
is Type A as defined above.) The third
group contains the 19 depository
institutions that reported between 150
and 999 originations. The Bureau
categorizes these as Type B DIs. The
final group contains the 11 depository
institutions that reported 1,000 or more
originations. The Bureau categorizes
these as Type C DIs.
There are not enough nondepository
institutions in the cost estimation
sample to separate nondepository
institutions into Types A, B, and C and
obtain meaningful estimates. Instead,
the Bureau is relying on the assumption
that nondepository institutions (referred
to as Non-DIs for purposes of this
analysis) will incur the same one-time
costs regardless of complexity.
The Bureau estimated the one-time
costs for each of the four categories of
financial institutions (Type A DI, Type
B DI, Type C DI, and Non-DI) using the
following methodology.
For each of the eight categories of onetime costs, the Bureau asked financial
institutions to estimate and report the
total number of hours that junior, midlevel, and senior staff would spend on
each task, along with any additional
non-salary expenses. If a respondent did
not provide estimates for any
component (i.e., staff hours or nonsalary expenses) of any category, it is
not counted as part of the cost
estimation sample. If a respondent
provided estimates for some
components but did not provide an
estimate for a particular component
(e.g., non-salary expenses for
preparation/planning) then the Bureau
assumed that the respondent estimated
zero for that component.
The Bureau asked survey respondents
to report the average hourly wage for
junior, mid-level, and senior/executive
staff involved in the one-time cost
categories. However, for the purposes of
estimating one-time costs, the Bureau
assumed a constant wage across
financial institutions for each level of
staff. For junior staff, the Bureau used
$16.18, the 10th percentile hourly wage
estimate for ‘‘loan officers’’ according to
the 2020 Occupational Employment
Statistics compiled by the Bureau of
Labor Statistics.889 For mid-level staff,
the Bureau used $36.99, the mean
hourly wage estimate for ‘‘loan officers.’’
For senior staff, the Bureau used $64.35,
the 90th percentile hourly wage
estimate for ‘‘loan officers.’’ To account
for non-monetary compensation, the
Bureau also scaled these hourly wages
up by 43 percent.890 The Bureau
assumed a total hourly compensation of
$23.14 for junior staff, as compared to
$28.76, the mean of the junior wages
888 Nondepository institutions also reported
assets. The Bureau separately reports asset category
for depository institutions because asset sizes are
not as comparable between depositories and
nondepositories. The Bureau does not report asset
sizes for nondepository respondents because there
were too few respondents to report separately
without risking re-identification of respondents.
889 See Bureau of Labor Statistics, U.S. Dep’t of
Labor, Occupational Employment and Wage
Statistics (May 2020), https://www.bls.gov/oes/
current/oes132072.htm.
890 The March 2020 Employer Costs for Employee
Compensation from the Bureau of Labor Statistics
documents that wages and salaries are, on average,
70 percent of employee compensation for private
industry workers. The Bureau inflates the hourly
wage to account for 100 percent of employee
compensation ((100/70) ¥ 1) * 100 = 43 percent).
See Bureau of Labor Statistics, U.S. Dep’t of Labor,
Employer Costs for Employee Compensation (Mar.
2020), https://www.bls.gov/news.release/archives/
ecec_06182020.pdf.
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P25¥1.5*(P75¥P25) where P75 and P25
are the 75th and 25th percentiles,
respectively, of total costs within that
group. Using this method, the Bureau
identified one outlier in each Type A DI,
Type B DI, and Type C DI group and no
outliers in the Non-DI group.
In addition to the total estimated onetime costs, the Bureau is interested in
the hours, non-salary expenses, and
total costs associated with each of the
different one-time cost categories. For
each group, the Bureau estimated each
component of one-time costs by taking
the mean of the estimated component
within the group, after excluding
outliers. For example, the estimated
number of junior hours required by DIs
of Type A to update computer systems
is the mean number of junior hours
reported by the nine DIs of Type A that
were in the cost estimation sample,
excluding one outlier. The Bureau
estimated the cost associated with each
category as the sum of the junior wage
multiplied by the estimated junior
hours, the mid-level wage multiplied by
the estimated mid-level hours, and the
senior wage multiplied by the estimated
senior hours, and the estimated nonsalary expenses.
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2. Methodology for Estimating Ongoing
Costs of Implementation of the Proposed
Rule
The Bureau identified 15 specific data
collection and reporting activities that
would impose ongoing costs. Table 5
presents the full list of 15 activities.
Activities 1 through 3 can broadly be
described as data collection activities:
These tasks are required to intake data
and transfer it to the financial
institution’s small business data entry
system. Activities 4 through 10 are
related to reporting and resubmission:
These tasks are required to collect
required data, conduct internal checks,
and report data consistent with the
proposed rule. Activities 11 through 13
are related to compliance and internal
audits: Employee training, and internal
and external auditing procedures
required to ensure data consistency and
reporting in compliance with the rule.
Finally, activities 14 and 15 are related
to 1071 examinations by regulators:
These tasks will be undertaken to
prepare for and assist during regulatory
compliance examinations.
BILLING CODE 4810–25–P
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reported by respondents. The Bureau
assumed a total hourly compensation of
$52.90 for mid-level staff, as compared
to $48.94, the mean of the mid-level
wages reported by respondents. The
Bureau assumed a total hourly
compensation of $92.02, as compared to
$90.19, the mean of the senior/executive
wages reported by respondents.
For each respondent in the cost
estimation sample, the Bureau
calculated the cost of each one-time cost
category as the sum of the junior wage
multiplied by the reported junior hours,
the mid-level wage multiplied by the
reported mid-level hours, and the senior
wage multiplied by the reported senior
hours and the reported non-salary
expenses. The total cost for the
respondent was the sum of the costs
across all eight categories.
After calculating the total costs for
each respondent, the Bureau identified
outliers within the four groups of
financial institutions (Type A DI, Type
B DI, Type C DI, and Non-DI) using the
interquartile range method, a standard
outlier identification method. For each
group of financial institutions, an
observation is considered an outlier if
the estimated total cost is greater than
1.5*(P75¥P25) + P75 or less than
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number of applications the institution
receives, or a ‘‘fixed cost’’ that does not
depend on the number of applications.
Table 6 shows these calculations for a
Type A FI, or the institution with the
least amount of complexity. Table 7
below summarizes the activities whose
calculation differs by institution
complexity and shows the calculations
for Type B FIs and Type C FIs (where
they differ from those for a Type A
FI).891
applications. The term ‘‘fixed’’ means the
compliance cost does not depend on the number of
applications (even if there are other factors upon
which it may vary).
BILLING CODE 4810–25–C
891 In this table, the term ‘‘variable’’ means the
complance cost depends on the number of
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Table 6 provides an example of how
the Bureau calculated ongoing
compliance costs associated with each
compliance task. The table shows the
calculation for each activity and notes
whether the task would be a ‘‘variable
cost,’’ which would depend on the
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Many of the activities in Table 6
require time spent by loan officers and
other financial institution employees.
To account for time costs, the
calculation used the hourly
compensation of a loan officer
multiplied by the amount of time
required for the activity. The Bureau
used a mean hourly wage of $36.99 for
loan officers, based on data from the
Bureau of Labor Statistics.892 To
account for non-monetary
compensation, the Bureau scaled this
hourly wage by 43 percent to arrive at
a total hourly compensation of $52.90
for use in these calculations.893 The
Bureau used assumptions from its 2015
HMDA final rule analysis, updated to
reflect differences between mortgage
lending and small business lending, to
estimate time spent on ‘‘ongoing
tasks.’’ 894 As an example of a time
calculation, the Bureau estimated that
transcribing the required data points
would require approximately 11
minutes per application for a Type A FI.
The calculation multiplied the number
of minutes by the number of
applications and the hourly
compensation to arrive at the total cost,
on an annual basis, of transcribing data.
As another example, the Bureau
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892 These data reflect the mean hourly wage for
‘‘loan officers’’ according to the 2020 Occupational
Employment Statistics compiled by the Bureau of
Labor Statistics. See Bureau of Labor Statistics, U.S.
Dep’t of Labor, Occupational Employment and
Wages (May 2020), https://www.bls.gov/oes/
current/oes132072.htm.
893 The March 2020 Employer Costs for Employee
Compensation from the Bureau of Labor Statistics
documents that wages and salaries are, on average,
70 percent of employee compensation for private
industry workers. The Bureau inflates the hourly
wage to account for 100 percent of employee
compensation ((100/70) ¥ 1) * 100 = 43 percent).
Bureau of Labor Statistics, U.S. Dep’t of Labor,
Employer Costs for Employee Compensation (Mar.
2020), https://www.bls.gov/news.release/archives/
ecec_06182020.pdf.
894 Home Mortgage Disclosure Act (Regulation C),
80 FR 66128 (Oct. 28, 2015).
Some differences, for example, are reflected in
the number of applications, the number of data
points per application, and the number of loan
officers for the representative institutions.
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estimated that ongoing training for loan
officers to comply with a financial
institution’s 1071 policies and
procedures would take about two hours
per loan officer per year. The cost
calculation multiplies the number of
hours by the number of loan officers and
by the hourly compensation.
To arrive at the amount of time
required per application for each of the
15 tasks covered financial institutions
would conduct to collect, check, and
report 1071 data, the Bureau began with
the assumptions made for each task for
the 35 data points under the 2015
HMDA final rule and then adjusted
these required times relative to the
number of data points required under
the proposed 1071 rule. The proposed
rule would require covered financial
institutions to collect 21 data points for
each covered application. Several of
these data points have multiple
components. For example, the credit
type data point has three
subcomponents of product type, the
type of guarantee, and the term. The
data points for pricing information and
the ethnicity, race, and sex of principal
owners also have multiple
subcomponents.
Some activity costs in Table 6 depend
on the number of applications. It is
important to differentiate between these
variable costs and fixed costs because
the type of cost impacts whether and to
what extent covered institutions might
be expected to pass on their costs to
small business loan applicants in the
form of higher interest rates or fees
(discussed in more detail in part VII.F.4
below). Data collection, reporting, and
submission activities such as geocoding
data, standard annual edits and internal
checks, researching questions, and
resolving question responses are
variable costs. All other activities are
fixed cost because they do not depend
on the overall number of applications
being processed. An example of a fixed
cost calculation is exam preparation,
where the hourly compensation is
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multiplied by the number of total hours
required by loan officers to prepare for
1071-related compliance examinations.
Table 7 shows where and how the
Bureau assumed Type B FIs and Type
C FIs differ from Type A FIs in its
ongoing cost methodology. Type B FIs
and Type C FIs use more automated
procedures, which result in different
cost calculations. For example, for Type
B FIs and Type C FIs, transferring data
to the data entry system and geocoding
applications are done automatically by
business application data management
software licensed annually by the
financial institution. The relevant
address is submitted for geocoding via
batch processing, rather than done
manually for each application. The
additional ongoing geocoding costs
reflect the time spent by loan officers on
‘‘problem’’ applications—that is, a
percentage of overall applications that
the geocoding software misses—rather
than time spent on all applications.
However, Type B FIs and Type C FIs
have the additional ongoing cost of a
subscription to a geocoding software or
service as well as a data management
software that represents an annual fixed
cost of reporting 1071 application data.
This is an additional ongoing cost that
less complex Type A FIs will not incur.
The Bureau expects that Type A FIs will
use free geocoding software available
from the FFIEC or the Bureau, which
may include a new batch function that
could be developed by either the FFIEC
or the Bureau.
Additionally, audit procedures differ
between the three representative
institution types. The Bureau expects a
Type A FI would not conduct an
internal audit but would pay for an
annual external audit. A Type B FI
would be expected to conduct a simple
internal audit for data checks and also
pay for an external audit on an annual
basis. Type C FIs would have a
sophisticated internal audit process in
lieu of an external audit.
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Table 8 below shows major
assumptions that the Bureau made for
each activity for each type of financial
institution. Table 8 provides the total
number of hours the Bureau assumes are
required for each task that requires
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labor. For example, the Bureau assumes
that transcribing data for 100
applications will require 18 hours of
labor. The table also shows the assumed
fixed cost of software and audits, as well
as areas where the Bureau assumes there
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will be cost savings due to technology.
In several cases, the activity does not
apply to financial institutions of a
certain type, and are therefore not
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3. Methodology for Generating MarketLevel Estimates of One-Time and
Ongoing Costs
To generate market-level cost
estimates, the Bureau relied on the
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estimates of the volume of small
business lending originations described
in part VII.D above. As with
institutional coverage, the Bureau
separates market-level cost estimates
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into estimates for depository institutions
and for nondepository institutions.
For depository institutions, the
Bureau estimated which institutions of
those that existed at the end of 2019
would likely be covered or not covered
by the proposed rule. An institution
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would be required to report data on
applications received in 2019 if it
originated at least 25 covered
originations in each of the preceding
two years (i.e., 2017 and 2018). If two
depository institutions merged between
the end of 2017 and the end of 2019, the
Bureau assumes that those institutions
would report as one entity. The Bureau
then categorized each institution as a
Type A DI, Type B DI, or Type C DI
based on its originations in 2019.
Depository institutions with 0 to 149
covered originations in 2019 are
categorized as Type A. Depository
institutions with 150 to 999 covered
originations are categorized as Type B.
Depository institutions with 1,000 or
more covered originations are
categorized as Type C. For each
depository institution, the Bureau
assigns the appropriate estimated onetime cost, ongoing fixed cost, ongoing
variable cost per application, and
applications per origination estimates
associated with its institution type. The
estimated number of annual
applications for each institution is the
estimated number of originations
multiplied by the number of
applications per origination for that
institution type. The annual ongoing
cost for each institution is the ongoing
fixed cost plus the ongoing variable cost
per application multiplied by the
estimated number of applications.
To generate market-level estimates,
the Bureau first calculates the estimated
one-time and annual ongoing costs for
each depository institution covered by
the proposed rule based on the
estimated number of originations for
that institution in 2019. The Bureau
then sums over the covered depository
institutions to find market-level
statistics of total costs. As with coverage
estimates, the Bureau presents a range of
estimates for market-level statistics. The
range reflects the uncertainty associated
with the estimate of costs for banks and
savings associations below the CRA
reporting threshold. The Bureau has
documented how it calculated these
ranges in its Supplemental estimation
methodology for institutional coverage
and market-level cost estimates in the
small business lending data collection
notice of proposed rulemaking.895
The Bureau is unaware of institutionlevel data on originations by
nondepository institutions that are
comprehensive enough to estimate costs
using the same method as that for
depository institutions. Therefore, to
895 See https://www.consumerfinance.gov/dataresearch/research-reports/supplemental-estimationmethodologies-small-business-lending-datacollection-nprm/.
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generate market-level estimates for
nondepository institutions, the Bureau
relies on the estimates discussed above
and several key assumptions. The
Bureau assumes that fintech lenders and
MCAs are Type C FIs because they
generally have more automated systems
and originate more products. The
Bureau assumes that the remaining
nondepository institutions are Type B
FIs. The Bureau assumes that each
nondepository receives the same
number of applications as the
representative institution for each type,
as described above. Hence, the Bureau
assumes that fintech lenders and MCAs
each receive 6,000 applications per year
and all other nondepository institutions
receive 400 applications per year. As
explained above, the Bureau also
assumes that all nondepository
institutions have the same one-time
costs.
F. Potential Benefits and Costs to
Covered Financial Institutions and
Small Businesses
1. Benefits to Small Businesses
The proposed rule could benefit small
businesses by collecting data that
further the two statutory purposes of
section 1071. Those purposes are to
facilitate the enforcement of fair lending
laws and enable communities,
governmental entities, and creditors to
identify business and community
development needs and opportunities of
women-owned, minority-owned, and
small businesses. Some of the benefits
to small businesses discussed below
stem from the public release of the data
collected under the proposed rule. As
discussed in more detail in part VI, the
Bureau is proposing to exercise its
discretion under ECOA section
704B(e)(4) to delete or modify data
collected under section 1071 which are
or will be available to the public where
the Bureau determines that the deletion
or modification of the data would
advance a privacy interest. The below
discussion considers the benefits of
unmodified data released for public
consumption, but the Bureau
acknowledges that the benefits derived
from public disclosure may be lower if
modifications are made that reduce the
utility of the public dataset.
Data collected under the proposed
rule would constitute the largest and
most comprehensive data in the United
States on credit availability for small
businesses. These data would provide
important insight into possible
discriminatory lending patterns in the
small business lending market.
Regulators could use the data to gauge
fair lending risks and prioritize
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examinations of lenders that have a
higher likelihood of violating
antidiscrimination statutes. This would
lead to a more efficient use of
government resources in enforcing fair
lending provisions. Furthermore, the
public nature of the dataset would allow
for members of the public to review the
public dataset for possible violations of
antidiscrimination statutes. The
increased ability to perform fair lending
analyses would benefit women-owned
and minority-owned small businesses
both directly, in the form of remediation
when lenders ultimately are found to
have violated fair lending laws, and
indirectly, with increased access
resulting from the scrutiny placed on
financial institutions.
Central to the fair lending benefit of
the dataset is the proposed collection of
the action taken data point. Existing
datasets that collect transaction-level
data only contain data on originated
small business loans. Application-level
data, combined with the collection of
action taken data, could allow users to
construct approval or denial rates, for
example, for particular lenders. Such
analyses could indicate whether, for
example, women-owned or minorityowned small businesses are being
denied credit at higher rates than other
small businesses.
The proposed rule would also include
several data points on the pricing of
covered credit transactions that are
originated or approved but not accepted.
Data users could examine, for example,
whether women-owned or minorityowned small businesses are charged
higher interest rates, origination
charges, or initial annual charges than
similarly situated businesses that are
not women- or minority-owned. The
proposed rule would also require
information on prepayment penalties,
which is an area of increasing concern
due to the potential for predatory
lending practices.896 Users could
examine whether women-owned or
minority-owned small firms are more
likely to have prepayment penalties on
extended credit.
Several data points included in the
proposed rule would contribute to more
accurate fair lending analyses by
allowing users to compare credit
products with similar characteristics.
For example, there are likely differences
in approval rates and prices for covered
credit transactions based on credit
amount applied for and approved, all
896 Such concerns have led California, for
example, to include prepayment policies as a
required component of pricing disclosures in
commercial financing (see Cal. S.B. 1235 (Sept. 30,
2018), https://leginfo.legislature.ca.gov/faces/
billTextClient.xhtml?bill_id=201720180SB1235).
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three aspects of credit type (type of
credit product, types of guarantees, and
loan term), and credit purpose, since
these factors influence the risk of
extending credit. Many creditors also
consider characteristics about the small
business, such as industry, gross annual
revenue, or time in business during
their underwriting or pricing processes.
Supply and demand for small business
credit also varies over time and by
location, so the inclusion of census
tract, application date, and action taken
date could lead to more accurate
analyses. More accurate screening for
fair lending risk would, for example,
reduce the false positive rate observed
during fair lending prioritization and
increase the efficiency of fair lending
reviews.
Creditors would also likely use the
data to understand small business
lending market conditions more
effectively and at a more granular level
than is possible with existing data
sources, such as Call Reports, data from
public lending programs, or privately
purchased data. Data collected under
the proposed rule, combined with the
institution’s existing information on the
small business lending market, could
help creditors to identify potentially
profitable opportunities to extend
credit. For example, creditors could use
the census tract information to find
areas of high credit demand into which
they could consider expanding. Small
business owners would benefit from
increased credit availability.
Governmental entities will likely use
the data to develop solutions that
achieve policy objectives. For example,
loan guarantees provided by the SBA’s
7(a) and 504 programs are designed to
increase the availability of business
credit for businesses that otherwise have
difficulty accessing credit.
Governmental entities could use the
comprehensive data on applications for
covered credit transactions collected
under the proposed rule to identify
additional opportunities to create new—
or tailor existing—programs to advance
their small business lending policy
objectives.
The data collected under the
proposed rule would be the most
extensive data on credit access for
women-owned and minority-owned
small businesses, and such information
will help various data users in
understanding the needs and
opportunities of women-owned and
minority-owned small businesses. For
example, governmental entities often
create programs that specifically target
women-owned and minority-owned
businesses, such as those that reserve
government contracts, those that
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provide grants, or those specifically
targeted at women-owned and minorityowned small firms. Governmental
entities could use data collected under
the proposed rule to alter existing
programs or create new ones to meet the
needs of these business owners. Private
lenders could also use the data to find
untapped markets of credit demand
from women-owned and minorityowned small businesses.
As one of the premier data sources on
the small business credit market, data
collected under the proposed rule
would also facilitate rigorous academic
research. HMDA data, which are similar
in many ways to the data that will be
collected under the proposed rule, have
been analyzed in many scholarly
publications. The data collected under
section 1071 will provide academics
and other researchers a clearer window
into potential discrimination in the
small business credit market, as well as
a better understanding of small business
credit market trends and dynamics. Like
in the case of HMDA, data collected
under the proposed rule will be more
broadly used to understand how
business owners make borrowing
decisions, respond to higher prices, and
respond to risk.897
The proposed data points would
provide the above benefits in several
ways. The action taken and pricing
information data points would allow
various entities to monitor the tightness
of the small business credit market and
identify areas where there are high
denial rates for small business credit or
where it is provided only at high cost,
especially to women-owned or
minority-owned small businesses. Data
on census tract, NAICS code, gross
897 For examples of how HMDA data has
facilitated research on the mortgage market, see,
e.g., Bureau of Consumer Fin. Prot., Data Point:
Asian American and Pacific Islanders in the
Mortgage Market (July 2021), https://files.consumer
finance.gov/f/documents/cfpb_aapi-mortgagemarket_report_2021-07.pdf; Bureau of Consumer
Fin. Prot., Manufactured Housing Finance: New
Insights from the Home Mortgage Disclosure Act
Data (May 2021), https://files.consumerfinance.gov/
f/documents/cfpb_manufactured-housing-financenew-insights-hmda_report_2021-05.pdf; Neil Bhutta
& Benjamin J. Keys, Moral Hazard during the
Housing Boom: Evidence from Private Mortgage
Insurance, The Review of Fin. Studies (2021),
https://academic.oup.com/rfs/advance-article/doi/
10.1093/rfs/hhab060/6279755; Sumit Agarwal et
al., The Effectiveness of Mandatory Mortgage
Counseling: Can One Dissuade Borrowers from
Choosing Risky Mortgages? (Nat’l Bureau of Econ.
Research, Working Paper No. 19920, 2014), https://
www.nber.org/system/files/working_papers/
w19920/w19920.pdf; Alexei Alexandrov & Sergei
Koulayev, No Shopping in the U.S. Mortgage
Market: Direct and Strategic Effects of Providing
Information (Bureau of Consumer Fin. Prot., Off. of
Research Working Paper No. 2017–01, 2018),
https://papers.ssrn.com/sol3/papers.cfm?abstract_
id=2948491.
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annual revenue, and number of workers
will provide insight into the availability
of small business credit by geography,
industry, and business size. Credit type
and credit purpose would provide more
information on how small womenowned and minority-owned businesses
use credit and whether their use differs
from that of other small businesses.
Time in business information would
allow data users to understand the
credit needs of young small businesses,
and specifically young women-owned
and minority-owned small businesses.
Recent research has shown that womenowned and minority-owned businesses
face different financing challenges early
in the business lifecycle than other
firms, primarily driven by less access to
external financing.898
The Bureau seeks comment on its
analysis of potential benefits to small
businesses as described herein.
2. Benefits to Covered Financial
Institutions
The proposed rule would provide
some benefits to some covered financial
institutions—i.e., the financial
institutions that would be required to
collect and report 1071 data on small
business applications for credit. The
first is some reduction of the
compliance burden of fair lending
reviews for lower risk financial
institutions, by reducing the ‘‘false
positive’’ rates during fair lending
review prioritization by regulators.
Currently, financial institutions are
subject to fair lending reviews by
regulators to ensure that they are
complying with the ECOA in their small
business lending processes. Data
reported under the proposed rule would
allow regulators to prioritize fair
lending reviews of financial institutions
with higher risk of fair lending
violations, which reduces the burden on
institutions with lower fair lending risk.
Covered financial institutions would
also be able to use the data to monitor,
identify, and address their own fair
lending risks and thereby avoid liability
from enforcement actions and adverse
exam findings requiring remedial
action.
The proposed data collection could
also provide an unprecedented window
into the small business lending market,
and such transparency may benefit
financial institutions covered by the
rule. Comprehensive information on
small business credit applications and
originations are currently unavailable.
898 See, e.g., JPMorgan Chase & Co. Inst., Small
business ownership and liquid wealth (Mar. 2021),
https://www.jpmorganchase.com/institute/
research/small-business/small-business-ownershipand-liquid-wealth-report.
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The data made public pursuant to the
proposed rule could allow financial
institutions to better understand the
demand for small business credit
products and the conditions under
which they are being supplied by other
covered financial institutions.
The Bureau seeks comment on its
analysis of potential benefits to covered
persons as described herein.
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3. Costs to Covered Financial
Institutions
i. One-Time Costs to Covered Financial
Institutions
Using the methodology described in
part VII.E.1 above, Table 9 shows the
estimated total expected one-time costs
for financial institutions covered by the
proposed rule as well as a breakdown by
the eight component categories that
comprise the one-time costs for Type A
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DIs, Type B DIs, and Type C DIs, and
Non-DIs.
Table 10 shows the estimated number
of junior, mid-level, and senior staff
hours and non-salary expenses for each
component activity for Type A DIs.
Tables 11 through 13 show the same
estimates for Type B DIs, Type C DIs
and Non-DIs respectively. As discussed
above, the Bureau estimates all one-time
costs to covered financial institutions
using the One-Time Cost Survey results.
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The Bureau estimates that updating
computer systems would be the biggest
driver of one-time costs for Type A DIs,
and Type B DIs and Non-DIs. Type A
DIs and Type B DIs would be expected
to spend similar amounts on updating
computer systems, but Type A DIs
would rely somewhat more on staff.
The Bureau expects that Non-DIs
would have the highest one-time costs
and the highest costs to update
computer systems. To update computer
systems, Non-DIs would rely on midlevel staff hours and third-party
vendors. Non-DIs would also spend
relatively more on preparation and
planning than Type A DIs or Type B
DIs. These estimates are consistent with
the expectation that Non-DIs will incur
higher costs because they are less likely
to already report data to regulators.
The Bureau estimates that the biggest
drivers of one-time costs for Type C DIs
would be preparation and planning and
post-implementation review. These
depository institutions would generally
rely on mid-level staff hours to
implement the required one-time
changes and, in particular, would rely
on mid-level staff hours for these two
key activities. The Bureau estimates that
Type C DIs will spend the most of all
financial institution types on staff hours
to implement one-time changes and the
least on non-salary expenses.
The Bureau estimates that one-time
costs would be higher for Type A DIs
than for Type B DIs. These two types of
depository institutions have similar
estimated costs for most activities, but
Type A DIs are expected to spend more
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on testing/validating systems and legal/
compliance review.
These estimates are generally
consistent with feedback from SERs
during the SBREFA process. Several
SERs stated that changes to their
computer systems would contribute to
their one-time costs.899 However, some
SERs estimated larger one-time costs
than the Bureau and others estimated
smaller one-time costs. One SER (a
commercial finance company) said that
many financial institutions in their
industry have no experience reporting
data such as will be required under the
1071 rule and that their current
developer estimates that the costs just to
develop, test, and integrate their system
could be up to $200,000. Another SER
(a fintech) stated that they do not
anticipate any one-time costs. Two SERs
estimated that one-time costs would be
between $15,000 and $25,000 without a
detailed breakdown of those costs. One
SER provided a detailed breakdown of
costs and estimated that total one-time
costs would be $27,000.
As mentioned above, the Bureau
realizes that one-time costs vary by
institution due to many factors, and that
this variance exists on a continuum that
is impossible to fully represent. The
Bureau focuses on representative types
of financial institutions in order to
generate practical and meaningful
estimates of costs. As a result, the
Bureau expects that individual financial
institutions would have slightly
899 The SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 38–39.
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different one-time costs than the average
estimates presented here.
The One-Time Cost Survey instructed
respondents to assume that covered
institutions would be required to report
data at the application level on small
business financing that constitutes
‘‘credit’’ for purposes of ECOA for the
13 statutorily mandated data points one
time per year, and be responsible for
validating the accuracy of all data.
Respondents were further instructed to
use their own institution’s internal
definition of small business, assume the
Regulation B definition of an
application, and assume a reporting
structure similar to that under HMDA.
Finally, respondents were instructed to
not include any costs associated with
creating a firewall. As such, respondents
estimated one-time costs assuming that
the proposed rule would be different in
some ways from what the Bureau has
ultimately proposed here. One SER
provided feedback during the SBREFA
Panel that it was hard to estimate onetime costs in the survey without
knowing all the details of the proposed
rule.
The Bureau estimates that the overall
market impact of one-time costs for
depository institutions would be
between $218,000,000 and
$229,000,000.900 Using a 7 percent
discount rate and a five-year
amortization window, the annualized
900 The Bureau notes that the variation in this
range comes primarily from the uncertainty in the
number of originations made by small banks and
savings associations. The range does not fully
account for the uncertainty associated with
estimates of the one-time costs for each type of
institution.
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one-time costs for depository
institutions would be $53,200,000 to
$55,800,000. The Bureau estimates that
the overall market impact of one-time
costs for nondepository institutions
would be $94,400,000. Using a 7 percent
discount rate and a five-year
amortization window, the annualized
one-time costs for nondepository
institutions would be $23,000,000. As a
frame of reference for these market-level
one-time cost estimates, the estimated
total non-interest expenses from the
FFIEC and NCUA Call Reports for
depository institutions that the Bureau
estimates would be covered under the
proposed rule was about $439 billion in
2019. The upper bound estimate of total
one-time costs is approximately 0.05
percent of the total annual non-interest
expenses.
The Bureau seeks comment on its
analysis of one-time costs to covered
financial institutions as described
herein. In particular, the Bureau seeks
comment on how to adjust the estimates
of one-time costs to account for
differences between what respondents
to the survey were asked to assume and
the proposed rule.
Using the methodology described in
part VII.E.2, Table 14 shows the total
expected annual ongoing costs of the
proposed rule as well as a breakdown by
the component 15 activities that
comprise the ongoing costs for Type A
FIs, Type B FIs, and Type C FIs. The
bottom of the table shows the total
estimated annual 1071 ongoing
compliance cost for each type of
institution, along with the total cost per
application the financial institution
processes. To produce the estimates in
Table 14, the Bureau used the
calculations described in Tables 6 and
7 above and the assumptions for each
activity in Table 8. In the following
analysis, the Bureau provides examples
of these cost calculations for the largest
drivers of ongoing costs.
The Bureau estimates that a
representative low complexity
institution (i.e., a Type A FI) would
incur around $7,386 in total annual
ongoing costs, or about $74 in total cost
per application processed (assuming a
representative 100 applications per
year). For financial institutions of this
type, the largest driver of ongoing costs
is the fixed cost of the external audit,
$3,500. Besides the audit cost, the
largest drivers of the ongoing costs are
activities that require employee time to
complete. Activities like transcribing
data, transferring data to the data
management software, standard edits
and internal checks, and training all
require loan officer time. The Bureau
expects training (activity number 11) to
annually require approximately $638 for
6 representative loan officers to engage
in two hours of training. The Bureau
expects other time-dependent activities
to cost around $1,000 each. For
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example, the Bureau assumes that Type
A FIs will spend around 18 hours
transferring data to 1071 data
management software (activity number
3) based on estimates of the required
time to transfer data to HMDA data
management software. At the assumed
hourly compensation, our estimate is
around $1,013 for the Type A FI
institutions to transfer data. An
assumption of around 17 total hours to
conduct standard annual editing checks
(activity number 5) with some savings
assumed due to an online submission
platform that automatically checks for
errors, results in an estimated annual
ongoing cost of $490.
The Bureau estimates that a
representative middle complexity
institution (i.e., a Type B FI), which is
somewhat automated, would incur
approximately $35,476 in additional
ongoing costs per year, or around $89
per application (assuming a
representative 400 applications per
year). The largest components of this
ongoing cost are the expenses of the
small business application management
software and geocoding software
(activity 10) in the form of an annual
software subscription fee, and the
external audit of the data (activity
number 13). Using interviews of
financial institutions conducted to
determine compliance costs with
HMDA, the Bureau found mid-range
HMDA data management systems to be
approximately $8,000 in annual costs;
the Bureau believes that cost would be
comparable in the small business
lending context and thus applies that
estimate here. This analysis assumes
that the subscription purchase would be
separate from HMDA management
systems, but the development of a
software to jointly manage HMDA and
small business lending-related data
would likely result in cost savings for
both products. The Bureau also
estimates that a Type B FI would spend
around $5,000 on external audits of
their small business loan application
data. The Type B FI incurs employee
time-related fixed costs conducting
internal checks ($10,576), training
($3,189), and prepping for examinations
($4,227) but saves time and expense on
data entry and geocoding by using data
management software. As an example,
the Bureau expects Type B FIs to have
two full-time employees spend 40 hours
each to prepare for an examination
(activity number 14) resulting in a cost
of $4,227, and have employees spend
around 12 hours assisting with an
examination (activity number 15)
costing $672 annually.
The Bureau estimates a representative
high complexity institution (i.e., a Type
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C FI), would incur $243,266 of annual
ongoing costs, or $41 per application
(assuming a representative 6,000
application per year). The largest driver
of costs for a Type C FI is the employee
time required to conduct an internal
audit. The assumed 2,304 hours of
employee time results in nearly
$122,000 of ongoing costs annually.
Exam preparation, training, and
standard annual and internal checks
would be expected to cost $25,365,
$26,262, and $26,181 each year,
respectively. The Bureau also assumes
that a Type C institution would need a
subscription to a small business data
management software near the upper
bound of the range found in interviews
with financial institutions, of $13,271.
The Bureau estimates that the total
annual ongoing costs for depository
institutions would be between about
$310,000,000 and $330,000,000 per
year, about $192,000,00 to $201,000,000
of which would be annual variable
costs. The Bureau estimates that the
total annual ongoing costs for
nondepository institutions would be
about $62,300,000, about $13,700,000 of
which would be annual variable costs.
To understand the impacts of these
cost estimates on the profits of
depository institutions, the Bureau
estimates the average total net income
across all products per small business
origination for all DIs by type.901 There
is no comprehensive published source
of data on profits earned on small
business credit transactions. The Bureau
presents estimates of total net income
per origination as an indication of a
financial institution’s ability to cover
the additional expenses associated with
the proposed rule. The Bureau estimates
that banks and savings associations of
Type A have an average net income per
origination between $105,000 and
$119,000. Credit Unions of Type A have
an average net income per origination of
$272,000. Assuming two applications
per origination, a bank or savings
association of Type A has a net income
per application of approximately
$53,000 to $60,000 and a credit union
of the same type has a net income per
application of about $136,000. The
Bureau estimates that banks and savings
associations of Type B have an average
901 There are no broadly available data on profit
per application for nondepository institutions. The
Bureau uses the FFIEC Bank and NCUA Credit
Union Call Report data from December 31, 2019,
accessed on June 25, 2021. The Bureau uses the
same internal estimates of small business loan
originations as discussed in part VI.B above and
total net income across all products. For estimates
of net income per origination and per application,
the Bureau uses only net income per origination for
depository institutions with over 25 originations in
2019.
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net income per origination between
$50,000 and $57,000 or a net income per
application between $25,000 and
$29,000. The Bureau estimates that
credit unions of Type B have an average
net income per origination of $218,000
or an average net income per
application of $109,000. The Bureau
estimates that banks and savings
associations of Type C have a net
income per origination between
$237,000 and $267,000, or, assuming
three applications per origination, a net
income per application between $79,000
and $89,000. The Bureau estimates that
credit unions of Type C have an average
net income per origination of $8,000,
and average net income per application
of about $3,000.
The Bureau presented early versions
of these ongoing cost estimates in the
SBREFA Outline and to SERs during the
SBREFA process. Since then, the Bureau
has adjusted its estimates to match the
total number of data points in the
proposed rule relative to the SBREFA
Outline. The Bureau also adjusted its
estimates in response to SER
feedback.902 Several SERs provided
feedback that audit costs in the SBREFA
Outline were likely too low for the
lowest complexity (i.e., Type A)
institution. The Bureau adjusted the
Type A FI external audit costs to match
estimates provided to the Bureau from
a SER of $3,500, an increase from the
original $500–$1,000 expected. The
Bureau continues to assume the
representative low complexity
institution employs only an external
audit but acknowledges feedback from
SERs that this is not necessarily true for
all Type A institutions.
The Bureau also seeks additional
comment on the cost estimates above.
During the Small Business Panel Review
Process, several SERs indicated other
areas where costs estimates should be
adjusted. A number of SERs remarked
that the annual training costs estimates
were likely too low. One SER estimated
that training costs should be around 20
percent higher and several suggested
that the number of employees the
Bureau is assuming for training costs on
an annual basis is too low. One SER, for
example, stated that everyone who
interacts with customers will need to be
trained and several indicated that the
scope of employees who will require
training includes administrative and
management staff, as well as those
directly involved in the credit process.
One SER stated that the hourly
compensation the Bureau was using for
902 The SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 39.
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cost calculations is assuming employees
are too junior given the complexity of
the process and should be around $25
higher. Another suggested that the
transcribing data costs estimate is too
low. One SER remarked that researching
questions and the annual subscription
cost of 1071 data management or
geocoding software is too low. While the
Bureau has not made specific changes in
response to these suggestions, the
Bureau seeks comment on its estimation
methodology and cost estimates. In
accordance with the balancing test
discussed in part VI above, the Bureau
expects to publicly release data
collected under the rule, potentially
with certain data modified or deleted. A
more fulsome discussion of potential
risks and harms from the publication of
a public 1071 data can be found in part
VI.C above, but in this section the
Bureau acknowledges several potential
costs to covered entities that stem from
the publication of a public dataset under
the proposed rule.
With the publicly disclosed data,
users would be able to assess fair
lending risks at the institution and
market level, furthering section 1071’s
fair lending purpose. Several
commenters to the Bureau’s 2017 RFI
expressed concerns, however, about
costs related to these analyses.903
During the SBREFA process, some SERs
were concerned that published 1071
data could be used against financial
institutions in litigation by class action
attorneys or to harm their public
reputations.904 Depending on the extent
of publicly disclosed data, the Bureau
expects that some financial institutions
could incur ongoing costs related to
responding to reports of disparities in
their small business lending practices.
Some financial institutions could also
experience reputational risks associated
with high profile reports of existing
disparities where more fulsome analysis
of its business practices would conclude
that the disparities do not support a
finding of discrimination on a
prohibited basis. In anticipation of
needing to respond to outside analysis
and potential reputational risks, it is
possible that some financial institutions
may choose to change their product
offerings available to small businesses,
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903 82
FR 22318 (May 15, 2017).
example, one SER was concerned that
published 1071 data could lead to increased
litigation and thus a higher cost of credit for small
businesses. Another SER expressed concern that
pricing information could be misinterpreted by
users of 1071 data (for example, according to the
SER, higher pricing for one race might be used to
infer discrimination when the pricing was in fact
unrelated to the race of the applicant). Such a
misinterpretation may cause reputational damage
and consequently decrease applications.
904 For
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underwriting or pricing practices, or
overall participation in the small
business lending market. These costs are
difficult to quantify, but the Bureau
seeks comment on the extent of the
possible costs posed by litigation or
reputational harm as a result of the
proposed rule.
The Bureau also received feedback
that financial institutions could face
potential costs with the publication of a
public dataset under the proposed rule
either because potential clients would
be concerned about their data being
collected or because of the additional
competitive pressure brought by a
publicly available dataset. During the
SBREFA process, a number of SERs
were concerned that full disclosure of
all 1071 data would result in the reidentification of small business
applicants and potentially harm their
privacy interests. Several SERs asserted
that public knowledge of borrowing
activity (even without any other
potential harms) would be very
concerning to some small businesses as
some small business owners consider
that information sensitive or deeply
personal. Relatedly, one SER said that
the collection of 1071 data, including
personal or demographic information,
could seem like an invasion of privacy
by the financial institution, particularly
to minorities, and thus prospective
applicants may decide to seek financing
elsewhere. A number of these SERs
stated that 1071 data could be used to
generate marketing lists, resulting in a
financial institution’s competitors
stealing small business customers.
Several SERs were concerned about the
Bureau potentially making public
pricing data. Several SERs were
particularly focused on information
regarding pricing and pricing structure
being commercially sensitive to
financial institutions. The Bureau seeks
comment on this class of potential costs
to covered financial institutions.
The Bureau seeks comment on its
analysis of ongoing costs to covered
financial institutions as described
herein.
4. Costs to Small Businesses
The Bureau expects that any direct
costs of the proposed rule on small
businesses would stem from additional
fields that the applicant may have to
complete on credit applications due to
the proposed rule compared to the
baseline application process. This could
include information such as the race,
ethnicity, and sex of business owners or
number of workers that are not typically
required on business credit
applications. However, the Bureau
expects that the cost of completing these
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fields on applications to be negligible,
especially compared to the overall cost
of credit. Therefore, the Bureau focuses
the rest of the discussion on the costs of
small businesses to whether and how
the Bureau expects financial institutions
to pass on the costs of compliance with
the proposed rule to small businesses
and any possible effects on the
availability of small business credit.
Three types of costs (one-time, fixed
ongoing, and variable ongoing) have the
potential to influence the price and
availability of credit to small businesses.
In a competitive marketplace, standard
microeconomics suggests that lenders
will extend loans up to the point at
which the revenue from granting an
additional loan is equal to the
additional cost associated with the
financial institution providing the loan.
One-time costs and fixed ongoing costs
affect the overall profitability of a
lender’s loan portfolio but do not affect
the added profit from extending an
additional loan. Variable ongoing costs,
however, affect the profitability of each
additional loan and will influence the
number of loans a lender provides.
Based on the Bureau’s available
evidence, it expects that the variable
ongoing costs will be passed on in full
to small business credit applicants in
the form of higher prices or fees and
does not expect there to be a significant
reduction in small businesses’ ability to
access credit.
One-time and fixed ongoing costs
affect the overall profitability of the loan
portfolio and will be considered in the
lender’s decision to remain in the small
business credit market or the market for
specific small business credit products.
A financial institution would find it
worthwhile to incur the one-time costs
associated with complying with the
proposed rule if it expects to generate
enough profit over multiple years to
cover those costs. Each year, a financial
institution would find it worthwhile to
continue extending credit if the total
expected revenue from its chosen
quantity of loans is greater than the sum
of its ongoing fixed and variable costs.
A financial institution would find it
worthwhile to exit the market, even if it
had already incurred the one-time costs,
if the total expected revenue from that
year were less than the total expected
ongoing costs. During the SBREFA
process, the Bureau asked panelists how
they would respond to the cost of
complying with the proposed rule.905
One nondepository institution
participant did indicate that smaller
firms in their industry may stop
participating if one-time costs are too
905 SBREFA
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high, particularly if small business
lending is a secondary aspect of their
business model.906 Another
nondepository institution participant
indicated that significantly increasing
the time between application and
decision could occur due to the
proposed requirements, which they said
would threaten their ability to compete
with other lenders.
In the One-Time Cost Survey, the
Bureau asked respondents to rank a list
of potential actions they may take in
response to the compliance costs of
implementing section 1071.
Respondents ranked the following list:
‘‘Raise rates or fees on small business
products’’; ‘‘Raise rates/fees on other
credit products’’; ‘‘Accept lower
profits’’; ‘‘Exit some geographic
markets’’; ‘‘Tighten underwriting
standards’’; ‘‘Offer fewer or less
complex products’’; ‘‘No longer offer
small business credit products’’; or
‘‘Other’’ with two write-in options.
Respondents ranked these options from
‘‘1’’ to ‘‘9’’ indicating their most to least
likely responses, where ‘‘1’’ was the
most likely.
In order to analyze these responses,
the Bureau pooled data only from
respondents that answered both the
ranking question and the number of
originations question. The Bureau
implemented these restrictions to the
pool to eliminate responses from
institutions that would not be required
to report under the proposed rule. Of
the 105 total respondents to the OneTime Cost Survey, 44 ranked every
option and reported more than 25
originations in the last year. The Bureau
will henceforth refer to these
respondents as the ‘‘impacts of
implementation’’ sample.
Table 15 presents the potential
responses to implementing section 1071
and the average ranking assigned by
respondents in the impacts of
implementation sample. The responses
are listed in order of most to least likely
on average, where a lower average
ranking number means that respondents
ranked that response most likely.
Consistent with economic theory,
respondents reported that they would be
most likely to raise rates or fees on small
business products and other credit
products. On average, respondents
reported that they would be least likely
to exit some geographic markets or cease
offering small business credit products.
The Bureau expects that the variable
ongoing costs would be passed on in
full to small business credit applicants
in the form of higher prices or fees. This
expectation is consistent with both
standard microeconomic theory and
feedback from SERs during the SBREFA
process and respondents to the OneTime Cost Survey. Per application, the
variable costs are approximately $28,
$24, and $7 for Type A FIs, Type B FIs,
and Type C FIs, respectively. Even if the
variable costs were passed on in full to
small business applicants in the form of
higher interest rates or fees associated
with a loan or line of credit (or even
applicants in the form of application
fees), the Bureau expects that this would
comprise a small portion of the total
cost of the average loan to the small
business applicant.
As discussed above, the Bureau
believes financial institutions would
decide to remain in or exit the small
business credit market based on the
revenue generated from small business
credit relative to the sum of one-time
costs, fixed ongoing costs, and variable
ongoing costs. The Bureau’s total
estimated one-time and ongoing costs
are non-negligible and could potentially
result in exit from the market by
financial institutions that do not
regularly originate many covered credit
transactions. The Bureau’s proposed
coverage threshold of 25 covered credit
transactions in two consecutive years
could prevent some low-volume
financial institutions from leaving the
small business credit market in response
to the compliance costs of the proposed
rule. For example, the Bureau estimates
that a Type A DI would incur one-time
costs of $58,400 and fixed ongoing costs
of $4,536. A depository institution that
originates very few covered transactions
every year may exit the market if it does
not expect that profits, even over several
years, would cover that one-time cost or
if it does not expect annual revenues to
exceed the annual ongoing costs.
However, based on the net income per
application estimates discussed above,
the Bureau believes that institutions that
are covered under the proposed rule
(i.e., above the proposed coverage
threshold) will earn enough revenue to
exceed these costs. Furthermore, the
Bureau’s findings during the SBREFA
process and the respondents to the OneTime Cost Survey (discussed above)
additionally support the Bureau’s
conclusion that the increase in
compliance costs will likely be passed
through to customers in the form of
increased fees, rather than result in
financial institutions leaving the small
business credit market.907
906 The SER feedback discussed herein can be
found in the SBREFA Panel Report at 40.
907 As stated in the SBREFA Panel Report at 40,
‘‘[g]enerally, SERs did not suggest that they would
leave the small business lending market in response
to increased costs under the eventual 1071 rule.’’
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The Bureau seeks comment on other
potential costs to small businesses not
discussed here. The Bureau seeks
comment on its analysis of costs to
small businesses as described herein.
5. Alternatives Considered
This section discusses two categories
of alternatives considered: Other
methods for defining a covered financial
institution and limiting the data points
to those mandated by section 1071. The
Bureau uses the methodologies
discussed in parts VII.D and VII.E to
estimate the impacts of these
alternatives.
First, the Bureau considered multiple
reporting thresholds for purposes of
defining a covered financial institution.
In particular, the Bureau considered
whether to exempt financial institutions
with fewer than 50 or 100 originations
in each of the two preceding calendar
years instead of 25 originations, as
proposed. The Bureau also considered
whether to exempt depository
institutions with assets under $100
million or $200 million from section
1071’s data collection and reporting
requirements.
Under a 50-origination threshold, the
Bureau estimates that about 2,900 to
3,100 depository institutions would
report, which is approximately 1,100
fewer depository institutions relative to
the proposed threshold of 25
originations. The Bureau estimates that
about 2,700 to 2,900 banks and savings
associations and about 200 credit
unions would be covered under a 50origination threshold. The Bureau does
not have sufficient information to
estimate how many fewer
nondepository institutions would report
under this alternative threshold. The
Bureau estimates that the total one-time
costs across all financial institutions
associated with a 50-origination
threshold would be about $252,000,000
to $264,000,000, a decrease of about
$60,000,000 relative to the 25origination threshold. The Bureau
estimates that the total annual ongoing
costs associated with this threshold
would be about $357,000,000 to
$374,000,000, a decrease of about
$17,000,000 per year relative to the 25origination threshold.
Under a 100-origination threshold, the
Bureau estimates that about 1,800 to
2,000 depository institutions would
report, which is approximately 2,200
fewer depository institutions relative to
the proposed threshold of 25
originations. The Bureau estimates that
about 1,700 to 1,900 banks and savings
associations and about 100 credit
unions would be covered under a 100origination threshold The Bureau
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estimates that the total one-time costs
across all financial institutions
associated with a 100-origination
threshold would be about $192,000,000
to $203,000,000, a decrease of
$120,000,000 relative to the 25origination threshold. The Bureau
estimates that the total annual ongoing
costs associated with this threshold
would be about $332,000,000 to
$347,000,000, a decrease of about
$40,000,000 to $45,000,000 per year
relative to the 25-origination threshold.
Again, the Bureau does not have
sufficient information to estimate how
many fewer nondepository institutions
would be required to report under this
alternative.
The Bureau also considered $100
million and $200 million asset-based
thresholds for depository institutions.
For the purposes of considering these
alternatives, the Bureau estimates how
institutional coverage and costs would
be different if the Bureau required a 25origination threshold in addition to an
asset-based threshold for depository
institutions. The Bureau assumes that
the alternative proposal would have
been that a depository institution would
be required to report its small business
lending activity for 2019 if it had more
than 25 originations in 2017 and 2018
and had assets over the asset-based
threshold on December 31, 2018. The
Bureau further assumes that if two
institutions merged in 2019 then the
resulting institution would be required
to report if the sum of the separate
institutions’ assets on December 31,
2018 exceeded the asset-based
threshold.
Under a $100 million asset-based
threshold, the Bureau estimates that
between 3,500 and 3,600 depository
institutions would report,
approximately 500 to 600 fewer
depository institutions relative to a 25origination threshold with no assetbased threshold. The Bureau estimates
that about 3,100 to 3,300 banks and
savings associations and about 300
credit unions would be covered under a
25-origination and $100 million assetbased threshold. The Bureau estimates
that the total one-time costs across all
financial institutions associated with
the addition of a $100 million asset
threshold would be about $284,000,000
to $291,000,000, a decrease of between
$28,000,000 and $32,000,000 relative to
the proposed rule. The Bureau estimates
that the total annual ongoing costs
associated with this threshold would be
about $366,000,000 to $384,000,000, a
decrease of about $7,000,000 to
$9,000,000 per year relative to the 25origination threshold with no assetbased threshold.
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Under a $200 million asset-based
threshold, the Bureau estimates that
between 2,600 and 2,700 depository
institutions would report,
approximately 1,400 to 1,500 fewer
depository institutions relative to a 25origination threshold with no assetbased threshold. The Bureau estimates
that about 2,300 to 2,400 banks and
savings associations and about 300
credit unions would be covered under a
25-origination and $200 million assetbased threshold. The Bureau estimates
that the total one-time costs across all
financial institutions associated with
the addition of a $200 million asset
threshold would be about $240,000,000
to $244,000,000, a decrease of between
$73,000,000 and $80,000,000 relative to
the proposed rule. The Bureau estimates
that the total annual ongoing costs
associated with this threshold would be
about $348,000,000 to $363,000,000, a
decrease of about $25,000,000 to
$29,000,000 per year relative to the 25origination threshold with no assetbased threshold.
Second, the Bureau considered the
costs and benefits for limiting its data
collection to the data points required by
the section 1071. In addition to the
statutorily required data points
enumerated in section 1071, the statute
also requires financial institutions to
collect and report any additional data
that the Bureau determines would aid in
fulfilling the purposes of section 1071.
The Bureau is proposing several
additional data points that rely solely on
this authority. Specifically, the Bureau
is proposing to require that financial
institutions collect and report data on
application channel, application
recipient, denial reasons (for denied
applications only), pricing information
(for applications that are originated or
approved but not accepted), NAICS
code, number of workers, time in
business, and number of principal
owners. The Bureau has considered the
impact of instead proposing only the
collection of those data points required
by statute.
Requiring the collection and reporting
of only the statutory data points would
result in a reduction in the fair lending
benefit of the data compared to the
proposed rule. For example, not
collecting pricing information would
obscure possible fair lending risk by
covered financial institutions. Potential
discriminatory behavior is not limited to
the action taken on an application, but
rather includes the terms and conditions
under which applicants can access
credit. If the Bureau did not collect
pricing information, it would not be
able to evaluate potential discriminatory
behaviors on the basis of price. As
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mentioned in part VII.F.1 above, several
of the data points the Bureau is
proposing under its ECOA section
704B(e)(2)(H) authority are useful in
creating more accurate fair lending
analyses. A reduction in the rule’s
ability to facilitate the enforcement of
fair lending laws would negatively
impact small businesses and small
business owners relative to the
proposed rule.
Limiting the rule’s data collection to
only the data points required under the
statute would also reduce the ability of
the rule to support the business and
community development purpose of the
section 1071. Not including pricing
information would significantly reduce
the ability of communities,
governmental entities, and creditors to
understand credit conditions available
to small businesses. Not including
NAICS code or time in business would
reduce the ability of governmental
entities to tailor programs that can
specifically benefit young businesses or
businesses in certain industries. This
reduction in benefits might be
disproportionately borne by womenowned and minority-owned small
businesses.
Only requiring the collection and
reporting of the statutory data points
would have reduced the annual ongoing
cost of complying with the proposed
rule. Under this alternative, the
estimated total annual ongoing costs for
Type A FIs, Type B FIs, and Type C FIs
would be $6,833; $34,004 and $233,209,
respectively. Per application, the
estimated ongoing cost would be $68,
$85, and $39 for Type A FIs, Type B FIs,
and Type C FIs, respectively. The
estimated total annual market-level
ongoing cost of reporting would be
between $363,000,000 and $382,000,000
or about $10,000,000 per year less than
under the proposed rule. As discussed
above, respondents to the One-Time
Cost Survey were instructed to assume
that they would only report the
mandatory data fields. Hence, the
Bureau can only estimate how ongoing
costs would be different under this
alternative.
G. Potential Impact on Depository
Institutions and Credit Unions With $10
Billion or Less in Total Assets
As discussed above, the proposed rule
would exclude financial institutions
with fewer than 25 originated covered
credit transactions in both of the two
preceding calendar years. The Bureau
believes that the benefits of the
proposed rule to banks, savings
associations, and credit unions with $10
billion or less in total assets will be
similar to the benefits to covered
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financial institutions as a whole,
discussed above. Regarding costs, other
than as noted here, the Bureau also
believes that the impact of the proposed
rule on banks, savings associations, and
credit unions with $10 billion or less in
total assets will be similar to the impact
for covered financial institutions as a
whole. The primary difference in the
impact on these institutions is likely to
come from differences in the level of
complexity of operations, compliance
systems, and software, as well as
number of product offerings and volume
of originations of these institutions.
Based on FFIEC and NCUA Call
Report data for December 2019, 10,375
of 10,525 banks, savings associations,
and credit unions had $10 billion or less
in total assets. The Bureau estimates
that between 3,900 and 4,000 of such
institutions would be subject to the
proposed rule. The Bureau estimates
that the market-level impact of the
proposed rule on annual ongoing costs
for banks, savings associations, and
credit unions with $10 billion or less in
assets would be between $151,000,000
and $171,000,000. Regarding one-time
costs, the Bureau estimates that the
market-level impact of the proposed
rule for banks, savings associations, and
credit unions with $10 billion or less in
assets would be between $209,000,000
and $220,000,000. Using a 7 percent
discount rate and a five-year
amortization window, the estimated
annualized one-time costs would be
between $51,000,000 and $54,000,000.
The Bureau seeks comment on its
analysis of the potential impact on
depository institutions and credit
unions with $10 billion or less in total
assets as described herein.
H. Potential Impact on Small Businesses
in Rural Areas
The proposed rule would not directly
impact small businesses in rural areas.
However, as with all small businesses,
small businesses in rural areas may bear
some indirect costs of the proposal. This
would occur if financial institutions
serving rural areas are covered by the
proposed rule and if those institutions
pass on some or all of their cost of
complying with the proposed rule to
small businesses.
The source data from CRA
submissions that the Bureau uses to
estimate institutional coverage and
market estimates provide information
on the county in which small business
borrowers are located. However,
approximately 89 percent of banks did
not report CRA data in 2019, and as a
result the Bureau does not believe the
reported data are robust enough to
estimate the locations of the small
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business borrowers for the banks that do
not report CRA data. The Credit Union
Call Report data do not provide any
information on the location of credit
union borrowers. Nonetheless, the
Bureau is able to provide some
geographical estimates of institutional
coverage based on depository institution
branch locations.
The Bureau used the FDIC’s Summary
of Deposits to identify the location of all
brick and mortar bank and savings
association branches and the NCUA
Credit Union Branch Information to
identify the location of all credit union
branch and corporate offices.908 A bank,
savings association, or credit union
branch was defined as rural if it is in a
rural county, as specified by the USDA’s
Urban Influence Codes.909 A branch is
considered covered by the proposed
rule if it belongs to a bank, savings
association, or credit union that the
Bureau estimated would be included
under the proposed threshold of 25
originations in 2017 and 2018. Using the
estimation methodology discussed in
part VII.D above, the Bureau estimates
that about 90 to 92 percent of rural bank
and savings association branches and
about 95 percent of non-rural bank and
savings association branches would be
covered under the proposed rule. The
Bureau estimates that about 27 percent
of rural credit union branches and about
29 percent of non-rural credit union
branches would be covered under the
proposed rule.910
In a competitive framework in which
financial institutions are profit
maximizers, financial institutions
would pass on variable costs to future
small business applicants, but absorb
one-time costs and increased fixed costs
in the short run.911 Based on previous
908 See Fed. Deposit Ins. Corp., Summary of
Deposits (SOD)—Annual Survey of Branch Office
Deposits (last updated June 1, 2021), https://
www.fdic.gov/regulations/resources/call/sod.html.
The NCUA provides data on credit union branches
in the quarterly Call Report Data files. See Nat’l
Credit Union Admin., Call Report Quarterly Data,
https://www.ncua.gov/analysis/credit-unioncorporate-call-report-data/quarterly-data (last
visited Aug. 5, 2021).
909 This is the same methodology as used in the
Bureau’s rural counties list. See Bureau of
Consumer Fin. Prot., Rural and underserved
counties list, https://www.consumerfinance.gov/
compliance/compliance-resources/mortgageresources/rural-and-underserved-counties-list/ (last
visited July 28, 2020).
910 The Bureau notes that most credit union
branches do not belong covered credit unions
because most credit unions did not report any small
business loans in the NCUA Call Report data. Of the
5,437 credit unions that existed in December 2019,
4,359 (or 81.5 percent) reported no small business
originations in 2017 or 2018.
911 If markets are not perfectly competitive or
financial institutions are not profit maximizers,
then what financial institutions pass on may differ.
For example, they may attempt to pass on one-time
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through the SBREFA process, the
following seven operational steps affect
variable costs: Transcribing data,
resolving reportability questions,
transferring data to a data entry system,
geocoding, researching questions,
resolving question responses, and
checking post-submission edits. Overall,
the Bureau estimates that the impact of
the proposed rule on variable costs per
application is $28 for a Type A FI, $24
for type B FIs, and $7 for Type C FIs.
The covered financial institutions that
serve rural areas will attempt to pass
these variable costs on to future small
business applicants. Amortized over the
life of the loan, this expense would
represent a negligible increase in the
cost of a covered credit transaction.
The One-Time Cost Survey can shed
light on how financial institutions that
serve rural communities will respond to
the proposed rule. The Bureau asked
respondents to the survey to report
whether their institution primarily
served rural or urban communities or an
even mix. All respondents in the
impacts of implementation sample
answered this question. Of the 44
respondents in the impacts of
implementation sample, 13 primarily
serve rural communities, 15 primarily
serve urban communities, and 16 serve
an even mix. Table 16 presents the
potential responses to implementing
section 1071 and the average ranking
assigned by respondents that serve rural
communities, urban communities, an
even mix, and all of the respondents in
the impacts of implementation sample.
The responses are listed in order of most
to least likely on average across all
respondents, where a lower average
ranking number means that respondents
ranked that response most likely.
Respondents that primarily serve rural
communities or an even mix rank
raising rates or fees on small business or
other credit products as the most likely
response. These institutions also rank
exiting some geographic markets and no
longer offering small business credit
products as the least likely response to
the proposed rule.
The Bureau thus does not anticipate
any material adverse effect on credit
access in the long or short term to rural
small businesses.
The Bureau seeks comment on its
analysis of potential impacts on small
businesses in rural areas as described
herein.
subject to notice-and-comment
rulemaking requirements. These
analyses must ‘‘describe the impact of
the proposed rule on small entities.’’ 913
An IRFA or FRFA is not required if the
agency certifies that the rule will not
have a significant economic impact on
a substantial number of small
entities.914 The Bureau also is subject to
certain additional procedures under the
RFA involving the convening of a panel
to consult with small business
representatives prior to proposing a rule
for which an IRFA is required.915 The
Bureau has not certified that the
proposed rule would not have a
significant economic impact on a
substantial number of small entities
within the meaning of the RFA.
Accordingly, the Bureau convened and
chaired a Small Business Review Panel
under SBREFA to consider the impact of
the proposed rule on small entities that
would be subject to that rule and to
obtain feedback from representatives of
such small entities. The Small Business
Review Panel for this rulemaking is
discussed below in part VIII.A. The
Bureau is also publishing an IRFA.
Among other things, the IRFA estimates
the number of small entities that will be
subject to the proposed rule and
‘‘small entities’’ is defined in the RFA to include
small businesses, small not-for-profit organizations,
and small government jurisdictions. 5 U.S.C. 601(6).
A ‘‘small business’’ is determined by application of
SBA regulations and reference to the NAICS
classifications and size standards. 5 U.S.C. 601(3).
A ‘‘small organization’’ is any ‘‘not-for-profit
enterprise which is independently owned and
operated and is not dominant in its field.’’ 5 U.S.C.
601(4). A ‘‘small governmental jurisdiction’’ is the
government of a city, county, town, township,
village, school district, or special district with a
population of less than 50,000. 5 U.S.C. 601(5).
914 5 U.S.C. 605(b).
915 5 U.S.C. 609.
VIII. Regulatory Flexibility Act
Analysis
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The Regulatory Flexibility Act
(RFA) 912 generally requires an agency to
conduct an initial regulatory flexibility
analysis (IRFA) and a final regulatory
flexibility analysis (FRFA) of any rule
costs and increases in fixed costs, or they may not
be able to pass on variable costs. Furthermore, some
financial institutions may exit the market in the
long run. However, other financial institutions may
also enter the market in the long run.
912 5 U.S.C. 601 et seq.
913 5 U.S.C. 603(a). For purposes of assessing the
impacts of the proposed rule on small entities,
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describes the impact of that rule on
those entities. The IRFA for this
rulemaking is set forth below in part
VIII.B.
A. Small Business Review Panel
Under section 609(b) of the RFA, as
amended by SBREFA and the DoddFrank Act,916 the Bureau must seek,
prior to conducting the IRFA,
information from representatives of
small entities that may potentially be
affected by its proposed rules to assess
the potential impacts of that rule on
such small entities.917 Section 609(b)
sets forth a series of procedural steps
with regard to obtaining this
information. The Bureau first notifies
the Chief Counsel for Advocacy of the
SBA (Chief Counsel) and provides the
Chief Counsel with information on the
potential impacts of the proposed rule
on small entities and the types of small
entities that might be affected.918 Not
later than 15 days after receipt of the
formal notification and other
information described in section
609(b)(1) of the RFA, the Chief Counsel
then identifies the small entity
representatives, the individuals
representative of affected small entities
for the purpose of obtaining advice and
recommendations from those
individuals about the potential impacts
of the proposed rule.919 The Bureau
convenes a Small Business Review
Panel for such rule consisting wholly of
full-time Federal employees of the office
within the Bureau responsible for
carrying out the proposed rule, OIRA
within the OMB, and the Chief
Counsel.920 The Small Business Review
Panel reviews any material the Bureau
has prepared in connection with the
SBREFA process and collects the advice
and recommendations of each
individual small entity representative
identified by the Bureau after
consultation with the Chief Counsel on
issues related to sections 603(b)(3)
through (b)(5) and 603(c) of the RFA.921
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916 5
U.S.C. 609(b).
917 Id.
918 5 U.S.C. 609(b)(1).
919 5 U.S.C. 609(b)(2).
920 5 U.S.C. 609(b)(3).
921 5 U.S.C. 609(b)(4). As described in part VIII.B
below, sections 603(b)(3) through (5) and 603(c) of
the RFA, respectively, require a description of and,
where feasible, provision of an estimate of the
number of small entities to which the proposed rule
will apply; a description of the projected reporting,
record keeping, and other compliance requirements
of the proposed rule, including an estimate of the
classes of small entities which will be subject to the
requirement and the type of professional skills
necessary for preparation of the report or record; an
identification, to the extent practicable, of all
relevant Federal rules which may duplicate,
overlap, or conflict with the proposed rule; and a
description of any significant alternatives to the
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No later than 60 days after the date the
Bureau convenes the Small Business
Review Panel, the panel reports on the
comments of the small entity
representatives (SERs) and its findings
as to the issues on which the Small
Business Review Panel consulted with
the SERs, and the report is made public
as part of the rulemaking record.922
Where appropriate, the Bureau modifies
the proposed rule or the IRFA in light
of the foregoing process.923
On August 10, 2020, the Bureau
provided the Chief Counsel (as well as
OIRA) with the formal notification and
other information required under
section 609(b)(1) of the RFA. To obtain
feedback from small entities to inform
the Small Business Review Panel
pursuant to section 609(b)(2) and (4) of
the RFA, the Bureau, in consultation
with the Chief Counsel, identified
several categories of small entities that
may be subject to the proposed rule for
purposes of the IRFA: Depository
institutions; fintech lenders and MCA
providers; commercial finance
companies; nondepository CDFIs;
nondepository lenders of other 5+ unit
mortgages; Farm Credit System
members; and governmental lending
entities. Section 3 of the IRFA, in part
VIII.B.3 below, describes in greater
detail the Bureau’s analysis of the
number and types of entities that may
be affected by the proposed rule. Having
identified the categories of small entities
that may be subject to the proposed rule
for purposes of an IRFA, the Bureau
then, in consultation with the Chief
Counsel and OIRA, selected 20 SERs to
participate in the SBREFA process. As
discussed in section 7 of the SBREFA
Panel Report,924 described below, the
SERs included representatives from
each of the categories identified by the
Bureau and comprised a diverse group
of individuals with regard to geography
and type of locality (i.e., rural, urban,
suburban, or metropolitan areas).
On October 15, 2020, the Bureau
formally convened the Small Business
Review Panel pursuant to section
609(b)(3) of the RFA. Afterwards, to
collect the advice and recommendations
of the SERs under section 609(b)(4) of
the RFA, the Small Business Review
Panel held a total of four Panel Outreach
Meetings with the SERs during October
19–22, 2020, conducted online via video
conference. To help SERs and to
proposed rule which accomplish the stated
objectives of applicable statutes and which
minimize any significant economic impact of the
proposed rule on small entities. 5 U.S.C. 603(b)(3)
through (5), (c).
922 5 U.S.C. 609(b)(5).
923 5 U.S.C. 609(b)(6).
924 See SBREFA Panel Report at 15.
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facilitate an informed and detailed
discussion of the proposals under
consideration, discussion questions for
the SERs were included throughout the
Bureau’s SBREFA Outline.925 In
advance of the Panel Outreach
Meetings, the Bureau, SBA’s Office of
Advocacy, and OIRA held a series of
video conferences with the SERs to
describe the Small Business Review
Process, obtain important background
information about each SER’s current
business practices, and begin
discussions on selected portions of the
proposals under consideration. All 20
SERs participated in the Panel Outreach
Meetings. The Panel also invited SERs
to submit written feedback by November
9, 2020; the Bureau received written
feedback from 15 of the SERs.926
The Bureau also invited other
stakeholders to submit feedback on the
SBREFA Outline, which was due by
December 14, 2020. See generally
SBREFA Outline. Feedback from these
other stakeholders was not considered
by the Panel and is not reflected in the
Panel Report. See part III above for
additional information.
On December 15, 2020, the Bureau
publicly released the written SBREFA
Panel Report.927 The SBREFA Panel
Report includes the following:
Background information on the
proposals under consideration at the
time; information on the types of small
entities that would be subject to those
proposals and on the SERs who were
selected to advise the Panel; a summary
of the Panel’s outreach to obtain the
advice and recommendations of those
small entity representatives; a
discussion of the comments and
recommendations of the small entity
representatives; and a discussion of the
Panel’s findings, focusing on the
statutory elements required under
section 603 of the RFA.928
In preparing this proposed rule and
the IRFA, the Bureau has considered the
925 These questions also appeared in a shorter
Discussion Guide for Small Entity Representatives.
Bureau of Consumer Fin. Prot., Small Business
Advisory Review Panel, Consumer Financial
Protection Bureau, Small Business Lending Data
Collection Rulemaking, Discussion Guide for Small
Entity Representatives (Sept. 15, 2020), https://
files.consumerfinance.gov/f/documents/cfpb_1071sbrefa_discussion-guide_2020-09.pdf.
926 This written feedback is attached as appendix
A to the SBREFA Panel Report.
927 Bureau of Consumer Fin. Prot., Consumer
Financial Protection Bureau Releases Report on
Implementing the Dodd-Frank Act’s Small Business
Lending Data Collection Requirement (Dec. 15,
2021), https://www.consumerfinance.gov/about-us/
newsroom/consumer-financial-protection-bureaureleases-report-on-implementing-the-dodd-frankacts-small-business-lending-data-collectionrequirement/.
928 5 U.S.C. 609(b)(5).
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feedback from SERs through the
SBREFA process and the findings and
recommendations in the SBREFA Panel
Report. The section-by-section analysis
of the proposed rule in part V above and
the IRFA discuss this feedback and the
specific findings and recommendations
of the Panel, as applicable. The SBREFA
process provided the Panel and the
Bureau with an opportunity to identify
and explore opportunities to minimize
the burden of the proposed rule on
small entities while achieving the rule’s
purposes. It is important to note,
however, that the Panel prepared the
SBREFA Panel Report at a preliminary
stage of the proposal’s development and
that the SBREFA Panel Report—in
particular, the Panel’s findings and
recommendations—should be
considered in that light. Also, any
options identified in the SBREFA Panel
Report for reducing the proposed rule’s
regulatory impact on small entities were
expressly subject to further
consideration, analysis, and data
collection by the Bureau to ensure that
the options identified were practicable,
enforceable, and consistent with section
1071 of the Dodd-Frank Act and its
statutory purposes. The proposed rule
and the IRFA reflect further
consideration, analysis, and data
collection by the Bureau.
B. Initial Regulatory Flexibility Analysis
Under RFA section 603(a), an IRFA
‘‘shall describe the impact of the
proposed rule on small entities.’’ 929
Section 603(b) of the RFA sets forth the
required elements of the IRFA. Section
603(b)(1) requires the IRFA to contain a
description of the reasons why action by
the agency is being considered.930
Section 603(b)(2) requires a succinct
statement of the objectives of, and the
legal basis for, the proposed rule.931 The
IRFA further must contain a description
of and, where feasible, an estimate of
the number of small entities to which
the proposed rule will apply.932 Section
603(b)(4) requires a description of the
projected reporting, recordkeeping, and
other compliance requirements of the
proposed rule, including an estimate of
the classes of small entities that will be
subject to the requirement and the types
of professional skills necessary for the
preparation of the report or record.933 In
addition, the Bureau must identify, to
the extent practicable, all relevant
Federal rules which may duplicate,
overlap, or conflict with the proposed
929 5
U.S.C. 603(a).
U.S.C. 603(b)(1).
931 5 U.S.C. 603(b)(2).
932 5 U.S.C. 603(b)(3).
933 5 U.S.C. 603(b)(4).
19:49 Oct 07, 2021
1. Description of the Reasons Why
Agency Action Is Being Considered
As discussed in part I above, section
1071 of the Dodd-Frank Act amended
ECOA to require that financial
institutions collect and report to the
Bureau certain data regarding
applications for credit for womenowned, minority-owned, and small
businesses.937 Section 1071’s statutory
purposes are (1) to facilitate
enforcement of fair lending laws, and (2)
to enable communities, governmental
entities, and creditors to identify
business and community development
needs and opportunities of womenowned, minority-owned, and small
businesses.
Section 1071 specifies a number of
data points that financial institutions
are required to collect and report, and
also provides authority for the Bureau to
require any additional data that the
Bureau determines would aid in
fulfilling its statutory purposes. Section
1071 also contains a number of other
requirements, including those that
address restricting the access of
underwriters and other persons to
certain 1071 data, publication of 1071
data, and the Bureau’s discretion to
modify or delete data prior to
publication in order to advance a
privacy interest.
As discussed throughout this notice,
Congress amended ECOA by adding
section 1071, which directs the Bureau
to adopt regulations governing the
collection and reporting of small
business lending data. Section 1071
934 5
U.S.C. 603(b)(5).
U.S.C. 603(c).
936 5 U.S.C. 603(d)(1); Dodd-Frank Act section
1100G(d)(1), 124 Stat. 2112.
937 ECOA section 704B.
930 5
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rule.934 Furthermore, the Bureau must
describe any significant alternatives to
the proposed rule which accomplish the
stated objectives of applicable statutes
and which minimize any significant
economic impact of the proposed rule
on small entities.935 Finally, as
amended by the Dodd-Frank Act, RFA
section 603(d) requires that the IRFA
include a description of any projected
increase in the cost of credit for small
entities, a description of any significant
alternatives to the proposed rule which
accomplish the stated objectives of
applicable statutes and which minimize
any increase in the cost of credit for
small entities (if such an increase in the
cost of credit is projected), and a
description of the advice and
recommendations of representatives of
small entities relating to the cost of
credit issues.936
935 5
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directs the Bureau to prescribe such
rules and issue such guidance as may be
necessary to carry out, enforce, and
compile data pursuant to section 1071,
and permits the Bureau to adopt
exceptions to any requirement or to
exempt financial institutions from the
requirements of section 1071 as the
Bureau deems necessary or appropriate
to carry out the purposes of section
1071.
In addition, as discussed in part II
above, currently available data on small
business lending are fragmented,
incomplete, and not standardized,
making it difficult to make meaningful
comparisons across products, financial
institutions, and over time. This hinders
attempts by policymakers and other
stakeholders to understand the size,
shape, and dynamics of the small
business lending marketplace, including
the interaction of supply and demand,
as well as potentially problematic
lending practices, gaps, or trends in
funding that may be holding back some
communities.938
Data collected under the proposed
rule would constitute the largest and
most comprehensive data in the United
States on credit availability for small
businesses. The proposed data
collection would also provide an
unprecedented window into the small
business lending market, and such
transparency will benefit financial
institutions covered by the rule. The
public data published under the
proposed rule would allow financial
institutions to better understand the
demand for small business credit
products and the conditions under
which they are being supplied by other
lenders. Lenders would likely use the
data to understand small business
lending market conditions more
effectively and at a more granular level
than is possible with existing data
sources, such as Call Reports, data from
public lending programs, or privately
purchased data. Data collected under
the proposed rule could enable lenders
to identify promising opportunities to
extend credit.
The proposed rule will also provide
some reduction of the compliance
burden of fair lending reviews for lower
risk financial institutions by reducing
the ‘‘false positive’’ rates during fair
lending review prioritization by
regulators. Currently, financial
institutions are subject to fair lending
reviews by regulators to ensure that they
938 While Call Report and CRA data provide some
indication of the level of supply of small business
credit, the lack of data on small business credit
applications makes demand for credit by small
businesses more difficult to assess, including with
respect to local markets or protected classes.
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are complying with the ECOA in their
small business lending processes. Data
reported under the proposed rule will
allow regulators to prioritize fair
lending reviews of lenders with higher
risk of potential fair lending violations,
which reduces the burden on
institutions with lower fair lending risk.
The proposed rule effectuates
Congress’s specific mandate to the
Bureau to adopt rules to implement
section 1071. For a further description
of the reasons why agency action is
being considered, see the background
discussion for the proposed rule in part
II above.
2. Succinct Statement of the Objectives
of, and Legal Basis for, the Proposed
Rule
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This rulemaking has multiple
objectives. The proposed rule is
intended to advance the two statutory
purposes of section 1071, which are (1)
facilitating enforcement of fair lending
laws and (2) enabling communities,
governmental entities, and creditors to
identify business and community
development needs and opportunities of
women-owned, minority-owned, and
small businesses. To achieve these
objectives, the proposed rule would
require covered financial institutions to
collect and report certain data on
applications for covered credit
transactions for small businesses,
including minority-owned and womenowned small businesses. The data to be
collected and reported would include a
number of statutorily required data
fields regarding small business
applications, as well as several
additional data fields that the Bureau
preliminarily determines would help
fulfill the purposes of section 1071. The
Bureau would make available to the
public, annually on the Bureau’s
website, the data submitted to it by
financial institutions, subject to
deletions or modifications made by the
Bureau, at its discretion, if the Bureau
determines that such deletions or
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modifications would advance a privacy
interest.
As described above, the Dodd-Frank
Act amended ECOA by adding section
1071, which directs the Bureau to adopt
regulations governing the collection and
reporting of small business lending data.
ECOA section 704B(g)(1) grants the
Bureau general rulemaking authority,
providing that the Bureau shall
prescribe such rules and issue such
guidance as may be necessary to carry
out, enforce, and compile data pursuant
to section 1071. Section 704B(g)(2) also
permits the Bureau to adopt exceptions
to any requirement of section 1071 and
to conditionally or unconditionally
exempt any financial institution or class
of financial institutions from the
requirements of section 1071, as the
Bureau deems necessary or appropriate
to carry out the purposes of section
1071. In addition, section 703(a) of
ECOA authorizes the Bureau to
prescribe regulations to carry out the
purposes of ECOA.
Much of section 1071 establishes
requirements or obligations for financial
institutions that the Bureau would
implement in this proposed rule. ECOA
section 704B(e)(2) requires that the
information compiled and maintained
be itemized in order to clearly and
conspicuously disclose an enumerated
list of data points. Section 704B(e)(2)(H)
requires financial institutions to collect
and report any additional data that the
Bureau determines would aid in
fulfilling the purposes of section 1071.
Other parts of section 1071 require the
Bureau to adopt regulations to
implement certain requirements,
including how financial institutions
must compile and maintain data
pursuant to section 1071, and the form
of information made available by
financial institutions to the public and
the form and manner that the Bureau
itself should make 1071 data available
to the public generally. Additional
section 1071 provisions give the Bureau
the discretionary authority to delete or
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modify 1071 data before making it
available to the public if the Bureau
determines that the deletion or
modification of the data would advance
a privacy interest, and to compile and
aggregate 1071 data for its own use, as
well as to make public such
compilations of aggregate data. The legal
basis for the proposed rule is discussed
in detail in the legal authority analysis
in part IV and in the section-by-section
analyses in part V above.
3. Description of and, Where Feasible,
Provision of an Estimate of the Number
of Small Entities to Which the Proposed
Rule Will Apply
As discussed in the SBREFA Panel
Report,939 for the purposes of assessing
the impacts of the proposed rule on
small entities, ‘‘small entities’’ is
defined in the RFA to include small
businesses, small nonprofit
organizations, and small government
jurisdictions.940 A ‘‘small business’’ is
determined by application of SBA
regulations in reference to the North
American Industry Classification
System (NAICS) classification and size
standards.941 Under such standards, the
Bureau identified several categories of
small entities that may be subject to the
proposed provisions: Depository
institutions; fintech lenders and MCA
providers; commercial finance
companies; nondepository CDFIs;
nondepository lenders of other 5+ unit
mortgages; Farm Credit System
members; and governmental lending
entities. The NAICS codes covered by
these categories are described below.
The following table provides the
Bureau’s estimate of the number and
types of entities that may be affected by
the proposed rule:
939 See
SBREFA Panel Report at 41–42.
U.S.C. 601(6).
941 The current SBA size standards are found on
SBA’s website, Small Bus. Admin., Table of size
standards (Aug. 19, 2019), https://www.sba.gov/
content/table-small-businesssize-standards.
940 5
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The following paragraphs describe the
categories of entities that the Bureau
expects would be affected by the
proposed rule.
Depository institutions (banks and
credit unions): The Bureau estimates
that there are about 4,100 banks, savings
associations, and credit unions engaged
in small business lending that originate
enough covered transactions to be
covered by the proposed rule.942 These
companies potentially fall into four
different industry categories, including
942 The Bureau notes that the category of
depository institutions also includes CDFIs that are
also depository institutions.
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‘‘Commercial Banking’’ (NAICS
522110), ‘‘Savings Institutions’’ (NAICS
522120), ‘‘Credit Unions’’ (NAICS
522130), and ‘‘Credit Card Issuing’’
(NAICS 522210). All of these industries
have a size standard threshold of $600
million in assets. The Bureau estimates
that about 2,700 of these institutions are
small entities according to this
threshold. See part VII.D above for more
detail on how the Bureau arrived at
these estimates.
Fintech lenders and MCA providers:
As discussed in more detail in part II.D
above, the Bureau estimates that there
are about 130 fintech lenders and MCA
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providers engaged in small business
lending that originate enough covered
transactions to be covered by the
proposed rule. These companies span
multiple industries, including ‘‘All
Other Nondepository Credit
Intermediation’’ (NAICS 522298),
‘‘Consumer Lending’’ (NAICS 522291),
‘‘Financial Transactions, Processing,
Reserve, and Clearinghouse Activities’’
(NAICS 522320), and ‘‘Data Processing,
Housing and Related Services’’ (NAICS
518210). All of these industries have a
size standard threshold of $35 million
in sales (NAICS 518210) or $41.5
million in sales (all other NAICS). The
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Bureau assumes that about 90 percent,
or 117, of these entities are small
according to these size standards.
Commercial finance companies: As
discussed in more detail in part II.D
above, the Bureau estimates that there
are about 300 commercial finance
companies, including captive and
independent financing, engaged in
small business lending that originate
enough covered credit transactions to be
covered by the proposed rule. These
companies span multiple industries,
including ‘‘Software Publishers’’
(NAICS 511210), ‘‘Commercial Air, Rail,
and Water Transportation Equipment
Rental and Leasing’’ (NAICS 532411),
‘‘Other Commercial and Industrial
Machinery and Equipment Rental and
Leasing’’ (NAICS 532490), ‘‘Sales
financing’’ (NAICS 522220) and
‘‘Consumer Lending’’ (NAICS 522291).
These industries have size standard
thresholds of $41.5 million in sales
(NAICS 511210 and 522220) or $35
million in sales (NAICS 532411, 532490,
and 522291). The Bureau assumes that
about 90 percent, or 270, commercial
finance companies are small according
to these size standards.
Nondepository CDFIs: As discussed in
more detail in part II.D above, the
Bureau estimates that there are 240
nondepository CDFIs engaged in small
business lending that originate enough
covered credit transactions to be
covered by the proposed rule. CDFIs
generally fall into ‘‘Activities Related to
Credit Intermediation (Including Loan
Brokers)’’ (NAICS 522390),
‘‘Miscellaneous Intermediation’’ (NAICS
523910), ‘‘Civic and Social
Organizations’’ (NAICS 813410), and
‘‘Mortgage and Nonmortgage Loan
Brokers’’ (NAICS 522310). These
industries have size standard thresholds
of $8 million in sales (NAICS 522310,
813410), $22 million in sales (NAICS
522390), and $41.5 million in sales
(NAICS 523910). The Bureau assumes
that about 95 percent, or 228,
nondepository CDFIs are small entities.
Nondepository lenders of other 5+
unit mortgages: As discussed in more
detail in part II.D above, the Bureau
estimates that there are about 50
nondepository mortgage lenders
engaged in small business lending that
originate enough covered credit
transactions to be covered by the
proposed rule. These institutions are in
either ‘‘Real estate credit’’ (NAICS
522292) or ‘‘Mortgage and Nonmortgage
Loan Brokers’’ (NAICS 522310). These
industries both have a size standard
threshold of $41.5 million. The Bureau
estimates that about 90 percent, or 45,
nondepository mortgage lenders are
small entities.
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Farm Credit System members: The
Bureau estimates that there are 72
members of the Farm Credit System
(banks and associations) that are
engaged in small business lending and
that originate enough covered credit
transactions to be covered by the
proposed rule.943 These institutions are
in the ‘‘All Other Nondepository Credit
Intermediation’’ (NAICS 522298)
industry. The size standard for this
industry is $41.5 million in sales. The
Bureau estimates that 18 members of the
Farm Credit System are small entities.
Governmental lending entities: As
discussed in more detail in part II.D
above, the Bureau estimates that there
are about 100 governmental lending
entities engaged in small business
lending that originate enough covered
credit transactions to be covered by the
proposed rule. ‘‘Small governmental
jurisdictions’’ are the governments of
cities, counties, towns, townships,
villages, school districts, or special
districts, with a population of less than
fifty thousand. The Bureau assumes that
none of the governmental lending
entities covered by the proposed rule
are considered small.
4. Projected Reporting, Recordkeeping,
and Other Compliance Requirements of
the Proposed Rule, Including an
Estimate of the Classes of Small Entities
Which Will Be Subject to the
Requirement and the Type of
Professional Skills Necessary for the
Preparation of the Report
Reporting requirements. ECOA
section 704B(f)(1) provides that ‘‘[t]he
data required to be compiled and
maintained under [section 1071] by any
financial institution shall be submitted
annually to the Bureau.’’ Section 1071
requires financial institutions to collect
and report information regarding any
application for ‘‘credit’’ made by
women-owned, minority-owned, and
small businesses. The Bureau is also
proposing that the following
transactions are not covered by the rule:
leases, factoring, consumer-designated
credit, credit secured by certain
properties, trade credit, public utilities
credit, securities credit, and incidental
credit.
Under the proposed rule, financial
institutions would be required to report
data on small business credit
943 Fed. Farm Credit Banks Funding Corp., Farm
Credit 2019 Annual Information Statement of the
Farm Credit System, at 7 (Feb. 28, 2020), https://
www.farmcreditfunding.com/ffcb_live/serve/public/
pressre/finin/report.pdf?assetId=395570. The
Bureau notes that Farm Credit System banks do not
report FFIEC Call Reports and are thus not counted
in the number of banks and savings associations
discussed above.
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applications if they originated at least
25 covered transactions in each of the
previous two calendar years. The
Bureau is proposing that 1071 data
collection be done on a calendar-year
basis and submitted to the Bureau by a
specified time after the end of each
calendar year. The section-by-section
analyses of the proposed rule in part V
above discuss the required data points
and the scope of the proposed rule in
greater detail. More information is also
available in section 3 of the SBREFA
Panel Report.
Recordkeeping requirements. ECOA
section 704B(f)(2)(A) requires that
information compiled and maintained
under section 1071 be ‘‘retained for not
less than 3 years after the date of
preparation.’’ The Bureau is proposing
that financial institutions retain 1071
data for at least three years after it is
submitted to the Bureau. Further,
704B(f)(2) generally requires that the
information compiled and maintained
by financial institutions, and submitted
annually to the Bureau, be made
available to the public. Publication of
these data would fill existing gaps in the
public’s general understanding of the
small business lending environment and
help identify potential fair lending
concerns regarding small businesses as
well as the needs and opportunities for
both business and community
development. In accordance with
704B(e)(3), the Bureau is also proposing
a prohibition on including certain
personally identifiable information
about any individuals associated with
small business applicants in the data
that a financial institution is required to
compile, maintain, and report to the
Bureau, other than information
specifically required to be collected and
reported (such as the race, sex, and
ethnicity of principal owners). Financial
institutions must, unless subject to an
exception, limit the access of a certain
officers and employees to applicants’
responses to the inquiries regarding
women-owned and minority-owned
business status, as well as the race, sex,
and ethnicity of principal owners. In
addition, applicants’ responses to the
inquiries regarding women-owned and
minority-owned business status, as well
as the race, sex, and ethnicity of
principal owners, must be maintained
separately from the application and
accompanying information.
Costs to small entities. The Bureau
expects that the proposed rule may
impose one-time and ongoing costs on
small-entity providers of credit to small
businesses. The Bureau has
preliminarily identified eight categories
of one-time costs that make up the
components necessary for a financial
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institution to develop the infrastructure
to collect and report data required by
the eventual 1071 rule. Those categories
are preparation/planning; updating
computer systems; testing/validating
systems; developing forms/applications;
training staff and third parties (such as
dealers and brokers); developing
policies/procedures; legal/compliance
review; and post-implementation review
of compliance policies and procedures.
The Bureau conducted a survey
regarding potential one-time
implementation costs for section 1071
compliance targeted at financial
institutions who extend small business
credit. The Bureau used the results of
this survey to estimate the one-time
costs for financial institutions covered
by the proposed rule using the
methodology described in part VII.E.1
above. The Bureau estimates that
depository institutions with the lowest
level of complexity in compliance
operations (i.e., Type A DIs) would
incur one-time costs of $58,400. The
Bureau estimates that depository
institutions with a middle level of
complexity in compliance operations
(i.e., Type B DIs) would incur one-time
costs of $44,500. The Bureau estimates
that depository institutions with the
highest level of complexity in
compliance operations (i.e., Type C DIs)
would incur one-time costs of $75,700.
Finally, the Bureau estimates that NonDIs would incur one-time costs of
$95,200.
The Bureau estimates that the overall
market impact of one-time costs for
small depository institutions will be
between $143,000,000 and
$153,000,000.944 The Bureau estimates
that the overall market impact of onetime costs for Non-DIs will be
$63,000,000.
Adapting ongoing cost methodology
from previous HMDA rulemaking
efforts, the Bureau identified 15 specific
data collection and reporting activities
that would impose ongoing costs to
financial institutions covered by the
rule.945 The Bureau estimated that
financial institutions with the lowest
level of complexity in compliance
operations (i.e. Type A FIs) would incur
around $7,386 in total annual ongoing
costs, or about $74 in total cost per
application processed (assuming a
944 The Bureau notes that the variation in this
range comes primarily from the uncertainty in the
number of originations made by small banks and
savings associations. The range does not fully
account for the uncertainty associated with
estimates of the one-time costs for each type of
institution.
945 The Bureau applied the same methodology for
the ongoing costs for small entities as that found in
part VII.E.2 above.
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representative 100 applications per
year). For financial institutions of this
type, the largest drivers of the ongoing
costs are activities that require
employee time to complete. Activities
like transcribing data, transferring data
to the data management software,
standard edits and internal checks, and
training all require loan officer time.
The Bureau estimates that financial
institutions with a middle level of
complexity in compliance operations
(i.e. Type B FIs), which is somewhat
automated, would incur approximately
$35,476 in additional ongoing costs per
year, or around $89 per application
(assuming a representative 400
applications per year). The largest
components of this ongoing cost are the
expenses of the small business
application management software and
geocoding software (in the form of an
annual software subscription fee) and
the external audit of the data. The
Bureau estimates that financial
institutions with the highest level of
complexity in compliance operations
(i.e. Type C FIs), which is significantly
automated, would incur approximately
$243,266 in additional ongoing costs per
year, or around $41 per application
(assuming a representative 6,000
applications per year). The largest
components of this ongoing cost are the
cost of an internal audit, transcribing
data, and annual edits and internal
checks.
The Bureau estimates that the overall
market impact of ongoing costs for small
entities will be between $112,000,000
and $126,000,000 per year.
Estimate of the classes of small
entities that will be subject to the
requirement and the type of professional
skills necessary for the preparation of
the report or record. Section 603(b)(4) of
the RFA also requires an estimate of the
type of professional skills necessary for
the preparation of the reports or records.
The recordkeeping and compliance
requirements of the proposed rule that
would affect small entities are
summarized above. Based on outreach
with financial institutions, vendors, and
governmental agency representatives,
the Bureau classified the operational
activities that financial institutions
would likely use for Section 1071 data
collection and reporting into 15
operational ‘‘tasks’’ which can be
further grouped into four ‘‘primary
tasks.’’ These are:
1. Data collection: Transcribing data,
resolving reportability questions, and
transferring data to a 1071 data
management system.
2. Reporting and resubmission:
Geocoding, standard annual edit and
internal checks, researching questions,
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56571
resolving question responses, checking
post-submission edits, filing postsubmission documents, and using
vendor data management software.
3. Compliance and internal audits:
Training, internal audits, and external
audits.
4. Section 1071-related exams: Exam
preparation and exam assistance.
All these tasks are related to the
preparation of reports or records and
most of them are performed by
compliance personnel in the
compliance department of financial
institutions. For some financial
institutions, however, the data intake
and transcribing stage could involve
loan officers or processors whose
primary function is to evaluate or
process loan applications. For example,
at some financial institutions the loan
officers would take in information from
the applicant to complete the
application and input that information
into the reporting system. However, the
Bureau believes that such roles
generally do not require any additional
professional skills related to
recordkeeping or other compliance
requirements of this proposed rule that
are not otherwise required during the
ordinary course of business for small
entities.
The type of professional skills
required for compliance varies
depending on the particular task
involved. For example, data transcribing
requires data entry skills. Transferring
data to a data entry system and using
vendor data management software
requires knowledge of computer
systems and the ability to use them.
Researching and resolving reportability
questions requires a more complex
understanding of the regulatory
requirements and the details of the
relevant line of business. Geocoding
requires skills in using the geocoding
software, web systems, or, in cases
where geocoding is difficult, knowledge
of the local area in which the property
is located. Standard annual editing,
internal checks, and post-submission
editing require knowledge of the
relevant data systems, data formats, and
section 1071 regulatory requirements in
addition to skills in quality control and
assurance. Filing post-submission
documents requires skills in
information creation, dissemination,
and communication. Training, internal
audits, and external audits require
communications skills, educational
skills, and regulatory knowledge.
Section 1071-related exam preparation
and exam assistance involve knowledge
of regulatory requirements, the relevant
line of business, and the relevant data
systems.
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The Standard Occupational
Classification (SOC) code has
compliance officers listed under code
13–1041. The Bureau believes that most
of the skills required for preparation of
the reports or records related to this
proposal are the skills required for job
functions performed in this occupation.
However, the Bureau recognizes that
under this general occupational code
there is a high level of heterogeneity in
the type of skills required as well as the
corresponding labor costs incurred by
the financial institutions performing
these functions. During the SBREFA
process, some SERs noted that, for
instance, high-level corporate officers
such as CEOs and senior vice presidents
could be directly involved in some
regulatory tasks. As such, the Bureau
seeks comment regarding the skills
required for the preparation of the
records related to this proposed rule.
The Bureau acknowledges the
possibility that certain aspects of the
proposed rule may require some small
entities to hire additional compliance
staff. The Bureau has no evidence that
such additional staff will possess a
qualitatively different set of professional
skills than small entity staff employed
currently for compliance purposes. It is
possible, however, that compliance with
the proposed rule may emphasize
certain skills. For example, new data
points may increase demand for skills
involved in researching questions,
standard annual editing, and postsubmission editing. Nevertheless, the
Bureau believes that compliance would
still involve the general set of skills
identified above. The recordkeeping and
reporting requirements associated with
this proposal would also involve skills
for information technology system
development, integration, and
maintenance. Financial institutions
required to report data under HMDA
often use data management systems
called HMDA Management Systems
(HMS) for existing regulatory purposes.
A similar software for reporting the data
required under the proposed rule could
be developed by the institution
internally or purchased from a thirdparty vendor. It is possible that other
systems used by financial institutions,
such as loan origination systems, might
also need to be upgraded to capture new
data fields required to be collected and
reported under the proposed rule. The
professional skills required for this onetime upgrade would be related to
software development, testing, system
engineering, information technology
project management, budgeting and
operation.
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5. Identification, to the Extent
Practicable, of All Relevant Federal
Rules Which May Duplicate, Overlap, or
Conflict With the Proposed Rule
The proposed rule contains
requirements related to the collection
and reporting of small business lending
information by certain financial
institutions and publication by the
Bureau. In its SBREFA Outline, the
Bureau identified certain other Federal
statutes and regulations that relate in
some fashion to these areas and has
considered the extent to which they
may duplicate, overlap, or conflict with
this proposal.946 The SBREFA Panel
Report included an updated list of these
Federal statutes and regulations, as
informed by SER feedback.947 Each of
the statutes and regulations identified in
the SBREFA Panel Report is discussed
below.
ECOA, implemented by the Bureau’s
Regulation B (12 CFR part 1002),
prohibits creditors from discriminating
in any aspect of a credit transaction,
including a business-purpose
transaction, on the basis of race, color,
religion, national origin, sex (including
sexual orientation and gender identity),
marital status, age (if the applicant is
old enough to enter into a contract),
receipt of income from any public
assistance program, or the exercise in
good faith of a right under the Consumer
Credit Protection Act. The Bureau has
certain oversight, enforcement, and
supervisory authority over ECOA
requirements and has rulemaking
authority under the statute.
Regulation B generally prohibits
creditors from inquiring about an
applicant’s race, color, religion, national
origin, or sex (including sexual
orientation and gender identity), with
limited exceptions, including if it is
required by law. Regulation B requires
creditors to request information about
the race, ethnicity, sex, marital status,
and age of applicants for certain
dwelling-secured loans and to retain
that information for certain periods.
Regulation B requires this data
collection for credit primarily for the
purchase or refinancing of a dwelling
occupied or to be occupied by the
applicant as a principal residence,
where the extension of credit will be
secured by the dwelling, and requires
the data to be maintained by the creditor
for 25 months for purposes of
946 Rules are duplicative or overlapping if they
are based on the same or similar reasons for the
regulation, the same or similar regulatory goals, and
if they regulate the same classes of industry. Rules
are conflicting when they impose two conflicting
regulatory requirements on the same classes of
industry.
947 See SBREFA Panel Report at app. C.
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monitoring and enforcing compliance
with ECOA/Regulation B and other
laws. Section 1071 of the Dodd-Frank
Act amended ECOA to require financial
institutions to compile, maintain, and
submit to the Bureau certain data on
credit applications by women-owned,
minority-owned, and small businesses.
The Small Business Act,948
administered through the SBA, defines
a small business concern as a business
that is ‘‘independently owned and
operated and which is not dominant in
its field of operation’’ and empowers the
Administrator to prescribe detailed size
standards by which a business concern
may be categorized as a small business.
The SBA has adopted more than one
thousand industry-specific size
standards, classified by 6-digit NAICS
codes, to determine whether a business
concern is ‘‘small.’’ In addition, the
Small Business Act authorizes loans for
qualified small business concerns for
purposes of plant acquisition,
construction, conversion, or expansion,
including the acquisition of land,
material, supplies, equipment, and
working capital. The SBA sets the
guidelines that govern the ‘‘7(a) loan
program,’’ determining which
businesses financial institutions may
lend to through the program and the
type of loans they can provide. The
Bureau’s proposed rule would include
reporting on SBA lending and guarantee
programs.
The CRA, implemented through
regulations issued by the OCC, the
Board, and the FDIC, requires some
institutions to collect, maintain, and
report certain data about small business,
farm, and consumer lending to ensure
they are serving their communities. The
purpose of the CRA is to encourage
institutions to help meet the credit
needs of the local communities in
which they do business, including lowand moderate-income neighborhoods.
The Bureau has been working with the
CRA regulatory agencies to ensure that
a 1071 rule and the CRA do not conflict
and that 1071 data can be used as part
of the CRA compliance process.
The Riegle Community Development
and Regulatory Improvement Act of
1994949 authorized the Community
Development Financial Institution Fund
(CDFI Fund). The Department of the
Treasury administers the regulations
that govern the CDFI Fund. A certified
CDFI is a specialized financial
institution that works in markets that
are underserved by traditional financial
institutions, including regulated
institutions such as community
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development banks and credit unions,
and non-regulated institutions such as
loan and venture capital funds. The
CDFI program includes an annual
mandatory Certification and Data
Collection Report. The Bureau is
proposing to require that financial
institutions reporting 1071 data identify
if they are CDFIs.
HMDA, implemented by the Bureau’s
Regulation C (12 CFR part 1003),
requires lenders who meet certain
coverage tests to collect, report, and
disclose detailed information to their
Federal supervisory agencies about
mortgage applications and loans at the
transaction level. The HMDA data are a
valuable source for regulators,
researchers, economists, industry, and
advocates assessing housing needs,
public investment, and possible
discrimination as well as studying and
analyzing trends in the mortgage market
for a variety of purposes, including
general market and economic
monitoring. There may be some overlap
between what is required to be reported
under HMDA and what is proposed to
be covered by section 1071 for certain
credit applications secured by
dwellings.
The Currency and Foreign
Transactions Reporting Act,950 as
amended by the USA PATRIOT Act,951
and commonly referred to as the Bank
Secrecy Act, authorized the Financial
Crimes Enforcement Network (FinCEN),
a bureau of the Department of the
Treasury, to combat money laundering
and promote financial security. FinCEN
regulations require covered financial
institutions to establish and maintain
written procedures that are reasonably
designed to identify and verify
beneficial owners of legal entity
customers, which is sometimes called
the customer due diligence (CDD) rule.
The Federal Credit Union Act,
implemented by the NCUA (12 CFR part
1756), requires Federal credit unions to
make financial reports as specified by
the agency. The NCUA requires
quarterly reports of the total number of
outstanding loans, total outstanding
loan balance, total number of loans
950 Public
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951 Public
Law 91–508, tit. II, 84 Stat. 1118 (1970).
Law 107–56, 115 Stat. 272 (2001).
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granted or purchased year-to-date, total
amount granted or purchased year-todate for commercial loans to members,
not including loans with original
amounts less than $50,000. The NCUA
also requires quarterly reports of the
total number and total outstanding
balance (including the guaranteed
portion) of loans originated under an
SBA loan program.
The Federal Deposit Insurance Act,952
implemented by the FDIC (12 CFR part
304), requires insured banks and savings
associations to file Call Reports in
accordance with applicable instructions.
These instructions require quarterly
reports of loans to small businesses,
defined as loans for commercial and
industrial purposes to sole
proprietorships, partnerships,
corporations, and other business
enterprises and loans secured by nonfarm non-residential properties with
original amounts of $1 million or less.
In accordance with amendments by the
Federal Deposit Insurance Corporation
Improvement Act of 1991,953 the
instructions require quarterly reports of
loans to small farms, defined as loans to
finance agricultural production, other
loans to farmers, and loans secured by
farmland (including farm residential
and other improvements) with original
amounts of $500,000 or less. The Bureau
intends to work with the FDIC to ensure
that a 1071 rule and the Federal Deposit
Insurance Act do not conflict.
The Bureau requests comment to
identify any additional such Federal
statutes or regulations that impose
duplicative, overlapping, or conflicting
requirements on financial institutions
and potential changes to the proposed
rules in light of duplicative,
overlapping, or conflicting
requirements.
6. Description of Any Significant
Alternatives to the Proposed Rule
Which Accomplish the Stated
Objectives of Applicable Statutes and
Minimize Any Significant Economic
Impact of the Proposed Rule on Small
Entities
In drafting this proposed rule, the
Bureau considered multiple financial
952 12
institution reporting thresholds. In
particular, the Bureau considered
whether to exempt financial institutions
with fewer than 50 or 100 originations
of covered credit transactions for small
businesses in each of the two preceding
calendar years, instead of 25
originations as proposed. The Bureau
also considered whether to exempt
depository institutions with assets
under $100 million or $200 million
from section 1071’s data collection and
reporting requirements. The Bureau
understands that some burden reduction
may result from a threshold higher than
25 loans. However, the Bureau is
concerned that a higher threshold
would result in the elimination of data
that are important in fulfilling the
purposes of section 1071. Therefore, the
Bureau is proposing an originations
threshold of at least 25 covered
transactions in each of the previous two
calendar years.
The following table shows the
estimated impact that different reporting
thresholds the Bureau considered would
have had on financial institution
coverage. For the purposes of
considering the asset-based threshold
alternatives, the Bureau estimates how
institutional coverage and costs would
be different if the Bureau required a 25origination threshold in addition to an
asset-based threshold for depository
institutions. For the asset-based
threshold alternatives, the Bureau
assumes that the alternative proposal
would have been that a depository
institution would be required to report
its small business lending activity for
2019 if it had more than 25 originations
in both 2017 and 2018 and had assets
over the asset-based threshold on
December 31, 2018. The Bureau further
assumes that if two institutions merged
in 2019 then the resulting institution
would be required to report if the sum
of the separate institutions’ assets on
December 31, 2018 exceeded the assetbased threshold.
U.S.C. 1811 et seq.
Law 102–242, 105 Stat. 2236 (1991).
953 Public
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Further, the Bureau is proposing a
number of discretionary data points
(i.e., data points that are not expressly
listed in section 1071 but that the
Bureau is proposing to add pursuant to
its authority under ECOA section
704B(e)(2)(H)) in this rule. The Bureau
concluded that seven discretionary data
points (application channel, application
recipient, pricing, number of principal
owners, NAICS code, number of
workers, and time in business) would
help the data collection fulfill the
purposes of section 1071.
During the SBREFA process, SERs
provided detailed feedback on the
discretionary data points that the
Bureau is considering.954 One SER
stated that the cost of collecting and
reporting the discretionary data points
under consideration would be
significant, and another SER stated that
the Bureau should include as few data
points as possible to avoid unnecessary
costs. Another SER stated that the
Bureau should finalize a rule with just
the statutorily required data points and
avoid adding any discretionary data
points. Other SERs favored or opposed
the inclusion of some or all of the
individual discretionary data points
under consideration during the SBREFA
process.
The Bureau understands that
discretionary data points may introduce
additional burden to small entities.
However, the Bureau has preliminarily
determined that these data points would
aid in fulfilling the statutory purposes of
section 1071—facilitating enforcement
of fair lending laws and enabling
communities, governmental entities,
and creditors to identify business and
954 The SER feedback discussed herein can be
found in the SBREFA Panel Report at 30–32.
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community development needs and
opportunities of women-owned,
minority-owned, and small businesses.
The Bureau seeks comment on the likely
impact of the proposed rule on the
compliance cost to small entities.
7. Discussion of Impact on Cost of
Credit for Small Entities
Three types of costs (one-time, fixed
ongoing, and variable ongoing) have the
potential to influence the price and
availability of credit to small businesses.
In a competitive marketplace, standard
microeconomics suggests that lenders
will extend loans up to the point at
which the value of granting an
additional loan is equal to the
additional cost associated with the
financial institution providing the loan.
One-time costs and fixed ongoing costs
affect the overall profitability of a
lender’s loan portfolio but do not affect
the profitability of extending an
additional loan. Variable ongoing costs,
however, affect the profitability of each
additional loan and will influence the
number of loans a lender provides.
Based on the Bureau’s available
evidence, it expects that the variable
ongoing costs to comply with the
proposed rule will be passed on in full
to small business credit applicants in
the form of higher prices or fees to small
businesses.
During the SBREFA process, the
Bureau asked SERs how they would
respond to the cost of complying with
the proposals under consideration.955
One nondepository SER did indicate
that smaller firms in their industry may
stop participating if one-time costs are
too high, particularly if small business
lending is a secondary aspect of their
955 SBREFA
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business model.956 Another
nondepository SER indicated that
significantly increasing the time
between application and decision could
occur due to the proposed requirements,
which they said would threaten their
ability to compete with other lenders.
When asked if they expected the costs
of the eventual 1071 rule to be passed
on in the form of higher rates and fees,
a number of SERs (from banks, credit
unions, and nondepositories) indicated
that they expected to do so at their
institutions. However, a number of other
SERs indicated that they did not believe
an eventual 1071 rule would result in
higher rates or fees. Several depository
institution SERs said that they would be
able to absorb the costs in their
operating budgets as they have with
previous regulations.
In the One-Time Cost Survey, the
Bureau asked respondents to rank a list
of potential actions they may take in
response to the compliance costs of
implementing section 1071.957
Respondents ranked the following list:
‘‘Raise rates or fees on small business
products’’; ‘‘Raise rates/fees on other
credit products’’; ‘‘Accept lower
profits’’; ‘‘Exit some geographic
markets’’; ‘‘Tighten underwriting
standards’’; ‘‘Offer fewer or less
complex products’’; ‘‘No longer offer
small business credit products’’; or
‘‘Other’’ with two write-in options.
Respondents ranked these options from
‘‘1’’ to ‘‘9’’ indicating their most to least
likely responses. Respondents also had
the opportunity to write in their own
responses. Consistent with economic
956 The SER feedback discussed in this sectionby-section analysis can be found in the SBREFA
Panel Report at 40.
957 See One-Time Cost Survey at 11.
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theory, respondents reported that they
would be most likely to raise rates or
fees on small business products and
other credit products. On average,
respondents reported that they would be
least likely to exit some geographic
markets or cease offering small business
credit products. Accordingly, the
Bureau expects the likely impact of an
eventual 1071 rule on the cost of credit
to small entities to be higher rates and
fees because financial institutions pass
on the variable ongoing costs of the
required data collection. The Bureau
estimates that $28, $24, and $7 in
variable costs would be passed through
per application to Type A, B, and C FIs,
respectively. To put these values in
context, the Bureau estimates that the
per application net income is in a range
of $53,000–$60,500; $25,000–$28,500;
and $79,000–$89,000 for banks and
savings associations of Types A, B, and
C, respectively.
IX. Paperwork Reduction Act
Under the Paperwork Reduction Act
of 1995 (PRA),958 Federal agencies are
generally required to seek approval from
the Office of Management and Budget
(OMB) for information collection
requirements prior to implementation.
Under the PRA, the Bureau may not
conduct nor sponsor, and,
notwithstanding any other provision of
law, a person is not required to respond
to, an information collection unless the
information collection displays a valid
control number assigned by OMB.
As part of its continuing effort to
reduce paperwork and respondent
burden, the Bureau conducts a
preclearance consultation program to
provide the general public and Federal
agencies with an opportunity to
comment on the information collection
requirements in accordance with the
PRA. This helps ensure that the public
understands the Bureau’s requirements
or instructions, respondents can provide
the requested data in the desired format,
reporting burden (time and financial
resources) is minimized, information
collection instruments are clearly
understood, and the Bureau can
properly assess the impact of
information collection requirements on
respondents.
The proposed rule would amend 12
CFR part 1002 (Regulation B), which
implements the ECOA. The Bureau’s
OMB control number for Regulation B is
3170–0013. This proposed rule would
revise the information collection
requirements contained in Regulation B
that OMB has approved under that OMB
control number.
958 44
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Under the proposal, the Bureau would
add four information collection
requirements to Regulation B:
1. Compilation of reportable data
(proposed § 1002.107), including a notice
requirement (in proposed § 1002.107(a)(18)
through (20)).
2. Reporting data to the Bureau (proposed
§ 1002.109).
3. Firewall notice requirement (proposed
§ 1002.108(d)).
4. Recordkeeping (proposed § 1002.111).
The information collection
requirements in this proposed rule
would be mandatory. Certain data fields
would be modified or deleted by the
Bureau, in its discretion, to advance a
privacy interest before the 1071 data are
made available to the public (as
permitted by section 1071 and the
Bureau’s proposed rule). The data that
are not modified or deleted would be
made available to the public and are not
considered confidential. The rest of the
data would be considered confidential if
the information:
• Identifies any natural persons who
might not be applicants (e.g., owners of
a business where a legal entity is the
applicant); or
• Implicates the privacy interests of
financial institutions.
The collections of information
contained in this proposed rule, and
identified as such, have been submitted
to OMB for review under section
3507(d) of the PRA. A complete
description of the information collection
requirements (including the burden
estimate methods) is provided in the
information collection request (ICR) that
the Bureau has submitted to OMB under
the requirements of the PRA. Please
send your comments to the Office of
Information and Regulatory Affairs,
OMB, Attention: Desk Officer for the
Bureau of Consumer Financial
Protection. Send these comments by
email to oira_submission@omb.eop.gov
or by fax to 202–395–6974. If you wish
to share your comments with the
Bureau, please send a copy of these
comments as described in the
ADDRESSES section above. The ICR
submitted to OMB requesting approval
under the PRA for the information
collection requirements contained
herein is available at
www.regulations.gov as well as on
OMB’s public-facing docket at
www.reginfo.gov.
Title of Collection: Regulation B:
Equal Credit Opportunity Act.
OMB Control Number: 3170–0013.
Type of Review: Revision of a
currently approved collection.
Affected Public: Private Sector;
Federal and State Governments.
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Estimated Number of Respondents:
188,800.
Estimated Total Annual Burden
Hours: 5,688,000.
Comments are invited on: (a) Whether
the collection of information is
necessary for the proper performance of
the functions of the Bureau, including
whether the information will have
practical utility; (b) the accuracy of the
Bureau’s estimate of the burden of the
collection of information, including the
validity of the methods and the
assumptions used; (c) ways to enhance
the quality, utility, and clarity of the
information to be collected; and (d)
ways to minimize the burden of the
collection of information on
respondents, including through the use
of automated collection techniques or
other forms of information technology.
Comments submitted in response to this
proposal will be summarized and/or
included in the request for OMB
approval. All comments will become a
matter of public record.
If applicable, the notice of final rule
will display the control number
assigned by OMB to any information
collection requirements proposed herein
and adopted in the final rule.
List of Subjects in 12 CFR Part 1002
Banks, Banking, Civil rights,
Consumer protection, Credit, Credit
unions, Marital status discrimination,
National banks, Penalties.
Authority and Issuance
For the reasons set forth in the
preamble, the Bureau proposes to
amend Regulation B, 12 CFR part 1002,
as set forth below:
PART 1002—EQUAL CREDIT
OPPORTUNITY ACT (REGULATION B)
1. The authority citation for part 1002
is revised to read as follows:
■
Authority: 12 U.S.C. 5512, 5581; 15 U.S.C.
1691b. Subpart B is also issued under 15
U.S.C. 1691c–2.
Subpart A—General
2. Sections 1002.1 through 1002.16
are designated as subpart A under the
heading set forth above.
■ 3. Section 1002.5 is amended by
revising paragraph (a)(4) introductory
text and adding paragraphs (a)(4)(vii)
through (ix) to read as follows:
■
§ 1002.5 Rules concerning requests for
information.
(a) General rules—
*
*
*
*
(4) Other permissible collection of
information. Notwithstanding paragraph
(b) of this section, a creditor may collect
*
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information under the following
circumstances provided that the creditor
collects the information in compliance
with appendices F and G to this part, or
appendix B to 12 CFR part 1003, as
applicable:
*
*
*
*
*
(vii) A creditor that was required to
report small business lending data
pursuant to § 1002.109 for any of the
preceding five calendar years but is not
currently a covered financial institution
under § 1002.105(b) may collect
information pursuant to subpart B of
this part for a covered application as
defined in § 1002.103 regarding whether
the applicant is a minority-owned
business or a women-owned business,
and the ethnicity, race, and sex of the
applicant’s principal owners if it
complies with the requirements of
subpart B as otherwise required for
covered financial institutions pursuant
to §§ 1002.107, 1002.108, 1002.111,
1002.112, and 1002.114 for that
application.
(viii) A creditor that exceeded the
loan-volume threshold in the first year
of the two-year threshold period
provided in § 1002.105(b) may, in the
second year, collect information
pursuant to subpart B of this part for a
covered application as defined in
§ 1002.103 regarding whether the
applicant is a minority-owned business
or a women-owned business, and the
ethnicity, race, and sex of the
applicant’s principal owners if it
complies with the requirements of
subpart B as otherwise required for
covered financial institutions pursuant
to §§ 1002.107, 1002.108, 1002.111,
1002.112, and 1002.114 for that
application.
(ix) A creditor that is not currently a
covered financial institution under
§ 1002.105(b), and is not otherwise a
creditor to which § 1002.5(a)(4)(vii) or
(viii) applies, may collect information
pursuant to subpart B of this part for a
covered application as defined in
§ 1002.103 regarding whether an
applicant for a covered credit
transaction is a minority-owned
business or a women-owned business,
and the ethnicity, race, and sex of the
applicant’s principal owners for a
transaction if it complies with the
requirements of subpart B as otherwise
required for covered financial
institutions pursuant to §§ 1002.107
through 1002.112 and 1002.114 for that
application.
*
*
*
*
*
■ 4. Subpart B is added to read as
follows:
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Subpart B—Small Business Lending
Data Collection
§ 1002.101 Authority, purpose, and scope.
§ 1002.102 Definitions.
§ 1002.103 Covered applications.
§ 1002.104 Covered credit transactions and
excluded transactions.
§ 1002.105 Covered financial institutions
and exempt institutions.
§ 1002.106 Business and small business.
§ 1002.107 Compilation of reportable data.
§ 1002.108 Firewall.
§ 1002.109 Reporting of data to the Bureau.
§ 1002.110 Publication of data.
§ 1002.111 Recordkeeping.
§ 1002.112 Enforcement.
§ 1002.113 Severability.
§ 1002.114 Effective date, compliance date,
and special transitional rules.
§ 1002.101
Authority, purpose, and scope.
(a) Authority and scope. This subpart
to Regulation B is issued by the Bureau
pursuant to section 704B of the Equal
Credit Opportunity Act (15 U.S.C.
1691c–2). Except as otherwise provided
herein, this subpart Applies to covered
financial institutions, as defined in
§ 1002.105(b), other than a person
excluded from coverage of this part by
section 1029 of the Consumer Financial
Protection Act of 2010, title X of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law
111–203, 124 Stat. 1376, 2004 (2010).
(b) Purpose. This subpart implements
section 704B of the Equal Credit
Opportunity Act, which is intended:
(i) To facilitate enforcement of fair
lending laws; and
(ii) To enable communities,
governmental entities, and creditors to
identify business and community
development needs and opportunities of
women-owned, minority-owned, and
small businesses.
§ 1002.102
Definitions.
In this subpart:
(a) Affiliate means, with respect to a
financial institution, any company that
controls, is controlled by, or is under
common control with, another
company, as set forth in the Bank
Holding Company Act of 1956 (12
U.S.C. 1841 et seq.). With respect to a
business or an applicant, affiliate shall
have the same meaning as in 13 CFR
121.103.
(b) Applicant means any person who
requests or who has received an
extension of business credit from a
financial institution.
(c) Business is defined in
§ 1002.106(a).
(d) Business credit shall have the
same meaning as in § 1002.2(g).
(e) Closed-end credit transaction
means an extension of credit that is not
an open-end credit transaction under
paragraph (n) of this section.
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(f) Covered application is defined in
§ 1002.103.
(g) Covered credit transaction is
defined in § 1002.104.
(h) Covered financial institution is
defined in § 1002.105(b).
(i) Credit shall have the same meaning
as in § 1002.2(j).
(j) Dwelling shall have the same
meaning as in Regulation C, 12 CFR
1003.2(f).
(k) Financial institution is defined in
§ 1002.105(a).
(l) Minority individual means a
natural person who is American Indian
or Alaska Native, Asian, Black or
African American, Native Hawaiian or
Other Pacific Islander, and/or Hispanic
or Latino.
(m) Minority-owned business means a
business for which more than 50
percent of its ownership or control is
held by one or more minority
individuals, and more than 50 percent
of its net profits or losses accrue to one
or more minority individuals.
(n) Open-end credit transaction
means an open-end credit plan as
defined in Regulation Z, 12 CFR
1026.2(a)(20), but without regard to
whether the credit is consumer credit,
as defined in § 1026.2(a)(12), is
extended by a creditor, as defined in
§ 1026.2(a)(17), or is extended to a
consumer, as defined in § 1026.2(a)(11).
(o) Principal owner means a natural
person who directly owns 25 percent or
more of the equity interests of a
business.
(p) Small business is defined in
§ 1002.106(b).
(q) Small business lending application
register or register means the data
reported, or required to be reported,
annually pursuant to § 1002.109.
(r) State shall have the same meaning
as in § 1002.2(aa).
(s) Women-owned business means a
business for which more than 50
percent of its ownership or control is
held by one or more women, and more
than 50 percent of its net profits or
losses accrue to one or more women.
§ 1002.103
Covered applications.
(a) Covered application. Except as
provided in paragraph (b) of this
section, covered application means an
oral or written request for a covered
credit transaction that is made in
accordance with procedures used by a
financial institution for the type of
credit requested.
(b) Circumstances that are not
covered applications. A covered
application does not include:
(1) Reevaluation, extension, or
renewal requests on an existing business
credit account, unless the request seeks
additional credit amounts.
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(2) Inquiries and prequalification
requests.
§ 1002.104 Covered credit transactions
and excluded transactions.
(a) Covered credit transaction means
an extension of business credit that is
not an excluded transaction under
paragraph (b) of this section.
(b) Excluded transactions. The
requirements of this subpart do not
apply to:
(1) Trade credit. A financing
arrangement wherein a business
acquires goods or services from another
business without making immediate
payment to the business providing the
goods or services.
(2) Public utilities credit. Public
utilities credit as defined in
§ 1002.3(a)(1).
(3) Securities credit. Securities credit
as defined in § 1002.3(b)(1).
(4) Incidental credit. Incidental credit
as defined in § 1002.3(c)(1), but without
regard to whether the credit is consumer
credit, as defined in § 1002.2(h).
§ 1002.105 Covered financial institutions
and exempt institutions.
(a) Financial institution means any
partnership, company, corporation,
association (incorporated or
unincorporated), trust, estate,
cooperative organization, or other entity
that engages in any financial activity.
(b) Covered financial institution
means a financial institution that
originated at least 25 covered credit
transactions for small businesses in each
of the two preceding calendar years. For
purposes of this definition, if more than
one financial institution was involved
in the origination of a covered credit
transaction, only the financial
institution that made the credit decision
approving the application shall count
the origination for purposes of this
paragraph (b).
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§ 1002.106
Business and small business.
(a) Business has the same meaning as
the term ‘‘business concern or concern’’
in 13 CFR 121.105.
(b) Small business has the same
meaning as the term ‘‘small business
concern’’ in 15 U.S.C. 632(a), as
implemented in 13 CFR 121.101
through 121.107. Notwithstanding the
size standards set forth in 13 CFR
121.201, for purposes of this subpart, a
business is a small business if and only
if its gross annual revenue, as defined in
§ 1002.107(a)(14), for its preceding fiscal
year is $5 million or less.
§ 1002.107
Compilation of reportable data.
(a) Data format and itemization. A
covered financial institution shall
compile and maintain data regarding
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covered applications from small
businesses. The data shall be compiled
in the manner prescribed below and as
explained in associated Official
Interpretations and the Filing
Instructions Guide for this subpart for
the appropriate year. The data compiled
shall include the items described in
paragraphs (a)(1) through (21) of this
section.
(1) Unique identifier. An
alphanumeric identifier, starting with
the legal entity identifier of the financial
institution, unique within the financial
institution to the specific covered
application, and which can be used to
identify and retrieve the specific file or
files corresponding to the application
for or extension of credit.
(2) Application date. The date the
covered application was received by the
financial institution or the date shown
on a paper or electronic application
form.
(3) Application method. The means
by which the applicant submitted the
covered application directly or
indirectly to the financial institution.
(4) Application recipient. Whether the
applicant submitted the covered
application directly to the financial
institution or its affiliate, or whether the
applicant submitted the covered
application indirectly to the financial
institution via a third party.
(5) Credit type. The following
information regarding the type of credit
applied for or originated:
(i) Credit product. The credit product.
(ii) Guarantees. The type or types of
guarantees that were obtained for an
extension of credit, or that would have
been obtained if the covered credit
transaction were originated.
(iii) Loan term. The length of the loan
term, in months, if applicable.
(6) Credit purpose. The purpose or
purposes of the credit applied for or
originated.
(7) Amount applied for. The initial
amount of credit or the initial credit
limit requested by the applicant.
(8) Amount approved or originated. (i)
For an application for a closed-end
credit transaction that is approved but
not accepted, the amount approved by
the financial institution; or
(ii) For a closed-end credit transaction
that is originated, the amount of credit
originated; or
(iii) For an application for an openend credit transaction that is originated
or approved but not accepted, the
amount of the credit limit approved.
(9) Action taken. The action taken by
the financial institution on the covered
application, reported as originated,
approved but not accepted, denied,
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withdrawn by the applicant, or
incomplete.
(10) Action taken date. The date of the
action taken by the financial institution.
(11) Denial reasons. For denied
applications, the principal reason or
reasons the financial institution denied
the covered application.
(12) Pricing information. The
following information regarding the
pricing of a covered credit transaction
that is originated or approved but not
accepted, as applicable:
(i) Interest rate. (A) If the interest rate
is fixed, the interest rate that is or would
be applicable to the covered credit
transaction; or
(B) If the interest rate is adjustable,
the margin, index value, and index
name that is or would be applicable to
the covered credit transaction at
origination;
(ii) Total origination charges. The
total amount of all charges payable
directly or indirectly by the applicant
and imposed directly or indirectly by
the financial institution at or before
origination as an incident to or a
condition of the extension of credit,
expressed in dollars;
(iii) Broker fees. The total amount of
all charges included in paragraph
(a)(12)(ii) of this section that are fees
paid by the applicant directly to a
broker or to the financial institution for
delivery to a broker, expressed in
dollars;
(iv) Initial annual charges. The total
amount of all non-interest charges that
are scheduled to be imposed over the
first annual period of the covered credit
transaction, expressed in dollars;
(v) Additional cost for merchant cash
advances or other sales-based financing.
For a merchant cash advance or other
sales-based financing transaction, the
difference between the amount
advanced and the amount to be repaid,
expressed in dollars; and
(vi) Prepayment penalties. (A)
Notwithstanding whether such a
provision was in fact included, whether
the financial institution could have
included a charge to be imposed for
paying all or part of the transaction’s
principal before the date on which the
principal is due under the policies and
procedures applicable to the covered
credit transaction; and
(B) Notwithstanding the response to
paragraph (a)(20)(iv)(A) of this section,
whether the terms of the covered credit
transaction do in fact include a charge
imposed for paying all or part of the
transaction’s principal before the date
on which the principal is due.
(13) Census tract. The census tract in
which is located:
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(i) The address or location where the
proceeds of the credit applied for or
originated will be or would have been
principally applied; or
(ii) If the information in paragraph
(a)(13)(i) of this section is unknown, the
address or location of the main office or
headquarters of the applicant; or
(iii) If the information in both
paragraphs (a)(13)(i) and (ii) of this
section is unknown, another address or
location associated with the applicant.
(iv) The financial institution shall also
indicate which one of the three types of
addresses or locations listed in
paragraphs (a)(13)(i), (ii), or (iii) of this
section the census tract is based on.
(14) Gross annual revenue. The gross
annual revenue of the applicant for its
preceding full fiscal year prior to when
the information is collected.
(15) NAICS code. A 6-digit North
American Industry Classification
System (NAICS) code appropriate for
the applicant.
(16) Number of workers. The number
of non-owners working for the
applicant.
(17) Time in business. The time the
applicant has been in business,
described in whole years, as relied on or
collected by the financial institution.
(18) Minority-owned business status.
Whether the applicant is a minorityowned business and whether minorityowned business status is being reported
based on previously collected data
pursuant to § 1002.107(c)(2). The
financial institution shall collect and
report minority-owned business status
as prescribed in appendix F to this part.
When requesting minority-owned
business status from an applicant, the
financial institution shall inform the
applicant that the financial institution
cannot discriminate on the basis of
minority-owned business status, or on
whether the applicant provides this
information.
(19) Women-owned business status.
Whether the applicant is a womenowned business and whether womenowned business status is being reported
based on previously collected data
pursuant to § 1002.107(c)(2). The
financial institution shall collect and
report women-owned business status as
prescribed in appendix F to this part.
When requesting women-owned
business status from an applicant, the
financial institution shall inform the
applicant that the financial institution
cannot discriminate on the basis of
women-owned business status, or on
whether the applicant provides this
information.
(20) Ethnicity, race, and sex of
principal owners. The ethnicity, race,
and sex of the applicant’s principal
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owners and whether ethnicity, race, and
sex are being reported based on
previously collected data pursuant to
§ 1002.107(c)(2). The data compiled for
purposes of this paragraph (a)(20) shall
also include whether ethnicity and race
are being reported based on visual
observation or surname. The financial
institution shall collect and report
principal owners’ ethnicity, race, and
sex information as prescribed in
appendix G to this part. When
requesting ethnicity, race, and sex
information from an applicant, the
financial institution shall inform the
applicant that the financial institution
cannot discriminate on the basis of a
principal owner’s ethnicity, race, or sex,
or on whether the applicant provides
this information.
(21) Number of principal owners. The
number of the applicant’s principal
owners.
(b) Verification of applicant-provided
information. Unless otherwise provided
in this subpart, the financial institution
may rely on statements of the applicant
when compiling data unless it verifies
the information provided, in which case
it shall use the verified information.
(c) Time and manner of collection—
(1) In general. A covered financial
institution shall maintain procedures to
collect applicant-provided data under
paragraph (a) of this section at a time
and in a manner that is reasonably
designed to obtain a response.
(2) Previously collected data. A
covered financial institution is
permitted, but not required, to reuse
previously collected data to satisfy
paragraphs (a)(13) through (21) of this
section if:
(i) The data were collected within the
same calendar year as the current
covered application; and
(ii) The financial institution has no
reason to believe the data are inaccurate.
§ 1002.108
Firewall.
(a) Definitions. For purposes of this
section, the following terms shall have
the following meanings:
(1) Involved in making any
determination concerning a covered
application means participating in a
decision regarding the evaluation of a
covered application, including the
creditworthiness of an applicant for a
covered credit transaction.
(2) Should have access means that an
employee or officer may need to collect,
see, consider, refer to, or otherwise use
the information to perform that
employee’s or officer’s assigned job
duties.
(b) Prohibition on access to certain
information. Unless the exception under
paragraph (c) of this section applies, an
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employee or officer of a covered
financial institution or a covered
financial institution’s affiliate shall not
have access to an applicant’s responses
to inquiries that the financial institution
makes pursuant to this subpart
regarding whether the applicant is a
minority-owned business under
§ 1002.107(a)(18) or a women-owned
business under § 1002.107(a)(19), and
regarding the ethnicity, race, and sex of
the applicant’s principal owners under
§ 1002.107(a)(20), if that employee or
officer is involved in making any
determination concerning that
applicant’s covered application.
(c) Exception to the prohibition on
access to certain information. The
prohibition in paragraph (b) of this
section shall not apply to an employee
or officer if the financial institution
determines that it is not feasible to limit
that employee’s or officer’s access to an
applicant’s responses to the financial
institution’s inquiries under
§ 1002.107(a)(18) through (20) and the
financial institution provides the notice
required under paragraph (d) of this
section to the applicant. It is not feasible
to limit access as required pursuant to
paragraph (b) of this section if the
financial institution determines that an
employee or officer involved in making
any determination concerning a covered
application should have access to one or
more applicants’ responses to the
financial institution’s inquiries under
§ 1002.107(a)(18) through (20).
(d) Notice. In order to satisfy the
exception set forth in paragraph (c) of
this section, a financial institution shall
provide a notice to each applicant
whose responses will be accessed,
informing the applicant that one or
more employees or officers involved in
making determinations concerning the
covered application may have access to
the applicant’s responses to the
financial institution’s inquiries
regarding whether the applicant is a
minority-owned business or a womenowned business, and regarding the
ethnicity, race, and sex of the
applicant’s principal owners. The
financial institution shall provide the
notice required by this paragraph (d)
when making the inquiries required
under § 1002.107(a)(18) through (20)
and together with the notices required
pursuant to § 1002.107(a)(18) through
(20).
§ 1002.109
Bureau.
Reporting of data to the
(a) Reporting to the Bureau—(1)
Annual reporting. (i) On or before June
1 following the calendar year for which
data are compiled and maintained as
required by § 1002.107, a covered
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financial institution shall submit its
small business lending application
register in the format prescribed by the
Bureau.
(ii) An authorized representative of
the covered financial institution with
knowledge of the data shall certify to
the accuracy and completeness of the
data reported pursuant to this paragraph
(a).
(iii) When the last day for submission
of data prescribed under paragraph
(a)(1) falls on a date that is not a
business day, a submission shall be
considered timely if it is submitted no
later than the next business day.
(2) Reporting by subsidiaries. A
covered financial institution that is a
subsidiary of another covered financial
institution shall complete a separate
small business lending application
register. The subsidiary shall submit its
small business lending application
register, directly or through its parent, to
the Bureau.
(3) Reporting obligations where
multiple financial institutions are
involved in a covered credit transaction.
If a covered application results in an
origination, only one covered financial
institution shall report the covered
credit transaction. If more than one
financial institution is involved in the
origination of a covered credit
transaction, the financial institution that
makes the final credit decision
approving the application shall report
the loan as an origination (if that
financial institution is a covered
financial institution). If there was no
origination, then any covered financial
institution that made a credit decision
shall report the application.
(b) Financial institution identifying
information. A financial institution
shall provide each of the following with
its submission:
(1) Its name.
(2) Its headquarters address.
(3) The name and business contact
information of a person who may be
contacted with questions about the
financial institution’s submission.
(4) Its Federal prudential regulator, if
applicable.
(5) Its Federal Taxpayer Identification
Number (TIN).
(6) Its Legal Entity Identifier (LEI).
(7) Its Research, Statistics,
Supervision, and Discount
identification (RSSD ID) number, if
applicable.
(8) Parent entity information, if
applicable, including:
(i) The name of the immediate parent
entity;
(ii) The LEI of the immediate parent
entity, if available;
(iii) The RSSD ID number of the
immediate parent entity, if available;
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(iv) The name of the top-holding
parent entity;
(v) The LEI of the top-holding parent
entity, if available; and
(vi) The RSSD ID number of the topholding parent entity, if available.
(9) The type of financial institution
that it is, indicated by selecting the
appropriate type or types of institution
from the list provided.
(10) Whether the financial institution
is voluntarily reporting covered
applications for covered credit
transactions.
(c) Procedures for the submission of
data to the Bureau. The Bureau shall
make available a Filing Instructions
Guide, containing technical instructions
for the submission of data to the Bureau
pursuant to this section, as well as any
related materials, available at [a
designated Bureau website].
§ 1002.110
Publication of data.
(a) Publication of small business
lending application registers and
associated financial institution
information. The Bureau shall make
available to the public generally the data
reported to it by financial institutions
pursuant to § 1002.109, subject to
deletions or modifications made by the
Bureau, at its discretion, if the Bureau
determines that the deletion or
modification of the data would advance
a privacy interest. The Bureau shall
make such data available on an annual
basis, by publishing it on the Bureau’s
website at [a designated Bureau
website].
(b) Publication of aggregate data. The
Bureau may, at its discretion, compile
and aggregate data submitted by
financial institutions pursuant to
§ 1002.109, and make any compilations
or aggregations of such data publicly
available as the Bureau deems
appropriate.
(c) Statement of financial institution’s
small business lending data available
on the Bureau’s website. A covered
financial institution shall make
available to the public on its website, or
otherwise upon request, a statement that
the covered financial institution’s small
business lending application register, as
modified by the Bureau pursuant to
§ 1002.110(a), is or will be available on
the Bureau’s website at [a designated
Bureau website]. A financial institution
shall use language provided by the
Bureau, or substantially similar
language, to satisfy the requirement to
provide a statement pursuant to this
paragraph (c).
(d) Availability of statements. A
covered financial institution shall make
the notice required by paragraph (c) of
this section available to the public on its
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website when it submits a small
business lending application register to
the Bureau pursuant to § 1002.109(a)(1),
and shall maintain the notice for as long
as it has an obligation to retain its small
business lending application registers
pursuant to § 1002.111(a).
§ 1002.111
Recordkeeping.
(a) Record retention. A covered
financial institution shall retain
evidence of compliance with this
subpart, which includes a copy of its
small business lending application
register, for at least three years after the
register is required to be submitted to
the Bureau pursuant to § 1002.109.
(b) Certain information kept separate
from the rest of the application. A
financial institution shall maintain,
separately from the rest of the
application and accompanying
information, an applicant’s responses to
the financial institution’s inquiries
pursuant to this subpart regarding
whether an applicant for a covered
credit transaction is a minority-owned
business under § 1002.107(18) or a
women-owned business under
§ 1002.107(19), and regarding the
ethnicity, race, and sex of the
applicant’s principal owners under
§ 1002.107(20).
(c) Limitation on personally
identifiable information in records
retained under this section. In
compiling and maintaining any records
under § 1002.107 or paragraph (b) of this
section, or reporting data pursuant to
§ 1002.109, a financial institution shall
not include any name, specific address,
telephone number, email address, or
any personally identifiable information
concerning any individual who is, or is
connected with, an applicant, other than
as required pursuant to § 1002.107 or
paragraph (b) of this section.
§ 1002.112
Enforcement.
(a) Administrative enforcement and
civil liability. A violation of section
704B of the Act or this subpart is subject
to administrative sanctions and civil
liability as provided in sections 704 (15
U.S.C. 1691c) and 706 (15 U.S.C. 1691e)
of the Act, where applicable.
(b) Bona fide errors. A bona fide error
in compiling, maintaining, or reporting
data with respect to a covered
application is one that was
unintentional and occurred despite the
maintenance of procedures reasonably
adapted to avoid such an error. A bona
fide error is not a violation of the Act
or this subpart. A financial institution is
presumed to maintain procedures
reasonably adapted to avoid such errors
with respect to a given data field if the
number of errors found in a random
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sample of the financial institution’s
submission for the data field does not
equal or exceed a threshold specified by
the Bureau for this purpose in appendix
H to this part. However, an error is not
a bona fide error if either there is a
reasonable basis to believe the error was
intentional or there is other evidence
that the financial institution does not or
has not maintained procedures
reasonably adapted to avoid such errors.
(c) Safe harbors. (1) Incorrect entry for
census tract. An incorrect entry for
census tract is not a violation of the Act
or this subpart if the financial
institution obtained the census tract by
correctly using a geocoding tool
provided by the FFIEC or the Bureau.
(2) Incorrect entry for NAICS code. If
a financial institution identifies the
NAICS code for an applicant itself,
without the applicant or another source
providing the NAICS code, and the
identified NAICS code is incorrect, the
incorrect entry for the NAICS code is
not a violation of the Act or this subpart
provided that the first two digits of the
NAICS code are correct and the
financial institution maintains
procedures reasonably adapted to
correctly identify the subsequent four
digits.
(3) Incorrect determination of small
business status. A financial institution
that initially determines that an
applicant for a covered credit
transaction is a small business, as
defined in § 1002.106(b), but later
concludes the applicant is not a small
business, does not violate the Act or this
regulation if the financial institution
collected information pursuant to this
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subpart regarding whether an applicant
for a covered credit transaction is a
minority-owned business or a womenowned business, and the ethnicity, race,
and sex of the applicant’s principal
owners. A financial institution seeking
to avail itself of this safe harbor shall
comply with the requirements of this
subpart As otherwise required pursuant
to §§ 1002.107, 1002.108, and 1002.111
with respect to the collected
information.
(4) Incorrect application date. A
financial institution does not violate the
Act or this subpart if it reports on its
small business lending application
register an application date that is
within three calendar days of the actual
application date pursuant to
§ 1002.107(a)(2).
§ 1002.113
Severability.
The provisions of this subpart are
separate and severable from one
another. If any provision is stayed or
determined to be invalid, the remaining
provisions shall continue in effect.
§ 1002.114 Effective date, compliance
date, and special transitional rules.
(a) Effective date. The effective date
for this subpart is [90 days after the date
of publication of the final rule in the
Federal Register].
(b) Compliance date. The compliance
date for this subpart is [approximately
18 months after the date of publication
of the final rule in the Federal Register].
(c) Special transitional rules—(1)
Collection of information prior to the
compliance date. A financial institution
that will be a covered financial
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institution as of the compliance date in
paragraph (b) of this section is
permitted, but not required, to collect
information regarding whether an
applicant for a covered credit
transaction is a minority-owned
business under § 1002.107(a)(18), a
women-owned business under
§ 1002.107(a)(19), and the ethnicity,
race, and sex of the applicant’s principal
owners under § 1002.107(a)(20)
beginning [12 months prior to the
compliance date]. A financial institution
collecting such information pursuant to
this paragraph (c)(1) must do so in
accordance with the requirements set
out in §§ 1002.107(18) through (20) and
1002.108.
(2) Determining whether a financial
institution is a covered financial
institution for purposes of this subpart.
For purposes of determining whether a
financial institution is a covered
financial institution under § 1002.105(b)
as of the compliance date specified in
paragraph (b) of this section, a financial
institution is permitted, but not
required, to use its to use its
originations of covered credit
transactions for small businesses in the
second and third preceding calendar
years (rather than its originations in the
two immediately preceding calendar
years).
■ 5. Appendices E through H are added
to read as follows:
Appendix E to Part 1002—Sample Form
for Collecting Certain ApplicantProvided Data under Subpart B
BILLING CODE 4810–25–P
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Appendix F to Part 1002—Instructions
for Collecting and Reporting Small
Business Applicants’ Minority-Owned
Business Status and Women-Owned
Business Status Under Subpart B
Covered financial institutions are required
by subpart B of this part to collect certain
information from small business applicants
about covered applications, including
whether the applicant is a minority-owned
business or a women-owned business. This
appendix provides instructions for collecting
that information.
1. Unless a financial institution is reporting
based on previously collected data as
discussed in Instruction 11, the financial
institution must ask the applicant about its
minority-owned business status and womenowned business status for each of the
applicant’s covered applications. However,
the financial institution cannot require an
applicant to provide this information.
2. Generally, a financial institution must
ask the applicant whether it is a minorityowned business and whether it is a womenowned business on a paper or electronic data
collection form that is separate from the
application form and other documents used
to collect other information related to the
application. See the sample data collection
form in appendix E for sample language. For
a covered application taken solely by
telephone or another medium that does not
involve providing any paper or electronic
documents, the financial institution must ask
the applicant about its minority-owned
business status and women-owned business
status orally if the financial institution is not
reporting based on previously collected data.
The financial institution may combine these
business status questions with questions
regarding principal owners’ ethnicity, race,
and sex pursuant to § 1002.107(a)(20) and a
question about the applicant’s number of
principal owners pursuant to
§ 1002.107(a)(21). See the sample data
collection form in appendix E.
3. When asking the questions regarding
minority-owned business status and womenowned business status (regardless of whether
they are asked on a paper form,
electronically, or orally), the financial
institution also must provide the applicant
with definitions of the terms ‘‘minority
individual,’’ ‘‘minority-owned business,’’ and
‘‘women-owned business’’ as set forth in
§ 1002.102(l), (m), and (s). The financial
institution satisfies this requirement if it
provides the definitions of minority
individual, minority-owned business, and
women-owned business set forth in the
sample data collection form in appendix E.
4. A financial institution may inform the
applicant that Federal law requires it to ask
for an applicant’s minority-owned business
status and women-owned business status to
help ensure that all small business applicants
for credit are treated fairly and that
communities’ small business credit needs are
being fulfilled. The financial institution must
inform the applicant that it is not required to
respond to the financial institution’s
questions regarding the applicant’s minorityowned business status and women-owned
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business status. The financial institution also
must inform the applicant that the financial
institution cannot discriminate on the basis
of minority-owned business status or womenowned business status, or on the basis of
whether the applicant provides this
information.
5. A financial institution must report the
answers to the minority-owned business
status and women-owned business status
questions that the applicant provided on the
paper or electronic data collection form the
financial institution uses to satisfy the
requirements of § 1002.107(a)(18) and (19)
without regard to any answers provided for
other purposes. If the financial institution
asks the minority-owned business status and
women-owned business status questions
orally, the financial institution must report
the answers the applicant provided in
response to the inquiries the financial
institution makes to satisfy the requirements
of § 1002.107(a)(18) and (19) without regard
to any answers provided for other purposes.
For example, if a financial institution uses a
paper data collection form to ask an
applicant if it is a minority-owned business
or women-owned business for purposes of
§ 1002.107(a)(18) and (19) and the applicant
responds that it is not a minority-owned
business or a women-owned business, the
financial institution must report that the
applicant is not a minority-owned business
or a women-owned business, even if the
applicant indicates that it is a minorityowned business for other purposes, such as
for a special purpose credit program or a
Small Business Administration program.
6. A financial institution is neither
required nor permitted to verify the minorityowned business status or women-owned
business status that the applicant provides.
7. If the applicant declines to provide
information on the applicant’s minorityowned business status or women-owned
business status (such as by checking only the
‘‘I do not wish to provide this information’’
box on a paper or electronic data collection
form or stating orally that it does not wish
to provide this information), the financial
institution must report that the applicant
declined to provide information on the
applicant’s minority-owned business status
or women-owned business status, as
applicable.
8. If the applicant does not respond to the
financial institution’s inquiry regarding its
minority-owned business status (such as by
leaving the response blank or failing to
submit a data collection form), the financial
institution must report that the information
was not provided by the applicant. Similarly,
if the applicant does not respond to the
financial institution’s inquiry regarding its
women-owned business status, the financial
institution must report that the information
was not provided by the applicant.
9. If the applicant both provides a
substantive response to a question requesting
business status (that is, checks either ‘‘yes’’
or ‘‘no’’) and also checks the ‘‘I do not wish
to provide this information’’ box for that
question, the financial institution reports the
minority-owned business status or womenowned business status provided by the
applicant (rather than reporting that the
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applicant declined to provide the
information).
10. A financial institution does not report
minority-owned business status or womenowned business status based on visual
observation, surname, or any basis other than
the applicant’s responses to the inquiries that
the financial institution makes to satisfy
§ 1002.107(a)(18) and (19) or, as discussed in
Instruction 11, on the basis of the applicant’s
responses to the inquiries that the financial
institution previously made to satisfy
§ 1002.107(a)(18) and (19).
11. Section 1002.107(c)(2) and its
commentary set forth when a financial
institution is permitted to report information
based on previously collected data. If the
financial institution is permitted to report
minority-owned business status or womenowned business status based on previously
collected data, the financial institution may
but is not required to do so.
12. If a financial institution reports
minority-owned business status or womenowned business status based on previously
collected data, the financial institution must
also report that it is providing that
information based on previously collected
data.
Appendix G to Part 1002—Instructions
for Collecting and Reporting Ethnicity,
Race, and Sex of Small Business
Applicants’ Principal Owners Under
Subpart B
Covered financial institutions are required
by subpart B of this part to collect certain
information from small business applicants
about covered applications, including the
ethnicity, race, and sex of the applicant’s
principal owners. This appendix provides
instructions for collecting that information.
General Instructions
1. Unless a financial institution is reporting
based on previously collected data as
discussed in Instructions 26 through 29, the
financial institution must ask the applicant
for the ethnicity, race, and sex of its principal
owners for each of the applicant’s covered
applications. However, a financial institution
cannot require an applicant or any principal
owner to provide this information.
2. Generally, a financial institution must
ask the applicant about the ethnicity, race,
and sex of the applicant’s principal owners
on a paper or electronic data collection form
that is separate from the application form and
other documents used to collect other
information related to the application. See
the sample data collection form in appendix
E for sample language. For a covered
application taken solely by telephone or
another medium that does not involve
providing any paper or electronic documents,
the financial institution must ask the
applicant for the principal owners’ ethnicity,
race, and sex orally if the financial institution
is not reporting based on previously collected
data. A financial institution may combine the
questions regarding the principal owners’
ethnicity, race, and sex with a question
regarding the applicant’s number of principal
owners pursuant to § 1002.107(a)(21) and
questions regarding the applicant’s minorityowned business status and women-owned
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business status pursuant to § 1002.107(a)(18)
and (19). See the sample data collection form
in appendix E.
3. When asking about principal owners’
ethnicity, race, and sex, the financial
institution must also provide the applicant
with the definition of the term ‘‘principal
owner’’ as set forth in § 1002.102(o). The
financial institution satisfies this requirement
if it provides the definition of principal
owner set forth in the sample data collection
form in appendix E.
4. A financial institution may inform the
applicant that Federal law requires it to ask
for the principal owners’ ethnicity, race, and
sex to help ensure that all small business
applicants for credit are treated fairly and
that communities’ small business credit
needs are being fulfilled. The financial
institution must inform the applicant that the
applicant is not required to respond to the
financial institution’s questions regarding the
principal owner’s ethnicity, race, and sex.
The financial institution also must inform the
applicant that the financial institution cannot
discriminate on the basis of a principal
owner’s ethnicity, race, or sex, or on whether
the applicant provides this information.
5. If it is possible that a financial
institution will meet in person with one or
more of the applicant’s principal owners and
the financial institution is not reporting
based on previously collected data, the
financial institution must inform the
applicant that if the applicant does not
provide any ethnicity, race, or sex
information for at least one principal owner,
the financial institution is required to report
ethnicity and race on the basis of visual
observation and/or surname for at least one
of the principal owners that the financial
institution has met in person. If a financial
institution collects ethnicity, race, and sex
information using a paper or electronic data
collection form, the financial institution may
satisfy this requirement by providing a
statement on that form. See the sample data
collection form in appendix E. If a financial
institution meets in person with a natural
person representing an applicant but does
not know if the natural person is a principal
owner, the financial institution must ask or
otherwise determine if that person is a
principal owner. See comment 107(a)(20)–10
for examples of when a financial institution
has and has not met in person with one or
more principal owners. As described in
Instruction 23, financial institutions do not
report a principal owner’s sex based on
visual observation or surname.
Instructions Regarding Ethnicity, Race, and
Sex Categories
6. When asking for a principal owner’s sex,
a financial institution must allow the
applicant to respond using the sex categories
set forth in the sample data collection form
in appendix E and discussed in comment
107(a)(20)–8. These categories must include
the option to self-identify using free-form text
on a paper or electronic form or using
language that informs the applicant of the
opportunity to self-identify when taking the
application by means other than a paper or
electronic data collection form, such as by
telephone.
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7. When asking for a principal owner’s
ethnicity and race, a financial institution
must allow the applicant to respond using
the aggregate and disaggregated ethnicity and
race categories and subcategories as set forth
in the sample data collection form in
appendix E and discussed in comments
107(a)(20)–6 and –7. The disaggregated
subcategories must include the ‘‘other’’
disaggregated subcategories that provide the
option to self-identify using free-form text on
a paper or electronic data collection form or
using language that informs the applicant of
the opportunity to self-identify when taking
the application by means other than a paper
or electronic data collection form, such as by
telephone.
8. A financial institution must permit an
applicant to identify its principal owners as
being of a particular Hispanic or Latino
disaggregated subcategory (Cuban, Mexican,
Puerto Rican, Other Hispanic or Latino) or of
a particular Asian disaggregated subcategory
(Asian Indian, Chinese, Filipino, Japanese,
Korean, Vietnamese, Other Asian) or of a
particular Native Hawaiian or Other Pacific
Islander disaggregated subcategory
(Guamanian or Chamorro, Native Hawaiian,
Samoan, Other Pacific Islander) or of a
particular Black or African American
disaggregated subcategory (African
American, Ethiopian, Haitian, Jamaican,
Nigerian, Somali, or Other Black or African
American) or of a particular American Indian
or Alaska Native enrolled or principal tribe.
An applicant must be permitted to select a
disaggregated ethnicity or race subcategory
even if the applicant does not also select the
corresponding aggregate ethnicity or
aggregate race category. For example, if an
applicant selects only the ‘‘Mexican’’
disaggregated subcategory, the financial
institution reports ‘‘Mexican’’ for the
ethnicity of the applicant but does not also
report ‘‘Hispanic or Latino.’’
9. A financial institution must offer the
applicant the option of selecting more than
one ethnicity, race, and sex for each principal
owner. If an applicant selects more than one
ethnicity, race, or sex for a principal owner,
the financial institution must report each
selected designation. The financial
institution must also report any additional
information that the applicant has provided
as free-form text in the appropriate data
reporting field. For example, if the applicant
chooses to self-identify a principal owner’s
sex and provides additional information, the
financial institution must report that
information as free-form text in the
appropriate data reporting field. Similarly, if
an applicant indicates that a principal owner
is Other Asian and provides additional
information, such as writing in Cambodian,
the financial institution must report that
information as free-form text in the
appropriate data reporting field.
10. If an applicant provides ethnicity, race,
or sex information for one or more principal
owners, the financial institution must report
the ethnicity, race, and sex as provided by
the applicant. For example, if an applicant
selects ‘‘Asian’’ for a principal owner’s race,
the financial institution reports ‘‘Asian’’ for
the race of that principal owner. Similarly, if
the applicant selects ‘‘Asian’’ and ‘‘Native
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Hawaiian’’ for a particular principal owner,
the financial institution reports that principal
owner’s race as ‘‘Asian’’ and ‘‘Native
Hawaiian,’’ even though ‘‘Native Hawaiian’’
is not a disaggregated subcategory for the
aggregate ‘‘Asian’’ category.
11. A financial institution is neither
required nor permitted to verify the ethnicity,
race, or sex information that the applicant
provides.
Instructions for Reporting if the Applicant
Fails To Provide or Declines To Provide
Responses to a Financial Institution’s
Inquiries
12. Except as noted in Instruction 17, if the
applicant declines to provide a principal
owner’s ethnicity, race, or sex (such as by
answering these questions by checking only
the ‘‘I do not wish to provide this
information’’ box on a paper or electronic
data collection form or stating orally that it
does not wish to provide this information),
the financial institution must report that the
applicant declined to provide this
information. The financial institution only
reports that the applicant declined to provide
information if the applicant specifically
declines to provide that information. See
Instruction 13 for reporting if the applicant
does not respond rather than specifically
declines to provide information.
13. Except as noted in Instruction 17, if the
applicant does not respond to a request about
a principal owner’s ethnicity, race, or sex, the
financial institution must report that the
information was not provided by the
applicant. For example, if the financial
institution provides the applicant with a
paper data collection form and asks the
applicant to complete and return the form
but the applicant does not return it, the
financial institution reports that the principal
owner’s ethnicity, race, and sex was not
provided by the applicant. Similarly, if the
financial institution provides an electronic
data collection form, the applicant indicates
that it has two principal owners, the
applicant provides ethnicity, race, and sex
for the first principal owner, and the
applicant does not check any of the boxes
(including the ‘‘I do not wish to provide this
information’’ boxes) for the second principal
owner’s ethnicity, race, and sex, the financial
institution reports the ethnicity, race, and sex
that the applicant provided for the first
principal owner and reports that ethnicity,
race, and sex for the second principal owner
were not provided by the applicant.
14. If an applicant provides some but not
all of the requested ethnicity, race, and sex
information, the financial institution reports
the information that was provided by the
applicant and reports that the applicant
declined to provide or did not provide (as
applicable) the remainder of the information.
For example, assume an applicant indicates
that it has two principal owners and provides
ethnicity, race, and sex information for the
first principal owner and provides only
ethnicity for the second principal owner.
Further assume that the applicant does not
indicate that it does not wish to provide race
or sex information for the second principal
owner. In this case, the financial institution
reports the ethnicity, race, and sex
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information provided for the first principal
owner. The financial institution also reports
the ethnicity provided for the second
principal owner, and reports that the
applicant did not provide race and sex
information for the second principal owner.
15. If an applicant provides any ethnicity,
race, or sex information for any principal
owner, the financial institution does not
report any additional information based on
visual observation and/or surname. For
example, if an applicant indicates that it has
four principal owners and provides sex
information for one principal owner and no
other ethnicity, race, or sex information, the
financial institution reports the sex
information provided for one principal
owner. It reports either that the applicant did
not provide or declined to provide (as
applicable) the ethnicity and race
information for one principal owner and the
ethnicity, race, and sex information for the
other principal owners. The financial
institution does not report any ethnicity or
race information based on visual observation
or surname, even if it is has met in person
with one or more principal owners.
16. If an applicant provides information in
response to the question requesting a given
principal owner’s ethnicity, race, or sex and
also checks the ‘‘I do not wish to provide this
information’’ box for that question or
otherwise indicates that the applicant does
not wish to provide the information, the
financial institution reports the information
on ethnicity, race, or sex that was provided
by the applicant (rather than reporting that
the applicant declined to provide the
information). For example, if an applicant is
completing a paper data collection form and
provides information that a principal owner
is female and also checks a box to indicate
that the applicant does not wish to provide
information regarding that principal owner’s
sex, the financial institution reports the
principal owner’s sex as female.
Instructions for Collecting Ethnicity and
Race Information via Visual Observation
and/or Surname if the Applicant Declines To
Provide Information or Does Not Respond
17. If an applicant does not provide any
ethnicity, race, or sex information for any of
its principal owners or declines to provide all
of the requested ethnicity, race, or sex
information, and during the application
process the financial institution meets in
person with at least one principal owner of
that applicant, the financial institution must
collect the ethnicity and race of the principal
owner(s) with whom it meets on the basis of
visual observation and/or surname. For
example, assume a financial institution
provides electronic data collection forms to
applicants, and an applicant fails to complete
and submit the data collection form. Assume
that the financial institution is not permitted
to report based on previously collected data.
Also, assume that the financial institution
meets in person with two of the applicant’s
four principal owners at the same time
during the application process. The financial
institution reports the ethnicity and race
information for the two principal owners it
met with in person based on visual
observation and/or surname. Additionally, as
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noted in Instruction 21, the financial
institution reports that it is reporting this
information based on visual observation and/
or surname. The financial institution reports
that the applicant did not provide sex
information for these two principal owners.
It also reports that the applicant did not
provide ethnicity, race, and sex information
for the other two principal owners. For
additional information on when a financial
institution has or has not met in person with
a principal owner, see comment 107(a)(20)–
10.
18. For purposes of determining whether
reporting based on visual observation and/or
surname is required, a financial institution is
considered to have met in person with a
principal owner if the financial institution
has a meeting via an electronic medium with
the principal owner and can visually observe
the principal owner using a video
component. For additional information on
when a financial institution has or has not
met in person with a principal owner, see
comment 107(a)(20)–10. For additional
information on when reporting based on
visual observation and/or surname is
required, see comment 107(a)(20)–9.
19. A financial institution is not required
to report ethnicity and race information
based on visual observation and/or surname
if the financial institution only meets in
person with one or more principal owners
after the application process is complete, for
example, at loan closing or account opening.
In those circumstances, the financial
institution may report that the information
was not provided by the applicant or that the
applicant declined to provide the
information, as applicable.
20. A financial institution is required to
collect race and ethnicity information based
on visual observation and/or surname at only
one meeting with one or more principal
owners. If the financial institution meets in
person with another principal owner at a
different meeting, the financial institution is
permitted, but not required, to also collect
the other principal owner’s race and
ethnicity information via visual observation
and/or surname. For example, assume that a
financial institution meets in person with
one of an applicant’s principal owners on
June 1 and records that principal owner’s
ethnicity and race. Also, assume that the
financial institution meets in person with all
four of the applicant’s principal owners on
June 10. The financial institution is
permitted, but not required, to record the
other principal owners’ ethnicity and race
information based on the meeting that occurs
on June 10, because it already recorded one
principal owner’s ethnicity and race based on
the meeting that occurred on June 1.
21. If a financial institution reports
ethnicity and race based on visual
observation and/or surname and is not
relying on previously collected data, the
financial institution also must report that the
information was collected on the basis of
visual observation and/or surname. If a
financial institution is relying on previously
collected data that the financial institution
collected via visual observation and/or
surname, the financial institution reports that
it is reporting the information based on
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previously collected data, and that it is
providing the information based on visual
observation and/or surname.
22. When a financial institution reports
ethnicity and race on the basis of visual
observation and/or surname, the financial
institution must select only from the
following aggregate categories: Ethnicity
(Hispanic or Latino; not Hispanic or Latino);
race (American Indian or Alaska Native;
Asian; Black or African American; Native
Hawaiian or Other Pacific Islander; White).
23. A financial institution never reports sex
based on visual observation or surname. If an
applicant declines or otherwise does not
provide a principal owner’s sex, the financial
institution reports that the applicant declined
to provide that information or that the
information was not provided by the
applicant, as applicable.
Instructions Regarding Persons who Are Not
Principal Owners and When an Applicant
Has Fewer Than Four Principal Owners
24. A financial institution does not report
a guarantor’s ethnicity, race, and sex unless
the guarantor is also a principal owner of the
applicant.
25. Because there are data reporting fields
for four principal owners, when submitting
data to the Bureau, a financial institution will
need to report that the requirement to report
ethnicity, race, and sex is not applicable for
some principal owners if the applicant has
fewer than four principal owners. For
example, if an applicant has only one
principal owner (i.e., only one natural person
directly owns 25 percent or more of the
applicant’s equity interests), the financial
institution reports that the requirement to
report ethnicity, race, and sex is not
applicable in the data fields for principal
owners two through four.
Instructions for Reporting Based on
Previously Collected Data
26. Section 1002.107(c)(2) and its
commentary set forth when a financial
institution is permitted to report information
based on previously collected data. If the
financial institution is permitted to report
ethnicity, race, or sex information based on
previously collected data, the financial
institution may but is not required to do so.
27. If a financial institution reports
ethnicity, race, or sex information based on
previously collected data, the financial
institution must also report that it is
providing that information based on
previously collected data.
28. If a financial institution reports one or
more principal owner’s ethnicity, race, or sex
information based on previously collected
data, the financial institution does not need
to collect any additional ethnicity, race, or
sex information. However, the financial
institution may need to report that the
applicant did not provide or declined to
provide information when the financial
institution previously collected the data, as
applicable.
29. If a financial institution is reporting a
principal owner’s ethnicity and/or race based
on data that the financial institution
previously collected via visual observation
and/or surname, the financial institution
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reports that it is reporting ethnicity and race
based on previously collected data and based
on visual observation and/or surname.
Additionally, the financial institution reports
that the applicant declined to provide
information about the principal owner’s sex
or that the applicant did not provide the
principal owner’s sex, as applicable, and
reports that the financial institution is
reporting sex based on previously collected
data.
The size of the random sample, under
column B, shall depend on the size of the
financial institution’s small business lending
application register, as shown in column A
of the Threshold Table.959
The thresholds in column C of the
Threshold Table reflect the number of
unintentional errors a financial institution
may make within a particular data field (e.g.,
loan amount or gross annual revenue) in a
small business lending application register
that would be deemed bona fide errors for
purposes of § 1002.112(b).
For instance, a financial institution that
submitted a small business lending
application register containing 45
applications would be subject to a threshold
of three errors per data field. If the financial
institution had made two errors in reporting
loan amount and two errors reporting gross
annual income, all of these errors would be
covered by the bona fide error provision of
§ 1002.112(b) and would not constitute a
violation of the Act or this part. If the same
financial institution had made four errors in
reporting loan amount and two errors
reporting gross annual income, the bona fide
error provision of § 1002.112(b) would not
apply to the four loan amount errors but
would still apply to the two gross annual
income errors.
Even when the number of errors in a
particular data field do not equal or exceed
the threshold in column C, if either there is
a reasonable basis to believe that errors in
that field were intentional or there is other
evidence that the financial institution did not
maintain procedures reasonably adapted to
avoid such errors, then the errors are not
bona fide errors under § 1002.112(b). To
illustrate, assume that a financial institution
has incorrectly coded withdrawn
applications as denials to such an extent that
it likely prevents reliable fair lending
analysis of underwriting disparities. If so, the
errors would not be deemed bona fide errors
under § 1002.112(b) and would violate the
Act and this part.
For purposes of determining bona fide
errors under § 1002.112(b), the term ‘‘data
field’’ generally refers to individual fields.
However, with respect to information on the
ethnicity or race of an applicant or borrower,
or co-applicant or co-borrower, a data field
group may consist of more than one field. If
one or more of the fields within an ethnicity
or race field group have errors, they count as
one (and only one) error for that data field
group.
959 For
a financial institution with fewer than 30
entries in its small business lending application
register, the full sample size is the financial
insitution’s total number of entries. The threshold
number for such financial institution’s remains
three. Accordingly, the threshold percentage will be
higher for financial institions with fewer than 30 in
their registers.
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Appendix H to Part 1002—Tolerances
for Bona Fide Errors in Data Reported
Under Subpart B
As set out in § 1002.112(b) and in comment
112(b)–1, a financial institution is presumed
6. In Supplement I to part 1002:
a. Under Section 1005.5—Rules
Concerning Requests for Information,
revise Paragraph 5(a)(2) by revising the
heading and adding comment –4, and
■
■
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to maintain procedures reasonably adapted to
avoid errors with respect to a given data field
if the number of errors found in a random
sample of a financial institution’s data
submission for a given data field do not equal
or exceed the threshold in column C of the
following table (Table 1, Tolerance
Thresholds for Bona Fide Errors):
revise Paragraph 5(a)(4) including the
heading.
■ b. Add Section 1002.102—Definitions;
Section 1002.103—Covered
Applications; Section 1002.104—
Covered Credit Transactions and
Excluded Transactions; Section
1002.105—Covered Financial
Institutions and Exempt Institutions;
Section 1002.106—Business and Small
Business; Section 1002.107—
Compilation of Reportable Data; Section
1002.108—Firewall; Section 1002.109—
Reporting of Data to the Bureau; Section
1002.110—Publication of Data; Section
1002.111—Recordkeeping; and Section
1002.112—Enforcement.
The revisions and additions read as
follows:
Supplement I to Part 1002—Official
Interpretations
Section 1002.5—Rules Concerning Requests
for Information
5(a) General rules.
*
*
*
*
*
5(a)(2) Required collection of information.
*
*
*
*
*
4. Information required by subpart B.
Subpart B of this part generally requires
creditors that are covered financial
institutions as defined in § 1002.105(a) to
collect and report information about the
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ethnicity, race, and sex of the principal
owners of applicants for certain small
business credit, as well as whether the
applicant is minority-owned or womenowned as defined in § 1002.102(m) and (s),
respectively.
5(a)(4) Other permissible collection of
information.
1. Other permissible collection of
information. Information regarding ethnicity,
race, and sex that is not required to be
collected pursuant to Regulation C, 12 CFR
part 1003, or subpart B of this part, may
nevertheless be collected under the
circumstances set forth in § 1002.5(a)(4)
without violating § 1002.5(b). The
information collected pursuant to 12 CFR
part 1003 must be retained pursuant to the
requirements of § 1002.12. The information
collected pursuant to subpart B of this part
must be retained pursuant to the
requirements set forth in § 1002.111.
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*
*
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Section 1002.102—Definitions
102(j) Dwelling.
1. Consistency with Regulation C. Bureau
interpretations that appear in supplement I to
part 1003 containing official commentary in
connection with § 1003.2(f) are applicable to
the definition of a dwelling in § 1002.102(j).
2. Dwelling under subpart A. The
definition of dwelling under § 1002.14(b)(2)
applies to relevant provisions under subpart
A, and § 1002.102(j) is not intended to repeal,
abrogate, annul, impair, or interfere with any
existing interpretations, orders, agreements,
ordinances, rules, or regulations adopted or
issued pursuant to § 1002.14(b)(2).
102(l) Minority individual.
1. Purpose of definition. The definition of
minority individual is used only when an
applicant determines if it is a minorityowned business pursuant to §§ 1002.102(m)
and 1002.107(a)(18). A financial institution
provides an applicant with the definition of
minority individual when asking the
applicant to determine if its business is a
minority-owned business, as defined in
§ 1002.102(m). An applicant determines if
the natural persons who own and control and
to whom the business’s profits or losses
accrue are minority individuals when the
applicant provides its minority-owned
business status pursuant to § 1002.107(a)(18).
Separately, pursuant to § 1002.107(a)(20) and
related commentary, a financial institution
may be required to report a principal owner’s
ethnicity and race based on visual
observation and/or surname. However, the
definition of minority individual in
§ 1002.102(l) is not used when determining
the race or ethnicity of a principal owner.
2. Multi-racial and multi-ethnic
individuals. For purposes of subpart B of this
part, a natural person who is multi-racial or
multi-ethnic is a minority individual. For
example, a natural person who is both Asian
and White is a minority individual.
3. Relationship to disaggregated
subcategories used to determine ethnicity
and race of principal owners. The term
‘‘minority individual’’ is defined in
§ 1002.102(l) using aggregate ethnicity
(Hispanic or Latino) and race (American
Indian or Alaska Native, Asian, Black or
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African American, and Native Hawaiian or
Other Pacific Islander) categories. Separately
an applicant may provide a principal owner’s
ethnicity and race using aggregate categories
and/or disaggregated subcategories for
purposes of § 1002.107(a)(20). However, as
discussed in comment 107(a)(20)–11, a
financial institution may only use aggregate
ethnicity and race categories when required
to report a principal owner’s ethnicity and
race based on visual observation and/or
surname.
102(m) Minority-owned business.
1. In general. In order to be a minorityowned business for purposes of subpart B of
this part, a business must satisfy both prongs
of the definition of minority-owned business.
First, one or more minority individuals must
own or control more than 50 percent of the
business. However, it is not necessary that
one or more minority individuals both own
and control more than 50 percent of the
business. For example, a business that is
owned entirely by minority individuals, but
is not controlled by any minority individuals
satisfies the first prong of the definition. If a
business does not satisfy this first prong of
the definition, it is not a minority-owned
business. Second, 50 percent or more of the
net profits or losses must accrue to one or
more minority individuals. If a business does
not satisfy this second prong of the
definition, it is not a minority-owned
business, regardless of whether it satisfies the
first prong of the definition.
2. Purpose of definition. The definition of
minority-owned business is used only when
an applicant determines if it is a minorityowned business for purposes of
§ 1002.107(a)(18). A financial institution
provides an applicant with the definition of
minority-owned business when asking the
applicant to provide its minority-owned
business status pursuant to § 1002.107(a)(18),
but the financial institution is neither
permitted nor required to make its own
determination regarding the applicant’s
minority-owned business status.
3. Further clarifications of terms used in
the definition of minority-owned business. In
order to assist an applicant when
determining whether it is a minority-owned
business, a financial institution may provide
the applicant with the definitions of
ownership, control, and accrual of net profits
or losses and related concepts set forth in
comments 102(m)–4 through –6. A financial
institution may assist an applicant when the
applicant is determining its minority-owned
business status but is not required to do so.
For purposes of reporting an applicant’s
status, a financial institution relies on the
applicant’s determinations of its ownership,
control, and accrual of net profits and losses.
4. Ownership. For purposes of determining
if a business is a minority-owned business,
a natural person owns a business if that
natural person directly or indirectly, through
any contract, arrangement, understanding,
relationship or otherwise, has an equity
interest in the business. Examples of
ownership include being the sole proprietor
of a sole proprietorship, directly or indirectly
owning or holding the stock of a corporation
or company, directly or indirectly having a
partnership interest in a business, or directly
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or indirectly having a membership interest in
a limited liability company. Indirect as well
as direct ownership are used when
determining ownership for purposes of
§§ 1002.102(m) and 1002.107(a)(18). Thus,
where applicable, ownership must be traced
through corporate or other indirect
ownership structures. For example, assume
that the applicant is company A. If company
B owns 60 percent of applicant company A
and a natural person owns 100 percent of
company B, the natural person owns 60
percent of applicant company A. Similarly, if
a natural person directly owns 20 percent of
applicant company A and is an equal partner
in partnership B that owns the remaining 80
percent of applicant company A, the natural
person owns 60 percent of applicant
company A (i.e., 20 percent due through
direct ownership and 40 percent indirectly
through partnership B). A trustee is
considered the owner of the trust. Thus, if a
trust owns a business and the trust has two
co-trustees, each co-trustee owns 50 percent
of the business.
5. Control. A natural person controls a
business if that natural person has significant
responsibility to manage or direct the
business. A natural person controls a
business if the natural person is an executive
officer or senior manager (e.g., a chief
executive officer, chief financial officer, chief
operating officer, managing member, general
partner, president, vice president, or
treasurer) or regularly performs similar
functions. Additionally, a business may be
controlled by two or more minority
individuals if those individuals collectively
control the business, such as constituting a
majority of the board of directors or a
majority of the partners of a partnership.
6. Accrual of net profits or losses. A
business’s net profits and losses accrue to a
natural person if that natural person receives
the net profits or losses, is legally entitled or
required to receive the net profits or losses,
or is legally entitled or required to recognize
the net profits or losses for tax purposes.
102(o) Principal owner.
1. Natural person. Only a natural person
can be a principal owner of a business for
purposes of subpart B of this part. Entities,
such as trusts, partnerships, limited liability
companies, and corporations, are not
principal owners for this purpose.
Additionally, a natural person must directly
own an equity share of 25 percent or more
in the business in order to be a principal
owner. Unlike the determination of
ownership for purposes of collecting and
reporting minority-owned business status
and women-owned business status, indirect
ownership is not considered when
determining if someone is a principal owner
for purposes of collecting and reporting
principal owners’ ethnicity, race, and sex or
the number of principal owners. Thus, when
determining who is a principal owner,
ownership is not traced through multiple
corporate structures to determine if a natural
person owns 25 percent or more of the equity
interests. For example, if natural person A
directly owns 20 percent of a business,
natural person B directly owns 20 percent,
and partnership C owns 60 percent, the
business does not have any owners who
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satisfy the definition of principal owner set
forth in § 1002.102(o), even if natural person
A and natural person B are the only partners
in the partnership C. Similarly, if natural
person A directly owns 30 percent of a
business, natural person B directly owns 20
percent, and trust D owns 50 percent, natural
person A is the only principal owner as
defined in § 1002.102(o), even if natural
person B is the sole trustee of trust D.
2. Purpose of definition. A financial
institution shall provide an applicant with
the definition of principal owner when
asking the applicant to provide the number
of its principal owners pursuant to
§ 1002.107(a)(21) and the ethnicity, race, and
sex of its principal owners pursuant to
§ 1002.107(a)(20). If a financial institution
meets in person with a natural person about
a covered application, the financial
institution may be required to determine if a
natural person with whom it meets is a
principal owner in order to collect and report
the principal owner’s ethnicity and race
based on visual observation and/or surname.
(See comments 107(a)(20)–5 and –9.)
Additionally, if an applicant does not
provide the number of its principal owners
in response to the financial institution’s
request pursuant to § 1002.107(a)(21), the
financial institution may need to determine
and report the number of the applicant’s
principal owners based on other documents
or information. (See comments 107(a)(21)–1
through –3.)
102(s) Women-owned business.
1. In general. In order to be a womenowned business for purposes of subpart B of
this part, a business must satisfy both prongs
of the definition of women-owned business.
First, one or more women must own or
control more than 50 percent of the business.
However, it is not necessary that one or more
women both own and control more than 50
percent of the business. For example, a
business that is owned entirely by women,
but is not controlled by any women satisfies
the first prong of the definition. If a business
does not satisfy this first prong of the
definition, it is not a women-owned business.
Second, 50 percent or more of the net profits
or losses must accrue to one or more women.
If a business does not satisfy this second
prong of the definition, it is not a womenowned business, regardless of whether it
satisfies the first prong of the definition.
2. Purpose of definition. The definition of
women-owned business is used only when
an applicant determines if it is a womenowned business pursuant to
§ 1002.107(a)(19). A financial institution
provides an applicant with the definition of
women-owned business when asking the
applicant to provide its women-owned
business status pursuant to § 1002.107(a)(19),
but the financial institution is neither
permitted nor required to make its own
determination regarding the applicant’s
women-owned business status.
3. Further clarifications of terms used in
the definition of women-owned business. In
order to assist an applicant when
determining whether it is a women-owned
business, a financial institution may provide
the applicant with the definitions of
ownership, control, and accrual of net profits
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or losses and related concepts set forth in
comments 102(s)–4 through –6. A financial
institution may assist an applicant when the
applicant is determining its women-owned
business status but is not required to do so.
For purposes of reporting an applicant’s
status, a financial institution relies on the
applicant’s determinations of its ownership,
control, and accrual of net profits and losses.
4. Ownership. For purposes of determining
if a business is a women-owned business, a
natural person owns a business if that natural
person directly or indirectly, through any
contract, arrangement, understanding,
relationship or otherwise, has an equity
interest in the business. Examples of
ownership include being the sole proprietor
of a sole proprietorship, directly or indirectly
owning or holding the stock of a corporation
or company, directly or indirectly having a
partnership interest in a business, or directly
or indirectly having a membership interest in
a limited liability company. Indirect as well
as direct ownership are used when
determining ownership for purposes of
§§ 1002.102(s) and 1002.107(a)(19). Thus,
where applicable, ownership must be traced
through corporate or other indirect
ownership structures. For example, assume
that the applicant is company A. If company
B owns 60 percent of the applicant company
A and a natural person owns 100 percent of
company B, the natural person owns 60
percent of the applicant company A.
Similarly, if a natural person directly owns
20 percent of the applicant company A and
is an equal partner in a partnership B that
owns the remaining 80 percent of the
applicant company A, the natural person
owns 60 percent of applicant company A
(i.e., 20 percent due through direct
ownership and 40 percent indirectly through
partnership B). A trustee is considered the
owner of the trust. Thus, if a trust owns a
business and the trust has two co-trustees,
each co-trustee owns 50 percent of the
business.
5. Control. A natural person controls a
business if that natural person has significant
responsibility to manage or direct the
business. A natural person controls a
business if the natural person is an executive
officer or senior manager (e.g., a chief
executive officer, chief financial officer, chief
operating officer, managing member, general
partner, president, vice president, or
treasurer) or regularly performs similar
functions. Additionally, a business may be
controlled by two more women if those
women collectively control the business,
such as constituting a majority of the board
of directors or a majority of the partners of
a partnership.
6. Accrual of net profits or losses. A
business’s net profits and losses accrue to a
natural person if that natural person receives
the net profits or losses, is legally entitled or
required to receive the net profits or losses,
or is legally entitled or required to recognize
the net profits or losses for tax purposes.
Section 1002.103—Covered Applications
103(a) In general.
1. In general. Subject to the requirements
of subpart B of this part, a financial
institution has latitude to establish its own
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application process or procedures, including
designating the type and amount of
information it will require from applicants.
2. Procedures used. The term ‘‘procedures’’
refers to the actual practices followed by a
financial institution as well as its stated
application procedures. For example, if a
financial institution’s stated policy is to
require all applications to be in writing on
the financial institution’s application form,
but the financial institution also makes credit
decisions based on oral requests, the
financial institution’s procedures are to
accept both oral and written applications.
3. Consistency with subpart A. Bureau
interpretations that appear in this
supplement I in connection with §§ 1002.2(f)
and 1002.9 are generally applicable to the
definition of a covered application in
§ 1002.103. However, the definition of a
covered application in § 1002.103 does not
include inquiries and prequalification
requests. The definition of a covered
application also does not include
reevaluation, extension, or renewal requests
on an existing business credit account, unless
the request seeks additional credit amounts.
See § 1002.103(b).
4. Requests for multiple covered credit
transactions at one time. Assuming the
requirements of a covered application are
met, if an applicant makes a request for two
or more covered credit transactions at the
same time, the financial institution reports
each request for a covered credit transaction
as a separate covered application. For
example, if an applicant requests both a term
loan and a line of credit on an application
form, the financial institution reports each
request for a covered credit transaction as a
separate covered application. Section
1002.107(c)(2) sets forth the requirements for
reusing certain data required under
§ 1002.107(a) across multiple applications.
5. Initial request for a single covered credit
transaction that results in the origination of
multiple covered credit transactions.
Assuming the requirements of a covered
application are met, if an applicant initially
makes a request for one covered credit
transaction, but over the course of the
application process requests and obtains
multiple covered credit transactions, each
covered credit transaction must be reported
as a separate covered application.
6. Requests for multiple lines of credit at
one time. Assuming the requirements of a
covered application are met, if an applicant
requests multiple lines of credit on a single
credit account, it is reported as one or more
covered applications based on the procedures
used by the financial institution for the type
of credit account. For example, if a financial
institution treats a request for multiple lines
of credit at one time as sub-components of a
single account, the financial institution
reports the request as a single covered
application. If, on the other hand, the
financial institution treats each line of credit
as a separate account, then the financial
institution reports each request for a line of
credit as a separate covered application, as
set forth in comment 103(a)–4.
7. Changes in whether there is a covered
credit transaction. In certain circumstances,
an applicant may change the type of product
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requested during the course of the
application process. Assuming other
requirements of a covered application are
met, if an applicant initially requests a
product that is not a covered credit
transaction, but during the application
process decides to seek instead a product that
is a covered credit transaction, the
application is a covered application and must
be reported. If, on the other hand, an
applicant initially requests a product that is
a covered credit transaction, but then during
the application process decides instead to
seek a product that is not a covered credit
transaction, the application is not a covered
application and thus is not reported. If an
applicant initially requests a product that is
a covered credit transaction, the financial
institution counteroffers with a product that
is not a covered credit transaction, and the
applicant declines to proceed or fails to
respond, the application is reported as a
covered application. For example, if an
applicant initially applies for a term loan, but
then, after consultation with the financial
institution, decides that a lease would better
meet its needs and decides to proceed with
that product, the application is not a covered
application and thus is not reported.
However, if an applicant initially applies for
a term loan, the financial institution offers to
consider the applicant only for a lease, and
the applicant refuses, the transaction is a
covered application that must be reported.
103(b) Circumstances that are not covered
applications.
1. In general. The circumstances set forth
in § 1002.103(b) are not covered applications
for purposes of subpart B of this part, even
if considered applications under subpart A of
this part. However, in no way are the
exclusions in § 1002.103(b) intended to
repeal, abrogate, annul, impair, change, or
interfere with the scope of the term
application in § 1002.2(f) as applicable to
subpart A.
2. Reevaluation, extension, or renewal
requests that do not request additional credit
amounts. An applicant’s request to change
one or more terms of an existing account
does not constitute a covered application,
unless the applicant is requesting additional
credit amounts on the account. For example,
an applicant’s request to extend the duration
on a line of credit or to remove a guarantor
would not be a covered application.
3. Reevaluation, extension, or renewal
requests that request additional credit
amounts. An applicant’s request for
additional credit amounts on an existing
account that is a covered credit transaction
constitutes a covered application. For
example, an applicant’s request for a line
increase on an existing line of credit, made
in accordance with a financial institution’s
procedures for the type of credit requested,
would be a covered application. As discussed
in comment 107(a)(7)–4, when reporting a
covered application that seeks additional
credit amounts on an existing account, the
financial institution need only report the
additional credit amount sought, and not the
entire credit amount. For example, if an
applicant currently has a line of credit
account for $100,000, and seeks to increase
the line to $150,000, the financial institution
reports the amount applied for as $50,000.
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4. Reviews or evaluations initiated by the
financial institution. For purposes of subpart
B of this part, the term covered application
does not include evaluations or reviews of
existing accounts initiated by the financial
institution because the applicant has not
made the request. For example, if a creditor
conducts periodic reviews of its existing
lines of credit and decides to increase the
applicant’s line by $10,000, it is not a
covered application because the applicant
never made a request for the additional credit
amounts. However, if such an evaluation or
review of an existing account by a financial
institution results in the financial institution
inviting the applicant to apply for additional
credit amounts on an existing account that is
a covered credit transaction, and the
applicant does so, the applicant’s request
constitutes a covered application for
purposes of subpart B of this part. Similarly,
the term covered application also does not
include solicitations and firm offers of credit.
5. Inquiries and prequalification requests.
An inquiry is a request by a prospective
applicant for information about credit terms
offered by the financial institution. A
prequalification request is a request by a
prospective applicant for a preliminary
determination on whether the prospective
applicant would likely qualify for credit
under a financial institution’s standards or
for a determination on the amount of credit
for which the prospective applicant would
likely qualify. Inquiry and prequalification
requests are not covered applications under
subpart B of this part, even though in certain
circumstances inquiries and prequalification
requests may constitute applications under
subpart A.
Section 1002.104—Covered Credit
Transactions and Excluded Transactions
104(a) Covered credit transaction.
1. General. The term ‘‘covered credit
transaction’’ includes all business credit
(including loans, lines of credit, credit cards,
and merchant cash advances) unless
otherwise excluded under § 1002.104(b).
104(b) Excluded transactions.
1. Factoring. The term ‘‘covered credit
transaction’’ does not cover factoring as
described herein. For the purpose of this
subpart, factoring is an accounts receivable
purchase transaction between businesses that
includes an agreement to purchase, transfer,
or sell a legally enforceable claim for
payment for goods that the recipient has
supplied or services that the recipient has
rendered but for which payment has not yet
been made. This description of factoring is
not intended to repeal, abrogate, annul,
impair, or interfere with any existing
interpretations, orders, agreements,
ordinances, rules, or regulations adopted or
issued pursuant to comment 9(a)(3)–3. A
financial institution shall report an extension
of business credit incident to a factoring
arrangement that is otherwise a covered
credit transaction as a ‘‘Other sales-based
financing transaction’’ under
§ 1002.107(a)(5).
2. Leases. The term ‘‘covered credit
transaction’’ does not cover leases as
described herein. A lease, for the purpose of
this subpart, is a transfer from one business
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to another of the right to possession and use
of goods for a term, and for primarily
business or commercial (including
agricultural) purposes, in return for
consideration. A lease does not include a
sale, including a sale on approval or a sale
or return, or a transaction resulting in the
retention or creation of a security interest.
3. Consumer-designated credit. The term
‘‘covered credit transaction’’ does not include
consumer-designated credit used for business
purposes. A transaction qualifies as
consumer-designated credit if the financial
institution offers or extends the credit
primarily for personal, family, or household
purposes. For example, an open-end credit
account used for both personal and business
purposes is not business credit for the
purpose of subpart B of this part unless the
financial institution designated or intended
for the primary purpose of the account to be
business-related.
4. Credit secured by certain investment
properties. The term ‘‘covered credit
transaction’’ does not include an extension of
credit that is secured by 1–4 individual
dwelling units that the applicant (or one or
more of the applicant’s principal owners)
does not, or will not, occupy. A financial
institution should determine whether the
property to which the covered credit
transaction or application relates is or will be
used as an investment property. For purposes
of this comment, a property is an investment
property if the applicant or one or more of
the applicant’s principal owners does not or
will not occupy the property. For example,
if an applicant purchases a property, does not
occupy the property, and generates income
by renting the property, the property is an
investment property for purposes of this
comment. Similarly, if an applicant
purchases a property, does not occupy the
property, and does not generate income by
renting the property, but intends to generate
income by selling the property, the property
is an investment property. A property is an
investment property if the applicant does not
or will not occupy the property, even if the
applicant does not consider the property as
owned for investment purposes. For
example, if a corporation purchases a
property that is a dwelling under
§ 1002.102(j), that it does not occupy, but that
is for the long-term residential use of its
employees, the property is an investment,
even if the corporation considers the
property as owned for business purposes
rather than investment purposes, does not
generate income by renting the property, and
does not intend to generate income by selling
the property at some point in time. If the
property is for transitory use by employees,
the property would not be considered a
dwelling under § 1002.102(j).
104(b)(1) Trade credit.
1. General. Trade credit, as defined in
§ 1002.104(b)(1), is excluded from the
definition of a covered credit transaction. An
example of trade credit involves a supplier
that finances the sale of equipment, supplies,
or inventory. However, an extension of
business credit by a financial institution
other than the supplier for the financing of
such items is not trade credit.
2. Trade credit under subpart A. The
definition of trade credit under comment
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9(a)(3)–2 applies to relevant provisions under
subpart A, and § 1002.104(b)(1) is not
intended to repeal, abrogate, annul, impair,
or interfere with any existing interpretations,
orders, agreements, ordinances, rules, or
regulations adopted or issued pursuant to
comment 9(a)(3)–2.
Section 1002.105—Covered Financial
Institutions and Exempt Institutions
105(a) Financial institution.
1. Examples. Section 1002.105(a) defines a
financial institution as any partnership,
company, corporation, association
(incorporated or unincorporated), trust,
estate, cooperative organization, or other
entity that engages in any financial activity.
This definition includes, but is not limited
to, banks, savings associations, credit unions,
online lenders, platform lenders, community
development financial institutions, lenders
involved in equipment and vehicle financing
(captive financing companies and
independent financing companies),
commercial finance companies, organizations
exempt from taxation pursuant to 26 U.S.C.
501(c), and governments or governmental
subdivisions or agencies.
2. Motor vehicle dealers. Pursuant to
§ 1002.101(a), subpart B of this part excludes
from coverage persons defined by section
1029 of the Consumer Financial Protection
Act of 2010, title X of the Dodd-Frank Wall
Street Reform and Consumer Protection Act,
Public Law 111–203, 124 Stat. 1376, 2004
(2010).
105(b) Covered financial institution.
1. Preceding calendar year. The definition
of covered financial institution refers to
preceding calendar years. For example, in
2026, the two preceding calendar years are
2024 and 2025. Accordingly, in 2026,
Financial Institution A does not meet the
loan-volume threshold in § 1002.105(b) if did
not originate at least 25 covered credit
transactions for small businesses both during
2024 and during 2025.
2. Origination threshold. A financial
institution qualifies as a covered financial
institution based on total covered credit
transactions originated for small businesses,
rather than covered applications received
from small businesses. For example, if in
both 2024 and 2025, Financial Institution B
received 30 covered applications from small
businesses and originated 20 covered credit
transactions for small businesses, then for
2026, Financial Institution B is not a covered
financial institution.
3. Annual consideration. Whether a
financial institution is a covered financial
institution in a particular year depends on its
small business lending activity in the
preceding two calendar years. Therefore,
whether a financial institution is a covered
financial institution is an annual
consideration for each year that data may be
compiled and maintained for purposes of
subpart B of this part. A financial institution
may be a covered financial institution for a
given year of data collection (and the
obligations arising from qualifying as a
covered financial institution shall continue
into subsequent years, pursuant to
§§ 1002.110 and 1002.111), but the same
financial institution may not be a covered
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financial institution for the following year of
data collection. For example, Financial
Institution C originated 30 covered
transactions for small businesses in both
2024 and 2025. In 2026, Financial Institution
C is a covered financial institution and
therefore is obligated to compile and
maintain applicable 2026 small business
lending data under § 1002.107(a). During
2026, Financial Institution C originates 10
covered transactions for small businesses. In
2027, Financial Institution C is not a covered
financial institution with respect to 2027
small business lending data, and is not
obligated to compile and maintain 2027 data
under § 1002.107(a) (although Financial
Institution C may volunteer to collect and
maintain 2027 data pursuant to
§ 1002.5(a)(4)(vii) and as explained in
comment 105(b)–7). Pursuant to
§ 1002.109(a), Financial Institution C shall
submit its small business lending application
register for 2026 data in the format prescribed
by the Bureau by June 1, 2027 because
Financial Institution C is a covered financial
institution with respect to 2026 data, and the
data submission deadline of June 1, 2027
applies to 2026 data.
4. Merger or acquisition—coverage of
surviving or newly formed institution. After
a merger or acquisition, the surviving or
newly formed financial institution is a
covered financial institution under
§ 1002.105(b) if it, considering the combined
lending activity of the surviving or newly
formed institution and the merged or
acquired financial institutions (or acquired
branches or locations), satisfies the criteria
included in § 1002.105(b). For example,
Financial Institutions A and B merge. The
surviving or newly formed financial
institution meets the threshold in
§ 1002.105(b) if the combined previous
components of the surviving or newly formed
financial institution (A plus B) would have
reported at least 25 covered credit
transactions for small businesses for each of
the two preceding calendar years. Similarly,
if the combined previous components and
the surviving or newly formed financial
institution would have reported at least 25
covered transactions for small businesses for
the year previous to the merger as well as 25
covered transactions for small businesses for
the year of the merger, the threshold
described in § 1002.105(b) would be met and
the surviving or newly formed financial
institution would be a covered institution
under § 1002.105(b) for the year following the
merger. Comment 105(b)–5 discusses a
financial institution’s responsibilities with
respect to compiling and maintaining (and
subsequently reporting) data during the
calendar year of a merger.
5. Merger or acquisition—coverage specific
to the calendar year of the merger or
acquisition. The scenarios described below
illustrate a financial institution’s
responsibilities specifically for data from the
calendar year of a merger or acquisition. For
purposes of these illustrations, an
‘‘institution that is not covered’’ means either
an institution that is not a financial
institution, as defined in § 1002.105(a), or a
financial institution that is not a covered
financial institution, as defined in
§ 1002.105(b).
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i. Two institutions that are not covered
financial institutions merge. The surviving or
newly formed institution meets all of the
requirements necessary to be a covered
financial institution. No data are required to
be compiled, maintained, or reported for the
calendar year of the merger (even though the
merger creates an institution that meets all of
the requirements necessary to be a covered
financial institution).
ii. A covered financial institution and an
institution that is not covered merge. The
covered financial institution is the surviving
institution, or a new covered financial
institution is formed. For the calendar year
of the merger, data are required to be
compiled, maintained, and reported for
covered applications from the covered
financial institution and is optional for
covered applications from the financial
institution that was previously not covered.
iii. A covered financial institution and an
institution that is not covered merge. The
institution that is not covered is the surviving
institution and remains not covered after the
merger, or a new institution that is not
covered is formed. For the calendar year of
the merger, data are required to be compiled
and maintained (and subsequently reported)
for covered applications from the previously
covered financial institution that took place
prior to the merger. After the merger date,
compiling, maintaining, and reporting data is
optional for applications from the institution
that was previously covered.
iv. Two covered financial institutions
merge. The surviving or newly formed
financial institution is a covered financial
institution. Data are required to be compiled
and maintained (and subsequently reported)
for the entire calendar year of the merger.
The surviving or newly formed financial
institution files either a consolidated
submission or separate submissions for that
calendar year.
6. Foreign applicability. As discussed in
comment 1(a)–2, Regulation B (including
subpart B) generally does not apply to
lending activities that occur outside the
United States.
7. Voluntary collection and reporting.
Section 1002.5(a)(4)(vii) through (ix) permits
a creditor that is not a covered financial
institution under § 1002.105(b) to voluntarily
collect and report information regarding
covered applications in certain
circumstances. If a creditor is voluntarily
collecting information for covered
applications regarding whether the applicant
is a minority-owned business under
§ 1002.107(a)(18) or a women-owned
business under § 1002.107(a)(19), and
regarding the ethnicity, race, and sex of the
applicant’s principal owners under
§ 1002.107(20), it shall do so in compliance
with §§ 1002.107, 1002.108, 1002.111,
1002.112, and 1002.114 as though it were a
covered financial institution. See also
comment 5(a)(4)–1. If a creditor is voluntarily
reporting those covered applications to the
Bureau, it shall do so in compliance with
§§ 1002.109 and 1002.110 as though it were
a covered financial institution.
Section 1002.106—Business and Small
Business
106(b) Small business.
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1. Change in determination of small
business status—business is ultimately not a
small business. If a financial institution
initially determines an applicant is a small
business as defined in § 1002.106 based on
available information and collects data
required by § 1002.107(a)(18) through (20)
but later concludes that the applicant is not
a small business, the financial institution
may process and retain the data without
violating the Act or this regulation if it meets
the requirements of § 1002.112(c)(3). The
financial institution shall not report the
application on its small business lending
application register pursuant to § 1002.109.
2. Change in determination of small
business status—business is ultimately a
small business. Consistent with
§ 1002.107(a)(14), a financial institution need
not independently verify gross annual
revenue. If a financial institution initially
determines that the applicant is not a small
business as defined in § 1002.106, but later
concludes the applicant is a small business,
the financial institution shall endeavor to
compile, maintain, and report the data
required under § 1002.107(a) in a manner
that is reasonable under the circumstances.
For example, if the applicant initially
provides a gross annual revenue of $5.5
million (that is, above the threshold for a
small business as defined in § 1002.106(b)),
but during the course of underwriting the
financial institution discovers the applicant’s
gross annual revenue was in fact $4.75
million (meaning that the applicant is within
the definition of a small business under
§ 1002.106(b)), the financial institution is
required to report the covered application
pursuant to § 1002.109. In this situation, the
financial institution shall take reasonable
steps upon discovery to compile, maintain,
and report the data necessary under
§ 1002.107(a) to comply with subpart B of
this part for that covered application. Thus,
in this example, even if the financial
institution’s procedure is typically to request
applicant-provided data together with the
application form, in this circumstance, the
financial institution shall seek to collect the
data during the application process necessary
to comply with subpart B in a manner that
is reasonable under the circumstances. The
financial institution remains subject to
§ 1002.107(c)(1) related to the time and
manner of collecting applicant-provided
data.
3. Affiliate revenue. As explained in
comment 107(a)(14)–3, a financial institution
is permitted, but not required, to report the
gross annual revenue for the applicant that
includes the revenue of affiliates as well. As
explained in comment 107(a)(14)–1, pursuant
to § 1002.107(b), if the financial institution
verifies the gross annual revenue provided by
the applicant, it must report the verified
information. Likewise, a financial institution
is permitted to rely on an applicant’s
representations regarding gross annual
revenue (which may or may not include the
affiliate’s revenue) for purposes of
determining small business status under
§ 1002.106(b). However, if the applicant
provides updated gross annual revenue
information (see comment 107(c)(1)–7), or
the financial institution verifies the gross
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annual revenue information, the financial
institution must use the updated or verified
information in determining small business
status.
Section 1002.107—Compilation of
Reportable Data
107(a) Data format and itemization.
1. General. Section 1002.107(a) describes a
covered financial institution’s obligation to
compile and maintain data regarding the
covered applications it receives from small
businesses.
i. A covered financial institution reports
these data even if the credit originated
pursuant to the reported application was
subsequently sold by the institution.
ii. A covered financial institution annually
reports data for covered applications for
which final action was taken in the previous
calendar year.
iii. A financial institution reports data for
a covered application on its small business
lending application register for the calendar
year during which final action was taken on
the application, even if the institution
received the application in a previous
calendar year.
2. Filing Instructions Guide. Additional
details and procedures for compiling data
pursuant to § 1002.107 are included in the
Filing Instructions Guide, which is available
at [a designated Bureau website].
107(a)(1) Unique identifier.
1. Unique within the financial institution.
A financial institution complies with
§ 1002.107(a)(1) by compiling and reporting
an alphanumeric application or loan
identifier unique within the financial
institution to the specific application. The
identifier must not exceed 45 characters, and
must begin with the financial institution’s
Legal Entity Identifier (LEI), as defined in
comment 109(b)(6)–1. Separate applications
for the same applicant must have separate
identifiers. The identifier may only include
standard numerical and/or alphabetical
characters and cannot include dashes, other
special characters, or characters with
diacritics. The financial institution may
assign the unique identifier at any time prior
to reporting the application. Refinancings or
applications for refinancing must be assigned
a different identifier than the transaction that
is being refinanced. A financial institution
with multiple branches must ensure that its
branches do not use the same identifiers to
refer to multiple applications.
2. Does not include directly identifying
information. The unique identifier must not
include any directly identifying information
about the applicant or persons (natural or
legal) associated with the applicant. See also
§ 1002.111(c) and related commentary.
107(a)(2) Application date.
1. Consistency. Section 1002.107(a)(2)
requires that, in reporting the date of covered
application, a financial institution shall
report the date it received the covered
application, as defined under § 1002.103, or
the date shown on a paper or electronic
application form. Although a financial
institution need not choose the same
approach for its entire small business lending
application register, it should generally be
consistent in its approach by, for example,
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establishing procedures for how to report this
date within particular scenarios, products, or
divisions. If the financial institution chooses
to report the date shown on an application
form and the institution retains multiple
versions of the application form, the
institution reports the date shown on the first
application form satisfying the application
definition provided under § 1002.103.
2. Indirect applications. For an application
that was not submitted directly to the
financial institution or its affiliate (as
described in § 1002.107(a)(4)), the institution
may report the date the application was
received by the party that initially received
the application, the date the application was
received by the financial institution, or the
date shown on the application form.
Although a financial institution need not
choose the same approach for its entire small
business lending application register, it
should generally be consistent in its
approach by, for example, establishing
procedures for how to report this date within
particular scenarios, products, or divisions.
107(a)(3) Application method.
1. General. A financial institution complies
with § 1002.107(a)(3) by reporting the means
by which the applicant submitted the
application from one of the following
options: In-person, telephone, online, or
mail.
i. In-person. A financial institution reports
the application method as ‘‘in-person’’ if the
financial institution, or another party acting
on the financial institution’s behalf, meets
with the applicant in person (for example, in
a branch office, at the applicant’s place of
business, or via electronic media with a
video component).
ii. Telephone. A financial institution
reports the application method as
‘‘telephone’’ if the financial institution, or
another party acting on the financial
institution’s behalf, did not meet with the
applicant in person as described in comment
1002.107(a)(3)–1.i but communicated with
the applicant by telephone or via audio-based
electronic media without a video component.
iii. Online. A financial institution reports
the application method as ‘‘online’’ if the
financial institution, or another party acting
on the financial institution’s behalf, did not
meet with the applicant in person and did
not communicate with the applicant by
telephone as described in comments
1002.107(a)(3)–1.i and ii, but communicated
with the applicant through an online
application, electronic mail, text message,
and/or some other form of online
communication.
iv. Mail. A financial institution reports the
application method as ‘‘mail’’ if the financial
institution, or another party acting on the
financial institution’s behalf, did not meet
with the applicant in person and did not
communicate with the applicant by
telephone, as described in comments
1002.107(a)(3)–1.i and ii, but communicated
with the applicant in writing via United
States mail, courier or overnight service, or
hand-delivery (including hand-delivery of
documents via an overnight drop box or at
a teller window).
2. Reporting for interactions with
applicants involving both mail and online. If
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a financial institution, or another party acting
on the financial institution’s behalf,
communicated with the applicant both
online as described in comment
1002.107(a)(3)–1.iii and by mail as described
in 1002.107(a)(3)–1.iv, the financial
institution reports the application method
based on the method by which it, or another
party acting on its behalf, requested the
ethnicity, race, and sex of the applicant’s
principal owners pursuant to
§ 1002.107(a)(20). For example, if a financial
institution requests the ethnicity, race, and
sex information through an online form, it
reports the application method as ‘‘online.’’
If the financial institution requests the
ethnicity, race, and sex information via a
paper form sent to the applicant by mail, it
reports the application method as ‘‘mail.’’ If
the financial institution requests the
ethnicity, race, and sex information
electronically online or via an electronic
document that is emailed to the applicant,
that the applicant then prints and returns to
the financial institution by mail, the financial
institution reports the application method as
‘‘online’’ (because that is the method by
which the financial institution requested the
ethnicity, race, and sex information).
107(a)(4) Application recipient.
1. Agents. If a financial institution is
reporting actions taken by its agent consistent
with comment 109(a)(3)–3, the agent is
considered the financial institution for the
purposes of § 1002.107(a)(4). For example,
assume that an applicant submitted an
application to Financial Institution A, and
Financial Institution A made the credit
decision acting as Financial Institution B’s
agent under State law. Financial Institution
B reports the origination and indicates that
the application was submitted directly to
Financial Institution B.
107(a)(5) Credit type.
1. Reporting credit product—in general. A
financial institution complies with
§ 1002.107(a)(5)(i) by selecting the credit
product requested from the list below. If an
applicant requests more than one credit
product, the financial institution reports each
credit product requested as a separate
application. If the credit product requested or
originated is not included on this list, the
financial institution selects ‘‘other,’’ and
reports the credit specific product as freeform text.
i. Term loan—unsecured.
ii. Term loan—secured.
iii. Line of credit—unsecured.
iv. Line of credit—secured.
v. Credit card.
vi. Merchant cash advance.
vii. Other sales-based financing
transaction.
viii. Other.
ix. Not provided by applicant and
otherwise undetermined.
2. Credit product not provided by the
applicant and otherwise undetermined.
Pursuant to § 1002.107(c)(1), a financial
institution is required to maintain procedures
reasonably designed to collect applicantprovided data, which includes credit
product. However, if a financial institution is
nonetheless unable to collect or otherwise
determine credit product information
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because the applicant does not indicate what
credit product it seeks and the application is
denied, withdrawn, or closed for
incompleteness before a credit product is
identified, the financial institution reports
that the credit product is ‘‘not provided by
applicant and otherwise undetermined.’’
3. Reporting credit product involving
counteroffers. If a financial institution
presents a counteroffer for a different credit
product than the product the applicant had
initially requested, and the applicant does
not agree to proceed with the counteroffer,
the financial institution reports the
application for the original credit product as
denied pursuant to § 1002.107(a)(9). If the
applicant agrees to proceed with
consideration of the financial institution’s
counteroffer, the financial institution reports
the disposition of the application based on
the credit product that was offered and does
not report the original credit product applied
for. See comment 107(a)(9)–2.
4. Guarantees. A financial institution
complies with § 1002.107(a)(5)(ii) by
selecting the type or types of guarantees that
were obtained for an originated covered
credit transaction, or that would have been
obtained if the covered credit transaction was
originated, from the list below. The financial
institution selects, if applicable, up to a
maximum of five guarantees for a single
application or transaction. If the type of
guarantee does not appear on the list, the
financial institution selects ‘‘other guarantee’’
and reports the type of guarantee as free-form
text. If no guarantee is obtained or would
have been obtained if the covered credit
transaction was originated, the financial
institution selects ‘‘no guarantee.’’
i. Personal guarantee—owner(s).
ii. Personal guarantee—non-owner(s).
iii. SBA guarantee—7(a) program.
iv. SBA guarantee—504 program.
v. SBA guarantee—other.
vi. USDA guarantee.
vii. FHA insurance.
viii. Bureau of Indian Affairs guarantee
ix. Other Federal guarantee.
x. State or local government guarantee.
xi. Other guarantee.
xii. No guarantee.
5. Loan term. A financial institution
complies with § 1002.107(a)(5)(iii) by
reporting the number of months in the loan
term for the covered credit transaction. The
loan term is the number of months after
which the legal obligation will mature or
terminate. The financial institution does not
include in the loan term the time that
elapses, if any, between the settlement of the
transaction and the first payment period. For
example, if a loan closes on April 12, but the
first payment is not due until June 1 and
includes the interest accrued in May (but not
April), the financial institution does not
include the month of April in the loan term.
The financial institution may round the loan
term to the nearest full month or may count
only full months and ignore partial months,
as it so chooses. If a credit product, such as
a credit card, does not have a loan term, the
financial institution reports that the loan
term is ‘‘not applicable.’’ The financial
institution also reports ‘‘not applicable’’ if
the application is denied, withdrawn, or
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determined to be incomplete before a loan
term has been identified.
6. Other sales-based financing transaction.
For an extension of business credit incident
to a factoring arrangement that is otherwise
a covered credit transaction, a financial
institution selects ‘‘other sales-based
financing transaction’’ as the credit product.
See comment 104(b)–1.
107(a)(6) Credit purpose.
1. General. A financial institution complies
with § 1002.107(a)(6) by selecting the
purpose or purposes of the covered credit
transaction applied for or originated from the
list below.
i. Purchase, construction/improvement, or
refinance of owner-occupied dwelling(s).
ii. Purchase, construction/improvement, or
refinance of non-owner-occupied dwelling(s).
iii. Purchase, construction/improvement,
or refinance of non-owner-occupied, nondwelling real estate.
iv. Purchase, construction/improvement, or
refinance of owner-occupied, non-dwelling
real estate.
v. Purchase, refinance, or rehabilitation/
repair of motor vehicle(s) (including light
and heavy trucks).
vi. Purchase, refinance, or rehabilitation/
repair of equipment.
vii. Working capital (includes inventory or
floor planning).
viii. Business start-up.
ix. Business expansion.
x. Business acquisition.
xi. Refinance existing debt (other than
refinancings listed above).
xii. Line increase.
xiii. Other.
xiv. Not provided by applicant and
otherwise undetermined.
xv. Not applicable.
2. More than one purpose. If the applicant
indicates or the financial institution is
otherwise aware of more than one purpose
for the credit applied for or originated, the
financial institution reports those purposes,
up to a maximum of three, using the list
provided, in any order it chooses. For
example, if an applicant refinances a nondwelling commercial building it owns and
uses the funds to purchase a motor vehicle
and expand the business it runs in a part of
that building, the financial institution reports
that the three purposes of the credit are
purchase, construction/improvement, or
refinance of owner-occupied, non-dwelling
real estate; purchase, refinance, or
rehabilitation/repair of motor vehicle(s)
(including light and heavy trucks); and
business expansion. If an application has
more than three purposes, the financial
institution reports any three of those
purposes. In the example above, if the funds
were also used to purchase equipment, the
financial institution would select only three
of the relevant purposes to report.
3. ‘‘Other’’ credit purpose. If a purpose of
an application does not appear on the list of
purposes provided, the financial institution
reports ‘‘other’’ as the credit purpose and
reports the credit purpose as free-form text.
If the application has more than one ‘‘other’’
purpose, the financial institution chooses the
most significant ‘‘other’’ purpose, in its
discretion, and reports that ‘‘other’’ purpose.
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The financial institution reports a maximum
of three credit purposes, including any
‘‘other’’ purpose reported.
4. Credit purpose not provided by
applicant and otherwise undetermined.
Pursuant to § 1002.107(c)(1), a financial
institution shall maintain procedures
reasonably designed to collect applicantprovided information, which includes credit
purpose. However, if a financial institution is
nonetheless unable to collect or determine
credit purpose information, the financial
institution reports that the credit purpose is
‘‘not provided by applicant and otherwise
undetermined.’’
5. Not applicable. If the application is for
a credit product that generally has
indeterminate or numerous potential
purposes, such as a credit card, the financial
institution may report credit purpose as ‘‘not
applicable.’’
6. Excluded dwellings. As explained in
comment 104(b)–4, subpart B of this part
does not apply to an extension of credit that
is secured by 1–4 individual dwelling units
that the applicant or one or more of the
applicant’s principal owners does not, or will
not, occupy.
7. Collecting credit purpose. Pursuant to
§ 1002.107(c)(1), a financial institution shall
maintain procedures reasonably designed to
collect applicant-provided information,
including credit purpose. The financial
institution is permitted, but not required, to
present the list of credit purposes provided
in comment 107(a)(6)–1 to the applicant. The
financial institution is also permitted to ask
about purposes not included on the list
provided in comment 107(a)(6)–1. If the
applicant chooses a purpose or purposes not
included on the provided list, the financial
institution follows the instructions in
comment 107(a)(6)–3 regarding reporting of
‘‘other’’ as the credit purpose. If an applicant
chooses a purpose or purposes that are
similar to purposes on the list provided, but
uses different language, the financial
institution reports the purpose or purposes
from the list provided.
107(a)(7) Amount applied for.
1. Initial amount requested. A financial
institution complies with § 1002.107(a)(7) by
reporting the initial amount of credit or the
credit limit initially requested by the
applicant. The financial institution is not
required to report credit amounts or limits
discussed before an application is made, but
must capture the amount initially requested
at the application stage or later. If the
applicant does not request a specific amount,
but the financial institution underwrites the
application for a specific amount, the
financial institution reports the amount
considered for underwriting as the amount
applied for. If the applicant requests an
amount as a range of numbers, the financial
institution reports the midpoint of that range.
2. No amount requested. Pursuant to
§ 1002.107(c)(1), a financial institution shall
maintain procedures reasonably designed to
collect applicant-provided information,
which includes the credit amount initially
requested by the applicant. However, if a
financial institution is nonetheless unable to
collect or otherwise determine the amount
initially requested, the financial institution
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reports that the amount applied for is ‘‘not
provided by applicant and otherwise
undetermined.’’ If the particular product
applied for does not involve a specific
amount requested or underwritten, the
financial institution reports that the
requirement is ‘‘not applicable.’’
3. Firm offers. When an applicant responds
to a ‘‘firm offer’’ that specifies an amount or
limit, which may occur in conjunction with
a pre-approved credit solicitation, the
financial institution reports the amount
applied for as the amount of the firm offer,
unless the applicant requests a different
amount. If the firm offer does not specify an
amount or limit and the applicant does not
request a specific amount, the amount
applied for is the amount underwritten by
the financial institution.
4. Additional amounts on an existing
account. When reporting a covered
application that seeks additional credit
amounts on an existing account, the financial
institution reports only the additional credit
amount sought, and not any previous
amounts extended. See comment 103(b)–3.
107(a)(8) Amount approved or originated.
1. General. A financial institution complies
with § 1002.107(a)(8) by reporting the
amount approved or originated for credit that
is originated or approved but not accepted.
For applications that the financial institution,
pursuant to § 1002.107(a)(9), reports as
denied, withdrawn by the applicant, or
incomplete, the financial institution reports
that the amount approved or originated is
‘‘not applicable.’’
2. Multiple approval amounts. A financial
institution may sometimes approve an
applicant for more than one credit amount,
allowing the applicant to choose which
amount the applicant prefers for the
extension or line of credit. When multiple
approval amounts are offered for a closedend credit transaction for which the action
taken is approved but not accepted, and the
applicant does not accept the approved offer
of credit in any amount, the financial
institution reports the highest amount
approved. If the applicant accepts the offer of
closed-end credit, the financial institution
reports the amount originated. When
multiple approval amounts are offered for an
open-end credit transaction for which the
action taken is approved but not accepted,
and the applicant does not accept the
approved offer of credit in any amount, the
financial institution reports the highest
amount approved. If the applicant accepts
the offer of open-end credit, the financial
institution reports the actual credit limit
established.
3. Amount approved or originated—closedend credit transaction. For an originated
closed-end credit transaction, the financial
institution reports the principal amount to be
repaid. This amount will generally be
disclosed on the legal obligation.
4. Amount approved or originated—
refinancing. For a refinancing, the financial
institution reports the amount of credit
approved or originated under the terms of the
new debt obligation.
5. Amount approved or originated—
counteroffer. If an applicant agrees to
proceed with consideration of a counteroffer
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for an amount or limit different from the
amount for which the applicant applied, and
the covered credit transaction is approved
and originated, the financial institution
reports the amount granted. If an applicant
does not agree to proceed with consideration
of a counteroffer or fails to respond, the
institution reports the application as denied
and reports ‘‘not applicable’’ for the amount
approved or originated. See comment
107(a)(9)–2.
107(a)(9) Action taken.
1. General. A financial institution complies
with § 1002.107(a)(9) by selecting the action
taken by the financial institution on the
application from the following list:
originated, approved but not accepted,
denied, withdrawn by the applicant, or
incomplete. A financial institution identifies
the applicable action taken code based on
final action taken on the covered application.
i. Originated. A financial institution
reports that the covered credit transaction
was originated if the financial institution
made a credit decision approving the
application and that credit decision results in
an extension of credit.
ii. Approved but not accepted. A financial
institution reports an application as
approved but not accepted if the financial
institution made a credit decision approving
the application, but the applicant or the party
that initially received the application fails to
respond to the financial institution’s
approval within the specified time, or the
covered credit transaction was not otherwise
consummated or the account was not
otherwise opened.
iii. Denied. A financial institution reports
that the application was denied if it made a
credit decision denying the application
before an applicant withdraws the
application, before the file is closed for
incompleteness, or before the application is
denied for incompleteness.
iv. Withdrawn by the applicant. A financial
institution reports that the application was
withdrawn if the application is expressly
withdrawn by the applicant before the
financial institution makes a credit decision
approving or denying the application, before
the file is closed for incompleteness, or
before the application is denied for
incompleteness.
v. Incomplete. A financial institution
reports incomplete if the financial institution
took adverse action on the basis of
incompleteness under § 1002.9(c)(1)(i) or
provided a written notice of incompleteness
under § 1002.9(c)(2), and the applicant did
not respond to the request for additional
information within the period of time
specified in the notice.
2. Treatment of counteroffers. If a financial
institution makes a counteroffer to grant
credit on terms other than those originally
requested by the applicant (for example, for
a shorter loan maturity, with a different
interest rate, or in a different amount) and the
applicant declines the counteroffer or fails to
respond, the institution reports the action
taken as a denial on the original terms
requested by the applicant. If the applicant
agrees to proceed with consideration of the
financial institution’s counteroffer, the
financial institution reports the action taken
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as the disposition of the application based on
the terms of the counteroffer. For example,
assume an applicant applies for a term loan
and the financial institution makes a
counteroffer to proceed with consideration of
a line of credit. If the applicant declines to
be considered for a line of credit, the
financial institution reports the application
as a denied request for a term loan. If, on the
other hand, the applicant agrees to be
considered for a line of credit, then the
financial institution reports the action taken
as the disposition of the application for the
line of credit. For instance, using the same
example, if the financial institution makes a
credit decision approving the line of credit,
but the applicant fails to respond to the
financial institution’s approval within the
specified time by accepting the credit offer,
the financial institution reports the
application on the line of credit as approved
but not accepted.
3. Treatment of rescinded transactions. If
a borrower successfully rescinds a
transaction after closing but before a financial
institution is required to submit its small
business lending application register
containing the information for the
application under § 1002.109, the institution
reports the application as approved but not
accepted.
4. Treatment of pending applications. A
financial institution does not report any
application still pending at the end of the
calendar year; it reports such applications on
its small business lending application
register for the year in which final action is
taken.
5. Treatment of conditional approvals. If a
financial institution issues an approval that
is subject to the applicant meeting certain
conditions, the financial institution reports
the action taken as provided below
dependent on whether the conditions are
solely customary commitment or closing
conditions or if the conditions include any
underwriting or creditworthiness conditions.
Customary commitment or closing conditions
include, for example, a clear-title
requirement, proof of insurance policies, a
subordination agreement from another
lienholder, or property titling of associated
accounts. Underwriting or creditworthiness
conditions include, for example, conditions
that constitute a counteroffer (such as a
demand for a higher down-payment),
satisfactory loan-to-value ratios, or
verification or confirmation, in whatever
form the institution requires, that the
applicant meets underwriting conditions
concerning applicant creditworthiness,
including documentation or verification of
revenue, income or assets.
i. Conditional approval—denial. If the
approval is conditioned on satisfying
underwriting or creditworthiness conditions,
those conditions are not met, and the
financial institution takes adverse action on
some basis other than incompleteness, the
financial institution reports the action taken
as denied.
ii. Conditional approval—incompleteness.
If the approval is conditioned on satisfying
underwriting or creditworthiness conditions
that the financial institution needs to make
the credit decision, and the financial
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institution takes adverse action on the basis
of incompleteness under § 1002.9(c)(1)(i), or
has sent a written notice of incompleteness
under § 1002.9(c)(2) and the applicant did
not respond within the period of time
specified in the notice, the financial
institution reports the action taken as
incomplete.
iii. Conditional approval—approved but
not accepted. If the approval is conditioned
on satisfying conditions that are solely
customary commitment or closing conditions
and the conditions are not met, the financial
institution reports the action taken as
approved but not accepted. If all the
conditions (underwriting, creditworthiness,
or customary commitment or closing
conditions) are satisfied and the financial
institution agrees to extend credit but the
covered credit transaction is not originated
(for example, because the applicant
withdraws), the financial institution reports
the action taken as approved but not
accepted.
iv. Conditional approval—withdrawn by
the applicant. If the applicant expressly
withdraws before satisfying all underwriting
or creditworthiness conditions and before the
institution denies the application or before
the institution closes the file for
incompleteness, the financial institution
reports the action taken as withdrawn.
107(a)(10) Action taken date.
1. Reporting action taken date for denied
applications. For applications that are
denied, a financial institution reports either
the date the application was denied or the
date the denial notice was sent to the
applicant.
2. Reporting action taken date for
applications withdrawn by applicant. For
applications that are withdrawn by the
applicant, the financial institution reports the
date the express withdrawal was received, or
the date shown on the notification form in
the case of a written withdrawal.
3. Reporting action taken date for
applications that are approved but not
accepted. For applications approved by a
financial institution but not accepted by the
applicant, the financial institution reports
any reasonable date, such as the approval
date, the deadline for accepting the offer, or
the date the file was closed. A financial
institution should generally be consistent in
its approach to reporting by, for example,
establishing procedures for how to report this
date for particular scenarios, products, or
divisions.
4. Reporting action taken date for
originated covered credit transactions. For
covered credit transactions that are
originated, a financial institution generally
reports the closing or account opening date.
If the disbursement of funds takes place on
a date later than the closing or account
opening date, the institution may,
alternatively, use the date of initial
disbursement. A financial institution should
generally be consistent in its approach to
reporting by, for example, establishing
procedures for how to report this date in
different scenarios, products, or divisions.
5. Reporting action taken date for
incomplete applications. For files closed for
incompleteness or denied for
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incompleteness, the financial institution
reports either the date the action was taken
or the date the denial or incompleteness
notice was sent to the applicant.
107(a)(11) Denial reasons.
1. Reason for denial—in general. A
financial institution complies with
§ 1002.107(a)(11) by reporting the principal
reason or reasons it denied the application,
indicating up to four reasons. The financial
institution reports only the principal reason
or reasons it denied the application, even if
there are fewer than four reasons. For
example, if a financial institution denies an
application due to insufficient cashflow,
unacceptable collateral, and unverifiable
business information, the financial
institution is required to report these three
reasons. The reasons reported must
accurately describe the principal reason or
reasons the financial institution denied the
application. A financial institution reports
denial reasons by selecting its principal
reason or reasons for denying the application
from the following list:
i. Credit characteristics of the business. A
financial institution reports the denial reason
as ‘‘credit characteristics of the business’’ if
it denies the application based on an
assessment of the business’s ability to meet
its current or future credit obligations.
Examples include business credit score,
history of business bankruptcy or
delinquency, and/or a high number of recent
business credit inquiries.
ii. Credit characteristics of the principal
owner(s) or guarantor(s). A financial
institution reports the denial reason as
‘‘credit characteristics of the principal
owner(s) or guarantor(s)’’ if it denies the
application based on an assessment of the
principal owner(s) or guarantor(s)’s ability to
meet its current or future credit obligations.
Examples include principal owner(s) or
guarantor(s)’s credit score, history of charge
offs, bankruptcy or delinquency, low net
worth, limited or insufficient credit history,
or history of excessive overdraft.
iii. Use of loan proceeds. A financial
institution reports the denial reason as ‘‘use
of loan proceeds’’ if it denies an application
because, as a matter of policy or practice, it
limits lending to certain kinds of businesses,
particular product lines within a business
class, or certain industries it has identified as
high risk. For example, if an application for
credit to establish a cannabis dispensary is
denied by a financial institution because it
has classified all cannabis-related business as
‘‘high risk,’’ the financial institution reports
the reason for denial as ‘‘use of loan
proceeds.’’
iv. Cashflow. A financial institution reports
the denial reason as ‘‘cashflow’’ when it
denies an application due to insufficient or
inconsistent cashflow.
v. Collateral. A financial institution reports
the denial reason as ‘‘collateral’’ when it
denies an application due to insufficient,
inappropriate, or unacceptable collateral.
vi. Time in business. A financial institution
reports the denial reason as ‘‘time in
business’’ when it denies an application due
to insufficient time or experience in a line of
business. For example, a credit applicant
establishes a business and applies for credit
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five months later. The financial institution
may determine that the applicant has
insufficient experience in the business under
the institution’s underwriting standards and
deny the application.
vii. Government criteria. Certain loan
programs are backed by government agencies
that have specific eligibility requirements.
When those requirements are not met by an
applicant, and the financial institution
denies the application, the financial
institution reports the denial reason as
‘‘government criteria.’’ For example, if an
applicant cannot meet a governmentguaranteed loan program’s requirement to
provide a guarantor or proof of insurance, the
financial institution reports the reason for the
denial as ‘‘government criteria.’’
viii. Aggregate exposure. Aggregate
exposure is a measure of the total exposure
or level of indebtedness of the business and
its principal owner(s) associated with an
application. A financial institution reports
the denial reason as ‘‘aggregate exposure’’
where the total debt associated with the
application is deemed high or exceeds
certain debt thresholds set by the financial
institution. For example, if an application for
unsecured credit exceeds the maximum
amount a financial institution is permitted to
approve per applicant, as stated in its credit
guidelines, and the financial institution
denies the application for this reason, the
financial institution reports the reason for
denial as ‘‘aggregate exposure.’’
ix. Unverifiable information. A financial
institution reports the denial reason as
‘‘unverifiable information’’ when it is unable
to verify information on an application, and
denies the application for that reason. The
unverifiable information must be necessary
for the financial institution to make a credit
decision based on its procedures for the type
of credit requested. Examples include
unverifiable assets or collateral, unavailable
business credit report, and unverifiable
business ownership composition.
x. Other. A financial institution reports the
denial reason as ‘‘other’’ where none of the
enumerated denial reasons adequately
describe the principal reason or reasons it
denied the application, and the institution
reports the denial reason or reasons as freeform text.
2. Reason for denial—not applicable. A
financial institution complies with
§ 1002.107(a)(11) by reporting that the
requirement is not applicable if the action
taken on the application, pursuant to
§ 1002.107(a)(9), is not a denial. For example,
if the application resulted in an originated
covered credit transaction, or the application
was approved but not accepted, the financial
institution complies with § 1002.107(a)(11)
by reporting not applicable.
107(a)(12) Pricing information.
1. General. For applications that a financial
institution, pursuant to § 1002.107(a)(9),
reports as denied, withdrawn by the
applicant, or incomplete, the financial
institution reports that pricing information is
‘‘not applicable.’’
107(a)(12)(i) Interest rate.
1. Interest rate—introductory period. If a
covered credit transaction includes an initial
period with an introductory interest rate,
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after which the interest rate adjusts upwards
or shifts from a fixed to variable rate, a
financial institution complies with
§ 1002.107(a)(12)(i) by reporting information
about the interest rate applicable after the
introductory period. For example, if a
financial institution originates a covered
credit transaction with a fixed, initial interest
rate of 0 percent for six months following
origination, after which the interest rate will
adjust according to a Prime index rate plus
a 3 percent margin, the financial institution
reports the 3 percent margin, Prime’s value,
and Prime as the name of the index used to
adjust the interest rate.
2. Multiple interest rates. If a covered
credit transaction includes multiple interest
rates applicable to different credit features, a
financial institution complies with
§ 1002.107(a)(12)(i) by reporting the interest
rate applicable to the amount of credit
approved or originated reported in
§ 1002.107(a)(8). For example, if a financial
institution originates a credit card with
different interest rates for purchases, balance
transfers, cash advances, and overdraft
advances, the financial institution reports the
interest rate applicable for purchases.
3. Index names. A financial institution
complies with § 1002.107(a)(12)(i) by
selecting the index used from the following
list: Wall Street Journal Prime, 6-month CD
rate, 1-year T-Bill, 3-year T-Bill, 5-year TNote, 12-month average of 10-year T-Bill,
Cost of Funds Index (COFI)-National, Cost of
Funds Index (COFI)-11th District. If the index
used does not appear on the list of indices
provided, the financial institution reports
‘‘other’’ and provides the name of the index
via free-form text.
4. Index value. For covered transactions
with an adjustable interest rate, a financial
institution complies with
§ 1002.107(a)(12)(i)(B) by reporting the index
value that is applicable at the time the
application was approved by the financial
institution. For covered credit transactions
that include an initial period with an
introductory interest rate, after which the
interest rate adjusts upwards or shifts from a
fixed to variable rate, a financial institution
complies with § 1002.107(a)(12)(i)(B) by
reporting the index value applicable at the
time the application was approved by the
financial institution of the rate in effect after
the introductory interest rate is complete.
107(a)(12)(ii) Total origination charges.
1. Charges in comparable cash
transactions. Charges imposed uniformly in
cash and credit transactions are not
reportable under § 1002.107(a)(12)(ii). In
determining whether an item is part of the
total origination charges, a financial
institution should compare the covered
credit transaction in question with a similar
cash transaction. A financial institution
financing the sale of property or services may
compare charges with those payable in a
similar cash transaction by the seller of the
property or service.
2. Charges by third parties. A financial
institution includes fees and amounts
charged by someone other than the financial
institution in the total charges reported if the
financial institution:
i. Requires the use of a third party as a
condition of or an incident to the extension
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of credit, even if the applicant can choose the
third party; or
ii. Retains a portion of the third-party
charge, to the extent of the portion retained.
3. Special rule; broker fees. A financial
institution complies with
§ 1002.107(a)(12)(ii) by including fees
charged by a broker (including fees paid by
the applicant directly to the broker or to the
financial institution for delivery to the
broker) in the total origination charges
reported even if the financial institution does
not require the applicant to use a broker and
even if the financial institution does not
retain any portion of the charge. For more
information on broker fees, see commentary
for § 1002.107(a)(12)(iii).
4. Bundled services. Total origination
charges include all charges imposed directly
or indirectly by the financial institution at or
before origination as an incident to or a
condition of the extension of credit.
Accordingly, a financial institution complies
with § 1002.107(a)(12)(ii) by including
charges for other products or services paid at
or before origination in the total origination
charges reported if the financial institution
requires the purchase of such other product
or service as a condition of or an incident to
the extension of credit.
5. Origination charges—examples.
Examples of origination charges may include
application fees, credit report fees, points,
appraisal fees, and other similar charges.
107(a)(12)(iii) Broker fees.
1. Amount. A financial institution
complies with § 1002.107(a)(12)(iii) by
including the fees reported in
§ 1002.107(a)(12)(ii) that are fees paid by the
applicant directly to the broker or to the
financial institution for delivery to the
broker. For example, a covered transaction
has $3000 of total origination charges. Of that
$3000, $250 are fees paid by the applicant
directly to a broker and an additional $300
are fees paid to the financial institution for
delivery to the broker. The financial
institution complies with
§ 1002.107(a)(12)(iii) by reporting $550 in the
broker fees reported.
2. Fees paid directly to a broker by an
applicant. A financial institution complies
with § 1002.107(a)(12)(iii) by relying on the
best information readily available to the
financial institution at the time final action
is taken. Information readily available could
include, for example, information provided
by an applicant or broker that the financial
institution reasonably believes regarding the
amount of fees paid by the applicant directly
to the broker.
107(a)(12)(iv) Initial annual charges.
1. Charges during the initial annual period.
The total initial annual charges include all
charges scheduled to be imposed during the
initial annual period following origination.
For example, if a financial institution
originates a covered credit transaction with a
$50 monthly fee and a $100 annual fee, the
financial institution complies with
§ 1002.107(a)(12)(iv) by reporting $700 in the
initial annual charges reported.
2. Interest excluded. A financial institution
complies with § 1002.107(a)(12)(iv) by
excluding any interest expense from the
initial annual charges reported.
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3. Avoidable charges. A financial
institution complies with
§ 1002.107(a)(12)(iv) by only including
scheduled charges and excluding any charges
for events that are avoidable by the applicant
from the initial annual charges reported.
Examples of avoidable charges include
charges for late payment, for exceeding a
credit limit, for delinquency or default, or for
paying items that overdraw an account.
4. Initial annual charges—examples.
Examples of charges scheduled to be
imposed during the initial annual period may
include monthly fees, annual fees, and other
similar charges.
5. Scheduled charges with variable
amounts. A financial institution complies
with § 1002.107(a)(12)(iv) by reporting as the
default the highest amount for a charge
scheduled to be imposed. For example, if a
covered credit transaction has a $75 monthly
fee, but the fee is reduced to $0 if the
applicant maintains an account at the
financial institution originating the covered
credit transaction, the financial institution
complies with § 1002.107(a)(12)(iv) by
reporting $900 ($75×12) in the initial annual
charges reported.
107(a)(12)(v) Additional cost for merchant
cash advances or other sales-based financing.
1. Merchant cash advances. Section
1002.107(a)(12)(v) requires a financial
institution to report the difference between
the amount advanced and the amount to be
repaid for a merchant cash advance or other
sales-based financing transaction. For
example, in a merchant cash advance, a
financial institution reports the difference
between the purchase price and the amount
to be repaid, using the amounts provided in
the contract between the financial institution
and the applicant.
107(a)(12)(vi) Prepayment penalties.
1. Policies and procedures applicable to
the covered credit transaction. The policies
and procedures applicable to the covered
credit transaction include the practices that
the financial institution follows when
evaluating applications for the specific credit
type and credit purpose requested. For
example, assume that a financial institution’s
written procedures permit it to include
prepayment penalties in the loan agreement
for its term loans secured by non-owner
occupied commercial real estate. For such
transactions, the financial institution
includes prepayment penalties in some loan
agreements but not others. For an application
for, or origination of, a term loan secured by
non-owner occupied commercial real estate,
the financial institution reports under
§ 1002.107(12)(vi)(A) that a prepayment
penalty could have been included under the
policies and procedures applicable to the
transaction, regardless of whether the term
loan secured by non-owner occupied
commercial real estate actually includes a
prepayment penalty.
107(a)(13) Census tract.
1. General. A financial institution complies
with § 1002.107(a)(13) by reporting a census
tract number as defined by the U.S. Census
Bureau, which includes State and county
numerical codes. A financial institution
complies with § 1002.107(a)(13) if it uses the
boundaries and codes in effect on January 1
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of the calendar year covered by the small
business lending application register that it is
reporting. The financial institution reports
census tract based on the following:
i. Proceeds address. A financial institution
complies with § 1002.107(a)(13) by reporting
a census tract based on the address or
location where the proceeds of the credit
applied for or originated will be or would
have been principally applied, if known. For
example, a financial institution would report
a census tract based on the address or
location of the site where the proceeds of a
construction loan will be applied.
ii. Main office or headquarters address. If
the address or location where the proceeds of
the credit applied for or originated is
unknown, a financial institution complies
with § 1002.107(a)(13) by reporting a census
tract number based on the address or location
of the main office or headquarters of the
applicant, if known. For example, the
address or location of the main office or
headquarters of the applicant may be the
home address of a sole proprietor or the
office address of a sole proprietor or other
applicant.
iii. Another address or location. If neither
the address or location where the proceeds of
the credit applied for or originated will be or
would have been principally applied nor the
address or location of the main office or
headquarters of the applicant are known, a
financial institution complies with
§ 1002.107(a)(13) by reporting a census tract
number based on another address or location
associated with the applicant.
iv. Type of address used. In addition to
reporting the census tract, pursuant to
§ 1002.107(a)(13)(iv) a financial institution
must report which one of the three types of
addresses or locations listed in
§ 1002.107(a)(13)(i) through (iii) and
described in comments 107(a)(13)–1.i
through iii that the census tract is determined
from.
2. Financial institution discretion. A
financial institution complies with
§ 1002.107(a)(13) by identifying the
appropriate address or location and the type
of that address or location in good faith,
using appropriate information from the
applicant’s credit file or otherwise known by
the financial institution. A financial
institution is not required to make inquiries
beyond its standard procedures as to the
nature of the addresses or locations it
collects.
3. Address or location not provided by
applicant and otherwise undetermined.
Pursuant to § 1002.107(c)(1), a financial
institution shall maintain procedures
reasonably designed to collect applicantprovided information, which includes at
least one address or location for an applicant
for census tract reporting. However, if a
financial institution is nonetheless unable to
collect or otherwise determine any address or
location for an application, the financial
institution reports that the census tract
information is ‘‘not provided by applicant
and otherwise undetermined.’’
4. Safe harbor. As described in
§ 1002.112(c)(1) and comment 112(c)(1)–1, a
financial institution that obtains an incorrect
census tract by correctly using a geocoding
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tool provided by the FFIEC or the Bureau
does not violate the Act or subpart B of this
part.
107(a)(14) Gross annual revenue.
1. Collecting gross annual revenue. A
financial institution may rely on statements
of or information provided by the applicant
in collecting and reporting gross annual
revenue. However, pursuant to § 1002.107(b),
if the financial institution verifies the gross
annual revenue provided by the applicant, it
must report the verified information. The
financial institution may use the following
language to ask about gross annual revenue,
if it does not collect gross annual revenue by
another method, and may rely on the
applicant’s answer:
What was the gross annual revenue of the
business applying for credit in its last full
fiscal year? Gross annual revenue is the
amount of money the business earned before
subtracting taxes and other expenses. You
may provide gross annual revenue calculated
using any reasonable method.
2. Gross annual revenue not provided by
applicant and otherwise undetermined.
Pursuant to § 1002.107(c)(1), a financial
institution shall maintain procedures
reasonably designed to collect applicantprovided information, which includes the
gross annual revenue of the applicant.
However, if a financial institution is
nonetheless unable to collect or determine
the gross annual revenue of the applicant, the
financial institution reports that the gross
annual revenue is ‘‘not provided by applicant
and otherwise undetermined.’’
3. Affiliate revenue. A financial institution
is permitted, but not required, to report the
gross annual revenue for the applicant that
includes the revenue of affiliates as well. For
example, if the financial institution does not
normally collect information on affiliate
revenue, the financial institution reports only
the applicant’s revenue and does not include
the revenue of any affiliates when it has not
collected that information. Similarly, in
determining whether the applicant is a small
business under § 1002.106(b), a financial
institution may rely on an applicant’s
representations regarding gross annual
revenue, which may or may not include the
affiliate’s revenue.
107(a)(15) NAICS code.
1. General. NAICS stands for North
American Industry Classification System.
The Office of Management and Budget has
charged the Economic Classification Policy
Committee with the maintenance and review
of NAICS. A financial institution complies
with § 1002.107(a)(15) if it uses the NAICS
codes in effect on January 1 of the calendar
year covered by the small business lending
application register that it is reporting.
2. NAICS not provided by applicant and
otherwise undetermined. Pursuant to
§ 1002.107(c)(1), a financial institution shall
maintain procedures reasonably designed to
collect applicant-provided information,
which includes NAICS code. However, if a
financial institution is nonetheless unable to
collect or otherwise determine the
applicant’s NAICS code, the financial
institution reports that the NAICS code is
‘‘not provided by applicant and otherwise
undetermined.’’
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3. Reliance on statements by applicant.
Consistent with § 1002.107(b), a financial
institution may rely on statements of or
information provided by the applicant in
collecting and reporting the NAICS code. For
example, a financial institution may rely on
the NAICS code on an applicant’s tax return
that the applicant has otherwise provided to
the financial institution.
4. Reliance on other information. A
financial institution may rely on a NAICS
code obtained through the financial
institution’s use of business information
products, such as company profiles or
business credit reports, which provide the
applicant’s NAICS code.
5. Safe harbor. A financial institution that
identifies an incorrect NAICS code does not
violate the Act or subpart B of this part under
the circumstances described in
§ 1002.112(c)(2).
107(a)(16) Number of workers.
1. Collecting number of workers. In
collecting the number of workers from an
applicant, a financial institution shall
explain that full-time, part-time and seasonal
employees, as well as contractors who work
primarily for the applicant, would be
counted as workers, but principal owners of
the business would not. If asked, the
financial institution shall explain that
volunteers would not be counted as workers,
and workers for affiliates of the applicant
would only be counted if the financial
institution were also collecting the affiliates’
gross annual revenue. The financial
institution may rely on statements of or
information provided by the applicant in
collecting and reporting number of workers.
However, pursuant to § 1002.107(b), if the
financial institution verifies the number of
workers provided by the applicant, it must
report the verified information. The financial
institution may use the following language to
ask about the number of workers, if it does
not collect the number of workers by another
method, and may rely on the applicant’s
answer:
Counting full-time, part-time and seasonal
workers, as well as contractors who work
primarily for the business applying for credit,
but not counting principal owners of the
business, how many people work for the
business applying for credit?
2. Number of workers not provided by
applicant and otherwise undetermined.
Pursuant to § 1002.107(c)(1), a financial
institution shall maintain procedures
reasonably designed to collect applicantprovided information, which includes the
number of workers of the applicant.
However, if a financial institution is
nonetheless unable to collect or determine
the number of workers of the applicant, the
financial institution reports that the number
of workers is ‘‘not provided by applicant and
otherwise undetermined.’’
107(a)(17) Time in business.
1. As relied on or collected. A financial
institution complies with § 1002.107(a)(17)
by reporting the time the applicant has been
in business as relied on in making the credit
decision or collected by the financial
institution. The financial institution must
report the time in business in whole years
and indicate if a business has not begun
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operating yet or has been in operation for less
than a year. When the financial institution
relies on an applicant’s time in business as
part of a credit decision, it reports the time
in business relied on in making the credit
decision. (See comments 107(a)(17)–2 and –3
below regarding reporting of the time in
business relied on.) However,
§ 1002.107(a)(17) does not require the
financial institution to rely on an applicant’s
time in business in making a credit decision.
The financial institution may rely on
statements of or information provided by the
applicant in collecting and reporting time in
business. However, pursuant to
§ 1002.107(b), if the financial institution
verifies the time in business provided by the
applicant, it must report the verified
information.
2. Time in business relied on. When a
financial institution evaluates an applicant’s
time in business as part of a credit decision,
it reports the time in business relied on in
making the credit decision. For example, if
the financial institution relies on the number
of years of experience the applicant’s owners
have in the current line of business, the
financial institution reports that number of
years as the time in business. Similarly, if the
financial institution relies on the number of
years that the applicant has existed, the
financial institution reports the number of
years that the applicant has existed as the
time in business. The financial institution
reports the length of business existence or
experience duration that it relies on in
making its credit decision, and is not
required to adopt any particular definition of
time in business.
3. Multiple factors considered. A financial
institution relies on an applicant’s time in
business in making a credit decision if the
time in business was a factor in the credit
decision, even if it was not a dispositive
factor. For example, if the time in business
is one of multiple factors in the financial
institution’s credit decision, the financial
institution has relied on the time in business
even if the financial institution denies the
application because one or more
underwriting requirements other than the
time in business are not satisfied.
4. Collecting time in business. If the
financial institution does not rely on time in
business in considering an application,
pursuant to § 1002.107(c)(1) it shall still
maintain procedures reasonably designed to
collect applicant-provided information,
which includes the applicant’s time in
business. In collecting time in business from
an applicant, the financial institution
complies with § 1002.107(a)(17) by asking for
the number of years that the applicant has
been operating the business it operates now.
When the applicant has multiple owners
with different numbers of years operating
that business, the financial institution
collects and reports the greatest number of
years of any owner. (However, the financial
institution does not need to comply with this
instruction if it collects and relies on the time
in business by another method in making the
credit decision.)
5. Time in business not provided by
applicant and otherwise undetermined.
Pursuant to § 1002.107(c)(1), a financial
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institution shall maintain procedures
reasonably designed to collect applicantprovided information, which includes the
time in business of the applicant. However,
if a financial institution is nonetheless
unable to collect or determine the time in
business of the applicant, the financial
institution reports that the time in business
is ‘‘not provided by applicant and otherwise
undetermined.’’
107(a)(18) Minority-owned business status.
1. General. Unless a financial institution is
permitted to report minority-owned business
status based on previously collected data
pursuant to § 1002.107(c)(2), a financial
institution must ask an applicant whether it
is a minority-owned business for each
covered application. The financial institution
must permit an applicant to refuse to answer
the financial institution’s inquiry and must
inform the applicant that the applicant is not
required to provide the information. The
financial institution must report the
applicant’s response, its refusal to answer the
inquiry (such as when the applicant indicates
that it does not wish to provide the requested
information), or its failure to respond to the
inquiry (such as when the applicant fails to
submit a data collection form). See appendix
F for additional instructions on collecting
and reporting minority-owned business
status.
2. Notice of non-discrimination. When
requesting minority-owned business status
from an applicant, a financial institution
must inform the applicant that the financial
institution cannot discriminate on the basis
of the applicant’s minority-owned business
status, or on whether the applicant provides
its minority-owned business status. A
financial institution may combine this nondiscrimination notice regarding minorityowned business status with the similar nondiscrimination notices that a financial
institution is required to provide when
requesting women-owned business status
and a principal owner’s ethnicity, race, and
sex if a financial institution requests
minority-owned business status, womenowned business status, and/or a principal
owner’s ethnicity, race, and sex in the same
data collection form or at the same time.
3. Recording an applicant’s response
regarding minority-owned business status
separate from the application. A financial
institution must record an applicant’s
response to the financial institution’s inquiry
pursuant to § 1002.107(a)(18) separate from
the application and accompanying
information. See comment 111(b)–1. If the
financial institution provides a paper or
electronic data collection form, the data
collection form must not be part of the
application form or any other document that
the financial institution uses to provide or
collect any information other than womenowned business status, minority-owned
business status, principal owners’ ethnicity,
race, and sex, and the number of the
applicant’s principal owners. See the sample
data collection form in appendix E. For
example, if the financial institution sends the
data collection form via email, the data
collection form should be a separate
attachment to the email or accessed through
a separate link in the email. If the financial
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institution uses a web-based data collection
form, the form should be on its own page.
4. Minority-owned business status not
provided by applicant. Pursuant to
§ 1002.107(c)(1), a financial institution shall
maintain procedures reasonably designed to
collect applicant-provided information,
which includes the applicant’s minorityowned business status. However, if a
financial institution does not receive a
response to the financial institution’s inquiry
for purposes of § 1002.107(a)(18), the
financial institution reports that the
applicant’s minority-owned business status is
‘‘not provided by applicant.’’
5. No verification. Notwithstanding
§ 1002.107(b), a financial institution must
report the applicant’s response, the
applicant’s refusal to answer the inquiry, or
the applicant’s failure to respond to the
inquiry pursuant to § 1002.107(a)(18), even if
the financial institution verifies or otherwise
obtains an applicant’s minority-owned
business status for other purposes.
6. No reporting based on visual observation
or surname. A financial institution does not
report minority-owned business status based
on visual observation, surname, or any basis
other than the applicant’s response to the
inquiry that the financial institution makes to
satisfy § 1002.107(a)(18) or, if the financial
institution is permitted to report based on
previously collected data, on the basis of the
applicant’s response to the inquiry that the
financial institution previously made to
satisfy § 1002.107(a)(18).
7. Previously collected data. A financial
institution may report minority-owned
business status based on previously collected
data if the financial institution is permitted
to do so pursuant to § 1002.107(c)(2) and its
commentary.
107(a)(19) Women-owned business status.
1. General. Unless a financial institution is
permitted to report women-owned business
status based on previously collected data
pursuant to § 1002.107(c)(2), a financial
institution must ask an applicant whether it
is a women-owned business for each covered
application. The financial institution must
permit an applicant to refuse to answer the
financial institution’s inquiry and must
inform the applicant that the applicant is not
required to provide the information. The
financial institution must report the
applicant’s response, its refusal to answer the
inquiry (such as when the applicant indicates
that it does not wish to provide the requested
information), or its failure to respond to the
inquiry (such as when the applicant fails to
submit a data collection form). See appendix
F for additional instructions on collecting
and reporting women-owned business status.
2. Notice of non-discrimination. When
requesting women-owned business status
from an applicant, a financial institution
must inform the applicant that the financial
institution cannot discriminate on the basis
of the applicant’s women-owned business
status, or on whether the applicant provides
its women-owned business status. A
financial institution may combine this nondiscrimination notice regarding womenowned business status with the similar nondiscrimination notices that a financial
institution is required to provide when
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requesting minority-owned business status
and a principal owner’s ethnicity, race, and
sex if a financial institution requests
minority-owned business status, womenowned business status, and/or a principal
owner’s ethnicity, race, and sex in the same
data collection form or at the same time.
3. Recording an applicant’s response
regarding women-owned business status
separate from the application. A financial
institution must record an applicant’s
response to the financial institution’s inquiry
pursuant to § 1002.107(a)(19) separate from
the application and accompanying
information. See comment 111(b)–1. If the
financial institution provides a paper or
electronic data collection form, the data
collection form must not be part of the
application form or any other document that
the financial institution uses to provide or
collect any information other than womenowned business status, minority-owned
business status, principal owners’ ethnicity,
race, and sex, and the number of the
applicant’s principal owners. See the sample
data collection form in appendix E. For
example, if the financial institution sends the
data collection form via email, the data
collection form should be a separate
attachment to the email or accessed through
a separate link in the email. If the financial
institution uses a web-based data collection
form, the form should be on its own page.
4. Women-owned business status not
provided by applicant. Pursuant to
§ 1002.107(c)(1), a financial institution shall
maintain procedures reasonably designed to
collect applicant-provided information,
which includes the applicant’s womenowned business status. However, if a
financial institution does not receive a
response to the financial institution’s inquiry
for purposes of § 1002.107(a)(19), the
financial institution reports that the
applicant’s women-owned business status is
‘‘not provided by applicant.’’
5. No verification. Notwithstanding
§ 1002.107(b), a financial institution must
report the applicant’s response, the
applicant’s refusal to answer the inquiry, or
the applicant’s failure to respond to the
inquiry pursuant to § 1002.107(a)(19), even if
the financial institution verifies or otherwise
obtains an applicant’s women-owned
business status for other purposes.
6. No reporting based on visual observation
or surname. A financial institution does not
report women-owned business status based
on visual observation, surname, any basis
other than the applicant’s response to the
inquiry that the financial institution makes to
satisfy § 1002.107(a)(19) or, if the financial
institution is permitted to report based on
previously collected data, on the basis of the
applicant’s response to the inquiry that the
financial institution previously made to
satisfy § 1002.107(a)(19).
7. Previously collected data. A financial
institution may report women-owned
business status based on previously collected
data if the financial institution is permitted
to do so pursuant to § 1002.107(c)(2) and its
commentary.
107(a)(20) Ethnicity, race, and sex of
principal owners.
1. General. Unless a financial institution is
permitted to report ethnicity, race, and sex
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information based on previously collected
data pursuant to § 1002.107(c)(2), a financial
institution must ask an applicant to report its
principal owners’ ethnicity, race, and sex for
each covered application. The financial
institution must permit an applicant to refuse
to answer the financial institution’s inquiries
and must inform the applicant that it is not
required to provide the information. The
financial institution must report the
applicant’s responses, its refusal to answer
the inquiries, or its failure to respond to the
inquiries. In certain situations, discussed in
comments 107(a)(20)–9 and –10 and in
appendix G, a financial institution may also
be required to report one or more principal
owners’ ethnicity and race based on visual
observation and/or surname. However, a
financial institution shall not report a
principal owner’s sex based on visual
observation, surname, or any basis other than
the applicant-provided information
(including previously collected data if
permitted pursuant to § 1002.107(c)(2)). See
appendix G for additional instructions on
collecting and reporting the ethnicity, race,
and sex of principal owners.
2. Notice of non-discrimination. When
requesting a principal owner’s ethnicity,
race, and sex from an applicant, a financial
institution must inform the applicant that the
financial institution cannot discriminate on
the basis of a principal owner’s ethnicity,
race, or sex, or on whether the applicant
provides the information. A financial
institution may combine this nondiscrimination notice with the similar nondiscrimination notices that a financial
institution is required to provide when
requesting minority-owned business status
and women-owned business status if a
financial institution requests minority-owned
business status, women-owned business
status, and/or a principal owner’s ethnicity,
race, and sex in the same data collection form
or at the same time.
3. Recording an applicant’s responses
regarding principal owners’ ethnicity, race,
and sex separate from the application. A
financial institution must record an
applicant’s response to the financial
institution’s inquiries pursuant to
§ 1002.107(a)(20) separate from the
application and accompanying information.
See comment 111(b)–1. If the financial
institution provides a paper or electronic
data collection form, the data collection form
must not be part of the application form or
any other document that the financial
institution uses to provide or collect any
information other than women-owned
business status, minority-owned business
status, principal owners’ ethnicity, race, and
sex, and the number of the applicant’s
principal owners. See the sample data
collection form in appendix E. For example,
if the financial institution sends the data
collection form via email, the data collection
form should be a separate attachment to the
email or accessed through a separate link in
the email. If the financial institution uses a
web-based data collection form, the form
should be on its own page.
4. Ethnicity, race, or sex of principal
owners not provided by applicant. Pursuant
to § 1002.107(c)(1), a financial institution
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shall maintain procedures reasonably
designed to collect applicant-provided
information, which includes the ethnicity,
race, and sex of an applicant’s principal
owners. However, if a financial institution is
nonetheless unable to collect the principal
owners’ ethnicity, race, or sex from the
applicant, and if the financial institution is
not required to report based on visual
observation or surname, the financial
institution reports that the principal owner’s
ethnicity, race, or sex (as applicable) is ‘‘not
provided by applicant.’’
5. Determining who is a principal owner.
Generally, an applicant determines its
principal owners and decides whether to
provide information about those principal
owners. However, as discussed in comments
107(a)(20)–9 and –10 and appendix G, a
financial institution may be required to
report ethnicity and race information based
on visual observation and/or surname if the
applicant does not provide ethnicity, race, or
sex information for at least one principal
owner and the financial institution meets in
person with one or more principal owners.
Thus, a financial institution may need to
determine if a natural person that it meets
with in person is a principal owner. In that
case, the financial institution may either ask
the natural person who is acting on behalf of
an applicant whether that natural person is
a principal owner, or it may independently
determine if the natural person is a principal
owner. For example, if a financial institution
has collected information regarding an
applicant’s ownership structure and obtained
the name or identity of the natural person for
other purposes, it may use this information
to independently determine whether the
natural person who meets in person with the
financial institution is a principal owner. If
a financial institution asks if a natural person
is a principal owner, the financial institution
can rely on an applicant’s or natural person’s
response, unless the financial institution has
knowledge to the contrary. The financial
institution is not required to verify any
responses regarding whether a natural person
is a principal owner.
6. Ethnicity. i. Aggregate categories. A
financial institution must permit an
applicant to provide a principal owner’s
ethnicity for purposes § 1002.107(a)(20) using
one or more of the following aggregate
categories:
A. Hispanic or Latino.
B. Not Hispanic or Latino.
ii. Disaggregated subcategories. A financial
institution must permit an applicant to
provide a principal owner’s ethnicity for
purposes of § 1002.107(a)(20) using one or
more the following disaggregated
subcategories, regardless of whether the
applicant has indicated that the relevant
principal owner is Hispanic or Latino and
regardless of whether the applicant selects
any aggregate categories: Cuban; Mexican;
Puerto Rican; or Other Hispanic or Latino. If
an applicant indicates that a principal owner
is Other Hispanic or Latino, the financial
institution must permit the applicant to
provide additional information regarding the
principal owner’s ethnicity, such as
indicating, for example, that the principal
owner is Argentinean, Colombian,
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Dominican, Nicaraguan, Salvadoran, or
Spaniard. If an applicant chooses to provide
additional information regarding a principal
owner’s ethnicity, such as indicating that a
principal owner is Argentinean, a financial
institution must report that additional
information as free-form text in the
appropriate data reporting field.
iii. Selecting multiple categories. The
financial institution must permit the
applicant to select one, both, or none of the
aggregate categories and as many
disaggregated subcategories as the applicant
chooses. A financial institution must permit
an applicant to select a disaggregated
subcategory even if the applicant does not
select the corresponding aggregate category.
A financial institution must also permit the
applicant to refuse to provide ethnicity
information for one or more principal
owners. If an applicant provides ethnicity
information for a principal owner, the
financial institution reports all of the
aggregate categories and disaggregated
subcategories provided by the applicant. For
example, if an applicant selects both
aggregate categories and four disaggregated
subcategories for a principal owner, the
financial institution reports the two aggregate
categories that the applicant selected and all
four of the disaggregated subcategories that
the applicant selected.
iv. Information not provided by applicant.
Unless a financial institution is required to
report based on visual observation and/or
surname (see comments 107(a)(20)–9 and –10
and appendix G), if an applicant refuses or
fails to provide ethnicity information for a
principal owner, the financial institution
reports that the applicant declined to provide
the information or failed to respond, as
applicable. Because there are data reporting
fields for four principal owners, when
submitting data to the Bureau, a financial
institution will need to report that the
requirement to report ethnicity is not
applicable for some principal owners if the
applicant has fewer than four principal
owners. For example, if an applicant has only
one principal owner, the financial institution
reports that the requirement to report
ethnicity is not applicable in the data fields
for principal owners two through four.
7. Race. i. Aggregate categories. A financial
institution must permit an applicant to
provide a principal owner’s race for purposes
of § 1002.107(a)(20) using one or more of the
following aggregate categories:
A. American Indian or Alaska Native.
B. Asian.
C. Black or African American.
D. Native Hawaiian or Other Pacific
Islander.
E. White.
ii. Disaggregated subcategories. The
financial institution must permit an
applicant to provide a principal owner’s race
for purposes of § 1002.107(a)(20) using one or
more of the disaggregated subcategories as
listed in this comment 107(a)(20)–7.ii and set
forth in the sample data collection form in
appendix E, regardless of whether the
applicant has selected the corresponding
aggregate category.
A. The Asian aggregate category includes
the following disaggregated subcategories:
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Asian Indian; Chinese; Filipino; Japanese;
Korean; Vietnamese; and Other Asian. An
applicant must also be permitted to provide
the principal owner’s race using one or more
of these disaggregated subcategories
regardless of whether the applicant indicates
that the principal owner is Asian and
regardless of whether the applicant selects
any aggregate categories. Additionally, if an
applicant indicates that a principal owner is
Other Asian, the financial institution must
permit the applicant to provide additional
information about the principal owner’s race,
such as providing information, for example,
that the principal owner is Cambodian,
Hmong, Laotian, Pakistani, or Thai.
B. The Black or African American category
includes the following disaggregated
subcategories: African American; Ethiopian;
Haitian; Jamaican; Nigerian; Somali; or Other
Black or African American. An applicant
must also be permitted to provide the
principal owner’s race using one or more of
these disaggregated subcategories regardless
of whether the applicant indicates that the
principal owner is Black or African American
and regardless of whether the applicant
selects any aggregate categories.
Additionally, if an applicant indicates that a
principal owner is Other Black or African
American, the financial institution must
permit the applicant to provide additional
information about the principal owner’s race,
such as providing information, for example,
that the principal owner is Barbadian,
Ghanaian, or South African.
C. The Native Hawaiian or Other Pacific
Islander includes the following disaggregated
subcategories: Guamanian or Chamorro;
Native Hawaiian; Samoan; and Other Pacific
Islander. An applicant must also be
permitted to provide the principal owner’s
race using one or more of these disaggregated
subcategories regardless of whether the
applicant indicates that the principal owner
is Native Hawaiian or Other Pacific Islander
and regardless of whether the applicant
selects any aggregate categories.
Additionally, if an applicant indicates that a
principal owner is Other Pacific Islander, the
financial institution must permit the
applicant to provide additional information
about the principal owner’s race, such as
providing information, for example, that the
principal owner is Fijian or Tongan.
D. If an applicant chooses to provide
additional information regarding a principal
owner’s race, such as indicating that a
principal owner is Cambodian, Barbadian, or
Fijian, a financial institution must report that
additional information as free-form text in
the appropriate data reporting field.
E. In addition to permitting an applicant to
indicate that a principal owner is American
Indian or Alaska Native, a financial
institution must permit an applicant to
provide the name of an enrolled or principal
tribe. An applicant must be permitted to
provide the name of an enrolled or principal
tribe regardless of whether the applicant
indicates that the principal owner is
American Indian or Alaska Native. If an
applicant chooses to provide the name of an
enrolled or principal tribe, a financial
institution must report that information as
free-form text in the appropriate data
reporting field.
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iii. Selecting multiple categories. The
financial institution must permit the
applicant to select as many aggregate
categories and disaggregated subcategories as
the applicant chooses. A financial institution
must permit an applicant to select one or
more disaggregated subcategories even if the
applicant does not select an aggregate
category. A financial institution must also
permit the applicant to refuse to provide this
information for one or more principal
owners. If an applicant provides race
information for a principal owner, the
financial institution reports all of the
aggregate categories and disaggregated
subcategories provided by the applicant. For
example, if an applicant selects two aggregate
categories and five disaggregated
subcategories for a principal owner, the
financial institution reports the two aggregate
categories that the applicant selected and the
five disaggregated subcategories that the
applicant selected.
iv. Information not provided by applicant.
Unless the financial institution is required to
report based on visual observation and/or
surname (see comments 107(a)(20)–9 and –10
and appendix G), if an applicant refuses or
fails to provide race information for a
principal owner, the financial institution
reports that the applicant declined to provide
the information or failed to respond, as
applicable. Because there are data reporting
fields for four principal owners, when
submitting data to the Bureau, a financial
institution must report that the requirement
to report race is not applicable for some
principal owners if the applicant has fewer
than four principal owners. For example, if
an applicant has only one principal owner
(i.e., only one natural person directly owns
25 percent or more of the applicant’s equity
interests), the financial institution reports
that the requirement to report race is not
applicable in the data reporting fields for
principal owners two through four.
8. Sex. A financial institution must permit
an applicant to provide a principal owner’s
sex for purposes of § 1002.107(a)(20) using
one or more of the following categories: Male,
Female, and/or that the principal owner
prefers to self-describe their sex.
Additionally, if an applicant indicates that a
principal owner prefers to self-describe their
sex, the financial institution must permit the
applicant to provide additional information
about the principal owner’s sex. A financial
institution must permit an applicant to select
as many categories as the applicant chooses.
A financial institution reports the category or
categories selected by the applicant, any
additional information provided by the
applicant (reported as free-form text in the
appropriate data reporting field), or reports
that the applicant refused to provide the
information or failed to respond. A financial
institution is not permitted to report sex
based on visual observation, surname, or any
basis other than the applicant-provided
information. Because there are data reporting
fields for four principal owners, when
submitting data to the Bureau a financial
institution must report that the requirement
to report sex is not applicable for some
principal owners if the applicant has fewer
than four principal owners. For example, if
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an applicant has only one principal owner,
the financial institution reports that the
requirement to report sex is not applicable in
the data fields for principal owners two
through four. See appendix G for additional
information on collecting and reporting a
principal owner’s sex.
9. Reporting based on visual observation
and/or surname. If a financial institution
meets in person with one or more of an
applicant’s principal owners and the
applicant does not provide ethnicity, race, or
sex information for at least one principal
owner, the financial institution must report
at least one principal owner’s ethnicity and
race (but not sex) based on visual
observation, surname, or a combination of
both visual observation and surname. (See
comment 107(a)(20)-10 for additional
information regarding what constitutes an inperson meeting with an applicant’s principal
owners.) However, a financial institution is
not required to report based on visual
observation and/or surname if the principal
owner only meets in person with a third
party through whom it is submitting an
application to the financial institution. For
example, a financial institution is not
required to report based on visual
observation and/or surname when an
employee or officer of an equipment dealer
or retailer that is not an affiliate of the
financial institution meets in person with a
principal owner.
10. Meeting in person with a principal
owner. i. In-person meetings. A financial
institution meets in person with a principal
owner if an employee or officer of the
financial institution or one of its affiliates has
a meeting or discussion with the applicant’s
principal owner about an application and can
visually observe the principal owner. The
following provides a non-exhaustive list of
examples to illustrate when a financial
institution meets in person with a principal
owner for purposes of the requirement to
collect principal owners’ race and ethnicity
information based on visual observation and/
or surname if not provided by the applicant:
A. A principal owner comes to a financial
institution’s branch or office and meets with
the financial institution’s loan officer to
discuss the status of a pending application.
B. A principal owner comes to a financial
institution’s branch or office and meets in
person with one or more employees or
officers of a financial institution in order to
complete an application and related
paperwork.
C. A principal owner contacts a financial
institution’s loan officer using an electronic
communication method with a video
component and, using the video component,
meets with the loan officer to discuss
outstanding documentation needed for a
pending application.
ii. Not in-person meetings. The following
provides a non-exhaustive list of examples to
illustrate when a financial institution does
not meet in person with a principal owner for
purposes of the requirement to collect
principal owners’ race and ethnicity
information via visual observation and/or
surname if not provided by the applicant:
A. A principal owner drops off documents
at a financial institution’s branch or office or
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provides the applicant’s name and drops off
documents without engaging in any
discussion regarding a covered application.
B. A principal owner meets in person with
an employee or officer of the financial
institution to discuss something other than a
covered application, such as another
financial product.
C. The financial institution meets with a
principal owner after the application process
is complete, such as at account opening or
loan closing.
D. A financial institution meets with a
principal owner before the applicant submits
an application.
11. Use of aggregate categories when
reporting based on visual observation or
surname. When reporting ethnicity and race
based on visual observation and/or surname,
the financial institution uses only the
aggregate ethnicity and race categories. See
appendix G for additional information on
collecting and reporting based on visual
observation and/or surname.
12. No verification of ethnicity, race, and
sex of principal owner. Notwithstanding
§ 1002.107(b), a financial institution is
neither required nor permitted to verify the
ethnicity, race, or sex information that the
applicant provides for purposes of
§ 1002.107(a)(20), even if the financial
institution verifies or otherwise obtains the
ethnicity, race, or sex of the applicant’s
principal owners for other purposes.
Additionally, if an applicant refuses to
respond to the inquiry pursuant to
§ 1002.107(a)(20) or fails to respond to this
inquiry, the financial institution reports that
the applicant declined to provide the
information or did not respond to the request
to provide the information (as applicable),
unless the financial institution is required to
report ethnicity and race based on visual
observation and/or surname. The financial
institution does not report ethnicity, race, or
sex based on information that the financial
institution collects for other purposes.
107(a)(21) Number of principal owners.
1. General. A financial institution may
request an applicant’s number of principal
owners from the applicant or may determine
the number of principal owners from
information provided by the applicant or that
the financial institution otherwise obtains. If
the financial institution asks the applicant to
provide the number of its principal owners
pursuant to § 1002.107(a)(21), a financial
institution must provide the definition of
principal owner set forth in § 1002.102(o). If
permitted pursuant to § 1002.107(c)(2), a
financial institution may also report an
applicant’s number of principal owners
based on previously collected data.
2. Number of principal owners provided by
applicant; verification of number of principal
owners. The financial institution may rely on
statements or information provided by the
applicant in collecting and reporting the
number of the applicant’s principal owners.
However, pursuant to § 1002.107(b), if the
financial institution verifies the number of
principal owners provided by the applicant,
it must report the verified information. The
financial institution is not required to verify
the number of principal owners, but if the
financial institution verifies the number of
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principal owners in making the credit
decision, then the financial institution
reports the verified number of principal
owners.
3. Number of principal owners not
provided by applicant and otherwise
undetermined. Pursuant to § 1002.107(c)(1), a
financial institution shall maintain
procedures reasonably designed to collect
applicant-provided information, which
includes the number of principal owners of
the applicant. However, if a financial
institution is nonetheless unable to collect or
otherwise determine the applicant’s number
of principal owners, the financial institution
reports that the number of principal owners
is ‘‘not provided by applicant and otherwise
undetermined.’’
107(b) Verification of applicant-provided
information.
1. Reliance on statements or information
provided by an applicant. A financial
institution may rely on statements made by
an applicant (whether made in writing or
orally) or information provided by an
applicant when compiling and reporting data
pursuant to subpart B of this part for
applicant-provided data; the financial
institution is not required to verify those
statements. However, if the financial
institution does verify applicant statements
for its own business purposes, such as
statements relating to gross annual revenue
or time in business, the financial institution
reports the verified information. Depending
on the circumstances and the financial
institution’s procedures, certain applicantprovided data can be collected without a
specific request from the applicant. For
example, gross annual revenue may be
collected from tax return documents.
Applicant-provided data are the data
required that are or could be provided by the
applicant, including § 1002.107(a)(5) through
(7) and (13) through (21). See comment
107(c)(2)–3.
107(c) Time and manner of collection.
107(c)(1) In general.
1. Procedures. The term ‘‘procedures’’
refers to the actual practices followed by a
financial institution as well as its stated
policies or procedures. For example, if a
financial institution’s stated policy is to
collect applicant-provided data on or with a
paper application form, but the financial
institution’s employees encourage applicants
to skip the page that asks whether the
applicant is a minority-owned business or a
women-owned business under
§ 1002.107(a)(18) and (19), the financial
institution’s procedures are not reasonably
designed to obtain a response.
2. Latitude to design procedures. A
financial institution has flexibility to
establish procedures concerning the timing
and manner that it collects applicantprovided data that work best for its particular
lending model and product offerings,
provided that those procedures are
reasonably designed to collect the applicantprovided data in § 1002.107(a).
3. Applicant-provided data. Applicantprovided data are the data required that are
or could be provided by the applicant,
including § 1002.107(a)(5) (credit type),
§ 1002.107(a)(6) (credit purpose),
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§ 1002.107(a)(7) (amount applied for),
§ 1002.107(a)(13) (address or location for
purposes of determining census tract),
§ 1002.107(a)(14) (gross annual revenue),
§ 1002.107(a)(15) (NAICS code, or
information about the business such that the
financial institution can determine the
applicant’s NAICS code), § 1002.107(a)(16)
(number of workers), § 1002.107(a)(17) (time
in business), § 1002.107(a)(18) (minorityowned business status), § 1002.107(a)(19)
(women-owned business status),
§ 1002.107(a)(20) (ethnicity, race, and sex of
the applicant’s principal owners), and
§ 1002.107(a)(21) (number of principal
owners). Applicant-provided data does not
include data that are generated or supplied
only by the financial institution, including
§ 1002.107(a)(1) (unique identifier),
§ 1002.107(a)(2) (application date),
§ 1002.107(a)(3) (application method),
§ 1002.107(a)(4) (application recipient),
§ 1002.107(a)(8) (amount approved or
originated), § 1002.107(a)(9) (action taken),
§ 1002.107(a)(10) (action taken date),
§ 1002.107(a)(11) (denial reasons),
§ 1002.107(a)(12) (pricing data), and
§ 1002.107(a)(13) (census tract, based on
address or location provided by the
applicant). Depending on the circumstances
and the financial institution’s procedures,
certain applicant-provided data can be
collected without a specific request from the
applicant. For example, credit type may be
collected based on the type of product
chosen by the applicant or NAICS code may
be collected from an applicant’s tax return
that the applicant has otherwise provided to
the financial institution.
4. Reasonably designed—generally.
Whether a financial institution’s procedures
are reasonably designed to collect applicantprovided data depends on the financial
institution’s particular lending model and
product offerings. A financial institution
shall reassess on a periodic basis, based on
available data, whether its procedures are
reasonably designed to obtain a response. For
example, a financial institution may be able
to assess whether its procedures are
reasonably designed by comparing its
response rate with similarly situated
financial institutions (for instance, those that
offer similar products, use a similar lending
model, or are of a similar size). A financial
institution is permitted, but not required, to
develop different procedures for different
applicant-provided data, so long as the
procedures used are reasonably designed to
obtain a response. A financial institution is
permitted, but not required, to make more
than one attempt to obtain applicantprovided data if the applicant does not
respond to an initial request.
5. Examples of procedures that are
generally reasonably designed to obtain a
response. Although a fact-based
determination, the following procedures
reflect practices concerning the time or
manner of collection that are generally
reasonably designed to obtain a response:
i. Timing of collection. A financial
institution requests applicant-provided data
early in the application process; for example,
at the time of a covered application, as
defined in § 1002.103. The earlier in the
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application process, the more likely the
timing of collection is reasonably designed to
obtain a response.
ii. Manner of collection. A financial
institution requests applicant-provided data
on the same form or in connection with other
required information. For example, a
financial institution requests applicantprovided data as part of a written application
form or on a separate data collection form
provided with the written application form.
See also comments 107(a)(18)–3, 107(a)(19)–
3, and 107(a)(20)–3, which discuss the use of
a separate data collection form for collecting
minority-owned business status, womenowned business status, and the ethnicity,
race, and sex of an applicant’s principal
owners.
6. Examples of procedures that are
generally not reasonably designed to obtain
a response. The following procedures reflect
practices concerning the time or manner of
collection that are generally not reasonably
designed to obtain a response. Depending on
the particular facts, however, these
procedures may be reasonably designed to
obtain a response; for example, if the
financial institution has evidence or a reason
to believe that under its procedures the
response rate would be similar to or better
than other alternatives.
i. Timing of collection. A financial
institution requests applicant-provided data
simultaneous with or after notifying an
applicant of its action taken on a covered
application.
ii. Manner of collection. A financial
institution requests applicant-provided data
in a manner that imposes unnecessary
applicant burden or is inconsistent with the
rest of its application process. For example,
collecting application information related to
the creditworthiness determination in
electronic form, but mailing a paper form to
the applicant seeking the data required under
§ 1002.107(a) that the financial institution
does not otherwise need for its
creditworthiness determination and requiring
the applicant to mail it back.
7. Updated applicant-provided data. A
financial institution reports updated
applicant-provided data if it obtains more
current data during the application process.
For example, if an applicant states it has 100
non-owners working for the business, but
then the applicant notifies the financial
institution that the number is actually 75, the
financial institution reports 75 non-owners
working for the business. For reporting of
verified applicant-provided information, see
§ 1002.107(b) and comment 107(b)–1.
8. Change in determination of small
business status. If a financial institution
changes its determination regarding an
applicant’s status as a small business under
§ 1002.106(b), it must follow the procedures
described in comments 106(b)–1 and –2.
107(c)(2) Previously collected data.
1. In general. A financial institution may
reuse certain previously collected data if the
requirements of § 1002.107(c)(2) are met. In
that circumstance, a financial institution
need not seek to collect the data anew in
connection with a subsequent covered
application. For example, if an applicant
applies for and is granted a term loan, and
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then subsequently applies for a credit card in
the same calendar year, the financial
institution need not request again the data set
forth in § 1002.107(c)(2). Similarly, if an
applicant applies for more than one covered
credit transaction at one time, a financial
institution need only ask once for the data set
forth in § 1002.107(c)(2).
2. Data that can be reused. Subject to the
requirements of § 1002.107(c)(2) and
comment 107(c)(2)–3, a financial institution
may reuse the following data:
§ 1002.107(a)(13) (census tract),
§ 1002.107(a)(14) (gross annual revenue),
§ 1002.107(a)(15) (NAICS code),
§ 1002.107(a)(16) (number of workers),
§ 1002.107(a)(17) (time in business),
§ 1002.107(a)(18) (minority-owned business
status), § 1002.107(a)(19) (women-owned
business status), § 1002.107(a)(20) (ethnicity,
race, and sex of principal owners), and
§ 1002.107(a)(21) (number of principal
owners). A financial institution is not,
however, permitted to reuse other data, such
as § 1002.107(a)(6) (credit purpose).
3. Previously reported data without a
substantive response. Section 1002.107(c)(2)
permits a financial institution to reuse
certain previously collected data to satisfy
§ 1002.107(a)(13) through (21), if certain
conditions are met. Data have not been
‘‘previously collected’’ within the meaning of
this provision if the applicant did not
provide a substantive response to the
financial institution’s request for that data
and the financial institution was not
otherwise able to obtain the requested data
(for example, from the applicant’s credit
report, tax returns, or through visual
observation or surname collection for race
and ethnicity information).
4. Collection in the same calendar year.
Pursuant to § 1002.107(c)(2)(i), data can be
reused if they are collected in the same
calendar year. For applications that span
more than one calendar year, the following
applies:
i. If the data are collected in connection
with a covered application in one calendar
year, but then final action was taken on the
application in the following calendar year,
the financial institution may consider the
data as collected in the year that final action
was taken on the application.
ii. If data are collected in connection with
a covered application in one calendar year,
a financial institution may reuse that data
pursuant to § 1002.107(c)(2) in a subsequent
application initiated in the same calendar
year, even if final action was taken on the
subsequent application in the following
calendar year.
5. Reason to believe data are inaccurate.
Whether a financial institution has reason to
believe data are inaccurate pursuant to
§ 1002.107(c)(2)(ii) depends on the particular
facts and circumstances. For example, a
financial institution may have reason to
believe data on the applicant’s womenowned business status, minority-owned
business status, and ethnicity, race, and sex
of principal owners may be inaccurate if it
knows that the applicant has had a change
in ownership.
6. Minority-owned business status and
women-owned business status. If the
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financial institution asked the applicant to
provide its minority-owned business status
or women-owned business status for
purposes of § 1002.107(a)(18) and (19) and
the applicant refused to provide the
information (such as by selecting ‘‘I do not
wish to provide this information’’ on a data
collection form or by telling the financial
institution that it did not wish to provide the
information), the financial institution may
use that response when reporting data for a
subsequent application pursuant to
§ 1002.107(c)(2). However, if the applicant
failed to respond (such as by leaving the
response to the question blank or by failing
to return a data collection form), the financial
institution must inquire about the applicant’s
minority-owned business status or womenowned business status, as applicable, because
the data were not previously obtained.
7. Principal owners’ ethnicity, race, and
sex. If the financial institution asked the
applicant to provide its principal owners’
ethnicity, race, or sex for purposes
§ 1002.107(a)(20) and the applicant refused to
provide the information (such as by selecting
‘‘I do not wish to provide this information’’
on a data collection form or by telling the
financial institution that it did not wish to
provide the information) or if the financial
institution reported ethnicity and race based
on visual observation and/or surname, the
financial institution may use these data when
reporting information for a subsequent
application under § 1002.107(c)(2). However,
if the applicant failed to respond (such as by
leaving the response to the question blank or
by failing to return a data collection form)
and the financial institution did not report
ethnicity and race based on visual
observation and/or surname, the financial
institution must inquire about the ethnicity,
race, and sex of the applicant’s principal
owners, as applicable, because the data were
not previously obtained.
Section 1002.108—Firewall
108(a) Definitions.
1. Involved in making any determination
concerning a covered application. An
employee or officer is involved in making a
determination concerning a covered
application if the employee or officer makes,
or otherwise participates in, a decision
regarding the evaluation of a covered
application or the creditworthiness of an
applicant for a covered credit transaction.
This includes, but is not limited to,
employees and officers serving as
underwriters. The decision that an employee
or officer makes or participates in must be
about a specific covered application. An
employee or officer is not involved in making
a determination concerning a covered
application if the employee or officer is
involved in making a decision that affects
covered applications generally, or interacts
with small businesses prior to them
becoming applicants or submitting a covered
application. This group might include
officers and employees who develop policies
and procedures, program systems, or conduct
marketing. Additionally, an employee or
officer is not involved in making a
determination concerning a covered
application if the employee or officer makes
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or participates in a decision after the
financial institution has taken final action on
the application, such as a decision about
servicing or collecting a covered credit
transaction. Furthermore, an officer or
employee is not involved in making a
determination concerning a covered
application for purposes of § 1002.108 if the
officer or employee simply uses a check box
form to confirm whether an applicant has
submitted all necessary documents or
handles a minor or clerical matter during the
application process, such as suggesting or
selecting a time for an appointment with an
applicant.
2. Should have access. i. General. A
financial institution may determine that an
employee or officer should have access for
purposes of § 1002.108 if that employee or
officer is assigned one or more job duties that
may require the employee or officer to collect
(based on visual observation, surname, or
otherwise), see, consider, refer to, or use
information otherwise subject to the
prohibition in § 1002.108(b). The employee
or officer does not have to be required to
collect, see, consider, refer to or use such
information or to actually collect, see,
consider, refer to or use such information. It
is sufficient if the employee or officer might
need to do so to perform the employee’s or
officer’s assigned job duties. For example, if
a loan officer’s job description states that the
loan officer may need to collect ethnicity and
race information based on visual observation
and/or surname or if the loan officer is
assigned the task of assisting applicants with
the completion of data collection forms, the
financial institution may determine that the
loan officer should have access. If a financial
institution determines that an employee or
officer who is involved in making any
determination concerning a covered
application should have access for purposes
of § 1002.108, the financial institution is
responsible for ensuring that the employee or
officer only accesses and uses the protected
information for lawful purposes.
ii. When a group of employees or officers
should have access. A financial institution
may determine that all employees or officers
with the same job description or assigned
duties should have access for purposes of
§ 1002.108. If a job description assigns one or
more tasks that may require access to one or
more applicants’ responses to the financial
institution’s inquiries under
§ 1002.107(a)(18) through (20), the financial
institution may determine that all employees
and officers who share that job description
should have access for purposes of
§ 1002.108. For example, if the job
description for the position of loan officer
states that a loan officer may have to
distribute, collect, and help applicants
complete a data collection form that asks
about the applicant’s minority-owned
business status, women-owned business
status, and its principal owners’ ethnicity,
race, and sex, the financial institution may
determine that all employees and officers
who have been assigned the position of loan
officer should have access for purposes of
§ 1002.108.
108(b) Prohibition on access to certain
information.
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1. Scope of information subject to the
prohibition. i. When the prohibition applies.
The prohibition in § 1002.108(b) applies only
to an applicant’s responses to the inquiries
that the covered financial institution makes
to satisfy § 1002.107(a)(18) through (20). For
example, if a financial institution satisfies
§ 1002.107(a)(18) through (20) by using a
paper data collection form to ask an
applicant if it is a minority-owned business,
if it is a women-owned business, and for the
ethnicity, race, and sex of its principal
owners, the prohibition applies to the
responses that the applicant provides on the
paper data collection form and any other
paper or electronic records that the financial
institution creates based on the applicant’s
responses provided on the paper data
collection form. Similarly, if a financial
institution satisfies § 1002.107(a)(18) through
(20) by asking an applicant about its
minority-owned business status, its womenowned business status, and the ethnicity,
race, and sex of its principal owners during
a telephone call, the prohibition applies to
the responses to those inquiries provided
during that telephone call and to any records
created on the basis of those responses.
ii. When the prohibition does not apply.
Because the prohibition in § 1002.108(b) only
applies to the applicant’s responses to the
inquiries that the financial institution makes
to satisfy § 1002.107(a)(18) through (20), the
prohibition does not apply to ethnicity or
race information about principal owners that
the financial institution collects via visual
observation or surname. Additionally, the
prohibition in § 1002.108(b) does not apply
to an applicant’s responses to inquiries
regarding minority-owned or women-owned
business status, or principal owners’
ethnicity, race, or sex, made for other
purposes. Thus, an employee or officer who
obtains information to determine if an
applicant is eligible for a Small Business
Administration program for women-owned
businesses may make determinations
concerning the applicant’s covered
application without regard to whether the
exception in § 1002.108(c) is satisfied.
Additionally, § 1002.108(b) does not prohibit
an employee or officer from making a
determination regarding a covered
application if the employee or officer
generally knows that an applicant is a
minority-owned business or women-owned
business or knows the ethnicity, race, or sex
of any of the applicant’s principal owners
due to activities unrelated to the inquiries
made to satisfy the financial institution’s
obligations under subpart B of this part.
Thus, an employee or officer who knows, for
example, that an applicant is a minorityowned business due to social relationships or
other professional relationships with the
applicant or any of its principal owners may
make determinations concerning the
applicant’s covered application.
2. Scope of persons subject to the
prohibition. The prohibition in § 1002.108(b)
applies to an employee or officer of a covered
financial institution or its affiliate if the
employee or officer is involved in making
any determination concerning a covered
application. For example, if a financial
institution is affiliated with company B and
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an employee of company B is involved in
making a determination regarding a covered
application on behalf of the financial
institution, then the financial institution
must comply with § 1002.108 with regard to
company B’s employee. Section 1002.108
does not require a financial institution to
limit the access of employees and officers of
third parties who are not affiliates of the
financial institution. Section 1002.108 does
not require a financial institution to limit the
access of third parties (who are not
employees or officers of the financial
institution or its affiliates) through whom the
financial institution receives covered
applications.
108(c) Exception to the prohibition on
access to certain information.
1. General. A financial institution is not
required to limit the access of a particular
employee or officer who is involved in
making determinations concerning covered
applications if the financial institution
determines that the particular employee or
officer should have access to the information
collected pursuant to § 1002.107(a)(18)
through (20) and the financial institution
provides the notice required by
§ 1002.108(d). A financial institution can also
determine that several employees and
officers should have access or that all of a
group of similarly situated employees or
officers should have access. See comment
108(a)–2. However, the financial institution
cannot permit all employees and officers to
have access simply because it has determined
that one or more employees or officers
should have access. For example, a financial
institution may determine that a single
compliance officer or all of its compliance
officers should have access and then permit
one or all of its compliance officers,
respectively, to have access. However, the
financial institution cannot permit other
employees or officers to have access unless
it independently determines that they should
have access.
108(d) Notice.
1. General. If a financial institution
determines that one or more employees or
officers should have access pursuant to
§ 1002.108(c), the financial institution must
provide the required notice to, at a minimum,
the applicant or applicants whose responses
will be accessed by an employee or officer
involved in making determinations regarding
the applicant’s or applicants’ covered
applications. Alternatively, the financial
institution may also provide the required
notice to larger group of applicants,
including all applicants, if it determines that
one or more officers or employees should
have access.
2. Content of the required notice. The
notice must inform the applicant that one or
more employees and officers involved in
making determinations regarding the
applicant’s covered application may have
access to the applicant’s responses regarding
the applicant’s minority-owned business
status, women-owned business status, and its
principal owners’ ethnicity, race, and sex.
The financial institution may, but is not
required to, provide the notice on its data
collection form. If the financial institution
provides the notice on an electronic or paper
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data collection form, the notice must use
language substantially similar to the
following: ‘‘Employees and officers making
determinations concerning an application,
such as loan officers and underwriters, may
have access to the information provided on
this form.’’ If the financial institution
provides the notice orally, it must use
language substantially similar to the
following: ‘‘Employees and officers making
determinations concerning your application,
such as loan officers and underwriters, may
have access to your responses regarding your
minority-owned business status, your
women-owned business status, and your
principal owners’ ethnicity, race, or sex.’’
3. Timing for providing the notice. If the
financial institution is providing the notice
orally, it must provide the notice required by
§ 1002.108(d) prior to asking the applicant if
it is a minority-owned business or womenowned business and prior to asking for a
principal owner’s ethnicity, race, or sex. If
the notice is provided on the same paper or
electronic data collection form as the
inquiries about minority-owned business
status, women-owned business status, and
the principal owners’ ethnicity, race, or sex,
the notice must appear at the top of the form.
If the notice is provided in an electronic or
paper document that is separate from the
data collection form, the notice must be
provided at the same time as the data
collection form or prior to providing data
collection form. Additionally, the notice
must be provided with the nondiscrimination notices required pursuant to
§ 1002.107(a)(18) through (20). See appendix
E.
Section 1002.109—Reporting of Data to the
Bureau
109(a) Reporting to the Bureau.
109(a)(2) Reporting by subsidiaries.
1. Subsidiaries. A covered financial
institution is considered a subsidiary of
another covered financial institution for
purposes of reporting data pursuant to
§ 1002.109 if more than 50 percent of the
ownership or control of the first covered
financial institution is held by the second
covered financial institution.
109(a)(3) Reporting obligations where
multiple financial institutions are involved in
a covered credit transaction.
1. General. The following provides
guidance on how to report originations and
applications involving more than one
institution. The discussion below assumes
that all of the parties are covered financial
institutions. However, the same principles
apply if any of the parties is not a covered
financial institution. See also comment
109(a)(3)–2 (providing examples of
transactions involving more than one
financial institution) and comment 109(a)(3)–
3 (discussing how to report actions taken by
agents).
i. Only one financial institution reports
each originated covered credit transaction as
an origination. If more than one financial
institution was involved in the origination of
a covered credit transaction, the financial
institution that made the final credit decision
approving the application reports the covered
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credit transaction as an origination. It is not
relevant whether the covered credit
transaction closed or, in the case of an
application, would have closed in the
financial institution’s name. If more than one
financial institution approved an application
prior to closing or account opening and one
of those financial institutions purchased the
covered credit transaction after closing, the
financial institution that purchased the
covered credit transaction after closing
reports the covered credit transaction as an
origination. If a financial institution reports
a transaction as an origination, it reports all
of the information required for originations,
even if the covered credit transaction was not
initially payable to the financial institution
that is reporting the covered credit
transaction as an origination.
ii. In the case of an application for a
covered credit transaction that did not result
in an origination, a financial institution
reports the action it took on that application
if it made a credit decision on the application
or was reviewing the application when the
application was withdrawn or closed for
incompleteness. It is not relevant whether the
financial institution received the application
directly from the applicant or indirectly
through another party, such as a broker, or
whether another financial institution also
reviewed and reported an action taken on the
same application.
2. Examples. The following scenarios
illustrate how a financial institution reports
a particular application or originated covered
credit transaction. The illustrations assume
that all of the parties are covered financial
institutions. However, the same principles
apply if any of the parties is not a covered
financial institution.
i. Financial Institution A received a
covered application from an applicant and
forwarded that application to Financial
Institution B. Financial Institution B
reviewed the application and approved the
covered credit transaction prior to closing.
The covered credit transaction closed in
Financial Institution A’s name. Financial
Institution B purchased the covered credit
transaction from Financial Institution A after
closing. Financial Institution B was not
acting as Financial Institution A’s agent.
Since Financial Institution B made the final
credit decision prior to closing, Financial
Institution B reports the application as an
origination. Financial Institution A does not
report the application.
ii. Financial Institution A received a
covered application from an applicant and
forwarded that application to Financial
Institution B. Financial Institution B
reviewed the application before the covered
credit transaction would have closed, but the
application did not result in an origination
because Financial Institution B denied the
application. Financial Institution B was not
acting as Financial Institution A’s agent.
Since Financial Institution B made the credit
decision, Financial Institution B reports the
application as a denial. Financial Institution
A does not report the application. If, under
the same facts, the application was
withdrawn before Financial Institution B
made a credit decision, Financial Institution
B would report the application as withdrawn
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and Financial Institution A would not report
the application.
iii. Financial Institution A received a
covered application from an applicant and
approved the application before closing the
loan in its name. Financial Institution A was
not acting as Financial Institution B’s agent.
Financial Institution B later purchased the
covered credit transaction from Financial
Institution A. Financial Institution B did not
review the application before closing.
Financial Institution A reports the
application as an origination. Financial
Institution B has no reporting obligation for
this transaction.
iv. Financial Institution A received a
covered application from an applicant. If
approved, the covered credit transaction
would have closed in Financial Institution
B’s name. Financial Institution A denied the
application without sending it to Financial
Institution B for approval. Financial
Institution A was not acting as Financial
Institution B’s agent. Since Financial
Institution A made the credit decision before
the loan would have closed, Financial
Institution A reports the application.
Financial Institution B does not report the
application.
v. Financial Institution A reviewed a
covered application and made the credit
decision to approve a covered credit
transaction using the underwriting criteria
provided by a third party (e.g., another
financial institution or party). The third party
did not review the application and did not
make a credit decision prior to closing.
Financial Institution A was not acting as the
third party’s agent. Financial Institution A
reports the application. The third party has
no reporting obligation for this application.
Assume the same facts, except that Financial
Institution A made a credit decision to
approve the application, and the applicant
chose not to accept the covered credit
transaction from Financial Institution A.
Financial Institution A reports the
application as approved but not accepted and
the third party does not report the
application.
vi. Financial Institution A reviewed and
made the credit decision on a covered
application based on the criteria of a thirdparty insurer or guarantor (for example, a
government or private insurer or guarantor).
Financial Institution A reports the action
taken on the application.
vii. Financial Institution A received a
covered application and forwarded it to
Financial Institutions B and C. Financial
Institution A made a credit decision, acting
as Financial Institution D’s agent, and
approved the application. Financial
Institution B made a credit decision
approving the application, and Financial
Institution C made a credit decision denying
the application. The applicant did not accept
the covered credit transaction from Financial
Institution D. Financial Institution D reports
the application as approved but not accepted.
Financial Institution A does not report the
application. The applicant accepted the offer
of credit from Financial Institution B, and
credit was extended. Financial Institution B
reports the origination. Financial Institution
C reports the application as denied.
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3. Agents. If a covered financial institution
made a credit decision on a covered
application through the actions of an agent,
the financial institution reports the
application. For example, acting as Financial
Institution A’s agent, Financial Institution B
approved an application prior to closing and
a covered credit product was originated.
Financial Institution A reports the covered
credit product as an origination. State law
determines whether one party is the agent of
another.
109(b) Financial institution identifying
information.
Paragraph 109(b)(4).
1. Federal prudential regulator. For
purposes of § 1002.109(b)(4), Federal
prudential regulator means, if applicable, the
Federal prudential regulator for a financial
institution that is a depository institution as
determined pursuant to section 3q of the
Federal Deposit Insurance Act (12 U.S.C.
1813(q)), including the Office of the
Comptroller of the Currency, the Federal
Deposit Insurance Corporation, or the Board
of Governors of the Federal Reserve System;
or the National Credit Union Administration
Board for financial institutions that are
Federal credit unions.
2. Change in Federal prudential regulator.
If the Federal prudential regulator for a
financial institution changes (as a
consequence of a merger or a change in the
institution’s charter, for example), the
institution must identify its new Federal
prudential regulator in its data submission
under § 1002.109 for the calendar year of the
change. For example, if a financial
institution’s Federal prudential regulator
changes in February 2026, it must identify its
new Federal prudential regulator in the
annual submission for its 2026 data (which
is due by June 1, 2027) pursuant to
§ 1002.109(b)(4).
Paragraph 109(b)(5).
1. Federal Taxpayer Identification Number.
If a financial institution obtains a new
Federal Taxpayer Identification Number
(TIN), it should provide the new number in
its subsequent data submission. For example,
if two financial institutions that previously
reported data under subpart B of this part
merge and the surviving institution retained
its Legal Entity Identifier but obtained a new
TIN, then the surviving institution should
report the new TIN with its data submission.
For example, if a financial institution’s TIN
changes in February 2026, it must identify its
new TIN in the annual submission for its
2026 data (which is due by June 1, 2027)
pursuant to § 1002.109(b)(5).
Paragraph 109(b)(6).
1. Legal Entity Identifier (LEI). A Legal
Entity Identifier is a utility endorsed by the
LEI Regulatory oversight committee, or a
utility endorsed or otherwise governed by the
Global LEI Foundation (GLEIF) (or any
successor of the GLEIF) after the GLEIF
assumes operational governance of the global
LEI system. A financial institution complies
with § 1002.109(b)(6) by reporting its current
LEI number. A financial institution that does
not currently possess an LEI number must
obtain an LEI number, and has an ongoing
obligation to maintain the LEI number. The
GLEIF website provides a list of LEI issuing
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organizations. A financial institution may
obtain an LEI, for purposes of complying
with § 1002.109(b)(6), from any one of the
issuing organizations listed on the GLEIF
website.
Paragraph 109(b)(7).
1. RSSD ID number. The RSSD ID is a
unique identifying number assigned to
institutions, including main offices and
branches, by the Board of Governors of the
Federal Reserve System. A financial
institution’s RSSD ID may be found on the
website of the National Information Center,
which provides comprehensive financial and
structure information on banks and other
institutions for which the Federal Reserve
Board has a supervisory, regulatory, or
research interest including both domestic
and foreign banking organizations that
operate in the United States. If a financial
institution does not have an RSSD ID, it
reports that this information is not
applicable.
Paragraph 109(b)(8).
1. Immediate parent entity. An entity is the
immediate parent of a financial institution
for purposes of § 1002.109(b)(8)(i) through
(iii) if it is a separate entity that directly owns
more than 50 percent of the financial
institution.
2. Top-holding parent entity. An entity is
the top-holding parent of a financial
institution for purposes of
§ 1002.109(b)(8)(iv) through (vi) if it
ultimately owns more than 50 percent of the
financial institution, and the entity itself is
not controlled by any other entity. If the
immediate parent entity and the top-holding
parent entity are the same, the financial
institution reports that § 1002.109(b)(8)(iv)
through (vii) are not applicable.
3. LEI. For purposes of § 1002.109(b)(8)(ii)
and (v), a financial institution shall report the
LEI of a parent entity if the parent entity has
an LEI number. If a financial institution’s
parent entity does not have an LEI, the
financial institution reports that this
information is not applicable.
4. RSSD ID numbers. For purposes of
§ 1002.109(b)(8)(iii) and § 1002.109(b)(8)(vi),
a financial institution shall report the RSSD
ID number of a parent entity if the entity has
an RSSD ID number. If a financial
institution’s parent entity does not have an
RSSD ID, the financial institution reports that
this information is not applicable.
Paragraph 109(b)(9).
1. Type of financial institution. A financial
institution complies with § 1002.109(b)(9) by
selecting the applicable type or types of
financial institution from the list below. A
financial institution shall select all
applicable types.
i. Bank or savings association.
ii. Minority depository institution.
iii. Credit union.
iv. Nondepository institution.
v. Community development financial
institution (CDFI).
vi. Other nonprofit financial institution.
vii. Farm Credit System institution.
viii. Government lender.
ix. Commercial finance company.
x. Equipment finance company.
xi. Industrial loan company.
xii. Fintech.
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xiii. Other.
2. Use of ‘‘other’’ for type of financial
institution. A financial institution reports
type of financial institution as ‘‘other’’ where
none of the enumerated types of financial
institution appropriately describe the
applicable type of financial institution, and
the institution reports the type of financial
institution as free-form text. A financial
institution that selects at least one type from
the list is permitted, but not required, to also
report ‘‘other’’ (with appropriate free-form
text) if there is an additional aspect of its
business that is not one of the enumerated
types set out in comment 109(b)(9)–1.
Paragraph 109(b)(10).
1. Financial institutions that voluntarily
report covered applications under subpart B
of this part. A financial institution that is not
a covered financial institution pursuant to
§ 1002.105(b) but that elects to voluntarily
compile, maintain, and report data under
§§ 1002.107 through 1002.109 (see comment
1002.105(b)–6) complies with
§ 1002.109(b)(10) by selecting ‘‘voluntary
reporter.’’
109(c) Procedures for the submission of
data to the Bureau.
1. Filing Instructions Guide. The Bureau
includes in the Filing Instructions Guide
additional details and procedures for the
submission of data to the Bureau pursuant to
§ 1002.109, as well as any related materials,
which are available at [a designated Bureau
website].
Section 1002.110—Publication of Data
110(c) Statement of financial institution’s
small business lending data available on the
Bureau’s website.
1. Statement. A financial institution shall
provide the statement required by
§ 1002.110(c) using the following, or
substantially similar, language:
Small Business Lending Data Notice
Data about our small business lending are
available online for review at the Consumer
Financial Protection Bureau’s website at [a
designated Bureau website]. The data show
the geographic distribution of our small
business lending applications; information
about our loan approvals and denials; and
demographic information about the principal
owners of our small business applicants. The
Bureau may delete or modify portions of our
data prior to posting it if the Bureau
determines that doing so would advance a
privacy interest. Small business lending data
for many other financial institutions are also
available at this website.
2. website. A financial institution without
a website complies with § 1002.110(c) by
making a written statement using the
language in comment 110(c)–1, or
substantially similar language, available
upon request.
Section 1002.111—Recordkeeping
111(a) Record retention.
1. Evidence of compliance. Section
1002.111(a) requires a financial institution to
retain evidence of compliance with subpart
B of this part for at least three years after its
small business lending application register is
required to be submitted to the Bureau
pursuant to § 1002.109. In addition to the
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financial institution’s small business lending
application register, such evidence of
compliance is likely to include, but is not
limited to, the applications for credit from
which information in the register is drawn,
as well as the files or documents that, under
§ 1002.111(b), are kept separate from the
applications for credit.
2. Record retention for creditors under
§ 1002.5(a)(4)(vii) and (viii). A creditor that is
voluntarily, under § 1002.5(a)(4)(vii) and
(viii), collecting information pursuant to
subpart B of this part complies with
§ 1002.111(a) by retaining evidence of
compliance with subpart B for at least three
years after June 1 of the year following the
year that data was collected.
111(b) Certain information kept separate
from the rest of the application.
1. Separate from the application. A
financial institution may satisfy the
requirement in § 1002.111(b) by keeping an
applicant’s responses to the financial
institution’s request pursuant to
§ 1002.107(a)(18) through (20) in a file or
document that is discrete or distinct from the
application and its accompanying
information. For example, such information
could be collected on a piece of paper that
is separate from the rest of the application
form. In order to satisfy the requirement in
§ 1002.111(b), an applicant’s responses to the
financial institution’s request pursuant to
§ 1002.107(a)(18) through (20) need not be
maintained in a separate electronic system,
nor need they be removed from the physical
files containing the application. However, the
financial institution may nonetheless need to
keep this information in a different electronic
or physical file in order to satisfy the
requirements of § 1002.108.
111(c) Limitation on personally identifiable
information in records retained under this
section.
1. Small business lending application
register. The prohibition in § 1002.111(c)
applies to data compiled and maintained
pursuant to § 1002.107, data in the small
business lending application register
submitted by the financial institution to the
Bureau under § 1002.109, the version of the
register that the financial institution
maintains under § 1002.111(a), and the
separate record of certain information created
pursuant to § 1002.111(b).
2. Examples. Section 1002.111(c) prohibits
a financial institution from including any
name, specific address (other than the census
tract required under § 1002.107(a)(13)),
telephone number, or email address in the
data it compiles and maintains pursuant to
§ 1002.107, in its records under
§ 1002.111(b), or in data reported to the
Bureau under § 1002.109. It likewise
prohibits a financial institution from
including any personally identifiable
information concerning any individual who
is, or is connected with, an applicant, except
as required pursuant to § 1002.107 or
§ 1002.111(b). Examples of such personally
identifiable information that a financial
institution may not include in its small
business lending application register include,
but are not limited to, the following: Date of
birth, Social Security number, official
government-issued driver’s license or
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identification number, alien registration
number, government passport number, or
employer or taxpayer identification number.
3. Other records. The prohibition in
§ 1002.111(c) does not extend to the
application or any other records that the
financial institution maintains.
4. Name and business contact information
for submission. The prohibition in
§ 1002.111(c) does not bar financial
institutions from providing to the Bureau,
pursuant to § 1002.109(b)(3), the name and
business contact information of the person
who may be contacted with questions about
the financial institution’s submission under
§ 1002.109.
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Section 1002.112—Enforcement
112(b) Bona fide errors.
1. Tolerances for bona fide errors. Section
1002.112(b) provides that a financial
institution is presumed to maintain
procedures reasonably adapted to avoid
errors with respect to a given data field if the
number of errors found in a random sample
of the financial institution’s data submission
for the data field does not equal or exceed a
threshold specified by the Bureau for this
purpose. The Bureau’s thresholds appear in
column C of the table in appendix H. The
size of the random sample, set out in column
B, shall depend on the size of the financial
institution’s small business lending
application register, as shown in column A
of the table in appendix H. A financial
institution has not maintained procedures
reasonably adapted to avoid errors if either
there is a reasonable basis to believe the error
was intentional or there is other evidence
that the financial institution has not
maintained procedures reasonably adapted to
avoid errors. To illustrate, assume that a
financial institution has incorrectly coded
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withdrawn applications as denials to such an
extent that it likely prevents reliable fair
lending analysis of underwriting disparities.
If so, the errors would not be deemed bona
fide errors under § 1002.112(b) and would
violate the Act and this Regulation.
2. Tolerances and data fields. For purposes
of determining whether an error is bona fide
under § 1002.112(b), the term ‘‘data field’’
generally refers to individual fields.
However, with respect to information on the
ethnicity and race of an applicant’s principal
owner, a data field group consists of more
than one field. If one or more of the fields
within an ethnicity or race field group have
errors, they count as one (and only one) error
for that data field group. For instance, in the
ethnicity data field group, if an applicant
indicates that one of its principal owners is
Cuban, but the financial institution reports
that the principal owner is Mexican and
Puerto Rican, the financial institution has
made errors in two fields within the ethnicity
data field group for that principal owner. For
purposes of the error threshold table in
appendix H, the financial institution is
deemed to have made one error. However, a
financial institution that makes, for example,
one error in the race data field group and one
error in the ethnicity field group regarding a
particular principal owner has made two
errors for purposes of the error threshold
table in appendix H.
3. Tolerances and safe harbors. An error
that meets the criteria for one of the four safe
harbor provisions in § 1002.112(c) is not
counted as an error for purposes of
determining whether a financial institution
has exceeded the relevant error threshold in
appendix H for a given data field.
112(c) Safe harbors.
1. Information from a Federal agency—
census tract. Section 1002.112(c)(1) provides
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that an incorrect entry for census tract is not
a violation of the Act or subpart B of this
part, if the financial institution obtained the
census tract using a geocoding tool provided
by the FFIEC or the Bureau. However, this
safe harbor provision does not extend to a
financial institution’s failure to provide the
correct census tract number for a covered
application on its small business lending
application register, as required by
§ 1002.107(a)(13), because the FFIEC or
Bureau geocoding tool did not return a
census tract for the address provided by the
financial institution. In addition, this safe
harbor provision does not extend to a census
tract error that results from a financial
institution entering an inaccurate address
into the FFIEC or Bureau geocoding tool.
2. Applicability of NAICS code safe harbor.
A financial institution is permitted to rely on
an applicant’s representations or on other
information regarding the NAICS code as
described in comments 107(a)(15)–3 and –4.
The safe harbor in § 1002.112(c)(2) applies
when a financial institution does not rely on
such information, but instead the financial
institution identifies the NAICS code for an
applicant and the NAICS code is incorrect.
Where the incorrect NAICS code entry is due
to an unintentional error, the safe harbor in
§ 1002.112(c)(2) may apply in addition to the
bona fide error provision in § 1002.112(b),
provided its requirements are met.
*
*
*
*
*
Dated: August 31, 2021.
David Uejio,
Acting Director, Bureau of Consumer
Financial Protection.
[FR Doc. 2021–19274 Filed 9–30–21; 4:15 pm]
BILLING CODE 4810–25–P
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[Federal Register Volume 86, Number 193 (Friday, October 8, 2021)]
[Proposed Rules]
[Pages 56356-56606]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-19274]
[[Page 56355]]
Vol. 86
Friday,
No. 193
October 8, 2021
Part II
Bureau of Consumer Financial Protection
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12 CFR Part 1002
Small Business Lending Data Collection Under the Equal Credit
Opportunity Act (Regulation B); Proposed Rule
Federal Register / Vol. 86 , No. 193 / Friday, October 8, 2021 /
Proposed Rules
[[Page 56356]]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1002
[Docket No. CFPB-2021-0015]
RIN 3170-AA09
Small Business Lending Data Collection Under the Equal Credit
Opportunity Act (Regulation B)
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Proposed rule; request for public comment.
-----------------------------------------------------------------------
SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is
publishing for public comment a proposed rule amending Regulation B to
implement changes to the Equal Credit Opportunity Act (ECOA) made by
section 1071 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act). Consistent with section 1071, the
Bureau is proposing to require covered financial institutions to
collect and report to the Bureau data on applications for credit for
small businesses, including those that are owned by women or
minorities. The Bureau's proposal also addresses its approach to
privacy interests and the publication of section 1071 data; shielding
certain demographic data from underwriters and other persons;
recordkeeping requirements; enforcement provisions; and the proposed
rule's effective and compliance dates.
DATES: Comments must be received on or before January 6, 2022.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2021-
0015 or RIN 3170-AA09, by any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include Docket No. CFPB-
2021-0015 or RIN 3170-AA09 in the subject line of the message.
Mail/Hand Delivery/Courier: Comment Intake--Section 1071
Small Business Lending Data Collection, Bureau of Consumer Financial
Protection, 1700 G Street NW, Washington, DC 20552.
Instructions: The Bureau encourages the early submission of
comments. All submissions should include the agency name and docket
number or Regulatory Information Number (RIN) for this rulemaking.
Because paper mail in the Washington, DC area and at the Bureau is
subject to delay, and in light of difficulties associated with mail and
hand deliveries during the COVID-19 pandemic, commenters are encouraged
to submit comments electronically. In general, all comments received
will be posted without change to https://www.regulations.gov. In
addition, once the Bureau's headquarters reopens, comments will be
available for public inspection and copying at 1700 G Street NW,
Washington, DC 20552, on official business days between the hours of 10
a.m. and 5 p.m. Eastern Time. At that time, you can make an appointment
to inspect the documents by telephoning 202-435-7275.
All comments, including attachments and other supporting materials,
will become part of the public record and subject to public disclosure.
Proprietary information or sensitive personal information, such as
account numbers or Social Security numbers, or names of other
individuals, should not be included. Comments will not be edited to
remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Camille Gray, Paralegal Specialist;
Tola Adenuga, Regulatory Implementation and Guidance Specialist;
Tarrian Ellis, Honors Attorney; Jaydee DiGiovanni, Counsel; Kristine M.
Andreassen, Pavitra Bacon, Benjamin Cady, Joseph Devlin, Amy Durant,
Gregory Evans, David Jacobs, Kathryn Lazarev, Lawrence Lee, Kristen
Phinnessee, or Michael Scherzer, Senior Counsels, Office of
Regulations, at 202-435-7700 or https://reginquiries.consumerfinance.gov/. If you require this document in an
alternative electronic format, please contact
[email protected].
SUPPLEMENTARY INFORMATION:
I. Summary of the Proposed Rule
In 2010, Congress passed the Dodd-Frank Act. Section 1071 of that
Act amended ECOA\1\ to require that financial institutions collect and
report to the Bureau certain data regarding applications for credit for
women-owned, minority-owned, and small businesses.\2\ Section 1071's
statutory purposes are to (1) facilitate enforcement of fair lending
laws, and (2) enable communities, governmental entities, and creditors
to identify business and community development needs and opportunities
of women-owned, minority-owned, and small businesses.
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\1\ 15 U.S.C. 1691 et seq.
\2\ Public Law 111-203, tit. X, section 1071, 124 Stat. 1376,
2056 (2010), codified at ECOA section 704B, 15 U.S.C. 1691c-2.
---------------------------------------------------------------------------
Section 1071 specifies a number of data points that financial
institutions are required to collect and report, and also provides
authority for the Bureau to require any additional data that the Bureau
determines would aid in fulfilling section 1071's statutory purposes.
Section 1071 also contains a number of other requirements, including
those that address restricting the access of underwriters and other
persons to certain 1071 data; recordkeeping; publication of 1071 data;
and modifications or deletions of data prior to publication in order to
advance a privacy interest.
Section 1071 directs the Bureau to prescribe such rules and issue
such guidance as may be necessary to carry out, enforce, and compile
data pursuant to section 1071, and permits the Bureau to adopt
exceptions to any requirement or to exempt financial institutions from
the requirements of section 1071 as the Bureau deems necessary or
appropriate to carry out the purposes of section 1071. The Bureau is
proposing to add a new subpart B to Regulation B to implement the
requirements of section 1071.\3\ Key aspects of the Bureau's proposal
are summarized below.
---------------------------------------------------------------------------
\3\ The Bureau interpreted section 1071 to mean that obligations
for financial institutions to collect, maintain, and submit data
``do not arise until the Bureau issues implementing regulations and
those regulations take effect.'' See Letter from Leonard Kennedy,
General Counsel, CFPB, to Chief Executive Officers of Financial
Institutions under Section 1071 of the Dodd-Frank Act (Apr. 11,
2011), https://files.consumerfinance.gov/f/2011/04/GC-letter-re-1071.pdf.
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If finalized, the Bureau's proposed rule would create the first
comprehensive database of small business credit applications in the
United States. This would include critical information about women-
owned and minority-owned small businesses to help regulators and the
public identify and address fair lending concerns. The database would
also enable a range of stakeholders to better identify business and
community development needs and opportunities for small businesses,
including women-owned and minority-owned small businesses. Just as the
Bureau works in other ways to help foster fairness and opportunity in
consumer financial services markets for all consumers, the proposed
1071 rule is structured to realize these same goals for the small
business market--for all small businesses within the scope of the rule,
including those that are owned by women and minorities. Research
indicates that minority-owned small businesses face particular
obstacles, as do those that are women-owned, but the current lack of
comprehensive, quantitative data has made it difficult to understand
the extent of these obstacles and address them with responsive
[[Page 56357]]
policy. By shining a light on lending practices in this area, the
Bureau believes that the 1071 data would not only foster a culture of
compliance but bring particular attention to the underserved parts of
the small business market that have traditionally faced the greatest
obstacles to success. In this way, the proposed rule is intended to
help small businesses drive inclusive and equitable growth.
Scope. The Bureau is proposing to require financial institutions to
collect and report 1071 data regarding applications for credit for
small businesses, including those that are owned by women and
minorities. The Bureau is not proposing to require that financial
institutions collect and report data regarding applications for women-
owned and minority-owned businesses that are not small. Because most
existing businesses are small businesses, covering small businesses
necessarily means nearly all women-owned and minority-owned businesses
will also be covered. The Bureau believes that this scope is consistent
with the statute and will allow the rule to carry out section 1071's
purposes without requiring collection of data that would be of limited
utility.
Covered financial institutions. Consistent with language from
section 1071, the Bureau is proposing to define a ``financial
institution'' to include any partnership, company, corporation,
association (incorporated or unincorporated), trust, estate,
cooperative organization, or other entity that engages in any financial
activity. Under the proposed definition, the Bureau's 1071 rule would
apply to a variety of entities that engage in small business lending,
including depository institutions (i.e., banks, savings associations,
and credit unions),\4\ online lenders, platform lenders, community
development financial institutions (both depository and nondepository
institutions), lenders involved in equipment and vehicle financing
(captive financing companies and independent financing companies),
commercial finance companies, governmental lending entities, and
nonprofit nondepository lenders.\5\
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\4\ For purposes of this notice of proposed rulemaking, the
Bureau is using the term depository institution to mean any bank or
savings association defined by the Federal Deposit Insurance Act, 12
U.S.C. 1813(c)(1), or credit union defined pursuant to the Federal
Credit Union Act, 12 U.S.C. 1751 et seq., as implemented by 12 CFR
700.2. The Bureau notes that the Dodd-Frank Act defines a depository
institution to mean any bank or savings association defined by the
Federal Deposit Insurance Act, 12 U.S.C. 1811 et seq.; there, that
term does not encompass credit unions. 12 U.S.C. 5301(18)(A),
1813(c)(1). To facilitate analysis and discussion, the Bureau is
referring to banks and savings associations together with credit
unions as depository institutions throughout this notice, unless
otherwise specified.
\5\ The Bureau's rules, including this proposed rule to
implement section 1071, generally do not apply to motor vehicle
dealers, as defined in section 1029(f)(2) of the Dodd-Frank Act,
that are predominantly engaged in the sale and servicing of motor
vehicles, the leasing and servicing of motor vehicles, or both. 12
U.S.C. 5519.
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The Bureau's proposal uses the term ``covered financial
institution'' to refer to those financial institutions that would be
required to comply with section 1071's data collection and reporting
requirements. The Bureau is proposing that a covered financial
institution would be a financial institution that originated at least
25 covered credit transactions for small businesses in each of the two
preceding calendar years. The Bureau is not proposing an asset-based
exemption threshold for depository institutions, or any other general
exemptions for particular categories of financial institutions.
The Bureau is also proposing to permit creditors that are not
covered financial institutions to voluntarily collect and report data
under section 1071 in certain circumstances.
Covered credit transactions. The Bureau is proposing to require
that covered financial institutions collect and report data regarding
covered applications from small businesses for covered credit
transactions. The Bureau is proposing to define a ``covered credit
transaction'' as one that meets the definition of business credit under
existing Regulation B, with certain exceptions. Loans, lines of credit,
credit cards, and merchant cash advances (including such credit
transactions for agricultural purposes and those that are also covered
by the Home Mortgage Disclosure Act of 1975 (HMDA) \6\) would all be
covered credit transactions within the scope of this proposed rule. The
Bureau is proposing to exclude trade credit, public utilities credit,
securities credit, and incidental credit. Factoring, leases, consumer-
designated credit used for business purposes, and credit secured by
certain investment properties would also not be covered credit
transactions.
---------------------------------------------------------------------------
\6\ 12 U.S.C. 2801 et seq.
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Covered applications. The Bureau is proposing to define a ``covered
application''--which would trigger data collection and reporting and
related requirements--as an oral or written request for a covered
credit transaction that is made in accordance with procedures used by a
financial institution for the type of credit requested. This proposed
definition of covered application is largely consistent with the
existing Regulation B definition of that term. However, the Bureau is
also proposing that certain circumstances would not be covered
applications, even if they are considered applications under existing
Regulation B. Specifically, the Bureau is proposing that a covered
application does not include (1) reevaluation, extension, or renewal
requests on an existing business credit account, unless the request
seeks additional credit amounts; or (2) inquiries and prequalification
requests.
Small business definition. The Bureau is proposing to define a
``small business,'' about whose applications for credit data must be
collected and reported, by reference to the definitions of ``business
concern'' and ``small business concern'' as set out in the Small
Business Act \7\ and Small Business Administration (SBA) regulations.
However, in lieu of using the SBA's size standards for defining a small
business concern, the Bureau's proposed definition would look to
whether the business had $5 million or less in gross annual revenue for
its preceding fiscal year. The Bureau is seeking SBA approval for its
alternate small business size standard pursuant to the Small Business
Act.\8\
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\7\ 15 U.S.C. 631 et seq.
\8\ See 15 U.S.C. 632(a)(2)(C).
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Data to be collected and reported. The Bureau's proposal addresses
the data points that must be collected and reported by covered
financial institutions for covered applications from small businesses.
Many of the proposed data points are specifically enumerated in section
1071; for the others, the Bureau is proposing to use the authority
granted by section 1071 to require financial institutions to collect
and report any additional data that the Bureau determines would aid in
fulfilling the purposes of section 1071. Certain of these data points
are or could be collected from the applicant (or otherwise determined
based on information provided or authorized by the applicant); other
data points are based on information solely within the financial
institution's control. The Bureau is proposing that covered financial
institutions maintain procedures to collect applicant-provided data at
a time and in a manner that is reasonably designed to obtain a
response. The Bureau's proposal also addresses what financial
institutions should do if, despite having such procedures in place,
they are unable to obtain certain data from an applicant. A financial
institution would be permitted to rely on statements made by an
[[Page 56358]]
applicant (whether in writing or orally) or information provided by an
applicant when collecting and reporting 1071 data, although for most
data points if the financial institution verifies the information
provided it must report the verified information. The Bureau's proposal
would also permit financial institutions to reuse certain previously
collected data in certain circumstances.
As noted above, the Bureau's proposal includes certain data points
that are, or could be, provided by the applicant. Some data points
specifically relate to the credit being applied for: The credit type
(which includes information on the credit product, types of guarantees,
and loan term); The credit purpose; and the amount applied for. There
are also data points that relate to the applicant's business: A census
tract based on an address or location provided by the applicant; gross
annual revenue for the applicant's preceding full fiscal year; the 6-
digit North American Industry Classification System (NAICS) code
appropriate for the applicant; the number of workers that the applicant
has (i.e., non-owners working for the applicant); the applicant's time
in business; and the number of principal owners of the applicant.
There are also data points that would be provided by the applicant
addressing the demographics of the applicant's ownership: Whether the
applicant is a minority-owned business; whether the applicant is a
women-owned business; and the ethnicity, race, and sex of the
applicant's principal owners. The Bureau refers to these data points
collectively as an applicant's ``protected demographic information.''
The Bureau is proposing that principal owners' ethnicity and race be
collected from applicants using aggregate categories as well as
disaggregated subcategories. The Bureau is proposing to permit
principal owners to self-describe their sex (instead of or in addition
to choosing male and/or female), and is seeking comment on whether and,
if so, how its collection of principal owners' sex should incorporate
sexual orientation and gender identity in light of the recent Supreme
Court decision in Bostock v. Clayton County \9\ and the Bureau's
subsequent ECOA interpretive rule.\10\ If an applicant does not provide
any ethnicity, race, or sex information for any principal owners, the
Bureau is proposing that the financial institution must collect at
least one principal owner's race and ethnicity (but not sex) via visual
observation or surname, but only if the financial institution meets
with any principal owners in person or via electronic media with an
enabled video component. The Bureau is proposing detailed instructions
to assist financial institutions in collecting and reporting
applicants' protected demographic information pursuant to section 1071.
The Bureau is also proposing a sample data collection form, which would
include a required notice to applicants that the financial institution
cannot discriminate on the basis of an applicant's minority- or women-
owned business status or any principal owner's ethnicity, race, or sex.
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\9\ 140 S. Ct. 1731 (2020).
\10\ 86 FR 14363 (Mar. 16, 2021).
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In addition, the Bureau's proposal includes data points that would
be generated or supplied solely by the financial institution. These
data points include, for all applications: A unique identifier for each
application for or extension of credit; the application date; the
application method (i.e., the means by which the applicant submitted
its application); the application recipient (that is, whether the
financial institution or its affiliate received the application
directly, or whether it was received by the financial institution via a
third party); the action taken by the financial institution on the
application; and the action taken date. For denied applications, there
is also a data point for denial reasons. For applications that are
originated or approved but not accepted, there is a data point for the
amount originated or approved, and a data point for pricing information
(which would include, as applicable, interest rate, total origination
charges, broker fees, initial annual charges, additional cost for
merchant cash advances or other sales-based financing, and prepayment
penalties).
Firewall. The Bureau's proposal includes a section to implement the
requirement in section 1071 that certain data collected be shielded
from underwriters and certain other persons; the Bureau refers to this
as the ``firewall.'' An employee or officer of a financial institution
or a financial institution's affiliate that is involved in making any
determination concerning the application would be prohibited from
accessing an applicant's responses to inquiries that the financial
institution makes pursuant to section 1071 regarding whether the
applicant is a minority-owned or women-owned business, and the
ethnicity, race, and sex of the applicant's principal owners.
This prohibition would not apply to an employee or officer,
however, if the financial institution determines that it is not
feasible to limit that employee's or officer's access to an applicant's
responses to the financial institution's inquiries regarding the
applicant's protected demographic information, and the financial
institution provides a notice to the applicant regarding that access.
It would not be feasible to limit access if the financial institution
determines that an employee or officer involved in making any
determination concerning a covered application should have access to
one or more applicants' responses to inquiries regarding protected
demographic information. The notice must be provided to each applicant
whose information will be accessed or, alternatively, the financial
institution could provide the notice to all applicants whose
information could be accessed. The Bureau is proposing sample language
that a financial institution could use in providing this notice.
Reporting data to the Bureau; publication of data by the Bureau;
and privacy considerations. The Bureau is proposing to require that
1071 data be collected on a calendar year basis and reported to the
Bureau on or before June 1 of the following year. Financial
institutions reporting data to the Bureau would be required to provide
certain identifying information about themselves as part of their
submission. The Bureau is proposing to provide technical instructions
for the submission of 1071 data in a Filing Instructions Guide and
related materials.
The Bureau is proposing to make available to the public, on an
annual basis and on the Bureau's website, the data submitted to it by
financial institutions, subject to modifications or deletions made by
the Bureau, at its discretion, to protect privacy interests. To
determine whether and how the Bureau might use its discretion to modify
or delete data prior to publication, the Bureau is proposing a
``balancing test'' that would assess the risks and benefits of public
disclosure. After the Bureau receives at least one full year of 1071
data following the compliance date of the final rule, the Bureau plans
to issue a policy statement in which it would set forth its intended
modifications and deletions. The Bureau is also proposing that the
Bureau's publication of the data would satisfy financial institutions'
statutory obligation to make data available to the public upon request.
Recordkeeping, enforcement, severability, and effective and
compliance dates. The Bureau's proposal addresses issues related to
recordkeeping and to severability of the rule. It also addresses
enforcement of violations of the rule, along with provisions regarding
bona fide errors
[[Page 56359]]
under the rule as well as several safe harbors.
Finally, the Bureau is proposing that its final rule to implement
section 1071 would become effective 90 days after publication in the
Federal Register, though compliance with the rule would not be required
until approximately 18 months after publication in the Federal
Register. The Bureau is also proposing several related transitional
provisions that would permit covered financial institutions to begin
collecting applicants' protected demographic information prior to the
compliance date and would permit financial institutions to use a
different time period to determine whether they will be covered by the
rule as of the compliance date.
II. Background
As discussed above, in 2010, Congress enacted the Dodd-Frank Act.
Section 1071 of the Dodd-Frank Act, which amended ECOA, requires
financial institutions to collect and report to the Bureau data
regarding applications for credit for women-owned, minority-owned, and
small businesses. Section 1071 was adopted for the dual purposes of
facilitating fair lending enforcement and enabling communities,
governmental entities, and creditors to identify business and community
development needs and opportunities of such businesses. Section 1071
complements other Federal efforts to ensure fair lending and to promote
community development for small businesses, including through ECOA, the
Community Reinvestment Act of 1977 (CRA),\11\ and the Community
Development Financial Institutions (CDFI) Fund.\12\
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\11\ 12 U.S.C. 2901 et seq.
\12\ The Riegle Community Development Banking and Financial
Institutions Act of 1994, 12 U.S.C. 4701 et seq., authorized the
Community Development Financial Institution Fund (CDFI Fund). The
CDFI Fund is discussed in more detail in part II.F.2.ii below.
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The collection and subsequent publication of more robust and
granular data regarding credit applications for small businesses,
including those that are women- and minority-owned, will provide much-
needed transparency to the small business lending market. The current
COVID-19 pandemic has shown that transparency is essential,
particularly at a time of crisis, when small businesses, especially
those owned by women and minorities, may be in urgent need of credit in
order to recover from economic shocks.
Furthermore, in the years and decades to come, the collection and
publication of these data will be helpful in identifying potential fair
lending violations and in facilitating the enforcement of anti-
discrimination laws. It will also help governments, community groups,
financial institutions, and other stakeholders to identify
opportunities and gaps in the market, thereby enhancing business and
community development and boosting broad-based economic activity and
growth.
Overview
Small businesses are a cornerstone of the U.S. economy. There were
over 30 million small businesses in the U.S. in 2017, employing almost
half of all private sector employees.\13\ Small businesses,
particularly start-ups, also generated 65 percent of new jobs since
2000.\14\ Small businesses were hit hard by two major shocks in the
last two decades. First, the Great Recession, which began in 2007,
disproportionately affected small businesses.\15\ Between 2007 and
2009, employment at businesses with under 50 employees fell by 10.4
percent, compared with 7.5 percent at larger firms,\16\ while between
2008 and 2011 lending to small firms fell by 18 percent, compared with
9 percent at larger firms.\17\ Small businesses suffered again because
of the COVID-19 pandemic. Around 40 percent of small businesses were
temporarily closed in late March and early April 2020, due primarily to
demand shocks and employee health concerns.\18\ Across the first year
of the pandemic, ``excess'' business establishment exits from the
market, in comparison to exits over the same period from prior years,
numbered up to 200,000.\19\ As of mid-2021, loan approvals (other than
for government emergency programs) still remained low, and some 845,000
non-farm private sector jobs had not yet been recovered.\20\
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\13\ Off. of Advocacy, Small Bus. Admin., 2020 Small Business
Profile (May 2020), https://cdn.advocacy.sba.gov/content/uploads/2020/06/04144214/2020-Small-Business-Economic-Profile-States-Territories.pdf (estimating 31.7 million small businesses in the
United States).
\14\ Off. of Advocacy, Small Bus. Admin., Frequently Asked
Questions About Small Business, at 1 (Oct. 2020), https://cdn.advocacy.sba.gov/wp-content/uploads/2020/11/05122043/Small-Business-FAQ-2020.pdf (SBA OA 2020 FAQs) (small businesses accounted
for 65.1 percent of new jobs since 2000). See generally
Congressional Research Serv., Small Business Administration and Job
Creation (updated June 23, 2021), https://fas.org/sgp/crs/misc/R41523.pdf (discussing small business job creation); Jon Haltiwanger
et al., Who Creates Jobs? Small Versus Large Versus Young, 95 Rev.
Econ. Stat. 347, 347-48 (May 2013), https://direct.mit.edu/rest/article/95/2/347/58100/Who-Creates-Jobs-Small-versus-Large-versus-Young (finding that young firms, which are generally small,
contribute disproportionately to both gross and net job creation).
\15\ Jason Dietrich et al., Bureau of Consumer Fin. Prot., Data
Point: Small Business Lending and the Great Recession, at 9 (Jan.
23, 2020), https://files.consumerfinance.gov/f/documents/cfpb_data-point_small-business-lending-great-recession.pdf (finding that small
business lending fell sharply during the Great Recession and
recovered slowly, still not reaching pre-Recession levels by 2017).
\16\ Ay[scedil]eg[uuml]l [Scedil]ahin et al., Fed. Reserve Bank
of N.Y., Current Issues in Economics & Finance, Why Small Businesses
Were Hit Harder by the Recent Recession, at 1 (Vol. 17, No. 4,
2011), https://www.newyorkfed.org////_issues/ci17-4.pdf.
\17\ Rebel A. Cole, Off. of Advocacy, Small Bus. Admin, How Did
the Financial Crisis Affect Small Business Lending in the United
States?, at 2 (Nov. 2012), https://www.microbiz.org/content/ploads//04/SmallBizLending-and-FiscalCrisis.pdf.
\18\ Alexander W. Bartik et al., The Impact of COVID-19 on Small
Business Outcomes and Expectations, 117 Proc. Nat'l Acad. Sci.
17656, 17656 (July 2020), https://www.pnas.org/content/pnas/117/30/17656.full.pdf.
\19\ Leland D. Crane et al., Bd. of Governors of the Fed.
Reserve Sys., Finance and Economics Discussion Series, 2020-089,
Business Exit During the COVID-19 Pandemic: Non-Traditional Measures
in Historical Context, at 4 (2020), https://www.federalreserve.gov/econres/feds/files/2020089r1pap.pdf (estimating excess establishment
exits and analyzing other estimates of small business exits during
the pandemic). The paper defines ``exit'' as permanent shutdown and
calculates ``excess'' exits by comparing the number of exits during
the 12-month period from March 2020 to February 2021 with previous
years. Id. at 2-4.
\20\ ADP Research Inst., ADP National Employment Report (May
2021), https://adpemploymentreport.com////May-2021.aspx (non-farm
private sector jobs as of June 2021 as compared to Feb. 2020);
Biz2Credit, Biz2Credit Small Business Lending Index Finds April 2021
Non-PPP Loan Approval Rates Move Little for All Types of Lenders
(Apr. 2021), https://www.biz2credit.com/business-lending-index/april-2021 (approvals as of May 2021).
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During the last two decades, the small business lending landscape
has also transformed. Traditional providers--namely banks--
consolidated, leading to branch closures. The number of banks in the
U.S. has declined from over 18,000 in 1986 to under 5,200 today and the
number of branches declined by 14 percent from 2009 to 2020.\21\
Meanwhile, new providers and products, such as fintechs and merchant
cash advances (MCAs), have become increasingly prevalent in the small
business lending market. Financing by MCA providers is estimated to
have increased from $8.6 billion in volume during 2014 to $15.3 billion
in 2017.\22\ From 2017 to 2019, the volume may
[[Page 56360]]
have increased further to $19 billion.\23\ Meanwhile, financing by
fintechs \24\ is estimated to have increased from $1.4 billion \25\ in
outstanding balances in 2013 to approximately $25 billion \26\ in 2019.
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\21\ Congressional Research Serv., Small Business Credit Markets
and Selected Policy Issues, at 6 (Aug. 20, 2019), https://fas.org/sgp//misc/R45878.pdf (decline since 1986); Bruce C. Mitchell et al.,
Nat'l Cmty. Reinvestment Coal., Relationships Matter: Small Business
and Bank Branch Locations, https://ncrc.org/relationships-matter-small-business-and-bank-branch-locations/ (last visited Aug. 24,
2021) (branch closures).
\22\ PYMNTS, How Long Can MCAs Avoid the `Loan' Label? (Jan. 20,
2016), https://www.pymnts.com/in-depth/2016/how-long-can-mcas-avoid-the-loan-label/.
\23\ Paul Sweeney, Gold Rush: Merchant Cash Advances are Still
Hot, deBanked (Aug. 18, 2019), https://debanked.com/2019/08/gold-rush-merchant-cash-advances-are-still-hot/. Although the article
does not specify one way or the other, estimates by the underlying
source, Bryant Park Capital, appear to reference origination volumes
rather than outstanding balances. See Nimayi Dixit, S&P Global
Market Intelligence, Payment Fintechs Leave Their Mark On Small
Business Lending (Aug. 28, 2018), https://www.spglobal.com/marketintelligence/en/news-insights/research/payment-fintechs-leave-their-mark-on-small-business-lending. Depending on credit multiplier
effects, the value of annual origination volumes could be smaller or
greater than outstanding balances. Without information on
outstanding balances and for the purposes of calculating a market
size for small business financing in 2019, the Bureau assumes in
this paper a 1:1 ratio between annual origination volumes and
outstanding balances for MCA products. See part II.D below for
discussion of credit multiplier effects and for market size
calculations for MCA and other small business financing products in
2019.
\24\ Fintechs are defined as ``technology companies providing
alternatives to traditional banking services, most often exclusively
in an online environment,'' and may overlap in part with other
categories of financial institution, such as commercial finance
companies and/or providers of specialized products, including
factoring and MCAs. Brett Barkley & Mark Schweitzer, The Rise of
Fintech Lending to Small Businesses: Businesses' Perspectives on
Borrowing, 17 Int'l J. Cent. Banking 35, 35-36 (Mar. 2021), https://www.ijcb.org/journal/ijcb21q1a2.pdf.
\25\ Id. (citing Katie Darden et al., S&P Global Market
Intelligence, 2018 US Fintech Market Report, at 5, https://www.spglobal.com/marketintelligence/en/documents/2018-us-fintech-market-report.pdf (2018 US Fintech Market Report)). This figure
annualizes $121 million in estimated 2013 quarterly originations to
$484 million in annual originations and scales up to estimated
outstanding balances using the ratio between the FFIEC Call Report
and the CRA data discussed in part II.D below.
\26\ 2018 US Fintech Market Report at 6. This figure scales up
$9.3 billion in estimated 2019 credit originations for small to
medium sized enterprise (SME) borrowers to outstanding balances
using the ratio methodology discussed in part II.D below.
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Both recent economic shocks and changes in patterns of small
business financing have had fair lending and community development
implications. In terms of the effect of economic shocks, data suggest
that women-owned and minority-owned small businesses were impacted
disproportionately by the economic crises of the last two decades.\27\
Data further suggest that women-owned and minority-owned small
businesses, compared to other small businesses, had fewer cash reserves
and faced steeper hurdles in accessing credit that would have allowed
them to better weather these crises.\28\
---------------------------------------------------------------------------
\27\ See part II.E below.
\28\ Id.
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Regarding trends in the small business financing landscape, the
shift away from traditional providers of small business credit toward
newer types of providers gives rise to both potential harm and
opportunity. In terms of potential harms, bank closures may have made
it more difficult for small businesses, particularly women-owned and
minority-owned small businesses, to access credit and remain open--
particularly in low- and moderate-income areas and rural communities.
Newer providers, often offering newer products, have less experience
complying with both Federal and State lending laws and regulations.
Additionally, they may use algorithms and artificial intelligence (AI),
which may create or heighten ``risks of unlawful discrimination,
unfair, deceptive, or abusive acts or practices . . . or privacy
concerns.'' \29\ In addition, opaque product terms and high interest
rates could trap business owners in cycles of debt.
---------------------------------------------------------------------------
\29\ 86 FR 16837, 16839 (Mar. 31, 2021).
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In terms of opportunity, innovative products and lending models,
including the use of AI, may yield benefits of more accurate, lower-
cost, and faster underwriting, as well as expanded credit access for
small businesses that may not have obtained credit under traditional
credit underwriting approaches.\30\ Specifically, newer providers and
approaches may permit those with low or nonexistent personal or
business credit scores--including women and minorities who own or seek
to start small businesses but on average have relatively lower personal
credit scores than male and white business owners \31\--to more easily
access credit.\32\ Non-traditional credit providers may help offset
decreases in lending associated with the closure of bank branches. For
instance, fintechs may help provide financing to small businesses in
rural communities that lack bank branches.
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\30\ Id. See also Patrice Ficklin et al., Bureau of Consumer
Fin. Prot., Innovation Spotlight: Providing Adverse Action Notices
When Using AI/ML Models (July 7, 2020), https://www.consumerfinance.gov/about-us/blog/innovation-spotlight-providing-adverse-action-notices-when-using-ai-ml-models/
(discussing potential benefits and risks from financial institutions
using AI in credit underwriting and other areas).
\31\ Geng Li, Bd. of Governors of the Fed. Reserve Sys., FEDS
Notes: Gender-Related Differences in Credit Use and Credit Scores
(June 22, 2018), https://www.federalreserve.gov/econres/notes/feds-notes/gender-related-differences-in-credit-use-and-credit-scores-20180622.htm (finding that single women on average have lower credit
scores than single men); Alicia Robb, Off. of Advocacy, Small Bus.
Admin., Minority-Owned Employer Businesses and their Credit Market
Experiences in 2017, at 4 (July 22, 2020), https://cdn.advocacy.sba.gov/wp-content/uploads/2020/07/22172533/Minority-Owned-Employer-Businesses-and-their-Credit-Market-Experiences-in-2017.pdf (finding that Black and Hispanic small business borrowers
are disproportionately denied credit or discouraged from applying
for credit on the basis of their credit score).
\32\ See Jessica Battisto et al., Who Benefited from PPP Loans
by Fintech Lenders?, Liberty Street Economics (May 27, 2021),
https://libertystreeteconomics.newyorkfed.org/2021/05/who-received-ppp-loans-by-fintech-lenders.html (showing that fintech lenders were
an important source of credit for Black owners during the COVID-19
pandemic).
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The precise impacts of these broader trends are not well understood
at present because there are no comprehensive, comparable, and
application-level data across the fragmented and complex small business
lending market. Some small business lending data exist, provided mostly
by Federal regulators, but available data are incomplete in certain
ways. Some do not include lending by certain categories of
institutions, such as smaller depository institutions. And none include
lending by nondepository institutions, which comprises almost half of
all small business financing.\33\
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\33\ The Bureau estimates that nondepository private business
financing totaled approximately $550 billion out of around $1.2
trillion in total private outstanding balances in 2019 (47 percent).
This $550 billion figure includes estimated financing by fintechs
(around $25 billion), commercial finance companies (around $160
billion), nondepository CDFIs (around $1.5 billion), MCA providers
(around $19 billion), factors (around $100 billion), equipment
leasing providers (around $160 billion), nondepository mortgage
lenders originating loans for 5+ unit residential developments
(around $30 billion), and non-financial trade creditors (around $50
billion). There may additionally be lending by equipment and vehicle
dealers originating loans in their own name that is not captured
here. Public lenders include the Small Business Association (SBA),
the Federal Housing Association (FHA), Fannie Mac and Freddie Mac,
and the Farm Credit System (FCS), with public lending totaling
around $210 billion in traditional lending programs plus $1 trillion
in emergency COVID-19 SBA lending programs. See part II.D below for
methodology and sources regarding market size estimates for each
lending category.
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The datasets that do exist both over- and underestimate small
business lending in certain respects by including small dollar loans to
non-small businesses and by excluding larger loans to small
businesses.\34\ Further, these datasets all concern originated loans;
they do not include information on applications that do not result in
originated loans. Nor do they generally include borrower demographics.
Other public, private, and nonprofit datasets offer only partial
snapshots of particular areas of the market. Finally, much of the
publicly available data are aggregated, which does not permit more
granular, loan- or application-level analysis that
[[Page 56361]]
would facilitate fair lending or business and community development
analysis by stakeholders other than those that collected the data. See
part II.B below for a detailed discussion on existing data on small
business financing.
---------------------------------------------------------------------------
\34\ See part II.B below.
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The remainder of this part II focuses on several broad topics that
explain, in more detail, the need for the small business lending data
that the proposed rule to implement section 1071 would provide: (A) The
role of small businesses in the U.S. economy; (B) existing data on
small business financing; (C) the landscape of small business
financing; (D) estimating the size of the small business financing
market despite limited data; (E) the particular challenges faced by
women-owned and minority-owned small businesses; and (F) the purposes
and impact of section 1071.
A. Small Businesses in the United States
Small businesses are an important, dynamic, and widely diverse part
of the U.S. economy. They are critical to employment, innovation, and
economic growth and stability, both overall and specifically for
minority and women entrepreneurs.
The Small Business Act, as implemented by the SBA, defines a small
business using size standards that generally hinge on the average
number of employees or average annual receipts of the business concern
and are customized industry by industry across 1,057 6-digit North
American Industry Classification System (NAICS) codes.\35\ Size
standards based on average number of employees are used in all
industries in the manufacturing and wholesale trade sectors, as well as
in certain industries across a variety of other sectors as well.
Employee-based size standards range from 100 (used almost entirely in
certain industries within the wholesale trade sector) to 1,000 (used in
industries across a variety of sectors including, for example,
petroleum refineries, automobile manufacturing, and greeting card
publishers).\36\ Size standards based on average annual receipts are
used in nearly all other industries, and range from $1 million (used in
most industries in the crop production and animal production and
aquaculture subsectors) to $41.5 million (used in industries across a
variety of sectors including, for example, passenger car leasing,
television broadcasting, and general medical and surgical
hospitals).\37\
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\35\ See Small Bus. Admin., Table of Small Business Size
Standards Matched to North American Industry Classification System
Codes (effective Aug. 19, 2019), https://www.sba.gov/sites/default/files/2019-08/SBA%20%20%20Size%20Standards_Effective%20Aug%2019%2C%202019_Rev.pdf.
\36\ See id.
\37\ A small number of industries use a size standard based on a
metric other than average annual receipts or average number of
employees. For example, the commercial banking industry (NAICS
522110) is subject to an asset-based size standard. See id.
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Simpler definitions of what constitutes a small business are used
in certain contexts. For example, in certain annual research releases
the SBA's Office of Advocacy defines a small business as one that has
fewer than 500 employees.\38\ According to the Office of Advocacy, and
based on this definition of a small business, there are 31.7 million
such businesses in the U.S. that represent 99.9 percent of all U.S.
firms and employ over 60 million Americans.\39\ Six million of these
small businesses have paid employees, while 25.7 million are non-
employer businesses (i.e., the owner(s) are the only people involved in
the business).\40\ From 2000 to 2019, small businesses, particularly
young businesses and start-ups, created 10.5 million net new jobs in
the U.S., while large businesses created 5.6 million.\41\
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\38\ See SBA OA 2020 FAQs at 1.
\39\ See id.
\40\ See id.
\41\ See id.; see also Haltiwanger et al., 95 Rev. Econ. Stat.
at 347-48 (finding that young firms, which are generally small,
contribute disproportionately to both gross and net job creation).
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Nearly one third of all businesses are minority-owned and more than
one third are women-owned, though minorities and women own a smaller
share of employer firms. As of 2018, minorities owned over one million
employer firms in the U.S. (amounting to 18.3 percent of all employer
firms) \42\ and, as of 2017, approximately 8.2 million non-employer
firms.\43\ Likewise, as of 2018, women owned about 1.1 million employer
firms (19.9 percent of all employer firms) \44\ and, as of 2017,
approximately 10.6 million non-employer firms.\45\
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\42\ See Press Release, U.S. Census Bureau, Annual Business
Survey Release Provides Data on Minority-Owned, Veteran-Owned and
Women-Owned Businesses (Jan. 28, 2021), https://www.census.gov/newsroom/press-releases//business-survey.html.
\43\ Minority Bus. Dev. Agency, U.S. Dep't of Com., The Number
of Minority Nonemployer Firms Grew by Nearly 17% between 2014 and
2017 (Dec. 18, 2020), https://www.mbda.gov/news/press-releases/2020/12/the-number-of-minority-nonemployer (stating that the nearly 8.2
million minority non-employer firms in the U.S. generated $279.3
billion in revenues in 2017, and grew in number at four times the
rate of non-minority non-employer firms between 2014 and 2017). See
also SBA OA 2020 FAQs at 3 (showing over 7.6 million minority-owned
non-employer firms as of 2016).
\44\ See Press Release, U.S. Census Bureau, Annual Business
Survey Release Provides Data on Minority-Owned, Veteran-Owned and
Women-Owned Businesses (Jan. 28, 2021), https://www.census.gov/newsroom/press-releases//business-survey.html.
\45\ See Press Release, Nat'l Women's Bus. Council, NWBC Shares
2017 Nonemployer Statistics by Demographics Estimates for Women-
Owned Businesses (Dec. 17, 2020), https://www.nwbc.gov/2020/12/17/nwbc-shares-2017-nonemployer-statistics-by-demographics-estimates-for-women-owned-businesses/ (also stating that these 10.6 million
non-employer firms generate $286.1 billion in revenue, and that
nearly half of all women-owned non-employer firms generate less than
$10,000 in annual receipts, while only 0.05 percent generate $1
million or more in revenue).
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Businesses are legally structured in several ways. In 2017, 87
percent of non-employer businesses were sole proprietorships, which
means that the business is not distinguishable from the owner for tax
and legal purposes; the owner receives profits directly but is also
legally responsible for the business's obligations.\46\ Seven percent
of non-employer businesses were partnerships, which can be structured
to limit the personal liability of some or all owners; limited partners
may exchange control for limited liability, while general partners that
run the business may remain personally liable.\47\ Six percent of non-
employer businesses were structured as corporations--4.6 percent are S-
corporations and 1.5 percent are C-corporations--which are independent
legal entities owned by shareholders who are not personally liable for
the corporation's obligations.\48\ In 2017, most small employer
businesses were corporations, with 50.5 percent choosing to be S-
corporations and 16.8 percent preferring C-corporation status, although
sole proprietorship and partnership structures remained relatively
popular at 12.9 percent and 11.8 percent respectively. By contrast,
74.2 percent of large employer businesses chose to be C-corporations,
with 9.3 percent preferring a partnership structure and 8.1 percent S-
corporation status.\49\
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\46\ See SBA OA 2020 FAQs at 3.
\47\ Id. at 4.
\48\ Id.
\49\ Id.
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Small businesses are particularly important in specific sectors of
the economy. In 2016, in the services sector, small businesses supplied
45 percent of 19.7 million healthcare and social services jobs, over 60
percent of 13.7 million accommodation and food services jobs, and over
80 percent of 6.3 million construction jobs.\50\ In the same year, in
manufacturing, small businesses made up 44 percent out of 11.6 million
[[Page 56362]]
jobs.\51\ Finally, in 2016, small family farms totaled 96 percent out
of 2.2 million farms,\52\ and small businesses provided over 80 percent
of agriculture, forestry, and fishing and hunting jobs out of
161,000.\53\ As such, the financial health of small businesses is
essential to the U.S. economy, especially to the supply of critical and
basic goods and services--from producing food to serving it at
restaurants, and from home building to healthcare.
---------------------------------------------------------------------------
\50\ See Off. of Advocacy, Small Bus. Admin., 2019 Small
Business Profile (Apr. 2019), https://cdn.advocacy.sba.gov/wp-content/uploads/2019/04/23142719/2019-Small-Business-Profiles-US.pdf
(2019 Small Business Profile).
\51\ Id. at 3.
\52\ Nat'l Inst. of Food & Agric., U.S. Dep't of Agric., Family
Farms, https://nifa.usda.gov/family-farms (last visited July 26,
2021) (classifying family farms as any farm organized as a sole
proprietorship, partnership, or family corporation. Family farms
exclude farms organized as non-family corporations or cooperatives,
as well as farms with hired managers.).
\53\ 2019 Small Business Profile at 3.
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Small businesses have been especially hard-hit by the COVID-19
pandemic. At a low point in the pandemic in April 2020, 20 percent of
self-employed workers had temporarily exited the labor market.\54\
Industries in which small businesses played a large role have been
particularly impacted. For example, comparing April 2020 with April
2019, employment declined by almost 50 percent in the leisure and
hospitality industries (also declining by 50 percent among food
services and drinking establishments within the leisure and hospitality
industry), in which small businesses employ 60 percent of workers.\55\
---------------------------------------------------------------------------
\54\ Daniel Wilmoth, Off. of Advocacy, Small Bus. Admin., The
Effects of the COVID-19 Pandemic on Small Businesses (Issue Brief
No. 16) (Mar. 2021), https://cdn.advocacy.sba.gov/wp-content/uploads/2021/03/02112318/COVID-19-Impact-On-Small-Business.pdf.
\55\ Id. By August 2021, many of these jobs had since returned
as mandatory closure orders ended and the economy began to recover.
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B. Existing Data on Small Business Lending
While small businesses are a critical part of the U.S. economy and
require financial support, it is still true, as it was in 2017 when the
Bureau published its White Paper on small business lending, that it is
not possible with current data to confidently answer basic questions
regarding the state of small business lending. This limitation is
especially the case with regard to the race, sex, and ethnicity of
small business owners, applications as opposed to originations, and for
small business financing products that are not currently reported in
Call Report data.\56\
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\56\ Bureau of Consumer Fin. Prot., Key dimensions of the small
business lending landscape, at 39-40 (May 2017), https://files.consumerfinance.gov/f/documents/201705_cfpb_Key-Dimensions-Small-Business-Lending-Landscape.pdf (White Paper).
---------------------------------------------------------------------------
Data on small business lending are fragmented, incomplete, and not
standardized, making it difficult to conduct meaningful comparisons
across products and over time. This hinders attempts by policymakers
and other stakeholders to understand the size, shape, and dynamics of
the small business lending marketplace, including the interaction of
supply and demand, as well as potentially problematic lending
practices, gaps in the market, or trends in funding that may be holding
back some communities.\57\ For example, absent better data, it is hard
to determine if relatively lower levels of bank loans to small
businesses in the decade before the pandemic began were reflective of a
net relative decline in lending to small businesses as compared to
large businesses or rather a shift within small business lending from
banks to alternative lenders.\58\ To the extent there may have been a
relative decline, it is difficult to assess if that decline affected
certain types of small businesses more than others, including women-
owned and minority-owned small businesses.\59\
---------------------------------------------------------------------------
\57\ While Call Report and CRA data provide some indication of
the level of supply of small business credit, the lack of data on
small business credit applications makes demand for credit by small
businesses more difficult to assess, including with respect to local
markets or protected classes.
\58\ Rebel A. Cole, Off. of Advocacy, Small Bus. Admin., How Did
Bank Lending to Small Business in the United States Fare After the
Financial Crisis?, at 26 (Jan. 2018), https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf (showing a decline in bank loans to small
businesses from 2008 to 2015 from $710 billion to $600 billion). The
level of bank lending to small businesses has recovered somewhat
since a trough in 2012-13 that represented the lowest amount of
lending since 2005. Fed. Deposit Ins. Corp., https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx (last visited July 22, 2021).
\59\ White Paper at 40.
---------------------------------------------------------------------------
The primary sources of information on lending by depository
institutions are the Federal Financial Institutions Examination Council
(FFIEC) and National Credit Union Administration (NCUA) Consolidated
Reports of Condition and Income (Call Reports), as well as reporting
under the CRA. Under the FFIEC and CRA reporting regimes, small loans
to businesses of any size are used in whole or in part as a proxy for
loans to small businesses. The FFIEC Call Report captures banks'
outstanding number and amount of small loans to businesses (that is,
loans originated under $1 million to businesses of any size; small
loans to farms are those originated under $500,000).\60\ The CRA
requires banks and savings associations with assets over a specified
threshold to report loans in original amounts of $1 million or less to
businesses; reporters are asked to indicate whether the borrower's
gross annual revenue is $1 million or less, if they have that
information.\61\ The NCUA Call Report captures data on all loans over
$50,000 to members for commercial purposes, regardless of any indicator
about the business's size.\62\ There are no similar sources of
information about lending to small businesses by nondepository
institutions. The SBA also releases data concerning its loan programs,
but these typically do not include demographic information, and this
covers only a small portion of the overall small business financing
market.
---------------------------------------------------------------------------
\60\ See Fed. Fin. Insts. Examination Council, Reporting Forms
31, 41, and 51 (last modified Mar. 16, 2021), https://www.ffiec.gov/ffiec_report_forms.htm (FFIEC Call Report).
\61\ See Fed. Fin. Insts. Examination Council, A Guide to CRA
Data Collection and Reporting, at 11, 13 (2015), https://www.ffiec.gov/cra/pdf/2015_CRA_Guide.pdf (2015 FFIEC CRA Guide).
Small business loans are defined for CRA purposes as loans whose
original amounts are $1 million or less and that were reported on
the institution's Call Report or Thrift Financial Report as either
``Loans secured by nonfarm or nonresidential real estate'' or
``Commercial and industrial loans.'' Small farm loans are defined
for CRA purposes as loans whose original amounts are $500,000 or
less and were reported as either ``Loans to finance agricultural
production and other loans to farmers'' or ``Loans secured by
farmland.'' Id. at 11. Beginning in 2023, national banks supervised
by the OCC with assets greater than $2.5 billion will be required to
report loans of $1.6 million or less and indicate whether the
borrower's gross annual review is $1.6 million or less. See 85 FR
34734 (June 5, 2020).
\62\ See Nat'l Credit Union Admin., Call Report Form 5300 (June
2020), https://www.ncua.gov/files/publications/regulations/form-5300-june-2020.pdf.
---------------------------------------------------------------------------
These public data sources provide some of the most extensive
information currently available on small business lending. However,
they suffer from four material limitations, namely that the data
capture only parts of the market, are published at a high level of
aggregation, do not permit detailed analysis across the markets, and
lack standardization across different agencies.
First, these datasets exclude entire categories of lenders. For
example, banks under $1.322 billion in assets do not have to report
under the CRA.\63\ The FFIEC and NCUA Call Reports and CRA data do not
include lending by nondepository financial institutions, which the
Bureau estimates to represent 40 percent of the small business
financing market and is rapidly growing.\64\
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\63\ Fed. Fin. Insts. Examination Council, Community
Reinvestment Act 2021 Reporting Criteria, https://www.ffiec.gov/cra/reporter21.htm (last visited Aug. 5, 2021).
\64\ Nondepository lending is estimated to total approximately
$550 billion out of $1.4 trillion in total lending, excluding $1
trillion in COVID-19 emergency program lending. See part II.D below
(providing a detailed breakdown and methodology of estimates across
lending products).
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[[Page 56363]]
Second, Federal agencies publish summary data at a high level in a
manner that does not facilitate independent analysis by other agencies
or stakeholders. The FFIEC and NCUA Call Reports and the CRA data are
all available at a higher level of aggregation than loan-level,
limiting fair lending and detailed geographic analyses since race, sex,
and ethnicity as well as business location data are rarely disclosed.
Third, the detailed data collected by these Federal sources have
significant limitations as well, preventing any analysis into certain
issues or types of borrowers, even by the regulators possessing these
data. Neither Call Report nor CRA data include applications, which
limits insights into any potential discrimination or discouragement in
application processes as well as into the interaction between credit
supply and demand. The Call Report and CRA data separately identify
loans of under $1 million in value, and CRA data also identify loans to
businesses with annual revenues of $1 million or less.\65\ However, the
Call Report definition of small business loans as those with a loan
size of $1 million or less at origination is both overinclusive, as it
counts small loans to businesses of all sizes, and underinclusive, as
it excludes loans over $1 million made to small businesses. Credit
unions report any loans under $50,000 as consumer loans and not as
commercial loans,\66\ potentially excluding from measurement an
important source of funding for many small businesses, particularly the
smallest and often most underserved.
---------------------------------------------------------------------------
\65\ Fed. Fin. Insts. Examination Council, Schedule RC-C, Part
II Loans to Small Businesses and Farms, at 1, https://www.fdic.gov/regulations/resources/call/crinst-031-041/2017/2017-03-rc-c2.pdf
(detailing the Call Report loan size threshold of $1 million at
origination for loans to small businesses); 2015 FFIEC CRA Guide at
11 (detailing the CRA size thresholds of $1 million both for loan
amount at origination and for revenue of small business borrowers).
\66\ Nat'l Credit Union Admin., Call Report Form 5300
Instructions, at 26 (effective Mar. 31, 2021), https://www.ncua.gov/files/publications/regulations/call-report-instructions-march-2021.pdf.
---------------------------------------------------------------------------
Finally, the Federal sources of small business lending data are not
standardized across agencies and cannot be easily compared. For
example, the FFIEC Call Report collects small loans to businesses as a
proxy for small business lending, whereas the NCUA Call Report collects
loans to members for commercial purposes above $50,000 but with no
upper limit. The loan-level data for the Paycheck Protection Program
(PPP) offer an unprecedented level of insight into small business
lending, but this dataset is a one-off snapshot into the market for a
specific lending program at an acute moment of crisis and is also
limited in utility by relatively low response levels to demographic
questions concerning borrowers.\67\
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\67\ Zachary Warmbrodt, Tracking the Money: Bid to Make Business
Rescue More Inclusive Undercut by Lack of Data, Politico (Mar. 2,
2021), https://www.politico.com/news/2021/03/02/businesses-inclusive-coronavirus-relief-money-data-472539 (reporting that 75
percent of PPP recipients did not report their ethnicity and 58
percent did not reveal their gender).
---------------------------------------------------------------------------
The Federal government also conducts and releases a variety of
statistics, surveys, and research reports on small business lending
through the member banks for the Federal Reserve System, the FDIC, CDFI
Fund, and the U.S. Census Bureau. These data sources offer insights
into broad trends and specific small business lending issues but are
less useful for detailed fair lending analyses or identification of
specific areas, industries, or demographic groups being underserved.
Periodic changes in survey methodology and questions can also limit
comparability and the ability to track developments over time.
There are also a variety of non-governmental data sources, issued
by both private and nonprofit entities, that cover small businesses
and/or the small business financing market. These include datasets and
surveys published by commercial data and analytics firms, credit
reporting agencies, trade associations, community groups, and academic
institutions. Certain of these data sources are publicly available and
track specific topics, such as small business optimism,\68\ small
business employment,\69\ rates of small business credit application
approvals,\70\ small business lending and delinquency levels,\71\ and
rates of small business closure.\72\ Other databases have more
granularity and provide detailed information on individual businesses,
including revenue, credit utilization, industry, and location.\73\
---------------------------------------------------------------------------
\68\ Nat'l Fed'n of Indep. Bus., Small Business Optimism Index
(June 2021), https://www.nfib.com/surveys/small-business-economic-trends/.
\69\ ADP, Employment Reports, https://adpemploymentreport.com/
(last visited July 22, 2021).
\70\ Biz2Credit, Biz2Credit Small Business Lending Index,
https://www.biz2credit.com/small-business-lending-index (last
visited July 27, 2021).
\71\ PayNet, Small Business Lending Index, https://sbinsights.paynetonline.com/lending-activity/ (last visited July 27,
2021).
\72\ Opportunity Insights Economic Tracker, https://tracktherecovery.org/ (last visited July 27, 2021). The Opportunity
Insights Economic Tracker and similar data sources may materially
overestimate the number of business closures by not controlling for
attrition in the small business client base of data providers. See
Leland D. Crane et al., Bd. of Governors of the Fed. Reserve Sys.,
Finance and Economics Discussion Series, 2020-089, Business Exit
During the COVID-19 Pandemic: Non-Traditional Measures in Historical
Context, at 21-22 (2020), https://www.federalreserve.gov/econrest/feds/files2020089r1pap.pdf.
\73\ See, e.g., Dun & Bradstreet, https://www.dnb.com/ (data
provider and credit reporter); Data Axle, https://www.data-axle.com/
(data provider); Equifax, https://www.equifax.com/business/business-credit-reports/ (credit reporter); Experian, https://www.experian.com/small-business/business-credit-reports (credit
reporter).
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While these non-public sources of data on small businesses may
provide a useful supplement to existing Federal sources of small
business lending data, these private and nonprofit sources often do not
have lending information, may rely in places on unverified research
based on public internet sources, and/or narrowly limit use cases for
parties accessing data. Further, commercial datasets are generally not
free to public users and can be costly, raising equity issues for
stakeholders who cannot afford access.
C. The Landscape of Small Business Finance
Notwithstanding the lack of data on the market, it is clear that
financing plays an important role in enabling small businesses to grow
and contribute to the economy. When it is available, financing not only
provides resources for small businesses to smooth cash flows for
current operations, but also affords business owners the opportunity to
invest in business growth. An analysis by the National Small Business
Association, which examined data from 1993 through 2016, found a
correlation between small business owners' ability to access credit and
their ability to hire.\74\ This same study found that, while not the
sole cause, the inability to secure financing may have led 16 percent
of small businesses to reduce their number of employees and
approximately 10 percent of small businesses to reduce employee
benefits. Lack of access to financing also contributed to a further 10
percent of small businesses being unable to increase store inventory in
order to meet existing demand.\75\
---------------------------------------------------------------------------
\74\ Nat'l Small Bus. Ass'n, 2016 Year-End Economic Report (July
2017), https://www.nsba.biz/wp-content/uploads/2017/02/Year-End-Economic-Report-2016.pdf.
\75\ Id.
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To support their growth or to make it through harder times, small
businesses look to a variety of funding sources. Especially when
starting out, entrepreneurs often rely on their own
[[Page 56364]]
savings and help from family and friends. If a business generates a
profit, its owners may decide to reinvest retained earnings to fund
further growth. However, for many aspiring business owners--and their
personal networks--savings and retained earnings may not be sufficient
to fund a new venture or grow it, leading owners to seek other sources
of funding. This is particularly true for minority- and women-led
households, which on average have less wealth than their white- and
men-led counterparts.\76\
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\76\ Emily Moss et al., The Black-White Wealth Gap Left Black
Households More Vulnerable, Brookings Inst. (Dec. 8, 2020), https://www.brookings.edu/blog/up-front/2020/12/08/the-black-white-wealth-gap-left-black-households-more-vulnerable/ (detailing wealth gaps in
2019 by race and sex that show white male households with more
wealth than white female or Black male or female households at all
age brackets). See also Erin Ruel & Robert Hauser, Explaining the
Gender Wealth Gap, 50 Demography 1155, 1165 (Dec. 2012), https://read.dukeupress.edu/demography/article/50/4/1155/169553/Explaining-the-Gender-Wealth-Gap (finding a gender wealth gap of over $100,000
in a longitudinal study over 50 years of a single age cohort in
Wisconsin); Neil Bhutta et al., Bd. of Governors of the Fed. Reserve
Sys., Disparities in Wealth by Race and Ethnicity in the 2019 Survey
of Consumer Finances (Sept. 28, 2020), https://www.federalreserve.gov/econres/notes/feds-notes/disparities-in-wealth-by-race-and-ethnicity-in-the-2019-survey-of-consumer-finances-20200928.htm (finding median white family wealth in 2019 of
$188,200 compared with $24,100 for Black families and $36,100 for
Hispanic families).
---------------------------------------------------------------------------
One such source of funding comes from others besides family and
friends, whether high net worth individuals or ``angel investors,''
venture capital funds, or, in a more recent development usually
facilitated by online platforms, via crowdsourcing from retail
investors. Often, these early investments take the form of equity
funding, which business owners are not obligated to repay to investors.
However, equity funding requires giving up some ownership and control
to investors, which certain entrepreneurs may not wish to do. For small
businesses, equity funding also tends to be somewhat more expensive
than debt financing in the longer run. This is for a number of reasons,
including that loan interest payments, unlike capital gains, are tax-
deductible.\77\ Finally, equity investments from others besides family
and friends are available to only a minority of small businesses.
---------------------------------------------------------------------------
\77\ Jim Woodruff, The Advantages and Disadvantages of Debt and
Equity Financing, CHRON (updated Mar. 4, 2019), https://smallbusiness.chron.com/advantages-disadvantages-debt-equity-financing-55504.html.
---------------------------------------------------------------------------
Many small businesses instead seek debt financing from a wide range
of providers. These providers include depository institutions, such as
banks, savings associations, and credit unions,\78\ as well as fintechs
and commercial finance companies, specialized providers of specific
financing products, and a range of government and government-sponsored
enterprises, among others.
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\78\ For purposes of this notice of proposed rulemaking, the
Bureau is using the term depository institution to mean any bank or
savings association defined by section 3(c)(1) of the Federal
Deposit Insurance Act, 12 U.S.C. 1813(c)(1), or credit union defined
pursuant to the Federal Credit Union Act, as implemented by 12 CFR
700.2. The Bureau notes that the Dodd-Frank Act defines a depository
institution to mean any bank or savings association defined by the
Federal Deposit Insurance Act; there, that term does not encompass
credit unions. 12 U.S.C. 5301(18)(A), 1813(c)(1). The Bureau is
referring to banks and savings associations together with credit
unions as depository institutions throughout this notice, unless
otherwise specified, to facilitate analysis and discussion.
---------------------------------------------------------------------------
In the past, small businesses principally sought credit from banks;
however, as banks have merged and consolidated, particularly in the
wake of the Great Recession, they have provided less financing to small
businesses.\79\ As noted earlier, the number of banks has declined
significantly since a post-Great Depression peak in 1986 of over 18,000
institutions to around 5,200 institutions today,\80\ while 13,500
branches closed from 2009 to mid-2020, representing a 14 percent
decrease.\81\ Although nearly half of counties either gained bank
branches or retained the same number between 2012 and 2017, the
majority lost branches over this period.\82\ Out of 44 counties that
were deeply affected by branch closures, defined as having 10 or fewer
branches in 2012 and seeing five or more of those close by 2017, 39
were rural counties.\83\ Of rural counties, just over 40 percent lost
bank branches in that period; the rural counties that experienced
substantial declines in bank branches tend to be lower-income and with
a higher proportion of African-American residents relative to other
rural counties,\84\ raising concerns about equal access to credit.
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\79\ Rebel A. Cole, Off. of Advocacy, Small Bus. Admin., How Did
Bank Lending to Small Business in the United States Fare After the
Financial Crisis?, at 26 (Jan. 2018), https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf (showing a decline in bank loans to small
businesses from 2008 to 2015 from $710 billion to $600 billion). The
level of bank lending to small businesses has recovered somewhat
since a trough in 2012-13 that represented the lowest amount of
lending since 2005. Fed. Deposit Ins. Corp., https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx (last visited July 22, 2021).
\80\ Congressional Research Serv., Small Business Credit Markets
and Selected Policy Issues, at 6 (Aug. 20, 2019), https://fas.org/sgp/crs/misc/R45878.pdf.
\81\ Bruce C. Mitchell et al., Nat'l Cmty. Reinvestment Coal.,
Relationships Matter: Small Business and Bank Branch Locations, at 6
(2020), https://ncrc.org/relationships-matter-small-business-and-bank-branch-locations/ (stating that in 2009 there were 95,596 brick
and mortar full-service branches or retail locations but, as of June
30, 2020, that number had fallen to 82,086).
\82\ Bd. of Governors of the Fed. Reserve Sys., Perspectives
from Main Street: Bank Branch Access in Rural Communities, at 1, 3-
4, 19 (Nov. 2019), https://www.federalreserve.gov/publications/files/bank-branch-access-in-rural-communities.pdf.
\83\ Id.
\84\ Id.
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As banks and branches have merged and/or closed, the share of
banking assets has also become increasingly concentrated in the largest
institutions, with banks of over $10 billion in assets representing 84
percent of all industry assets in 2018,\85\ totaling $15.1 out of $17.9
trillion.\86\ Nevertheless, banks of under $10 billion in assets
continue to hold approximately half of all small business loans (using
the FFIEC Call Report definition of loans of under $1 million),
highlighting the importance of smaller banks to the small business
lending market.\87\ Since smaller bank credit approvals have
traditionally been close to 50 percent, while large banks approve only
25-30 percent of applications, bank consolidation may have implications
for small business credit access.\88\ Since institutions under $1.322
billion in assets are not required to report on lending under the
CRA,\89\ it is difficult to precisely assess the
[[Page 56365]]
impact of bank consolidation and shuttered branches on small business
lending and access to credit in local areas.\90\ By contrast, credit
unions increased their small business lending from $30 billion in 2008
to at least $55 billion in 2019.\91\ Like banks, credit unions
typically receive high satisfaction scores among small business
borrowers, reflecting more high-contact, relationship-based lending
models.\92\
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\85\ Congressional Research Serv., Small Business Credit Markets
and Selected Policy Issues, at 6 (Aug. 20, 2019), https://fas.org/sgp/crs/misc/R45878.pdf.
\86\ Fed. Deposit Ins. Corp., Bank Data and Statistics, https://www.fdic.gov/bank/statistical/ (last visited Aug. 22, 2021).
\87\ Speech by Board Governor Lael Brainard: Community Banks,
Small Business Credit, and Online Lending (Sept. 30, 2015), https://www.federalreserve.gov/newsevents/speech/brainard20150930a.htm.
Banks with under $10 billion in assets are often referred to as
``community banks.'' Congressional Research Serv., Over the Line:
Asset Thresholds in Bank Regulation, at 2-3 (May 3, 2021), https://fas.org/sgp/crs/misc/R46779.pdf (noting that the Board of Governors
of the Federal Reserve System (Board) and the Office of the
Comptroller of the Currency (OCC) define community banks as having
under $10 billion in assets, although there may be other criteria,
with the FDIC considering also geographic footprint and a relative
emphasis on making loans and taking deposits as opposed to engaging
in securities and derivatives trading). Community banks are also
more likely to engage in relationship-based lending. See id. at 3.
\88\ Biz2Credit, Biz2Credit Small Business Lending Index,
https://www.biz2credit.com/small-business-lending-index (last
visited July 22, 2021). These historical approval rates are
reflected in pre-pandemic Small Business Lending Index releases by
Biz2Credit. See, e.g., Biz2Credit, Small Business Loan Approval
Rates at Big Banks Remain at Record High in February 2020:
Biz2Credit Small Business Lending Index, https://www.biz2credit.com/small-business-lending-index/february-2020 (last visited July 29,
2021) (showing large bank approvals of 28.3 percent in February 2020
and of 27.2 percent in February 2019 and smaller bank approvals of
50.3 percent in February 2020 and of 48.6 percent in February 2019).
\89\ See part II.B above.
\90\ Bruce C. Mitchell et al., Nat'l Cmty. Reinvestment Coal.,
Relationships Matter: Small Business and Bank Branch Locations,
https://ncrc.org/relationships-matter-small-business-and-bank-branch-locations/ (last visited July 27, 2021).
\91\ Rebel A. Cole, Off. of Advocacy, Small Bus. Admin., How Did
Bank Lending to Small Business in the United States Fare After the
Financial Crisis?, at 26 (Jan. 2018), https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf.
\92\ Fed. Reserve Banks, Small Business Credit Survey, 2021
Report On Employer Firms (2021), https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2021/2021-sbcs-employer-firms-report.
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Certain banks and credit unions choose to be mission-based lenders,
as CDFIs or Minority Depository Institutions (MDIs).\93\ Mission-based
lenders focus on providing credit to traditionally underserved and low-
income communities and individuals to promote community development and
expand economic opportunity, making them a relatively smaller by dollar
value but essential part of the small business lending market. There
were over 1,200 CDFIs (around half of which are depository
institutions) as of May 2021 and over 140 MDIs as of March 2021.\94\
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\93\ According to the FDIC, FDIC-insured MDIs and CDFI banks are
banks, savings banks, and savings associations (collectively, banks)
that serve minority, low- or moderate-income (LMI), and rural
communities at higher rates than mainstream banks. MDIs serve
minority communities including African American, Asian American,
Hispanic American, and Native American. CDFI banks are certified
through the U.S. Department of the Treasury by demonstrating they
serve LMI communities. See, e.g., Fed. Deposit Ins. Corp. Minority
Depository Institutions Program website, https://www.fdic.gov/regulations/resources/minority/mission-driven/ (last
visited July 11, 2021).
\94\ Cmty. Dev. Fin. Inst., CDFI Certification, https://www.cdfifund.gov/programs-training/certification/cdfi (last visited
July 21, 2021); Fed. Deposit Ins. Corp., Minority Depository
Institutions Program (last updated June 9, 2021), https://www.fdic.gov/regulations/resources/minority/mdi.html.
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During a period in which that depository institutions have been
providing relatively less funding to small businesses,\95\ small
businesses have increasingly relied on other nondepository institutions
for financing. Since nondepositories typically do not report their
small business financing activities to regulators, however, there are
no authoritative sources for either the number of such entities or the
dollar value of financing they provide to small businesses.\96\
However, what data are available make clear that fintech firms are
rapidly increasing their share of the small business financing
market.\97\
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\95\ See Rebel A. Cole, Off. of Advocacy, Small Bus. Admin., How
Did Bank Lending to Small Business in the United States Fare After
the Financial Crisis?, at 26 (Jan. 2018), https://cdn.advocacy.sba.gov/wp-content/uploads/2019/05/09134658/439-How-Did-Bank-Lending-to-Small-Business-Fare.pdf (showing a decline in
bank loans to small businesses from 2008-15 from $710 billion to
$600 billion). The level of bank lending to small businesses has
recovered somewhat since a trough in 2012-13 that represented the
lowest amount of lending since 2005. See also Fed. Deposit Ins.
Corp., https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx (last visited July 21,
2021) (tabulating outstanding balances for credit extended to small-
and non-small business lending by banks and thrifts over time).
\96\ See part II.B above.
\97\ See part II.D below.
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Whether depository or nondepository, each provider of small
business financing assesses a variety of different criteria to
determine whether and on what terms to grant an extension of credit or
other financing product, including business and financial performance,
the credit history of the business and its owner(s), the time in
business, and the industry, among other factors. Protections such as
guarantees, collateral, and insurance can mitigate perceived risks,
potentially enabling a lender to offer better terms or facilitating an
extension of credit that would otherwise not meet lending limit or
underwriting criteria. Often, government agencies, including the SBA,
FHA, and USDA, guarantee or insure loans themselves to encourage
lenders to provide credit to borrowers that may not otherwise be able
to obtain credit, either on affordable terms and conditions or at
all.\98\ Different lenders also employ diverse methods for assessing
risk, with smaller banks generally relying more on traditional
underwriting methods and typically managing multi-product
relationships. Fintechs increasingly use algorithms, automation, and
even AI and machine learning to assess risk and make underwriting
decisions, with originations typically being less relationship-based in
nature.
---------------------------------------------------------------------------
\98\ Congressional Research Serv., Small Business Administration
7(a) Loan Guaranty Program (updated June 21, 2021), https://fas.org/sgp/crs/misc/R41146.pdf (discussing the SBA's flagship 7(a) loan
guarantee program); U.S. Dep't of Hous. & Urban Dev., Descriptions
Of Multifamily Programs, https://www.hud.gov/program_offices/housing/mfh/progdesc (last visited July 27, 2021) (listing FHA
mortgage insurance programs for 5+ unit residential developments);
Farm Serv. Agency, U.S. Dep't of Agric., Guaranteed Loan Program
Fact Sheet (Mar. 2020), https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/guaranteed_loan_program-factsheet.pdf
(discussing the USDA's Farm Service Agency guaranteed loan program).
---------------------------------------------------------------------------
As well as diversity in underwriting methodology and criteria,
there are also considerable differences across small business financing
products and providers with respect to pricing methods and repayment
structures. As a result, it can be challenging to compare the
competitiveness of product pricing and terms. The Bureau understands
that term loans, lines of credit, and credit cards typically disclose
annualized interest rates; leases often take into account depreciation;
factoring products discount an invoice's value and add a fee; and MCAs
apply a multiple to the value of the up-front payment.\99\ Moreover,
providers may add additional fees that are not standardized within
industries, much less across them. The Bureau believes that this
complexity may confuse business owners and render them unable to secure
more favorable rates due to opacity in offers presented--which in some
cases may even be deliberate \100\--and a corresponding inability to
effectively compare across different financing options.\101\ This may
impair applicants' ability to make informed choices.
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\99\ See part II.D below for definitions of the different
product categories.
\100\ Press Release, Fed. Trade Comm'n, Cash Advance Firm to Pay
$9.8M to Settle FTC Complaint It Overcharged Small Businesses (Apr.
22, 2021), https://www.ftc.gov/news-events/press-releases/2021/04/cash-advance-firm-pay-98m-settle-ftc-complaint-it-overcharged
(settling a lawsuit between the Federal Trade Commission (FTC) and
an MCA provider for $9.8 million where the complaint alleged that
the provider ``deceived'' and ``misle[d]'' business borrowers about
the amount and terms of financing); Bd. of Governors of the Fed.
Reserve Sys., Record of Meeting: Community Advisory Council and the
Board of Governors, at 7 (Oct. 5, 2018), https://www.federalreserve.gov/aboutthefed/files/cac-20181005.pdf (noting a
growing trend of small business owners facing difficulty with
expensive loan products such as MCAs where the pricing and structure
of the loans is often deliberately obscured).
\101\ Fed. Trade Comm'n, `Strictly Business' Forum, Staff
Perspective, at 5 (Feb. 2020), https://www.ftc.gov/system/files/documents/reports/staff-perspective-paper-ftcs-strictly-business-forum/strictly_business_forum_staff_perspective.pdf (discussing the
difficulty in comparing across financing products with widely
differing methods for calculating and describing key features).
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D. Estimating the Size and Scope of the Small Business Financing Market
In light of the lack of data and the heterogeneity of products and
providers within the small business financing market, it can be
difficult to get a clear sense of the size and scope of the market. In
this section, the Bureau describes its estimates of the total
outstanding balances of credit in the market, the number of
institutions that are active in the small business
[[Page 56366]]
financing market, and how the Bureau arrived at these estimates. Where
possible, the Bureau tries to estimate the state of the small business
financing market at the end of 2019 in order to estimate the state of
the market during a year unaffected by the COVID-19 pandemic.
One challenge is that some of the data report the dollar value of
originations and some report outstanding balances. For the purposes of
this exercise and for most, but not all, products, the Bureau assumes
that for every $1 originated in the market in a given year, there is
approximately a corresponding $3 of outstanding balances. This
assumption is based on the ratio of the 2019 FFIEC Call Report data,
which totaled $721 billion in outstanding balances on bank loans to
small businesses and small farms, and the 2019 CRA data, which recorded
$264 billion in bank loan originations to small businesses and small
farms.\102\ This assumption is limited by the extent to which other
small business financing products differ from loans and lines of
credit, which make up the majority of financing products captured by
the FFIEC Call Report data and the CRA data.\103\
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\102\ FFIEC Call Report data records outstanding balances on
loans with origination amounts less than $1 million across
Commercial & Industrial, Nonfarm Nonresidential, Agricultural, and
Secured by Farmland lending categories. See FDIC Quarterly Banking
Profile Time Series, https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/timeseries/small-business-farm-loans.xlsx (last
visited August 29, 2021).
\103\ FFIEC Call Report data and CRA data on small business
credit products also include business credit card products, but
loans and lines of credit made up $713 billion out of $775 billion
in outstanding balances on bank, savings association, and credit
union loans to small businesses in 2019. One important caveat to
this assumption is that products with materially shorter average
term lengths, for example credit cards, factoring products, and
MCAs, may have an inverse ratio of originations to outstanding
balances. For example, top issuers of general purpose credit cards
recorded purchase volumes of two to seven times their outstanding
balances in 2020. Nilson Report, Issue 1192, at 6 (Feb. 2021),
https://nilsonreport.com/publication_newsletter_archive_issue.php?issue=1192. If business-
purpose credit cards, factoring products, and MCAs behaved similarly
with respect to the ratio of originations to outstanding balances,
then for every $1 originated in the market in a given year, there
could be a corresponding $0.14-0.50 in outstanding balances for such
products ($1 divided by two to seven).
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As detailed in this section, the Bureau estimates that the market
for small business financing products totaled $1.4 trillion in
outstanding balances in 2019. The Bureau estimates that small business
financing by depository institutions makes up just over half of small
business financing by private institutions. In 2020 and 2021, COVID-19
emergency lending programs added a further $1 trillion to this value,
bringing the overall size of the small business financing market up to
$2.4 trillion. Below, the Bureau estimates the market share for
different small business financing products.
Since the available data regarding depository institutions' small
loans to businesses address term loans, lines of credit, and credit
cards together, the respective share of different products in the
overall small business financing market is difficult to assess. As
detailed in this section, the Bureau estimates that together, private
term loans and lines of credit constitute the largest small business
credit product by value, totaling approximately $770 billion in
outstanding balances in 2019, although PPP and EIDL Program loans have
since added $1 trillion to this figure.
Lending by banks, saving associations, and credit unions comprises
the largest part of this total amount for private term loans and lines
of credit. Using FFIEC Call Report data for December 2019, the Bureau
estimates that banks and savings associations account for a total of
about $721 billion in outstanding credit to small businesses and small
farms as of December 2019.\104\ Using NCUA Call Report data for
December 2019, the Bureau estimates that credit unions account for a
total of about $55 billion in outstanding credit to members for
commercial purposes.\105\ From this value, the Bureau subtracts $62
billion in credit card lending to arrive at $713 billion in outstanding
balances for term loans and lines of credit. From this value, the
Bureau further subtracts $134 billion in SBA guaranteed loans to arrive
at $580 billion in outstanding balances for private term loans and
lines of credit extended by depository institutions (i.e., banks,
savings associations, and credit unions) as of December 2019.
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\104\ Calculated from FFIEC Call Report data accessed on June 8,
2021. The Bureau notes that, as discussed in part II.B above, these
estimates rely on small loans to businesses as a proxy for loans to
small businesses. As such, the Bureau acknowledges that the true
outstanding value of credit extended to small businesses by such
institutions may be different than what is presented here. For
example, the small loans to businesses proxy would overestimate the
value of outstanding credit if a significant number of small loans
to businesses and farms are to businesses or farms that are actually
large. Alternatively, the proxy would underestimate the value of
outstanding credit to small businesses if a significant number of
businesses and farms that are small under the proposed rule take out
loans that are larger than $1 million or $500,000, for businesses
and farms, respectively.
\105\ Nat'l Credit Union Admin., 2019 Call Report Quarterly
Data, https://www.ncua.gov/analysis/credit-union-corporate-call-report-data/quarterly-data (last visited Aug. 24, 2021) (2019 NCUA
Call Report). The Bureau notes that, as discussed in part II.B
above, credit unions only report credit transactions made to members
for commercial purposes with values over $50,000. The Bureau uses
this value as a proxy for small business credit. The Bureau
acknowledges that the true value of small business credit extended
by credit unions may be different than what is presented here. For
example, this proxy may overestimate the value of outstanding small
business credit because some members are taking out loans for large
businesses. Alternatively, this proxy may underestimate the value of
outstanding small business credit if credit unions originate a
substantial number of small business loans with origination values
of under $50,000. For this analysis, the Bureau includes all types
of commercial loans to members except construction and development
loans and multifamily residential property. This includes loans
secured by farmland; loans secured by owner-occupied, non-farm, non-
residential property; loans secured by non-owner occupied, non-farm,
non-residential property; loans to finance agricultural production
and other loans to farmers; commercial and industrial loans;
unsecured commercial loans; and unsecured revolving lines of credit
for commercial purposes. The Bureau does include multifamily in part
VII below.
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The remaining $190 billion in outstanding balances for private term
loans and lines of credit was extended by various nondepository
institutions, namely commercial finance companies, fintechs, and
nondepository CDFIs.\106\
---------------------------------------------------------------------------
\106\ There may additionally be lending by equipment and vehicle
dealers originating loans in their own name that is not captured
here.
---------------------------------------------------------------------------
Commercial finance companies specialize in financing equipment and
vehicle purchases. The Bureau estimates that the value of outstanding
balances on credit extended by commercial finance companies totaled
approximately $160 billion. Using data from the Federal Reserve Board's
Finance Company Business Receivables data on owned assets as of
December 2019, the Bureau estimates commercial finance companies
outstanding credit for commercial purposes as the value of retail motor
vehicle loans plus equipment loans and other business receivables,
which totaled about $215 billion.\107\ The Bureau further assumes that
about 75 percent of this value, or $162 billion, can be attributed to
loans to small businesses.\108\
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\107\ Bd. of Governors of the Fed. Reserve Sys., Finance
Companies--G.20 (updated July 15, 2021), https://www.federalreserve.gov/releases/g20/hist/fc_hist_b_levels.html. The
Bureau does not include leases, since they are already counted
within the product category of equipment and vehicle leasing, or
wholesale loans, which it assumes are typically made to non-small
businesses.
\108\ This methodology is consistent with the approach taken by
Gopal and Schnabl (2020).
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Typical fintech providers are characterized primarily by providing
banking services exclusively in an online environment.\109\ The Bureau
estimates that total outstanding loan balances for fintech providers
reached around $25 billion in 2019. In a 2018 report, S&P Global
projected that online
[[Page 56367]]
platform lenders would originate about $9.3 billion in credit to small
and medium enterprises in 2019.\110\ Using this estimate, the Bureau
scales up the value of originations to $25 billion in estimated
outstanding balances, under the assumptions discussed above.\111\ At
the beginning of the COVID-19 pandemic and financial crisis, fintechs
originated around $22 billion in PPP loans to small businesses from
March to August 2020 \112\ and likely continued to originate billions
more during the third wave of PPP loans in 2021, which represents an
almost 90 percent increase or more in outstanding balances since
2019.\113\ This follows already rapid growth from $1.4 billion in
estimated outstanding balances in 2013.\114\
---------------------------------------------------------------------------
\109\ Barkley & Schweitzer, 17 Int'l J. Cent. Banking at 35-36.
\110\ 2018 US Fintech Market Report at 6.
\111\ The Bureau notes that this figure may underestimate the
total value of fintech lending because it focuses on platform
lenders and may overestimate the value of lending to small
businesses because it also includes credit to medium businesses.
Additionally, the Bureau notes that fintechs often offer products
besides loans and lines of credit, and that there is no clear
demarcation between fintech, commercial finance company, and MCA
provider, limiting the precision of market size estimates. Finally,
fintechs often sell loans once originated to other entities,
securitize their originations, or purchase loans that banks have
originated, which may further present challenges to the precision of
market size estimates for this market segment.
\112\ Jessica Battisto et al., Who Benefited from PPP Loans by
Fintech Lenders?, Liberty Street Economics (May 27, 2021), https://libertystreeteconomics.newyorkfed.org/2021/05/who-received-ppp-loans-by-fintech-lenders.html; Small Bus. Admin., Paycheck
Protection Program (PPP) Report (approvals through 12 p.m. EST Apr.
16, 2020), https://www.sba.gov/sites/default/files/2020-06/PPP%20Deck%20copy-508.pdf; Small Bus. Admin., Paycheck Protection
Program (PPP) Report (approvals through Aug. 8, 2020), https://www.sba.gov/sites/default/files/2020-08/PPP_Report%20-%202020-08-10-508.pdf.
\113\ Per the program's intent, many PPP loans have been
forgiven since the program began, which may mean that outstanding
balances on PPP loans extended by fintech providers have since
declined.
\114\ Barkley & Schweitzer, 17 Int'l J. Cent. Banking at 35-36
(citing 2018 US Fintech Market Report at 5). This figure annualizes
$121 million in estimated 2013 quarterly originations to $484
million in annual originations and scales up to estimated
outstanding balances using the ratio between the FFIEC Call Report
and the CRA data discussed above.
---------------------------------------------------------------------------
The Bureau estimates the value of outstanding balances on credit
extended by nondepository CDFIs to small business borrowers to be
around $1.5 billion. Using reporting by the CDFI Fund for 2019, the
Bureau scales down the outstanding balances for loan funds of $13.8
billion and for venture capital funds of $0.3 billion by the proportion
of all CDFI lending attributable to business borrowers, which totaled
$15.4 billion out of $141.2 billion.\115\
---------------------------------------------------------------------------
\115\ CDFI Fund, CDFI Annual Certification and Data Collection
Report (ACR): A Snapshot for Fiscal Year 2019, at 17, 22 (Oct.
2020), https://www.cdfifund.gov/sites/cdfi/files/2021-01/ACR-Public-Report-Final-10292020-508Compliant.pdf. To the extent that CDFI loan
funds and venture capital funds extend credit to business customers
at different rates than CDFI banks and credit unions, this
calculation may over- or underestimate the value of lending to small
businesses by nondepository CDFIs. This figure also assumes that all
CDFI lending is for small businesses.
---------------------------------------------------------------------------
Categorized here separately so as to distinguish residential from
non-residential loans, the Bureau estimates outstanding balances for
loans on 5+ unit residential dwellings to total over $30 billion.\116\
Using data from the Mortgage Bankers Association, the Bureau scales up
$11 billion in 2019 annual originations on loans of under $1 million in
value at origination for 5+ unit residential dwellings to $30 billion
in estimated outstanding balances, using the ratio between the FFIEC
Call Report and the CRA data discussed above.\117\
---------------------------------------------------------------------------
\116\ Depository institutions, discussed above, extend a
sizeable proportion of loans for 5+ unit residential dwellings; both
nondepository and depository institutions are included in the total
for 5+ unit outstanding balances.
\117\ See Mortg. Bankers Ass'n, Annual Report on Multi-Family
Lending--2019, at 5 (2020), https://www.mba.org/store/products/research/general/report/2019-annual-report-on-multifamily-lending.
This includes both private loans, estimated at around $18 billion,
and loans extended by Fannie Mae, Freddie Mac, and the FHA,
estimated at around $13 billion. The share of 5+ unit residential
dwelling loans of all sizes extended by governmental or government-
sponsored entities was 41 percent. The Bureau assumes for the
purposes of this exercise that the same share is reflected in loans
of under $1 million in value at origination, although arguably this
share would be higher if government and government-sponsored
entities are extended disproportionately smaller dollar value loans
on average.
---------------------------------------------------------------------------
Also categorized separately from depository institution totals so
as to distinguish private from government and government-sponsored
loans, the Bureau estimates that outstanding balances for loans
extended by the Small Business Administration and the Farm Credit
System totaled around $200 billion in 2019.\118\
---------------------------------------------------------------------------
\118\ The grand total for lending by government and government-
sponsored entities would be approximately $210 billion, including 5+
unit residential dwelling loans extended by Fannie Mae, Freddie Mac,
and the FHA, which are separately recorded within the 5+ unit
residential dwelling loan product category.
---------------------------------------------------------------------------
The SBA, through its traditional 7(a), 504, and microloan programs
as well as the Economic Impact Disaster Loan (EIDL) program and funding
for Small Business Investment Companies (SBICs), is the largest
governmental lender by value, with $143.5 billion in outstanding
balances at the end of fiscal 2019.\119\ However, since the outbreak of
the COVID-19 pandemic, SBA lending has increased in size by over $1
trillion due to the PPP, which totaled $800 billion, and the EIDL
Program, which totaled $210 billion.\120\
---------------------------------------------------------------------------
\119\ Small Bus. Admin., Small Business Administration Loan
Program Performance (effective Mar. 31, 2021), https://www.sba.gov/document/report-small-business-administration-loan-program-performance. SBA guaranteed loans comprised $134 billion out of this
total, which amount has been deducted from the totals for depository
institutions to avoid double counting.
\120\ Small Bus. Admin., Paycheck Protection Program (PPP)
Report (approvals through May 31, 2021), https://www.sba.gov/sites/default/files/2021-06/PPP_Report_Public_210531-508.pdf; Small Bus.
Admin., Disaster Assistance Update--Nationwide COVID EIDL, Targeted
EIDL Advances, Supplemental Targeted Advances (June 3, 2021),
https://www.sba.gov/sites/default/files/2021-06/COVID-19%20EIDL%20TA%20STA_6.3.2021_Public-508.pdf; Small Bus. Admin.,
Disaster Assistance Update--Nationwide EIDL Loans (Nov. 23, 2020),
https://www.sba.gov/sites/default/files/2021-02/EIDL%20COVID-19%20Loan%2011.23.20-508_0.pdf.
---------------------------------------------------------------------------
The Farm Credit System is another important government-related part
of the small business credit landscape. The Bureau estimates that Farm
Credit System members had around $55 billion in outstanding balances of
credit extended to small farms in 2019. Using the same small loan to
farms proxy as is used in the FFIEC Call Report, the Bureau estimates
credit to farms with an origination value of less than $500,000. Based
on the Farm Credit System's 2019 Annual Information Statement of the
Farm Credit System, the Bureau estimates that outstanding balances of
such small credit to farms totaled $55 billion at the end of 2019.\121\
The Bureau notes that, as with the FFIEC Call Report proxy, this number
may include credit to non-small farms and may exclude larger credit
transactions extended to small farms.
---------------------------------------------------------------------------
\121\ Fed. Farm Credit Banks Funding Corp., Farm Credit 2019
Annual Information Statement of the Farm Credit System, at 54,
https://www.farmcreditfunding.com/ffcb_live/investorResources/informationStatements.html (last visited Aug. 13, 2021).
---------------------------------------------------------------------------
Mostly extended by depository institutions, the Bureau estimates
that the market for small business credit cards totaled over $60
billion in outstanding balances for 2020.\122\ Using data from Y-14
Form submissions to the Federal Reserve Board, the Bureau estimates the
value of outstanding balances for small business credit card accounts
where the loan is underwritten
[[Page 56368]]
with the sole proprietor or primary business owner as an
applicant.\123\
---------------------------------------------------------------------------
\122\ See Bd. of Governors of the Fed. Reserve Sys., Report
Forms FR Y-14M, https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDYnbIw+U9pka3sMtCMopzoV (last visited
July 12, 2021). The Board's data are received from bank holding
companies over $50 billion in assets, which represent 70 percent of
outstanding balances for consumer credit cards; the corresponding
percent of balances captured for small business cards is not known,
so the total small business-purpose credit card market could be
substantially higher or lower. See Bureau of Consumer Fin. Prot.,
The Consumer Credit Card Market, at 18 (Aug. 2019), https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2019.pdf.
\123\ Off. of Mgmt. & Budget, Instructions for the Capital
Assessments and Stress Testing Information Collection (Reporting
Form FR-Y14M), OMB No. 7100-0341, at 148 (Mar. 2020), https://omb.report/icr/202101-7100-006/doc/108187801.
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Equipment and vehicle leasing, whereby businesses secure the right
to possess and use a piece of equipment or vehicle for a term in return
for consideration, is another important product category that is
estimated to value roughly $160 billion in outstanding balances in
2019. Using data from the Equipment Leasing and Financing Foundation
for 2019, the Bureau estimates the total size of the equipment and
vehicle leasing market for all sized businesses in 2019 to be
approximately $900 billion.\124\ The Bureau further assumes that small
businesses comprise around 18 percent of the total equipment and
vehicle leasing market.\125\
---------------------------------------------------------------------------
\124\ See Equip. Leasing & Fin. Found., Horizon Report, https://www.leasefoundation.org/industry-resources/horizon-report/ (last
updated Apr. 22, 2021).
\125\ See Karen Mills, Harvard Bus. Sch., State of Small
Business Lending, at 29 (July 2014), https://www.hbs.edu/ris/Supplemental%20Files/15-004%20HBS%20Working%20Paper%20Chart%20Deck_47695.pdf (estimating
equipment leasing outstanding balances for small business borrowers
at approximately $160 billion at Dec. 31, 2013); Monitor Daily, SEFI
Report Finds Strong Performance Despite Challenges, https://www.monitordaily.com/news-posts/sefi-report-finds-strong-performance-despite-challenges/ (last visited July 27, 2021) ($903
billion market in 2014, commensurate with an 18 percent market share
for small business borrowers at the time of the Karen Mills report).
---------------------------------------------------------------------------
Factoring is a similarly significant product type, estimated at
around $100 billion in market size for 2019.\126\ In a factoring
transaction, factors purchase, at a discount, a legally enforceable
claim for payment (i.e., accounts receivables or invoices) for goods
already supplied or services already rendered by a business for which
payment has not yet been made; hence, a factor's risk related to
repayment often lies with the business's customer and not the business
itself. In most cases, specific companies, called factors, provide
factoring products.
---------------------------------------------------------------------------
\126\ See Secured Fin. Found., 2019 Secured Finance: Market
Sizing & Impact Study Extract Report, at 7 (June 2019), https://www.sfnet.com/docs/default-source/data-files-and-research-documents/sfnet_market_sizing___impact_study_extract_f.pdf?sfvrsn=72eb7333_2.
This study estimated the total volume of the U.S. factoring market
to be $101 billion. To the extent that factoring volumes differ from
outstanding balances, the value of outstanding balances may be
higher or lower than this estimate. Also, this estimate captures
factoring for business borrowers of all sizes, not just small
business borrowers. The Bureau assumes that most factoring is
provided to small business customers.
---------------------------------------------------------------------------
The market for MCAs is developing rapidly and data are even more
scarce than for other segments of the small business lending market.
This limits the reliability of estimates as to the MCA market's size.
Based on market research conducted by Bryant Park Capital (BPC) and
reported on by deBanked.com, the Bureau estimates the 2019 market size
to be around $20 billion.\127\ The MCA market is also of particular
significance for smaller and traditionally underserved businesses that
may not qualify for other types of credit.\128\ MCAs are typically
structured to provide a lump sum payment up front (a cash advance) in
exchange for a share of future revenue until the advance, plus an
additional amount, is repaid. Unlike the majority of other small
business financing products, MCAs typically purport to be for short
durations.\129\ The Bureau understands that MCAs also tend to be
relatively high-cost products.\130\ Two States, New York and
California, will soon implement laws that will require providers of
``sales-based financing,'' such as MCAs, to provide disclosures
(including estimated APR) similar to those required under the Truth in
Lending Act (TILA),\131\ which generally only applies to consumer
credit.\132\
---------------------------------------------------------------------------
\127\ Paul Sweeney, Gold Rush: Merchant Cash Advances are Still
Hot, deBanked (Aug. 18, 2019), https://debanked.com/2019/08/gold-rush-merchant-cash-advances-are-still-hot/. BPC estimates appear to
reference origination volumes rather than outstanding balances. See
Nimayi Dixit, S&P Global Market Intelligence, Payment Fintechs Leave
Their Mark On Small Business Lending (Aug. 28, 2018), https://www.spglobal.com/marketintelligence/en/news-insights/research/payment-fintechs-leave-their-mark-on-small-business-lending.
Depending on credit multiplier effects, the value of annual
origination volumes could be smaller or greater than outstanding
balances. Without information on outstanding balances and for the
purposes of calculating a market size for small business financing
in 2019, the Bureau assumes in this paper a 1:1 ratio between annual
origination volumes and outstanding balances for MCA products. See
above for discussion of credit multiplier effects.
\128\ Cf. Barbara Lipman & Ann Marie Wiersch, Bd. of Governors
of the Fed. Reserve Sys., Uncertain Terms: What Small Business
Borrowers Find When Browsing Online Lender websites, at 3 (Dec.
2019), https://www.federalreserve.gov/publications/files/what-small-business-borrowers-find-when-browsing-online-lender-websites.pdf
(observing that online lenders, including providers of MCA products,
position themselves as offering financing to borrowers underserved
by traditional lenders).
\129\ See id. (stating that MCAs are generally repaid in three
to 18 months).
\130\ Id. (stating that annual percentage rates on MCA products
can exceed 80 percent or rise to triple digits). See also Fed. Trade
Comm'n, `Strictly Business' Forum, Staff Perspective, at 5 (Feb.
2020), https://www.ftc.gov/system/files/documents/report/staff-perspective-paper-ftcs-strictly-business-forum/strickly_business__forum_staff_perspective.pdf (observing
stakeholder concern about the high-cost of MCAs that can reach
triple digit annual percentage rates).
\131\ 15 U.S.C. 1601 et seq.
\132\ New York State law will require, as of January 1, 2022,
that providers of ``sales-based financing'' provide disclosures to
borrowers which would include calculations of an estimated annual
percentage rate in accordance with the Bureau's Regulation Z, 12 CFR
part 1026. See New York S.898, section 803(c) (signed Jan. 6, 2021)
(amending S.5470-B), https://legislation.nysenate.gov/pdf/bills/2021/s898. Similarly, California's Department of Financial
Protection and Innovation is in the process of issuing a rule to
implement a California law requiring disclosures by commercial
financing companies, including those providing sales-based
financing. See 10 Cal. Code Reg. 2057(a)(22) (defining sales-based
financing as ``a commercial financing transaction that is repaid by
a recipient to the financer as a percentage of sales or income, in
which the payment amount increases and decreases according to the
volume of sales made or income received by the recipient'' and
including ``a true[hyphen]up mechanism''); 10 Cal. Code Reg.
2065(a)(3) and 3001 (requiring sales-based financing providers
disclosure estimated annual percentage rate according to Regulation
Z, 12 CFR part 1026). Under these laws, providers of commercial
financing generally will be required to disclose: (1) The total
amount financed, and the amount disbursed if it is different from
the total amount financed; (2) the finance charge; (3) the APR (or
the estimated APR for sales-based financing and factoring
transactions), calculated in accordance with TILA and Regulation Z;
(4) the total repayment amount; (5) the term (or the estimated term
for sales-based financing) of the financing; (6) periodic payment
amounts; (7) prepayment charges; (8) all other fees and charges not
otherwise disclosed; and (9) any collateral requirements or security
interests. See Cal. S.B. 1235 (Sept. 30, 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235; N.Y. S.B. S5470B (July
23, 2020), https://legislation.nysenate.gov/pdf/bills/2019/S5470B.
---------------------------------------------------------------------------
Finally, trade credit is another significant market, which the
Bureau estimates to total $51 billion in outstanding balances in 2019.
Using a report by Fundbox/PYMNTS, the Bureau estimates the trade credit
market size by adding the total accounts payable for businesses under
$1 million in annual revenue.\133\ Considering the total value of
accounts payable for businesses between $1 million and $5 million would
increase the market size by $88 billion.\134\ Trade credit is an often
informal, business-to-business transaction, usually between non-
financial firms whereby suppliers allow their customers to acquire
goods and/or
[[Page 56369]]
services without requiring immediate payment.
---------------------------------------------------------------------------
\133\ See Fundbox/PYMNTS.com, The Trade Credit Dilemma, at 11
(May 2019), https://www.pymnts.com/wp-content/uploads/2019/05/Trade-Credit-Dilemma-Report.pdf (estimating accounts payable for
businesses with revenue of under $250,000 at $6.7 billion and for
businesses with revenue of $250,000 to $999,000 at $44.6 billion).
\134\ Id. The trade credit market is estimated to total $1.6
trillion across all business sizes in the United States. In the
overall $1.4 trillion market size total for all small business
financing products, the Bureau has included only the trade credit
market for businesses of up to $1 million in revenue for consistency
with its White Paper.
---------------------------------------------------------------------------
The Bureau estimates that there were approximately 8,100 financial
institutions extending small business financing in 2019, almost 80
percent of which were depository institutions.
Based on FFIEC Call Report data for December 2019, the Bureau
estimates that about 5,100 banks and savings associations are active in
the small business lending market, out of a total of about 5,200 banks
and savings associations.\135\ The Bureau assumes that a bank or
savings association is ``active'' in the market if it reports a
positive outstanding balance of small loans, lines of credit, and
credit cards to businesses.
---------------------------------------------------------------------------
\135\ Calculated from FFIEC Call Report data accessed on June 8,
2021.
---------------------------------------------------------------------------
Based on the NCUA Call Report data for December 2019, the Bureau
estimates that about 1,200 out of 5,300 total credit unions were active
in the small business lending market.\136\ The Bureau defines a credit
union as ``active'' in the market if it reported a positive number of
originations of loans, lines of credit, and credit cards to members for
commercial purposes in 2019.
---------------------------------------------------------------------------
\136\ 2019 NCUA Call Report. (One hundred twelve credit unions
were not federally insured as of December 2019 but are included here
as depository institutions. Calculated from NCUA Call Report data
accessed on June 8, 2021.)
---------------------------------------------------------------------------
The Bureau estimates that there are about 1,800 nondepository
institutions active in the small business financing market,\137\
accounting for around $550 billion in outstanding credit to small
businesses.
---------------------------------------------------------------------------
\137\ There may also be cooperative or nonprofit lenders as well
as equipment and vehicle finance dealers originating in their own
name that are not captured by the Bureau in these figures. For
example, by searching Uniform Commercial Code (UCC) filings, Manasa
Gopal and Philipp Schnabl identified 19 cooperative lenders that
originated at least 1,500 loans over the period from 2006 to 2016.
Manasa Gopal & Philipp Schnabl, The Rise of Finance Companies and
FinTech Lenders in Small Business Lending, N.Y.U. Stern Sch. of
Bus., at 18 (May 13, 2020), https://ssrn.com/abstract=3600068.
Additionally, these figures do not include trade creditors, which
are non-financial companies that extend credit by allowing customers
a period of time in which to pay and which are much greater in
number since the practice is widespread across the economy.
---------------------------------------------------------------------------
The Bureau estimates that about 300 commercial finance companies
are engaged in small business lending. By searching UCC filings, Manasa
Gopal and Philipp Schnabl identified almost 300 commercial finance
companies, including both independent and captive finance companies,
with at least 1,500 small business loans between 2006 and 2016.\138\
The Bureau also estimates there to be about 30 or more fintechs
currently active in the small business lending market, not including
MCA providers. Using the same methodology as for commercial finance
companies, Gopal and Schnabl identified 19 fintech companies.\139\ The
Bureau conservatively increases this estimate to 30 to account for
rapid growth in the industry from 2016 to 2019.
---------------------------------------------------------------------------
\138\ Id. This figure combines 192 independent finance companies
with 95 captive finance companies. Since this estimate captures only
those commercial finance companies averaging at least 150 loans per
year over the 2006 to 2016 period, it may exclude smaller volume
lenders and should be considered conservative.
\139\ Id. Since this estimate captures only those fintechs
averaging at least 150 loans per year over the 2006 to 2016 period,
it may exclude smaller volume lenders and should be considered
conservative. On the other hand, since 2019, the COVID-19 economic
shock may have led to some fintechs scaling back or exiting the
small business financing market. See, e.g., Ingrid Lunden, Amex
Acquires SoftBank-backed Kabbage After Tough 2020 for the SMB
Lender, TechCrunch (Aug. 17, 2020), https://techcrunch.com/2020/08/17/amex-acquires-softbank-backed-kabbage-after-tough-2020-for-the-smb-lender/ (noting that Kabbage temporarily shut down credit lines
to small businesses during April 2020 and then spun off its small
business loan portfolio when it was subsequently acquired by
American Express).
---------------------------------------------------------------------------
The Bureau estimates that 340 nondepository CDFIs are engaged in
small business lending. Both depository and nondepository institutions
can be CDFIs. Depository CDFIs are counted in the numbers of banks,
savings associations, and credit unions engaged in small business
lending. According to the CDFI fund, 487 nondepository funds (i.e.,
loan funds and venture capital funds) reported as CDFIs in 2019.\140\
Of these, 340 institutions reported that business finance or commercial
real estate finance were a primary or secondary line of business in
2019.\141\
---------------------------------------------------------------------------
\140\ CDFI Fund, CDFI Annual Certification and Data Collection
Report (ACR): A Snapshot for Fiscal Year 2019, at 8 (Oct. 2020),
https://www.cdfifund.gov/sites/cdfi/files/2021-01/ACR-Public-Report-Final-10292020-508Compliant.pdf.
\141\ Id. at 15-16.
---------------------------------------------------------------------------
The Bureau estimates that about 270 nondepository mortgage lenders
participated in the credit market for 5+ unit residential dwellings in
2019 and that about 50 of these institutions extended 25 or more of
these loans to small businesses. In its ``2019 Multifamily Lending
Report,'' the Mortgage Bankers Association lists annual multifamily
lending volumes by institution, including a distinction for loans of
under $1 million in value at origination.\142\ Using the same small
loan to business proxy as is used in the FFIEC Call Report, the Bureau
estimates the number of nondepository mortgage lenders by counting the
number of institutions that appear on this list that are not depository
institutions and that extended at least 50 loans in 2019. The Bureau
counts institutions extending at least 50 loans of any size in order to
estimate institutions extending at least 25 small loans, based on the
assumption that some 50 percent of these loans may have been for values
greater than $1 million.
---------------------------------------------------------------------------
\142\ See Mortg. Bankers Ass'n, Annual Report on Multi-Family
Lending--2019, at 9-66 (2020), https://www.mba.org/store/products/research/general/report/2019-annual-report-on-multifamily-lending.
_____________________________________-
Based on data from UCC filings collected by deBanked.com, the
Bureau estimates that about 100 institutions were active in the market
for providing MCA products to small businesses in 2021.\143\
---------------------------------------------------------------------------
\143\ deBanked, UCC-1 and UCC-3 Filings by Merchant Cash Advance
Companies & Alternative Business Lenders, https://debanked.com/merchant-cash-advance-resource/merchant-cash-advance-ucc/ (last
visited July 11, 2021).
---------------------------------------------------------------------------
The Bureau estimates the number of factors to be between 700-900
and assumes that most factors are providing financing to small
business.\144\
---------------------------------------------------------------------------
\144\ See Secured Fin. Found., 2019 Secured Finance: Market
Sizing & Impact Study Extract Report, at 15 (June 2019), https://www.sfnet.com/docs/default-source/data-files-and-research-documents/sfnet_market_sizing___impact_study_extract_f.pdf?sfvrsn=72eb7333_2
(estimating the number of factors at between 700 and 900).
---------------------------------------------------------------------------
Finally, many government agencies and government-sponsored
enterprises provide or facilitate a significant proportion of small
business credit. As the flagship government lender, the Small Business
Administration managed in 2019 a portfolio of over $140 billion in
loans to small businesses, to which it added over $1 trillion in loans
extended as part of the COVID-19 emergency lending programs. Across
Federal, State, and municipal governments, the Bureau estimates that
there are likely over 100 government small business lending
programs.\145\ Additionally, the Farm Credit System reports that, as of
December 2019, the Farm Credit System contains a total of 72 banks and
associations.\146\ The Bureau assumes that all of these Farm Credit
System institutions are engaged in lending to small farms.
---------------------------------------------------------------------------
\145\ In addition to several Federal small business lending
programs, States and major municipalities also often have one or
more programs of their own. One State and one municipal program in
each State would already total 100 government lending programs
across Federal, State, and municipal governments.
\146\ Fed. Farm Credit Banks Funding Corp., Farm Credit 2019
Annual Information Statement of the Farm Credit System, at 7 (Feb.
28, 2020), https://www.farmcreditfunding.com/ffcb_live/serve/public/pressre/finin/.pdf?assetId=395570. The Bureau notes that Farm Credit
System banks do not report FFIEC Call Reports and are thus not
counted in the number of banks and savings associations discussed
above.
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[[Page 56370]]
E. Challenges for Women-Owned and Minority-Owned Small Businesses
Within the context of small business financing, women-owned and
minority-owned businesses often face relatively more challenges than
their counterparts. Specifically, women-owned and minority-owned small
businesses can be even more susceptible to the impact of economic
shocks and have a harder time accessing credit to survive and thrive in
better times.
Although women-owned and minority-owned businesses are found in
many industry sectors, women-owned businesses are concentrated in the
health care and social assistance sector, while minority-owned
businesses are primarily concentrated in the service sector, the
healthcare and social assistance sector, and the administrative
support, waste management and remediation sectors.\147\ During economic
downturns, such as the Great Recession and the financial crisis
resulting from the COVID-19 pandemic, women-owned and minority-owned
small businesses tend to fare worse than other small businesses. Women
and minority business owners have been disproportionately hurt by the
COVID-19 pandemic, with rates of business ownership dropping from
February to April 2020 by 41 percent, 32 percent, and 26 percent for
African American, Latinx, and Asian individuals, respectively, compared
with 17 percent for white individuals.\148\ Female business ownership
declined by 25 percent, compared with 20 percent for male
ownership.\149\
---------------------------------------------------------------------------
\147\ White Paper at 12, 15.
\148\ Robert Fairlie, Stanford Inst. for Economic Policy
Research, Working Paper No. 20-022, The Impact of COVID-19 on Small
Business Owners: Evidence of Early Stage Losses from the April 2020
Current Population Survey, at 5 (May 2020), https://siepr.stanford.edu/sites/default/files/publications/20-022.pdf. The
authors define the rate of business ownership as the percentage of
the labor force that owns and is actively employed in a business as
their main job in the survey month. Id. at 3. As such, the decline
in business ownership could reflect owners not only exiting the
labor market but also switching to a different (wage and salary)
job. In many cases, these exit or switching trends were temporary
reactions to public health lockdowns and have since partially
reversed.
\149\ Id. at 6, 8.
---------------------------------------------------------------------------
Women-owned and minority-owned small businesses often have smaller
cash reserves on average, leaving them less able to weather downturns
and credit crunches. For example, in February 2021, 39 percent of
women-owned businesses had one month or less in cash reserves, compared
with 29 percent of men-owned firms.\150\ And in around 90 percent of
majority Black and Hispanic communities, most businesses have fewer
than 14 days of cash buffer, while this is true of only 35 percent of
majority white communities.\151\ As a result, many small businesses,
especially those owned by women and minorities, may have had a greater
need for financing just as small business lenders began to approve
fewer loans in response to economic uncertainty. Loan approvals at
smaller banks dropped from 50 percent pre-pandemic to 12 percent in
April 2020 and have settled between 18 and 19 percent since June 2020;
the trend is similar for large banks, credit unions, and fintechs.\152\
---------------------------------------------------------------------------
\150\ Eric Groves, Cash Strapped SMBs, While 75% Of PPP Is Still
Available, Alignable (Feb. 9, 2021), https://www.alignable.com/forum/alignable-road-to-recovery-report-february-2021?utm_campaign=February&utm_medium=Press&utm_source=Press.
\151\ JPMorgan Chase Inst., Place Matters: Small Business
Financial Health in Urban Communities, at 5 (Sept. 2019), https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/institute/pdf/institute-place-matters.pdf.
\152\ Biz2Credit, Small Business Lending Index, https://www.biz2credit.com/small-business-lending-index (last visited July
27, 2021).
---------------------------------------------------------------------------
The PPP--part of the Federal government's response to the
pandemic--helped to keep many small businesses afloat, but a number of
factors prevented minority-owned small businesses from accessing PPP
loans as easily as other firms. For example, established banking
relationships between applicants and lending providers were often
critical to approvals in early PPP underwriting; \153\ many minority-
owned businesses did not have such relationships.\154\ Further, many
minority-owned firms are sole proprietorships and independent
contractors, both of which received delayed access to PPP loans.\155\
Unprofitable non-employer firms were also initially barred from
receiving loans.\156\ Although Black-owned firms are more likely to use
fintech providers, these lenders were only belatedly allowed to
disburse PPP funds.\157\ However, once fintech providers were allowed
to disburse PPP loans, Black borrowers in particular benefited from
this access, highlighting the ability of fintech firms to reach
minority-owned business borrowers.\158\
---------------------------------------------------------------------------
\153\ Sara Savat, Who you know matters, even when applying for
PPP loans, The Source, Newsroom, Wash. Univ. in St. Louis (Feb. 15,
2021), https://source.wustl.edu/2021/02/who-you-know-matters-even-when-applying-for-ppp-loans/ (previous lender relationship increased
likelihood of obtaining a PPP loan by 57 percent). See generally 86
FR 7271, 7280 (Jan. 27, 2021) (noting that many banks restricted
access to PPP loans to existing customers, which may run a risk of
violating the ECOA and Regulation B).
\154\ Claire Kramer Mills, Fed. Reserve Bank of N.Y., Double
Jeopardy: COVID-19's Concentrated Health and Wealth Effects in Black
Communities, at 6 (Aug. 2020), https://www.newyorkfed.org/medialibrary/media/smallbusiness/DoubleJeopardy_COVID19andBlackOwnedBusinesses (arguing that a lack
of strong banking relationships among Black-owned firms may have led
to relatively lower rates of access to PPP loans for such firms);
Fed. Reserve Banks, Small Business Credit Survey: 2021 Report on
Firms Owned by People of Color, at ii (Apr. 15, 2021), https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2021/sbcs-report-on-firms-owned-by-people-of-color (Small Business Credit
Survey of Firms Owned by People of Color) (finding that ``firms
owned by people of color tend to have weaker banking
relationships'').
\155\ Greg Iacurci, Coronavirus loan program delayed for
independent contractors and self-employed workers, CNBC (Apr. 3,
2020), https://www.cnbc.com/2020/04/03/delays-in-sba-loans-for-independent-contractors-self-employed-workers.html.
\156\ Stacy Cowley, `It Was a Joke': Some Small Businesses Got
$1 Relief Loans, N.Y. Times (Jan. 11, 2021), https://www.nytimes.com/2021/01/11/business/small-businesses-ppp-covid.html
(observing that sole proprietorships were initially eligible for PPP
loans only if they were profitable); see also Stacy Cowley, Minority
Entrepreneurs Struggled to Get Small-Business Relief Loans, N.Y.
Times (Apr. 4, 2021), https://www.nytimes.com/2021/04/04/business/ppp-loans-minority-businesses.html (noting that sole proprietorships
and independent contractor business structures are particularly
prevalent among minority-owned businesses, which led to minority-
owned businesses being disproportionately restricted from accessing
PPP loans during initial roll-out of the program).
\157\ Claire Kramer Mills, Fed. Reserve Bank of N.Y., Double
Jeopardy: COVID-19's Concentrated Health and Wealth Effects in Black
Communities, at 5-7 (Aug. 2020), https://www.newyorkfed.org/medialibrary/media/smallbusiness/DoubleJeopardy_COVID19andBlackOwnedBusinesses.
\158\ Jessica Battisto et al., Liberty Street Economics, Fed.
Reserve Bank of N.Y., Who Benefited from PPP Loans by Fintech
Lenders? (May 27, 2021), https://libertystreeteconomics.newyorkfed.org/2021/05/who-benefited-from-ppp-loans-by-fintech-lenders.html.
---------------------------------------------------------------------------
Finally, applicants whose owners belong to protected categories may
have received different credit outcomes when applying for PPP loans,
although limitations in demographic information for PPP loans have
hindered fair lending analyses.\159\
---------------------------------------------------------------------------
\159\ Rocio Sanchez-Moyano, Fed. Reserve Bank of S.F., Paycheck
Protection Program Lending in the Twelfth Federal Reserve District
(Mar. 3, 2021), https://www.frbsf.org/community-development/publications/community-development-research-briefs/2021/february/ppp-lending-12th-district/ (citing matched-pair audit studies that
found discouragement and provision of incomplete information for
minority business owners seeking PPP loans); 86 FR 7271, 7280 (Jan.
27, 2021) (noting that facially neutral PPP policies such as
limiting loans to businesses with pre-existing relationships may run
a risk of violating the ECOA and Regulation B due to a
disproportionate impact on a prohibited basis).
---------------------------------------------------------------------------
Given the severity of the COVID-19 pandemic for small businesses
generally and its potentially disproportionate impact on women-owned
and minority-owned small businesses, it is essential to better
understand the small business financing landscape to maintain support
for this key part of the U.S. economy both during and after the
pandemic.
[[Page 56371]]
F. The Purposes and Impact of Section 1071
The Dodd-Frank Act sets forth the Bureau's purposes and mission. It
provides that a key component of the Bureau's fair lending work is to
ensure fair, equitable, and nondiscriminatory access to credit for both
individuals and their communities.\160\ And in passing section 1071,
Congress articulated two purposes for requiring the Bureau to collect
data on small business credit applications and loans--to ``facilitate
enforcement of fair lending laws'' and to ``enable communities,
governmental entities, and creditors to identify business and community
development needs and opportunities of women-owned, minority-owned, and
small businesses.'' \161\ Although the Dodd-Frank Act does not further
explain or clarify these dual statutory purposes, other Federal laws
shed light on both purposes. That is, a set of existing Federal laws
form the backdrop for the use of 1071 data to facilitate the
enforcement of fair lending laws, and to identify business and
community development needs of small businesses across the United
States.
---------------------------------------------------------------------------
\160\ See 12 U.S.C. 5493(c)(2)(A) (directing the Office of Fair
Lending and Equal Opportunity to provide ``oversight and enforcement
of Federal laws intended to ensure the fair, equitable, and
nondiscriminatory access to credit for both individuals and
communities that are enforced by the Bureau,'' including ECOA and
the Home Mortgage Disclosure Act).
\161\ ECOA section 704B(a).
---------------------------------------------------------------------------
1. Facilitating Enforcement of Fair Lending Laws
Congress intended for section 1071 to ``facilitate enforcement of
fair lending laws,'' \162\ which include ECOA, the Home Mortgage
Disclosure Act of 1975 (HMDA),\163\ the Fair Housing Act (FHAct),\164\
and other Federal and State anti-discrimination laws.
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\162\ Id.
\163\ 12 U.S.C. 2801 et seq.
\164\ 42 U.S.C. 3601 through 3619.
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i. Equal Credit Opportunity Act (ECOA)
ECOA, which is implemented by Regulation B, applies to all
creditors. Congress first enacted ECOA in 1974 to require financial
institutions and other firms engaged in the extension of credit to
``make credit equally available to all creditworthy customers without
regard to sex or marital status.'' \165\ Two years later, Congress
expanded ECOA's scope to include age, race, color, religion, national
origin, receipt of public assistance benefits, and exercise of rights
under the Federal Consumer Credit Protection Act.\166\
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\165\ Public Law 93-495, tit. V, section 502, 88 Stat. 1500,
1521 (1974).
\166\ See Equal Credit Opportunity Act Amendments of 1976,
Public Law 94-239, section 701(a), 90 Stat. 251, 251 (1976).
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ECOA makes it unlawful for any creditor to discriminate against any
applicant with respect to any aspect of a credit transaction (1) on the
basis of race, color, religion, national origin, sex (including sexual
orientation and gender identity),\167\ marital status, or age (provided
the applicant has the capacity to contract); (2) because all or part of
the applicant's income derives from any public assistance program; or
(3) because the applicant has in good faith exercised any right under
the Consumer Credit Protection Act.\168\ In keeping with the broad
reach of the statute's prohibition, Regulation B covers creditor
activities before, during, and after the extension of credit.\169\
Regulation B also bars creditors from making any oral or written
statement, in advertising or otherwise, to applicants or prospective
applicants that would discourage, on a prohibited basis, a reasonable
person from making or pursuing an application.\170\ Regulation B also
generally prohibits creditors from making inquiries about whether an
applicant is a member of certain protected categories.\171\
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\167\ In March 2021, the Bureau issued an interpretive rule
clarifying that the scope of ECOA's and Regulation B's prohibition
on credit discrimination on the basis of sex encompasses
discrimination based on sexual orientation and gender identity,
including discrimination based on actual or perceived nonconformity
with sex-based or gender-based stereotypes and discrimination based
on an applicant's associations. 86 FR 14363 (Mar. 16, 2021). See
also Press Release, Bureau of Consumer Fin. Prot., CFPB Clarifies
That Discrimination by Lenders on the Basis of Sexual Orientation
and Gender Identity Is Illegal (Mar. 9, 2021), https://www.consumerfinance.gov/about-us/newsroom/cfpb-clarifies-discrimination-by-lenders-on-basis-of-sexual-orientation-and-gender-identity-is-illegal/. The interpretive rule states that an example
of discriminatory sex-based or gender-based stereotyping occurs if a
small business lender discourages a small business owner appearing
at its office from applying for a business loan and tells the
prospective applicant to go home and change because, in the view of
the creditor, the small business customer's attire does not accord
with the customer's gender. 86 FR at 14365.
\168\ 15 U.S.C. 1601 et seq.
\169\ See Regulation B Sec. 1002.4(a) and (b).
\170\ Id. Sec. 1002.4(b).
\171\ Id. Sec. 1002.5(b) through (d).
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The Bureau has recognized the following methods of proving lending
discrimination under ECOA and Regulation B: Overt evidence of
discrimination, evidence of disparate treatment, and evidence of
disparate impact.\172\ Overt evidence of discrimination exists when a
creditor blatantly discriminates on a prohibited basis.\173\ Disparate
treatment occurs when a creditor treats an applicant differently based
on a prohibited basis such as race or national origin.\174\ Disparate
impact occurs when a creditor employs facially neutral policies or
practices that have an adverse effect or impact on a member of a
protected class unless the facially neutral policies or practices meet
a legitimate business need that cannot reasonably be achieved by means
that are less disparate in their impact.\175\
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\172\ See Bureau of Consumer Fin. Prot., CFPB Bulletin 2012-04
(Fair Lending), Lending Discrimination (Apr. 18, 2012), https://files.consumerfinance.gov/f/201404_cfpb_bulletin_lending_discrimination.pdf (Interagency Policy
Statement on Discrimination in Lending) (concurring with Interagency
Task Force on Fair Lending, Policy Statement on Discrimination in
Lending, 59 FR 18266 (Apr. 15, 1994)).
\173\ See Interagency Policy Statement on Discrimination in
Lending at 18268.
\174\ See Regulation B comment 4(a)-1 (stating that
``[d]isparate treatment on a prohibited basis is illegal whether or
not it results from a conscious intent to discriminate''); Bureau of
Consumer Fin. Prot., Equal Credit Opportunity Act (ECOA) Examination
Procedures, at 1 (Oct. 30, 2015), https://files.consumerfinance.gov/f/documents/201510_cfpb_ecoa-narrative-and-procedures.pdf (ECOA
Examination Procedures); see also Interagency Policy Statement on
Discrimination in Lending at 18268.
\175\ See Regulation B comment 6(a)-2; ECOA Examination
Procedures at 1; see also Interagency Policy Statement on
Discrimination in Lending at 18269.
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Multiple Federal regulators can enforce violations of ECOA and
Regulation B and apply various penalties. Enforcement and penalties for
those who violate ECOA and Regulation B are set forth in 15 U.S.C.
1691e(b) and 12 CFR 1002.16. Violations may also result in civil money
penalties, which are governed by 12 U.S.C. 5565(c)(3). The Bureau and
multiple other Federal regulators have the statutory authority to bring
actions to enforce the requirements of ECOA.\176\ These regulators have
the authority to engage in research, conduct investigations, file
administrative complaints, hold hearings, and adjudicate claims through
the administrative enforcement process regarding ECOA. Regulators also
have independent litigation authority and can file cases in Federal
court alleging violations of fair lending laws under their
jurisdiction. Like other Federal regulators who are assigned
enforcement authority under section 704 of ECOA, the Bureau is required
to refer matters to the Department of Justice (DOJ) when it has reason
to
[[Page 56372]]
believe that a creditor has engaged in a pattern or practice of lending
discrimination.\177\ Private parties may also bring claims under the
civil enforcement provisions of ECOA, including individual and class
action claims against creditors for actual and punitive damages for any
violation of ECOA.\178\
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\176\ These regulators include the OCC, the Board, the FDIC, the
NCUA, the Surface Transportation Board, the Civil Aeronautics Board,
the Secretary of Agriculture, the Farm Credit Administration, the
Securities and Exchange Commission, the SBA, the Secretary of
Transportation, the Bureau, and the FTC. See 15 U.S.C. 1691c;
Regulation B Sec. 1002.16(a).
\177\ See 15 U.S.C. 1691e(h).
\178\ 15 U.S.C. 1691e(a); Regulation B Sec. 1002.16(b)(1).
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ii. Home Mortgage Disclosure Act (HMDA)
HMDA, implemented by the Bureau's Regulation C (12 CFR part 1003),
requires lenders who meet certain coverage tests to report detailed
information to their Federal supervisory agencies about mortgage
applications and loans at the transaction level. These reported data
are a valuable resource for regulators, researchers, economists,
industry, and advocates assessing housing needs, public investment, and
possible discrimination as well as studying and analyzing trends in the
mortgage market for a variety of purposes, including general market and
economic monitoring. There may be some overlap between what is required
to be reported under HMDA and what is covered by section 1071 for
certain mortgage applications and loans for women-owned, minority-
owned, and small businesses.
A violation of HMDA and Regulation C is subject to administrative
sanctions, including civil money penalties. Compliance can be enforced
by the Bureau, the U.S. Department of Housing and Urban Development
(HUD), the FDIC, the Board, the National Credit Union Administration
(NCUA), or the Office of the Comptroller of Currency (OCC). These
regulators have the statutory authority to bring actions to enforce the
requirements of HMDA and to engage in research, conduct investigations,
file administrative complaints, hold hearings, and adjudicate claims
through the administrative enforcement process regarding HMDA.
iii. Fair Housing Act (FHAct)
Title VIII of the Civil Rights Act of 1968, as amended (Fair
Housing Act, or FHAct), prohibits discrimination in the sale, rental,
or financing of dwellings and in other housing-related activities
because of race, color, religion, sex (including sexual orientation and
gender identity),\179\ disability,\180\ familial status, or national
origin.\181\ The Fair Housing Act \182\ and its implementing
regulations specifically prohibit discrimination in the making of
loans,\183\ the purchasing of loans,\184\ and in setting the terms and
conditions for making loans available,\185\ without reference to
consumers, legal entities, or the purpose of the loan being made,
although these prohibitions relate exclusively to dwellings.\186\ As
with ECOA, the courts have recognized three methods of proof of lending
discrimination under the FHAct: (1) Overt evidence of discrimination;
(2) evidence of disparate treatment; and (3) evidence of disparate
impact.\187\
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\179\ See U.S. Dep't of Hous. & Urban Dev., Implementation of
Executive Order 13988 on the Enforcement of the Fair Housing Act
(Feb. 11, 2021), https://www.hud.gov/sites/dfiles/PA/documents/HUD_Memo_EO13988.pdf.
\180\ The Bureau uses the term ``disability'' to refer to what
the FHA and its implementing regulations term a ``handicap'' because
that is the preferred term. See, e.g., Hunt v. Aimco Props., L.P.,
814 F.3d 1213, 1218 n.1 (11th Cir. 2016) (noting the term disability
is generally preferred over handicap).
\181\ 42 U.S.C. 3601 through 3619, 3631.
\182\ 42 U.S.C. 3605(b) (noting that for purposes of 3605(a), a
``residential real estate-related transaction'' includes the making
or purchasing of loans or providing other financial assistance for
purchasing, constructing, improving, repairing, or maintaining a
dwelling, or transactions secured by residential real estate).
\183\ 24 CFR 100.120.
\184\ 24 CFR 100.125.
\185\ 24 CFR 100.130.
\186\ A ``dwelling,'' as defined by the Fair Housing Act, is any
building, structure, or portion thereof which is occupied as, or
designed or intended for occupancy as, a residence by one or more
families, and any vacant land which is offered for sale or lease for
the construction or location thereon of any such building,
structure, or portion thereof. 42 U.S.C. 3602(b).
\187\ See Interagency Policy Statement on Discrimination in
Lending at 18268. See also 78 FR 11459, 11459 (Feb. 15, 2013)
(stating that HUD, which is statutorily charged with the authority
and responsibility for interpreting and enforcing the Fair Housing
Act and with the power to make rules implementing the Act, ``has
long interpreted the Act to prohibit practices with an unjustified
discriminatory effect, regardless of whether there was an intent to
discriminate'').
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The DOJ and HUD are jointly responsible for enforcing the Fair
Housing Act. The Fair Housing Act authorizes the HUD Secretary to issue
a Charge of Discrimination on behalf of aggrieved persons following an
investigation and a determination that reasonable cause exists to
believe that a discriminatory housing practice has occurred.\188\ The
DOJ may bring lawsuits where there is reason to believe that a person
or entity is engaged in a ``pattern or practice'' of discrimination or
where a denial of rights to a group of persons raises an issue of
general public importance,\189\ or where a housing discrimination
complaint has been investigated by HUD, HUD has issued a Charge of
Discrimination, and one of the parties to the case has ``elected'' to
go to Federal court.\190\ In FHAct cases, HUD and the DOJ can obtain
injunctive relief, including affirmative requirements for training and
policy changes, monetary damages and, in pattern or practice cases,
civil penalties.\191\
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\188\ 42 U.S.C. 3610(g)(1) and (2).
\189\ See 42 U.S.C. 3614(a).
\190\ 42 U.S.C. 3612(o)(1).
\191\ See 42 U.S.C. 3612, 3614.
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Upon receipt of a complaint alleging facts that may constitute a
violation of the FHAct or upon receipt of information from a consumer
compliance examination or other information suggesting a violation of
the FHAct, Federal executive agencies forward such facts or information
to HUD and, where such facts or information indicate a possible pattern
or practice of discrimination in violation of the FHAct, to the
DOJ.\192\ Private parties may also bring claims under the civil
enforcement provisions of FHAct.\193\
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\192\ 59 FR 2939, 2939 (Jan. 17, 1994).
\193\ See 42 U.S.C. 3613.
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iv. Other Fair Lending Laws
Several other Federal statutes seek to promote fair lending. The
CRA seeks affirmatively to encourage institutions to help to meet the
credit needs of the entire community served by each institution covered
by the statute, and CRA ratings take into account lending
discrimination by those institutions.\194\ The Americans with
Disabilities Act of 1990 prohibits discrimination against persons with
disabilities in the provision of goods and services, including credit
services.\195\ Sections 1981\196\ and 1982 \197\ of the Federal Civil
Rights Acts are broad anti-discrimination laws that have been applied
to many aspects of credit transactions.\198\
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\194\ See 12 U.S.C. 2901 et seq.
\195\ See 42 U.S.C. 12101 et seq.
\196\ 42 U.S.C. 1981(a).
\197\ 42 U.S.C. 1982.
\198\ See, e.g., Jackson v. Novastar Mortg., Inc., 645 F. Supp.
2d 636 (W.D. Tenn. 2007) (motion to dismiss claim that defendants
violated sections 1981 and 1982 by racial targeting and by offering
credit on less favorable terms on the basis of race denied); Johnson
v. Equicredit Corp., No. 01-CIV-5197, 2002 U.S. Dist. LEXIS 4817
(N.D. Ill. Mar. 22, 2002) (predatory lending/reverse redlining case
brought pursuant to section 1981); Hargraves v. Cap. City Mortg.
Corp., 140 F. Supp. 2d 7 (D.D.C. 2000) (predatory lending/reverse
redlining case brought under both sections 1981 and 1982),
reconsideration granted in part, denied in part, 147 F. Supp. 2d 1
(D.D.C. 2001) (section 1981 claim dismissed for lack of standing,
but not section 1982 claim); Doane v. Nat'l Westminster Bank USA,
938 F. Supp. 149 (E.D.N.Y. 1996) (mortgage redlining case brought
under sections 1981 and 1982); Fairman v. Schaumberg Toyota, Inc.,
No. 94-CIV-5745, 1996 U.S. Dist. LEXIS 9669 (N.D. Ill. July 10,
1996) (section 1981 suit over allegedly predatory credit scheme
targeting African Americans and Hispanics); Steptoe v. Sav. of Am.,
800 F. Supp. 1542 (N.D. Ohio 1992) (mortgage redlining case brought
under sections 1981 and 1982 and the Fair Housing Act); Evans v.
First Fed. Sav. Bank of Ind., 669 F. Supp. 915 (N.D. Ind. 1987)
(section 1982 can be used in mortgage lending discrimination case);
Assocs. Home Equity Servs. v. Troup, 778 A.2d 529 (N.J. 2001)
(predatory lending/reverse redlining case brought pursuant to
section 1981).
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[[Page 56373]]
Many States and municipalities have also enacted fair lending, fair
housing, and/or civil rights laws (often modeled on their Federal
counterparts) that seek to broadly prohibit credit discrimination,
including protections for business credit.\199\ Some of these laws
expressly enumerate protections beyond those expressly enumerated in
the Federal statutes.\200\
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\199\ See, e.g., Cal. Civ. Code 51 and 51.5 and Cal. Gov't Code
12955; Colo. Rev. Stat. 24-34-501(3) and 5-3-210; Conn. Gen. Stat.
46a-81e, 46a-81f, and 46a-98; Del. Code Ann. tit. 6, 4604; D.C. Code
2-1402.21; Haw. Rev. Stat. 515-3 and 515-5; 775 Ill. Comp. Stat. 5/
1-102, 5/1-103, 5/4-102, 5/3-102, and 5/4-103; Iowa Code 216.8A and
216.10; Me. Rev. Stat. tit. 5, 4553(5-C) and (9-C), 4595 to 4598,
and 4581 to 4583; Md. Code Ann. State Gov't 20-705, 20-707, and 20-
1103; Mass. Gen. Laws ch. 151B, 4(3B), (14); Minn. Stat. 363A.03
(Subd. 44), 363A.09(3), 363A.16 (Subds. 1 and 3), and 363A.17; N.H.
Rev. Stat. Ann. 354-A:10; N.J. Stat. Ann. 10:5-12(i); N.M. Stat.
Ann. 28-1-7; N.Y. Civ. Rights Law 40-c(2); N.Y. Exec. Law 296-A; Or.
Rev. Stat. 174.100(7) and 659A.421; R.I. Gen. Laws 34-37-4(a)
through (c), 34-37-4.3, and 34-37-5.4; Va. Code Ann. 6.2-501(B)(1),
15.2-853, and 15.2-965; Vt. Stat. Ann. tit. 8, 10403 and tit. 9,
2362, 2410, and 4503(a)(6); Wash. Rev. Code 49.60.030, 49.60.040
(14), (26), and (27), 49.60.175, and 49.60.222; Wis. Stat. 106.50
and 224.77. There are also a number of municipalities that have
enacted credit discrimination ordinances. See, e.g., Austin City
Code 5-1-1 et seq.; N.Y.C. Admin. Code 8-101 and 8-107 et seq.; S.F.
Police Code 3304(a) et seq.
\200\ See, e.g., Mass. Gen. Laws ch. 151B, 4(3B) (prohibiting
discrimination based on genetic information); N.J. Stat. Ann. 10:5-1
to 10:5-42 (same); D.C. Code 2-1401.02 and 2-1402.21 (extending
protections from discrimination to domestic violence victims); Wis.
Stat. 224.77 (same); N.Y. Exec. Law 296-a (prohibiting
discrimination on the basis of military status) (credit
transactions); N.Y. Exec. Law 296(5)(a) through (c) (same) (housing
transactions); Wash. Rev. Code 49.60.176 (protecting veterans and
honorably discharged service members); 775 Ill. Comp. Stat. 5/3-101
and 5/4-101 (prohibiting discrimination based on an applicant's
unfavorable discharge from the military); 815 Ill. Comp. Stat. 140/
1a (same). Several other State statutes also prohibit discrimination
based on the geographic area of residence. See, e.g., 815 Ill. Comp.
Stat. 120/1 to 120/6; Iowa Code 535A.1 to 535A.9; Md. Code Ann.,
Com. Law 12-603 (West); Mich. Comp. Laws 445.1601 to 445.1614; Minn.
Stat. 363A.09(3)(c); N.Y. Banking Law 9-f; Wash. Rev. Code 30.04.500
to 30.04.515.
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v. Facilitating Enforcement
In order for the 1071 rule to facilitate enforcement of the fair
lending laws discussed above, the Bureau believes that it must collect
and make available sufficient data to help the public and regulators
identify potentially discriminatory lending patterns that could
constitute violations of fair lending laws. Financial regulators and
enforcement agencies need a consistent and comprehensive dataset for
all financial institutions subject to 1071 reporting in order to also
use 1071 data in their initial prioritization, peer analysis, redlining
reviews, and screening processes to select institutions for monitoring,
examination, or investigation. Section 1071 data would facilitate more
efficient fair lending examinations. For example, regulators could use
pricing and other data to prioritize fair lending examinations--without
such data, some financial institutions would face unnecessary
examination burden while others whose practices warrant closer review
would not receive sufficient scrutiny.
Moreover, as discussed in part V below, the Bureau believes
specific aspects of its proposal offer particular benefits for the
enforcement of fair lending laws. For example, the Bureau's proposal
regarding transactional and institutional coverage would allow
community groups and government agencies to include most of the small
business financing market in fair lending analyses. The proposed
inclusion of pricing data fields such as interest rate and fees would
provide information on disparities in pricing outcomes, and data fields
such as gross annual revenue, denial reasons, and time in business
would allow for a more refined analysis and understanding of
disparities in both underwriting and pricing outcomes. While 1071 data
alone generally will not offer proof of compliance with fair lending
laws, regulators, community groups, researchers, and financial
institutions will be able to use 1071 data to identify potential
disparities in small business lending based on disaggregated categories
of race and ethnicity. Overall, the data collection under 1071 rule
will allow, for the first time, for comprehensive and market-wide fair
lending risk analysis.
2. Identifying Business and Community Development Needs
The second purpose of section 1071 is to enable communities,
governmental entities, and creditors to identify business and community
development needs and opportunities of women-owned, minority-owned, and
small businesses.\201\
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\201\ ECOA section 704B(a).
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Section 1071 does not expressly define the phrase ``business and
community development needs.'' However, other Federal statutes and
regulations, including the CRA and the Riegle Community Development and
Regulatory Improvement Act of 1994,\202\ reference or define the
phrases ``business development'' and ``community development'' and can
help explain what it means to enable communities, governmental
entities, and creditors to ``identify business and community
development needs and opportunities.''
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\202\ Public Law 103-325, tit. I, section 102, 108 Stat. 2160,
2163 (1994) (12 U.S.C. 4701 through 4719).
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The Bureau believes, based on its consideration of these other
Federal statutes and regulations, that the proposed 1071 rule would
provide more data to the public--including communities, governmental
entities, and creditors--for analyzing whether financial institutions
are serving the credit needs of their small business customers. In
addition, with 1071 data, the public would be better able to understand
access to and sources of credit in particular communities or
industries, such as a higher concentration of risky loan products in a
given community, and to identify the emergence of new loan products,
participants, or underwriting practices. The data would not only assist
in identifying potentially discriminatory practices, but would also
contribute to a better understanding of the experiences that members
within certain communities may share in the small business financing
market.
i. Community Reinvestment Act (CRA)
The CRA, a part of the Housing and Community Development Act, was
passed by Congress in 1977, which found that ``regulated financial
institutions have continuing and affirmative obligation to help meet
the credit needs of the local communities in which they are
chartered.'' \203\ As such, one of the statutory purposes of the CRA is
to encourage such institutions to help meet the credit needs of the
local communities in which they are chartered consistent with the safe
and sound operation of such institutions.\204\
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\203\ 12 U.S.C. 2901(a)(3).
\204\ 12 U.S.C. 2901(b).
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The legislative history for the CRA suggests that the concerns
motivating the Act's passage included certain practices by banks
including redlining (i.e., declining to extend credit in neighborhoods
populated by ethnic or racial minorities) \205\ and community
[[Page 56374]]
disinvestment (i.e., taking deposits from lower-income areas, often
populated by ethnic or racial minorities, without extending credit or
banking services to residents of those areas).\206\ The CRA requires
the ``appropriate Federal financial supervisory agency'' of a given
depository institution to ``prepare a written evaluation of the
institution's record of meeting the credit needs of its entire
community, including low- and moderate-income neighborhoods.'' \207\
These requirements were first implemented by a 1978 rulemaking,\208\
and were amended in 1995 \209\ and 2005.\210\ These rulemakings,
adopted by each of the agencies responsible for ensuring compliance
with the CRA, established specific performance measures,\211\ requiring
banks to disclose information about small business, small farm and
community development lending.\212\
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\205\ See H.R. Rep. No. 561, 94th Cong., 1st Sess. 4 (1975)
(``[The practice of redlining] increasingly has served to polarize
elements of our society . . . . As polarization intensifies,
neighborhood decline accelerates.''), reprinted in 1975 U.S.C.C.A.N.
2303, 2305-06.
\206\ Robert C. Art, Social Responsibility in Bank Credit
Decisions: The Community Reinvestment Act One Decade Later, 18 Pac.
L.J. 1071, 1076-77 & n.23 (1987) (citing 123 Cong. Rec. S8958 (daily
ed. June 6, 1977), which stated that Sen. Proxmire, the
congressional sponsor of the Act described redlining as ``the fact
that banks and savings and loans will take their deposits from a
community and instead of reinvesting them in that community, they
will invest them elsewhere, and they will actually or figuratively
draw a red line on a map around the areas of their city,'' further
noting that those lines are drawn ``sometimes in the inner city,
sometimes in the older neighborhoods, sometimes ethnic and sometimes
black . . . .'').
\207\ 12 U.S.C. 2906(a)(1).
\208\ 43 FR 47144 (Oct. 12, 1978).
\209\ 60 FR 22156 (May 4, 1995).
\210\ 70 FR 44256 (Aug. 2, 2005).
\211\ 12 CFR 228.11.
\212\ See, e.g., 12 CFR 25.42, 228.11.
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The agencies tasked with ensuring compliance--including the
OCC,\213\ the Board,\214\ and the FDIC \215\--evaluate each insured
depository institution's record in helping meet the credit needs of its
entire community.\216\ Overall, the CRA and its regulations generate
data that help agencies and the public at large identify instances of
redlining, community disinvestment, and geographical areas that are
``banking deserts.'' \217\ The CRA regulations of the Board and the
FDIC currently have the same definitions of ``community development''
that include banking and credit services that support the following:
(1) Affordable housing for low- and moderate-income (LMI) individuals;
\218\ (2) community services for LMI individuals; \219\ (3) activities
that promote economic development by financing small business and small
farms; \220\ and (4) activities that revitalize or stabilize LMI
geographies, disaster areas, and certain distressed or underserved
middle-income areas based on other factors.\221\
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\213\ 12 CFR part 25.
\214\ 12 CFR part 228.
\215\ 12 CFR parts 345, 195.
\216\ Most specifically, that record is taken into account in
considering an institution's application for deposit facilities,
including mergers and acquisitions with other financial institutions
and the opening of bank branches.
\217\ OCC regulations define ``CRA desert'' as an area that has
``significant unmet community development or retail lending needs''
and where: (1) Few banks have branches or non-branch deposit-taking
facilities, (2) There is ``less retail or community development
lending than would be expected based on demographic or other
factors,'' or (3) The area ``lacks community development
organizations or infrastructure.'' 12 CFR 25.03.
\218\ 12 CFR 228.12(g)(1), 345.12(g)(1).
\219\ 12 CFR 228.12(g)(2), 345.12(g)(2).
\220\ 12 CFR 228.12(g)(3), 345.12(g)(3).
\221\ 12 CFR 228.12(g)(4), 345.12(g)(4).
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In September 2020, the Board announced an advance notice of
proposed rulemaking to update its CRA regulations, specifically to more
effectively meet the needs of LMI communities and address inequities in
credit access.'' \222\ As part of this exercise, the Board requested
feedback on potential revisions to its data collection and reporting
requirements.\223\ The Board suggested that more granular reporting of
community development loan and investment data may be needed to aid
community development and improve compliance with the CRA, noting that
the lack of such data ``means that there is no aggregate community
development data at a local level available to create the local
benchmarks for the community development financing metric.'' \224\ As
such, the publication of 1071 data would also be a useful resource for
supporting community development efforts under the CRA.
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\222\ 85 FR 66410 (Oct. 19, 2020).
\223\ Id. at 66459-63.
\224\ Id. at 66462.
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In June 2020, the OCC promulgated a final rule that adopted a
broader definition of ``community development'' than the one used by
the Board and the FDIC.\225\ However, in July 2021, the OCC announced
that it was reconsidering the June 2020 revisions to its CRA
regulations,\226\ and that it may join the Board's consideration of
proposed revisions to strengthen bank compliance with CRA
regulations.\227\
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\225\ The FDIC initially joined the OCC in issuing its early
2020 proposed rule to expand the definition of ``community
development'' for purposes of CRA compliance, but it did not join
the OCC in its issuance of a rule finalizing that proposal. Compare
85 FR 1204 (Jan. 9, 2020) (joint FDIC-OCC proposal to amend the
agencies' respective CRA regulations), with 85 FR 34734 (June 5,
2020) (OCC final rule amending CRA regulations). The rule added to
the range of activities that comprise ``community development'' for
purposes of the OCC's revisions to the CRA regulations.
Specifically, the OCC expanded the qualifying activities criteria to
capture activities the OCC stated were consistent with the statutory
purpose of the CRA but that generally did not receive credit under
CRA regulations prior to the OCC's revisions, including certain
activities in identified ``areas of need beyond LMI areas (i.e.,
underserved areas, distressed areas, disaster areas, Indian country
and other tribal and native lands)'' as well as those activities
that ``benefit a whole community, while maintaining an appropriate
focus on LMI neighborhoods.'' 85 FR 34734, 34735 (June 5, 2020); see
also 12 CFR 25.04(a)(1) (stating that a retail loan, a community
development loan, a community development investment, or a community
development service ``that helps to meet the credit needs of a
bank's entire community, including low- and moderate-income
communities, is a qualifying activity if it meets the criteria in
this section at the time the activity is originated, made, or
conducted''); 12 CFR 25.04(b)(3) (listing 12 sets of activities that
qualify as community development loans, investments and services).
\226\ Off. of the Comptroller of the Currency, OCC Statement on
Rescinding its 2020 Community Reinvestment Act Rule (News Release
2021-76) (July 20, 2021), https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-76.html (stating that the OCC will propose
rescinding its June 2020 CRA final rule).
\227\ Id. (noting the crucial nature of strengthening the CRA
jointly with the Board and FDIC and signaling intention to issue a
joint notice of proposed rulemaking building on the ANPR proposed by
the Board in September 2020).
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ii. Community Development Financial Institution Fund (CDFI Fund)
The Riegle Community Development and Regulatory Improvement Act of
1994 authorized the CDFI Fund.\228\ In passing that statute, Congress
found that many of the Nation's urban, rural, and Native American
communities face ``critical social and economic problems arising in
part from the lack of economic growth, people living in poverty, and
the lack of employment and other opportunities.'' \229\
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\228\ 12 U.S.C. 4701(b).
\229\ 12 U.S.C. 4701(a)(1).
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To address these problems, Congress created the CDFI Fund to
``promote economic revitalization and community development'' through
investment in and assistance to CDFIs, including enhancing the
liquidity of CDFIs.\230\
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\230\ 12 U.S.C. 4701(b).
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The concept of community development is central to the operation of
the CDFI Fund. While CDFI Fund regulations do not directly define that
term, any entity applying for CDFI certification must have ``promoting
community development'' as its ``primary mission.'' \231\ In making
this determination, the CDFI Fund considers whether the activities of
the entity are purposefully directed toward improving the social and/or
economic conditions of underserved people, which may include low-income
persons or persons
[[Page 56375]]
who lack adequate access to capital and financial services and
residents of economically distressed communities.\232\
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\231\ 12 CFR 1805.201(b)(1).
\232\ Id.
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The CDFI Fund collects data from the recipients of its financial
and technical assistance, shedding some light on the extent of
community development in the areas where CDFIs operate.\233\ The CDFI
Fund also publishes the data it receives with appropriate redactions to
protect privacy interests.\234\ However, given that CDFIs comprise a
relatively small share of the overall small business lending market,
section 1071 would materially enhance understanding of the broader
extent of community development outside of areas where CDFIs already
operate. The data from a 1071 rulemaking would also likely augment the
data the CDFI Fund already receives.
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\233\ 12 CFR 1805.803(e) (requiring recipients of technical and
financial assistance to provide to the CDFI Fund certain information
and documentation).
\234\ 12 CFR 1805.803(e)(4).
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3. Potential Impact of Section 1071 Data
A section 1071 rule would provide on an annual basis application-
level data on small business credit, including certain protected
demographic information about applicants and their principal owners.
This would include information on applications for credit that are
originated, as well as those that are denied, withdrawn, incomplete, or
approved by the financial institution but not accepted by the
applicant. This information would enable stakeholders of all kinds in
the small business lending market to gain unprecedented insight into
trends in small business lending, specifically with respect to women-
owned and minority-owned small businesses. It would also provide
insight into the interaction of supply and demand over time.
In terms of facilitating fair lending enforcement, interested
government agencies and other stakeholders would be able to use 1071
data to analyze potential instances of practices resulting in the
disparate treatment of or disparate impact on women- and minority-owned
small businesses, using statistical methods to identify possible fair
lending risks.
Regarding the identification of business and community development
needs, the data that would be made available by the Bureau under this
rulemaking, if finalized as proposed, would help government entities
and public and private lenders identify and target sub-segments of the
market that remain underserved, facilitating entrepreneurship and
business development in those communities.
The advancement of both statutory purposes of section 1071--
facilitating fair lending enforcement and identifying business and
community development needs--in turn will support small businesses
across all sectors of the economy, which are fundamental to the
economic health of the U.S. and which have been hard hit by recent
economic and financial crises. The use of data that would be provided
pursuant to regulations under section 1071 can both support the
underlying purposes of section 1071 and help the economy as a whole.
For example, according to one estimate, fair and equitable lending to
Black entrepreneurs could have added $13 trillion in business revenue
over the last 20 years and created 6 million jobs.\235\ As the economy
recovers from the effects of the COVID-19 pandemic, data collected and
published pursuant to regulations implementing section 1071 would help
to support equitable and sustainable growth and prosperity in all
communities in the U.S.
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\235\ Citigroup, Citi GPS: Global Perspectives & Solutions,
Closing the Racial Inequality Gaps: The Economic Cost of Black
Inequality in the U.S., at 4 (Sept. 2020), https://ir.citi.com/NvIUklHPilz14Hwd3oxqZBLMn1_XPqo5FrxsZD0x6hhil84ZxaxEuJUWmak51UHvYk75VKeHCMI%3D.
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4. Bureau Priorities
On June 2, 2021, the Bureau announced as priorities action to
address issues of pervasive racial injustice and the long-term economic
impacts of the COVID-19 pandemic on consumers.\236\ The Acting Director
explained that the Bureau will use all of its tools and authority--
including rulemaking--to protect and fight for fairness for all
consumers in financial markets.\237\ The Bureau believes that
implementing the section 1071 data collection, maintenance, and
reporting obligations established in the Dodd-Frank Act would advance
those priorities.
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\236\ Blog post, Dave Uejio, Acting Director, Bureau of Consumer
Fin. Prot., Addressing racial inequities in consumer finance markets
(June 2, 2021), https://www.consumerfinance.gov/about-us/blog/addressing-racial-inequities-consumer-finance-markets/.
\237\ See Bureau of Consumer Fin. Prot., https://www.consumerfinance.gov/about-us/racial-equity/.
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Congress enacted section 1071 for the purposes of facilitating
enforcement of fair lending laws, and enabling communities,
governmental entities, and creditors to identify business and community
development needs and opportunities for women-owned, minority-owned,
and small businesses. The Bureau believes that 1071 data will come to
play an important role as HMDA data have done for the mortgage market.
HMDA data have provided lenders, community groups, and others the tools
to identify and address fair lending risks and strengthen fair lending
oversight and enforcement. In a similar way, section 1071 data will
allow diverse stakeholders to analyze lending patterns that are
potentially discriminatory. By identifying and addressing
discriminatory small business lending practices, the Bureau will help
to ensure fair, equitable, and nondiscriminatory access to credit for
both individuals and their communities.
HMDA data have also proven effective in creating transparency in
the mortgage market that improves the understanding of credit needs,
where they may remain unmet, and the relationship between mortgage
lending and community development. The Bureau believes that the 1071
data will provide the Bureau and other stakeholders with critical
insights into the small business lending market. The current COVID-19
pandemic has shown that transparency is essential at a time of crisis,
when small businesses, especially those owned by women and minorities,
may be in urgent need of credit in order to recover from the economic
shocks. As at least one SER suggested, a 1071 rule would help lenders
across the country better connect underserved entrepreneurs to working
capital and resources in order to build a more inclusive economy.
III. Outreach
In the years leading up to the release of this proposed rule, the
Bureau held over 100 outreach meetings with financial institutions,
trade associations, community groups, researchers, governmental
entities, and other stakeholders regarding the 1071 rulemaking. The
Bureau also took a number of other steps, beyond individual stakeholder
meetings, to solicit feedback more broadly from the public on a 1071
rule.
Request for information, field hearing, and White Paper on small
business lending. On May 10, 2017, the Bureau published a request for
information (RFI) regarding the small business lending market \238\ in
which it sought public comment to understand more about the products
that are offered to small businesses, the financial institutions that
offer such credit, the small business lending data that currently are
used and may be maintained by financial institutions, the potential
complexity and cost of small business data collection and reporting,
[[Page 56376]]
and privacy concerns related to the disclosure purposes of section
1071.\239\ On the same date, the Bureau held a field hearing regarding
section 1071 at which the RFI was announced and then-Director Richard
Cordray noted the importance of a section 1071 rulemaking given the
absence of systematic data on how small businesses are faring and
whether or how much they are being held back by financing
constraints.\240\ Finally, at the same time, the Bureau also published
its White Paper on small business lending,\241\ which reflected the
initial findings of the Bureau's research providing a preliminary
understanding of the small business lending environment, with a
particular emphasis on lending to women-owned and minority-owned small
businesses.
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\238\ 82 FR 22318 (May 15, 2017).
\239\ In response to the RFI, the Bureau received over 2,000
comments in total, and over 100 unique comments offering detailed
substantive responses on the topics raised in the RFI. These
comments from the public helped to inform the Bureau's approach in
its SBREFA Outline. See Bureau of Consumer Fin. Prot., Request for
Information Regarding the Small Business Lending Market, Docket ID
CFPB-2017-0011, https://www.regulations.gov/docket/CFPB-2017-0011.
\240\ See Bureau of Consumer Fin. Prot., Prepared Remarks of
CFPB Director Richard Cordray at the Small Business Lending Field
Hearing (May 10, 2017), https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-cfpb-director-richard-cordray-small-business-lending-field-hearing/.
\241\ Bureau of Consumer Fin. Prot., Key dimensions of the small
business lending landscape (May 2017), https://files.consumerfinance.gov/f/documents/201705_cfpb_Key-Dimensions-Small-Business-Lending-Landscape.pdf.
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1071 Symposium. In November 2019, the Bureau held a symposium on
section 1071 to assist the Bureau in its policy development process and
to receive feedback from experts, including academic, think tank,
consumer advocate, industry, and government experts in the small
business lending arena.\242\ The symposium had two panels. The first
panel focused on the evolution in the small business lending
marketplace. The second panel included a discussion surrounding the
implementation of section 1071, including issues raised in response to
the Bureau's RFI.
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\242\ Bureau of Consumer Fin. Prot., Symposium: Section 1071 of
the Dodd-Frank Act (held Nov. 6, 2019), https://www.consumerfinance.gov/about-us/events/archive-past-events/cfpb-symposium-section-1071-dodd-frank-act/.
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Small Business Advisory Review Panel. Under the Small Business
Regulatory Enforcement Fairness Act of 1996 (SBREFA),\243\ which
amended the Regulatory Flexibility Act (RFA), the Bureau must convene
and chair a Small Business Advisory Review Panel (Panel) if it is
considering a proposed rule that could have a significant economic
impact on a substantial number of small entities.\244\ The Panel
considers the impact of the proposals under consideration by the Bureau
and obtains feedback from representatives of the small entities that
would likely be subject to the rule. The Panel is comprised of a
representative from the Bureau, the Chief Counsel for Advocacy of the
Small Business Administration (SBA), and a representative from the
Office of Information and Regulatory Affairs (OIRA) in the Office of
Management and Budget (OMB). Representatives from 20 small businesses
were selected as small entity representatives (SERs) for this SBREFA
process. These SERs were representatives of small businesses that are
financial institutions that would likely be directly affected by a 1071
rule. These SERs did not represent the small business applicants for
credit about whom information would be collected and reported under a
1071 rule.
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\243\ Public Law 104-121, 110 Stat. 857 (1996).
\244\ 5 U.S.C. 609(b).
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On September 15, 2020, the Bureau issued its Outline of Proposals
under Consideration and Alternatives Considered (Outline or SBREFA
Outline) for the section 1071 rulemaking, a detailed document that
discusses (1) the relevant law, (2) the regulatory process, (3) the
rule proposals the Bureau was considering, and (4) an economic analysis
of the potential impacts of those proposals on directly affected small
entities.\245\
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\245\ Bureau of Consumer Fin. Prot., Small Business Advisory
Review Panel for Consumer Financial Protection Bureau Small Business
Lending Data Collection Rulemaking, Outline of Proposals Under
Consideration and Alternatives Considered (Sept. 15, 2020), https://files.consumerfinance.gov/f/documents/cfpb_1071-sbrefa_outline-of-proposals-under-consideration_2020-09.pdf (SBREFA Outline). See also
Bureau of Consumer Fin. Prot., Consumer Financial Protection Bureau
Releases Outline of Proposals Under Consideration to Implement Small
Business Lending Data Collection Requirements (Sept. 15, 2020),
https://www.consumerfinance.gov/about-us/newsroom/cfpb-releases-outline-proposals-implement-small-business-lending-data-collection-requirements/.
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The Bureau convened the Panel for this proposed rule on October 15,
2020 and held a total of four meetings with SERs during October 19-22,
2020, conducted online via video conference (Panel Outreach Meetings).
In preparation for the Panel Outreach Meetings and to facilitate an
informed and detailed discussion of the proposals under consideration,
discussion questions for the SERs were included throughout the Bureau's
Outline.\246\
---------------------------------------------------------------------------
\246\ These questions also appeared in a shorter Discussion
Guide for Small Entity Representatives. See Bureau of Consumer Fin.
Prot., Small Business Advisory Review Panel for Consumer Financial
Protection Bureau Small Business Lending Data Collection Rulemaking,
Discussion Guide for Small Entity Representatives (Sept. 15, 2020),
https://files.consumerfinance.gov/f/documents/cfpb_1071-sbrefa_discussion-guide_2020-09.pdf.
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In advance of the Panel Outreach Meetings, the Bureau, SBA's Office
of Advocacy, and OIRA held a series of video conferences with the SERs
to describe the Small Business Review Process, obtain important
background information about each SER's current business practices, and
begin discussions on selected portions of the proposals under
consideration.
All 20 SERs participated in the Panel Outreach Meetings.
Representatives from the Bureau, SBA's Office of Advocacy, and OIRA
provided introductory remarks. The meetings were then organized around
discussions led by the Bureau about each aspect of the proposals under
consideration and the potential impact on small businesses. The Bureau
also invited SERs to submit written feedback by November 9, 2020; most
SERs did so.
On December 15, 2020, the Bureau released the Final Report of the
Small Business Review Panel on the CFPB's Proposals Under Consideration
for the Small Business Lending Data Collection Rulemaking.\247\ This
report includes a summary of the feedback received from SERs during the
panel process (including oral feedback received during the pre-Panel
video conferences and Panel Outreach Meetings, as well as timely
submitted written feedback) and findings and recommendations made by
the Panel.\248\ As required by the RFA, the Bureau considers the
Panel's findings in its initial regulatory flexibility analysis, as set
out in part VIII below.
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\247\ Bureau of Consumer Fin. Prot., Final Report of the Small
Business Review Panel on the CFPB's Proposals Under Consideration
for the Small Business Lending Data Collection Rulemaking (Dec. 14,
2020), https://files.consumerfinance.gov/f/documents/cfpb_1071-sbrefa-report.pdf (SBREFA Panel Report). See also Bureau of Consumer
Fin. Prot., Consumer Financial Protection Bureau Releases Report on
Implementing the Dodd-Frank Act's Small Business Lending Data
Collection Requirement (Dec. 15, 2020), https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-releases-report-on-implementing-the-dodd-frank-acts-small-business-lending-data-collection-requirement/. The
Bureau's SBREFA Outline and related materials, as well as the
Bureau's presentation slides framing the discussion during the Panel
Outreach Meetings, are appended to the SBREFA Panel Report. See
SBREFA Panel Report at app. C through F.
\248\ The written feedback from SERs is appended to the Panel
Report. See id. at app. A.
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The Bureau also invited other stakeholders to submit feedback on
the SBREFA Outline by December 14, 2020. The Bureau received
approximately 60 submissions from a variety of other stakeholders,
including financial institutions, trade associations,
[[Page 56377]]
community groups, a think tank, and a government agency.\249\ Feedback
from these other stakeholders was not considered by the Panel and is
not reflected in the Panel Report.
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\249\ Feedback received from these stakeholders on the SBREFA
Outline will be placed on the public docket for this notice.
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The Bureau has considered the feedback it received from SERs, the
findings and recommendations of the Panel, and the feedback from other
stakeholders in preparing this proposed rule. The feedback, findings,
and recommendations are summarized throughout this notice where
relevant.
One-Time Cost Survey. On July 22, 2020, the Bureau released a
voluntary survey to measure the one-time costs of compliance with an
eventual small business lending data collection rule.\250\ The
objective of the survey was to solicit, from institutions offering
small business credit products that could potentially be covered by
this rule, information about potential one-time costs to prepare to
collect and report data. The survey did not cover potential on-going
costs from actually collecting and reporting 1071 data, and assumed
that reporting was required only for the 13 statutorily required data
points and that compliance with the statutory firewall requirement was
not required.\251\ The deadline for responses was October 16, 2020. The
Bureau received responses from 105 financial institutions.\252\ The
results of the survey inform the Bureau's analyses of the potential
impacts of the proposed rule as set out in parts VII and VIII below.
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\250\ Bureau of Consumer Fin. Prot., Survey: Small Business
Compliance Cost Survey (July 22, 2020), https://files.consumerfinance.gov/f/documents/cfpb_1071-survey_2020-10.pdf.
\251\ Id. at 1.
\252\ See part VI below for additional details regarding this
survey.
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ECOA request for information. On July 28, 2020, the Bureau issued a
request for information to seek public input on ECOA and Regulation
B.\253\ In the RFI, the Bureau sought public comment on a number of
topics, including small business lending and the ways that the Bureau,
in light of its authority under ECOA and Regulation B, might support
efforts to meet the credit needs of small businesses, particularly
those that are minority-owned and women-owned.\254\
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\253\ Bureau of Consumer Fin. Prot., Consumer Financial
Protection Bureau Requests Information on Ways to Prevent Credit
Discrimination and Build a More Inclusive Financial System (July 28,
2020), https://www.consumerfinance.gov/about-us/newsroom/cfpb-rfi-prevent-credit-discrimination-build-more-inclusive-financial-system/.
\254\ 85 FR 46600, 46602 (Aug. 3, 2020).
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Ongoing market monitoring. The Bureau conducts outreach to industry
and other stakeholders to understand their experiences with the small
business finance market, economic conditions, and the collection and
reporting of data regarding that market. A particular near-term
priority in the Bureau's recent market monitoring has been the impacts
of the pandemic and the effectiveness of the Federal government
response. Findings from market monitoring activities inform the Bureau
on matters affecting the small business sector.
Technical outreach. In the months before the publication of this
proposed rule, the Bureau began conducting technical outreach with
third party software providers that serve financial institutions and
software and technology staff from financial institutions that are
likely to have to report 1071 data to the Bureau. With these software
vendors and technical staffs, the Bureau has held and, after
publication of this proposed rule, will continue to hold discussions
concerning the technical systems and procedures the Bureau will provide
to collect 1071 data. The Bureau intends to understand the technology
solutions currently provided by vendors to support the small business
lending activities of financial institutions. The Bureau believes this
information will be helpful in informing the Bureau in its design and
implementation of a platform for intake and processing of 1071 data to
help the platform integrate, to the degree possible, with existing
systems and data collection procedures. These meetings also serve to
raise awareness of technology providers as to their potential future
role in supporting the 1071 rule as well as the lead time that may be
necessary for some or all affected financial institutions to come into
compliance with the requirements of a final section 1071 rule. The
feedback that the Bureau is gathering is purely technical in nature.
This outreach process is ongoing and will continue throughout the
rulemaking.
IV. Legal Authorities
The Bureau is issuing this proposed rule pursuant to its authority
under section 1071. Some aspects of this rule are also proposed under
the Bureau's more general rulemaking authorities in ECOA. Congress
enacted ECOA to prohibit discrimination against any applicant,
regarding any aspect of a credit transaction, on the basis of, amongst
other things, race, color, national origin, and sex.\255\ The Bureau
has certain oversight, enforcement, and supervisory authority over ECOA
requirements and has rulemaking authority under the statute.
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\255\ 15 U.S.C. 1691(a)(1).
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ECOA is implemented in Regulation B.\256\ Among other things,
Regulation B generally prohibits creditors from inquiring about an
applicant's race, color, religion, national origin, or sex, with
limited exceptions, including if it is required by law.\257\
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\256\ 12 CFR part 1002.
\257\ Regulation B Sec. 1002.5(a)(2).
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As discussed above, in the Dodd-Frank Act Congress amended ECOA by
adding section 1071, which directs the Bureau to adopt regulations
governing the collection and reporting of small business lending data.
Specifically, section 1071 requires financial institutions to collect
and report to the Bureau certain data on applications for credit for
women-owned, minority-owned, and small businesses.\258\ Congress
enacted section 1071 for the purpose of (1) facilitating enforcement of
fair lending laws and (2) enabling communities, governmental entities,
and creditors to identify business and community development needs and
opportunities of women-owned, minority-owned, and small
businesses.\259\ The Bureau often refers to these as section 1071's
fair lending purpose and its business and community development
purpose, respectively.
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\258\ ECOA section 704B.
\259\ ECOA section 704B(a).
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To advance these statutory purposes, section 1071 grants the Bureau
general rulemaking authority for section 1071, providing that the
Bureau shall prescribe such rules and issue such guidance as may be
necessary to carry out, enforce, and compile data pursuant to section
1071.\260\ ECOA section 704B(g)(2) also permits the Bureau to adopt
exceptions to any requirement of section 1071 and to conditionally or
unconditionally exempt any financial institution or class of financial
institutions from the requirements of section 1071, as the Bureau deems
necessary or appropriate to carry out the purposes of section 1071. The
Bureau principally relies on its 704B(g)(1) authority in this proposed
rule and relies on 704B(g)(2) when proposing specific exceptions or
exemptions to section 1071's requirements. Section 704B(g)(3) directs
the Bureau to issue guidance designed to facilitate compliance with the
requirements of section 1071.
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\260\ ECOA section 704B(g)(1).
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In addition, section 703(a) of ECOA gives the Bureau broad
authority to prescribe regulations to carry out the purposes of ECOA,
including provisions
[[Page 56378]]
that in the judgment of the Bureau are necessary or proper to
effectuate the purposes of ECOA, to prevent circumvention or evasion
thereof, or to facilitate or substantiate compliance therewith. That
section also states that the Bureau may provide for such adjustments
and exceptions for any class of transactions, as in the judgment of the
Bureau are necessary or proper to effectuate the purposes of ECOA, to
prevent circumvention or evasion thereof, or to facilitate or
substantiate compliance therewith.
Section 1071 establishes requirements or obligations for financial
institutions that the Bureau would implement in this proposed rule.
These provisions include the requirement in ECOA section 704B(b) that a
financial institution shall inquire whether an applicant for credit is
a women-owned, minority-owned, or small business; that a financial
institution must maintain a record of responses to such inquiry,
separate from the application; that an applicant may refuse to provide
any information requested regarding the inquiry under 704B(b); that a
financial institution must limit access of loan underwriters, or other
officers or employees of the financial institution or any affiliate, to
applicant responses to inquiries under 704B(b); and that if a financial
institution determines that a loan underwriter or other officer or
employee should have access to any information provided by the
applicant pursuant to a request under 704B(b) that the financial
institution shall provide notice to the applicant of the access of the
underwriter to such information, along with notice that the financial
institution may not discriminate on the basis of such information.\261\
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\261\ ECOA section 704B(b)(1), (b)(2), (c), (d)(1) and (2).
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ECOA section 704B(e)(1) directs financial institutions to compile
and maintain, in accordance with regulations of the Bureau, records of
the information provided by applicants for credit pursuant to a request
under 704B(b). Section 704B(e)(2) requires that the information
compiled and maintained under 704B(e)(1) be itemized in order to
clearly and conspicuously disclose an enumerated list of data points.
Section 704B(e)(2)(H) requires financial institutions to compile and
maintain any additional data that the Bureau determines would aid in
fulfilling the purposes of section 1071.
Several provisions of section 1071 expressly refer to regulations
that the Bureau shall promulgate to implement certain requirements,
including in ECOA section 704B(e)(1) regarding how financial
institutions must compile and maintain data pursuant to section 1071,
and in 704B(f)(2)(B) and (C) regarding the form of information made
available by financial institutions to the public and the form and
manner in which the Bureau itself should make 1071 data available to
the public generally.
Two provisions expressly give the Bureau discretion with respect to
public availability of 1071 data. Specifically, ECOA section 704B(e)(4)
states that the Bureau may, at its discretion, delete or modify 1071
data before making it available to the public if the Bureau determines
that the deletion or modification of the data would advance a privacy
interest. Section 704B(f)(3) gives the Bureau the discretion to compile
and aggregate 1071 data for its own use, as well as to make public such
compilations of aggregate data.
V. Section-by-Section Analysis
Overview
In this Overview of part V, the Bureau first provides an overview
of section 1071 and then a brief summary of the proposed rule. Each
provision, along with its rationale and relevant feedback received
through the SBREFA process, is discussed in detail in the section-by-
section analyses that follow. The Bureau's proposed rule is largely
consistent with, though more detailed than, its proposals under
consideration in the SBREFA Outline. However, the Bureau has altered or
refined its approach since SBREFA in certain respects, which are noted
in the summary of the proposed rule below and discussed in detail in
the section-by-section analyses that follow.
Next, the Bureau discusses the high-level and general comments
regarding this rulemaking that it received from SERs and other
stakeholders on its SBREFA Outline. Finally, the Bureau addresses
several issues for which there is no proposed regulatory text or
commentary.
The Bureau seeks comment on its proposed approach to implementing
section 1071. Requests for comment on each provision and on particular
issues are included throughout the section-by-section analyses in this
part V.
A. Overview of Section 1071
As discussed above, section 1071 of the Dodd-Frank Act requires
that financial institutions collect and report to the Bureau certain
data regarding applications for credit for women-owned, minority-owned,
and small businesses. Section 1071's statutory purposes are to (1)
facilitate enforcement of fair lending laws, and (2) to enable
communities, governmental entities, and creditors to identify business
and community development needs and opportunities of women-owned,
minority-owned, and small businesses.
Section 1071 specifies a number of data points that financial
institutions are required to collect and report, and also provides
authority for the Bureau to require any additional data that the Bureau
determines would aid in fulfilling section 1071's statutory purposes.
Section 1071 also contains a number of other requirements, including
those that address restricting the access of underwriters and other
persons to certain 1071 data and publication of 1071 data. In addition,
section 1071 permits the Bureau, at its discretion, to modify or delete
data prior to publication if it determines that such a deletion or
modification would advance a privacy interest.
Section 1071 directs the Bureau to prescribe such rules, and issue
such guidance as may be necessary to carry out, enforce, and compile
data pursuant to section 1071. It also permits the Bureau to adopt
exceptions to any requirement or to exempt financial institutions from
the requirements of section 1071 as the Bureau deems necessary or
appropriate to carry out the purposes of section 1071. Section 1071
also directs the Bureau to issue guidance designed to facilitate
compliance with the requirements of section 1071. As discussed in part
IV above and throughout the section-by-section analyses in this part V,
most of the Bureau's proposal is dedicated to implementing these
statutory provisions.
B. Section 1071 in the Context of HMDA
The Bureau's proposal for implementing section 1071 necessarily
exists against the backdrop of HMDA \262\ (as discussed in part
II.F.1.ii above). With the passage of the Dodd-Frank Act in 2010,
Congress enacted section 1071 at the same time that it amended HMDA and
transferred HMDA rulemaking authority and other functions to the
Bureau. HMDA is a data collection and reporting statute that requires
certain depository institutions and for-profit nondepository
institutions to collect, report, and disclose data about originations
and purchases of mortgage loans, as well as mortgage loan applications
that do not result in originations (for example, applications that are
denied or withdrawn). The Bureau's Regulation C, 12 CFR part
[[Page 56379]]
1003, implements HMDA. In light of the similarities between 1071 and
HMDA, the Bureau's section-by-section analyses in this part V often
discusses how similar provisions are addressed in the context of HMDA.
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\262\ 12 U.S.C. 2801 et seq.
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HMDA's purposes are: (1) To help determine whether financial
institutions are serving their communities' housing needs; (2) to
assist public officials in distributing public investment to attract
private investment; and (3) to assist in identifying potential
discriminatory lending patterns and enforcing antidiscrimination
statutes.
A covered institution for purposes of HMDA reporting is a
depository or nondepository institution that meets the relevant
coverage criteria set forth in the regulation. A depository institution
is required to comply with Regulation C if it meets the asset-size
threshold, location test, loan activity test, federally related test,
and the loan-volume threshold for either closed-end loans or open-end
lines of credit set forth in the regulation. A nondepository
institution is required to comply with Regulation C if it meets the
location test and the loan-volume threshold for either closed-end loans
or open-end lines of credit set forth in the regulation.
A covered transaction under HMDA is generally a loan or line of
credit secured (or, for applications, proposed to be secured) by a lien
on a dwelling, that is not specifically excluded under Regulation C
Sec. 1003.3(c). The data points generally required to be reported
about each covered transaction can be grouped into four broad
categories: \263\
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\263\ Under the Economic Growth, Regulatory Relief, and Consumer
Protection Act, Public Law 115-174, 132 Stat. 1296 (2018), as
implemented in Regulation C Sec. 1003.3(d), certain HMDA-covered
institutions may be eligible for partial exemptions from some of the
HMDA reporting requirements and only certain covered loans and
applications are covered under partial exemptions. If a covered loan
or application is covered under a partial exemption, the covered
institution is not required to collect, record, and report certain
data points.
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Information about the applicants, borrowers, and
underwriting process, such as ethnicity, race, and sex of the
applicant,\264\ the applicant's gross income and debt-to-income ratio,
the application channel, action taken, and, if applicable, reason(s)
for denial.
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\264\ As with section 1071, collection of an applicant's
ethnicity, race, and sex under HMDA is an exception to the general
prohibition on inquiring into protected demographic information in
existing Sec. 1002.5(b).
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Information about the property securing the loan or
proposed to secure the loan, such as census tract and other property
location information, construction method, property value, and
additional information about manufactured and multifamily housing.
Information about the features of the loan, such as the
loan type, pricing information (including interest rate and origination
charges), loan term, introductory rate period, and non-amortizing
features.
Certain unique identifiers, such as a universal loan
identifier, loan originator identifier, and a legal entity identifier
for the financial institution.
Covered institutions are required to submit their HMDA data by
March 1 following the calendar year for which data are collected.
Covered institutions with larger volumes of covered loans and
applications are required to submit their HMDA data for each of the
first three quarters of the year in addition to their annual
submission.
Following the calendar year in which HMDA data are collected, a
covered institution's disclosure statement \265\ and modified loan/
application register (LAR) become publicly available on the FFIEC's
HMDA Platform.\266\ In addition, aggregate reports for each
Metropolitan Statistical Area and Metropolitan Division that show
lending patterns by property location, age of housing stock, and income
level, sex, ethnicity, and race become publicly available.
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\265\ A disclosure statement contains aggregated data derived
from loan-level data.
\266\ A HMDA LAR contains the record of information required to
be collected and the record submitted annually or quarterly, as
applicable. A modified LAR is a covered institution's LAR modified
by the Bureau, on its website, to protect applicant and borrower
privacy. The Bureau interprets HMDA, as amended by the Dodd-Frank
Act, to call for the use of a balancing test to determine whether
and how HMDA data should be modified prior to its disclosure to the
public in order to protect applicant and borrower privacy while also
fulfilling HMDA's public disclosure purposes. See 80 FR 66127,
66133-34 (Oct. 28, 2015). In December 2018, the Bureau issued final
policy guidance describing the modifications the Bureau intends to
apply to the loan-level HMDA data that covered institutions report
before the data are disclosed publicly. See 84 FR 649 (Jan. 31,
2019).
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HMDA data are the primary source of information for regulators,
researchers, economists, industry, and advocates analyzing the mortgage
market both for HMDA's purposes and for general market monitoring. HMDA
data are used by the Federal supervisory agencies to support a variety
of activities. For example, Federal supervisory agencies use HMDA data
as part of their fair lending \267\ examination process, and also use
HMDA data in conducting Community Reinvestment Act \268\ performance
evaluations. HMDA disclosures provide the public with information on
the home mortgage lending activities of particular reporting entities
and on activity in their communities. These disclosures are used by
local, State, and Federal officials to evaluate housing trends and
issues and by community organizations to monitor financial institution
lending patterns.
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\267\ See ECOA (15 U.S.C. 1691 through 1691f), Regulation B, 12
CFR part 1002, and FHA, 42 U.S.C. 3605, 24 CFR part 100.
\268\ 12 U.S.C. 2901 through 2908, and 12 CFR parts 25, 195,
228, and 345.
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C. Summary of the Proposed Rule
The Bureau is proposing to add a new subpart B to Regulation B to
implement the requirements of section 1071 and to make conforming
amendments to existing Regulation B. The Bureau's proposal is
summarized below, in the order of the section-by-section analyses in
this part V that follow.
1. General Provisions (Sec. Sec. 1002.5(a)(4), 1002.101, and 1002.102)
Changes to existing Regulation B (Sec. 1002.5(a)(4)). The Bureau
is proposing to amend existing Sec. 1002.5(a)(4) to expressly permit
voluntary collection and reporting of information regarding the
ethnicity, race, and sex of applicants' principal owners, or whether
the applicant is a minority-owned business or a women-owned business,
in certain circumstances.
Scope, purpose, and authority (Sec. 1002.101). The Bureau is
proposing in Sec. 1002.101 to set forth the authority, purpose, and
scope for proposed subpart B. Among other things, this proposed section
would set forth section 1071's two statutory purposes of facilitating
enforcement of fair lending laws and enabling communities, governmental
entities, and creditors to identify business and community development
needs and opportunities of women-owned, minority-owned, and small
businesses.
Definitions (Sec. 1002.102). The Bureau is proposing in Sec.
1002.102 a number of definitions for terms used in proposed subpart B,
which generally fall into several categories. First, some proposed
definitions refer to terms defined elsewhere in proposed subpart B--
specifically, terms of particular importance including business,
covered application, covered credit transaction, covered financial
institution, financial institution, and small business. Second, some
proposed definitions refer to terms defined elsewhere in existing
Regulation B (i.e., business credit, credit, and State) or other
regulations (i.e., the definition of dwelling and a portion of the
definition of affiliate reference Regulation C and an SBA regulation,
respectively). Finally, the remaining terms are defined in proposed
Sec. 1002.102, including
[[Page 56380]]
applicant, closed-end credit transaction, minority individual,
minority-owned business, open-end credit transaction, principal owner,
small business lending application register, women-owned business, and
a portion of the definition of affiliate.
2. Coverage (Sec. Sec. 1002.103 Through 1002.106)
Covered applications (Sec. 1002.103). The Bureau is proposing
Sec. 1002.103 to define what is, and is not, a covered application
under proposed subpart B; this definition would trigger the data
collection and reporting requirements under subpart B for covered
financial institutions. The Bureau is proposing to define a covered
application in Sec. 1002.103(a) as an oral or written request for a
covered credit transaction that is made in accordance with procedures
used by a financial institution for the type of credit requested. The
Bureau is also proposing that a covered application does not include
(1) reevaluation, extension, or renewal requests on an existing
business credit account, unless the request seeks additional credit
amounts; and (2) inquiries and prequalification requests.
Covered credit transactions (Sec. 1002.104). The Bureau is
proposing to require that covered financial institutions collect and
report data for all covered applications from small businesses for
transactions that meet the definition of business credit under existing
Regulation B, with certain exceptions. The Bureau is proposing Sec.
1002.104(a) to define the term covered credit transaction as an
extension of business credit that is not an excluded transaction under
proposed Sec. 1002.104(b). Loans, lines of credit, credit cards, and
MCAs (including such credit transactions for agricultural purposes and
those that are also covered by HMDA`` \269\ (that is, HMDA-reportable
transactions)) would all fall within the scope of this proposed rule.
The Bureau is proposing in Sec. 1002.104(b) to exclude from the
requirements of proposed subpart B trade credit, public utilities
credit, securities credit, and incidental credit. Factoring, leases,
consumer-designated credit used for business purposes, and credit
secured by certain investment properties would also not be covered
credit transactions.
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\269\ 12 U.S.C. 2801 et seq.
---------------------------------------------------------------------------
Covered financial institutions (Sec. 1002.105). The Bureau is
proposing to define in Sec. 1002.105(a) the term financial
institution, consistent with the definition in section 1071, as any
partnership, company, corporation, association (incorporated or
unincorporated), trust, estate, cooperative organization, or other
entity that engages in any financial activity. Under this proposed
definition, proposed subpart B's requirements would apply to a variety
of entities that engage in small business lending, including depository
institutions (i.e., banks, savings associations, and credit unions),
online lenders, platform lenders, CDFIs, lenders involved in equipment
and vehicle financing (captive financing companies and independent
financing companies), commercial finance companies, governmental
lending entities, and nonprofit nondepository lenders. The Bureau is
not proposing to cover motor vehicle dealers.\270\ The Bureau is
proposing in Sec. 1002.105(b) to define the term covered financial
institution as a financial institution that originated at least 25
covered credit transactions for small businesses in each of the two
preceding calendar years. Only financial institutions that meet this
loan-volume threshold would be required to collect and report small
business lending data under proposed subpart B.
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\270\ The Bureau is proposing that subpart B does not apply to a
person excluded from coverage by section 1029 of the Consumer
Financial Protection Act of 2010, title X of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, Public Law 111-203, 124
Stat. 1376, 2004 (2010).
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Small business definition (Sec. 1002.106). The Bureau is proposing
in Sec. 1002.106 to adopt the SBA's definitions of ``business'' and
``small business'' as set out in the Small Business Act and SBA
regulations. The Bureau is also proposing that, notwithstanding the
small business size standards established by SBA regulations, for
purposes of proposed subpart B, a business is a small business if and
only if its gross annual revenue is $5 million or less for its
preceding fiscal year. The Bureau is seeking SBA approval for this
alternate small business size standard pursuant to the Small Business
Act.
3. Compiling, Maintaining, and Reporting 1071 Data (Sec. Sec. 1002.107
Through 1002.111)
Compilation of reportable data (Sec. 1002.107). The Bureau is
proposing in Sec. 1002.107 to address several aspects of collecting
data on covered applications from small businesses. The Bureau is
proposing in Sec. 1002.107(a) to require financial institutions to
compile and maintain the data points enumerated in Sec. 1002.107(a)(1)
through (21) regarding covered applications from small businesses.
These data points would be collected and reported in accordance with
the proposed official commentary and the Filing Instructions Guide that
the Bureau anticipates later providing for the appropriate year.
Certain of these data points are or could be collected from the
applicant (or otherwise determined based on information provided or
authorized by the applicant); other data points are based on
information solely within the financial institution's control. Proposed
appendix E would provide a sample data collection form for requesting
from applicants their minority- and women-owned business status and the
race, sex, and ethnicity of their principal owners. Proposed appendices
F and G provide additional details and guidance regarding collecting
those data points.
The Bureau is proposing in Sec. 1002.107(c)(1) that covered
financial institutions maintain procedures to collect applicant-
provided data at a time and in a manner that is reasonably designed to
obtain a response. The Bureau's proposal also addresses what financial
institutions should do if, despite having such procedures in place,
they are unable to obtain certain data from an applicant. Pursuant to
proposed Sec. 1002.107(b), financial institutions would be permitted
to rely on statements made by an applicant (whether in writing or
orally) or information provided by an applicant when collecting and
reporting 1071 data, although for most data points if the financial
institution verifies the information provided it must report the
verified information. Proposed Sec. 1002.107(c)(2) would also permit
financial institutions to reuse certain previously collected data in
certain circumstances.
Firewall (Sec. 1002.108). The Bureau is proposing Sec. 1002.108
to implement the requirement in section 1071 that certain data
collected be shielded from underwriters and certain other persons; the
Bureau refers to this as the ``firewall.'' Pursuant to proposed Sec.
1002.108(b), an employee or officer of a financial institution or a
financial institution's affiliate that is involved in making any
determination concerning the application would be prohibited from
accessing an applicant's responses to inquiries that the financial
institution makes pursuant to section 1071 regarding whether the
applicant is a minority-owned or women-owned business, and the
ethnicity, race, and sex of the applicant's principal owners.
However, pursuant to proposed Sec. 1002.108(c), this prohibition
would not apply to an employee or officer if the financial institution
determines that it is not feasible to limit that employee's or
officer's access to an applicant's
[[Page 56381]]
responses to the financial institution's inquiries regarding the
applicant's protected demographic information, and the financial
institution provides a notice to the applicant regarding that access.
It would not be feasible to limit access if the financial institution
determines that an employee or officer involved in making any
determination concerning a covered application should have access to
one or more applicants' responses to inquiries regarding the
applicant's protected demographic information. The notice must be
provided to each applicant whose information will be accessed or,
alternatively, the financial institution could provide the notice to
all applicants whose information could be accessed. The Bureau is
proposing sample language that a financial institution could use in
providing this notice.
Reporting data to the Bureau (Sec. 1002.109). The Bureau is
proposing Sec. 1002.109 to address several aspects of financial
institutions' obligations to report section 1071 data to the Bureau.
First, the Bureau is proposing in Sec. 1002.109(a) that 1071 data be
collected on a calendar year basis and reported to the Bureau on or
before June 1 of the following year. The Bureau also addresses
collection and reporting requirements of subsidiaries of financial
institutions and collection and reporting requirements of financial
institutions where multiple financial institutions are involved in a
transaction in proposed Sec. 1002.109(a). Second, the Bureau lists in
proposed Sec. 1002.109(b) the information that financial institutions
would be required to provide about themselves when reporting 1071 data
to the Bureau, including the financial institution's name, headquarters
address, contact person, Federal prudential regulator, institutional
identifiers, and parent entity information. Finally, the Bureau is
proposing Sec. 1002.109(c) to address technical instructions for the
submission of data to the Bureau, including information about the
Filing Instructions Guide, which the Bureau anticipates later providing
for the appropriate year.
Publication of 1071 data by the Bureau (Sec. 1002.110). The Bureau
is proposing in Sec. 1002.110 to address several issues regarding the
publication of 1071 data. The Bureau is proposing in Sec. 1002.110(a)
that it shall make available to the public, on an annual basis and on
the Bureau's website, the data submitted to it by financial
institutions. The Bureau is proposing to make these data available
subject to deletions or modifications made by the Bureau, at its
discretion, if the Bureau determines that such deletions or
modifications would advance a privacy interest. To determine whether
and how the Bureau might use its discretion to modify or delete data
prior to publication, the Bureau is proposing a ``balancing test'' that
assesses the risks and benefits of public disclosure. The Bureau's
proposed approach to the balancing test is discussed in detail in part
VI below. Proposed Sec. 1002.110(b) would state that the Bureau may,
at its discretion, compile and aggregate data submitted by financial
institutions and may publish such compilations or aggregations.
Proposed Sec. 1002.110(c) would require a covered financial
institution to publish on its website a statement that its 1071 data,
as modified by the Bureau, are or will be available on the Bureau's
website. Proposed Sec. 1002.110(d) would set forth when a covered
financial institution shall make this statement available and how long
the financial institution shall maintain the statement on its website.
These requirements would satisfy financial institutions' statutory
obligation to make data available to the public upon request.
Recordkeeping (Sec. 1002.111). The Bureau is proposing Sec.
1002.111 to address several aspects of the recordkeeping requirements
for 1071 data. First, the Bureau is proposing Sec. 1002.111(a) to
require a covered financial institution to retain evidence of
compliance with proposed subpart B, which includes a copy of its small
business lending application register, for at least three years after
the register is required to be submitted to the Bureau pursuant to
proposed Sec. 1002.109. Second, the Bureau is proposing Sec.
1002.111(b) to require a financial institution to maintain, separately
from the rest of an application for credit and accompanying
information, an applicant's responses to a financial institution's
inquiries regarding the applicant's protected demographic information.
Finally, the Bureau is proposing Sec. 1002.111(c) to require that, in
compiling and maintaining its small business lending application
register, a financial institution not include any personally
identifiable information concerning any individual who is, or is
connected with, an applicant.
4. Other Provisions (Sec. Sec. 1002.112 Through 1002.114)
Enforcement (Sec. 1002.112). The Bureau is proposing Sec.
1002.112 to address several issues related to the enforcement of
proposed subpart B. First, the Bureau is proposing Sec. 1002.112(a) to
state that a violation of section 1071 or proposed subpart B is subject
to administrative sanctions and civil liability as provided in sections
704 and 706 of ECOA. Second, the Bureau is proposing in Sec.
1002.112(b) to provide that a bona fide error in compiling,
maintaining, or reporting data with respect to a covered application is
an error that was unintentional and occurred despite the maintenance of
procedures reasonably adapted to avoid such an error, and that such an
error is presumed not to be a violation of ECOA or proposed subpart B
if the number of such errors does not exceed the thresholds set forth
in proposed appendix H. Third, the Bureau is proposing in Sec.
1002.112(c) to identify four safe harbors under which certain errors--
specifically those regarding census tract, NAICS code, small business
status, and application date--would not constitute violations of ECOA
or Regulation B.
Severability (Sec. 1002.113). The Bureau is proposing in Sec.
1002.113 to provide that the provisions of proposed subpart B are
separate and severable from one another, and that if any provision is
stayed or determined to be invalid, it is the Bureau's intent that the
remaining provisions shall continue in effect.
Effective date, compliance date, and special transitional rules
(Sec. 1002.114). The Bureau is proposing Sec. 1002.114 to address
several issues related to the Bureau's eventual final rule to implement
section 1071. First, the Bureau is proposing in Sec. 1002.114(a) that
its final rule to implement section 1071 would become effective 90 days
after publication in the Federal Register, but pursuant to proposed
Sec. 1002.114(b) compliance with the final rule would not be required
until approximately 18 months after publication in the Federal
Register. Second, the Bureau is proposing in Sec. 1002.114(c) certain
transitional provisions that would permit covered financial
institutions to begin collecting protected applicants' demographic
information beginning 12 months prior to the compliance date and would
permit financial institutions to use a different time period to
determine whether they will be covered by the rule as of the compliance
date.
D. High-Level and General Comments on the SBREFA Outline
During the SBREFA process, SERs provided feedback on nearly all
aspects of the Bureau's proposals under consideration as set forth in
the SBREFA Outline. Other stakeholders did likewise in their written
feedback on the SBREFA Outline. That feedback
[[Page 56382]]
is discussed in the section-by-section analyses of the proposed rule
below. SERs and other stakeholders also provided feedback of a more
general nature on the Bureau's section 1071 rulemaking. That feedback
is summarized here; the SBREFA Panel Report provides a more complete
summary of the SBREFA process and comments provided by SERs.\271\
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\271\ See generally SBREFA Panel Report.
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Most SERs and stakeholders were generally supportive of the
statutory purposes of section 1071.\272\ Several SERs as well as a
range of other stakeholders--including community groups, CDFIs, several
community banks, and a State consumer financial protection agency--were
supportive of the Bureau's statutory mandate to promulgate a section
1071 rule. Many stakeholders, including community groups, several CDFI
banks, and a small community bank, expressly supported broad coverage
of both financial institutions and products in the 1071 rulemaking. One
community bank stakeholder stated that larger financial institutions
should not be excluded; another community bank asserted that a 1071
rule should cover credit unions, governmental entities, commercial
finance firms, and alternative online lenders.
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\272\ The SER feedback discussed herein can be found in the
SBREFA Panel Report at 17-18.
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Several trade association stakeholders supported a more limited
approach to implementation of a 1071 rulemaking. A number of trade
associations requested exemptions for the specific types of financial
institutions they represented, including credit unions, vendor finance
and dealer-related institutions, and community banks. One trade
association argued that Federal credit union laws limited the extent to
which credit unions could seek to expand their small business lending
operations. Two trade association stakeholders suggested that the
Bureau adopt a phased or staged approach to implementation, starting
only with certain products and institutions. One trade association
suggested that the Bureau adopt a high size-based exemption for
institutions.
A number of SERs and stakeholders, including several CDFIs, a
number of community groups and a community bank, expressed the view
that data transparency in the small business lending market is critical
to advance the goals of fair lending enforcement and access to credit
for small businesses, especially those that are minority-owned and
women-owned. One SER and several stakeholders, including two community
groups and one small business trade association, stated that the
limited data currently available show that the lending practices of
many financial institutions exclude women-owned and minority-owned
businesses, exacerbating a racial wealth gap, and that section 1071 has
the opportunity to address such lending disparities, which are costly
to businesses, lenders, and the economy as a whole. The SER also said
that data transparency and fairness should be an advantage to smaller,
local financial institutions, allowing them to better distinguish their
value proposition compared to larger financial institutions or
predatory lenders.\273\ A CDFI stakeholder and a community group
stakeholder emphasized that 1071 data would be an important supplement
to CRA and HMDA data to determine community development needs. Another
community group stakeholder and a small business trade association
emphasized the importance of supporting access to credit for women-
owned and minority-owned small businesses. One community group argued
that the availability of 1071 data would spur innovation in the small
business lending market.
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\273\ Id.
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Several SERs and several community groups and CDFI stakeholders
stated that the completion of a 1071 rulemaking was welcome, given the
many years stakeholders have been waiting for these data. Several SERs
and other stakeholders, including community groups and CDFIs, supported
a 1071 rulemaking as necessary to better understand the small business
lending market, as the COVID-19 pandemic highlighted how the most
vulnerable small businesses can be disproportionately impacted by
economic shocks. Several community groups and a small business trade
association stakeholders argued that the response to the COVID-19
pandemic, including the PPP program, exacerbated existing gender and
racial disparities, and did not provide access to credit to excluded
lower- and middle-income communities and women-owned or minority-owned
small businesses. Two community bank trade associations noted the
outsized importance of community banks and CDFIs in providing PPP loans
to their local communities, including to minority-owned small
businesses, and warned that an unintended consequence of a 1071
rulemaking may be to impair this existing lending. One trade
association suggested that the Bureau delay issuing any proposal until
the economic forces driven by the COVID-19 pandemic have subsided and
recovery is evident.
Other stakeholders expressed concerns about the uses of data coming
from a 1071 rulemaking. One trade association suggested that the
collection of data on race and gender would create the perception among
customers that these factors played a role in credit decisions. One
community bank stakeholder asserted that 1071 data should not be used
in regulatory oversight or examinations of financial institutions, but
rather to better understand the small lending market and help
regulators support lending. Several trade associations expressed
concerns that misleading conclusions could be drawn from data from a
1071 rulemaking, and that small business lending was complex and
varied.
SERs nearly uniformly suggested that the Bureau aim to draft simple
regulations, and choose simpler options if possible, noting that more
complex rules tend to make compliance more difficult and drive up
compliance costs, which could potentially increase prices or reduce
small businesses' access to credit. A number of stakeholders--including
community banks, community groups, a small business trade association,
and bank and credit union trade associations--similarly supported
simple and clear regulations and requested that the Bureau avoid
complex or ambiguous rules, which they asserted would make compliance
more costly. One CDFI bank stakeholder asserted that existing
ambiguities and conflicts in the law have caused financial institutions
to avoid collecting the very data they would need to identify lending
discrimination, and that mandating data collection and clarifying rules
would be critical to addressing these concerns.
Many SERs and a community bank stakeholder requested clear written
guidance and implementation support materials from the Bureau, such as
small entity compliance guides, a ``help desk'' for questions, and
sample disclosure language (translated into languages other than
English for individuals with limited English proficiency). Several SERs
also discussed the need for applicant-facing materials explaining what
the section 1071 regulation is and why the financial institution must
collect data. Relatedly, one SER requested that the Bureau educate and
train currently unregulated financial institutions to help them
implement the rule.
A number of SERs (representing financial institutions that operate
primarily online as well as financial institutions that interact with
small business applicants in-person) indicated their belief that
financial institutions
[[Page 56383]]
with extensive online lending operations would be able to comply with
an eventual 1071 rule more easily, more quickly, and at lower cost due
to their greater degree of automation than financial institutions with
primarily in-person and/or paper-based operations. SERs and several
stakeholders (including a community bank trade association, a community
group, and a community bank) urged the Bureau to align with other
Federal data reporting regimes--such as HMDA, CRA, CDFI Fund, or SBA--
if possible, and thought that financial institutions with experience
complying with these other Federal data reporting regimes would have an
easier time complying with an eventual 1071 rule than would financial
institutions, including some SERs, with no such experience. One trade
association suggested that any comparisons with HMDA were misplaced, as
the small business lending market is more varied and complex than the
market for residential mortgage lending.
Several SERs stated that a 1071 rule should take into account the
different types of financial institutions operating in the small
business lending market. One SER suggested that the Bureau had not
focused enough attention on the impact of a 1071 rule on nondepository
institutions, which they said play a vital role in providing essential
credit to small businesses in the United States, many of which are
women-owned and minority-owned. Another SER and two trade associations
asserted that the data collected from credit unions, which are bound by
their charters (pursuant to Federal and State laws and regulations) to
serve a specific field of membership, would likely be incomparable with
data from other financial institutions that are permitted to serve any
kind of customer.
Many SERs supported broad coverage of both financial institutions
and products, as reflected in section 1071's language covering any
application to a financial institution for credit for a women-owned,
minority-owned, or small business.
The SBREFA Panel recommended that the Bureau issue implementation
and guidance materials (including a small entity compliance guide as
required by the RFA, as well as other materials), specifically to
assist small financial institutions in complying with the eventual 1071
rule.\274\ The Panel also recommended that the Bureau consider
providing sample disclosure language related to the collection of
ethnicity, race, and sex of applicants.\275\
---------------------------------------------------------------------------
\274\ Id. at 43.
\275\ Id.
---------------------------------------------------------------------------
The Bureau agrees with the general comments made in favor of
keeping the scope of the proposed rule broad. In general, the Bureau
believes that broad coverage of institutions and products as requested
by a number of SERs and stakeholders would result in the collection of
more data and would be consistent with the statutory purposes of
section 1071. The Bureau does not believe that the request made by
several trade association stakeholders to take a more limited approach
to scope--including the various limitations on the coverage of certain
types of financial institutions and products--would be consistent with
the statutory purposes of section 1071. The Bureau addresses these
issues directly in the section-by-section analyses of proposed
Sec. Sec. 1002.104 and 1002.105 below.
The Bureau agrees with the SERs and stakeholders that expressed the
view that data transparency in the small business lending market is
critical to advancing the statutory purposes of section 1071. The
Bureau believes that the limited data that do exist, cited by one SER
and several stakeholders, appear to support the existence of
disparities in the small business lending markets, as identified in
part II above. The Bureau agrees--as do other Federal regulators that
the Bureau has consulted in developing this proposed rule--that 1071
data would be an important supplementation to CRA and HMDA data in
helping a variety of parties determine and address business and
community development needs. The Bureau agrees with the SERs and
stakeholders that identified specific ways that the publication of 1071
data would advance this statutory purpose in helping the public
identify business needs, including, as one SER suggested, creating data
that would be useful to help smaller, local financial institutions
distinguish their value proposition compared to other lenders, and
could be used to spur innovation in the small business lending market.
Regarding the support of certain SERs and other stakeholders
welcoming the completion of a 1071 rulemaking, the Bureau's views on
this are best expressed in the section-by-section analyses of proposed
Sec. Sec. 1002.113 and 1002.114 concerning effective date and
compliance date. Regarding the data cited by SERs and other
stakeholders concerning lending disparities in the PPP program during
the COVID-19 pandemic, the Bureau believes that the availability of
data on PPP lending further supports the importance of collecting and
publishing 1071 data; it was only the existence of PPP lending data,
despite its limitations, that enabled these stakeholders to make
arguments regarding the state of fair lending and business and
community development under PPP.
The Bureau appreciates the concerns expressed by some stakeholders
concerning the uses of 1071 data. The Bureau believes that the firewall
provision of proposed Sec. 1002.108, including the proposed notice
provision, are intended to address the concern by one trade association
stakeholder that the collection of ethnicity, race, and sex data may
create the perception among customers that these factors play a role in
credit decisions. The Bureau disagrees with the stakeholder that
asserted that 1071 data should not be used in regulatory oversight or
examinations. Such use is contemplated by ECOA section 704B(a)(2),
which provides that the data are intended to facilitate the enforcement
of fair lending laws. The Bureau does agree with the same stakeholder,
however, that 1071 data should be used to help regulators better
understand the small business lending markets and better support such
lending. The Bureau does not disagree in the abstract with the
assertions made by several trade associations that misleading
conclusions could be drawn from 1071 data; the Bureau notes that these
stakeholders did not cite any examples and that any source of data may
be misinterpreted absent robust procedures and methodologies. The
Bureau believes, given its experience with HMDA data, that such
concerns are misplaced--overall, HMDA data have helped shed light on
previously hidden issues and proven highly effective in accomplishing
its congressionally mandated purposes.
The Bureau has attempted as much as possible to propose rules that
are both simple and clear, as SERs and other stakeholders suggested.
For instance, the Bureau is proposing a simple definition of small
business in proposed Sec. 1002.106 below. While the Bureau has
endeavored to avoid unnecessary ambiguity and complexity in its
proposed rule, complexity in the proposed rule reflects the inherent
complexity of the subject, including the variations and diversity in
the small business lending market as well as the complications of
collecting data to conduct fair lending analyses and identify business
and community development needs.
Regarding the request for clear written guidance and implementation
support materials, the Bureau intends to develop various compliance
materials, as it does with most major rules. These materials will
include a small entity compliance
[[Page 56384]]
guide that will provide regulatory implementation guidance, and a
Filing Instructions Guide that will provide technical instructions for
the submission of 1071 data to the Bureau. With regard to the comment
that the Bureau should provide applicant-facing materials, the Bureau
proposes in appendix E a sample data collection form that can be used
to collect from applicants their minority-owned business status, women-
owned business status, and the ethnicity, race, and sex of their
principal owners, along with the related required disclosures.
The Bureau generally agrees with the observation of a number SERs
that financial institutions with extensive online lending operations
would likely find compliance with a section 1071 rule easier than those
with primarily in-person operations. The Bureau sets out its
preliminary assessment of the costs of the rule on financial
institutions in parts VII and VIII below.
The Bureau has attempted, whenever possible, to align or conform
its proposed rule with other Federal data reporting regimes, as several
SERs and other stakeholders requested. The Bureau references and, where
possible, aligns the proposed rule with specific Federal data reporting
regimes, as explained in the section-by-section analyses below. The
Bureau appreciates the comments made by some SERs and other
stakeholders that there are different types of financial institutions
in the small business lending market and that the differences between
institutional types may complicate data analysis. The Bureau notes,
however, that simply excluding certain types of institutions from 1071
reporting requirements would be inconsistent with the statutory
purposes of section 1071, and that it would be more congruent with
section 1071 instead to collect information on financial institution
type as set out in proposed Sec. 1002.109(b)(9), for the reasons set
out below.
E. Cross-Cutting Interpretive Issues
1. The Bureau's Approach to Non-Small Women-Owned and Minority-Owned
Businesses in This Rulemaking
The Bureau is proposing to require financial institutions to
collect and report data regarding applications for credit for small
businesses; the Bureau is not, however, proposing to require financial
institutions to collect and report data with respect to applicants that
are not small businesses. ECOA section 704B(b) states that ``in the
case of any application to a financial institution for credit for [a]
women-owned, minority-owned, or small business,'' the financial
institution must ``inquire whether the business is a women-owned,
minority-owned or small business . . . .'' For the reasons set forth
below, the Bureau is proposing this approach as an interpretation of
the statute pursuant to its authority under 704B(g)(1), and, in the
alternative, pursuant to its authority under 704B(g)(2) to adopt
exceptions to any requirement of section 1071 as the Bureau deems
necessary or appropriate to carry out the purposes of section 1071 and
its implied de minimis authority.
The Bureau explained in the SBREFA Outline that in light of the
comprehensive coverage of women-owned and minority-owned businesses
within the scope of small businesses (discussed in more detail below),
it was considering proposing that the data collection and reporting
requirements of its eventual 1071 rule would apply to any application
to a financial institution for credit only for small businesses as
defined under the eventual 1071 rule.\276\ The Bureau explained that it
was concerned that a requirement to collect and report 1071 data on
applications for women-owned and minority-owned businesses that are not
small businesses could affect all aspects of financial institutions'
commercial lending operations while resulting in limited information
beyond what would already be collected and reported about women-owned
and minority-owned small businesses. In addition, financing for large
businesses can be much more varied and complex than are the products
used for small business lending. Thus, under the approach the Bureau
was considering proposing, financial institutions would collect and
report lending data for all applicants that satisfy the Bureau's
definition of a small business, including identifying women-owned and
minority-owned businesses within that pool, but financial institutions
would not be required to collect and report 1071 data for women-owned
and minority-owned businesses that are not ``small.''
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\276\ SBREFA Outline at 9.
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In the SBREFA Outline, the Bureau noted that most existing
businesses, including almost all women-owned and minority-owned
businesses, are ``small business concerns'' as that term is currently
defined by the SBA.\277\ Therefore, the Bureau posited that coverage of
small businesses by this rule would necessarily include nearly all
women-owned and minority-owned businesses. Based on the 2018 Annual
Business Survey by the U.S. Census, the Bureau estimated that 5.72
million employer firms--99.6 percent of all employer firms--are small
(defined for the purposes of the survey as having fewer than 500
employees). That same definition covers one million minority-owned
employer firms (99.9 percent of all minority-owned firms) and 1.1
million women-owned employer firms (99.9 percent of all women-owned
firms).\278\ The Bureau estimated that, among non-small businesses,
which are only 0.4 percent of all firms nationally, 10 percent of this
small fraction are minority-owned firms and 13 percent are women-
owned.\279\
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\277\ See the section-by-section analysis of proposed Sec.
1002.106 below for additional discussion regarding the definition of
``small business'' for purposes of this rulemaking.
\278\ SBREFA Outline at 9.
\279\ Id.
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A number of SERs expressed a belief that covering just small
business applications would supply adequate or nearly complete lending
data for purposes of section 1071.\280\ However, other SERs stated that
the Bureau's regulation should collect data regarding applications for
credit for non-small minority-owned and women-owned businesses as well.
One SER relayed first-hand observations in their community that larger
minority-owned and women-owned businesses were excluded from full
access to credit, and expressed an interest in the Bureau capturing and
reporting that information. One SER observed that smaller financial
institutions, or those that generally focus on small business lending,
might find that collecting and reporting data for all business loan
applications would be simpler than determining which applications would
be within the scope of the eventual 1071 rule.
---------------------------------------------------------------------------
\280\ The SER feedback discussed in herein can be found in the
SBREFA Panel Report at 18.
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The SBREFA Panel recommended that the Bureau continue to explore
whether the data collection and reporting requirements in its 1071 rule
should be limited to any application to a financial institution for
credit only for small businesses (as defined by the Bureau's
regulation) or whether it should also extend to applications for women-
owned and minority-owned businesses that are not small.\281\ The Panel
also recommended that the Bureau seek comment on the costs to small
financial institutions of collecting and reporting 1071 data regarding
applications for credit for women-owned and minority-owned businesses
[[Page 56385]]
that are not small (as defined by the Bureau's regulation).\282\
---------------------------------------------------------------------------
\281\ Id. at 43.
\282\ Id.
---------------------------------------------------------------------------
Feedback from other stakeholders generally supported the Bureau's
approach to limiting 1071 data collection to small businesses,
including identifying women- and minority-owned businesses within that
pool. A number of commenters expressed support for the Bureau's
approach under consideration, arguing that requiring data collection
for non-small women- and minority-owned businesses would increase
compliance burden without significantly contributing to 1071's
purposes. Some responses also stated that this approach was consistent
with legislative intent, positing that Congress did not intend for
financial institutions to collect 1071 data on large companies. A
community group noted that its support for the Bureau's approach was
conditional on the Bureau adopting a broad definition of small
business, thus limiting the likelihood of missing significant women-
and minority-owned business application data. A joint comment from a
number of community groups urged the Bureau to monitor the market and
to reevaluate this approach if later publications of the Annual
Business Survey show that the number of non-small women- and minority-
owned businesses exceed current estimates. Another joint comment from
community groups did not support the Bureau's approach under
consideration, urging the Bureau to consider instead covering non-small
women- and minority-owned businesses in the data collection and arguing
that it might be easier for financial institutions to collect data for
all applicants, as opposed to developing systems for screening out
applicants that are not covered. Two banks suggested that 1071 data
collection should extend to all businesses; one was concerned about
fair lending disparities, while the other remarked that large business
applicants should not be relieved of the burden of having their data
collected under 1071.
The Bureau believes that section 1071 is ambiguous with respect to
its coverage of applications for credit for non-small women- or
minority-owned businesses, and the Bureau therefore proposes to
interpret this ambiguity pursuant to ECOA section 704B(g)(1). The
Bureau acknowledges that the plain language of 704B(b) could be read to
require financial institutions to collect information from all women-
owned and minority-owned businesses, including those that are not small
businesses. But based on a close consideration of the text, structure,
and purpose of the statute, and the interactions between section 1071
and other provisions of ECOA and Regulation B, the Bureau believes that
the statute's coverage of, and Congress's intent with respect to, data
regarding non-small businesses is ambiguous.
The Bureau interprets ECOA section 704B(b) and (b)(1) to require
that financial institutions first determine whether an applicant is a
small business within the scope of the rule's data collection before
making the required inquiries that would otherwise be prohibited by
existing Regulation B. There is a general prohibition in existing
Regulation B (in Sec. 1002.5(b)) which states that a ``creditor shall
not inquire about the race, color, religion, national origin, or sex of
an applicant or any other person in connection with a credit
transaction, except'' if expressly permitted to do so by law or
regulation.
In the introductory language to ECOA section 704B(b), Congress
instructed that the 1071 data collection regime applies only ``in the
case of any application to a financial institution for credit for
women-owned, minority-owned, or small business'' (emphasis added). The
Bureau believes that ``in the case of'' indicates Congress's intent to
limit application of section 1071 to these types of businesses, rather
than requiring financial institutions to make 1071-related inquiries of
all business applicants for credit.\283\ The next paragraph
(704B(b)(1)) does not use the conditional phrase ``in the case of''
used in 704B(b); rather, it instructs a financial institution to
``inquire.'' The Bureau believes that the instruction to ``inquire'' in
704B(b)(1) is intended to provide the necessary exception to Regulation
B's general prohibition against ``inquir[ing]'' as to protected
demographic information in connection with a credit transaction.\284\
Indeed, absent section 1071's lifting of the prohibition, generally, a
financial institution could not determine, or even ask about, an
applicant's women- or minority-owned status, because doing so would
necessarily constitute ``inquir[ing] about the race, color, religion,
national origin, or sex of an applicant'' in violation of existing
Sec. 1002.5(b). The Bureau believes that Congress likely intended to
ensure that financial institutions could determine whether an applicant
is covered by the 1071 data collection without risking a violation of
other provisions of ECOA and Regulation B.
---------------------------------------------------------------------------
\283\ Merriam-Webster defines ``case'' as meaning ``a set of
circumstances or conditions,'' ``a situation requiring investigation
or action (as by the police),'' or ``the object of investigation or
consideration.''
\284\ As discussed in greater detail in the next section, the
fact that the language of ECOA section 704B(b)(1) is designed to
expressly permit inquiry into protected demographic information,
which would otherwise be prohibited by existing Sec. 1002.5(b), is
also evidenced by the statute's three provisions creating special
protections for responses to the inquiry: 704B(b)(2) requires that
responses to protected inquiries remain separate from the
application and accompanying information; 704B(c) requires that
applicants have a right to refuse to answer the protected inquiry;
and 704B(d) requires that certain underwriters or other employees
involved in making determinations on an application not have access
to the responses to protected inquiries.
---------------------------------------------------------------------------
However, unlike with women- and minority-owned business status,
there is no legal impediment to a financial institution's determining
whether an applicant is a small business, and financial institutions
can make that determination as a threshold matter without risking
running afoul of ECOA and Regulation B. Therefore, the Bureau believes
that the scope of the introductory ``in the case of'' language in ECOA
section 704(b) is ambiguous as to coverage of non-small women- and
minority-owned businesses. To resolve this ambiguity, the Bureau has
applied its expertise to interpreting the language and structure of
1071 within the context of the general prohibition on inquiring into
protected demographic information in existing Sec. 1002.5(b), and
concludes that ECOA section 704B(b)(1) is best read as only referring
to questions about applicants' protected demographic information (i.e.,
women- and minority-owned business status as well as the race, sex, and
ethnicity of the principal owners of the business). The Bureau believes
704B(b)'s more general ``in the case of'' language should be understood
to indicate the conditions under which 1071 data collection should take
place, and requires financial institutions to make a threshold
determination that an applicant is a small business before proceeding
with an inquiry into the applicant's protected demographic information.
The Bureau also notes that the collection of data on applications
for non-small women- or minority-owned businesses would not carry out
either of section 1071's stated purposes because the data would be of
only limited usefulness for conducting the relevant analyses of non-
small businesses. Such analyses would necessitate comparing data
regarding non-small women-owned and minority-owned business applicants
to data regarding non-small non-women-owned and non-minority-owned
business applicants, in order to control for lending outcomes that
result from differences in applicant size. But section 1071 does not
require or otherwise address the collection of data for non-small
business applicants that
[[Page 56386]]
are not women- or minority-owned. Therefore, the resulting data set
will lack a control group, arguably the most meaningful comparator for
any data on non-small women- or minority-owned businesses. It is
unlikely that Congress intended, and the statute is reasonably read not
to require, the collection of data that would be of limited
utility.\285\
---------------------------------------------------------------------------
\285\ See, e.g., Pub. Citizen v. U.S. Dep't of Just., 491 U.S.
440, 454 (1989) (``Where the literal reading of a statutory term
would `compel an odd result,' Green v. Bock Laundry Machine Co., 490
U.S. 504, 509 (1989), we must search for other evidence of
congressional intent to lend the term its proper scope.'').
---------------------------------------------------------------------------
Finally, the Bureau notes that the title of section 1071 is ``Small
Business Data Collection,'' and 1071 amends ECOA to add a new section
titled ``Small Business Loan Data Collection.'' In the presence of
ambiguity, these titles provide some additional evidence that Congress
did not intend the statute to authorize the collection of data on
businesses that are not small.\286\
---------------------------------------------------------------------------
\286\ Almendarez-Torres v. United States, 523 U.S. 224, 234
(1998) (`` `[T]he title of a statute and the heading of a section'
are `tools available for the resolution of a doubt' about the
meaning of a statute.'') (quoting Bhd. of R.R. Trainmen v. Balt. &
Ohio R.R., 331 U.S. 519, 529 (1947)).
---------------------------------------------------------------------------
For these reasons, the Bureau proposes to interpret ECOA section
704B(b) to cover the collection only of data with respect to small
businesses, including those that are women- and minority-owned.
Likewise, as discussed immediately below in E.2 of this Overview to
part V, the Bureau is proposing to clarify that the 704B(b)(1) inquiry,
when applicable, pertains to an applicant's minority-owned business
status and women-owned business status as well as the race, sex, and
ethnicity of its principal owners. For the same reasons, the Bureau
believes that not requiring the collection of data with respect to
applications for non-small businesses would be necessary or appropriate
to carry out the purposes of section 1071; therefore, in the
alternative, the Bureau proposes to exercise its exception authority in
704B(g)(2) to effect this outcome. Finally, because the Bureau believes
that the collection of data on non-small women- and minority-owned
businesses would ``yield a gain of trivial or no value,'' the Bureau
proposes, in the alternative, to exercise its implied de minimis
authority to create this exception.\287\
---------------------------------------------------------------------------
\287\ Waterkeeper All. v. EPA, 853 F.3d 527, 530 (D.C. Cir.
2017) (quoting Pub. Citizen v. FTC, 869 F.2d 1541, 1556 (D.C. Cir.
1989)); see Alabama Power Co. v. Costle, 636 F.2d 323, 360-61 (D.C.
Cir. 1979).
---------------------------------------------------------------------------
The Bureau seeks comment on its proposed approach to limiting the
scope of data collection pursuant to subpart B to covered applications
for small businesses, but not women- or minority-owned businesses that
are not small. As recommended by the SBREFA Panel, the Bureau also
seeks comment on the costs to small financial institutions of
collecting and reporting 1071 data regarding applications for credit
for women-owned and minority-owned businesses that are not small
businesses as defined in proposed Sec. 1002.106(b). See the section-
by-section analysis of proposed Sec. 1002.106(b) below, where the
Bureau is seeking comment on the proposed definition of a small
business.
2. The Meaning of ``information requested pursuant to subsection (b)''
Four different provisions of section 1071 refer to or rely on
``information requested pursuant to subsection (b)'' or similar
language. First, ECOA section 704B(b)(2) provides that financial
institutions must ``maintain a record of the responses to such
inquiry'' and keep those records separate from the application and
information that accompanies it. Second, 704B(c) states that applicants
for credit ``may refuse to provide any information requested pursuant
to subsection (b).'' Third, 704B(d) requires financial institutions to
limit the access of certain employees to ``information provided by the
applicant pursuant to a request under subsection (b),'' with certain
exceptions. Fourth, 704B(e) instructs financial institutions that
``information provided by any loan applicant pursuant to a request
under subsection (b) . . . shall be itemized in order to clearly and
conspicuously disclose'' data including the loan type and purpose,
amount of credit applied for and approved, and gross annual revenue.
In light of these four disparate provisions, the Bureau believes
that section 1071 is ambiguous with respect to the meaning of ``any
information provided by the applicant pursuant to a request under
subsection (b).'' \288\ On the one hand, ECOA section 704B(b)(1)
directs financial institutions to inquire whether a business is ``a
women-owned, minority-owned, or small business,'' so the phrase could
be interpreted as referring only to those three data points. Section
704B(e), however, indicates that the scope of 704B(b) could be much
broader; it suggests that all of the information that financial
institutions are required to compile and maintain--not simply an
applicant's status as a women-owned, minority-owned, or small
business--constitutes information provided by an applicant ``pursuant
to a request under subsection (b).'' But as noted above, information
deemed provided pursuant to subsection (b) is subject to the notable
protections of separate recordkeeping under 704B(b)(2), a right to
refuse under 704B(c), and the firewall under 704B(d). Applying these
special protections to many of the data points in 704B(e), such as
gross annual revenue or amount applied for, would be extremely
difficult to implement, because this information is critical to
financial institutions' ordinary operations in making credit decisions.
Additionally, 704B(e) describes as ``provided by any loan applicant''
under 704B(b) data points that plainly must come from the financial
institution itself, such as application number and action taken,
further suggesting that Congress viewed this term as encompassing more
information than lies within the four corners of 704B(b)(1). Finally,
as noted above, the circular structure of 704B(b) complicates the
question of what constitutes information provided ``pursuant to a
request under subsection (b).'' Read together, the introductory
language in 704B(b) and (b)(1) direct financial institutions, ``in the
case of'' a credit application ``for [1] women-owned, [2] minority-
owned, or [3] small business,'' to ``inquire whether the business is a
[1] women-owned, [2] minority-owned, or [3] small business.'' The
Bureau believes that this circularity further demonstrates the
ambiguity of the phrase ``pursuant to a request under subsection (b).''
---------------------------------------------------------------------------
\288\ The Bureau does not believe that the minor linguistic
variations in these four provisions themselves have significance.
---------------------------------------------------------------------------
The Bureau believes that it is reasonable to resolve these
ambiguities by giving different meanings to the phrase ``any
information provided by the applicant pursuant to a request under
subsection (b)'' (or similar) with respect to ECOA section 704B(e) as
opposed to 704B(b)(2), (c), and (d).\289\ With respect to 704B(e), the
Bureau interprets the phrase to refer to all the data points now
articulated in proposed Sec. 1002.107(a). Section 704B(e) is the
source of financial institutions' obligation to ``compile and
maintain'' data that they must then submit to the
[[Page 56387]]
Bureau, so it would be reasonable to interpret this paragraph as
referring to the complete data collection Congress devised in enacting
section 1071.
---------------------------------------------------------------------------
\289\ While there is a presumption that a phrase appearing in
multiple parts of a statute has the same meaning in each, ``this is
no more than a presumption. It can be rebutted by evidence that
Congress intended the words to be interpreted differently in each
section, or to leave a gap for the agency to fill.'' Catskill
Mountains Chapter of Trout Unlimited, Inc. v. EPA, 846 F.3d 492, 532
(2d Cir. 2017) (citing Env't Def. v. Duke Energy Corp., 549 U.S.
561, 575 (2007)). Here, the Bureau believes Congress indicated such
an intention by using the same phrase in the substantially different
contexts of providing special protections for sensitive demographic
information on the one hand and ``itemiz[ing]'' all collected data
on the other.
---------------------------------------------------------------------------
But with respect to the three statutory provisions creating special
protections for certain information--the firewall in ECOA section
704B(d), separate recordkeeping in 704B(b)(2), and the right to refuse
in 704B(c)--the Bureau interprets the phrase to refer to the data
points in proposed Sec. 1002.107(a)(18) (women-owned business status),
(a)(19) (minority-owned business status), and (a)(20) (ethnicity, race,
and sex of principal owners).\290\ Each of these data points requests
sensitive demographic information that has no bearing on the
creditworthiness of the applicant, about which existing Sec. 1002.5(b)
would generally prohibit the financial institution from inquiring
absent section 1071's mandate to collect and report that information,
and with respect to which applicants are protected from discrimination.
The Bureau accordingly believes that it would be reasonable to apply
section 1071's special-protection provisions to apply to this
information, regardless of whether the statutory authority to collect
it originates in 704B(b)(1) (women-owned and minority-owned business
status) or 704B(e)(2)(G) (race, sex, and ethnicity of principal
owners). The Bureau similarly believes that it would have been
unreasonable for Congress to have intended that these special
protections would apply to any of the other data points now proposed in
Sec. 1002.107(a), which the financial institution is permitted to
request regardless of coverage under section 1071 which are not the
subject of Federal antidiscrimination law, and many of which financial
institutions currently use for underwriting purposes.
---------------------------------------------------------------------------
\290\ The Bureau's interpretations with respect to a separate
data point for small business status are discussed in the next
section.
---------------------------------------------------------------------------
The Bureau implements these interpretations of ``information
requested pursuant to subsection (b)'' in several different section-by-
section discussions. With respect to ECOA section 704B(e), the Bureau
discusses its interpretation of the phrase in the section-by-section
analysis of proposed Sec. 1002.107(a). The Bureau's interpretation of
704B(d)'s firewall requirement is addressed at greater length in the
section-by-section analysis of proposed Sec. 1002.108, and the
Bureau's interpretation of the separate recordkeeping requirement in
704B(b)(2) is addressed in the section-by-section analysis of proposed
Sec. 1002.111(b). The right to refuse in 704B(c) is discussed in the
section-by-section analyses of the data points that the Bureau proposes
to be subject to the right to refuse: Proposed Sec. 1002.107(a)(18)
(women-owned business status), (19) (minority-owned business status),
and (20) (ethnicity, race, and sex of principal owners).
3. No Collection of Small Business Status as a Data Point
The Bureau notes that neither of its interpretations of
``information requested pursuant to subsection (b)'' reference a
specific data point for an applicant's status as a small business, nor
is the Bureau otherwise including in proposed Sec. 1002.107(a) that
financial institutions collect, maintain, or submit a data point whose
sole function is to state whether the applicant is or is not a small
business.
At SBREFA, the Bureau conveyed that it was considering proposing
small business status as a separate data point. The Bureau also stated
that it was considering not proposing to extend the right to refuse or
firewall to a financial institution's specific inquiry regarding small
business status; \291\ the Bureau did not address in the SBREFA Outline
whether small business status would be subject to the separate
recordkeeping requirement. In lieu of further details about the
potential data point on small business status, the Bureau noted that it
was considering proposing that collection and reporting of whether an
applicant for credit is a small business be based on applicant-reported
information, but that the precise nature of the data point would depend
on the ultimate definition of small business.
---------------------------------------------------------------------------
\291\ SBREFA Outline at 25.
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As discussed below in the section-by-section analysis of proposed
Sec. 1002.106(b), the Bureau is now proposing a definition of small
business that largely adopts the SBREFA Outline's First Alternative
Approach with a threshold of $5 million. After considering the
implications of this approach, the Bureau now believes that it would
render redundant any requirement that financial institutions also
collect a standalone data point whose sole purpose is to state whether
an applicant is a small business, because the gross annual revenue data
point wholly encompasses whether an applicant is a small business.
Indeed, under the proposed definition of small business, when a
financial institution asks an applicant its gross annual revenue, that
question is functionally identical to asking, ``are you a small
business?'' The Bureau believes that it would be a reasonable
interpretation of ECOA section 704B(b)'s query as to small business
status for that question to take the form of, ``what is your gross
annual revenue?'' Furthermore, as discussed above with respect to the
Bureau's approach to non-small women- and minority-owned businesses,
the Bureau is interpreting financial institutions' data collection
obligations as attaching only in the case of applications from small
businesses; if a financial institution determines that an applicant is
not a small business, none of the obligations under this rule would
apply. As such, a standalone data point that serves only to designate
whether a business qualifies as small for purposes of the rule would be
redundant with the mere fact that the 1071 data collection occurs at
all, as well as with the collection of gross annual revenue.
The Bureau acknowledges that the plain language of ECOA section
704B(b) could be read to require financial institutions to ask
applicants subject to the data collection the precise question, ``are
you a small business?'' Upon further analysis, however, the Bureau
believes that Congress's intended treatment of small business status as
a standalone data point is ambiguous. As described in more detail above
with respect to the rulemaking's coverage of women- and minority-owned
businesses that are not small, 704B(b)'s introductory language and
704B(b)(1) appear to require financial institutions to know the answer
to whether an applicant is women-owned, minority-owned, or small before
they make their inquiry; to resolve this ambiguity, the Bureau
interprets 704B(b)'s introductory language and 704B(b)(1) to require
that financial institutions first straightforwardly assess whether an
applicant is a small business before proceeding to inquire into the
applicant's protected demographic information that would otherwise be
prohibited by existing Sec. 1002.5(b).
In sum, pursuant to its authority under ECOA section 704B(g)(1) to
prescribe such rules as may be necessary to carry out, enforce, and
compile data pursuant to section 1071, the Bureau interprets 704B(b)
and (b)(1) to obviate the need for financial institutions to collect a
standalone data point whose sole purpose is to note an applicant's
small business status. For the same reasons, the Bureau believes that
not requiring the collection of a separate data point on small business
status would be necessary or appropriate to carry out the purposes of
section 1071; therefore, in the alternative, the Bureau proposes to
exercise its exception authority in 704B(g)(2) to effect this outcome.
[[Page 56388]]
Finally, because the Bureau believes that the collection of a
standalone data point on small business status would ``yield a gain of
trivial or no value,'' the Bureau proposes, in the alternative, to
exercise its implied de minimis authority to create this
exception.\292\
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\292\ Waterkeeper All., 853 F.3d at 530 (quoting Pub. Citizen,
869 F.2d at 1556); see Alabama Power, 636 F.2d at 360-61.
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In light of the above, the Bureau seeks comment on whether a
standalone data point solely dedicated to small business status might
nonetheless be useful and, if so, how it might be implemented.
F. Conforming Amendments to Existing Regulation B
As discussed above, the Bureau is proposing to implement its
section 1071 rule in a new subpart B of Regulation B. The content of
existing Regulation B would become subpart A of Regulation B. This
change would not affect the current section numbering in Regulation B.
The Bureau believes it is appropriate to make this rule a part of
Regulation B, as section 1071 is a part of ECOA. Nonetheless, the
Bureau seeks comment on whether it should instead codify its section
1071 rule as a free-standing regulation with its own CFR part and, if
so, why.
As noted above and as discussed in more detail below, the Bureau is
proposing amendments to amend existing Sec. 1002.5(a)(4) and
associated commentary to expressly permit voluntary collection of
minority-owned business status, women-owned business status, and the
race, sex, and ethnicity of applicants' principal owners in accordance
with the requirements of subpart B. In addition, the Bureau anticipates
revising certain references to the entire regulation (which use the
terms ``regulation'' or ``part'') in existing Regulation B to instead
refer specifically to subpart A. The Bureau does not intend to make any
substantive changes with these revisions, but rather intends to
maintain the status quo.
Subpart A--General
Section 1002.5 Rules Concerning Requests for Information
5(a) General Rules
5(a)(4) Other Permissible Collection of Information
Background
ECOA prohibits creditors from discriminating against applicants,
with respect to any aspect of a credit transaction, on the basis of--
among other things--race, color, religion, national origin, sex or
marital status, or age.\293\ It also states that making an inquiry
under 15 U.S.C. 1691c-2 (that is, section 1071), in accordance with the
requirements of that section, shall not constitute discrimination for
purposes of ECOA.\294\ Regulation B, in existing Sec. 1002.5(b),
generally prohibits a creditor from inquiring about protected
demographic information in connection with a credit transaction unless
otherwise required by Regulation B, ECOA, or other Federal law or
regulation.\295\
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\293\ 15 U.S.C. 1691(a).
\294\ 15 U.S.C. 1691(b)(5).
\295\ Existing Sec. 1002.5(a)(2).
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In 2017, the Bureau amended Regulation B, adding Sec. 1002.5(a)(4)
to allow creditors to collect ethnicity, race, and sex from mortgage
applicants in certain cases where the creditor is not required to
report under HMDA and Regulation C.\296\ As part of this rulemaking,
the Bureau added Sec. 1002.5(a)(4) to expressly permit the collection
of ethnicity, race, and sex information from mortgage applicants in
certain cases where the creditor is not required to report under HMDA
and Regulation C. For example, existing Sec. 1002.5(a)(4) expressly
permits the collection of ethnicity, race, and sex information for
certain transactions for which Regulation C permits optional reporting.
However, nothing in existing Regulation B (or in ECOA) expressly
permits voluntary collection and reporting of information regarding the
ethnicity, race, and sex of applicants' principal owners, or whether
the applicant is a minority-owned business or women-owned business,
under section 1071.
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\296\ Equal Credit Opportunity Act (Regulation B) Ethnicity and
Race Information Collection, 82 FR 45680, 45684 (Oct. 2, 2017).
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SBREFA Proposal Under Consideration and Feedback Received
During the SBREFA process, some SERs, primarily small CDFIs and
mission-oriented community banks, stated that they would be inclined to
collect and report 1071 data to the Bureau even if not required to do
so, such as if they fell under loan-volume thresholds. These SERs
expressed an intent to report data even if not required to out of a
belief in the importance and utility of 1071 data.
Proposed Rule
The Bureau is proposing to amend existing Sec. 1002.5(a)(4) to add
three exemptions (in proposed Sec. 1002.5(a)(4)(vii), (viii), and
(ix)) that would permit certain creditors that are not covered
financial institutions under the rule to collect small business
applicants' protected demographic information under certain
circumstances. The Bureau is also proposing to add comment 5(a)(2)-4
and to revise existing comment 5(a)(4)-1 to provide guidance on these
proposed exemptions.
Proposed Sec. 1002.5(a)(4)(vii) would provide that a creditor that
was required to report small business lending data pursuant to proposed
Sec. 1002.109 for any of the preceding five calendar years but is not
currently a covered financial institution under proposed Sec.
1002.105(b) may collect information pursuant to proposed subpart B for
a covered application as defined in proposed Sec. 1002.103 regarding
whether the applicant is a minority-owned business or a women-owned
business, and the ethnicity, race, and sex of the applicant's principal
owners if it complies with the requirements of proposed subpart B as
otherwise required for covered financial institutions pursuant to
proposed Sec. Sec. 1002.107, 1002.108, 1002.111, 1002.112, and
1002.114 for that application. In short, proposed Sec.
1002.5(a)(4)(vii) would permit a previously covered financial
institution to collect such information for covered applications for up
to five years after it fell below the loan-volume threshold of proposed
Sec. 1002.105(b), provided that it does so in accordance with the
relevant requirements of proposed subpart B.
The Bureau expects that some creditors that are no longer covered
financial institutions and thus no longer required to report 1071 data
in a given reporting year may prefer to continue to collect applicants'
protected demographic information in the event they become a covered
financial institution again, in order to maintain consistent compliance
standards from year to year. As it did in a similar context for HMDA
reporting,\297\ the Bureau believes that permitting such collection for
five years provides an appropriate time frame under which a financial
institution should be permitted to continue collecting the information
without having to change its compliance processes. The Bureau believes
that a five-year period is sufficient to help an institution discern
whether it is likely to have to report 1071 data in the near future but
not so long as to permit it to collect such information in a period too
attenuated from previous 1071 reporting.
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\297\ Existing Sec. 1002.5(a)(4)(iii).
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Therefore, the Bureau believes that it is an appropriate use of its
statutory authority under sections 703(a) \298\ and
[[Page 56389]]
704B(g)(1) of ECOA to permit creditors to collect the 1071 demographic
information in the manner set out in proposed Sec. 1002.5(a)(4)(vii).
The proposal would effectuate the purposes of and facilitate compliance
with ECOA and is necessary to carry out, enforce, and compile data
pursuant to section 1071 because it would permit creditors to collect
information without interruption from year to year, thereby
facilitating compliance with the 1071 rule's data collection
requirements and improving the quality and reliability of the data
collected. The Bureau also believes that this provision is narrowly
tailored and would preserve and respect the general limitations in
existing Sec. 1002.5(b) through (d).
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\298\ 15 U.S.C. 1691b(a).
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Proposed Sec. 1002.5(a)(4)(viii) would provide that a creditor
that exceeded the loan-volume threshold in the first year of the two-
year threshold period provided in proposed Sec. 1002.105(b) may, in
the second year, collect information pursuant to proposed subpart B for
a covered application as defined in proposed Sec. 1002.103 regarding
whether the applicant is a minority-owned business or a women-owned
business, and the ethnicity, race, and sex of the applicant's principal
owners if it complies with the requirements of subpart B as otherwise
required for covered financial institutions pursuant to proposed
Sec. Sec. 1002.107, 1002.108, 1002.111, 1002.112, and 1002.114 for
that application.
The Bureau believes that its proposal would benefit creditors in
certain situations in which the creditor has not previously reported
1071 data but expects to be covered in the following year and wishes to
prepare for that future reporting obligation. For example, where a
creditor surpasses the loan-volume threshold of proposed Sec.
1002.105(b) for the first time in a given calendar year, it may wish to
begin collecting applicants' protected demographic information for
covered applications received in the next calendar year (second
calendar year) so as to ensure its compliance systems are fully
functional before it is required to collect and report information
pursuant to proposed subpart B in the following calendar year (third
calendar year).
The Bureau believes that it is an appropriate use of its statutory
authority under sections 703(a) and 704B(g)(1) of ECOA to permit
creditors to collect information under proposed Sec.
1002.5(a)(4)(viii). A creditor likely would benefit from being able to
collect applicants' protected demographic information with assurance of
compliance with existing Sec. 1002.5 regardless of whether it actually
becomes subject to proposed subpart B reporting at the end of the two-
year threshold period. The proposal would effectuate the purposes of
and facilitate compliance with ECOA and is necessary to carry out,
enforce, and compile data pursuant to section 1071 because it would
facilitate compliance with the 1071 rule's data collection requirements
and improve the quality and reliability of the data collected by
financial institutions that may be transitioning into being required to
collect and report 1071 data.
Proposed Sec. 1002.5(a)(4)(ix) would state that a creditor that is
not currently a covered financial institution under proposed Sec.
1002.105(b), and is not otherwise a creditor to which proposed Sec.
1002.5(a)(4)(vii) or (viii) applies, may collect information pursuant
to proposed subpart B for a covered application as defined in proposed
Sec. 1002.103 regarding whether an applicant for a covered credit
transaction is a minority-owned business or a women-owned business, and
the ethnicity, race, and sex of the applicant's principal owners if the
creditor complies with the requirements of proposed subpart B as
otherwise required for covered financial institutions pursuant to
proposed Sec. Sec. 1002.107 through 1002.112 and 1002.114 for that
application. The proposal would permit a financial institution that
wishes to voluntarily report 1071 data to collect applicants' protected
demographic information without running afoul of Regulation B. Unlike
creditors subject to proposed Sec. 1002.5(a)(4)(vii) or (viii), a
creditor seeking to voluntarily collect applicant's protected
demographic information under proposed Sec. 1002.5(a)(4)(ix) would be
required to report it to the Bureau.
The Bureau believes that permitting creditors to collect 1071
demographic information pursuant to proposed Sec. 1002.5(a)(4)(vii) or
(viii) would facilitate compliance and promote data quality in the
event that creditors subject to those provisions later become covered
financial institutions. For those creditors that wish to voluntarily
report 1071 data, as well as others covered by proposed Sec.
1002.5(a)(4)(ix) (where reporting is required when applicants'
protected demographic information is collected), the reported data
would be additional information that would further the intended
purposes of the statute. An analysis of business and community
development needs would benefit from the inclusion of voluntarily
reported data from financial institutions below the reporting
threshold. Such institutions more often serve sparsely populated rural,
underserved communities or are member-owned organizations (such as
credit unions). As some SERs suggested, the voluntary collection and
reporting of 1071 data by such financial institutions may stem from a
community development orientation and commitment to fair lending.
Further, the reporting of such data would provide a more complete
picture of total lending activity--and therefore enable a more complete
analysis of fair lending risks as well as business and community
development needs--especially given that larger financial institutions
may be less likely to operate in sparsely populated, rural, and
underserved communities, for the reasons set out in part II above. The
Bureau is proposing Sec. 1002.5(a)(4)(ix) in response to feedback from
some stakeholders that indicated they might want to collect and report
1071 data even if they were not required to do so. The Bureau believes,
for the reasons set out above, that it is an appropriate use of its
general authority under sections 703(a) and 704B(g)(1) of ECOA to
permit creditors to collect information under proposed Sec.
1002.5(a)(4)(ix), as such collection would effectuate the purposes of
and facilitate compliance with ECOA and is necessary to carry out,
enforce, and compile data pursuant to section 1071. Further, the Bureau
believes that permitting creditors to collect applicants' protected
demographic information would result in the collection of additional
information that could carry out section 1071's business and community
development purpose.
Existing comment 5(a)(4)-1 currently addresses recordkeeping
requirements for ethnicity, race, and sex information that is
voluntarily collected for HMDA under the existing provisions of Sec.
1002.5(a)(4). The Bureau is proposing to revise this comment by adding
to it a parallel reference to proposed subpart B, along with a
statement that the information collected pursuant to proposed subpart B
must be retained pursuant to the requirements set forth in proposed
Sec. 1002.111.
Proposed comment 5(a)(2)-4 would state that proposed subpart B of
Regulation B generally requires creditors that are covered financial
institutions as defined in proposed Sec. 1002.105(a) to collect and
report information about the ethnicity, race, and sex of the principal
owners of applicants for certain small business credit, as well as
whether the applicant is minority-owned or women-owned as defined in
proposed Sec. 1002.102(m) and (s), respectively. The Bureau is
proposing this comment for parity with existing comment 5(a)(2)-2,
which
[[Page 56390]]
addresses the requirement to collect and report information about the
race, ethnicity, and sex of applicants under HMDA. Existing comment
5(a)(2)-3 explains that persons such as loan brokers and correspondents
do not violate ECOA or Regulation B if they collect information that
they are otherwise prohibited from collecting, where the purpose of
collecting the information is to provide it to a creditor that is
subject to HMDA or another Federal or State statute or regulation
requiring data collection. The Bureau believes that the reference to
another Federal statute or regulation adequately encompasses section
1071 and proposed subpart B, and thus it does not propose to amend this
existing comment in order to make clear that loan brokers and other
persons collecting applicants' protected demographic information on
behalf of covered financial institutions are not violating ECOA or
Regulation B by doing so.
The Bureau seeks comment on these three proposed exemptions to be
added to existing Sec. 1002.5(a)(4), and associated commentary,
including whether there are other specific situations that should be
added to the list of exemptions in Sec. 1002.5(a)(4) to permit the
collection of applicants' protected demographic information, and
whether any similar modifications to other provisions are necessary. In
particular, the Bureau seeks comment on whether it should add another
exemption to Sec. 1002.5(a)(4) relating to proposed Sec.
1002.114(c)(1), wherein the Bureau is proposing to permit financial
institutions to collect, but would not require them to report,
applicants' protected demographic information prior to the compliance
date.
The Bureau also notes that, as discussed in the section-by-section
analysis of proposed Sec. 1002.104(a) below, it seeks comment on
whether it should permit financial institutions to voluntarily collect
and report 1071 data on applications for products that the Bureau is
not proposing to cover. If the Bureau were to permit such voluntary
collection and reporting, the Bureau expects to add a provision similar
to proposed Sec. 1002.5(a)(4)(ix) to address it.
Subpart B--Small Business Lending Data Collection
Section 1002.101 Authority, Purpose, and Scope
Proposed Sec. 1002.101 would set forth the authority, purpose, and
scope for proposed subpart B. Specifically, it would provide that
proposed subpart B is issued by the Bureau pursuant to section 704B of
ECOA (15 U.S.C. 1691c-2). It would further state that, except as
otherwise provided therein, proposed subpart B applies to covered
financial institutions, as defined in proposed Sec. 1002.105(b), other
than a person excluded from coverage of this part by section 1029 of
the Dodd-Frank Act. It also would set out section 1071's two statutory
purposes of facilitating fair lending enforcement and enabling the
identification of business and community development needs and
opportunities for women-owned, minority-owned, and small businesses.
The Bureau seeks comment on its proposed approach to this section,
including whether any other information on the 1071 rule's authority,
purpose, or scope should be addressed herein.
Section 1002.102 Definitions
The Bureau is proposing a number of definitions for terms used in
subpart B, in Sec. 1002.102.\299\ These definitions generally fall
into several categories. First, some definitions in proposed Sec.
1002.102 refer to terms defined elsewhere in proposed subpart B--
specifically, the terms business, covered application, covered credit
transaction, covered financial institution, financial institution, and
small business are defined in proposed Sec. Sec. 1002.106(a),
1002.103, 1002.104, 1002.105(b), 1002.105(a), and 1002.106(b),
respectively. These terms are of particular importance in proposed
subpart B, and the Bureau is proposing to define them in separate
sections, rather than in proposed Sec. 1002.102, for ease of reading.
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\299\ The Bureau notes that there are certain terms defined in
proposed subpart B outside of proposed Sec. 1002.102. This occurs
where a definition is relevant only to a particular section. For
example, the firewall provisions in proposed Sec. 1002.108 use the
phrases ``involved in making any determination concerning a covered
application'' and ``should have access.'' Those phrases are defined
in Sec. 1002.108(a). Those definitions are discussed in detail in
the section-by-section analysis of the provisions in which they
appear.
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Second, some terms in proposed Sec. 1002.102 are defined by cross-
referencing the definitions of terms defined in existing Regulation B--
specifically, business credit, credit, and State are defined by
reference to existing Sec. 1002.2(g), (j), and (aa), respectively.
Similarly, several definitions refer to terms defined in other
regulations--specifically, a portion of the affiliate definition refers
to the SBA's regulation at 13 CFR 121.103, and dwelling refers to the
definition in Regulation C Sec. 1003.2(f). These terms are each used
in proposed subpart B, and the Bureau believes it is appropriate to
incorporate them into the subpart B definitions in this manner.
Finally, the remaining terms are defined directly in proposed Sec.
1002.102. These include applicant, closed-end credit transaction,
minority individual, minority-owned business, open-end credit
transaction, principal owner, small business lending application
register, and women-owned business, as well as a portion of the
definition of affiliate. Some of these definitions draw on definitions
in existing Regulation B or elsewhere in Federal laws or regulations.
The Bureau believes that basing this proposal's definitions on
previously defined terms (whether in Regulation B, Regulation C, or
regulations promulgated by another agency), to the extent possible,
would minimize regulatory uncertainty and facilitate compliance,
particularly where the other regulations are likely to apply, in their
own right, to the same transactions. However, as discussed further
below, the Bureau is in certain instances proposing to deviate from the
existing definitions for purposes of this proposal.
These definitions are each discussed in detail below. The Bureau is
proposing these definitions pursuant to its authority under section
704B(g)(1) to prescribe such rules and issue such guidance as may be
necessary to carry out, enforce, and compile data pursuant to section
1071. In addition, the Bureau is proposing certain of these definitions
to implement particular definitions in section 1071 including the
statutory definitions set out in 704B(h). Any other authorities that
the Bureau is relying on to propose certain definitions are discussed
in the section-by-section analysis of those specific definitions.
The Bureau seeks comment on its proposed approach to each of these
definitions, as well as whether there are any other terms that the
Bureau should define for purposes of proposed subpart B.
102(a) Affiliate
Proposed Sec. 1002.102(a) would define ``affiliate'' based on
whether the term is used to refer to a financial institution or to an
applicant.
Proposed Sec. 1002.102(a) would define ``affiliate'' with respect
to a financial institution as any company that controls, is controlled
by, or is under common control with, another company, as set forth in
the Bank Holding Company Act of 1956.\300\ Existing Regulation B does
not define affiliate. This proposed definition
[[Page 56391]]
would provide a consistent approach with the Bureau's Regulation C,
which applies the term to financial institutions, as defined in
Regulation C, for certain reporting obligations.\301\ The Bureau
believes that this definition would be appropriate to define an
affiliate of a financial institution, and that it should provide
sufficient clarity for financial institutions when determining
responsibilities under proposed subpart B.
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\300\ 12 U.S.C. 1841 et seq.
\301\ See Regulation C comment 4(a)(11)-3.
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Proposed Sec. 1002.102(a) would define ``affiliate'' with respect
to a business or an applicant as having the same meaning as described
in 13 CFR 121.103, which is an SBA regulation titled ``How does SBA
determine affiliation?'' This proposed definition would provide
consistency with the Bureau's proposed approach to what constitutes a
small business for purposes of section 1071, as discussed in the
section-by-section analysis of proposed Sec. 1002.106(b) below. As
discussed in the section-by-section analysis of proposed Sec.
1002.106(b) below, the Bureau is proposing to define a small business
by reference to the SBA's regulations (with the exception of an
alternate size standard, as set forth in proposed Sec. 1002.106(b)).
As discussed in the section-by-section analysis of proposed Sec.
1002.107(a)(14), the Bureau is proposing to permit, but not require, a
financial institution to report the gross annual revenue for the
applicant in a manner that includes the revenue of affiliates as well.
As discussed in the section-by-section analysis of proposed Sec.
1002.107(a)(16), the Bureau is proposing that a financial institution,
if asked, shall explain to the applicant that workers for affiliates of
the applicant would only be counted if the financial institution were
also collecting the affiliates' gross annual revenue. The Bureau is
therefore proposing to define affiliate in subpart B for purposes of a
business or an applicant by referring to the SBA's definition of
affiliate.
The Bureau seeks comment on its proposed approach to this
definition.
102(b) Applicant
Proposed Sec. 1002.102(b) would define ``applicant'' to mean any
person who requests or who has received an extension of business credit
from a financial institution. The term ``applicant'' is undefined in
section 1071. Proposed Sec. 1002.102(b) is based on the definition of
applicant in existing Regulation B, though for consistency with other
parts of this proposed rule, it adds a limitation that the credit be
business credit and uses the term financial institution instead of
creditor. It also omits the references to other persons who are or may
become contractually liable regarding an extension of credit such as
guarantors, sureties, endorsers, and similar parties. The Bureau is
concerned that including other such persons could exceed the scope of
the data collection anticipated by section 1071. Including them could
also make the data collection more difficult as financial institutions
might need to report data points (such as gross annual revenue, NAICS
code, time in business, and others) regarding multiple persons in
connection with a single application. Collecting such information on
guarantors, sureties, endorsers, and similar parties would likely not
support 1071's business and community development purpose. Thus, the
Bureau believes it is appropriate to limit the definition of applicant
in proposed subpart B to only those persons who request, or have
received, an extension of business credit from a financial institution.
The Bureau seeks comment on its proposed approach to this
definition.
102(c) Business
Proposed Sec. 1002.102(c) would refer to proposed Sec.
1002.106(a) for a definition of the term ``business.'' See the section-
by-section analysis of proposed Sec. 1002.106(a) for a detailed
discussion of that definition.
102(d) Business Credit
Proposed Sec. 1002.102(d) would refer to existing Sec. 1002.2(g)
for a definition of the term ``business credit.'' The term ``credit''
is undefined in section 1071. Section 1071 does not use the term
``business credit,'' though it does define ``small business loan'' as a
loan made to a small business. Existing Sec. 1002.2(g) defines
``business credit'' as ``referring to extensions of credit primarily
for business or commercial (including agricultural) purposes, but
excluding extensions of credit of the types described in Sec.
1002.3(a) through (d).'' The Bureau believes it is appropriate to
define business credit by reference to the existing definition in
Regulation B. The Bureau's proposal uses the term business credit
principally in defining a covered credit transaction in proposed Sec.
1002.104(a).
As described in the section-by-section analysis of proposed Sec.
1002.104(a) below, loans, lines of credit, credit cards, and MCAs
(including such credit transactions for agricultural purposes and those
that are also covered by HMDA) would all fall under the proposed
definition for business credit.
The Bureau notes existing Sec. 1002.2(g) excludes public utilities
credit, securities credit, incidental credit, and government credit
(that is, extensions of credit made to governments or governmental
subdivisions, agencies, or instrumentalities--not extensions of credit
made by governments), as defined in existing Sec. 1002.3(a) through
(d), from certain aspects of existing Regulation B.\302\ As described
in the section-by-section analysis of proposed Sec. 1002.104(b) below,
for the purpose of subpart B, the Bureau is proposing complete
exclusions for public utilities credit, securities credit, and
incidental credit from the definition of a covered credit transaction
in proposed Sec. 1002.104(b). The Bureau is not proposing an exclusion
for extensions of credit made to governments or governmental
subdivisions, agencies, or instrumentalities, because governmental
entities would not constitute small businesses under the proposed
rule.\303\ Moreover, as described in the section-by-section analysis of
proposed Sec. 1002.104(b) below, the Bureau believes it is appropriate
to interpret section 1071 as not applying to factoring, leases,
consumer-designated credit used for business purposes, or credit
secured by certain investment properties.
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\302\ As explained in existing comment 3-1, under Sec. 1002.3,
procedural requirements of Regulation B do not apply to certain
types of credit. The comment further states that all classes of
transactions remain subject to Sec. 1002.4(a) (the general rule
barring discrimination on a prohibited basis) and to any other
provision not specifically excepted.
\303\ Government entities are not ``organized for profit'' and
thus would not be a ``business concern'' under proposed Sec.
1002.106(a).
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The Bureau seeks comment on its proposed approach to this
definition.
102(e) Closed-End Credit Transaction
Proposed Sec. 1002.102(e) states that a closed-end credit
transaction means an extension of credit that is not an open-end credit
transaction under proposed Sec. 1002.102(n). The Bureau's proposal
specifies different requirements for collecting and reporting certain
data points based on whether the application is for a closed-end credit
transaction or an open-end credit transaction. See the section-by-
section analysis of proposed Sec. 1002.102(n) for a discussion of what
constitutes an open-end credit transaction.
The Bureau seeks comment on its proposed approach to this
definition.
102(f) Covered Application
Proposed Sec. 1002.102(f) would refer to proposed Sec. 1002.103
for a definition of the term ``covered application.'' See the
[[Page 56392]]
section-by-section analysis of proposed Sec. 1002.103 for a detailed
discussion of that definition.
102(g) Covered Credit Transaction
Proposed Sec. 1002.102(g) would refer to proposed Sec. 1002.104
for a definition of the term ``covered credit transaction.'' See the
section-by-section analysis of proposed Sec. 1002.104 for a detailed
discussion of that definition.
102(h) Covered Financial Institution
Proposed Sec. 1002.102(h) would refer to proposed Sec.
1002.105(b) for a definition of the term ``covered financial
institution.'' See the section-by-section analysis of proposed Sec.
1002.105(b) for a detailed discussion of that definition.
102(i) Credit
Proposed Sec. 1002.102(i) would refer to existing Sec. 1002.2(j)
for a definition of the term ``credit.'' The term ``credit'' is
undefined in section 1071. Existing Sec. 1002.2(j), which largely
follows the definition of credit in ECOA,\304\ defines ``credit'' to
mean the right granted by a creditor to an applicant to defer payment
of a debt, incur debt and defer its payment, or purchase property or
services and defer payment therefor. The Bureau believes that referring
to this existing definition of credit for purposes of subpart B would
help to foster consistency with existing Regulation B. The term credit
in proposed subpart B is used in the context of what constitutes a
covered credit transaction--that is, whether the application is
reportable under the section 1071 rule. See the section-by-section
analysis of proposed Sec. 1002.104 below for more details.
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\304\ See 15 U.S.C. 1691a. Existing Regulation B uses the term
``applicant'' instead of ``debtor.''
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The Bureau seeks comment on its proposed approach to this
definition.
102(j) Dwelling
Proposed Sec. 1002.102(j) would refer to Regulation C Sec.
1003.2(f) for a definition of the term ``dwelling.'' That provision
defines dwelling to mean a residential structure, whether or not
attached to real property. The term includes but is not limited to a
detached home, an individual condominium or cooperative unit, a
manufactured home or other factory-built home, or a multifamily
residential structure or community. Proposed comment 102(j)-1 would
provide that Bureau interpretations that appear in supplement I to part
1003 containing official commentary in connection with Sec. 1003.2(f)
are generally applicable to the definition of a dwelling in proposed
Sec. 1002.102(j). Proposed comment 102(j)-2 would clarify that the
definition of dwelling under existing Sec. 1002.14(b)(2) applies to
relevant provisions under existing Regulation B, and proposed Sec.
1002.102(j) is not intended to repeal, abrogate, annul, impair, or
interfere with any existing interpretations, orders, agreements,
ordinances, rules, or regulations adopted or issued pursuant to
existing Sec. 1002.14(b)(2).
The Bureau believes that adopting the Regulation C definition of
dwelling would streamline reporting and minimize compliance risks for
financial institutions that are also reporting covered credit
transactions under HMDA and would simplify data analysis for HMDA-
reportable transactions. As an alternative, the Bureau considered
adopting the existing Regulation B definition of dwelling, which is
similar to the Regulation C definition. The Bureau understands that the
existing Regulation B definition of dwelling is primarily applied in
the context of the ECOA Valuations Rule\305\ and would thus not
streamline reporting and minimize compliance risks in the same way as
would adopting the Regulation C definition, which is already being
applied to data collection and reporting requirements. The existing
Regulation B definition of dwelling is also not supported by the same
level of clarifying commentary as the definition under Regulation C.
The Bureau believes that proposed comment 102(j)-1 will address most if
not all questions related to the definition of dwelling by
incorporating the Bureau's official commentary related to Sec.
1003.2(f). Proposed comment 102(j)-2 also seeks to avoid potential
confusion by clarifying that proposed Sec. 1002.102(j) does not affect
the status of existing Sec. 1002.14(b)(2), which defines the term
``dwelling'' for purposes of existing Regulation B.
---------------------------------------------------------------------------
\305\ See 12 CFR 1002.14.
---------------------------------------------------------------------------
The Bureau seeks comment on its proposed approach to this
definition.
102(k) Financial Institution
Proposed Sec. 1002.102(l) would refer to proposed Sec.
1002.105(a) for a definition of the term ``financial institution.'' See
the section-by-section analysis of proposed Sec. 1002.105(a) for a
detailed discussion of that definition.
102(l) Minority Individual
Background
ECOA section 704B(b)(1) requires a financial institution to ask
whether an applicant is a minority-owned business. Additionally,
704B(h)(5) uses the term ``minority individual'' when defining the term
minority-owned business. Although 704B(h)(5) defines the term
``minority,'' section 1071 does not define the term ``minority
individual.'' Section 704B(h)(4) defines the term ``minority'' as
having the same meaning as in section 1204(c)(3) of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA).\306\ That statute defines ``minority'' to mean any Black
American, Native American, Hispanic American, or Asian American.\307\
---------------------------------------------------------------------------
\306\ Public Law 101-73, section 1204(c)(3), 103 Stat. 183, 521
(1989) (12 U.S.C. 1811 note).
\307\ Id.
---------------------------------------------------------------------------
SBREFA Proposal Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau stated that it was considering
proposing guidance that would clarify that a minority individual is a
natural person who is Black or African American, Asian, American Indian
or Alaska Native, Native Hawaiian or Other Pacific Islander, and/or
Hispanic or Latino \308\ (i.e., would mirror the aggregate race and
ethnicity categories in Regulation C).thnsp;\309\ The Bureau also
stated it was considering proposing guidance clarifying that a multi-
racial person would be considered a minority individual.
---------------------------------------------------------------------------
\308\ SBREFA Outline at 18-19.
\309\ Appendix B to 12 CFR part 1003.
---------------------------------------------------------------------------
Several SERs supported clarifying the meaning of minority
individual using the aggregate categories for race and ethnicity in
Regulation C.\310\ However, one SER suggested using the disaggregated
categories in Regulation C, instead of the aggregate categories, for
this purpose. Other stakeholders providing feedback on the SBREFA
Outline generally supported using the aggregate categories when
determining who is a minority individual for purposes of reporting
whether a business is a minority-owned business.
---------------------------------------------------------------------------
\310\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 22.
---------------------------------------------------------------------------
The SBREFA Panel recommended clarifying that, consistent with the
aggregate categories for race and ethnicity in Regulation C, a minority
individual is a natural person who is Black or African American, Asian,
American Indian or Alaska Native, Native Hawaiian or Other Pacific
Islander, and/or Hispanic or Latino.\311\
---------------------------------------------------------------------------
\311\ Id. at 44.
---------------------------------------------------------------------------
Proposed Rule
Consistent with the approach that the Bureau took during the SBREFA
process, proposed Sec. 1002.102(1) would clarify that the term
``minority
[[Page 56393]]
individual'' means a natural person who is American Indian or Alaska
Native, Asian, Black or African American, Native Hawaiian or Other
Pacific Islander, and/or Hispanic or Latino. The Bureau believes that
these categories represent contemporary, more specific delineations of
the categories described in section 1204(c)(3) of FIRREA.\312\ Proposed
comment 102(1)-2 would clarify that a multi-racial or multi-ethnic
person would be a minority individual. Proposed comment 102(1)-1 would
clarify that this definition would be used only when an applicant
determines whether it is a minority-owned business pursuant to proposed
Sec. Sec. 1002.102(m) and 1002.107(a)(18). Proposed comment 102(1)-3
would clarify the relationship of the definition of minority individual
to the disaggregated subcategories used to determine a principal
owner's ethnicity and race. The Bureau's proposed approach is
consistent with the SBREFA Panel's recommendation discussed above.
---------------------------------------------------------------------------
\312\ See, e.g., 80 FR 36356 (June 24, 2015) (NCUA interpretive
ruling and policy statement implementing an identical FIRREA
definition of minority using this same modern terminology).
---------------------------------------------------------------------------
The Bureau believes this clarified terminology, which uses the
aggregate ethnicity and race categories set forth in existing
Regulation B \313\ and Regulation C,\314\ would avoid the potentially
confusing situation where an applicant is using one set of aggregate
race and ethnicity categories when answering questions about the
principal owners' race and ethnicity but is asked to use a different
set of aggregate categories when indicating whether a business is a
minority-owned business. It also avoids creating a situation where a
financial institution is required to use different race and ethnicity
categories when complying with different portions of Regulation B and,
if applicable, Regulation C. Consistency among race and ethnicity data
collection regimes may also allow for better coordination among data
users when reviewing data across multiple data collection regimes.\315\
---------------------------------------------------------------------------
\313\ 12 CFR 1002.13(a)(1)(i).
\314\ Appendix B to 12 CFR part 1003.
\315\ For example, the OMB uses these same categories for the
classification of Federal data on race and ethnicity. See Off. of
Mgmt. & Budget, Revisions to the Standards for the Classification of
Federal Data on Race and Ethnicity, 62 FR 58785 (Oct. 30, 1996).
---------------------------------------------------------------------------
The Bureau seeks comment on its proposed approach to this
definition, including its proposed clarification of the definition of
minority individual, and requests comment on whether additional
clarification is needed. Additionally, in section-by-section analysis
of proposed Sec. 1002.107(a)(20), the Bureau is requesting comment
regarding whether an additional category for Middle Eastern or North
African should be added for purposes of responding to a financial
institution's inquiry regarding a principal owner's ethnicity or race
and, if so, how this category should be included and defined. The
Bureau also seeks comment on whether the definition of minority
individual should include a natural person who is Middle Eastern or
North African, as well as whether the inclusion of a natural person who
is Middle Eastern or North African in the definition of minority
individual for purposes of proposed Sec. 1002.102(l) should be
dependent on whether Middle Eastern or North African is added as an
aggregate category for purposes of proposed Sec. 1002.107(a)(20).
102(m) Minority-Owned Business
Background
ECOA section 704B(b)(1) requires financial institutions to inquire
whether applicants for credit are minority-owned businesses. For
purposes of the financial institution's inquiry under 704B(b),
704B(h)(5) defines a business as a minority-owned business if (A) more
than 50 percent of the ownership or control is held by one or more
minority individuals, and (B) more than 50 percent of the net profit or
loss accrues to one or more minority individuals. Section 1071 does not
expressly define the related terms of ``ownership'' or ``control,'' nor
does it describe what it means for net profits or losses to accrue to
an individual.
SBREFA Proposal Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau stated it was considering
proposing use of the statutory definition of ``minority-owned
business'' (as set forth above) with further clarification of the terms
``ownership'' and ``control.'' \316\ The Bureau considered proposing
use of concepts set forth in the Financial Crimes Enforcement Network's
(FinCEN) Customer Due Diligence (CDD) rule \317\ to clarify these
terms.
---------------------------------------------------------------------------
\316\ SBREFA Outline at 18-19.
\317\ See 31 CFR 1010.230.
---------------------------------------------------------------------------
Some SERs expressed concerns with certain aspects of the statutory
definition of minority-owned business, asserting that the definition
could cause confusion or pose particular complexities.\318\ Several
SERs and some other stakeholders providing feedback on the SBREFA
Outline asked that the definition of minority-owned business be revised
to align with the definition used by other agencies, such as the SBA
and the CDFI Fund. These SERs and other commenters recommended that the
Bureau use a ``50 percent or more'' threshold for ownership or control,
instead of the ``more than 50 percent'' standard in the statutory
definition. Conversely, two SERs and several other commenters supported
using the statutory definition of minority-owned business, including
the ``more than 50 percent'' portion of the definition.
---------------------------------------------------------------------------
\318\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 22.
---------------------------------------------------------------------------
A number of SERs recommended that the Bureau simplify the
definition to ensure it is understandable to small business applicants
and to thereby facilitate consistent data collection. SERs' suggestions
included eliminating the portion of the definition that refers to
accrual of net profits and losses, eliminating the portion of the
definition that refers to control, and providing a simplified and
standardized definition.
Several SERs supported using the concepts of ownership and control
in FinCEN's CDD rule when defining minority-owned business; one SER
said that doing so would be logical and efficient, while another said
it would create regulatory consistency and ease compliance burden. One
SER said that most credit unions are familiar with the CDD rule.
Generally, other commenters supported use of the CDD concepts to
clarify the terms ``ownership'' and ``control.'' They stated that small
business applicants are familiar with the concepts in the CDD rule or
that they appreciated the consistency with existing regulatory
requirements. However, one trade association commenter requested that
the Bureau provide simplified applicant-facing materials without
clarifying the definition, and two other stakeholders suggested that
applicants might not be familiar with the CDD rule or may not
understand the CDD rule.
The SBREFA Panel recommended seeking comment on potential
interpretations of the definition of minority-owned business to clarify
the term and to ensure that small business applicants would be able to
understand questions asking if they are minority-owned businesses.\319\
---------------------------------------------------------------------------
\319\ Id. at 44.
---------------------------------------------------------------------------
Proposed Rule
Proposed Sec. 1002.102(m) would define a minority-owned business
as a business for which more than 50 percent of its ownership or
control is held by one or more minority individuals, and more than 50
percent of its net profits or
[[Page 56394]]
losses accrue to one or more minority individuals. This definition is
consistent with ECOA section 704B(h)(5) and the Bureau's proposal under
consideration in the SBREFA Outline.
Proposed comment 102(m)-1 would explain that a business must
satisfy both prongs of the definition to be a minority-owned business--
that is, (A) more than 50 percent of the ownership or control is held
by one or more minority individuals, and (B) more than 50 percent of
the net profits or losses accrue to one or more minority individuals.
Proposed comment 102(m)-2 would clarify that the definition of
minority-owned business is used only when an applicant determines if it
is a minority-owned business for purposes of proposed Sec.
1002.107(a)(18). A financial institution would provide the definition
of minority-owned business when asking the applicant to provide
minority-owned business status pursuant to proposed Sec.
1002.107(a)(18), but a financial institution would not be permitted or
required to make its own determination regarding whether an applicant
is a minority-owned business for this purpose.
Proposed comment 102(m)-3 would further note that a financial
institution would be permitted to assist an applicant when determining
whether it is a minority-owned business but would not be required to do
so, and could provide the applicant with the definitions of ownership,
control, and accrual of net profits or losses set forth in proposed
comments 102(m)-4 through -6. Additionally, for purposes of reporting
an applicant's minority-owned business status, a financial institution
would rely on the applicant's determinations of its ownership, control,
and accrual of net profits and losses.
Consistent with the approach described during the SBREFA process,
the Bureau is proposing to clarify ``ownership'' and ``control'' using
concepts from the CDD rule. Proposed comment 102(m)-4 would clarify
that a natural person owns a business if that natural person directly
or indirectly, through any contract, arrangement, understanding,
relationship or otherwise, has an equity interest in the business.
Proposed comment 102(m)-4 would also provide examples of ownership and
clarify that, where applicable, ownership would need to be traced or
followed through corporate or other indirect ownership structures for
purposes of proposed Sec. Sec. 1002.102(m) and 1002.107(a)(18).
Proposed comment 102(m)-5 would clarify that a natural person controls
a business if that natural person has significant responsibility to
manage or direct the business, and would provide examples of natural
persons who control a business. Proposed comment 102(m)-6 would clarify
that a business's net profits and losses accrue to a natural person if
that natural person receives the net profits or losses, is legally
entitled or required to receive the net profits or losses, or is
legally entitled or required to recognize the net profits or losses for
tax purposes.
The Bureau believes many small business applicants already respond
to questions about who owns and who controls a business entity when
completing CDD forms or otherwise responding to questions related to
the CDD rule and thus should be familiar with the concepts in the CDD
rule. Because the CDD rule does not address the second prong of the
definition in ECOA section 704B(h)(5) (regarding accrual of net profit
or loss), the Bureau is proposing in Sec. 1002.102(m) that this prong
of the definition be defined to mean that one or more minority
individuals must receive or be legally entitled to receive the net
profits or losses or that one or more minority individuals must be
legally required to recognize the net profits and losses. However, the
Bureau shares some SERs' concerns that the statutory definition of
minority-owned business might, in some cases, be difficult for
applicants to understand, which could in turn jeopardize the accuracy
of reported data. Thus, consistent with the SBREFA Panel's
recommendation, the Bureau seeks comment on the proposed definition of
minority-owned business and possible alternatives that may clarify the
term in order to help ensure that small business applicants can
determine whether they are minority-owned businesses for purposes of
section 1071 data collection.
102(n) Open-End Credit Transaction
Proposed Sec. 1002.102(n) would state that open-end credit
transaction means an open-end credit plan as defined in Regulation Z
Sec. 1026.2(a)(20), but without regard to whether the credit is
consumer credit, as defined in Sec. 1026.2(a)(12), is extended by a
creditor, as defined in Sec. 1026.2(a)(17), or is extended to a
consumer, as defined in Sec. 1026.2(a)(11). The term ``open-end credit
transaction'' is undefined in section 1071. The Bureau's proposal
specifies different rules for collecting and reporting certain data
points based on whether the application is for a closed-end credit
transaction or an open-end credit transaction. The Bureau believes its
proposed definition is reasonable because it aligns with the definition
of ``open-end credit transaction'' in Regulation Z Sec. 1026.2(a)(20).
The Bureau further believes that such alignment will minimize confusion
and facilitate compliance.
The Bureau seeks comment on its proposed approach to this
definition.
102(o) Principal Owner
Background
ECOA section 704B(e) requires financial institutions to compile and
maintain the ethnicity, race, and sex of an applicant's principal
owners. However, section 1071 does not expressly define who is a
principal owner of a business.
SBREFA Proposal Under Consideration and Feedback
In the SBREFA Outline, the Bureau stated that it was considering
proposing to define the term ``principal owner'' in a manner consistent
with the CDD rule.\320\ Under a definition consistent with the CDD
rule, an individual would be a principal owner if the individual
directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, owns 25 percent or more of
the equity interests of the business.
---------------------------------------------------------------------------
\320\ SBREFA Outline at 32.
---------------------------------------------------------------------------
Several SERs and other stakeholders providing feedback on the
SBREFA Outline expressed familiarity with the CDD rule, and supported
aligning with that rule's 25 percent ownership standard for defining a
principal owner for the section 1071 rule.\321\ One SER said that
aligning definitions with the CDD rule would be logical and efficient.
Another SER supported use of the CDD rule's concepts in determining who
was a principal owner. Other SERs and stakeholders said they currently
collect this information for beneficial owners at or above 20 percent
in order to comply with SBA or other requirements and suggested
aligning with that standard instead.
---------------------------------------------------------------------------
\321\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 30.
---------------------------------------------------------------------------
The SBREFA Panel recommended that the Bureau propose aligning the
definition of principal owner with concepts of ownership and control
that exist in other Federal regulations with which financial
institutions are already complying, to the extent possible.\322\
---------------------------------------------------------------------------
\322\ Id. at 46.
---------------------------------------------------------------------------
Proposed Rule
Proposed Sec. 1002.102(o) would define principal owner in a manner
that is, in
[[Page 56395]]
part, consistent with the CDD rule. Specifically, a natural person
would be a principal owner if the natural person directly owns 25
percent or more of the equity interests of the business. However, as
proposed comment 102(o)-1 would note, a natural person would need to
directly own an equity share of 25 percent or more in the business in
order to be a principal owner. Due to the potential complications with
collecting a principal owner's ethnicity, race, and sex information
when a trust or entity is an owner, the Bureau is proposing that
entities not be considered principal owners and indirect ownership by
individuals likewise not be considered when determining if someone is a
principal owner for purposes of collecting and reporting principal
owners' ethnicity, race, and sex or the number of principal owners.
Thus, when determining who is a principal owner, ownership would not be
traced through multiple corporate structures to determine if a natural
person owns 25 percent or more of the applicant's equity interests.
Additionally, because only a natural person would be a principal owner
for the 1071 rule, entities such trusts, partnerships, limited
liability companies, and corporations, would not be principal owners.
Proposed comment 102(o)-2 would clarify that a financial
institution would provide an applicant with the definition of principal
owner when asking the applicant to provide the number of its principal
owners pursuant to proposed Sec. 1002.107(a)(21) and the ethnicity,
race, and sex of its principal owners pursuant to proposed Sec.
1002.107(a)(20). If a financial institution meets in person with a
natural person about a covered application, the financial institution
may be required to determine if the natural person with whom it meets
is a principal owner in order to collect and report the principal
owner's ethnicity and race based on visual observation and/or surname.
(See proposed comments 107(a)(20)-5 and -9.) Additionally, proposed
comment 102(o)-2 would note that if an applicant does not provide the
number of its principal owners in response to the financial
institution's request pursuant to proposed Sec. 1002.107(a)(21), the
financial institution may need to determine the number of the
applicant's principal owners and report that information based on other
documents or information. (See proposed comments 107(a)(21)-1 through -
3.)
Consistent with its approach in the SBREFA Outline and with the
SBREFA Panel's recommendation, the Bureau is proposing that the
definition of principal owner align with the 25 percent ownership
definition in the CDD rule. The Bureau believes that this standard,
which aligns with another Federal regulation, is already broadly in use
and is likely to be familiar to most financial institutions and
applicants. Banks, credit unions, and certain other financial
institutions must comply with the CDD rule. The Bureau believes
applicants, as a general matter, are more likely to be familiar with
CDD requirements than SBA or CDFI Fund requirements because they have
to complete CDD forms before opening an initial account (i.e., loan or
deposit account) at a bank or at certain other institutions. However,
due to potential complications with collecting ethnicity, race, and sex
information for principal owners, the Bureau is proposing that
individuals that only indirectly own 25 percent or more of an
applicant's equity interests, as well as entities and trusts, are not
principal owners.
The Bureau notes that it is possible under its proposed approach
that an applicant might not identify any principal owners as being
women or minorities but nonetheless could be a women- and/or minority-
owned business. This could occur, for example, if a white male owned 40
percent of a business while three Asian women each owned 20 percent.
Only the white male would be designated as a principal owner, but the
business would be nonetheless both women-owned and minority-owned.
While the Bureau acknowledges that some applicants could find this
approach confusing, it is consistent with the statutory language in
section 1071. To help mitigate against potential confusion, the Bureau
has proposed that the questions regarding minority-owned business
status and women-owned business status appear in the proposed sample
data collection form before questions about the race, sex, and
ethnicity of principal owners.
The Bureau seeks comment on this proposed definition of a principal
owner, including the proposal not to include individuals that only
indirectly own 25 percent or more of an applicant's equity interests as
principal owners. The Bureau requests comment on whether additional
clarification on any aspect of the proposed definition is needed.
102(p) Small Business
Proposed Sec. 1002.102(p) would refer to proposed Sec.
1002.106(b) for a definition of the term ``small business.'' See the
section-by-section analysis of proposed Sec. 1002.106(b) for a
detailed discussion of that definition.
102(q) Small Business Lending Application Register
Proposed Sec. 1002.102(q) would define the term ``small business
lending application register'' or ``register'' as the data reported, or
required to be reported, annually pursuant to proposed Sec. 1002.109.
The Bureau did not include a definition of small business lending
application register in the SBREFA Outline, though it did address
proposals under consideration for compiling, maintaining, and reporting
1071 data to the Bureau.\323\ See the section-by-section analysis of
proposed Sec. 1002.109 for a detailed discussion of the proposed
rule's provisions addressing reporting data to the Bureau, including
feedback received from SERs and other stakeholders on that subject. The
Bureau's proposed definition refers only to the data that is reported,
or required to be reported, annually; it does not refer to the data
required to be collected and maintained (prior to reporting).\324\
---------------------------------------------------------------------------
\323\ SBREFA Outline at 39.
\324\ In contrast, the term ``Loan/Application Register'' in
Regulation C Sec. 1003.2(k) refers to both the record of
information required to be collected pursuant to Sec. 1003.4 as
well as the record submitted annually or quarterly, as applicable,
pursuant to Sec. 1003.5(a).
---------------------------------------------------------------------------
The Bureau seeks comment on its proposed definition of ``small
business lending application register'' or ``register'' in proposed
Sec. 1002.102(q).
102(r) State
Proposed Sec. 1002.102(r) would refer to existing Sec. 1002.2(aa)
for a definition of the term ``State.'' Existing Sec. 1002.2(aa)
defines the term as any State, the District of Columbia, the
Commonwealth of Puerto Rico, or any territory or possession of the
United States. The Bureau did not include a definition of State in the
SBREFA Outline nor did it receive any feedback on the term from SERs.
This proposed definition of State would be consistent with existing
Regulation B and familiar to financial institutions.
The Bureau seeks comment on its proposed approach to this
definition.
102(s) Women-Owned Business
Background
ECOA section 704B(b)(1) requires financial institutions to inquire
whether applicants for credit are women-owned businesses. For purposes
of the financial institution's inquiry under 704B(b), 704B(h)(5)
defines a business as a women-owned business if (A) more than 50
percent of the ownership or control is held by one or more women, and
(B) more than 50 percent of the net profit or loss accrues to one or
more women.
[[Page 56396]]
Section 1071 does not expressly define the related terms of
``ownership'' or ``control,'' nor does it describe what it means for
net profits or losses to accrue to an individual.
SBREFA Proposal Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau stated that it was considering
proposing use of the statutory definition of a ``women-owned business''
(as set forth above) with further clarification of the terms
``ownership'' and ``control'' using concepts set forth in the CDD
rule.\325\
---------------------------------------------------------------------------
\325\ SBREFA Outline at 18-19.
---------------------------------------------------------------------------
Some SERs expressed concerns with certain aspects of the statutory
definition of women-owned business, asserting that the definition could
cause confusion or pose particular complexities.\326\ Several SERs and
some other stakeholders providing feedback on the SBREFA Outline asked
that the definition of women-owned business be revised to align with
the definition used by other agencies, such as the SBA and the CDFI
Fund. Some SERs as well as some other commenters expressed concern that
a business that is owned equally by a woman and a man would not be a
``women-owned business'' under the statutory definition of women-owned
business because the woman would not own ``more than 50 percent'' of
the business and the woman might not control more than 50 percent of
the business. These SERs and other commenters recommended that the
Bureau instead use a ``50 percent or more'' threshold for ownership or
control as the standard. Conversely, two SERs and several other
stakeholders supported using the statutory definition of women-owned
business, including the ``more than 50 percent'' portion of the
definition.
---------------------------------------------------------------------------
\326\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 22.
---------------------------------------------------------------------------
A number of SERs recommended that the Bureau simplify the
definition to ensure it is understandable to small business applicants
and to thereby facilitate consistent data collection. SERs' suggestions
included eliminating the portion of the definition that refers to
accrual of net profit and loss, eliminating the portion of the
definition that refers to control, and providing a simplified and
standardized definition.
Several SERs supported using the concepts of ownership and control
in the CDD rule when defining women-owned business; one SER said that
doing so would be logical and efficient, while another said it would
create regulatory consistency and ease compliance burden. One SER said
that most credit unions are familiar with the CDD rule. Generally,
other commenters supported use of the CDD concepts to clarify the terms
``ownership'' and ``control.'' They stated that small business
applicants are familiar with the concepts in the CDD rule or that they
appreciated the consistency with existing regulatory requirements.
However, one trade association commenter thought the Bureau should
provide simplified applicant-facing materials without clarifying the
definition, and two other stakeholders suggested that applicants might
not be familiar with the CDD rule or may not understand the CDD rule.
The SBREFA Panel recommended seeking comment on potential
interpretations of the definition of women-owned business to clarify
the term and to ensure that small business applicants would be able to
understand questions asking if they are a women-owned business.\327\
---------------------------------------------------------------------------
\327\ Id. at 44.
---------------------------------------------------------------------------
Proposed Rule
Proposed Sec. 1002.102(s) would define a women-owned business as a
business for which more than 50 percent of its ownership or control is
held by one or more women, and more than 50 percent of its net profits
or losses accrue to one or more women. This definition is consistent
with ECOA section 704B(h)(6) and the Bureau's proposal under
consideration in the SBREFA Outline.
Proposed comment 102(s)-1 would explain that a business must
satisfy both prongs of the definition to be a women-owned business--
that is, (A) more than 50 percent of the ownership or control is held
by one or more women, and (B) more than 50 percent of the net profits
or losses accrue to one or more women.
Proposed comment 102(s)-2 would clarify that the definition of
women-owned business is used only when an applicant determines if it is
a women-owned business for purposes of proposed Sec. 1002.107(a)(19).
A financial institution would provide the definition of women-owned
business when asking the applicant to provide women-owned business
status pursuant to proposed Sec. 1002.107(a)(19), but a financial
institution would not be permitted or required to make its own
determination regarding whether an applicant is a women-owned business
for this purpose.
Proposed comment 102(s)-3 would further note that a financial
institution would be permitted to assist an applicant when determining
whether it is a women-owned business but would not be required to do
so, and could provide the applicant with the definitions of ownership,
control, and accrual of net profits or losses set forth in proposed
comments 102(s)-4 through -6. Additionally, for purposes of reporting
an applicant's women-owned business status, a financial institution
would rely on the applicant's determinations of its ownership, control,
and accrual of net profits and losses.
Consistent with the approach during the SBREFA process, the Bureau
is proposing to clarify ``ownership'' and ``control'' using concepts
from the CDD rule. Proposed comment 102(s)-4 would clarify that a
natural person owns a business if that natural person directly or
indirectly, through any contract, arrangement, understanding,
relationship or otherwise, has an equity interest in the business.
Proposed comment 102(s)-4 would also provide examples of ownership and
clarify that, where applicable, ownership would need to be traced or
followed through corporate or other indirect ownership structures for
purposes of proposed Sec. Sec. 1002.102(s) and 1002.107(a)(19).
Proposed comment 102(s)-5 would clarify that a natural person controls
a business if that natural person has significant responsibility to
manage or direct the business and would provide examples of natural
persons who control a business. Proposed comment 102(s)-6 would clarify
that a business's net profits and losses accrue to a natural person if
that natural person receives the net profits, is legally entitled or
required to receive the net profits or losses, or is legally entitled
or required to recognize the net profits or losses for tax purposes.
The Bureau believes many small business applicants already respond
to questions about who owns and who controls a business entity when
completing CDD forms or otherwise responding to questions related to
the CDD rule and would be familiar with the concepts in the CDD rule.
Because the CDD rule does not address the second prong of the
definition in ECOA section 704B(h)(6) (regarding accrual of net profit
or loss), the Bureau is proposing in comment 102(s)-4 that this prong
of the definition be defined to mean that one or more women must
receive or be legally entitled to receive the net profits or losses or
that one or more women must be legally required to recognize the net
profits or losses. However, the Bureau shares some SERs' concerns that
the statutory definition of women-owned business might, in some cases,
be difficult for applicants to
[[Page 56397]]
understand, which could in turn jeopardize the accuracy of reported
data. Thus, consistent with the SBREFA Panel's recommendation, the
Bureau seeks comment on the proposed definition of women-owned business
and possible alternatives that may clarify the term in order to help
ensure that small business applicants can determine whether they are a
women-owned business for purposes of section 1071 data collection.
Section 1002.103 Covered Applications
ECOA section 704B(b) requires that financial institutions collect,
maintain, and report to the Bureau certain information regarding ``any
application to a financial institution for credit.'' For covered
financial institutions, the definition of ``application'' will trigger
data collection and reporting obligations with respect to covered
credit transactions. However, section 1071 does not expressly define
``application.''
The Bureau is proposing Sec. 1002.103 to define what is, and is
not, a covered application for purposes of subpart B pursuant to its
authority in ECOA section 704B(g)(1) to prescribe such rules and issue
such guidance as may be necessary to carry out, enforce, and compile
data pursuant to section 1071. Proposed Sec. 1002.103(a) would provide
a general definition of the term ``covered application,'' followed by a
list of the circumstances that are not covered applications in proposed
Sec. 1002.103(b).
103(a) Covered Application
SBREFA Proposal Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau stated it was considering
defining an ``application'' largely consistent with the definition of
that term in existing Sec. 1002.2(f)--i.e., ``an oral or written
request for an extension of credit that is made in accordance with
procedures used by a creditor for the type of credit requested.''\328\
The Bureau considered possible alternative definitions of
``application,'' including defining the term by using the definition of
the term ``completed application'' in existing Sec. 1002.2(f) (when
``a creditor has received all the information that the creditor
regularly obtains and considers in evaluating applications for the
amount and type of credit requested . . . ''). The Bureau also
considered defining ``application'' as particular documents or specific
data points that, if collected, would trigger a duty to collect and
report data.
---------------------------------------------------------------------------
\328\ SBREFA Outline at 22-23.
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SERs discussed their varied methods of defining what constitutes an
``application'' within their institutions.\329\ Many SERs define an
application as the point when there is enough information to make a
credit decision. Several SERs define an application as meeting the
requirements of a checklist, stating that obtaining all the information
and satisfying due diligence can take a long time. Other SERs define an
application as the submission of specific data or documents, or
obtaining sufficient information about the borrower to pull a credit
report. One SER explained that their in-person application process is
iterative, not readily definable, and unique for each applicant. The
SER also explained that a single underwriting process could be used at
their financial institution for multiple loans requested throughout the
year.
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\329\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 24.
---------------------------------------------------------------------------
Several SERs supported using the definition of ``application'' in
existing Sec. 1002.2(f). One of these SERs emphasized the importance
of capturing data that may indicate potential discouragement of
minority-owned businesses, including discouragement that could occur in
advance of an application being submitted for underwriting. Another SER
stated that using the definition in existing Sec. 1002.2(f) would be
helpful for training purposes, rather than creating a wholly new
definition for purposes of implementing section 1071. Many SERs urged
the Bureau in an eventual 1071 rule to define an application as a
completed application, that is, at the point when there is sufficient
information to render a credit decision. One SER opposed using the
definition of ``completed application,'' explaining that it would be
too restrictive and less aligned with the purposes of section 1071.
Another SER opposed use of the definition of application in existing
Sec. 1002.2(f), explaining that in a ``relationship lending'' model,
each small business application is unique.
SERs expressed varying views on whether withdrawn and incomplete
applications should be captured in the 1071 data. Some SERs felt
incomplete applications should be captured in the 1071 data as a
potential indicator of discouragement. One SER stated that small and
unsophisticated businesses are more likely to leave an application
incomplete. Another SER recommended not capturing incomplete
applications, asserting that such data would not be informative or
useful. Another SER expressed concern about whether incomplete or
withdrawn applications would include sufficient data for reporting.
Other stakeholders also provided feedback on the definition of
``application.'' The overwhelming majority of commenters, including
both community groups and industry representatives, supported use of
the definition of an ``application'' in existing Sec. 1002.2(f).
Community groups, CDFIs, and a SER noted that use of the definition
would further the purposes of 1071 by capturing applicants dissuaded
from completing an application, potentially due to unlawful
discouragement or other discrimination. Commenters highlighted research
that minority-owned and women-owned businesses are disproportionately
discouraged from applying for credit and the frequency of
discrimination during the pre-application stage. One commenter stated
that the definition could better identify barriers to credit,
consistent with the community development purpose of section 1071.
Other commenters, including many industry commenters, stated that
financial institutions are familiar with the definition in existing
Sec. 1002.2(f), and so use of this definition would reduce burden by
minimizing the need for additional training or different procedures.
Several commenters also stated that using the definition in existing
Sec. 1002.2(f) is appropriate given that section 1071 amends ECOA,
which is implemented by existing Regulation B. One industry commenter
also highlighted the flexibility provided by the definition in existing
Sec. 1002.2(f).
Although supportive of using the definition in existing Sec.
1002.2(f) for the 1071 rule, several industry commenters sought further
clarification or illustrations of the definition given considerable
variations in practices among financial institutions. One commenter
suggested a safe harbor that allows a financial institution to define
what constitutes an ``application.'' One industry trade representative
expressed that many of its members have no formal ``application'' and
so attempts to leverage existing definitions or stages to define an
application would be unfamiliar to their members and could create an
inflexible process.
Several industry commenters supported triggering section 1071 data
collection and reporting based on the ``completed application''
definition in existing Sec. 1002.2(f) and stated that the Bureau
should not require data collection on withdrawn and incomplete
applications. These commenters stated that using a
[[Page 56398]]
``completed application'' definition would provide more complete and
meaningful data, more uniformity across products and lenders, and
conserve resources that would otherwise be required to gather missing
data points on incomplete or withdrawn applications. One commenter
stated that collection of data on incomplete applications would not
further section 1071's purposes or reflect potential discrimination,
but rather would merely represent borrower confusion in the application
process. One commenter suggested using a defined set of criteria to
define an ``application.''
Several SERs and other stakeholders also provided comments on
applicant requests for more than one product at the same time. For
example, in connection with the application/loan number data point
(referred to in this proposal as the unique identifier data point), one
SER stated that if an applicant requests more than one type of credit
product, a separate application/loan number is assigned to each product
request. In contrast, other SERs indicated they use a single
application number even if multiple products are requested. Among other
stakeholders, some commenters supported reporting separate applications
in instances where the applicant requests multiple covered credit
transactions at the same time, while others supported requiring
reporting of only one application. One commenter suggested that the
Bureau should accommodate both approaches. Another commenter remarked
that if a business is applying for multiple products, the basic
information is going to be the same, the only difference being that
only one product is funded. This same commenter suggested that if these
requests are reported as multiple applications, that will overinflate
the data.
Relatedly, two SERs discussed the issue of multiple extensions of
credit resulting from a single application. One of these SERs explained
that such multiple extensions of credit are assigned separate
application/loan numbers at their financial institution. The other SER
suggested that reporting in this situation will be complex, and that
combining the separate loans that could result into a single reporting
line would be extremely difficult.
The SBREFA Panel recommended that, if the Bureau proposes using the
Regulation B definition of the term ``application''\330\ for 1071 data
collection, the Bureau consider clarifying when a completed
application--i.e., an application sufficient to make a credit
decision--falls within the proposed definition of the term
``application.'' \331\ The SBREFA Panel further recommended the Bureau
seek comment on the benefits and costs of collecting 1071 data on
incomplete or withdrawn applications.\332\ Finally, with respect to
lines of credit, the SBREFA Panel recommended (in the context of the
loan/credit type and loan/credit purpose data points) that the Bureau
seek comment on how financial institutions currently handle increases
in lines of credit and how best to require reporting of multiple lines
of credit within the same account.\333\
---------------------------------------------------------------------------
\330\ 12 CFR 1002.2(f).
\331\ SBREFA Panel Report at 45.
\332\ Id.
\333\ Id.
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Proposed Rule
The Bureau is proposing to define a covered application in Sec.
1002.103(a) as an oral or written request for a covered credit
transaction that is made in accordance with procedures used by a
financial institution for the type of credit requested. This proposed
definition of ``covered application'' is consistent with the definition
of ``application'' that the Bureau said it was considering proposing in
the SBREFA Outline.\334\ As noted above, the term ``application'' is
undefined in section 1071. The Bureau believes its proposed definition
of the term is reasonable, particularly as it aligns with the
definition of ``application'' in existing Sec. 1002.2(f). The Bureau
is also proposing commentary to accompany this definition.
Circumstances that are not covered applications are addressed in the
section-by-section analysis of proposed Sec. 1002.103(b) below.
Pursuant to ECOA section 704B(b)(1), an ``application'' triggering data
collection and reporting obligations occurs without regard to whether
such application is received in person, by mail, by telephone, by
electronic mail or other form of electronic transmission, or by any
other means.
---------------------------------------------------------------------------
\334\ SBREFA Outline at 22-23.
---------------------------------------------------------------------------
Several SERs and a majority of other commenters supported use of
this definition, noting that it best aligns with the purposes of
section 1071 and is familiar to creditors. The Bureau agrees with
certain SERs and other commenters that incomplete and withdrawn
applications--which would generally be captured under proposed Sec.
1002.103(a)--are essential to the purposes of section 1071 as a tool to
identify potential discrimination (including through discouragement)
and to better understand the credit market. The definition of ``covered
application'' in proposed Sec. 1002.103(a), which is similar to the
definition of ``application'' in existing Sec. 1002.2(f), is also
familiar to creditors and provides flexibility to accommodate different
application processes described by the SERs (including written and oral
applications; online and relationship lending models; and use of
standard forms, checklists, and other minimum requirements).\335\
Finally, the Bureau believes this approach strikes an appropriate
balance by triggering 1071 collection and reporting requirements only
after there is a request for credit (using procedures defined by the
financial institution), but still early enough in the process to
capture most incomplete, withdrawn, and denied applications.
---------------------------------------------------------------------------
\335\ Business creditors should be familiar with
operationalizing this definition based on their experience providing
adverse action notices under existing Regulation B, which can be
triggered in relation to an incomplete application. See Sec.
1002.9(a)(1) and (c) (requiring notice within 30 days after taking
adverse action on an incomplete application or 30 days after
receiving an incomplete application). Financial institutions may
also be familiar with Regulation C's definition of ``application,''
which aligns with existing Sec. 1002.2(f)'s definition of the term.
See Sec. 1003.2(b) (generally defining an ``application'' as ``an
oral or written request for a covered loan that is made in
accordance with procedures used by a financial institution for the
type of credit requested''); see also Regulation C comment 2(b)-1
(noting that Bureau interpretations that appear in the official
commentary to Regulation B are generally applicable to the
definition of application under Regulation C).
---------------------------------------------------------------------------
The Bureau recognizes that the proposed definition of ``covered
application'' in Sec. 1002.103(a), while flexible, would mean that
1071 data collection and reporting may be triggered at different times
for different financial institutions and different types of covered
credit transactions. For example, for a financial institution that
defines an application under its procedures as the submission of a
standard form either online or in-person, a ``covered application''
would be triggered when an applicant submits the form. In contrast,
another financial institution may not use a standard form and instead
define an application as a request for credit and authorization to pull
a credit check on the business and principal owners. In that
circumstance, a ``covered application'' under proposed Sec.
1002.103(a) would not be triggered until that process is satisfied.
Using the same example, if the financial institution orally collects
certain information from a prospective applicant (such as gross annual
revenue and business location) and discusses with the prospective
applicant potential credit product options offered by the
[[Page 56399]]
financial institution, no ``covered application'' would be triggered
until the prospective applicant indicates that it wants to proceed to
apply for credit and authorizes the financial institution to pull a
credit check. Similarly, if a prospective applicant merely expresses
interest in obtaining credit--not yet focusing on any particular type
of covered credit transaction and not submitting a ``covered
application''--the interaction also would not be reportable. While the
proposed definition of ``covered application'' does not provide a
bright-line rule, the Bureau believes the proposed definition would be
familiar to financial institutions and provide consistency with
existing Regulation B and Regulation C.
During SBREFA, SERs asked the Bureau to clarify when an application
sufficient to make a credit decision would align with an
``application'' triggering 1071 collection and reporting requirements.
Accordingly, the Bureau notes that a ``covered application'' may align
with the information necessary to make a credit decision or it may be
possible to have a ``covered application'' before having information
necessary to make a credit decision--it depends on each financial
institution's own procedures. For example, suppose a financial
institution defines an application under its procedures as the point
when an applicant, or someone on the applicant's behalf, fills out
certain key pieces of information on an application form. If the
financial institution's process is to immediately transmit the
application to underwriting for a decision once the form is submitted,
1071 collection and reporting would likely be triggered at the same
time there is sufficient information to make a credit decision. On the
other hand, if the financial institution requires additional
verification of documents and follow-up requests before submitting the
loan file to underwriting, the financial institution would likely have
a ``covered application'' before it has sufficient information to make
a credit decision.
Proposed comment 103(a)-1 would underscore that a financial
institution has latitude to establish its own application process or
procedure and to decide the type and amount of information it will
require from applicants. Proposed comment 103(a)-2 would explain that
the term ``procedures'' refers to the actual practices followed by a
financial institution as well as its stated application procedures, and
provides an example. Because the definition of ``covered application''
is based on a financial institution's actual practices, a financial
institution should have little incentive to attempt to artificially
define an ``application'' in its written procedures as occurring later
in the process; for example, if a financial institution has near a 100
percent approval rate because all ``applications'' have already been
vetted earlier in the process, the financial institution's stated
definition of an application likely does not reflect its actual
practices. Proposed comment 103(a)-3 would provide that the commentary
accompanying existing Sec. Sec. 1002.2(f) and 1002.9 is generally
applicable to the proposed definition of ``covered application,''
except as provided otherwise in proposed Sec. 1002.103(b).
Proposed comments 103(a)-4 through -6 would address how a financial
institution reports multiple covered credit transaction requests at one
time or a request for a credit transaction that results in the
origination of multiple covered credit transactions. Proposed comment
103(a)-4 would provide that if an applicant makes a request for two or
more covered credit transactions at one time, the financial institution
reports each request for a covered credit transaction as a separate
covered application. The Bureau believes the proposed approach would
further the purposes of section 1071 by better capturing demand for
credit, including demand for different covered credit transactions at
the same time. The Bureau also believes that the simplicity of this
approach would reduce data reporting errors compared to potential
alternatives, for example, alternatives in which the financial
institution may sometimes report such requests as a single covered
application or, in other circumstances, as multiple covered
applications. Finally, the Bureau believes that concerns about
duplicative information requests would be mitigated by permitting
financial institutions to reuse certain previously collected data, as
set forth in proposed Sec. 1002.107(c)(2). In response to SERs'
feedback, proposed comment 103(a)-5 would address the circumstance
where an initial request for a single covered credit transaction
results in the origination of multiple covered credit transactions.
Similarly, in response to the SBREFA Panel's recommendations, proposed
comment 103(a)-6 would address requests for multiple lines of credit at
one time, proposing that such requests would be reported based on the
procedures used by the financial institution for the type of credit
account.
Proposed comment 103(a)-7 would address how a financial institution
would report applications where there is a change in whether the
applicant is requesting a covered credit transaction. If the applicant
initially requests a covered credit transaction, but during the
application process is offered and accepts instead a product that is
not reportable, the Bureau is proposing to designate this circumstance
as not a covered application, due in part to concerns that reporting in
this scenario could affect data quality. For example, reporting on
product types that are not covered credit transactions (for example,
leases) could raise data quality questions if there are not appropriate
fields to capture the terms of those transactions. Despite these
concerns, the Bureau is also considering whether capturing such
transactions in the 1071 data could be useful to identifying potential
steering or other forms of discrimination, therefore furthering the
purposes of section 1071. As noted below, the Bureau seeks comment on
whether to require full or limited reporting in these circumstances. If
an applicant initially requests a product that is not a covered credit
transaction, but during the application process decides to seek instead
a product that is a covered credit transaction, the application is a
covered application and must be reported.
The Bureau seeks comment on its proposed definition of a covered
application in Sec. 1002.103(a) and associated commentary. The Bureau
also seeks comment on the advantages and disadvantages of collecting
data on incomplete or withdrawn applications, as well as how collection
would or would not further the purposes of section 1071. In addition,
the Bureau seeks comment on reporting of multiple lines of credit on a
single credit account, including how financial institutions internally
consider multiple lines of a credit on a single account and the
Bureau's proposed approach in comment 103(a)-6.
As noted above, the Bureau also seeks comment on how a financial
institution should report applications where there is a change in
whether the request for credit involves a covered credit transaction.
Specifically, the Bureau seeks comment on the advantages and
disadvantages of requiring full or limited reporting where an applicant
initially seeks a product that is a covered credit transaction, but
ultimately is offered and accepts a product that is not reportable. For
example, whether in those circumstances the financial institution
should report limited data points related to the transaction (such as
whether the applicant is a small business; whether the applicant is a
women-owned business or a minority-owned business;
[[Page 56400]]
the principal owners' race, sex, and ethnicity; number of principal
owners; gross annual revenue; and loan type reported as ``Non-
reportable credit product'' or something similar). The Bureau is
particularly interested in receiving comments on the utility of such
data to identify potential steering or other forms of discrimination,
the effect on data quality, and other factors related to the purposes
of section 1071.
Alternatives Considered
The Bureau considered several other options for defining
``application.'' First, the Bureau considered triggering 1071
collection and reporting based on a ``completed application,'' which is
defined in existing Sec. 1002.2(f) as an application in which the
creditor has received ``all the information that the creditor regularly
obtains and considers'' in evaluating similar products. The Bureau is
not proposing to use the definition of ``completed application'' in
existing Sec. 1002.2(f) for its definition of covered application in
subpart B, as doing so would exclude incomplete applications and many
withdrawn applications that may reflect demand for credit and potential
discrimination during the application process. While some commenters
noted that use of this definition would provide uniformity in the data
across financial institutions and product types, the Bureau is
concerned about the loss of data on incomplete and withdrawn
applications. Although some commenters suggested that the ``completed
application'' definition could result in more accurate and complete
data because it is collected later in the application process, the
Bureau believes that this benefit can largely be obtained under the
current proposal by requiring financial institutions to report, where
available, verified applicant-provided information, as set forth in
proposed Sec. 1002.107(b). Although some SERs and other stakeholders
urged the Bureau to define an application based on when there is
sufficient information to render a credit decision, as pointed out by
another SER, such a definition may not be as effective in furthering
the purposes of 1071. For example, it would capture few to no
incomplete applications and a smaller share of withdrawn applications.
Moreover, as discussed above, in certain situations--depending on a
financial institution's application procedures--the definition of a
covered application in proposed Sec. 1002.103(a) may align with the
point where there is enough information to render a credit decision.
The Bureau also considered defining ``covered application'' as a
set of specific data points that, if collected, would trigger a duty to
collect and report 1071 data. The Bureau is not proposing this approach
for a few reasons. First, this approach would introduce another
regulatory definition of ``application,'' \336\ which could cause
confusion and hinder compliance. Second, this approach could require
financial institutions to alter their existing practices, resulting in
burden. Third, this approach could lead some financial institutions to
intentionally delay the gathering of one or more data points until
after a credit decision was made in order to avoid triggering 1071
obligations. Last, this approach may be difficult to execute given that
financial institutions use different data points in underwriting based
on product type, lending model, exposure, and other factors.
---------------------------------------------------------------------------
\336\ Although certain regulations define an ``application'' as
a set of specific data points (e.g., name, income, property address,
estimated property value, etc.), many of the data points in those
regulations are specific to the mortgage context and would not be
applicable to small business lending. These regulations also do not
relate to data collection. See, e.g., Regulation X Sec. 1024.2(b)
and Regulation Z Sec. 1026.2(a)(3).
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103(b) Circumstances That Are Not Covered Applications
SBREFA Proposal Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau stated it was considering
clarifying circumstances that would not be reportable under section
1071, even if certain of those circumstances would otherwise be
considered an ``application'' under existing Sec. 1002.2(f).
Specifically, those circumstances were: (1) Inquiries/
prequalifications; (2) reevaluation, extension, and renewal requests,
except requests for additional credit amounts; and (3) solicitations
and firm offers of credit.\337\
---------------------------------------------------------------------------
\337\ SBREFA Outline at 22-24.
---------------------------------------------------------------------------
Reevaluation, extension, or renewal requests on an existing
business credit account, unless the request seeks additional credit
amounts. Several SERs supported the Bureau's proposal under
consideration to exclude renewals unless additional credit is
requested; one SER also supported excluding solicitations.\338\ Several
SERs urged the Bureau to exclude line increases as a distinct type of
application, explaining that financial institutions may not require a
new application for such requests and that underwriting a line increase
request is substantively distinct from underwriting a request for new
credit because a line increase extensively relies on past performance
data and prior relationships. Due to these differences, one SER
suggested that including line increases may skew 1071 data, causing
misinterpretations. The SBREFA Panel recommended the Bureau seek
comment on whether to include line increases as a separate reportable
application.\339\ The SBREFA Panel also recommended that the Bureau
seek comment on how financial institutions currently handle increases
in lines of credit.\340\
---------------------------------------------------------------------------
\338\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 24-25.
\339\ Id. at 45-46.
\340\ Id.
---------------------------------------------------------------------------
A number of other industry stakeholders also supported the Bureau's
proposal under consideration to exclude reevaluations, extensions, and
renewal requests (except requests for additional credit amounts). The
commenters stated that such collection would be duplicative since
financial institutions would also be reporting data on the original
application (perhaps in the same reporting year). The commenters also
noted that extension requests are often short term and granted without
a full application process, that requiring reporting could lead to
fewer financial institutions offering extensions due to the added
collection and reporting burden (particularly for open-ended credit),
and that providing an exemption would be consistent with HMDA
reporting. One commenter sought exclusion of rate adjustments.
Community group commenters opposed exclusion of reevaluations,
renewals, and extensions.
Several industry commenters opposed 1071 collection and reporting
on reevaluations, extensions, or renewals that seek additional credit
amounts. These commenters stated that 1071 collection and reporting
should focus on data collected at the time of origination, that
collecting data repeatedly from the same borrowers would add burden,
and that collecting data for line increases would make it difficult for
financial institutions to provide timely approvals. One commenter
suggested only reporting on additional credit amounts if the original
note is replaced. Other industry commenters--while not explicitly
opposing such collection--suggested the Bureau further consider whether
increases or renewals with additional credit amounts should be an
``application'' for purposes of the rule. The commenters noted that
such increases/renewals are typically more streamlined than a standard
application given the financial institution already has the applicant's
information in its possession, and that the Bureau should carefully
balance burden (which could
[[Page 56401]]
affect how such requests could be processed) with benefit (obtaining
additional data on the same applicant). One industry representative
supported collection on requests that include additional credit
amounts. Another commenter sought clarification on what would be
reported in such circumstances: The newly advanced funds or the entire
outstanding amount.
Inquiries and prequalification requests. Several SERs urged the
Bureau not to require reporting on prequalifications or inquiries.
These SERs explained that they encounter a high number of inquiries
from rate shoppers asking about qualification requirements and
potential rates, many of which are abandoned or otherwise do not
progress to a completed application.\341\ A significant number of other
industry commenters also supported the Bureau's proposal under
consideration to exclude inquiries and prequalifications. These
commenters noted that such inquiries could include countless informal
interactions that would be difficult to collect in a consistent manner
and that may lead to misleading or erroneous data. The commenters also
stated that collection would be duplicative and impose significant
burden without countervailing benefits. Community group commenters
expressed support for collecting data on inquiries and
prequalifications to identify discrimination that occurs before an
application is submitted.
---------------------------------------------------------------------------
\341\ Id. at 24-25.
---------------------------------------------------------------------------
Solicitations and firm offers of credit. A number of industry
commenters supported exclusion of solicitations and firm offers of
credit. One commenter noted that excluding such data would avoid
duplicative steps and be consistent with the purposes of section 1071.
Proposed Rule
Proposed Sec. 1002.103(b) would identify certain circumstances
that are not covered applications--even if they otherwise would be
considered an application under existing Sec. 1002.2(f). Specifically,
the Bureau is proposing that a covered application does not include (1)
reevaluation, extension, or renewal requests on an existing business
credit account, unless the request seeks additional credit amounts; and
(2) inquiries and prequalification requests. As discussed below,
solicitations and firm offers of credit would also not be ``covered
applications'' under the proposed definition. The Bureau is also
proposing comments 103(b)-1 through -5 to provide additional guidance
and examples of circumstances that do and do not trigger 1071
collection and reporting as a covered application. For example,
proposed comment 103(b)-4 clarifies that the term ``covered
application'' does not include evaluations or reviews of existing
accounts initiated by the financial institution.
Reevaluation, extension, or renewal requests on an existing
business credit account, unless the request seeks additional credit
amounts. The Bureau is proposing to exclude from the definition of a
``covered application'' requests by borrowers to modify the terms or
duration of an existing extension of credit, other than (as explained
below) requests for additional credit amounts. The Bureau believes that
requests to modify the terms or duration of an existing extension of
credit, which occur with high frequency in the small business lending
space, may add complexity and burden for financial institutions, while
potentially providing limited additional information relevant to the
purposes of section 1071. Moreover, broadly including requests to
modify the terms or duration of existing extensions of credit might
affect the quality of the data absent additional flags to distinguish
the transactions from new originations. The Bureau is also concerned
about the impact of adding 1071 collection and reporting requirements
to what are otherwise streamlined evaluations, particularly given the
limited additional data that would be gained from such reporting. The
Bureau also notes that Regulation C takes a similar approach by
excluding reporting of loan modifications.\342\
---------------------------------------------------------------------------
\342\ See Regulation C comment 2(d)-2.
---------------------------------------------------------------------------
In contrast, the Bureau is not proposing to exclude requests for
additional credit amounts (such as line increases or new money on
existing facilities). That is, reporting would be required for requests
for additional credit amounts. The Bureau believes that capturing
requests for additional credit amounts will further the purposes of
section 1071, particularly the community development purpose, as it
would more accurately capture demand for credit. Although several SERs
and other commenters opposed reporting on new credit amounts--due to
the potentially streamlined nature of such reviews (which may differ
from underwriting of new applications) and concerns about duplicative
reporting--the Bureau believes these factors do not outweigh the
potential community development benefits of reporting and collection.
Moreover, the Bureau believes that concerns about duplicative reporting
would be mitigated by proposed Sec. 1002.107(c)(2), which would permit
a financial institution to reuse certain data points under certain
circumstances. In addition, under proposed Sec. 1002.107(a)(7) and
(8), when reporting a covered application that seeks additional credit
amounts on an existing account, the financial institution would only
report the additional credit amount sought (and approved or originated,
as applicable), and not the entire credit amount extended. A request to
withdraw additional credit amounts at or below a previously approved
credit limit amount on an existing open-end line of credit would not be
a covered application as the request falls within the terms of a
previously approved covered credit agreement.
Inquiries and prequalification requests. Existing Regulation B
recognizes that before a consumer or business requests credit in
accordance with the procedures used by a creditor for the type of
credit requested, a creditor may provide a prospective applicant with
information about credit terms. Existing Regulation B comments 2(f)-3
and 9-5 refer to these situations as inquiries and prequalification
requests. Generally, an inquiry occurs when a consumer or business
requests information about credit terms offered by a creditor; a
prequalification request generally refers to a request by a consumer or
business for a preliminary determination on whether the prospective
applicant would likely qualify for credit under a creditor's standards
or for what amount.\343\ Under existing Regulation B comments 2(f)-3
and 9-5, an inquiry or prequalification request may become an
``application'' that triggers adverse action notification requirements
if the creditor evaluates information about the consumer or business,
decides to decline the request, and communicates this to the consumer
or business; otherwise, such inquiries and prequalification requests
are generally not considered applications under existing Regulation B.
As explained in existing comment 2(f)-3,
[[Page 56402]]
whether the inquiry or prequalification request becomes an application
depends on how the creditor responds to the consumer or business, not
on what the consumer or business says or asks.
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\343\ See also Regulation C comment 2(b)-2 (describing
prequalification requests). In addition, a preapproval as described
in existing comment 2(f)-5.i of Regulation B is an example of an
application under existing Regulation B. Under that comment, a
preapproval occurs when a creditor reviews a request under a program
in which the creditor, after a comprehensive analysis of an
applicant's creditworthiness, issues a written commitment valid for
a designated period of time to extend a loan up to a specified
amount. If a creditor's program does not provide for giving written
commitments, requests for preapprovals are treated as
prequalification requests.
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Regulation C excludes all prequalification requests from HMDA
reporting, even if the prequalification request becomes an application
under existing Regulation B.\344\ Regulation C does not address
reporting of inquiries more generally.
---------------------------------------------------------------------------
\344\ See Regulation C comment 2(b)-2.
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The Bureau is proposing to exclude inquiries and prequalification
requests as a ``covered application,'' even if the inquiry or
prequalification request may become an ``application'' under existing
Sec. 1002.2(f) that may trigger notification requirements. The Bureau
agrees with SERs and other commenters that requiring data collection
for all inquiries and prequalifications could create operational
challenges given that such interactions may be voluminous and typically
occur before a financial institution has the relevant data or processes
in place for tracking requests for credit. The Bureau is likewise
concerned that requiring the collection of 1071 data for these requests
could pose data accuracy issues, given the often informal nature of
these interactions, which may raise the risk of missing, unavailable,
or erroneous data. In addition, reporting of inquiries and
prequalifications could be duplicative if the applicant subsequently
applies for credit in accordance with the procedures designated by the
financial institution.
The Bureau also has concerns about requiring reporting of inquiries
and prequalification requests only in situations that would otherwise
be treated as an ``application'' under existing Regulation B--i.e.,
when the financial institution evaluates information about the consumer
or business, decides to decline the request, and communicates this to
the consumer or business. The Bureau is concerned that the logistics of
reporting an inquiry or prequalification only in certain
circumstances--if the institution evaluates the information, declines
the request, and communicates it to the business--would be
operationally challenging for financial institutions and could lead to
data distortion as only denials would be captured. In these
circumstances, a financial institution may prefer reporting all
inquiries and prequalifications, which could lead to some of the
challenges identified above. The Bureau is also considering the market
effects of requiring reporting only for certain inquiries and
prequalification requests, including whether it would cause financial
institutions to restrict such interactions or services.
The Bureau, however, remains concerned about potential
discrimination that may occur in these early interactions with a
financial institution. In particular, the Bureau is concerned about
excluding data on inquiries and prequalification requests when the
financial institution evaluates information about a business and
declines the request, which may be useful for identifying potential
prohibited discouragement of or discrimination against applicants or
prospective applicants.
On balance, the Bureau believes it is appropriate to interpret
``application'' as used in section 1071 to exclude inquiries and
prequalification requests given the considerations identified above,
including the timing and often informal nature of such interactions,
the operational challenges of implementing such a definition, and
related concerns about the reliability of the data.
Although the Bureau is proposing to exclude inquiries and
prequalification requests from the definition of ``covered
application,'' the Bureau notes that the relevant analysis of whether
an inquiry or prequalification request is reportable focuses on how the
financial institution structures, processes, and responds to such
requests, not what they are called. For example, if a financial
institution has a formalized process to screen businesses requesting
credit and deny those it considers ineligible, a request for credit
that goes through that process may be a ``covered application,'' even
if the financial institution labels the review a ``prequalification''
request or an ``inquiry.''
The Bureau further notes that requests for credit that meet the
proposed definition of ``covered application'' would be reportable,
even if the application was preceded by an inquiry or prequalification
request. For example, if a business initially seeks information about
potential credit offerings, the financial institution responds, and
then the business submits an application for a covered credit
transaction following the financial institution's procedures, the
application would be reportable. If, on the other hand, the business
asks about potential credit offerings, but then chooses not to submit
an application, there is no covered application.
Finally, the Bureau notes that inquiries and prequalification
requests where the institution evaluates the information, declines the
request, and communicates it to the business or consumer, are
``applications'' under existing Regulation B, and are thus subject to
its requirements regarding ``applications,'' including its adverse
action notification requirements and nondiscrimination provisions. In
no way are the exclusions in proposed Sec. 1002.103(b) intended to
repeal, abrogate, annul, impair, change, or interfere with the scope of
the term application in existing Sec. 1002.2(f) as applicable to
existing Regulation B.
Solicitations and firm offers of credit. Proposed comment 103(b)-4
would clarify that the term covered application does not include
solicitations and firm offers of credit; like other reviews or
evaluations initiated by the financial institution, these
communications do not involve an applicant requesting credit, and so
are not ``covered applications.'' Excluding solicitations and firm
offers of credit is also consistent with the language of ECOA section
704B(b)(1), which provides that an application in response to a
solicitation by a financial institution could be an application under
section 1071, but the text is silent on solicitations without any
applicant response. Thus, consistent with the statutory language, a
solicitation or firm offer of credit may become a ``covered
application'' under the proposed definition if an applicant responds to
the solicitation or offer by requesting a covered credit transaction.
In conclusion and for the reasons identified above, the Bureau
believes its proposed exclusion of inquiries and prequalification
requests is reasonable. Similarly, the Bureau believes its proposed
exclusion of reevaluation, extension, or renewal requests on an
existing business credit account, unless the request seeks additional
credit amounts, is a reasonable interpretation of an ``application'' as
used in section 1071 for the reasons described above, including that
the original extension of credit would be collected and reported and
further reporting would yield limited additional data. The Bureau also
believes its proposed treatment of solicitations and firm offers of
credit is a reasonable interpretation of an ``application'' as used in
section 1071, as discussed above.
The Bureau seeks comment on its proposed definition of a covered
application in Sec. 1002.103(b) and associated commentary. The Bureau
also seeks comment on whether instead to define a ``covered
application,'' consistent with existing Regulation B, to include
inquiries or prequalification requests where the financial institution
evaluates information about the business, decides to decline the
request,
[[Page 56403]]
and communicates this to the business. Related to this alternative
approach, the Bureau further seeks comment on whether additional data
fields may be necessary in order to distinguish prequalification
requests and inquiries from other reported applications. In addition,
if the Bureau were to require reporting of declined inquiries or
prequalification requests (as described above), the Bureau seeks
comment on whether financial institutions would want the option to
report all prequalification requests and inquiries, to allow for a
comparison with denials.
In addition, the Bureau seeks comment on whether, alternatively, to
define a ``covered application'' consistent with Regulation C, which
(as discussed above) does not require a financial institution to report
prequalification requests, even if those requests may constitute
applications under existing Regulation B for purposes of adverse action
notices, but does not address reporting of inquiries more generally.
Related to this alternative approach, the Bureau also seeks comment on
whether greater clarity could be achieved by defining, for purposes of
proposed subpart B only, inquiries as requests for information about
loan terms that do not become applications under existing Regulation B,
and prequalification requests as requests that may become applications
under existing Regulation B. In addition, the Bureau also seeks comment
on the frequency with which financial institutions accept
prequalification requests (as described in Regulation C comment 2(b)-2,
but with respect to prospective business applicants) and what data are
collected in connection with such prequalification requests, as well as
potential effects on the market if some or all prequalification
requests were reportable under section 1071.
Consistent with the SBREFA Panel's recommendation, the Bureau also
seeks comment on whether to include line increase requests as a
``covered application'' and information on how financial institutions
currently process requests for a line of credit increase. In addition
to line increases, the Bureau also seeks comment on financial
institution practices related to other types of requests for additional
credit amounts, and whether such requests should be captured in 1071
data.
Lastly, the Bureau notes that Regulation C requires the reporting
of assumptions for HMDA,\345\ but the Bureau does not have information
on whether assumptions are similarly used in the small business lending
context. The Bureau seeks comment on this issue, including how an
assumption in small business lending might be structured (for example,
whether it is typically a modification of an existing extension of
credit or a new extension of credit), the frequency of assumptions in
the small business lending context, and whether reporting of
assumptions for small business lending would further the purposes of
section 1071.
---------------------------------------------------------------------------
\345\ See Regulation C comment 2(j)-5 (discussing when
assumptions should be reported as home purchase loans).
---------------------------------------------------------------------------
Section 1002.104 Covered Credit Transactions and Excluded Transactions
104(a) Covered Credit Transaction
ECOA section 704B(b) requires financial institutions to collect and
report information regarding any application for ``credit'' made by
women-owned, minority-owned, or small businesses. Although the term
``credit'' is not specifically defined in section 1071, ECOA defines
``credit'' as ``the right granted by a creditor to a debtor to defer
payment of debt or to incur debts and defer its payment or to purchase
property or services and defer payment therefor.'' \346\ As noted above
in the section-by-section analysis of Sec. 1002.102(d), existing
Regulation B further defines ``business credit'' as ``extensions of
credit primarily for business or commercial (including agricultural)
purposes,'' with some exclusions.\347\ As discussed in detail below,
the Bureau is proposing to require that covered financial institutions
report data for all applications for transactions that meet the
definition of business credit unless otherwise excluded. Proposed Sec.
1002.104(a) would define the term ``covered credit transaction'' as an
extension of business credit that is not an excluded transaction under
proposed Sec. 1002.104(b). Loans, lines of credit, credit cards, and
MCAs (including such credit transactions for agricultural purposes and
HMDA-reportable transactions) would all fall within the scope of this
proposed rule, which would cover the majority of products that small
businesses use to obtain financing.\348\ As such, the Bureau believes
that the inclusion of these products in the Bureau's 1071 rule is
important to fulfilling the purposes of section 1071. Pursuant to this
approach, the Bureau notes that the products discussed below do not
constitute an exhaustive list of covered credit transactions; other
types of business credit not specifically described below would
nevertheless constitute covered credit transactions unless excluded by
proposed Sec. 1002.104(b).
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\346\ 15 U.S.C. 1691a(d); see also Sec. 1002.2(j).
\347\ 12 CFR 1002.2(g).
\348\ See White Paper at 21-22.
---------------------------------------------------------------------------
Proposed Sec. 1002.104(b), in turn, would state that the
requirements of subpart B do not apply to trade credit, public
utilities credit, securities credit, and incidental credit. Associated
commentary would make clear that the term ``covered credit
transaction'' also does not cover factoring, leases, consumer-
designated credit used for business purposes, or credit secured by
certain investment properties.
For the reasons set forth below, the Bureau is proposing Sec.
1002.104 pursuant to its authority under ECOA section 704B(g)(1) to
prescribe such rules and issue such guidance as may be necessary to
carry out, enforce, and compile data under section 1071.
In the SBREFA Outline, the Bureau stated that it was considering
proposing that a covered product under section 1071 is one that meets
the definition of ``credit'' under ECOA and is not otherwise excluded
from collection and reporting requirements.\349\ Specifically, the
Bureau stated that it was considering proposing that covered products
under section 1071 would include term loans, lines of credit, and
credit cards. The Bureau stated that term loans, lines of credit, and
credit cards meet the definition of ``credit'' under ECOA and these
products collectively make up the majority of business financing
products used by small businesses and are an essential source of
financing for such businesses.\350\ The Bureau also proffered in the
SBREFA Outline that the inclusion of these products in the Bureau's
1071 rule is important to fulfilling the purposes of section 1071.\351\
The Bureau also stated in SBREFA Outline that it was considering
proposing that the following products not be covered by the 1071 rule:
consumer credit used for business purposes; leases; trade credit;
factoring; and MCAs.\352\
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\349\ SBREFA Outline at 19-20.
\350\ Id. at 20.
\351\ Id.
\352\ Id.
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SERs and other stakeholders providing feedback on the SBREFA
Outline generally supported the Bureau's proposal under consideration
to include term loans, lines of credit, and credit cards as covered
products under section 1071.\353\ Many stakeholders (including roughly
half the SERs) urged the Bureau to pursue
[[Page 56404]]
expansive product coverage in order to adequately capture small
businesses' experiences with obtaining financing, especially for women-
owned and minority-owned small businesses. Many SERs and other
stakeholders advocated for including MCAs within the scope of the
eventual 1071 rule; some SERs and stakeholders also advocated for
including factoring, and in some cases leases as well, in order to
capture the full landscape of small business financing. Multiple
stakeholders expressed concern that the exclusions under consideration
for certain products (e.g., MCAs) would disproportionately burden
traditional lenders who do not offer such products.
---------------------------------------------------------------------------
\353\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 22-23.
---------------------------------------------------------------------------
As discussed below, the Bureau proposes that the 1071 rule cover
loans, lines of credit, credit cards, and MCAs. The Bureau also
explains below that ``covered credit transaction'' would encompass
agricultural-purpose credit and HMDA-reportable transactions.
Loans, lines of credit, and credit cards. As noted above,
stakeholders generally presume and support the coverage of loans, lines
of credit, and credit cards. These products are commonly offered to
small business applicants (making up almost 60 percent of the aggregate
dollar volume of various financial products used by small
businesses).\354\ The Bureau is not proposing definitions for loans,
lines of credit, and credit cards because the Bureau believes these
products are generally and adequately covered by the proposed
definition of ``credit'' in proposed Sec. 1002.102(i).\355\
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\354\ See id. at 21 fig. 2.
\355\ As noted in the section-by-section analysis of proposed
Sec. 1002.107(a)(5) below, the Bureau distinguishes between secured
and unsecured loans and lines of credit when financial institutions
report the type of credit product being applied for. The Bureau does
not believe that this distinction has relevance to whether these
products constitute ``credit.''
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The Bureau seeks comment on its proposed approach to covered credit
transactions and particularly on whether it should define loans, lines
of credit, and credit cards, and, if so, how.
Merchant cash advances. MCAs are a form of financing for small
businesses that purport to be structured as a sale of potential future
income. MCAs vary in form and substance, but under a typical MCA, a
merchant receives a cash advance and promises to repay it plus some
additional amount or multiple of the amount advanced (e.g., 1.2 or 1.5,
the ``payback'' or ``factor'' ``rate''). The merchant promises to repay
by either pledging a percentage of its future revenue, such as its
daily credit and debit card receipts (the ``holdback percentage''), or
agreeing to pay a fixed daily withdrawal amount to the MCA provider
until the agreed upon payment amount is satisfied. MCA contracts often
provide for repayment directly through the merchant's card processor
and/or via ACH withdrawals from the merchant's bank account.\356\ MCAs
constitute the primary product under an umbrella that the Bureau refers
to as ``sales-based financing''; generally, transactions wherein a
financial institution extends funds to a business and repayment is
based on the business's anticipated sales, revenue, or invoices.\357\
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\356\ This description is based on the Bureau's review of a
sample of MCA contracts that the Bureau believes fairly represent
typical MCA contracts in the market. The Bureau's review comports
with observations made by industry and community groups regarding
MCAs.
\357\ As stated below, the Bureau is not proposing to
specifically define sales-based financing in the 1071 rule because
the Bureau believes these products are covered by the proposed
definition of ``credit'' in proposed Sec. 1002.102(i). New York and
California laws have recently sought to define sales-based
financing. New York law, for example, defines ``sales-based
financing'' as ``a transaction that is repaid by the recipient to
the provider, over time, as a percentage of sales or revenue, in
which the payment amount may increase or decrease according to the
volume of sales made or revenue received by the recipient.'' N.Y.
Fin. Serv. 801(j). New York's definition of sales-based financing
also encompasses a true-up mechanism where the financing is repaid
as a fixed payment but provides for a reconciliation process that
adjusts the payment to an amount that is a percentage of sales or
revenue. Id. California law uses a similar definition. See 10 Cal.
Code Reg. 2057(a)(22) (defining sales-based financing as ``a
commercial financing transaction that is repaid by a recipient to
the financer as a percentage of sales or income, in which the
payment amount increases and decreases according to the volume of
sales made or income received by the recipient'' and including ``a
true[hyphen]up mechanism'').
---------------------------------------------------------------------------
The Bureau understands that the MCA market is generally dominated
by nondepository lenders not subject to Federal safety and soundness
supervision or reporting requirements. The Bureau also understands that
MCA providers may not be required to obtain State lending licenses. As
a result, information on MCA lending volume and practices is limited.
The Bureau notes, however, that California recently enacted a law that
brings providers of commercial financing options, including factoring
and MCAs, into the California Financing Law (CFL), which will impose
disclosure requirements.\358\ New York also enacted a law that would
impose similar disclosure requirements upon certain New York commercial
financing providers, including MCA providers.\359\
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\358\ The new law does not go so far as to amend the CFL to
require factors or MCA providers to be licensed, but it does impose
first-in-the-nation disclosure requirements in connection with these
products similar to those imposed under TILA. See Cal. S.B. 1235
(Sept. 30, 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235. The law will be
implemented through regulations, which have not been finalized yet.
See State of Cal. Dep't of Bus. Oversight (DBO), Draft Regulations
(July 26, 2019), https://dbo.ca.gov/wp-content/uploads/sites/296/2019/07/SB-1235-Draft-Regulations-7-26-19.pdf.
\359\ N.Y. S.B. S5470B (Dec. 23, 2020), https://legislation.nysenate.gov/pdf/bills/2019/S5470B.
---------------------------------------------------------------------------
Although the Bureau's 2017 White Paper estimated the MCA market
constituted less than 1 percent of the aggregate dollar volume of
various financial products used by small businesses in the U.S. in
2014,\360\ the Bureau finds that more recent evidence suggests the
industry may now be much larger. For example, the 2020 Federal Reserve
Banks' survey of firms with 1-499 employees (``employer firms'') found
that 8 percent of such businesses applied for and regularly used
MCAs.\361\ Moreover, on August 18, 2019, the trade website deBanked
reported that according to an investment bank's projections, ``the MCA
industry will have more than doubled its small business funding to
$19.2 billion by year-end 2019, up from $8.6 billion in 2014.'' \362\
---------------------------------------------------------------------------
\360\ See White Paper at 21 fig. 2, 22 fig. 3.
\361\ Fed. Reserve Banks, Small Business Credit Survey--2021
Report on Employer Firms, at 24 (Feb. 3, 2021), https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2021/2021-sbcs-employer-firms-report (2021 Small Business Credit Survey).
Starting in 2017, the Federal Reserve Banks began to gather specific
data on MCAs for its annual reports on small business financing for
employer firms--in the 2017 report, the survey found that 7 percent
of such businesses applied for and regularly used MCAs. Fed. Reserve
Banks, Small Business Credit Survey--2017 Report on Employer Firms,
at 9 (Apr. 11, 2017), https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2018/sbcs-employer-firms-report.pdf (2017
Small Business Credit Survey).
\362\ Paul Sweeney, Gold Rush: Merchant Cash Advances Are Still
Hot, deBanked (Aug. 18, 2019), https://debanked.com/2019/08/gold-rush-merchant-cash-advances-are-still-hot/.
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Based on stakeholder feedback and available data, the Bureau
understands that MCAs are often used by merchants due to the speed and
ease with which they can be obtained,\363\ particularly for merchants
unable to obtain financing from more traditional sources.\364\
According to the 2020 Federal Reserve Banks' report regarding firms
owned by people of color (both small employer firms and non-employer
firms), Black-owned firms, Hispanic-owned firms, and Asian-owned firms
were more likely to have applied for MCAs (14 percent, 10 percent, and
10 percent
[[Page 56405]]
respectively) than white-owned firms (7 percent).\365\ The Bureau
believes that this report supports stakeholders' assertions that
minority-owned businesses are more likely to use MCAs.
---------------------------------------------------------------------------
\363\ See 2021 Small Business Credit Survey at 26 (reporting
that 84 percent of surveyed credit applicants were approved for an
MCA, as compared to a 43 percent approval rate for personal loans).
\364\ See id. at 22 (noting that only 7 percent of ``high credit
risk'' applicants obtained all the financing sought).
\365\ Small Business Credit Survey of Firms Owned by People of
Color at 30.
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The Bureau believes that the higher frequency of MCA use among
minority-owned businesses coupled with reports of problematic provider
practices lends credence to many stakeholders' claims that MCAs may
raise fair lending concerns. The FTC released a Staff Perspective in
February 2020 discussing its concerns with the MCA industry \366\ and
noting the industry's tendency to ``cater to higher-risk businesses or
owners with low credit scores--typically offering them higher-cost
products.'' \367\ The FTC has also filed enforcement actions against
MCA providers and their principals, in one case alleging that they
misrepresented the terms of MCAs that they provided, and then used
``unfair collection practices, including sometimes threatening physical
violence, to compel consumers to pay.'' \368\ The FTC recently obtained
a settlement that requires an MCA provider to pay more than $9.8
million to settle charges that it took money from businesses' bank
accounts without permission and deceived them about the amount of
financing business owners would receive and other features of its
financing products.\369\ Moreover, the Bureau understands that the
default rate amongst small businesses that use MCAs is relatively
high--5 to 15 percent according to one estimate (compared with a 2
percent default rate on SBA loans).\370\ The Bureau believes this high
default rate may be explained by the fact that the typical MCA holdback
percentage--10 to 20 percent of gross receipts or revenues--may be
onerous for already cash-strapped small businesses.\371\ The Bureau
also understands that it is not uncommon for small businesses that use
MCAs to obtain new MCAs from other MCA providers (more than a quarter
of such businesses, by one account); \372\ they also may use one MCA to
pay off another. Firms that take on added debt loads in this way (a
process known as ``stacking'') ``may not fully recognize the costs
involved, which could potentially jeopardize the financial health of
their businesses.'' \373\
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\366\ Fed. Trade Comm'n, `Strictly Business' Forum, Staff
Perspective, at 6-8 (Feb. 2020), https://www.ftc.gov/system/files/documents/reports/staff-perspective-paper-ftcs-strictly-business-forum/strictly_business_forum_staff_perspective.pdf.
\367\ See id. at 2.
\368\ Press Release, Fed. Trade Comm'n, New York-Based Finance
Companies Deceived Small Businesses, Non-Profits and Seized Their
Personal and Business Assets (June 10, 2020), https://www.ftc.gov/news-events/press-releases/2020/06/new-york-based-finance-companies-deceived-small-businesses. See also Press Release, Fed. Trade
Comm'n, FTC Alleges Merchant Cash Advance Provider Overcharged Small
Businesses Millions (Aug. 3, 2020), https://www.ftc.gov/news-events/press-releases/2020/08/ftc-alleges-merchant-cash-advance-provider-overcharged-small.
\369\ Press Release, Fed. Trade Comm'n, Cash Advance Firm to Pay
$9.8M to Settle FTC Complaint It Overcharged Small Businesses (Apr.
22, 2021), https://www.ftc.gov/news-events/press-releases/2021/04/cash-advance-firm-pay-98m-settle-ftc-complaint-it-overcharged.
\370\ Kevin Voigt, It's the Wild West Out There: NerdWallet
Special Report, NerdWallet (Oct. 13, 2016), https://www.nerdwallet.com/blog/small-business-special-report-mca/.
\371\ See Bd. of Governors of the Fed. Reserve Sys., Browsing to
Borrow: ``Mom & Pop'' Small Business Perspectives on Online Lenders,
at 9 (June 2018), https://www.federalreserve.gov/publications/files/2018-small-business-lending.pdf (Board Small Business Perspectives)
(noting that when asked ``about the toughest part of running their
businesses, most participants cited the challenges of managing their
cash flow''); id. at 5 (noting that ``[s]ome observers have argued
that the owner's loss of control over cash flow puts some small
businesses at risk''). The Bureau also notes that many MCA providers
believe that they are not subject to State usury laws.
\372\ See Opportunity Fund, Unaffordable and Unsustainable: The
New Business Lending, at 3 (May 2016), https://www.leg.state.nv.us/App/InterimCommittee/REL/Document/13129 (stating that ``[m]ore than
a quarter of the businesses in our dataset had loans outstanding
with multiple alternative lenders'').
\373\ Board Small Business Perspectives at 6.
---------------------------------------------------------------------------
As small businesses struggle with the COVID-19 pandemic, the Bureau
is seeing more reports of MCA providers employing aggressive collection
practices, such as ``pursuing legal claims against owners that freeze
their bank accounts and . . . pressing their family members, neighbors,
insurers, distributors--even their customers.'' \374\ Given the fact
that 84 percent of the credit applicants surveyed by the Federal
Reserve Banks were approved for an MCA \375\ and the fact that it
appears significantly more difficult to obtain credit as a ``high
credit risk'' applicant during the COVID-19 pandemic,\376\ the Bureau
believes that vulnerable small businesses are increasingly seeking MCAs
to support their pandemic recovery.
---------------------------------------------------------------------------
\374\ Gretchen Morgenson, FTC official: Legal `loan sharks' may
be exploiting coronavirus to squeeze small businesses, NBC News
(Apr. 3 2020), https://www.nbcnews.com/business/economy/ftc-official-legal-loan-sharks-may-be-exploiting-coronavirus-squeeze-n1173346.
\375\ See 2021 Small Business Credit Survey at 26.
\376\ Compare id. at 22 (noting that only 7 percent of ``high
credit risk'' applicants obtained all the financing sought), with
Fed. Reserve Banks, Small Business Credit Survey--2020 Report on
Employer Firms, at 12 (Apr. 7, 2020), https://www.fedsmallbusiness.org/medialibrary/FedSmallBusiness/files/2020/2020-sbcs-employer-firms-report (reporting that 23 percent of ``high
credit risk'' applicants obtained all the financing sought) (2020
Small Business Credit Survey).
---------------------------------------------------------------------------
In its SBREFA Outline, the Bureau stated that it was considering
proposing that MCAs not be a covered product under section 1071 since
including them may add additional complexity or reporting burden given
the unique structure of the transactions.\377\
---------------------------------------------------------------------------
\377\ SBREFA Outline at 22.
---------------------------------------------------------------------------
During and following the SBREFA Panel meetings, many SERs advocated
for including MCAs within the scope of the 1071 rule due, in part, to
their widespread use by small businesses in the same way as traditional
loans. In response to the SBREFA Outline, many other stakeholders,
including community groups and industry representatives, urged the
inclusion of MCAs for one or more of the following reasons:
MCAs are widely used by small businesses and have a
rapidly growing market share.
MCAs are often advertised as loans even though MCA
providers have been strongly opposed to labeling their products as
loans.
The complexity of MCAs is not a good reason to exclude
them from coverage.
Minority-owned small businesses disproportionately use
MCAs.
Excluding the largely unregulated MCA industry would
create unequal regulatory burdens for entities that may compete for the
same small business clients.
MCAs should be considered ``credit'' for the purposes of
section 1071.
Small businesses do not distinguish these products from
other forms of financing.
Some MCA providers engage in harmful practices and should
be subject to oversight.
The Bureau observes that, throughout the development of the 1071
rule, MCAs have been the focus of significant attention and a unique
source of near-consensus among a diverse array of stakeholders--almost
all of whom advocated for covering MCAs in the 1071 rule.\378\ The only
commenters that have supported the exclusion of MCAs from the 1071 rule
were MCA providers or trade associations representing MCA providers.
These stakeholders argue that MCAs do not meet the definition of
[[Page 56406]]
credit under ECOA or State law and are instead much like traditional
factoring arrangements, which are generally understood not to be
credit.
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\378\ For instance, of the substantive responses to the 2017
RFI, comments authored or co-authored by dozens of stakeholders
(including community and business groups, industry, and trade
associations) expressed explicit support for requiring the reporting
of MCAs (and additional letters expressed support for covering
``fintech'' or ``alternative online'' products more generally).
---------------------------------------------------------------------------
Potential coverage of MCAs under the 1071 rule has also drawn the
attention of government entities seeking to regulate the industry. For
example, in response to the SBREFA Outline, the California Department
of Financial Protection and Innovation submitted a comment letter
stating that ``nearly all the data points would be just as easy for an
MCA company to report as any other financial institution.'' In
addition, FTC staff submitted a comment letter in response to the
Bureau's Request for Information on the Equal Credit Opportunity Act
and Regulation B \379\ noting that the FTC has brought many actions
protecting small businesses but that detecting illegal conduct in this
space can be challenging, particularly with regard to MCAs. The FTC
comment letter urges the Bureau to remind small business lenders that
whether a particular law applies depends on actual facts and
circumstances and not solely on how one party chooses to characterize
the transaction. FTC staff also recommends the Bureau help small
businesses through data collection, collecting complaints, and
education.
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\379\ 85 FR 46600 (Aug. 3, 2020).
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Upon further consideration and in light of stakeholder feedback
provided during the SBREFA process, the Bureau is proposing to cover
MCAs as reportable under 1071. The Bureau believes that the statutory
term ``credit'' in ECOA is ambiguous as to whether it covers sales-
based financing products like MCAs, and existing Regulation B offers no
further clarity except to note in commentary that factoring, as ``a
purchase of accounts receivable,'' is not covered by ECOA or Regulation
B.\380\ Based on its review of typical MCA arrangements and its
expertise with respect to the nature of credit transactions, the Bureau
believes that the better reading of the term ``credit'' is that it
encompasses MCAs and other types of sales-based financing. As noted
above, ECOA defines ``credit'' to mean ``the right granted by a
creditor to a debtor to defer payment of debt or to incur debts and
defer its payment or to purchase property or services and defer payment
therefor.'' The Bureau is thus not proposing to specifically define
MCAs or other sales-based financing in the 1071 rule because the Bureau
believes these products are covered by the proposed definition of
``credit'' in Sec. 1002.102(i). Nor does the Bureau believe that MCAs
should be excluded from the rule as a species of factoring (as defined
in proposed comment 104(a)-2), because MCAs are not based on accounts
receivable from ``goods that the recipient has supplied or services
that the recipient has rendered.''
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\380\ Existing comment 9(a)(3)-3.
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As an initial matter, the Bureau believes that MCAs do not
constitute factoring within the meaning of the existing commentary to
Regulation B or the definition in proposed comment 104(b)-1, discussed
in greater detail below. In factoring transactions, entities receiving
financing sell their legal right to payment from a third party for
goods supplied or services rendered, and that right exists at the time
of the transaction itself; the provider of funds seeks payment directly
from the third party, and the transaction between the recipient and the
provider of funds is complete at the time of the sale. In other words,
the recipient of the financing has no remaining payment obligation,
meaning that no payment is deferred. In contrast, at the time of the
advance in an MCA, the recipient of the financing has no existing
rights to payment that it can transfer. The transaction thus
constitutes only a promise by the ``seller'' to transfer funds to the
``buyer'' once they materialize at a later date. The Bureau believes
that the ECOA definition of credit, by referring to the right to
``defer'' payments, necessarily invokes this temporal consideration.
Furthermore, the Bureau interprets ECOA's definition of credit as
making dispositive whether one party has granted another the right to
repay at some time subsequent to the initial transaction, without
consideration of factors such as the existence of recourse or analysis
of who bears the risk of loss. MCA providers grant such a right: They
advance funds to small businesses and grant them the right to defer
repayment by allowing them to repay over time. Additionally, as a
practical matter, the Bureau understands that MCAs are underwritten and
function like a typical loan (i.e., underwriting of the recipient of
the funds; repayment that functionally comes from the recipient's own
accounts rather than from a third party; repayment of the advance
itself plus additional amounts akin to interest; and, at least for some
subset of MCAs, repayment in regular intervals over a predictable
period of time).
Finally, the Bureau believes that the inclusion of MCAs in the
Bureau's 1071 rule is important to fulfilling both the fair lending and
the business and community development purposes of section 1071.\381\
The Bureau also believes that including MCAs would create a more level
playing field across financial institutions that provide cash flow
financing to small businesses as well as create a data set that better
reflects demand for such financing by the smallest and most vulnerable
businesses.
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\381\ ECOA section 704B(a).
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The Bureau seeks comment on its proposed approach to covered credit
transactions, and in particular, on whether it should define MCAs and/
or other sales-based financing transactions, and if so, how.
Agricultural-purpose credit. In the SBREFA Outline, the Bureau did
not expressly address credit used for agricultural purposes, although
such credit is generally covered by the broad definition of credit
under ECOA and agricultural businesses are included in section 1071's
definition of small business.\382\ Based on questions from SERs about
the Bureau's intended approach, however, the SBREFA Panel recommended
that the Bureau address in the proposed rule whether it intends to
cover agricultural loans in the eventual 1071 rule.\383\ Moreover, in a
July 2019 report, the U.S. Government Accountability Office (GAO)
discussed its finding that information on the amount and types of
agricultural credit to socially disadvantaged farmers and ranchers
(SDFRs) \384\ is limited, and suggested that the 1071 rulemaking may be
a way to engage in ``additional data collection and reporting for
nonmortgage loans.'' \385\
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\382\ ECOA section 704B(h)(2) (defining a small business as
having the same meaning as the term ``small business concern'' in
section 3 of the Small Business Act (15 U.S.C. 632)''). Section
704B(h)(2) defines small business by reference to the Small Business
Act definition of a small business concern, which includes
independently owned and operated ``enterprises that are engaged in
the business of production of food and fiber, ranching and raising
of livestock, aquaculture, and all other farming and agricultural
related industries.'' 15 U.S.C. 632(a)(1).
\383\ SBREFA Panel Report at 44.
\384\ The U.S. Department of Agriculture (USDA) defines SDFRs as
members of certain racial and ethnic minority groups and women.
According to the GAO, USDA regulations further define SDFRs as
belonging to the following groups: American Indians or Alaskan
Natives, Asians, Blacks or African Americans, Native Hawaiians or
other Pacific Islanders, Hispanics, and women. See Gov't
Accountability Off., Agricultural Lending: Information on Credit and
Outreach to Socially Disadvantaged Farmers and Ranchers is Limited,
at 2 (2019), https://www.gao.gov/assets/710/700218.pdf (GAO Report).
The Bureau notes that those five categories align with the Bureau's
proposed categories used in the definition of ``minority
individual'' in proposed Sec. 1002.102(l).
\385\ GAO Report at 16.
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[[Page 56407]]
According to the 2017 Census of Agriculture,\386\ there are about
3.4 million farmers and ranchers (``producers'') working on 2 million
farming and ranching operations (``farms'') in the United States. The
U.S. Department of Agriculture (USDA) Economic Research Service found
that family farms (where the majority of the business is owned by the
operator and individuals related to the operator) of various types
together accounted for nearly 98 percent of U.S. farms in 2019.\387\
Small family farms (less than $350,000 in gross cash farm income
(GCFI)) accounted for 90 percent of all U.S. farms and large-scale
family farms ($1 million or more in GCFI) make up about 3 percent of
farms but 44 percent of the value of production.\388\
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\386\ The Census of Agriculture is conducted by the USDA every
five years and provides a detailed picture of farms and the people
who operate them. See generally U.S. Dep't of Agric., 2017 Census of
Agriculture (Apr. 2019), https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_US/usv1.pdf.
\387\ Econ. Research Serv., U.S. Dep't of Agric., Farming and
Farm Income (updated May 10, 2021), https://www.ers.usda.gov/data-products/ag-and-food-statistics-charting-the-essentials/farming-and-farm-income/.
\388\ Id.
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According to the 2019 Annual Report of the Farm Credit
Administration, most agricultural lending (approximately 83 percent) is
done by either commercial banks or the Farm Credit System (FCS), a
network of government-sponsored entities (GSEs) regulated by the Farm
Credit Administration, an independent government agency.\389\ The
USDA's Farm Service Agency accounts for a small share (3 percent) of
agricultural credit through direct loans and guarantees of loans made
by private lenders.\390\
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\389\ Farm Credit Admin., 2019 Annual Report of the Farm Credit
Administration, at 18 (2019), https://www.fca.gov/template-fca/about/2019AnnualReport.pdf.
\390\ Id.
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The GAO found that, using 2015-2017 USDA survey data, SDFRs
represented an estimated 17 percent of primary producers in the survey,
but accounted for only an estimated 8 percent of total outstanding
agricultural debt.\391\ Loans to purchase agricultural real estate
accounted for most of SDFRs' outstanding debt (67 percent).\392\ Farms
with minority or women primary producers \393\ are, on average, smaller
and bring in less revenue than farms with a non-SDFR primary producer
(i.e., a white male)--while SDFRs represented 30 percent of all farms,
they operated 21 percent of total farm land and accounted for 13
percent of the market value of agricultural products sold in 2017.\394\
---------------------------------------------------------------------------
\391\ GAO Report at 16. ``The primary producer is the individual
on a farm who is responsible for the most decisions. Each farm has
only one primary producer.'' Id. at 5.
\392\ Id. at 2.
\393\ ``Producers'' are individuals involved in farm decision-
making. A single farm may have more than one producer.
\394\ See GAO Report at 7.
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The share of minority representation in farming, particularly that
of Black farmers, has declined sharply over the last 100 years.\395\
The number of female producers has increased significantly over the
last 100 years but remains relatively small compared to male farm
producers.\396\ Based on the disposition of numerous lawsuits alleging
discrimination against minority farmers,\397\ the Bureau believes that
credit discrimination may play a role in this decline. The GAO cites
SDFR advocacy groups, which have said some SDFRs face actual or
perceived unfair treatment in lending or may be dissuaded from applying
for credit because of past instances of alleged discrimination.\398\ In
addition, the GAO cites SDFR advocacy groups, lending industry
representatives, and Federal officials in stating that SDFRs are more
likely to operate smaller, lower-revenue farms, have weaker credit
histories, or lack clear title to their agricultural land, which can
make it difficult for them to qualify for loans.\399\ The Bureau
understands that determining the ``creditworthiness'' of a farmer is
often a judgmental process in which lending decisions are de-
centralized and involve weighing many discretionary factors, the Bureau
believes that there are heightened fair lending risks in agricultural
lending.
---------------------------------------------------------------------------
\395\ In 1910, approximately 893,370 Black farmers operated
approximately 41.1 million acres of farmland, representing
approximately 14 percent of farmers. U.S. Census Bureau, 1910
Census: Volume 5 (Agriculture), Statistics of Farms, Classified by
Race, Nativity, and Sex of Farmers, at 298 (1910), https://www2.census.gov/library/publications/decennial/1920/volume-5/06229676v5ch04.pdf. In 2017, of the country's 3.4 million total
producers, only 45,508 of them (1.3 percent) are Black and they farm
on only 4.1 million acres (0.5 percent of total farmland); by
comparison, 95 percent of U.S. producers are white and own 94
percent of farmland. U.S. Dep't of Agric., 2017 Census of
Agriculture, at 62, 72 (Apr. 2019), https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_US/usv1.pdf.
\396\ In 1910, women farmers represented approximately 4 percent
of farm workers. See U.S. Census Bureau, 1910 Census: Volume 5
(Agriculture), Statistics of Farms, Classified by Race, Nativity,
and Sex of Farmers, at 340 (1910), https://www2.census.gov/library/publications/decennial/1920/volume-5/06229676v5ch04.pdf. As of 2017,
women account for approximately 36 percent of farmers. See U.S.
Dep't of Agric., 2017 Census of Agriculture, at 62 (Apr. 2019),
https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_US/usv1.pdf.
\397\ See, e.g., Order, In re Black Farmers Discrimination
Litig., No. 08-mc-0511 (D.D.C. filed Aug. 8, 2008), https://blackfarmercase.com/Documents/2008.08.08%20-%20PLF%20Consolidation%20Order_0.pdf; Pigford v. Glickman, 206 F.3d
1212 (D.C. Cir. 2000). See also Garcia v. Vilsack, 563 F.3d 519
(D.C. Cir. 2009); Love v. Connor, 525 F. Supp. 2d 155 (D.D.C. 2007);
Keepseagle v. Veneman, No. 99-CIV-03119, 2001 U.S. Dist. LEXIS 25220
(D.D.C. Dec. 12, 2001).
\398\ GAO Report at introductory highlights. Additionally, the
GAO cited these sources as noting that some SDFRs may not be fully
aware of credit options and lending requirements, especially if they
are recent immigrants or new to agriculture. Id.
\399\ Id.
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In light of the above, the Bureau believes that covering
agricultural credit in its 1071 rule is important for both of section
1071's statutory purposes, and is not proposing to define covered
credit in a way that would exclude agricultural credit from the rule.
The Bureau seeks comment on the potential costs and complexities
associated with covering such credit.
HMDA-reportable transactions. By adopting Regulation C's definition
of dwelling and its commentary regarding investment properties, the
Bureau seeks to ensure consistency and minimize compliance burdens for
financial institutions that must also report credit transactions
covered by HMDA (that is, HMDA-reportable transactions). Based on
Bureau calculations using the 2019 HMDA data, the Bureau found that
close to 2,000 lenders and around 530,000 applications indicated a
``business or commercial purpose'' and around 500,000 applications were
used for an ``investment'' (as defined by the occupancy code) purpose.
Of those applications, around 50,000 were for 5+ unit properties. The
overall number of applications the Bureau expects to be reported
annually under the proposed rule is around 26 million. Thus, the Bureau
anticipates a relatively small but not insignificant overlap regarding
real estate investment loans between HMDA and 1071.
The Bureau has considered excluding all transactions that were also
reportable under HMDA, but believes such an exclusion would add
complexity to data analysis. The Bureau understands that requiring
lenders to find and delete from databases that supply their 1071
submission only those transactions that also appear in HMDA may require
a separate scrub of the data and create additional compliance burden,
as well as compliance risk if HMDA-reportable transactions are not
deleted from a 1071 submission. For example, if the Bureau were to
exclude HMDA reportable transactions from 1071 and a small business
wants to purchase a 5+ dwelling unit property (that the financial
institution would need to know is HMDA reportable), the
[[Page 56408]]
financial institution would have to make sure it is not collecting
protected demographic information on principal owners, even though that
information must be collected for every other type of loan that same
business might apply for. The Bureau also believes that it may not be
possible to identify loans in the HMDA data that, but for this
exclusion, would be reported under 1071 because the financial
institution would need to know which HMDA applications are for small
businesses versus large businesses. Moreover, excluding HMDA-reportable
applications could mean that a financial institution that is below the
HMDA reporting threshold would not report these loans at all.
Further, in addition to not being able to distinguish which
applications are from small and not large businesses, the Bureau
believes that excluding all transactions that were also reportable
under HMDA may be at odds with the statutory purposes of section 1071.
The following information will not be collected for applications only
reported under HMDA: (1) The principal owner's race, sex, or ethnicity
where the applicant is not a natural person; (2) minority-owned and
women-owned business status; (3) gross annual revenue; and (4) other
1071 data points such as pricing, NAICS code, and number of workers.
The Bureau is concerned that not collecting this information would run
contrary to section 1071's fair lending and business and community
development purposes.
For applications that would be reported under both HMDA and 1071
(generally, business credit secured by dwellings, with the exception of
credit secured by 1-4 individual dwelling units that the applicant or
one or more of the applicant's principal owners does not, or will not,
occupy), the Bureau seeks comment on whether it should require such
applications to be flagged as such when reported under subpart B. The
Bureau believes that for data integrity and analysis purposes, it may
be helpful to know if a loan is in both datasets and a dual reporting
flag may help ensure any data analysis is not double-counting certain
applications.
104(b) Excluded Transactions
Proposed Sec. 1002.104(b) would provide that the requirements of
subpart B do not apply to trade credit, public utilities credit,
securities credit, and incidental credit. Proposed comments 104(b)-1
and -2 would make clear that the term covered credit transaction also
does not cover factoring and leases. The proposed treatment of each of
these types of transactions is discussed in detail below. Proposed
comments 104(b)-3 and -4 would clarify that the term covered credit
transaction does not include consumer-designated credit or credit
secured by certain investment properties because, as discussed in
detail below, such transactions are not business credit. The Bureau
also discusses its proposed treatment of extensions of credit made to
governments or governmental subdivisions, agencies, or
instrumentalities and certain purchases of covered credit transactions.
Finally, the Bureau discusses its proposed exclusions for trade credit,
public utilities credit, securities credit, and incidental credit.
The Bureau seeks comment on whether it should permit financial
institutions to voluntarily collect applicants' protected demographic
information (that is, the applicant's minority-owned business status
and women-owned business status, and the ethnicity, race, and sex of
the applicant's principal owners) for applications for some or all of
the types of transactions that the Bureau is proposing not to cover,
and to report those applications to the Bureau pursuant to proposed
Sec. 1002.109.
Factoring. In traditional factoring arrangements, a business in
need of financing sells all or a portion of its accounts receivable
(existing but unpaid invoices) to another business, known as a
``factor.'' The factor then receives payments on the accounts
receivable from the business's debtors or customers directly, and not
from the business that had entered into the factoring transaction. If
the business has sold only a portion of its invoices, then once the
account debtors pay their invoices to the factor, the factor remits the
remainder of the balance to the business after deducting a fee
(specifically, a discount applied to the sold accounts receivable
usually stated on a percentage basis).
The Bureau understands that like the market for MCAs, the factoring
market is generally dominated by nondepository lenders not subject to
Federal safety and soundness supervision or reporting requirements. The
Bureau also understands that generally, factors may not be required to
obtain State lending licenses. As a result, information on factoring
volume and practices is limited. The Bureau notes, however, that the
California and New York disclosure laws mentioned above cover
factoring.\400\
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\400\ See Cal. S.B. 1235 (Sept. 30, 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235; N.Y. S.B. S5470B (July
23, 2020), https://legislation.nysenate.gov/pdf/bills/2019/S5470B.
---------------------------------------------------------------------------
The Bureau's 2017 White Paper estimated the factoring market as
constituting around 8 percent of the number of accounts used by small
businesses in the U.S. in 2014.\401\ Based on more recent evidence, the
Bureau believes the industry has not significantly grown. For example,
the 2017 and 2020 Federal Reserve Banks' surveys of firms with 1-499
employees (``employer firms'') found that 4 percent of such businesses
applied for and regularly used factoring.\402\ In the 2020 Small
Business Credit Survey of Employer Firms, this figure dropped to 3
percent of employer firms.\403\
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\401\ White Paper at 21 fig. 2, 22 fig. 3.
\402\ 2020 Small Business Credit Survey; 2017 Small Business
Credit Survey.
\403\ See 2021 Small Business Credit Survey at 24.
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In the SBREFA Outline, the Bureau stated that it was considering
excluding factoring from coverage under the 1071 rule.\404\ As a
general matter, the Bureau received fewer comments from stakeholders
regarding factoring compared to some other products, though some SERs
did advocate for including factoring. Moreover, several stakeholders
(representing both community group and industry perspectives) argued
that factoring should be covered under section 1071: First, factoring
is widely used by small businesses, particularly very small businesses,
who are more likely to face heightened challenges accessing business
credit; second, both New York and California have passed disclosure
laws covering factoring and exclusion would potentially lead to a
regulatory advantage for lenders offering higher-cost, less-transparent
credit products.
---------------------------------------------------------------------------
\404\ SBREFA Outline at 22.
---------------------------------------------------------------------------
A community group commenter stated that the Bureau should require
the reporting of these agreements regardless of whether there is a
credit agreement incident to the factoring agreement under Regulation B
(this concept is discussed in more detail below). A few commenters that
supported the proposed exclusion under consideration of factoring did
so on the basis that factoring is not ``credit'' under ECOA. Commenters
did not raise fair lending concerns or concerns about predatory
practices related to factoring.
An existing comment in Regulation B (comment 9(a)(3)-3) provides
that ``[f]actoring refers to a purchase of accounts receivable, and
thus is not subject to [ECOA or Regulation B].'' Existing Regulation B
does not offer a definition for ``accounts receivable.'' However, if
there is a ``credit extension incident to the factoring arrangement,''
[[Page 56409]]
Regulation B's notification rules \405\ apply, as do other relevant
sections of ECOA and Regulation B.\406\ The Bureau understands that the
Board's treatment of credit extensions incident to factoring
arrangements--as a type of credit but one entitled to exemptions from
certain requirements--was motivated by its reading of congressional
intent related to the Women's Business Ownership Act of 1988,\407\
which amended ECOA to extend notification and record retention
requirements to business credit. In its proposed rule on this issue,
the Board explained that it was treating credit extensions incident to
factoring arrangements differently from other forms of business credit
based on ``evidence of congressional intent that the amendments should
not apply to . . . certain types of business credit (such as
applications for trade credit and credit incident to factoring
arrangements).'' \408\ Based on the Bureau's work to date and
conversations with industry stakeholders, the Bureau understands that
purported factoring arrangements may take various forms, including
longer-term or revolving transactions that appear to have credit or
credit-like features, and the Bureau believes that a subset of such
arrangements may constitute credit incident to the factoring
arrangement, particularly if they involve goods or services that have
not been supplied or rendered.
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\405\ See existing Sec. 1002.9(a)(3)(ii) (requiring a creditor
to notify an applicant, within a reasonable time (as opposed to
within 30 days for credit sought by consumers and businesses with
gross revenues of $1 million or less in preceding fiscal year),
orally or in writing, of the action taken).
\406\ Comment 9(a)(3)-3.
\407\ Public Law 100-533, 102 Stat. 2689 (1988).
\408\ 54 FR 29734, 29736 (July 14, 1989); see also 134 Cong.
Rec. H9282-89 (daily ed. Oct 3, 1988) (explaining that the committee
recognizes that some forms of commercial loan transactions and
extensions of credit may ``require specialized rules,'' and that,
for example, the committee believes that loans and credit extensions
incidental to trade credit, factoring arrangements, and
sophisticated asset-based loans should continue to be exempted from
the record retention and automatic notification requirements).
---------------------------------------------------------------------------
The Bureau is proposing to not cover factoring under the 1071 rule.
Modeled on the definitions set forth in the New York and California
commercial financing disclosure laws,\409\ proposed comment 104(b)-1
would provide that factoring is an accounts receivable purchase
transaction between businesses that includes an agreement to purchase,
transfer, or sell a legally enforceable claim for payment for goods
that the recipient has supplied or services that the recipient has
rendered but for which payment has not yet been made. Proposed comment
104(b)-1 would also clarify that an extension of business credit
incident to a factoring arrangement is a covered credit transaction and
that a financial institution shall report such a transaction as an
``Other sales-based financing transaction'' under proposed Sec.
1002.107(a)(5).
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\409\ See Cal. S.B. 1235 (Sept. 30, 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235; N.Y. S.B. S5470B (July
23, 2020), https://legislation.nysenate.gov/pdf/bills/2019/S5470B.
---------------------------------------------------------------------------
The Bureau believes that, as discussed with respect to MCAs above,
a traditional factoring agreement, as described in proposed comment
104(b)-1, is not credit under ECOA because the provider of the funds
does not grant the recipient the right to defer payment. Instead, the
provider of funds seeks payment directly from a third party, and the
transaction between the recipient and the provider of funds is complete
at the time of the sale. The Bureau also believes that treating
factoring as credit under the 1071 rule could create inconsistencies
and compliance concerns related to existing Regulation B, which
currently states that factoring (as a purchase of accounts receivable)
is not subject to ECOA. Moreover, while a few commenters did suggest
covering factoring as part of a broader effort to adequately capture
small businesses' experiences with obtaining financing, the Bureau
notes that commenters did not raise particular fair lending concerns
related to factoring. The Bureau is proposing a more detailed
description of what constitutes factoring in proposed comment 104(b)-1
because it is concerned that the existing Regulation B commentary
regarding factoring may not provide sufficient clarity for purposes of
collecting and reporting data under section 1071 as it does not offer a
definition for ``accounts receivable.'' Proposed comment 104(b)-1 would
state that it is not intended to repeal, abrogate, annul, impair, or
interfere with any existing interpretations, orders, agreements,
ordinances, rules, or regulations adopted or issued pursuant to
existing comment 9(a)(3)-3.
The Bureau seeks comment on its proposed approach to factoring. The
Bureau also seeks comment on how the subset of purported factoring
arrangements that may in fact be credit (i.e., those that are revolving
in nature or that cover anticipated receivables) should be reported
under the 1071 rule. Specifically, the Bureau seeks comment on whether
such arrangements should be reported as credit extensions incident to
factoring (and thus reported ``other sales-based financing'') or as
MCAs.
Leases. A leasing transaction generally refers to an agreement in
which a lessor transfers the right of possession and use of a good or
asset to a lessee in return for consideration.\410\ Under a ``true'' or
``operating'' lease, a lessee (the user) makes regular payments to a
lessor (the owner) in exchange for the right to use an asset (such as
equipment, buildings, motor vehicles, etc.).
---------------------------------------------------------------------------
\410\ See UCC Art. 2A-103(1)(j) (defining a ``lease'').
---------------------------------------------------------------------------
Leases are not expressly addressed in ECOA or Regulation B. The
Bureau has never opined on whether ECOA and Regulation B apply to
leases, and the Board made only one statement about the applicability
of ECOA and Regulation B to leases, in the preamble to a final rule
under ECOA. In that 1985 statement, the Board responded to the Ninth
Circuit's opinion in Brothers v. First Leasing,\411\ which concluded
that consumer leasing falls under ECOA.\412\ The Board stated that it
believes that ``Congress did not intend the ECOA, which on its face
applies only to credit transactions, to cover lease transactions unless
the transaction results in a `credit sale' as defined in the Truth in
Lending Act and Regulation Z.'' \413\ The Board then noted that it
would continue to monitor leasing transactions and take further action
as appropriate.\414\ The Bureau is unaware of any such further actions
taken by the Board.
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\411\ 724 F.2d 789 (9th Cir. 1984).
\412\ 50 FR 48018, 48020 (Nov. 20, 1985).
\413\ Id.
\414\ Id. Since then, courts have gone both ways on the issue.
Compare Ferguson v. Park City Mobile Homes, No. 89-CIV-1909, 1989 WL
111916, at *5 (N.D. Ill. Sept. 18, 1989) (leases are ``credit''
under ECOA), with Laramore v. Ritchie Realty Mgmt. Co., 397 F.3d
544, 547 (7th Cir. 2005) (leases are not ``credit'' under ECOA).
---------------------------------------------------------------------------
The Bureau understands that many financial institutions (such as
equipment finance companies) offer both loans and leases to their small
business customers and some financial institutions comply with
Regulation B for their leases as well as their loans as a matter of
course. Lessor stakeholders have told Bureau staff that from their
perspective, as well as that of their customers, loans and leases are
indistinguishable. The Bureau understands that this is particularly
true of ``financial'' or ``capital'' leases, as defined under article
2A of the UCC,\415\ which closely resemble (and according to some
stakeholders, in some cases are indistinguishable from) term loans. The
Bureau understands that financial leases
[[Page 56410]]
are treated like assets on buyers' balance sheets, whereas operating
leases are treated as expenses that remain off the balance sheet. The
Bureau understands that the ownership characteristics of a financial
lease also resemble those of a loan--the financial lease term is the
substantial economic life of the asset (as evidenced by a one dollar
purchase option at the end of the lease term and/or lack of residual
financial obligations at the end of the lease term) and the lessee
claims both interest and depreciation on their taxes. The Bureau
understands that for some financial institutions, reporting loans but
not leases may require added cost and effort to separate them in
databases. The Bureau also understands that because depository
institutions currently report both loan and lease activity to other
regulators in their Call Reports, they may prefer to maintain a
consistent approach for section 1071.
---------------------------------------------------------------------------
\415\ The Bureau notes that the UCC separately defines a
``consumer lease.'' See UCC 2A-103(1)(e). The Bureau's analysis
regarding leases does not apply to leases primarily for a personal,
family, or household purpose.
---------------------------------------------------------------------------
In its SBREFA Outline, the Bureau stated that it was considering
proposing that leases not be a covered product under section 1071
unless the product is a credit sale.\416\ The Bureau stated that for
purposes of section 1071, it was considering proposing a definition of
``credit sale'' similar to the Regulation Z definition of that term as
a transaction in which the lessor is a creditor and the lessee (i)
agrees to pay as compensation for use a sum substantially equivalent
to, or in excess of, the total value of the property and services
involved; and (ii) will become (or has the option to become), for no
additional consideration or for nominal consideration, the owner of the
property upon compliance with the agreement.\417\
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\416\ SBREFA Outline at 21.
\417\ See Regulation Z Sec. 1026.2(16).
---------------------------------------------------------------------------
In response to the SBREFA Outline, several stakeholders argued that
leases should be covered in an eventual 1071 rule, one noting that
leasing products make up 13 percent of the small business financing
market share in dollar terms. A few other stakeholders stated that
leases should not be covered. For example, a trade association stated
that (1) given the unique structure of the transactions, including
leases would add unnecessary, additional complexity and reporting
burdens, and that (2) unlike credit, in a lease, the lessee does not
have an ownership interest in the leased property and that this
difference could lead to data integrity issues.
The Bureau is proposing to not cover leases under the 1071 rule.
Drawing from the UCC definition of ``lease,'' \418\ which was adopted
by the New York and California commercial financing disclosure
laws,\419\ proposed comment 104(b)-2 would provide that the term
covered credit transaction does not cover leases, and that a lease, for
purposes of proposed subpart B, is a transfer from one business to
another of the right to possession and use of goods for a term, and for
primarily business or commercial (including agricultural) purposes, in
return for consideration. It would further state that a lease does not
include a sale, including a sale on approval or a sale or return, or a
transaction resulting in the retention or creation of a security
interest.
---------------------------------------------------------------------------
\418\ UCC 2A-103(1)(j) (`` `Lease' means a transfer of the right
to possession and use of goods for a term in return for
consideration, but a sale, including a sale on approval or a sale or
return, or retention or creation of a security interest is not a
lease. Unless the context clearly indicates otherwise, the term
includes a sublease.'').
\419\ See Cal. S.B. 1235 (Sept. 30, 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235; N.Y. S.B. S5470B (July
23, 2020), https://legislation.nysenate.gov/pdf/bills/2019/S5470B.
---------------------------------------------------------------------------
The Bureau considered several other approaches to covering leasing,
including referring to Regulation Z's definition of ``credit sale.''
The Bureau understands that financial institutions focused on offering
leases and loans for business purposes are generally not familiar with
the Regulation Z definition of ``credit sale,'' given that Regulation Z
applies only to consumer credit.\420\ The Bureau thus believes that
referring to the Regulation Z definition of ``credit sale'' could
create confusion and would not align with current industry practices.
The Bureau understands that such financial institutions offering leases
primarily for business or commercial (including agricultural) purposes
are more accustomed to applying the UCC definitions of ``lease'' \421\
and ``finance lease,'' \422\ and/or the generally accepted accounting
principles (GAAP) rules issued by the Financial Accounting Standards
Board (FASB) governing ``operating,'' ``capital,'' and ``finance''
leases.\423\ The Bureau believes that drawing from the UCC definition
of lease will lead to more consistency with financial institutions'
current practices. Nearly all U.S. jurisdictions have adopted Article
2A of the UCC,\424\ and the Bureau understands that virtually every
form of lease used by major leasing companies provides that it is
governed by the laws of one of the jurisdictions that has adopted
Article 2A.
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\420\ See Regulation Z Sec. 1026.2(a)(12) (defining ``consumer
credit'' as ``credit offered or extended to a consumer primarily for
personal, family, or household purposes'') and 1026.3(a)(1)
(excluding extensions of credit ``primarily for a business,
commercial or agricultural purpose'').
\421\ Id.
\422\ UCC 2A-103(1)(g).
\423\ See Fin. Acct. Standards Bd., Accounting Standards Update:
Leases (Topic 842), No. 2016-02 (Feb. 2016), https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176167901010&acceptedDisclaimer=true.
\424\ See Ala. Code 7-2A-101 et seq.; Alaska Stat. 45.12.101 et
seq.; Ariz. Rev. Stat. 47-2A101 et seq.; Ark. Code Ann. 4-2A-101 et
seq.; Cal. Com. Code 10101 et seq.; Choctaw Tribal Code 26-2A-101 et
seq.; Colo. Rev. Stat. 4-2.5-101 et seq.; Conn. Gen. Stat. 42a-2A-
101 et seq.; DC Code 28:2A-101 et seq.; Del. Code Ann. tit. 6, 2A-
101 et seq.; Fla. Stat. 680.1011 et seq.; Ga. Code Ann. 11-2A-101 et
seq.; Haw. Rev. Stat. 490:2A-101 et seq.; Idaho Code 28-12-101 et
seq.; 810 Ill. Comp. Stat. 5/2A-101 et seq.; Ind. Code 26-1-2.1-101
et seq.; Iowa Code 554.13101 et seq.; Kan. Stat. Ann. 84-2a-101 et
seq.; Ky. Rev. Stat. Ann. 355.2A-101 et seq.; Mass. Gen. Laws ch.
106, 2A-101 et seq.; Md. Code Ann., Com. Law 2A-101 et seq.; Me.
Stat. tit. 11, 2-1101 et seq.; Mich. Comp. Laws 440.2801 et seq.;
Minn. Stat. 336.2A-101 et seq.; Miss. Code Ann. 75-2A-101 et seq.;
Mo. Rev. Stat. 400.2A-101 et seq.; Mont. Code Ann. 30-2A-101 et
seq.; N.C. Gen. Stat. 25-2A-101 et seq.; N.D. Cent. Code 41-02.1-01
et seq.; N.H. Rev. Stat. Ann. 382-A:2A-101 et seq.; N.J. Stat. Ann.
12A:2A-101 et seq.; N.M. Stat. Ann. 55-2A-101 et seq.; N.Y. UCC Law
2-A-101 et seq.; Neb. Rev. Stat. UCC 2A-101 et seq.; Nev. Rev. Stat.
104A.2101 et seq.; Ohio Rev. Code Ann. 1310.01 et seq.; Okla. Stat.
tit. 12A, 2A-101 et seq.; Or. Rev. Stat. 72A.1010 et seq.; Pa. Cons.
Stat. 2A101 et seq.; R.I. Gen. Laws 6A-2.1-101 et seq.; S.C. Code
Ann. 36-2A-101 et seq.; S.D. Codified Laws 57A-2A-101 et seq.; Tenn.
Code Ann. 47-2A-101 et seq.; Tex. Bus. & Com. Code Ann. 2A.101 et
seq.; Utah Code Ann. 70A-2a-101 et seq.; V.I. Code Ann. tit. 11A,
2A-101 et seq.; Va. Code Ann. 8.2A-101 et seq.; Vt. Stat. Ann. tit.
9A, 2A-101 et seq.; W. Va. Code 46-2A-101 et seq.; Wash. Rev. Code
62A.2A-101 et seq.; Wisc. Stat. 411.101 et seq.; Wyo. Stat. Ann.
34.1-2.A-101 et seq.
---------------------------------------------------------------------------
Based on its review of business-purpose leases and its expertise
with respect to the meaning of ``credit,'' the Bureau believes that the
better reading of the term ``credit'' is that it does not encompass
such leases. In the business-purpose context, the Bureau understands
that in a true lease, the lessor retains title and will receive the
property back after the conclusion of the lease term, without any
expectation by either party that, for example, ownership of the
property will be transferred or that payments made pursuant to the
lease agreement constitute anything other than payments in exchange for
the temporary use of the property. As a result, the Bureau does not
believe that in the business-purpose context a true lease transaction
involves the right to incur debt and defer its payment, defer payment
of a debt, or defer payment for goods or services.
The Bureau is aware that there are other types of leases with
characteristics that bear some resemblance to forms of credit like
credit sales, such as a contemplated transfer of ownership at the end
of the lease term. The Bureau is not proposing at this time to parse
whether different types of leases might
[[Page 56411]]
constitute ``credit'' but notes that proposed comment 104(b)-2's
definition of lease would not include a sale, including a sale on
approval or a sale or return, or a transaction resulting in the
retention or creation of a security interest. The Bureau seeks comment
on whether there are types of leases, or leases with certain
characteristics, that should be excluded from proposed comment 104(b)-2
and thus treated as reportable under 1071. Based on the practical
difficulty cited by some stakeholders of distinguishing leases from
loans, the Bureau also seeks comment on whether financial institutions
should be permitted to voluntarily report lease transactions.
Consumer-designated credit. In the SBREFA Outline, the Bureau
stated that it was considering proposing that the 1071 rule not cover
products designated by the creditor as consumer purpose products.\425\
In response, several SERs asserted that consumer-designated credit is
often an important source of financing for small businesses
(particularly for women-owned and minority-owned small businesses, and
sole proprietorships), and ideally should be included within the scope
of the eventual 1071 rule. One SER stated that consumer-designated
credit used for business purposes should be included in an eventual
1071 rule if trends show increasing usage. However, these SERs
acknowledged the potential complexity and burden of trying to identify
the intended use of consumer-designated credit, such as whether a
consumer's home equity line of credit will be used for a business
purpose.
---------------------------------------------------------------------------
\425\ SBREFA Outline at 20-21.
---------------------------------------------------------------------------
Several SERs supported excluding consumer-designated credit. One
SER asserted that including consumer credit would not support the
purposes of section 1071. Another SER stated that including consumer-
designated credit used for business purposes would double their cost of
complying with an eventual 1071 rule. The SBREFA Panel recommended that
the Bureau continue to explore the potential costs to financial
institutions associated with reporting consumer-designated credit used
for business purposes in the 1071 rule as well as the implications of
including such credit in a small business lending data set.\426\ The
Panel also recommended that the Bureau seek comment in the proposed
rule on how best to define consumer-designated credit in the event the
Bureau determines that an exclusion for such products is
appropriate.\427\
---------------------------------------------------------------------------
\426\ SBREFA Panel Report at 44.
\427\ Id. at 45.
---------------------------------------------------------------------------
Many non-SER stakeholders supported the proposed exclusion under
consideration of consumer-designated credit from section 1071 for one
or more of the following reasons: First, that financial institutions
should be able to rely on the applicant's stated purpose for the use of
funds and institutions would not know, nor should they be expected to
know, if a borrower instead starts or invests in a business using the
proceeds of a personal loan. Second, that this approach would greatly
simplify the regulatory effort necessary to define and identify
business uses of consumer products. Third, that inclusion of consumer
credit could vastly expand the scope of the data collected beyond
usefulness and also greatly increase the costs of compliance.
One credit union trade association stakeholder stated that the
Bureau should adopt a clearer definition of consumer-designated credit
and that it should clarify that it will not challenge a credit union's
judgment when designating a consumer or business purpose for credit.
The Bureau is proposing that the 1071 rule not cover products
designated by the creditor as consumer purpose products (consumer-
designated credit). Proposed comment 104(b)-3 would make clear that the
term covered credit transaction does not include consumer-designated
credit used for business purposes, because such transactions are not
business credit. Proposed comment 104(b)-3 would provide that a
transaction qualifies as consumer-designated credit if the financial
institution offers or extends the credit primarily for personal,
family, or household purposes. For example, an open-end credit account
used for both personal and business purposes is not business credit for
the purpose of proposed subpart B unless the financial institution
designated or intended for the primary purpose of the account to be
business-related.
The Bureau understands that some small business owners may use
consumer-designated credit in order to finance their small businesses--
such as taking out a home equity line of credit or charging business
expenses on their personal credit cards. Nonetheless, the Bureau
believes it is appropriate to interpret section 1071 as not applying to
this type of credit. Most notably, ECOA section 704B(b) directs
financial institutions to collect data in the case of an application
``for credit for women-owned, minority-owned, or small business''
(emphasis added). The statute thus applies only to applications for
credit for a business; at the time of an application for consumer-
designated credit, however, the application is not for a business.
Several policy reasons also support this approach. First, the Bureau is
concerned about financial institutions' ability to consistently
identify when consumer-designated credit is being used for business
purposes. Inconsistent reporting across financial institutions could
lead to data quality concerns. Credit sought by consumers for both
personal and business purposes could be particularly difficult to
separate into reportable and non-reportable portions. The Bureau
believes the proposal to define business credit to exclude consumer-
designated credit will simplify compliance by obviating the need for
financial institutions to identify and distinguish business uses of
consumer-purpose credit products. Second, not including consumer-
designated credit used for business purposes within the scope of this
rulemaking would make it clear that the applications reported will all
be seeking credit to use for business purposes, which supports 1071's
directive to collect and report data in the case of an application for
credit for a business. Third, not covering consumer-designated credit
used for business purposes would provide certainty to financial
institutions that offer only consumer-designated credit that they would
not be subject to this proposal's data collection and reporting
requirements.
As recommended by the SBREFA Panel, the Bureau seeks comment on
this proposed interpretation, including how the Bureau has defined the
scope of consumer-designated credit. The Bureau also seeks comment on
whether it should permit financial institutions to voluntarily report
consumer-designated credit when they have reason to believe the credit
might be used for business purposes.
Credit secured by certain investment properties. In the SBREFA
Outline, the Bureau did not expressly discuss treatment of real estate-
secured loans used for investment purposes. Based on questions from
SERs about the Bureau's intended approach, however, the SBREFA Panel
recommended that the Bureau address in the proposed rule whether it
intends to cover real estate-secured investment loans in the 1071
rule.\428\ One SER had asked that the Bureau clarify whether loans
covering 1-4 family properties used for investment purposes are
business loans under section 1071, and several SERs recommended that
the Bureau cover real estate investment loans (for both non-owner
occupied residential property
[[Page 56412]]
and commercial property) under section 1071. Several other SERs sought
to distinguish certain types of real estate investment loans; one SER
remarked, for example, that owning a single non-owner occupied
residential property as an investment may be more of a ``hobby'' but
owning multiple properties could be considered a business.
---------------------------------------------------------------------------
\428\ Id. at 44-45.
---------------------------------------------------------------------------
A number of other stakeholders suggested that the Bureau should
exclude at least some real estate investment loans under section 1071.
A few stakeholders stated that the Bureau should consider an exemption
for loans that are reported under another regulatory framework, such as
HMDA and/or CRA because the effort of collecting and reporting
information regarding such real estate loans would not be worth the
added burden given the availability of alternative data sources. A few
stakeholders argued that Congress did not intend to include real estate
investment loans within the scope of section 1071. One such stakeholder
stated that this intention is evident because many of the proposed loan
purpose categories reflect a desire to collect data regarding credit
offered to businesses which offer a product or service. One stakeholder
seeking exclusion of certain real estate loans explained that most
commercial real estate loans are made to borrowers as investments and
not for operating their business. A few stakeholders suggested that the
Bureau should only treat as reportable loans secured by owner-occupied
commercial real estate where the primary source of repayment is the
cash flow from the ongoing business operations. One stakeholder noted
that because commercial real estate loans made to investors are
typically made to business entities with complex ownership structures,
their inclusion under 1071 would create additional hurdles for lenders
seeking to determine the principal owners.
Based on this feedback as well as its general knowledge regarding
both consumer and commercial real estate lending, the Bureau
understands that many financial institutions use their consumer
mortgage lending channels to process credit applications secured by 1-4
family residential property and used for investment purposes, while
applications for credit secured by 5+ unit multifamily properties or
rental portfolio loans secured by more than four 1-4 unit residential
properties are generally processed through commercial mortgage lending
channels. The Bureau also understands that loans made through consumer
mortgage lending channels are often made pursuant to the guidelines of
Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), and
the Department of Veterans Affairs (VA), and are likely already
reported under HMDA.
In light of the feedback received and the Panel's recommendation,
the Bureau is proposing that the 1071 rule not cover credit secured by
certain investment properties, because such credit may not always be
primarily for business or commercial purposes. Specifically, proposed
comment 104(b)-4 would explain that a covered credit transaction does
not include an extension of credit that is secured by 1-4 individual
dwelling units that the applicant or one or more of the applicant's
principal owners does not, or will not, occupy. The Bureau is not
proposing to exclude credit secured by owner-occupied dwellings; for
example, those secured by a dwelling occupied by a business's sole
proprietor/principal owner. The Bureau is thus proposing to exclude
real estate investment loans only in certain limited circumstances
(such as when credit is secured by non-owner occupied 1-4 dwelling
units and not 5+ dwelling units). As discussed above in the section-by-
section analysis of proposed Sec. 1002.102(j), the Bureau is proposing
to define ``dwelling'' to have the same meaning as Regulation C Sec.
1003.2(f). Similarly, proposed comment 104(b)-4, which would address
what does and does not constitute an investment property, is modeled on
Regulation C's comment 4(a)(6)-4.
The Bureau is proposing a definition of ``covered credit
transaction'' that does not cover certain real estate investment loans
in the scope of a ``covered credit transaction'' pursuant to its
authority under ECOA section 704B(g)(1) to prescribe such rules and
issue such guidance as may be necessary to carry out, enforce, and
compile data under section 1071. The Bureau believes that its exclusion
of credit secured by certain investment properties will better capture
lending to true small businesses (as opposed to consumers seeking to
diversify their investments) and will also better align with financial
institution lending practices. The Bureau understands that it may not
always be easy for financial institutions to distinguish between
business-purpose real estate investment loans and consumer-purpose real
estate investment loans; however, covering all such loans would likely
include some percentage of consumer-purpose loans in the 1071 rule,
which could be contrary to section 1071's business and community
development purpose.
The Bureau seeks comment on its proposed approach for credit
secured by certain investment properties, including whether it is
appropriate to consider credit not to be business credit when it is
secured by 1-4 individual dwelling units that the applicant or one or
more of the applicant's principal owners does not, or will not, occupy;
and, if not, whether a different number of dwelling units in the
property securing the credit would be an appropriate way to make a
distinction between business and consumer-designated credit. The Bureau
also solicits comment on whether to permit financial institutions to
voluntarily report real estate investment loan transactions that are
secured by non-owner occupied 1-4 dwelling units.
Government credit. The existing definition of business credit in
Sec. 1002.2(g) excludes public utilities credit, securities credit,
incidental credit, and government credit (that is, extensions of credit
made to governments or governmental subdivisions, agencies, or
instrumentalities--not extensions of credit made by governments), as
defined in existing Sec. 1002.3(a) through (d), from certain aspects
of existing Regulation B.\429\ For the purpose of proposed subpart B,
the Bureau is proposing complete exclusions for public utilities
credit, securities credit, and incidental credit from the definition of
a covered credit transaction in proposed Sec. 1002.104(b), as
discussed below.
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\429\ As explained in existing comment 3-1, under Sec. 1002.3,
procedural requirements of Regulation B do not apply to certain
types of credit. The comment further states that all classes of
transactions remain subject to Sec. 1002.4(a) (the general rule
barring discrimination on a prohibited basis) and to any other
provision not specifically excepted.
---------------------------------------------------------------------------
However, the Bureau is not proposing to exclude government credit,
as defined in existing Sec. 1002.3(d)(1) to mean ``extensions of
credit made to governments or governmental subdivisions, agencies, or
instrumentalities.'' The Bureau believes that an express exclusion for
extensions of credit made to governments or governmental subdivisions,
agencies, or instrumentalities is not necessary because such
governmental entities would not constitute small businesses under the
proposed rule.\430\ The Bureau seeks comment on its approach to
government credit.
---------------------------------------------------------------------------
\430\ Government entities are not ``organized for profit'' and
are thus not a ``business concern'' under proposed Sec.
1002.106(a).
---------------------------------------------------------------------------
Certain purchases of covered credit transactions. In the SBREFA
Outline, the Bureau did not expressly discuss treatment of loan
purchases, but the Bureau sought feedback on any products that should
or should not be covered by
[[Page 56413]]
the Bureau's eventual 1071 rule.\431\ Several SERs voiced support for
generally aligning small business lending reporting requirements for
financial institutions with the approach taken for HMDA reporting in
the Bureau's Regulation C. One SER stressed that imposing section 1071
requirements for loan buyers, who play an important role in assisting
CDFIs but do not make credit decisions, might risk their continued
participation. Feedback from other stakeholders was limited, although a
few stakeholders suggested that the Bureau should generally exclude
purchased loans. The Panel did not provide a specific recommendation on
this topic.
---------------------------------------------------------------------------
\431\ SBREFA Outline at 19-20.
---------------------------------------------------------------------------
The Bureau believes that this feedback may be based in part on the
requirements that apply to HMDA, where Regulation C requires financial
institutions to report purchases of covered loans under HMDA.\432\ This
requirement is based on statutory language that contemplates data
collection for loan purchases.\433\ As discussed in the section-by-
section analysis of proposed Sec. 1002.103, ECOA section 704B(b)
requires that financial institutions collect, maintain, and report to
the Bureau certain information regarding ``any application to a
financial institution for credit.'' For covered financial institutions,
the definition of ``application'' will trigger data collection and
reporting obligations with respect to covered credit transactions.
Under proposed subpart B, purchasing a loan does not, in itself,
generate an obligation for a covered financial institution to report
small business lending data. Rather, a reporting obligation may arise
on the basis of making a final credit decision on an application. (See
the section-by-section analysis of proposed Sec. 1002.109(a)(3) for
additional information.) The Bureau also notes the corollary point that
selling a covered loan would not, in itself, obviate an existing
obligation of a covered financial institution to report small business
lending data for that application, pursuant to proposed comment 107(a)-
1.i.
---------------------------------------------------------------------------
\432\ See Regulation C Sec. 1003.4(a) (stating that a financial
institution ``shall collect data regarding . . . covered loans that
it purchases for each calendar year'').
\433\ See 12 U.S.C. 2803(a)(1) (stating that institutions
``shall compile and make available . . . the number and total dollar
amount of mortgage loans which were (A) originated (or for which the
institution received completed applications), or (B) purchased by
that institution'').
---------------------------------------------------------------------------
Because under this proposal purchasing a loan does not, in itself,
generate an obligation for a covered financial institution to report
small business lending data regarding the underlying application, the
Bureau is not proposing a specific exclusion for these purchases.
The Bureau seeks comment on its proposal not to expressly exclude
the purchase of covered credit transactions in the proposed rule's
regulatory text or commentary.
Certain purchases of covered credit transactions--pooled loans. In
the SBREFA Outline, the Bureau did not expressly discuss treatment of
pooled loan purchases, but the Bureau sought feedback on any products
that should or should not be covered by the Bureau's eventual 1071
rule.\434\ A CDFI SER that occasionally participates in pooled loan
purchases recommended that the Bureau ensure that reporting obligations
for such pooled loans are clear.
---------------------------------------------------------------------------
\434\ SBREFA Outline at 19-20.
---------------------------------------------------------------------------
The Panel did not provide a specific recommendation on this topic.
The Bureau believes that this feedback may be based in part on the
requirements that apply to HMDA, where Regulation C requires financial
institutions to report purchases of covered loans under HMDA.\435\ This
requirement is based on statutory language that contemplates data
collection for loan purchases.\436\ However, Regulation C exempts from
these general reporting requirements ``[t]he purchase of an interest in
a pool of closed-end mortgage loans or open-end lines of credit'' \437\
As discussed in the section-by-section analysis of proposed Sec.
1002.103 above, ECOA section 704B(b) requires that financial
institutions collect, maintain, and report to the Bureau certain
information regarding ``any application to a financial institution for
credit.'' For covered financial institutions, the definition of
``application'' (or, as used in this proposed rule, ``covered
application'') will trigger data collection and reporting obligations
with respect to covered credit transactions. Under this proposed
subpart, the purchase of an interest in a pool of loans does not, in
itself, generate an obligation for a covered financial institution to
report small business lending data. There is thus no need to propose a
similar exclusion in this proposed subpart.
---------------------------------------------------------------------------
\435\ See Regulation C Sec. 1003.4(a) (stating that a financial
institution ``shall collect data regarding . . . covered loans that
it purchases for each calendar year'').
\436\ See 12 U.S.C. 2803(a)(1) (stating that depository
institutions ``shall compile and make available . . . the number and
total dollar amount of mortgage loans which were (A) originated (or
for which the institution received completed applications), or (B)
purchased by that institution'').
\437\ 12 CFR 1003.3(c)(4).
---------------------------------------------------------------------------
The Bureau believes that requiring covered financial institutions
to collect and maintain data related to the purchase of an interest in
a pool of covered credit transactions would do little to further the
purposes of section 1071. The Bureau generally believes that a pooled
loan purchase would arise after a final credit decision on the relevant
loans has already been made (e.g., after the loans were originated) and
therefore the Bureau believes that the purchaser of an interest in a
pool of loans would understand that there would be no section 1071
obligation. Section 1071 would already capture the lending information
of the loans in this pool, as the application for each origination in
the pool would already be reported (assuming it was originated by a
covered financial institution and otherwise satisfies the requirements
of proposed subpart B). For clarity, however, the Bureau is stating
here that no reporting obligations arise from purchasing an interest in
a pool of covered credit transactions, including credit-backed
securities or real estate investment conduits. The Bureau believes that
this clarification, similar to Regulation C comment 3(c)(4)-1, will
assist covered financial institutions in understanding the scope of
their obligations.
The Bureau seeks comment on its proposal not to expressly exclude
the purchase of an interest in a pool of covered credit transactions in
the proposed rule's regulatory text or commentary.
Certain purchases of covered credit transactions--partial interests
in a covered credit transaction. In the SBREFA Outline, the Bureau did
not specifically solicit feedback on a financial institution's
obligation to report the purchase of a partial interest in a covered
credit transaction (such as through participation loans, where multiple
financial institutions fund a single origination); however, the Bureau
did receive some feedback on this issue. One SER noted that there was
some uncertainty with respect to how the Bureau intended to treat loan
participations. This SER urged the Bureau not to discourage smaller
credit unions in rural markets, who the SER stated may be likely to
take part in loan participations, from helping their communities. The
Panel did not provide a specific recommendation on this topic. Several
other stakeholders also requested that the Bureau exempt participation
loans.
The Bureau believes that this feedback may be based in part on the
requirements that apply to HMDA, where Regulation C requires financial
institutions to report purchases of
[[Page 56414]]
covered loans under HMDA.\438\ This requirement is based on statutory
language that contemplates data collection for loan purchases.\439\
However, Regulation C exempts from these general reporting requirements
``[t]he purchase of a partial interest in a closed-end mortgage loan or
open-end line of credit'' \440\ As discussed in the section-by-section
analysis of proposed Sec. 1002.103 above, ECOA section 704B(b)
requires that financial institutions collect, maintain, and report to
the Bureau certain information regarding ``any application to a
financial institution for credit.'' For covered financial institutions,
the definition of ``application'' (or, as used in this proposed rule,
``covered application'') will trigger data collection and reporting
obligations with respect to covered credit transactions. Under this
subpart, a partial purchase of a loan does not, in itself, generate an
obligation for a covered financial institution to report small business
lending data. There is thus no need to propose a similar exclusion in
this subpart.
---------------------------------------------------------------------------
\438\ See Regulation B Sec. 1003.4(a) (stating that a financial
institution ``shall collect data regarding . . . covered loans that
it purchases for each calendar year'').
\439\ See 12 U.S.C. 2803(a)(1) (stating that depository
institutions ``shall compile and make available . . . the number and
total dollar amount of mortgage loans which were (A) originated (or
for which the institution received completed applications), or (B)
purchased by that institution'').
\440\ 12 CFR 1003.3(c)(8).
---------------------------------------------------------------------------
The Bureau believes that this approach, combined with proposed
Sec. 1002.109(a)(3), provides sufficient clarity for financial
institutions that choose to take part in loan participations. For
example, Financial Institution A receives an application for a covered
credit transaction and approves the loan, and then Financial
Institution A elects to organize a loan participation agreement where
Financial Institutions B and C agree to purchase a partial interest.
This is a covered credit transaction for Financial Institution A, but
it is not a covered credit transaction for Financial Institutions B and
C. The Bureau believes that this approach differs from how loan
participations are reported by banks and savings associations under the
CRA. That is, under the CRA, if the loan originated by Financial
Institution A met the definition of a small business loan, then if any
(or all) of the financial institutions were CRA loan reporters the
loans may be reported under the CRA.\441\
---------------------------------------------------------------------------
\441\ See, e.g., 12 CFR 228.21(f) (stating that when assessing
the record of a nonminority-owned and nonwomen-owned bank, the Board
considers loan participation as a factor).
---------------------------------------------------------------------------
The Bureau believes that the purposes of section 1071 counsel
towards the broad collection of small business lending by financial
institutions. The Bureau is further unaware of any reason why data with
respect to such lending should not be collected because more than one
financial institution holds an interest in a covered product.
Conversely, the Bureau does not believe that requiring reporting by
each financial institution with a partial interest in a covered credit
transaction would further section 1071's purposes, and is concerned
that having a single loan reported by multiple financial institutions
could compromise the quality of the section 1071 dataset. Read in
conjunction with proposed Sec. 1002.109(a)(3), however, the Bureau
believes that the covered credit transactions at issue here will
nonetheless generally be reported by one covered financial institution,
the financial institution that sold portions of the loan to other
participants.
The Bureau seeks comment on its proposal not to expressly exclude
the purchase of a partial interest in a covered credit transaction in
the proposed rule's regulatory text or commentary. In particular, the
Bureau solicits comment on how this proposed exclusion may differ from
reporting obligations under the CRA, and if the Bureau adopted another
approach, how overlapping reporters or data might be flagged to avoid
double-counting certain information.
Trade credit. Under existing Regulation B, trade credit refers to a
``financing arrangement that involves a buyer and a seller--such as a
supplier who finances the sale of equipment, supplies, or inventory; it
does not apply to an extension of credit by a bank or other financial
institution for the financing of such items.'' \442\ Thus, trade credit
typically involves a transaction in which a seller allows a business to
purchase its own goods without requiring immediate payment, and the
seller is not otherwise in the financial services business. Businesses
offering trade credit generally do so as a means to facilitate the sale
of their own goods and not as a stand-alone financing product.
---------------------------------------------------------------------------
\442\ Comment 9(a)(3)-2.
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Most of the notification requirements of existing Regulation B do
not apply to trade credit transactions.\443\ In a typical trade credit
transaction, the seller is not otherwise in the financial services
business.\444\ The Bureau's White Paper estimated that trade credit
represents approximately 21 percent of the aggregate dollar volume of
various financial products used by small businesses.\445\ The Bureau
understands that there are tens of thousands of merchants and
wholesalers that extend credit to small businesses solely in connection
with sale of goods and services by these trade creditors.
---------------------------------------------------------------------------
\443\ See Sec. 1002.9(a)(3)(ii).
\444\ See comment 9(a)(3)-2.
\445\ White Paper at 21 fig. 2.
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In its SBREFA Outline, the Bureau stated that it was considering
proposing that trade credit not be a covered product under section
1071.\446\ The Bureau stated that trade credit can be offered by
entities that are themselves very small businesses and that the Bureau
was concerned that these entities, in particular, may incur large costs
relative to their size to collect and report 1071 data in an accurate
and consistent manner.\447\
---------------------------------------------------------------------------
\446\ SBREFA Outline at 21.
\447\ See id.
---------------------------------------------------------------------------
The Bureau only received a few comments regarding its proposal
under consideration to exclude trade credit. A few stakeholders
suggested that trade credit should be covered. One commenter noted that
trade credit is used for a significant number of agricultural finance
transactions (equipment financing and input financing for row crop
farmers) and suggested that the Bureau should monitor this sector of
the agricultural finance industry. A trade association stated that the
exclusion of trade credit should apply not only to the seller of
inventory and businesses facilitating the sale of inventory, but also
its affiliates and facilitators because these entities generally
provide financing only for the seller's products and not for competing
or unrelated products. The trade association cautioned that the
collection and publication of data, if applied to such an affiliate,
could significantly impact the seller's ability to maintain trade
secrets, as these data would provide competitors a comprehensive
insight into the seller's distribution and wholesale strategies, and it
would also create a substantial risk to the applicants themselves due
to privacy concerns.
The Bureau is proposing to not cover trade credit in its 1071 rule.
Proposed Sec. 1002.104(b)(1) would define trade credit as a financing
arrangement wherein a business acquires goods or services from another
business without making immediate payment to the business providing the
goods or services. Proposed comment 104(b)(1)-1 would provide that an
example of trade credit is one that involves a supplier that finances
the sale of equipment,
[[Page 56415]]
supplies, or inventory. Proposed comment 104(b)(1)-1 would provide that
an extension of business credit by a financial institution other than
the supplier for the financing of such items is not trade credit.
Proposed comment 104(b)(1)-2 would clarify that the definition of trade
credit under existing comment 9(a)(3)-2 applies to relevant provisions
under existing Regulation B, and that proposed Sec. 1002.104(b)(1) is
not intended to repeal, abrogate, annul, impair, or interfere with any
existing interpretations, orders, agreements, ordinances, rules, or
regulations adopted or issued pursuant to existing comment 9(a)(3)-2.
The Bureau is proposing a definition of ``covered credit
transaction'' that excludes trade credit pursuant to its authority
under ECOA section 704B(g)(1) to prescribe such rules and issue such
guidance as may be necessary to carry out, enforce, and compile data
under section 1071. While trade credit constitutes ``credit'' within
the meaning of proposed Sec. 1002.102(k), the Bureau believes that
trade credit is categorically different from products like loans, lines
of credit, credit cards, and MCAs and that there are several reasons to
exclude it from coverage. Trade credit is not a general-use business
lending product--that is, trade creditors generally extend credit as a
means to facilitate the sale of their own goods, rather than offering
it as a stand-alone financial product. The Bureau believes that while
trade creditors might meet the definition in section 1071 of a
financial institution, they are not financial services providers that
manage compliance with regulatory requirements associated with making
extensions of credit. The Bureau understands that trade credit can be
offered by entities that are themselves very small businesses; the
Bureau continues to be concerned that these entities, in particular,
may incur large costs relative to their size to collect and report 1071
data in an accurate and consistent manner.\448\ Taken together, the
Bureau is concerned that requiring trade credit to be reported under
proposed subpart B may lead to significant data quality issues. The
Bureau is also concerned that the fixed costs of coming into compliance
with its 1071 rule could lead these businesses to reduce or cease
offering trade credit to their small business customers, which would
run contrary to the community development purpose of section 1071.
---------------------------------------------------------------------------
\448\ See Leora Klapper et al., The Review of Financial Studies,
Trade Credit Contracts, at 838-67 (vol. 25, issue 3, 2012), https://academic.oup.com/rfs/article/25/3/838/1616515, and Justin Murfin &
Ken Njoroge, The Review of Financial Studies, The Implicit Costs of
Trade Credit Borrowing by Large Firms, at 112-45 (vol. 28, issue 1,
2015), https://academic.oup.com/rfs/article/28/1/112/1681329.
---------------------------------------------------------------------------
The Bureau notes that its proposed definition of trade credit in
Sec. 1002.104(b)(1) is focused on the business providing the goods or
services being financed. It thus does not extend to affiliates and
facilitators of trade creditors that provide financing, even if only
for the trade creditor's products and not for competing or unrelated
products. Provided that they otherwise meet the definition of a covered
financial institution in proposed Sec. 1002.105(b), such affiliates
and facilitators must collect and report data under the 1071 rule. The
Bureau believes that, unlike trade creditors themselves, such
affiliates and facilitators offer stand-alone credit products in the
same way as other financial institutions. As such, the Bureau does not
have the same concerns about data quality or market exit by affiliates
and facilitators that it does about trade creditors themselves.
The Bureau seeks comment on its proposal to exclude trade credit
from the 1071 rule and on its proposed definition of trade credit.
Public utilities credit. As noted above, the existing definition of
business credit in Sec. 1002.2(g) excludes public utilities credit,
securities credit, incidental credit, and government credit, as defined
in existing Sec. 1002.3(a) through (d), from certain procedural
requirements of existing Regulation B. For the purpose of proposed
subpart B, the Bureau is proposing complete exclusions for public
utilities credit from the definition of a covered credit transaction in
proposed Sec. 1002.104(b).
In the SBREFA Outline, the Bureau did not expressly discuss
treatment of public utilities credit transactions. However, the Bureau
sought feedback on any products that should or should not be covered by
the Bureau's eventual 1071 rule, and did not receive any feedback
specific to public utilities credit.
Proposed Sec. 1002.104(b)(2) would exclude public utilities
credit, as defined in existing Sec. 1002.3(a)(1). Existing Sec.
1002.3(a)(1) states that the term public utilities credit refers to
extensions of credit that involve public utility services provided
through pipe, wire, or other connected facilities, or radio or similar
transmission (including extensions of such facilities), if the charges
for service, delayed payment, and any discount for prompt payment are
filed with or regulated by a government unit. Several existing
Regulation B requirements do not apply to public utilities credit
transactions.\449\ Existing comment 3(a)-1 explains that the definition
applies only to credit for the purchase of a utility service, such as
electricity, gas, or telephone service. Credit provided or offered by a
public utility for some other purpose--such as for financing the
purchase of a gas dryer, telephone equipment, or other durable goods,
or for insultation or other home improvements--would not be excepted
under proposed Sec. 1002.104(b)(2) but may be excepted if it
constitutes trade credit under proposed Sec. 1002.104(b)(1), or in the
case of financing for certain home improvements, for example, if it
does not constitute an extension of business credit under proposed
Sec. 1002.104(a). Existing comment 3(a)-2 states in part that a
utility company is a creditor when it supplies utility service and
bills the user after the service has been provided.
---------------------------------------------------------------------------
\449\ See Sec. 1002.3(a).
---------------------------------------------------------------------------
The Bureau is proposing a definition of ``covered credit
transaction'' that excludes public utilities credit pursuant to its
authority under ECOA section 704B(g)(1) to prescribe such rules and
issue such guidance as may be necessary to carry out, enforce, and
compile data under section 1071. The Bureau believes that excluding
public utilities credit from the 1071 rule is reasonable for the same
reasons as the Board enumerated when it adopted exemptions from certain
procedural requirements under subpart A. Specifically, the Bureau is
concerned that covering public utilities credit under 1071 could
require ``substantial changes in the forms and procedures of public
utilities companies. Costs associated with such changes would, in all
likelihood, be passed along to [small business owners].'' \450\ The
Bureau notes that many of the policies and procedures of public
utilities companies are separately regulated at the State and Municipal
levels by public service commissions, and at the Federal level by the
Federal Energy Regulatory Commission. The Bureau also believes that
public utilities credit is akin to trade credit and thus is proposing
to exclude it from coverage under subpart B for the same reasons.
---------------------------------------------------------------------------
\450\ 40 FR 49298, 49305 (Oct. 22, 1975).
---------------------------------------------------------------------------
The Bureau seeks comment on its proposal to exclude public
utilities credit.
Securities credit. As noted above, the existing definition of
business credit in Sec. 1002.2(g) excludes public utilities credit,
securities credit, incidental credit, and government credit, as defined
in existing Sec. 1002.3(a) through
[[Page 56416]]
(d), from certain procedural requirements of existing Regulation B. For
the purpose of proposed subpart B, the Bureau is proposing complete
exclusions for securities credit from the definition of a covered
credit transaction in proposed Sec. 1002.104(b).
In the SBREFA Outline, the Bureau did not expressly discuss
treatment of securities credit transactions, but the Bureau sought
feedback on any products that should or should not be covered by the
Bureau's eventual 1071 rule. The Bureau did not receive any feedback
specific to securities credit.
Proposed Sec. 1002.104(b)(3) would exclude securities credit, as
defined in existing Sec. 1002.3(b)(1). Existing Sec. 1002.3(b)(1)
states that the term securities credit refers to extensions of credit
subject to regulation under section 7 of the Securities Exchange Act of
1934 or extensions of credit by a broker or dealer subject to
regulation as a broker or dealer under the Securities Exchange Act of
1934. Several existing Regulation B requirements do not apply to
securities credit transactions.\451\
---------------------------------------------------------------------------
\451\ See Sec. 1002.3(b).
---------------------------------------------------------------------------
The Bureau is proposing a definition of ``covered credit
transaction'' that excludes securities credit pursuant to its authority
under ECOA section 704B(g)(1) to prescribe such rules and issue such
guidance as may be necessary to carry out, enforce, and compile data
under section 1071. The Bureau is proposing to exclude securities
credit to foster consistency with existing Regulation B.
The Bureau seeks comment on its proposal to exclude securities
credit.
Incidental credit. As noted above, the existing definition of
business credit in Sec. 1002.2(g) excludes public utilities credit,
securities credit, incidental credit, and government credit, as defined
in existing Sec. 1002.3(a) through (d), from certain procedural
requirements of existing Regulation B. For the purpose of proposed
subpart B, the Bureau is proposing complete exclusions for incidental
credit from the definition of a covered credit transaction in proposed
Sec. 1002.104(b).
In the SBREFA Outline, the Bureau did not expressly discuss
treatment of incidental credit transactions, but the Bureau sought
feedback on any products that should or should not be covered by the
Bureau's eventual 1071 rule. The Bureau did not receive any feedback
specific to incidental credit.
Proposed Sec. 1002.104(b)(4) would exclude incidental credit, as
defined in existing Sec. 1002.3(c)(1), but without regard to whether
the credit is consumer credit, as defined in existing Sec. 1002.2(h).
Existing Sec. 1002.3(c)(1) states that incidental credit refers to
extensions of consumer credit other than the types described in Sec.
1002(a) and (b): (i) That are not made pursuant to the terms of a
credit card account; (ii) that are not subject to a finance charge (as
defined in Regulation Z Sec. 1026.4); and (iii) that are not payable
by agreement in more than four installments. A number of existing
Regulation B requirements do not apply to ``incidental credit''
(referring to extensions of consumer credit).\452\ Existing comment
3(c)-1 explains that if a service provider (such as a hospital, doctor,
lawyer, or merchant) allows the client or customer to defer the payment
of a bill, this deferral of debt is credit for purposes of the
regulation, even though there is no finance charge and no agreement for
payment in installments. Because of the exceptions provided by existing
Sec. 1002.3, however, these particular credit extensions are excepted
from compliance with certain procedural requirements as specified in
Sec. 1002.3(c).
---------------------------------------------------------------------------
\452\ See Sec. 1002.3(c).
---------------------------------------------------------------------------
The Bureau is proposing a definition of ``covered credit
transaction'' that excludes incidental credit pursuant to its authority
under ECOA section 704B(g)(1) to prescribe such rules and issue such
guidance as may be necessary to carry out, enforce, and compile data
under section 1071. The Bureau believes that the Board's reasoning with
respect to incidental credit's limited exception under existing
Regulation B is equally applicable and relevant here. The Board sought
to minimize burdens on businesses that ``permit their customers to
defer payment of debt as a convenience and are not in the business of
extending credit.'' \453\ The Board cited the example of doctors and
dentists that permit their patients to defer payment of fees and who
are extending credit as incidental to their principal activity of
health care.\454\ The Board also noted that ``[s]mall neighborhood
businesses such as drugstores and grocery stores frequently permit
their customers to postpone payment on an informal basis not associated
with a formal credit plan.'' \455\ The Bureau believes that incidental
credit, as described above, is akin to trade credit and thus is
proposing to exclude it from coverage under subpart B for the same
reasons.
---------------------------------------------------------------------------
\453\ 40 FR 49298, 49304 (Oct. 22, 1975).
\454\ Id.
\455\ Id.
---------------------------------------------------------------------------
The Bureau seeks comment on its proposal to exclude incidental
credit.
Section 1002.105 Covered Financial Institutions and Exempt Institutions
ECOA section 704B(h)(1) defines the term ``financial institution''
as ``any partnership, company, corporation, association (incorporated
or unincorporated), trust, estate, cooperative organization, or other
entity that engages in any financial activity.'' The Bureau is
proposing to define a financial institution in Sec. 1002.105(a)
consistent with that statutory language. The Bureau is proposing to
define a covered financial institution in Sec. 1002.105(b) as a
financial institution that originated at least 25 covered credit
transactions from small businesses in each of the two preceding
calendar years. Only those financial institutions that meet this loan-
volume threshold in the definition of a covered financial institution
would be required to collect and report small business lending data
pursuant to proposed subpart B.
The Bureau's proposed definitions reflect the broad nature of the
data collection specified in section 1071, while recognizing the risks
that financial institutions with the lowest volume of small business
lending might reduce or cease their small business lending activity
because of the fixed costs of coming into compliance with this rule.
The Bureau is proposing Sec. 1002.105 to implement ECOA section
704B(h)(1) and pursuant to its authority under 704B(g)(1) to prescribe
such rules and issue such guidance as may be necessary to carry out,
enforce, and compile data pursuant to section 1071. The Bureau is also
proposing Sec. 1002.105(b) pursuant to its authority under 704B(g)(2)
to conditionally or unconditionally exempt any financial institution or
class of financial institutions from the statute's requirements, as the
Bureau deems necessary or appropriate to carry out the purposes of
section 1071. The Bureau is proposing these provisions and proposing to
use its exemption authority under 704B(g)(2) for the reasons set forth
below.
105(a) Financial Institution
Background
ECOA section 704B(h)(1) defines the term ``financial institution''
as ``any partnership, company, corporation, association (incorporated
or unincorporated), trust, estate, cooperative organization, or other
entity that engages in any financial activity.''
[[Page 56417]]
SBREFA Proposals Under Consideration and Feedback Received
At SBREFA, the Bureau stated it was considering proposing a general
definition of ``financial institution'' consistent with the section
1071 definition.\456\ The Bureau noted that Regulation B, which
implements ECOA, has not otherwise defined this term.
---------------------------------------------------------------------------
\456\ SBREFA Outline at 10.
---------------------------------------------------------------------------
SERs generally did not express concern regarding the general
definition of a ``financial institution'' under consideration, although
one SER expressed concern at the broad reach of what might be
considered a financial activity.\457\ The SBREFA Panel did not provide
any recommendations on the definition of a financial institution.
Feedback on the definition of ``financial institution'' from other
stakeholders was likewise nearly universally positive, with most
opining that a definition that encompasses all small business lenders
would be appropriate.
---------------------------------------------------------------------------
\457\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 18-20.
---------------------------------------------------------------------------
Proposed Rule
Proposed Sec. 1002.105(a) would define a financial institution as
any partnership, company, corporation, association (incorporated or
unincorporated), trust, estate, cooperative organization, or other
entity that engages in any financial activity. This proposed definition
restates the statute and is the same definition that the Bureau stated
it was considering proposing in the SBREFA Outline.\458\ The Bureau
believes that this definition reflects the broad nature of small
business lending data collection specified in section 1071. Under such
a definition, the rule's data collection and reporting requirements
would apply to a variety of entities that engage in small business
lending, including depository institutions (i.e., banks, savings
associations, and credit unions),\459\ online lenders, platform
lenders, CDFIs, lenders involved in equipment and vehicle financing
(captive financing companies and independent financing companies),
commercial finance companies, governmental lending entities, and
nonprofit, nondepository lenders.
---------------------------------------------------------------------------
\458\ SBREFA Outline at 10.
\459\ For purposes of this notice of proposed rulemaking, the
Bureau is using the term depository institution to mean any bank or
savings association defined by the Federal Deposit Insurance Act, 12
U.S.C. 1813(c)(1), or credit union defined pursuant to the Federal
Credit Union Act, as implemented by 12 CFR 700.2. The Bureau notes
that the Dodd-Frank Act defines a depository institution to mean any
bank or savings association defined by the Federal Deposit Insurance
Act; there, that term does not encompass credit unions. 12 U.S.C.
5301(18)(A), 1813(c)(1). To facilitate analysis and discussion, the
Bureau is referring to banks and savings associations together with
credit unions as depository institutions throughout this notice,
unless otherwise specified.
---------------------------------------------------------------------------
As noted above, one SER expressed concern at the broad reach of
this definition. But the broad scope of what may be considered a
``financial activity'' in the proposed definition of financial
institution is not the principal determinative factor as to whether
small business lending data collection and reporting is required; the
proposed definition of a covered financial institution, the proposed
definition of a covered application, and the proposed definition of a
covered credit transaction, among others, all would impose limits on
what entities could be subject to this proposed rule's data collection
and reporting requirements.
Proposed comment 105(a)-1 would provide a non-exhaustive list of
examples of entities that may fit within the definition of a financial
institution. This proposed comment would make clear that nonprofit and
governmental entities, governmental subdivisions, or governmental
agencies, among others, who conduct financial activity fit within the
definition of a financial institution. The definition of the term
``financial institution'' in ECOA section 704B(h)(1) includes the
phrase ``or other entity.'' That term readily encompasses governments
and government entities. Even if the term were ambiguous, the Bureau
believes--based on its expertise and experience--that interpreting it
to encompass governments and government entities would promote the
purposes of section 1071. For example, the Bureau believes that it will
be helpful to identify the business and community development needs of
women-owned, minority-owned, and small businesses by collecting lending
data from both a county-run assistance program for establishing new
businesses and financial institutions that operate nationwide, like
online lenders. The Bureau also believes that the terms ``companies''
or ``corporations'' under the definition of ``person,'' on their face,
cover all companies and corporations, including government-owned or -
affiliated companies and corporations. And even if those terms were
ambiguous, the Bureau believes--based on its expertise and experience--
that interpreting them to cover government-owned or -companies and
corporations would promote the purposes of section 1071. The Bureau
emphasizes that the list of examples of entities in proposed comment
105(a)-1 is not exhaustive and that other entities not specifically
described would nonetheless fit within the definition of a financial
institution under proposed Sec. 1002.105(a). For example, the Bureau
believes that an organization offering insurance premium financing,
where the organization provides short-term loans to businesses to pay
for property and casualty insurance, is included within the definition
of proposed Sec. 1002.105(a), even though this specific business model
is not described in proposed comment 105(a)-1.
Proposed comment 105(a)-2 would refer to proposed Sec. 1002.101(a)
to reiterate the statutory exclusion for motor vehicle dealers.
The Bureau seeks comment on this proposed definition of a financial
institution, and generally requests comment on whether additional
clarification is needed.
105(b) Covered Financial Institution
Background
The Bureau has received requests to adopt exemptions from section
1071 collection and reporting requirements for financial institutions
that do not frequently engage in small business lending. Reasons cited
have included encouraging market entry, ensuring data quality, alleged
lack of materiality of data from smaller lenders that rarely make small
business loans, and lack of capacity by the lenders sufficient to
justify small business lending as a line of business in light of the
cost of complying with an eventual 1071 rule.
SBREFA Proposals Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau stated that it was considering,
in light of section 1071's statutory purposes, proposing to exempt
financial institutions from any collection and reporting requirements
based on either or both a size-based and/or activity-based threshold.
In the SBREFA Outline, the Bureau set forth several alternative
thresholds under consideration for such an exemption.\460\
---------------------------------------------------------------------------
\460\ SBREFA Outline at 11-13.
---------------------------------------------------------------------------
There was a diversity of perspectives with respect to the Bureau's
approaches under consideration regarding potential exemptions.\461\
While some SERs stressed the need for expansive lender coverage to
fulfill section 1071's purposes, others suggested that such purposes
could be fulfilled by the Bureau collecting and reporting data from
only the largest lenders. SERs also offered varying opinions regarding
the exemption metrics and thresholds under
[[Page 56418]]
consideration, with some SERs favoring activity-based exemptions and
others preferring an asset-based approach. SERs uniformly supported
clear, predictable collection and reporting exemption thresholds.
---------------------------------------------------------------------------
\461\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 18-20.
---------------------------------------------------------------------------
The SBREFA Panel recommended that the Bureau continue to explore
whether either or both a size-based or activity-based test might be
appropriate to determine whether a financial institution must collect
and report 1071 data or should be exempt, given section 1071's
statutory purposes.\462\ The SBREFA Panel also recommended that the
Bureau continue to explore whether the fixed costs of coming into
compliance with an eventual 1071 rule might cause certain financial
institutions to reduce or cease lending to small businesses, as it
considers the possible exemptions for financial institutions based on
size and/or activity, along with any alternative approaches.\463\
---------------------------------------------------------------------------
\462\ Id. at 43.
\463\ Id.
---------------------------------------------------------------------------
Feedback from other stakeholders generally was in support of
exempting certain financial institutions from 1071 collection and
reporting obligations. Most feedback in support of pursuing exemptions
focused on the potential burden of a new regulatory regime, with some
stakeholders cautioning that collection and reporting obligations could
lead to an increase in the cost of credit. A few stakeholders connected
these potential costs with section 1071's purpose to identify community
development needs and opportunities (chiefly arguing that costs might
lead to higher costs of lending or lower lending volume), or otherwise
expressed a general belief that some exemptions were consistent with
statutory purposes. Several stakeholders, mostly community groups,
urged caution with respect to the extent of any such exemptions,
arguing that significant data limitations would run contrary to the
general purposes of section 1071.
Activity-based exemption. In the SBREFA Outline, the Bureau stated
that it was considering whether only financial institutions that engage
in a certain amount of small business lending activity should be
required to collect and report 1071 data.\464\ The Bureau explained
that in light of 1071's potentially broad application to financial
institutions, an activity-based test to determine reporting
responsibility might be appropriate. In particular, the Bureau
expressed concern that financial institutions with the lowest volume of
small business lending might reduce or cease their small business
lending activity because of the fixed costs of coming into compliance
with an eventual 1071 rule. The Bureau stated that this result could be
contrary to the community development purpose of section 1071.
---------------------------------------------------------------------------
\464\ SBREFA Outline at 12-13.
---------------------------------------------------------------------------
The Bureau specifically mentioned three possible activity-based
threshold levels, each defined by a financial institution's annual
number of small business loans originated or the financial
institution's annual total dollar value of small business loans
originated. (That is, if either measurement is exceeded, then the
financial institution must collect and report 1071 data.) Those three
possible activity-based threshold levels were: Originations of at least
25 loans or $2.5 million (Option 1 Exemption Threshold); originations
of at least 50 loans or $5 million (Option 2 Exemption Threshold); and
originations of at least 100 loans or $10 million (Option 3 Exemption
Threshold). These possible activity-based thresholds could be based on
the financial institution's lending as of the end of the last calendar
year, or the end of each of the last two calendar years. An activity-
based exemption could apply to depository and nondepository
institutions alike.
Some SERs advocated for an activity-based exemption. Several of
these SERs preferred an annual 25-loan threshold (with at least one
expressing support specifically for the Option 1 Exemption Threshold).
One SER preferred the Option 2 Exemption Threshold, while another
preferred the Bureau's Option 3 Exemption Threshold. Another SER
recommended setting a threshold of more than 100 small business
applications (rather than originations) for two consecutive years.
These SERs emphasized a general need for thorough data reporting from a
wide variety of lenders, and cautioned that in many smaller and rural
markets, larger exemptions might result in little or no data collection
given that many lenders in those markets make very few small business
loans annually.
One SER suggested setting an activity-based threshold based on loan
portfolio size rather than annual originations. Another SER suggested
that the Bureau consider exempting certain financial institutions using
a location test similar or identical to what is used for HMDA, which
does not apply to institutions that do not have a home or branch office
in a Metropolitan Statistical Area.
There was no uniformity in the feedback from other stakeholders
with respect to an activity-based exemption and its potential level.
Many commenters, including lenders, trade associations, and community
groups, expressed support for the Option 1 Exemption Threshold,
although most explicitly supported only the 25-loan threshold. On the
other hand, a few comments advocated for versions of the Option 3
Exemption Threshold and many comments urged the Bureau to adopt a
threshold higher than the Option 3 Exemption Threshold. Commenters who
advocated for higher thresholds consisted of lenders and trade
associations.
Size-based exemption. In the SBREFA Outline, the Bureau stated that
it was concerned that the smallest financial institutions might reduce
or cease their small business lending activity because of the fixed
costs of coming into compliance with an eventual 1071 rule, which could
be contrary to the community development purpose of section 1071.\465\
Specifically, the Bureau considered whether depository institutions
with assets under a given threshold should be exempt from collecting
and reporting small business lending data.
---------------------------------------------------------------------------
\465\ Id. at 11-12.
---------------------------------------------------------------------------
The Bureau stated that it was considering proposing to exempt
depository institutions with assets under a given threshold from
section 1071's data collection and reporting requirements. The Bureau
postulated that this size-based approach could provide a
straightforward exemption for very small depository institutions and
avoid the need for those entities to measure or monitor their small
business lending activity in order to determine whether they would be
exempt from the Bureau's 1071 rule. In particular, the Bureau
considered possible asset-based exemption threshold levels of $100
million (Option A Exemption Level) and $200 million (Option B Exemption
Level). For purposes of this exemption, the Bureau considered proposing
that a depository institution measure assets as of the end of the last
calendar year, or the end of both of the last two calendar years. The
Bureau asked SERs whether there were alternative approaches to a size-
based exemption that the Bureau should consider.
SERs did not suggest size-based exemptions other than an asset-
based metric that would apply to depository institutions. A few SERs
advocated that the Bureau should consider initially exempting lenders
other than ``large'' financial institutions (which, one SER suggested,
might be defined for depository institutions as those having more than
$1 billion in assets). These SERs stated that this approach would
capture the vast majority of small business loans while avoiding
imposing
[[Page 56419]]
undue regulatory burden on smaller lenders, who might be less capable
of absorbing such costs. They suggested that the Bureau might later
consider whether to expand section 1071 data collection and reporting
requirements to smaller financial institutions after first analyzing
the available data. Several SERs cautioned that some financial
institutions, particularly small nondepository lenders, might cease
lending to small businesses if the eventual 1071 rule's one-time costs
are too high.
One SER stated that a $200 million asset-based exemption would be
helpful to small depository lenders, and others suggested that a
threshold of $600 million was appropriate. Another SER countered,
however, that they were unaware of data to support an asset-based
exemption larger than $100 million. Some SERs expressly opposed an
asset-based exemption; one SER cautioned that an exemption based solely
on asset size would be inadvisable because many lenders do not hold
their loans on their balance sheet. Another SER stated that adopting an
asset-based exemption would risk excluding the collection of nearly all
small business lending data in certain regions.
Input from other stakeholders was split. Many stakeholders
supported a size-based exemption (typically an asset-based exemption),
contending that small depository institutions faced substantial
compliance costs and presented a lower likelihood of fair lending
violations. Small depository institutions were also particularly
concerned about data security issues. However, a number of other
stakeholders counseled against a size-based exemption, arguing that
exemptions should be based instead on lending activity, and that size-
based exemptions risked under-reporting in important markets. In
addition, some stakeholders noted that because there was no ready
equivalent size-based measurement for nondepository institutions,
including an asset-based exemption in the 1071 rule would put other
small financial institutions at a cost disadvantage.
Combined exemption. The Bureau stated that it was exploring whether
to combine the size- and activity-based approaches.\466\ Under a
combined approach, a financial institution would be required to collect
and report 1071 data if it exceeds either: (1) A given annual number of
small business loans originated; or (2) annual total small business
lending, measured in dollars. However, depository institutions with
assets under a given asset threshold would be exempt from reporting,
regardless of the number or dollar value of small business loans they
originated during the relevant time period.
---------------------------------------------------------------------------
\466\ Id. at 13.
---------------------------------------------------------------------------
At least one SER supported a combined size-based and activity-based
exemption. Some SERs also suggested other possible bases for setting
exemption thresholds. For example, several SERs suggested that the
Bureau focus on the number of small business loans that would be
covered or excluded, rather than the number of financial institutions,
in setting an exemption threshold. One SER suggested setting a
threshold based on loan portfolio size rather than annual originations.
As discussed above, another SER suggested that the Bureau consider
exempting certain financial institutions using a location test similar
or identical to what is used for HMDA, which does not apply to
institutions that do not have a home or branch office in a Metropolitan
Statistical Area.
Alternative exemptions. The Bureau did not express that it was
considering other collection and reporting exemptions. However, the
Bureau did request feedback on alternative approaches. In particular,
the Bureau asked whether there were certain types of financial
institutions, such as governmental lending entities or nonprofit
nondepository lenders, that the Bureau should consider not including
within 1071's data collection and reporting requirements.
One credit union SER requested that the Bureau exempt all credit
unions from section 1071 data collection and reporting requirements,
asserting that credit unions had not displayed what they characterized
as a ``pattern of unfair lending.'' In contrast, another SER cautioned
against providing exemptions for particular types of financial
institutions, noting the risk of missing important lending data. A few
SERs, particularly CDFIs, strongly preferred that all lenders,
including nonprofit and government lenders, be subject to section 1071
data collection and reporting requirements. One SER asserted that
disparities exist in many forms of small business lending, including
the SBA's 7(a) Loan Program, State lending programs, and funds
distributed through the recent Coronavirus Aid, Relief, and Economic
Security Act (CARES Act).\467\ Another SER stated that in certain parts
of the country, such as the Midwest, Farm Credit System loans are
available to small businesses, and thus Farm Credit institutions are in
competition with other lenders and should be covered entities. One SER
stated that the Bureau should consider exempting nondepository,
nonprofit Native CDFIs because section 1071 data collection and
reporting requirements might impose significant compliance costs and
privacy concerns.\468\ The SBREFA Panel recommendations did not
directly address this topic, although the Panel did recommend that the
Bureau continue to consider alternative approaches to exemptions.\469\
---------------------------------------------------------------------------
\467\ Public Law 116-136, 134 Stat. 281 (2020).
\468\ Native CDFIs are organizations certified as community
development financial institutions that primarily serve a Native
Community and are therefore eligible for Financial Assistance and
Technical Assistance awards provided by the Native American CDFI
Assistance Program. CDFI Fund, Fostering Economic Self-Determination
for Your Native Community, https://www.cdfifund.gov/sites/cdfi/files/documents/cdfi7205_fs_ni_updatedfeb20.pdf (last visited Aug.
12, 2021).
\469\ SBREFA Panel Report at 43.
---------------------------------------------------------------------------
Feedback from other stakeholders included a variety of suggestions
for other types of financial institutions that the Bureau should
consider exempting. These suggestions were made by financial
institutions (or their trade associations) to describe either
themselves or portions of their membership. The Bureau received this
feedback pertaining to CDFIs, credit unions, minority depository
institutions, financial institutions in rural areas or low- and
moderate-income areas, financial institutions that would themselves be
small businesses under the rule, and motor vehicle dealers. Conversely,
some stakeholders encouraged the Bureau not to provide any such
categorical exemptions. One stakeholder also urged the Bureau not to
exempt government or nonprofit lenders, arguing that they were an
important element of achieving broad coverage in 1071 data.
Proposed Rule--Activity-Based Exemption
Proposed Sec. 1002.105(b) would define a covered financial
institution as a financial institution that originated at least 25
covered credit transactions for small businesses in each of the two
preceding calendar years. This proposed definition adopts the portion
of the Option 1 Exemption Threshold based on number of originations
discussed at SBREFA, using the two consecutive year approach that was
also described at SBREFA. The Bureau believes this definition will
facilitate compliance by describing which financial institutions are
required to collect and report small business data. The Bureau is also
proposing commentary to accompany proposed Sec. 1002.105(b). The
Bureau's
[[Page 56420]]
rationale for proposing this exemption, and for not proposing any
others, is discussed in detail below.
In general, the Bureau believes that fulfilling the purposes of
section 1071 necessitates collecting small business lending data from
all sizes and types of financial institutions (other than those with a
low volume of lending activity), particularly given the variety of
entities identified in ECOA section 704B(h)(1). The Bureau is proposing
to exempt certain financial institutions from its small business
lending data collection rule because it remains concerned that
financial institutions with the lowest volume of small business lending
might reduce or cease their small business lending activity due to the
fixed costs of coming into compliance with the 1071 rule. A reduction
in access to credit would run contrary to the community development
purpose of section 1071. Section 1071 describes its community
development purpose as ``enabl[ing] communities, governmental entities,
and creditors to identify business and community development needs and
opportunities of women-owned, minority-owned, and small businesses.''
\470\ In the Bureau's view, such business and community development
opportunities cannot be appropriately identified if the 1071 rule
unduly eliminates those opportunities by reducing access to credit,
which, as explained below, supports the Bureau's use of its exemption
authority under 704B(g)(2) here. Feedback from SBREFA showed that a
broad array of financial institutions, trade associations, community
groups, and others share the Bureau's concern about the risk of
reducing access to small business credit, particularly with respect to
financial institutions that infrequently lend to small businesses.
---------------------------------------------------------------------------
\470\ ECOA section 704B(a).
---------------------------------------------------------------------------
The Bureau is proposing Sec. 1002.105(b) pursuant to its authority
under ECOA section 704B(g)(1) to prescribe such rules and issue such
guidance as may be necessary to carry out, enforce, and compile data
pursuant to section 1071 and its authority under 704B(g)(2) to adopt
exceptions to any requirement of section 1071 and, conditionally or
unconditionally, exempt any financial institution or class of financial
institutions from the requirements of section 1071, as the Bureau deems
necessary or appropriate to carry out the purposes of section 1071.
The Bureau believes that an activity-based threshold would provide
a simple basis for financial institutions that infrequently lend to
small businesses to determine whether they have conducted sufficient
lending activity as to be required to collect and report data under
proposed subpart B. With respect to setting an activity-based
threshold, feedback favored using only originations. SERs uniformly
supported clear, predictable collection and reporting exemption
thresholds. With respect to feedback from other stakeholders, nearly
all of the comments that expressed support for the Option 1 Exemption
Threshold provided support only for the 25-loan metric, and not the
total lending metric (and several comments explicitly urged the Bureau
not to adopt the $2.5 million lending threshold). The Bureau believes
that furnishing a dual activity-based threshold, under which infrequent
lenders must ascertain both measurements to determine whether reporting
may be required, would cut against the goal of simplifying the rule as
lenders would then have to track two metrics, not one. The Bureau
believes that a dual threshold would create more regulatory complexity
as, among other things, the resulting rule would have to address issues
such as how lines of credit and credit cards are meant to be counted
towards the dollar volume threshold. (For example, should the rule use
the maximum amount that could be extended or something else, like an
average of the amount actually outstanding? If the former, how should
changes in the limit be treated?) In contrast, tracking total annual
small business originations does not entail such complexity.
In particular, the Bureau believes that a primary advantage of an
activity-based threshold--ease of compliance--would be undermined if
the Bureau were to implement a complex, dual threshold eligibility
test. The Bureau wishes to ensure that infrequent lenders are not
incurring significant undue compliance costs, particularly while not
reporting data. In general, tracking two thresholds is more complex
than tracking one. And of these two thresholds, the Bureau believes
that tracking total originations is simpler than tracking total
lending. The Bureau believes it is also more likely that financial
institutions are already tracking total originations. The Bureau
believes that proposing an activity-based threshold that employs data
already generally collected by financial institutions could mitigate
the risk that section 1071, when implemented, would result in reduced
access to credit.
The Bureau is thus proposing to set the loan-volume threshold at 25
covered credit transactions from small businesses in each of the past
two years. This proposal is based, in part, on feedback received at
SBREFA. As mentioned above, several SERs recommended an annual 25-loan
threshold and many comments, including those from lenders, trade
associations, and community groups, expressed support for the Option 1
Exemption Threshold, with most explicitly supporting just the 25-loan
threshold and not total lending.
The Bureau continues to consider whether this loan-volume threshold
should be set at a different level, such as 50 or 100 originations, as
described in the SBREFA Outline.\471\ The Bureau notes that there was
also substantial support for a much higher loan-volume threshold than
25 originations. In addition to the SER feedback discussed above,
several stakeholders advocated for 100 loans and many others advocated
for an even higher threshold. However, at least to this point, the
Bureau is not convinced, based on the feedback from SERs and other
stakeholders, that higher thresholds would be more necessary or
appropriate to carry out the purposes of section 1071. Rather, such
advocacy focused either on concerns that lower thresholds would not
exempt a particular financial institution or type of financial
institution, such as community banks, or that higher thresholds would
not substantially diminish overall data collection.
---------------------------------------------------------------------------
\471\ SBREFA Outline at 12.
---------------------------------------------------------------------------
Supporters of the 25-loan threshold and supporters of the 100-loan
threshold each argued that such a threshold would be similar to that
used in HMDA. The Bureau's 2015 HMDA Rule set the closed-end loan
threshold
[[Page 56421]]
at 25 originated loans for each of the two preceding calendar
years.\472\ However, in 2020, the Bureau increased the threshold to 100
closed-end loans, effective the same year.\473\ The Bureau set the HMDA
threshold pursuant to its authority to provide adjustments or
exceptions that it judges as necessary and proper to effectuate the
purposes of HMDA or to facilitate compliance with HMDA. In the present
case, with respect to institutional coverage thresholds, the Bureau
does not believe a direct comparison with HMDA is instructive because
of differences in the relevant statutory authorities and between home
mortgages and small business loans.
---------------------------------------------------------------------------
\472\ See 80 FR 66127 (Oct. 28, 2015). The Bureau also provided
a higher threshold of 100 for open-end lines of credit. Id.
\473\ See 85 FR 28364 (May 12, 2020).
---------------------------------------------------------------------------
The Bureau also considered how its proposed threshold of 25 covered
credit transactions for small businesses (and the other thresholds
under consideration at SBREFA) might affect overall collection and
reporting of 1071 data from banks and credit unions, based on data as
of 2019. Table 1 below provides the Bureau's estimated share of
depository institutions, estimated share of small business loans from
those institutions (measured in total number of loans), and estimated
share of small business credit from those institutions (measured in
dollars) that would be covered by a loan-volume threshold of 25, 50, or
100 small business loans. The Bureau estimates that a depository
institution is covered for a particular loan-volume threshold as of
2019 if the estimated number of originations for that institution
exceeded the threshold in both 2017 and 2018. Given the limitations of
the source data, the Bureau cautions that these estimates are not
intended to provide a complete sense of the possible consequences of
adopting each particular threshold. Nonetheless, the Bureau is
providing estimates based on these data because it is the best
information currently available to the Bureau. Moreover, the Bureau
emphasizes that these estimates apply only to depository institutions.
This information is based on FFIEC and Credit Union Call Reports, as
well as Community Reinvestment Act submissions.\474\ Under these data
collections, banks report small loans made to businesses and farms
(regardless of the borrower's size). Credit unions report commercial
loans over $50,000 made to members (also, regardless of the borrower's
size). The Bureau is unable to determine the degree to which these data
provide an adequate proxy for the applications from small businesses
that would be subject to 1071 reporting. The methodologies and
assumptions used to produce these estimates are further documented in
part VII.D below and in more detail in its Supplemental estimation
methodology for institutional coverage and market-level cost estimates
in the small business lending data collection notice of proposed
rulemaking released concurrently with this proposal.\475\
---------------------------------------------------------------------------
\474\ On the bank Call Report and in the Community Reinvestment
Act data, for small bank and small farm loans, banks report on
business loans with original amounts of $1 million or less and farm
loans with original amounts of $500,000 or less. For lines of credit
or loan commitments, banks report the size of the line of credit or
commitment when it was most recently approved. Banks include loans
guaranteed by the SBA and other government entities in their small
loans to businesses. Banks do not report loans to nonprofit
organizations in this category. Thus, these data collections would
include loans made to purchase, for example, individual vehicles and
pieces of equipment for the nation's largest businesses.
\475\ This document is available at https://www.consumerfinance.gov/data-research/research-reports/supplemental-estimation-methodologies-small-business-lending-data-collection-nprm/.
[GRAPHIC] [TIFF OMITTED] TP08OC21.000
[[Page 56422]]
Table 1 above shows that as the loan-volume threshold rises, the
estimated share of depository institutions subject to section 1071
decreases substantially. Likewise, the estimated share of small
business loans and small business credit captured by the rule would
also decrease, although those decreases are less pronounced. The Bureau
has no information for nondepository institutions such that the Bureau
could provide similar estimates for comment. The Bureau requests in
response to this proposal such information and data that might bear on
any activity-based exemption for nondepository
institutions.476 477 478
---------------------------------------------------------------------------
\476\ There were 10,525 depository institutions as of December
31, 2019, including 112 credit unions that are not federally
insured.
\477\ Based on FFIEC Call Report data, there were 5,177 banks
and savings associations as of December 31, 2019.
\478\ Based on the 2019 NCUA Call Report data, there were 5,348
credit unions as of December 31, 2019, including 112 credit unions
that are not federally insured.
---------------------------------------------------------------------------
The Bureau notes that the above estimates represent small business
lending data prior to the COVID-19 pandemic and ensuing policy
responses. The Bureau is keenly aware that many financial institutions,
including those that may not have historically participated actively in
small business lending, served their communities by becoming
participating lenders in the SBA's Paycheck Protection Program. This
program ended on May 31, 2021. The Bureau expects that by the time its
1071 rule is finalized and implemented, lending activity conducted
pursuant to the SBA's Paycheck Protection Program will not be
determinative of whether a given financial institution qualifies as a
covered financial institution under the 1071 rule. The Bureau will
continue to monitor the market and consider what other adjustments, if
any, may be needed to ensure that, to the best of the Bureau's ability,
the 1071 rulemaking is informed by up-to-date and accurate information
about the small business lending market.
The Bureau seeks comment on its proposed 25 originations threshold
incorporated into the definition of a covered financial institution.
The Bureau also solicits comment on whether this threshold should
alternatively be set at 50 or 100 covered credit transactions.
The Bureau is proposing to define a covered financial institution
using a loan-volume threshold that must be achieved in each of the two
preceding calendar years. SERs provided relatively little feedback
directly on the measurement period, but broadly expressed a desire for
clear, predictable collection and reporting thresholds. The Bureau
received substantial feedback advocating for a two-year approach, but
little feedback asking for a one-year threshold period. A few
stakeholders also expressed interest in a measurement period longer
than two years.
The Bureau acknowledges that a loan-volume threshold based on a
two-year period could create some operational complexity for some
financial institutions. To be sure that it was not a covered financial
institution, a financial institution would need to maintain records
sufficient to show total small business originations for both years of
the threshold period. The Bureau believes that two years is not a
prohibitively long time, although it is possible that infrequent
lenders may have smaller staff or fewer resources to reliably track
such information for 1071 purposes. The Bureau believes that a two-year
threshold period is advisable to eliminate uncertainty surrounding data
collection responsibilities. Under this proposal, a financial
institution that may not frequently lend to small businesses, but that
experiences an unusual and unexpectedly high lending volume in a single
year would not be a covered financial institution. As discussed in part
VII below, in order to comply with the Bureau's proposed 1071 rule, a
financial institution may need to undertake substantial one-time costs
that include operational changes, such as staff training, information
technology changes, and develop policies and procedures. Therefore, the
Bureau believes that it is appropriate to propose a two-year threshold
period to provide more stability around reporting responsibilities.
Regulations that implement HMDA and the Community Reinvestment Act
provide similar periods to determine coverage.
The Bureau notes that employing a two-year approach would delay
reporting for new, potentially active entrants. For example, under this
proposal a large lender that enters the market and originates hundreds
or even thousands of small business loans in its first two calendar
years of lending would not report its covered applications. That is,
under the Bureau's proposal, this financial institution would not be
required to collect and report 1071 data on its covered applications
for small businesses in those first two years, although the institution
could choose to voluntarily collect and report data. The Bureau has
concerns, however, about triggering data collection and reporting
requirement based on lenders' estimates of their projected future
volume.
The proposed two-year threshold period may pose other
considerations for financial institutions that conduct small business
lending activity near the proposed 25 small business originations
threshold. See the section-by-section analysis of proposed Sec.
1002.5(a)(4) above for a discussion of proposed Sec.
1002.5(a)(4)(viii), which would allow a financial institution to
collect ethnicity, race, and sex information pursuant to proposed
subpart B for a covered application under certain circumstances during
the second year of the threshold period. See the section-by-section
analysis of proposed Sec. 1002.114(c) below for discussion of
additional flexibility that the Bureau is proposing regarding measuring
lending activity prior to the rule's compliance date.
The Bureau is proposing to set the activity-based threshold based
on small business originations, rather than applications. The statutory
language of 1071 generally applies to applications; however, the Bureau
believes that using small business originations for purposes of
defining a covered financial institution is the better approach. The
Bureau expects that financial institutions track their small business
application volumes in various ways, but whether an origination
resulted is a clear and readily identifiable metric. The Bureau is
concerned that attempting to use an exemption metric based on
applications would impose new obligations on financial institutions
solely for purposes of determining whether or not they are subject to
this rule. As discussed above, the Bureau believes that proposing an
activity-based threshold that employs data already generally collected
by financial institutions could mitigate the risk that section 1071,
when implemented, would result in reduced access to credit. In
addition, even those financial institutions that track total
applications now may not do so in a way that fully aligns with how the
Bureau is proposing to define covered applications for purposes of
proposed subpart B. Using originations is also consistent with the
Bureau's Regulation C. In addition, the Bureau received limited
feedback advocating for the use of applications to set the activity-
based threshold.
Proposed comment 105(b)-1 would clarify the meaning of a preceding
calendar year for purposes of the proposed activity-based exemption.
See the section-by-section analysis of proposed Sec. 1002.114(c)(2)
below for additional discussion regarding measuring lending activity
prior to the rule's compliance date. Proposed
[[Page 56423]]
comment 105(b)-2 would emphasize that a financial institution qualifies
as a covered financial institution based on total covered credit
transactions originated for small businesses, rather than covered
applications received from small businesses. Proposed comment 105(b)-3
would explain that whether a financial institution is a covered
financial institution depends on its particular small business lending
activity in the two preceding calendar years, and that the obligations
of a covered financial institution is an annual consideration for each
year that data may be compiled and maintained under proposed Sec.
1002.107(a).
The Bureau is proposing to clarify in Sec. 1002.105(b) that for
purposes of defining a covered financial institution, if more than one
financial institution was involved in the origination of a covered
credit transaction, only the financial institution that made the final
credit decision approving the application shall count the origination.
The Bureau believes that providing this clarifying language would
assist financial institutions in understanding which transactions count
towards the loan-volume threshold. This approach is consistent with the
Bureau's proposed Sec. 1002.109(a)(3).
Proposed comments 105(b)-4 and -5 would explain when a financial
institution is a covered financial institution following a merger or
acquisition. These proposed comments are largely consistent with the
Bureau's approach to reporting obligations surrounding a merger under
Regulation C,\479\ with modifications to reflect the nature of the
small business lending market and to provide additional clarifications.
---------------------------------------------------------------------------
\479\ See Regulation C comments 2(g)-3 and -4.
---------------------------------------------------------------------------
Proposed comment 105(b)-6 would clarify that Regulation B
(including proposed subpart B) generally does not apply to lending
activities that occur outside the United States.
Finally, proposed comment 105(b)-7 would address financial
institutions that do not qualify as covered financial institutions but
may nonetheless wish to voluntarily collect and report small business
lending data. This proposed comment would reiterate that proposed Sec.
1002.5(a)(4)(vii) through (ix) permits a creditor that is not a covered
financial institution under proposed Sec. 1002.105(b) to voluntarily
collect and report information regarding covered applications in
certain circumstances. If a creditor is voluntarily collecting
applicants' protected demographic information for covered applications,
it shall do so in compliance with proposed Sec. Sec. 1002.107,
1002.108, 1002.111, 1002.112, and 1002.114 as though it were a covered
financial institution. Proposed comment 105(b)-7 would further state
that if a creditor is voluntarily reporting those covered applications
to the Bureau, it shall do so in compliance with proposed Sec. Sec.
1002.109 and 1002.110 as though it were a covered financial
institution.
The Bureau seeks comment on its proposed definition of a covered
financial institution, which uses a loan-volume threshold of 25 covered
credit transactions from small businesses. The Bureau continues to
consider whether this loan-volume threshold should be changed to a
different threshold, such as 50 or 100 originations from small
businesses, and seeks feedback and data related to any of these three
potential thresholds. In addition, the Bureau seeks comment on whether
an activity-based threshold should be based on the total number of
small business applications, rather than originations. The Bureau also
requests comment on whether additional clarification is needed for this
proposed definition.
Alternatives Considered--Size-Based Exemption and Combined Exemptions
The Bureau is not proposing to define a covered financial
institution on the basis of the size of the financial institution, as
measured by total assets for depository institutions or some other
metric. Likewise, the Bureau is not proposing to define a covered
financial institution with reference to the financial institution's
size in combination with its small business lending activity.
For the reasons discussed above, the Bureau believes that proposing
an exemption based on a financial institution's recent small business
lending activity would be appropriate to carry out the purposes of
section 1071. The Bureau believes that in comparison to a size-based
exemption, an activity-based exemption is a more compelling basis for
exempting certain financial institutions from coverage in light of
section 1071's community development purpose. As previously stated, the
Bureau is concerned that certain financial institutions might reduce or
cease their small business lending activity because of the fixed costs
of coming into compliance with this rule, and that a reduction in
access to credit would run contrary to the community development
purpose of section 1071. However, the Bureau is persuaded that small
business lending activity holds a more direct relationship to a given
financial institution's role in the small business lending market than
a more general measurement of the financial institution's size as
measured in total assets. Using a size-based metric would present a
much rougher proxy for the risk that a financial institution may reduce
or eliminate its small business lending activities as a result of the
one-time costs of coming into compliance with this rule.
The Bureau also believes that proposing an activity-based exemption
is a superior approach to proposing a size-based exemption because an
exemption based on asset size would apply only to depository
institutions. The Bureau is unaware of a similar size metric for
nondepository institutions, and SERs and other stakeholders who
provided feedback on the SBREFA Outline were not able to offer one. A
size-based exemption approach might therefore risk distorting the
collected data and create an uneven playing field. As noted above,
other stakeholders explained that because there was no readily
available equivalent size-based measurement for nondepository
institutions, including an asset-based exemption might risk presenting
a cost disadvantage for other small financial institutions. Moreover,
exempting proportionately more depository institutions than
nondepository institutions may present demographic data collection
concerns. A recent small business credit survey revealed racial
disparities in applications under the SBA's Paycheck Protection
Program: the data showed white-owned firms were most likely to apply
for a loan through a small bank (defined as under $10 billion in
assets), while Black-owned firms were three times as likely as white-
owned firms to apply for a loan through an online lender.\480\ The
Bureau is concerned that collecting data under different standards for
depository institutions versus nondepository institutions would run
contrary to the purposes of section 1071 and undermine the utility of
the data, as well as the purposes of the Bureau, which are, in part,
``to implement and, where applicable, enforce . . . consistently''
Federal laws including ECOA.\481\
---------------------------------------------------------------------------
\480\ Small Business Credit Survey of Firms Owned by People of
Color at 14.
\481\ 12 U.S.C. 5511(a).
---------------------------------------------------------------------------
The Bureau also considered whether proposing a size-based
exemption, on the basis of total assets for depository institutions,
would be appropriate in combination with the above-discussed activity-
based exemption. The Bureau is not persuaded that proposing such an
additional exemption would be necessary or appropriate to carry out the
[[Page 56424]]
purposes of section 1071. In particular, the Bureau considered two
types of depository institutions that might be exempt by virtue of a
size-based exemption:
An Active Small Depository Institution (ASDI), meaning any
depository institution smaller than a particular asset size that lends
at or above a given activity-based threshold, and
An Inactive Small Depository Institution (ISDI), meaning
any depository institution smaller than a particular asset size that
lends below a given activity-based threshold.
In examining the case for ASDIs and ISDIs, the Bureau believes that
an additional, asset-based exemption may provide a slightly less costly
means of ascertaining exemption status for a small number of ISDIs, but
such an exemption would eliminate small business lending data from a
moderate share of ASDIs that would otherwise provide valuable data in
fulfilling both of section 1071's purposes.
Using the same data that were compiled for the activity-based
exemption analysis, the Bureau estimates that under its proposed 25
originations threshold approximately 6,300 to 6,500 depository
institutions would not be covered financial institutions, and therefore
would be exempt from collection and reporting. The Bureau further
estimates that proposing an asset-based exemption of $200 million would
result in approximately 1,300 to 1,500 additional depository
institutions not reporting (all of which, by definition, are ASDIs),
while 5,200 to 5,400 depository institutions would already have been
exempt, but have a somewhat lower-cost method of ascertaining this
information (e.g., ISDIs).\482\
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\482\ For the purposes of this analysis, the Bureau assumes that
the alternative proposal would have been that a depository
institution would be required to report its small business lending
activity for 2019 if it had more originations than the loan-volume
threshold in 2017 and 2018 and had assets over the asset-based
threshold on December 31, 2018. The Bureau further assumes that if
two institutions merged in 2019 then the resulting institution would
be required to report if the sum of the separate institutions'
assets on December 31, 2018 exceeded the asset-based threshold. Of
the 10,525 depository institutions that existed at the end of 2019,
6,687 either didn't exist at the end of 2018 or had merger adjusted
assets below $200 million.
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Table 2 below indicates the estimated number of ASDIs that would
report under various loan-volume thresholds, by asset size. As shown in
Table 2, if the Bureau proposed an asset-based exemption of $100
million in addition to the proposed activity-based exemption of 25
originated covered credit transactions for small businesses, 500 to 592
more depository institutions would not be covered financial
institutions, although these institutions originated more than 25
covered credit transactions for small businesses in each of the
previous two years. Likewise, if the Bureau proposed an asset-based
exemption of $200 million in addition to the proposed 25-originations
activity-based exemption, 1,299 to 1,466 more depository institutions
would not be covered financial institutions, although these
institutions originated more than 25 covered credit transactions for
small businesses in each of the previous two years.
[GRAPHIC] [TIFF OMITTED] TP08OC21.001
Of the estimated 5,200 to 5,400 ISDIs, as defined by a 25
originations threshold and $200 million asset threshold, about 4,200
are credit unions and about 1,000 or 1,200 are banks. Furthermore, the
vast majority of these ISDI credit unions (88 percent) had either no
small business originations in 2017 and 2018 or fewer than 10 small
business originations in 2017 and 2018 (97 percent).\483\ The Bureau
believes that it is likely that these institutions would be able to
determine that they do not meet a loan-volume threshold almost as
easily as they can determine that they do not meet an asset-based
threshold. Only 34 credit unions with assets below $200 million had
between 10 and 25 small business originations in both 2017 and 2018.
The Bureau estimates that as many as 1,200 banks and 34 credit unions
would benefit from a simpler method of determining exemption status.
However, as stated above, the Bureau believes that such cost savings
likely would still be minimal.
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\483\ However, it is possible that these credit unions have
originated loans to small businesses with values below $50,000.
Credit unions report commercial loans over $50,000 made to members
(regardless of the borrower's size).
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The Bureau therefore believes that providing an additional, asset-
based exemption might provide a somewhat less costly means of
ascertaining exemption status for some ISDIs, although this number may
be relatively modest. However, the tradeoff of providing a simpler
exemption for some depository institutions is that a $200 million
asset-based exemption would increase the overall percent of exempt
depository institutions by some 13 percentage points by also extending
to ASDIs. The Bureau estimates that these ASDIs accounted for between
171,000 and 226,000 originations in 2019, or about 2 percent of total
covered originations under the 25 originations threshold. Exempting
additional depository institutions by adding an asset-based exemption
would curtail
[[Page 56425]]
both the volume of and possible variety of data, and the Bureau is
concerned that exempting ASDIs would detract from the utility of 1071
data in carrying out the purposes of section 1071 by removing important
data from disclosure and review.
The Bureau also considered feedback from SERs and other
stakeholders who suggested that the Bureau exempt lenders other than
``large'' financial institutions, such as depository institutions with
more than $1 billion in assets, and then potentially extend the rule to
smaller lenders at a later time. These SERs and stakeholders argued
that this approach would capture the vast majority of small business
loans while avoiding imposing undue regulatory burden on smaller
lenders, who might be less capable of absorbing such costs. However,
the Bureau is not currently persuaded that capturing lending data only
from large financial institutions would be necessary or appropriate to
carry out section 1071's statutory purposes.
Supporters of collecting data only from large depository
institutions argue that such depository institutions may be more
capable of absorbing compliance costs. However, the Bureau is concerned
that data collection from only large depository institutions may not
provide adequate data for community development purposes, as there may
be demographic disparities among applications by the type (and size) of
financial institution. Likewise, data collection from only large
depository institutions would not allow the Bureau to conduct fair
lending analyses for other types of financial institutions. In general,
the Bureau believes that appropriately carrying out the purposes of
section 1071 necessitates collecting small business lending data from
all sizes and types of financial institutions (other than those with
the lowest volume of lending activity), particularly given the variety
of entities identified in section 704B(h)(1), discussed above. See the
section-by-section analysis of proposed Sec. 1002.114 below, however,
for further discussion of a possible tiered compliance date based on
the size of the financial institution.
Therefore, for the reasons described above, Bureau is not proposing
an asset-based exemption to the definition of a covered financial
institution.
Alternative Considered--Other Exemptions
The Bureau is not proposing to adopt alternative exemptions or
exceptions to the definition of covered financial institution, other
than the loan-volume threshold as described above.
As discussed above, the Bureau believes that, in light of the text
and purposes of section 1071, the Bureau should generally adopt the
posture that all manner of small business lenders should be subject to
reporting. Feedback from SERs and others generally did not provide
compelling policy reasons or legal arguments for exempting entire
classes of financial institutions. Moreover, the Bureau believes that
most policy arguments that were raised in this context are better
addressed through potential activity-based considerations.
With respect to government lenders, the Bureau has not identified,
nor did SERs or other stakeholders provide, policy or legal rationales
for excluding government lenders from data collection. To the contrary,
a few SERs, particularly CDFIs, strongly preferred that all lenders,
including government entities, be subject to section 1071 data
collection and reporting requirements; one stakeholder likewise urged
the Bureau not to exempt government lenders. The Bureau believes that
collecting information on small business lending by government entities
furthers the purposes of section 1071. Moreover, the Bureau believes,
as described above in the discussion of proposed comment 105(a)-1, that
government entities are included within the phrase ``other entity'' in
the ECOA section 704B(h)(1) definition of ``financial institution.''
For example, the Bureau believes that it will be helpful to identify
the business and community development needs of women-owned, minority-
owned, and small businesses by collecting lending data from both an
online lender and a county-run assistance program for establishing new
businesses.
For the same reasons, the Bureau does not believe that exempting
not-for-profit lenders from data collection is consistent with the
purposes of section 1071. The Bureau believes that organizations exempt
from taxation pursuant to 26 U.S.C. 501(c) play a crucial role in
lending to small businesses, particularly those that are women- or
minority-owned, in certain communities.
Those providing feedback generally argued for categorical
exemptions because, they said, certain financial institutions (1) would
encounter difficulty absorbing compliance costs; (2) are integral to a
community's lending needs; and/or (3) employ business methods or offer
products not conducive to data collection and reporting. With respect
to compliance costs, the Bureau believes that directly considering a
financial institution's activity is a more appropriate way to address
this concern. With respect to a financial institution's lending
importance for a community or region (such as low income or rural), the
Bureau believes that such arguments emphasize the importance of
collecting and analyzing such data to further the purposes of section
1071 rather than justify an exemption. Finally, with respect to
considering the particularities of certain business models, the Bureau
is persuaded that it can most appropriately address such concerns by
considering potentially modified reporting rules for particular
business models and specific products. See the section-by-section
analyses of proposed Sec. Sec. 1002.104(b) and 1002.109(a)(3). The
Bureau is proposing comment 105(a)-1, discussed above, consistent with
the considerations discussed here.
Therefore, for the reasons described above, the Bureau is not
proposing to define a covered financial institution by providing
alternative exemptions or exceptions. The Bureau seeks comment on this
approach, including data or information that might bear upon any such
alternative exemptions in light of section 1071's purposes.
Section 1002.106 Business and Small Business
ECOA section 704B(h)(2) defines the term ``small business'' as
having the same meaning as ``small business concern'' in section 3 of
the Small Business Act.\484\ The Bureau is proposing to define a small
business consistent with the statutory language. In particular, the
Bureau is proposing to define a small business concern to have the same
meaning as the term ``small business concern'' in 15 U.S.C. 632(a), as
implemented by 13 CFR 121.101 through 121.107. Notwithstanding the size
standards set forth in 13 CFR 121.201, for purposes of proposed subpart
B, the Bureau is proposing that a business is a small business if and
only if its gross annual revenue for its preceding fiscal year is $5
million or less. The Bureau is seeking SBA approval for this alternate
small business size standard pursuant to the Small Business Act.\485\
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\484\ 15 U.S.C. 632.
\485\ 15 U.S.C. 632(a)(2)(C).
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The Bureau believes it may be instructive for financial
institutions to first consider whether an applicant may be a business
under proposed Sec. 1002.106(a), and then to consider, if the
applicant is a business, whether the business is small under Sec.
1002.106(b). Furthermore, the Bureau believes that these proposed
definitions implement the statutory language of section 1071
[[Page 56426]]
while reflecting the need for a wide variety of financial institutions
to apply a simple, broad definition of a small business that would be
practical across the many product types, application types, technology
platforms, and applicants in the market.
For the reasons set forth below, the Bureau is proposing Sec.
1002.106 to implement ECOA section 704B(h)(2) and pursuant to its
authority under ECOA section 704B(g)(1) to prescribe such rules and
issue such guidance as may be necessary to carry out, enforce, and
compile data under section 1071.
106(a) Business
Background
ECOA section 704B(h)(2) defines the term ``small business'' as
having the same meaning as ``small business concern'' in section 3 of
the Small Business Act.\486\ The Small Business Act provides a general
definition of a ``small business concern,'' authorizes SBA to establish
detailed size standards for use by all agencies, and permits an agency
to request SBA approval for a size standard specific to an agency's
program. The SBA's regulations define a ``business concern'' as ``a
business entity organized for profit, with a place of business located
in the United States, and which operates primarily within the United
States or which makes a significant contribution to the U.S. economy
through payment of taxes or use of American products, materials or
labor.'' \487\
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\486\ 15 U.S.C. 632.
\487\ 13 CFR 121.105.
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SBREFA Proposals Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau stated it was considering
proposing to define ``small business'' by cross-referencing the SBA's
general definition of ``small business concern'' but adopting a
simplified size standard for purposes of its section 1071 rule.\488\
Thus, the Bureau explained that it was considering a proposal under
which financial institutions would not be required to collect and
report 1071 data for not-for-profit applicants, because they are not
``organized for profit'' and are thus not a ``business concern.'' The
Bureau explained that a business concern may take a number of different
legal forms, including a sole proprietorship, partnership, LLC,
corporation, joint venture, trust, or cooperative.\489\ The Bureau
explained that, because the definition is limited to American
businesses, if the Bureau adopted this definition for purposes of 1071,
loans to foreign companies would be outside the scope of 1071 data
collection and reporting requirements.
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\488\ SBREFA Outline at 14-18.
\489\ 13 CFR 121.105(b).
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Feedback from stakeholders regarding the proposal under
consideration focused primarily on how the Bureau might define a
business size standard, addressed below.\490\ The Bureau did receive
limited feedback, however, suggesting that the Bureau consider certain
modifications or adjustments to the definition of a business concern,
such as clarifying that the term does not include foreign-owned
entities, certain trusts, and certain real estate holding companies.
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\490\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 20-22.
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Proposed Rule
Proposed Sec. 1002.106(a) would define a business as having the
same meaning as the term ``business concern or concern'' in 13 CFR
121.105. This proposed definition is consistent with ECOA section
704B(h)(2), which defines the term ``small business'' as having the
same meaning as ``small business concern'' in section 3 of the Small
Business Act.\491\ The SBA has issued 13 CFR 121.105, ``How does SBA
define `business concern or concern,''' pursuant to the Small Business
Act. The Bureau refers to the entirety of that section for additional
information. In particular, the Bureau notes that this definition
includes elements such as being ``a business entity organized for
profit'' that has ``a place of business located in the United States''
and ``operates primarily within the United States or . . . makes a
significant contribution to the U.S. economy.'' \492\
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\491\ 15 U.S.C. 632.
\492\ 13 CFR 121.105(a)(1).
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The Bureau is not providing interpretations of this SBA regulation
in proposed subpart B because the Bureau believes that existing SBA
interpretations are responsive to the general questions posed at
SBREFA.\493\
---------------------------------------------------------------------------
\493\ See, e.g., 13 CFR 121.105(b), which states that a business
concern may be in the legal form of an individual proprietorship,
partnership, limited liability company, corporation, joint venture,
association, trust or cooperative, except that where the form is a
joint venture there can be no more than 49 percent participation by
foreign business entities in the joint venture. Thus, for example,
financial institutions would not be required to collect and report
data under proposed subpart B for not-for-profit applicants, because
they are not ``organized for profit'' and are thus not a ``business
concern.''
---------------------------------------------------------------------------
The Bureau seeks comment on this proposed definition of a business,
and generally seeks comment on whether additional clarification is
needed.
106(b) Small Business
Background
Section 1071 data collection purposes, requirements, and potential
impacts. A key component of the Bureau's fair lending work under the
Dodd-Frank Act is to ensure fair, equitable, and nondiscriminatory
access to credit for both individuals and their communities.\494\
Section 1071 of the Dodd-Frank Act, which amended ECOA, requires
financial institutions to collect and report to the Bureau data
regarding applications for credit for women-owned, minority-owned, and
small businesses. ECOA section 704B(h)(2) states that ``[t]he term
`small business' has the same meaning as the term `small business
concern' in section 3 of the Small Business Act (15 U.S.C. 632).''
Section 1071 was adopted for the dual statutory purposes of
facilitating fair lending enforcement and enabling communities,
governmental entities, and creditors to identify business and community
development needs and opportunities of women-owned, minority-owned, and
small businesses.\495\
---------------------------------------------------------------------------
\494\ See 12 U.S.C. 5493(c)(2)(A).
\495\ ECOA section 704B(a).
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As set forth in section 1071, the data that financial institutions
would be required to collect and report to the Bureau include, among
other things, the gross annual revenue of the business in the preceding
fiscal year, the type and purpose of the loan, the census tract for the
applicant's principal place of business, and the race, sex, and
ethnicity of the principal owners of the business.\496\ ECOA section
704B(f)(2)(C) further provides that information compiled and maintained
under the statute shall be ``annually made available to the public
generally by the Bureau, in such form and in such manner as is
determined by the Bureau, by regulation.'' The Bureau believes that the
collection and subsequent publication of robust and granular data
pursuant to section 1071 regarding credit applications for small
businesses, including those that are women- and minority-owned, will
provide much-needed transparency to an otherwise opaque market and
better ensure fair, equitable, and nondiscriminatory access to credit.
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\496\ ECOA section 704B(e)(2).
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The Bureau understands that access to fair, equitable, and
nondiscriminatory credit is crucial to the success of small businesses.
Small businesses--including women-owned and minority-owned small
businesses--need access to credit to smooth out business cash flows
[[Page 56427]]
and to enable entrepreneurial investments that take advantage of, and
sustain, opportunities for growth. The market these businesses turn to
for credit is vast, varied, and complex. Overall, small businesses have
many options when it comes to financing, including a wide range of
products and providers. Yet market-wide data on credit to small
businesses remains very limited, particularly with respect to
applicants' protected demographic information at the core of section
1071. The Bureau believes that a section 1071 rulemaking would provide
data that could serve as a significant resource for financial
institutions, community groups, policy makers, and small businesses.
SBA size standards. The Small Business Act permits the Small
Business Administrator to prescribe detailed size standards by which a
business concern may be categorized as a small business, which may be
based on the number of employees, dollar volume of business, net worth,
net income, a combination of these, or other appropriate factors.\497\
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\497\ 15 U.S.C. 632(a)(2)(A) and (B).
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As implemented by the SBA, these size standards generally hinge on
average annual receipts or the average number of employees of the
business concern and are customized industry-by-industry across 1,057
6-digit NAICS codes. Specifically, the SBA typically uses two primary
measures of business size for size standards purposes: (i) Average
annual gross receipts \498\ for businesses in services, retail trade,
agricultural, and construction industries, and (ii) average number of
employees for businesses in all manufacturing, most mining and
utilities industries, and some transportation, information and research
and development industries. To measure business size, the SBA also uses
financial assets for certain financial industries, and for the
petroleum refining industry, it uses refining capacity and employees.
The SBA's size standards are used to establish eligibility for a
variety of Federal small business assistance programs, including for
Federal government contracting and business development programs
designed to assist small businesses in obtaining Federal contracts and
for SBA's loan guarantee programs, which provide access to capital for
small businesses that are unable to qualify for and receive
conventional loans elsewhere. Under the Small Business Jobs Act of 2010
(Small Business Act),\499\ the SBA is required to review all size
standards no less frequently than once every five years.\500\ The Small
Business Act further provides that no Federal agency may prescribe a
size standard for categorizing a business concern as a small business
concern unless certain conditions are met, including approval by the
SBA's Administrator.\501\
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\498\ The SBA recently changed its regulations on the
calculation of average annual receipts for all of SBA's receipts-
based size standards, and for other agencies' proposed receipts-
based size standards, from a three-year averaging period to a five-
year averaging period, outside of the SBA Business Loan and Disaster
Loan Programs. 84 FR 66561 (Dec. 5, 2019).
\499\ Public Law 111-240, 124 Stat. 2504 (2010).
\500\ 15 U.S.C. 632 note.
\501\ 15 U.S.C. 632(a)(2)(C).
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The SBA's rule governing its consideration of other agencies'
requests for approval of alternate size standards requires that the
agency seeking to adopt an alternate size standard consult in writing
with the SBA's Division Chief for the Office of Size Standards in
advance of issuing an NPRM containing the proposed alternate size
standard.\502\ The Bureau has met this requirement. After issuing an
NPRM, the agency must provide a copy of the published NPRM to the
Division Chief for the Office of Size Standards, and the agency cannot
adopt a final rule including its alternate size standard until the size
standard has been approved by the SBA's Administrator.\503\
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\502\ 13 CFR 121.903(a)(2).
\503\ 13 CFR 121.903(a)(5).
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Market considerations. A wide variety of financial institutions,
with varying levels of sophistication and experience, extend credit to
small businesses. As proposed, section 1071 applies to abroad range of
financial institutions. Banks and credit unions that serve a breadth of
customers typically organize their commercial lending operations into
segments based on a combination of risk, underwriting, product
offering, and customer management factors that are appropriate to each
segment. The three most frequent organizational groupings are retail/
small business, middle market, and large corporate banking. Commercial
customers are generally assigned based on their revenue potential and
aggregate credit exposure, with smaller accounts assigned to the
retail/small business banking area. The overwhelming preponderance of
small businesses are generally found in the retail/small business
banking group, which may also conduct consumer banking.
Today, the distinguishing characteristic that many larger financial
institutions (principally banks with $10 billion or more in assets) use
to assign small businesses into the retail/small business banking group
is gross annual revenue. While cut-offs vary by financial institution,
the most common demarcations categorize small/retail customers as those
below $5 million, or up to $10 million, in gross annual revenue. The
maximum amount of a retail/small business banking term loan or credit
line is typically $5 million or less.
Financial institutions that do not conduct SBA lending generally do
not collect or consider the number of employees of a small business
applying for credit, but they often capture gross annual revenue
information, including for regulatory compliance purposes.
Specifically, retail/small business lenders routinely collect
applicants' gross annual revenue information because notification
requirements under existing Regulation B vary for business credit
applicants depending on whether or not they ``had gross revenues of $1
million or less in [their] preceding fiscal year.'' \504\ For a
business applicant with gross annual revenues of $1 million or less, a
creditor must provide a notification following an adverse action, such
as a credit denial, that is generally similar to that provided to a
consumer in both substance and timing.\505\ As a result, small business
lenders often adopt compliance management systems similar to those
found among consumer lenders.
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\504\ 12 CFR 1002.9(a)(3)(i).
\505\ Id. The notification requirements for applicants with
gross annual revenues in excess of $1 million are generally more
flexible in substance and also do not impose a firm deadline for
provision of a Regulation B notification. 12 CFR 1002.9(a)(3)(ii).
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The Bureau believes it is important for a financial institution to
be able to quickly determine at the beginning of the application
process whether an applicant is a ``small business'' for purposes of
the 1071 rule. Financial institutions generally cannot inquire about an
applicant's protected demographic information (including the race, sex,
and ethnicity of an applicant's principal owners) without being legally
required to do so.\506\ As discussed in the Overview of this part V,
this proposal will only require (and thus only permit) such inquiries
for small businesses. While the Bureau is proposing to allow financial
institutions flexibility in when they seek this protected demographic
information, the Bureau believes that financial institutions generally
have the best chance of obtaining it, and supporting the purposes of
section 1071, if they ask for it in the earlier stages of the
application process. As a result, a
[[Page 56428]]
financial institution may need to know, even before the application is
initiated, which application path the applicant must follow--a 1071-
governed or a non-1071-governed application path.
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\506\ See 12 CFR 1002.5(a).
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Early feedback. From very early on in its discussions with
stakeholders regarding section 1071, the Bureau has received feedback
focused primarily on how the Bureau might define a business size
standard. For example, in response to the Bureau's 2017 RFI, many
stakeholders expressed concern about the difficulties in determining
the appropriate NAICS code for businesses and in applying the NAICS-
based standards in determining whether a business loan applicant is a
small business. Commenters who addressed the issue of a small business
definition were universally in favor of the Bureau adopting something
less complex than the SBA's size standards based on 6-digit NAICS
codes. Commenters noted that the use of these standards is relatively
complex and would introduce burdens for the 1071 rule with limited
benefit. There was broad support in this particular context for a
simpler definition of small business, particularly echoing the 2017
RFI's mention of gross annual revenue as a threshold delineation
defining a small business. In addition to revenue, number of employees,
loan amount, total exposure of the business, or some combination of
those factors were also mentioned as possible bases for alternate size
standards. While community groups supported a simpler definition, some
cautioned that whatever definition the Bureau chooses must cover most
small businesses in order to comport with congressional intent.
SBREFA Proposals Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau stated that it believed that
using a simpler, more straightforward approach to the size standard
aspect of the ``small business'' definition was a better approach for
purposes of its 1071 rule.\507\ The Bureau further stated that such an
approach would assist both financial institutions and applicants
seeking to quickly understand whether a business is ``small'' and to
employ a workable size standard for small business data collection
without navigating the potential complexities of determining the
appropriate 6-digit NAICS code, and then the relevant size standard
based on that NAICS code, for each applicant.
---------------------------------------------------------------------------
\507\ SBREFA Outline at 16.
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The Bureau stated in the SBREFA Outline that it was considering
three alternative approaches to determining whether an applicant
business is small.\508\ These three approaches, described in more
detail below, would have used: (1) Only gross annual revenue (``SBREFA
First Alternative Approach''); (2) either the number of employees or
average annual receipts/gross annual revenue, depending on whether the
business is engaged in either manufacturing/wholesale or services
(``SBREFA Second Alternative Approach''); or (3) size standards across
13 industry groups that correspond to 2-digit NAICS code industry
groupings (``SBREFA Third Alternative Approach'').
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\508\ Id.
---------------------------------------------------------------------------
Under the SBREFA First Alternative Approach, the Bureau considered
proposing a size standard using the gross annual revenue of the
applicant business in the prior year, with a potential ``small''
threshold of $1 million or $5 million.
Under the SBREFA Second Alternative Approach, the Bureau considered
proposing a size standard of a maximum of 500 employees for
manufacturing and wholesale industries and a maximum of $8 million in
gross annual revenue for all other industries. The Bureau selected 500
employees as a potential threshold for manufacturing and wholesale
industries because that figure is the most common of the SBA's
employee-based size standards. The Bureau selected $8 million for all
other industries because that figure is the most common size standard
threshold for average annual receipts. The Bureau stated that it was
considering using gross annual revenue, rather than the SBA's average
annual receipts, for consistency with the 1071 statutorily required
gross annual revenue data point.
Under the SBREFA Third Alternative Approach, the Bureau considered
proposing a size standard using gross annual revenue or the number of
employees based on a size standard in each of 13 2-digit NAICS code
categories that applies to the largest number of firms within each 2-
digit NAICS code category.\509\ Applying the SBA's 2019 size standards,
the third alternative would result in eight different size standards
across the 13 categories.
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\509\ Specifically, under this approach, the Bureau first
considered the total number of employer firms in each NAICS 6-digit
industry, based on U.S. Census Bureau data. U.S. Census Bureau, 2017
Statistics of U.S. Businesses (2017), https://www.census.gov/data/datasets/2017/econ/susb/2017-susb.html. Next, within each NAICS 2-
digit industry, the Bureau determined how many unique size standards
are applied within that 2-digit industry and the total number of
employer firms to which each unique standard is applied. The
simplified standard for each NAICS 2-digit industry is the one that
applies to the largest number of firms within that industry.
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The Bureau stated it was not planning to propose requiring that
financial institutions verify information provided by applicants
necessary for determining whether an applicant is small, regardless of
the Bureau's approach to a small business size standard. Rather, the
Bureau was considering proposing that a financial institution would
generally report the information as provided by the applicant. However,
if the financial institution verifies such information for its own
purposes, it would report the verified information to the Bureau.
SERs generally preferred a simple small business definition and
expressed concern that the SBA's approach to defining a small
business--which bases classification on an applicant's 6-digit NAICS
code--is relatively complex. The Bureau discusses the concerns with
respect to the potential complexity of gathering NAICS codes in the
section-by-section analysis of proposed Sec. 1002.107(a)(15) below,
and the Bureau discusses the concerns with respect to the potential
complexity using NAICS codes to determine small business status below.
Nearly all SERs expressed some familiarity with the SBA's small
business definition. More than half the SERs currently gather an
applicant's NAICS code as a routine part of the application process,
because NAICS codes are used for SBA loans and for CDFI Fund reporting.
One SER also uses this information for tracking the concentration of
its loans across certain industries. Some SERs gather NAICS codes from
applicants' tax documents or business credit reports and others rely on
information provided directly by the applicants; these SERs emphasized
the importance of permitting reliance on applicant self-reported data.
One SER remarked that it would be critical for the purposes of
section 1071 to have sectoral industry information about applicants in
some form, such as NAICS codes, in order to ensure meaningful data. The
Bureau discusses the independent value of NAICS codes, and related
comments from SERs regarding certain difficulties and challenges
surrounding collecting NAICS codes from applicants, in the section-by-
section analysis of proposed Sec. 1002.107(a)(15) below. Another SER
expressly opposed using NAICS codes to determine whether an applicant
is a small business for purposes of section 1071. A few SERs stated
that they did not think it would be particularly costly to collect
NAICS codes for all of their small business loans, and one SER
described the SBA's classification
[[Page 56429]]
approach as precise and not very burdensome.
Some SERs supported the SBREFA First Alternative Approach for
defining a small business, which would use an applicant's gross annual
revenue with a potential ``small'' threshold of $1 million or $5
million. Several SERs were supportive of this simple approach but
thought the potential threshold should be higher. For most SERs, nearly
all their small business customers had less than $5 million in gross
annual revenue; most are under $1 million. Several SERs remarked that a
$1 million gross annual revenue threshold would be too low, noting that
it would exclude many businesses defined by SBA regulations as
``small''; some of these SERs said that a $5 million gross annual
revenue threshold would be acceptable. Some SERs advocated for higher
revenue thresholds, such as $8 million or $10 million. One SER
cautioned that a small business definition based only on gross annual
revenue would not account for regional variations in business size. One
SER specifically suggested that the Bureau align its small business
definition with the $1 million standard used by certain supervisory
agencies for CRA reporting (which requires the reporting of loans in
original amounts of $1 million or less to businesses and, if known,
identification of whether the business's gross annual revenue is $1
million or less). However, this SER also supported other versions of
the SBREFA First Alternative Approach and SBREFA Second Alternative
Approach if the Bureau did not adopt the CRA approach. Relatedly, there
were some concerns about capturing revenue information from small
businesses. Some SERs do not collect these data now, or do not do so
across all lending products. SERs also expressed a concern that some
applicants likely would not know their gross annual revenue as a
precise dollar amount. See the section-by-section analysis of proposed
Sec. 1002.107(a)(14) below for a discussion of the gross annual
revenue data point.
Some SERs supported the Bureau's SBREFA Second Alternative
Approach, which would distinguish between applicants in manufacturing
and wholesale industries (500 employees) and all other industries ($8
million in gross annual revenue). These SERs stated that while this
approach was still relatively simple, it would nonetheless capture most
relevant data. One SER noted a discrepancy between the thresholds,
stating that a manufacturer with 500 employees would be much larger
than a business with $8 million in gross annual revenue. Some SERs
expressed concerns about how to collect data on the number of
employees, particularly regarding how part-time and seasonal employees,
and contractors, would be counted. One SER suggested that a small
business be defined as having less than $10 million in annual revenue
and 50 or fewer employees. Another SER emphasized the importance of
including collection and reporting requirements for applicants with
very few or no employees on payroll, stating that most minority-owned
and women-owned small businesses have no employees. One SER opposed the
SBREFA Second Alternative Approach, stating that it would be too
complex and potentially confusing.
One SER also supported the SBREFA Third Alternative Approach as
closest to the SBA approach, stating that it reflects the SBA's
substantially different definitions of a small business across
different industries. This SER stated that the SBREFA First and Second
Alternative Approaches would exclude many SBA-qualified small
businesses. Other SERs also stated that this 2-digit NAICS code
alternative was significantly less complex and prone to less human
error than the SBA definition using 6-digit NAICS codes. On the other
hand, one SER stated that the SBREFA Third Alternative Approach would
be the most costly and difficult to implement compared to the other two
alternatives under consideration.
The SBREFA Panel recommended that the Bureau seek to adopt a
definition of ``small business'' that is easy for small business
applicants to understand and straightforward for financial institutions
to implement, while still collecting comprehensive data regarding
lending to small businesses.\510\ The SBREFA Panel also recommended
that the Bureau continue to explore how information that small
financial institutions may or may not currently collect from small
business applicants (specifically, gross annual revenue, number of
employees, and NAICS code) might inform the potential selection of an
alternative for a ``small business'' size standard.\511\ The SBREFA
Panel also recommended that the Bureau continue to explore ways to
minimize burden on both the small financial institutions collecting
NAICS code information as well as the small business applicants who
need to provide it, for example the possibility of collecting the 2-
digit NAICS code rather than the 6-digit code.\512\
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\510\ SBREFA Panel Report at 44.
\511\ Id.
\512\ Id.
---------------------------------------------------------------------------
Feedback on the SBREFA materials from stakeholders other than SERs
showed broad support for the Bureau pursuing a simplified version of
the SBA small business definition, focusing chiefly on the size
standard. A diverse array of stakeholders requested that the Bureau
provide a simplified small business definition, including a wide
variety of lenders, trade associations, and community groups. However,
at least one commenter explicitly urged the Bureau to adopt the SBA
definition. Reasons for supporting a simpler definition included that
it might lower compliance costs (and therefore, the commenters noted,
the cost of credit), it would obviate the need for financial
institutions to understand or track the SBA size standards, and a more
complex definition might impact data consistency or quality (either
because financial institutions might incorrectly report data, or
because the data itself might not lend itself to analysis). Several
stakeholders voiced concern with respect to the SBA's detailed approach
to categorizing the applicant's business, arguing that NAICS codes were
developed for procurement, contained too many categories, and were not
familiar to many financial institutions and applicants.
Stakeholders offered varying levels of support for the Bureau's
proffered size standard alternatives, although in general there was
more support for a standard using only gross annual revenue. Many
stakeholders, including a variety of trade associations, supported the
SBREFA First Alternative Approach; a few explicitly opposed it. Those
voicing support generally preferred the simplicity of the approach;
some stakeholders noted that a definition using gross annual revenue
aligned with how lenders typically consider an applicant's size for
other purposes. Stakeholders suggested that the Bureau select a
specific revenue limit for small businesses including $500,000, $1
million, $5 million, and $8 million. Some stakeholders expressing
support for a $8 million revenue limit noted that it would better
capture small businesses in wholesale and manufacturing, while allowing
the Bureau to adopt a single, uniform standard. Stakeholders opposing
the SBREFA First Alternative Approach generally expressed concern with
using gross annual revenue, either citing concerns about its accuracy
or because they said a uniform gross annual revenue standard would not
account for regional variation among
[[Page 56430]]
businesses or reflect the SBA's general approach to distinguishing
businesses by industry. One stakeholder generally expressed concern
that the SBREFA First Alternative Approach might exclude too many small
business applicants from the 1071 rule.
Several stakeholders, mostly community groups, supported the SBREFA
Second Alternative Approach; several comments from industry opposed the
approach. Those in support of the SBREFA Second Alternative Approach
characterized it as providing a balance between simplicity and
providing results more closely aligned with the more comprehensive SBA
approach, which distinguishes businesses by industry. Some stakeholders
expressed concern with respect to distinguishing the nature of the
applicant's business (e.g., whether it was engaged in manufacturing or
wholesale), and others thought that there may be difficulties
accurately measuring the number of employees.
A few stakeholders supported the SBREFA Third Alternative Approach,
while several explicitly opposed it. Supporters of the SBREFA Third
Alternative Approach praised how closely the alternative aligned with
the SBA's definition, while those in opposition criticized it as overly
complex. In particular, those opposing this approach were concerned
that it would still require financial institutions to have a close
working knowledge of NAICS codes.
A few stakeholders advocated that the Bureau consider adopting a
small business definition that incorporated loan size. Some of these
stakeholders suggested that the Bureau consider aligning this
definition with standards in the CRA. One stakeholder suggested that
the Bureau define a small business as one with gross annual revenue of
$1 million where the business has requested a loan of $1 million or
less.
Proposed Rule
Proposed Sec. 1002.106(b) would define a small business as having
the same meaning as the term ``small business concern'' in 15 U.S.C.
632(a), as implemented in 13 CFR 121.101 through 121.107. The Bureau
believes that adopting existing statutory and regulatory small business
definitions, which are widely understood and already the subject of
notice and comment, is consistent with the purposes of section 1071 and
will facilitate compliance. Proposed Sec. 1002.106(b) would further
state that, notwithstanding the size standards set forth in 13 CFR
121.201, for purposes of proposed subpart B, a business is a small
business if and only if its gross annual revenue, as defined in
proposed Sec. 1002.107(a)(14), for its preceding fiscal year is $5
million or less. This proposed definition largely adopts the SBREFA
First Alternative Approach with a threshold of $5 million. The Bureau
believes this proposed definition implements the statutory language of
section 1071 while reflecting a need for financial institutions to
apply a simple, broad definition of a small business. The Bureau is
seeking SBA approval for this alternate small business size standard
pursuant to the Small Business Act.\513\
---------------------------------------------------------------------------
\513\ 15 U.S.C. 632(a)(2)(C).
---------------------------------------------------------------------------
Proposed comments 106(b)-1 and 106(b)-2 would clarify the
obligations of covered financial institutions when new information may
arise that could change the determination of whether an applicant is a
small business, which in turn gives rise to requirements under proposed
subpart B and/or prohibitions under existing Regulation B. The Bureau
acknowledges that a financial institution's understanding of an
applicant's gross annual revenue may change as the institution proceeds
through underwriting. Proposed comment 106(b)-1 would explain that if a
financial institution initially determines an applicant is a small
business as defined in proposed Sec. 1002.106 based on available
information and obtains data required by proposed Sec. 1002.107(a)(18)
through (20), but the financial institution later concludes that the
applicant is not a small business, the financial institution may
process and retain the data without violating ECOA or this regulation
if it meets the requirements of proposed Sec. 1002.112(c)(3). Proposed
comment 106(b)-2 would explain that if a financial institution
initially determines that the applicant is not a small business as
defined in proposed Sec. 1002.106, but then later concludes the
applicant is a small business, the financial institution shall endeavor
to compile, maintain, and report the data required under proposed Sec.
1002.107(a) in a manner that is reasonable under the circumstances.
Proposed comment 106(b)-3 would explain that a financial
institution may rely on an applicant's representations regarding gross
annual revenue (which may or may not include an affiliate's revenue)
for purposes of determining small business status under Sec.
1002.106(b).
For the reasons discussed above in the section-by-section analysis
of proposed Sec. 1002.106(a), the Bureau is proposing to define a
small business as having the same meaning as the term ``small business
concern'' in 15 U.S.C. 632(a), as implemented in 13 CFR 121.101 through
121.107. However, for reasons discussed in detail below, the Bureau is
proposing that notwithstanding the size standards set forth in 13 CFR
121.201, for purposes of subpart B, a business is a small business if
and only if its gross annual revenue, as defined in proposed Sec.
1002.107(a)(14), for its preceding fiscal year is $5 million or less.
Generally, the Bureau believes that adopting this gross annual revenue
standard from the SBREFA First Alternative Approach is consistent with
the purposes of section 1071 and addresses the concerns that the Bureau
has heard with respect to determining whether applicants are small
businesses for purposes of complying with section 1071, particularly
with respect to the concerns regarding determining the applicant's
NAICS code, and the implications thereof. Due to concerns expressed by
other stakeholders, which are described above, and upon its own further
consideration as discussed in this section-by-section analysis under
Alternatives Considered below, the Bureau is not proposing the $1
million gross annual revenue standard from the SBREFA First Alternative
Approach.
The Bureau seeks comment on this proposed definition of a small
business, including the $5 million gross annual revenue size standard,
as well as whether additional clarification is needed for any aspect of
this proposed definition. The Bureau also seeks comment on whether
another variation of the proposed size standard would better serve the
purposes of section 1071, such as a lower revenue size standard or a
higher one, potentially at the $8 million or $10 million level. The
Bureau also seeks comment on whether, in addition to the above-
described gross annual revenue-based size standard, a small business
definition that also included any business that was furnished a loan
pursuant to an SBA program (regardless of the applicant's gross annual
revenue) would further the purposes of 1071.
Similarly, the Bureau seeks comment on whether the SBREFA Second
Alternative Approach at $8 million gross annual revenue or 500
employees (depending on the type of business) would align more closely
with section 1071's purposes. Likewise, the Bureau seeks comment on
whether a variation of the proposed size standard, such as using an
applicant's average gross annual revenue averaged over two or five
years, would better serve the purposes of section 1071. In addition,
the Bureau seeks comment on defining
[[Page 56431]]
a small business consistent with the entirety of existing SBA
regulations, including any advantages or disadvantages that using such
a definition might pose specifically in the context of this rulemaking.
Specifically, the Bureau seeks comment on how the proposed size
standard would fit in with a financial institution's current lending or
organization practices. If the financial institution is an SBA lender,
the Bureau seeks comment on whether the proposed size standard would
introduce additional difficulties or challenges.
In order to keep pace with changes to the SBA's own size standards
and the potential impact of future inflation, the Bureau is considering
whether it might update its proposed $5 million gross annual revenue
size standard over time (perhaps at the end of a calendar year in order
to allow financial institutions to use the same threshold consistently
throughout the year). The Bureau seeks comment on how this should be
done and the frequency at which it should occur.
Alternatives Considered
Gross annual revenue of $1 million. Under the SBREFA First
Alternative Approach, the Bureau considered proposing a size standard
using the gross annual revenue of the applicant business in the prior
year, with a potential ``small'' threshold of $1 million or $5
million.\514\ However, upon further consideration, the Bureau is
concerned that the $1 million threshold considered under the SBREFA
First Alternative Approach likely would not satisfy the SBA's
requirements for an alternative size standard across industries and
would exclude too many businesses designated as small under the SBA's
size standards.
---------------------------------------------------------------------------
\514\ SBREFA Outline at 16.
---------------------------------------------------------------------------
Loan size. The Bureau considered defining a small business based at
least in part on loan size. For example, one SER suggested that the
Bureau align its small business definition with the $1 million standard
for revenue and loan size used by certain supervisory agencies for CRA
reporting. The Bureau also considered that under the FFIEC Call Report
collections, banks report small loans made to businesses and farms.
Through the Credit Union Call Report, credit unions report commercial
loans over $50,000 made to members.
The Bureau believes that such potential definitions do not bear a
sufficient relationship to the size of the business or its operations.
The above-mentioned Call Report data, for example, is reported
regardless of the size of the business. Thus, such Call Reports would
capture lending information regarding small loans furnished to
businesses that may be dominant in their field. Likewise, under a
definition similar to the CRA, application data for businesses with low
revenue that may be applying for large loans would be excluded. The
Bureau does not believe that adopting such an approach would further
the purposes of section 1071. The Bureau also received some stakeholder
feedback cautioning against using the CRA definition based on loan
size, because such a definition would exclude substantial portions of
small business lending.
Existing SBA size standards. As discussed above, the Bureau is
seeking approval from the SBA to use a $5 million gross annual revenue
alternative size standard in defining a ``small business'' for purposes
of this rulemaking, as the Bureau does not believe the SBA's size
standards are suitable for this data collection initiative and prefers
to establish a more appropriate small business definition limited to
the section 1071 rulemaking.
The Bureau believes that requiring application of existing SBA size
standards for the section 1071 rule could result in many financial
institutions having to undergo operational and/or compliance management
system changes. The Bureau believes that it will reduce burden for
financial institutions, particularly those without sophisticated
compliance management systems or familiarity with SBA lending, to
comply with a gross annual revenue size standard for the section 1071
small business definition that better aligns with current lending
practices.
If the Bureau were to adopt a small business definition using the
existing SBA size standards that vary by industry based on 6-digit
NAICS codes, financial institutions would only be able to request an
applicant's protected demographic information further along in the
application process, once they have obtained the multiple pieces of
data that would be necessary to determine whether the applicant is
small and, therefore, the 1071 process applies. The Bureau is concerned
that this delay would make it more difficult for financial institutions
to collect applicants' protected demographic information that is
important to both of section 1071's statutory purposes. The Bureau is
particularly concerned about financial institutions' ability to collect
these data for applications that are withdrawn or closed for
incompleteness early in the application process. These data collection
considerations differ from those applicable to SBA lending programs,
whereby a lender often cannot (and should not) make an accurate
eligibility determination for an SBA loan until later in the
application process, often after a loan has already been initially
decisioned and after the lender has collected information related to
size, time in business, and other data.
In order to allow financial institutions to quickly determine
whether the section 1071 rule applies, the Bureau is seeking to
minimize complexity for financial institutions in determining whether a
covered application is reportable because the applicant business is a
small business--a necessary determination for the 1071-based collection
of any other information. The Bureau believes that the section 1071
rule would benefit from a universal, easy-to-apply reporting trigger
that does not need to be supported by additional documentation or
research. Such a reporting trigger must be easily understood by small
business owners who may be completing an application online, or by the
tens of thousands of customer-facing personnel who take small business
applications in an industry with a typical annual turnover rate of 10
to 20 percent. The Bureau believes that a gross annual revenue
reporting trigger will facilitate better compliance with 1071
requirements because it aligns with current lending and organizational
practices.
The Bureau is concerned that requiring financial institutions to
rely on the SBA's existing size standards for purposes of the section
1071 data collection and reporting requirements would pose risks to the
efficient operation of small business lending. Based on the
overwhelmingly consistent feedback the Bureau has received from
stakeholders on this issue, the Bureau believes that using the SBA's
existing size standards for the purposes of section 1071--wherein the
financial institution must quickly determine the appropriate 6-digit
NAICS code for businesses and then apply a variety of standards,
including potentially gathering information to determine five years of
the applicant's average annual receipts or employee information--would
not align with current lending and organizational practices.
Application of the existing size standards, at the beginning of the
application process, could slow down the application process,
particularly at institutions that are often able to render credit
decisions in a matter of minutes; the Bureau is concerned that
financial institutions may be compelled to raise the cost of credit or
originate fewer
[[Page 56432]]
covered credit transactions as a result. Such an outcome could
needlessly affect access to credit for small businesses. Eliminating
credit opportunities or reducing access to credit to small businesses,
including women-owned and minority-owned small businesses, in this way
would conflict with the statutory purpose of section 1071 to ``enable
communities, governmental entities, and creditors to identify business
and community development needs and opportunities of women-owned,
minority-owned, and small businesses.'' \515\
---------------------------------------------------------------------------
\515\ ECOA section 704B(a).
---------------------------------------------------------------------------
The Bureau expects that many financial institutions, for
efficiency, will bifurcate their business credit application procedures
based on an initial determination of whether the application will be
subject to section 1071. The Bureau therefore believes that many
financial institutions will not proceed with taking applicant
information until the financial institution is able to determine that
the applicant is small (in which case, section 1071 will require the
financial institution to collect and report the applicant's protected
demographic information) or that the applicant is not small (where ECOA
generally prohibits the financial institution from collecting protected
demographic information). If this process requires determining the
correct NAICS code for the applicant, and in many cases, requesting
five years of average annual receipts or employee information from the
applicant, the Bureau believes that businesses seeking access to credit
will encounter, at a minimum, otherwise avoidable delays in processing
applications.
The Bureau believes that the $5 million gross annual revenue
standard it is proposing is a more efficient and appropriate measure of
applicant size for purposes of determining whether small business
lending data collection is required pursuant to section 1071. The
Bureau understands that the SBA generally bases business concern size
standards on average annual receipts or the average number of employees
of the business concern, as customized industry-by-industry across
1,057 6-digit NAICS codes. The SBA typically uses two primary measures
of business size for size standards purposes: (i) Average annual gross
receipts \516\ for businesses in services, retail trade, agricultural,
and construction industries, and (ii) average number of employees \517\
for businesses in all manufacturing industries, most mining and
utilities industries, and some transportation, information, and
research and development industries.\518\ The Bureau understands that
SBA's size standards are used to establish eligibility for a variety of
Federal small business assistance programs, including for Federal
government contracting and business development programs designed to
assist small businesses in obtaining Federal contracts and for SBA's
loan guarantee programs, which provide access to capital for small
businesses that are unable to qualify for and receive conventional
loans elsewhere. The Bureau notes that the size standard used under
section 1071 would only be used to determine whether small business
lending data collection is required pursuant to section 1071, and would
have no bearing on eligibility for Federal small business assistance.
Moreover, the Bureau believes it is far more likely that an applicant
will be able to readily respond to a question regarding its gross
annual revenue for the preceding fiscal year--something already
contemplated by existing Regulation B for all business credit to
determine whether notice requirements apply \519\--than offer the
closest metric currently in use by SBA regulations, which is generally
average annual receipts for the previous five fiscal years.\520\
Furthermore, use of this gross annual revenue standard would be
efficient, as a financial institution is statutorily required to
collect and report gross annual revenue by ECOA section 704B(e)(2)(F).
---------------------------------------------------------------------------
\516\ The Bureau understands that the SBA recently changed its
regulations on the calculation of average annual receipts for all of
SBA's receipts-based size standards, and for other agencies'
proposed receipts-based size standards, from a three-year averaging
period to a five-year averaging period, outside of the SBA Business
Loan and Disaster Loan Programs. 84 FR 66561 (Dec. 5, 2019).
\517\ Generally, the average number of employees of the business
concern is used (including the employees of its domestic and foreign
affiliates) based upon numbers of employees for each of the pay
periods for the preceding completed 12 calendar months. See 13 CFR
121.106(b)(1).
\518\ To measure business size, the SBA also uses financial
assets for certain financial industries, and for the petroleum
refining industry, it uses refining capacity and employees.
\519\ See 12 CFR 1002.9(a)(3).
\520\ 13 CFR 121.104(a) and (c).
---------------------------------------------------------------------------
The Bureau believes that section 1071 differs from other programs
that may have been contemplated pursuant to the Small Business Act's
provisions pertaining to the establishment of size standards. First and
most notably, the rulemaking contemplated by section 1071 is not a
``program'' in the traditional sense of a procurement or other Federal
assistance program; the rule would not confer a direct benefit or
advantage to the small business applicant or financial institution in
terms of contract, procurement, loan guaranty, or government backed
debenture. Rather, financial institutions will be contributing
information about credit applications for businesses identified as
small under section 1071--information that will be valuable to the
Bureau, financial institutions, policymakers, and other stakeholders,
including small businesses. Second, unlike other such alternative size
standard requests, the Bureau notes that a size standard under section
1071 would apply to businesses across all sectors applying for
financing, rather than a particular industry or sector. And third, the
Bureau believes that arriving at a simplified size standard is an
essential element to this ``program,'' as more complex approaches may
limit opportunities for small businesses by reducing access to credit.
Section 1071 is also unique in that Congress specified that the
data collection regime include a particular form of revenue for the
businesses at issue. As discussed in the section-by-section analysis of
proposed Sec. 1002.107(a)(14) below, section 1071 requires a financial
institution to collect ``the gross annual revenue of the business in
the last fiscal year of the women-owned, minority-owned, or small
business loan applicant preceding the date of the application.'' \521\
The Bureau considered whether under section 1071 a financial
institution should have to apply two different revenue-based rules
(first, one for determining whether the business is small under the
existing SBA size standards and therefore section 1071 data must be
collected and reported; and, second, if the business is small, another
for reporting the business's gross annual revenue in the last fiscal
year), or whether applying only one revenue-based rule for section 1071
could be sufficient. The Bureau believes that requiring financial
institutions to apply both would be unnecessarily confusing and
burdensome, and would also increase potential for errors in data
collection. The Bureau does not believe it is appropriate to use only
average annual receipts, given the language of section 1071. Moreover,
as discussed below, section 1071 amends ECOA, which already
incorporates gross annual revenue as implemented under existing
Regulation B.
---------------------------------------------------------------------------
\521\ Id.
---------------------------------------------------------------------------
ECOA section 704B(e)(2)(G) requires a financial institution to
collect and report the race, sex, and ethnicity of the principal owners
of the business. Existing Regulation B generally prohibits a creditor
from inquiring about
[[Page 56433]]
such protected demographic information in connection with a credit
transaction unless otherwise required by Regulation B, ECOA, or other
State or Federal law, regulation, order, or agreement.\522\ Thus, in
order to avoid potential liability under ECOA and existing Regulation
B, a financial institution must accurately determine that a business
credit application is subject to section 1071 before inquiring about
the applicant's protected demographic information. The Bureau does not
believe the SBA's existing size standards allow for the quick and
accurate determination of small business status required for this 1071
data collection initiative. Specifically, the Bureau does not believe
this determination can be quickly and accurately made if, as required
under the SBA's existing size standards, the financial institution must
determine the appropriate NAICS code for the business and then apply
the NAICS-based size standards to determine whether a business loan
applicant is a small business.
---------------------------------------------------------------------------
\522\ Existing Sec. 1002.5(a)(2). ECOA states that it is not
discrimination for a financial institution to inquire about women-
owned or minority-owned business status, or the race, sex, and
ethnicity of principal owners pursuant to section 1071. 15 U.S.C.
1691(b)(5).
---------------------------------------------------------------------------
As discussed above, SERs and other stakeholders have expressed
concern to the Bureau about the difficulties in determining the
appropriate NAICS code for businesses and in applying the NAICS-based
size standards. They generally preferred a simple small business
definition and expressed concern that the SBA's approach to defining a
small business--which bases classification on an applicant's 6-digit
NAICS code--is relatively complex in this context. The Bureau believes
that removing a NAICS-based small business determination as a step in
determining small business status will both facilitate compliance and
better achieve the purposes of section 1071. The Bureau understands
that one reason that SERs and others expressed a strong desire for a
simple approach to determining whether an applicant is small is that
this initial determination may drive the application process. To comply
with section 1071 requirements, financial institutions may use a
different application process, or different or additional application
materials, with applicants for business credit that are small
businesses than they do with applicants that are not small businesses.
Thus, quickly and accurately determining whether an applicant is a
small business at the outset of the application process may be a
crucial step, one that financial institutions would benefit from being
able to seamlessly accomplish. Considering the requirements and
prohibitions in ECOA with respect to protected demographic information,
the Bureau understands the import that financial institutions have
placed on both the speed and accuracy of this determination.
As discussed in the section-by-section analysis of proposed Sec.
1002.107(a)(15) below, the Bureau believes that NAICS codes possess
considerable value for section 1071's fair lending purpose as well as
its business and community development purpose beyond being necessary
for determining whether an applicant is a small business under the
SBA's size standards. The Bureau is therefore proposing that financial
institutions be required to collect and report NAICS codes as one of
the data fields for applications subject to section 1071. However, the
Bureau believes that gathering NAICS code information at some point
during the application process, while still the subject of some concern
for financial institutions, is a different consideration from requiring
NAICS information as a necessary step to beginning an application (and
correctly determining which type of application to initiate).
The Bureau also believes that this simplified alternative size
standard will provide largely consistent reporting results, as compared
to adopting the full SBA size standards. The Bureau used data from the
U.S. Census's 2012 Statistics of U.S. Businesses (SUSB) and the U.S.
Department of Agriculture's 2012 Census of Agriculture to analyze how
each of the Bureau's contemplated alternative approaches would change
the number of businesses defined as ``small'' relative to the SBA
definition.\523\ If all NAICS classifications and size assessments
could be done correctly, applying the SBA's full 6-digit NAICS code-
based size standards would result in complete coverage of small
businesses as defined by the SBA--all applications by small businesses
would be reported (other than those made to financial institutions that
qualify for an exemption) and no applications made by non-small
businesses would be reported. The Bureau estimates that 270,000
businesses that would be small under the SBA's existing size standards
(out of 7.2 million small employer businesses and farms) would not be
covered by the Bureau's proposed $5 million gross revenue standard. The
Bureau further estimates that the Bureau's proposed rule would cover
some 77,000 businesses that would not be small under the SBA size
standards. The Bureau believes that such variation with respect to the
SBA's current size standards is an appropriate trade-off for the
reasons described herein.
---------------------------------------------------------------------------
\523\ The 2012 SUSB is the most recent Census product to have
categories of revenue and employees granular enough to conduct this
analysis. The Bureau constructed the 2012 equivalents of the second
and third alternatives due to the vintage of the SUSB data available
and used the SBA's 2012 size standards for the analysis. The 2012
SUSB only covers employer firms or businesses with at least one
employee.
---------------------------------------------------------------------------
The Bureau notes, however, that a $5 million gross annual revenue
alternative size standard would affect some industries more than
others. That is, applications for small businesses would be reported to
the Bureau less from some industries than others. In general, there
will be a larger proportion of businesses whose applications would not
be reported in industries with a higher revenue-based size standard.
The industries most affected by this are the retail trade and
construction industries. Other industries that would be
disproportionately affected may include manufacturing, wholesale trade,
health care and social assistance, and professional, scientific, and
technical services. The Bureau received little public feedback with
respect to such concerns, although the Bureau seeks comment with
respect to any potential effects on particular subsets of applicants
that may be disproportionately included or excluded on the basis of a
gross annual revenue standard (such as those subject to employee-based
size standards), particularly in light of section 1071's purposes.
The Bureau also believes that a simplified size standard will be
important for financial institutions that may not frequently engage in
small business lending in determining whether they are covered under
the 1071 rule. As discussed in the section-by-section analysis of
proposed Sec. 1002.105(b), the Bureau is proposing to mandate section
1071 small business lending data collection only from those financial
institutions that originated at least 25 covered credit transactions
from small businesses in each of the two preceding calendar years.
Those financial institutions that do not frequently lend to small
businesses will be seeking to track precisely how many covered credit
transactions for small businesses they have originated. The Bureau
believes that it is important to empower financial institutions to
quickly ascertain whether a covered credit transaction was furnished to
a small business, such that infrequent lenders can continue to monitor
[[Page 56434]]
whether section 1071 compliance is required.
Average gross annual revenue. The Bureau considered proposing an
approach that would use an average gross annual revenue calculated over
an averaging or ``lookback'' period instead of using the gross annual
revenue for the preceding fiscal year. This alternative approach would
be similar to the SBA approach of using a five-year annual receipts
average. The Bureau understands that the SBA expects the five-year
average to: (i) Enable some mid-size businesses currently categorized
above their corresponding size standards to gain or regain small
business status and thereby qualify for participation in Federal
assistance intended for small businesses, and (ii) allow some advanced
and larger small businesses close to their size thresholds to lengthen
their small business status for a longer period and thereby continue
their participation in Federal small business programs.\524\ However,
because the 1071 rule is not connected to eligibility for participation
in any Federal programs for small business loans, grants, procurement,
or otherwise, the Bureau believes that allowing financial institutions
to consider applicants' gross annual revenue for the preceding fiscal
year is sufficient for 1071 purposes. The Bureau also notes that using
gross annual revenue for the preceding fiscal year is consistent with
the notification requirements of existing Regulation B and the Bureau's
approach in proposed Sec. 1002.107(a)(14) regarding the gross annual
revenue data point. The Bureau believes that using this measure instead
of an average will better align with current lending practices and will
simplify determinations regarding 1071 reporting status.
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\524\ See 84 FR 66561, 66562 (Dec. 5, 2019).
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Section 1002.107 Compilation of Reportable Data
107(a) Data Format and Itemization
Background
ECOA section 704B(e) requires financial institutions to ``compile
and maintain'' records of information provided by applicants ``pursuant
to a request under subsection (b),'' and requires them to ``itemiz[e]''
such information to ``clearly and conspicuously disclose'' a number of
data points; \525\ the Bureau refers to these as statutory data points.
Section 704B(e)(2)(H) provides the Bureau with authority to require
``any additional data that the Bureau determines would aid in
fulfilling the purposes of [section 1071]''; the Bureau refers to data
points adopted under this authority as discretionary data points. The
stated statutory purposes of 1071 are twofold: (1) To facilitate
enforcement of fair lending laws; and (2) to enable communities,
governmental entities, and creditors to identify business and community
development needs and opportunities of women-owned, minority-owned, and
small businesses.\526\ The Bureau notes that ``discretionary'' in this
context means discretionary for the Bureau to adopt, not discretionary
for financial institutions to comply with.
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\525\ As discussed in greater detail above in E.2 of the
Overview to this part V, the Bureau interprets the phrase ``pursuant
to a request under subsection (b)'' in section 1071 as referring to
all of the data points contemplated by ECOA section 704B(e), not
merely whether the applicant is a minority-owned, women-owned, or
small business.
\526\ ECOA section 704B(a).
---------------------------------------------------------------------------
The 1071 data collected and reported by financial institutions
would generally be made available to the public unless the Bureau
decides to delete or modify certain data to advance a privacy
interest.\527\ As discussed below in part VI, the Bureau is proposing
to use a balancing test to determine what data should be deleted or
modified, but does not intend to apply the balancing test until
financial institutions have reported at least a full year of 1071 data
to the Bureau. The Bureau notes that the utility of 1071 data to
particular groups of data users will depend on the specific data
collected and the form, manner, and extent to which the Bureau makes
such data available to the public.
---------------------------------------------------------------------------
\527\ ECOA section 704B(e)(4), (f).
---------------------------------------------------------------------------
The users of data from the Bureau's proposed 1071 rule could
include the Bureau itself; other Federal agencies including the
prudential banking regulators; Congress; State and local governments;
community, consumer, and civil rights groups; researchers and
academics; financial institutions; small businesses; and small business
trade organizations. The comprehensive data that would be collected
under the Bureau's rule is not available elsewhere, though some
aggregate information for some loans to businesses--but not
applications--exists in other sources. For example, there are several
datasets on loans to businesses by depository institutions. The FFIEC
Call Report data provide information on banks' and savings
associations' total outstanding number and amount of loans to
businesses for loans under $1 million and farms for loans under
$500,000. The CRA requires banks and savings associations with assets
over a specified threshold ($1.322 billion as of 2021) to report data
on loans to businesses with origination amounts of $1 million or less
and loans to farms with origination amounts of $500,000 or less. NCUA
Call Reports include information on credit unions' outstanding and
originated commercial loans to members over $50,000. Though the Bureau
and other agencies with supervisory jurisdiction can currently
approximate some 1071 data through requests during examinations of
individual institutions, the agencies would only have access to data
from a relatively small number of such institutions at any one time and
the data obtained would not be uniform among institutions. The
availability of uniform 1071 data across different types of financial
institutions should significantly improve agencies' ability to focus
limited supervisory resources on institutions with higher fair lending
risk. Section 1071 data may also provide insight into how well the
market is meeting the credit needs of small businesses in general, as
well as women- and minority-owned small businesses in particular, and
could potentially be used to identify market opportunities.
The Bureau has received feedback relevant to the 1071 rulemaking
from a variety of sources, including through the SBREFA process as well
as the Bureau's 1071 Symposium and the 2017 RFI on small business
lending. This feedback addressed, among other things, the potential
inclusion of discretionary data points in the 1071 rulemaking, which is
discussed further below. By discussing these potential discretionary
data points under consideration in the SBREFA Outline, the Bureau
obtained helpful feedback on costs and benefits from the SERs and other
stakeholders to inform the Bureau's decision-making for purposes of
this NPRM.
SBREFA Proposals Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau explained its understanding of
the data points enumerated in section 1071.\528\ The Outline noted that
ECOA section 704B(b) requires financial institutions to inquire whether
an applicant for credit is a women-owned, minority-owned, or small
business. In addition, the statute states that the information compiled
and maintained by a financial institution under section 704B(e)(1)
shall be itemized in order to clearly and conspicuously disclose a
number of particular items that are enumerated in the statute. In the
Outline, the Bureau
[[Page 56435]]
stated that it was considering proposing to require all of these data
points.\529\
---------------------------------------------------------------------------
\528\ SBREFA Outline at 24.
\529\ Id. at 24-36.
---------------------------------------------------------------------------
The Bureau also discussed in the SBREFA Outline its proposals under
consideration regarding data points adopted pursuant to its
discretionary data points authority under ECOA section
704B(e)(2)(H).\530\ The Bureau explained that it was considering
proposing to require that financial institutions report discretionary
data points regarding pricing, time in business, NAICS code, and number
of employees.
---------------------------------------------------------------------------
\530\ Id. at 33.
---------------------------------------------------------------------------
SERs provided feedback on nearly all aspects of the data points
under consideration, including certain feedback applicable to all data
points.\531\ Regarding data points generally, most SERs requested that
the Bureau make the collection and reporting of data points as simple
as possible. Two SERs stated that collecting and reporting the
statutory data points would not pose any issues because they collect
them now. A number of SERs urged the Bureau to require collection and
reporting of a number of data points based only on information as
provided by the applicant. One SER stated that the Bureau should be
aware that, as with HMDA reporting, the cost of collecting and
reporting the data points will include expensive data quality scrubs in
order to avoid negative examination findings. Another SER stated that
it will be challenging to standardize the data so reporting can be
automated, and that this will likely require significant training and a
tremendous amount of human intervention.
---------------------------------------------------------------------------
\531\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 25-30.
---------------------------------------------------------------------------
Furthermore, some SERs expressed concern about asking applicants to
provide certain information (in particular the race, sex, and ethnicity
of principal owners), as they believed that applicants would feel
uncomfortable providing, or even being asked about, that information,
and that if applicants are denied credit they might feel it was because
of the protected demographic information they provided. One SER stated
that the collection of 1071 data could seem like an intrusion of
privacy by the financial institution, particularly to minority
borrowers. The SER stated that prospective applicants may decide to
seek financing elsewhere. Another SER stated that some prospective
applicants' distrust of the Federal government (and concern over how
1071 data might be used) might adversely impact their ability to lend
to the communities they serve. Other SERs that currently collect this
information (for example, because they are CDFIs or SBA lenders)
indicated that they generally do not have difficulty collecting
demographic information from borrowers.
Several SERs suggested that the Bureau develop a system to assist
in the collection of applicants' protected demographic information, and
possibly other applicant-provided 1071 data, that would avoid the need
for financial institutions to request and store sensitive information
about applicants. One SER suggested that this system could also permit
applicants to input their addresses for geocoding.
SERs also provided detailed feedback on the discretionary data
points that the Bureau was considering. One SER stated that the cost of
collecting and reporting the discretionary data points under
consideration would be significant, and another SER stated that the
Bureau should include as few data points as possible to avoid
unnecessary costs. Another SER stated that the Bureau should finalize a
rule with just the statutorily required data points and avoid adding
any discretionary data points. That SER suggested that if the Bureau
does include discretionary data points, the Bureau could consider
providing an exemption from discretionary data point collecting and
reporting for certain small 1071 reporters, similar to the partial data
point exemption approach taken under HMDA.\532\
---------------------------------------------------------------------------
\532\ See Regulation C Sec. 1003.3(d).
---------------------------------------------------------------------------
Other SERs favored the inclusion of some or all of the
discretionary data points. Two SERs stated their support for the
inclusion of all four discretionary data points under consideration.
One of these SERs suggested that the Bureau also collect information
regarding the way the application was taken (in person, by phone, or
online) in order to monitor possible discouragement of applicants. The
other SER suggested that the Bureau also collect credit score
information.
Stakeholders commenting on the statutory data points and data
points in general largely echoed the SERs' concerns. Industry
commenters suggested that the method of collection be as clear and
simple as possible, that the cost burden be taken into account, and
that the Bureau not require verification of applicant-provided
information. Community groups largely supported the Bureau's proposals
under consideration for the statutory data points, and emphasized the
importance of the new 1071 data collection regime.
A large majority of industry stakeholders commenting on the SBREFA
Outline opposed the collection of any discretionary data points,
stating that including them would be overly burdensome and unnecessary.
Industry commenters argued that the 1071 rule would be very burdensome
in any case, requiring new software and onerously different business
processes, and adding data points would only increase that burden. Some
commenters stated that collecting and reporting the discretionary data
points would increase compliance obligations and costs, and likely
impact credit costs and availability for small business customers. Some
commenters were concerned about the discretionary data points being
made public without contextual information, potentially leading to
damaging misinterpretations. One stakeholder stated that unnecessary
discretionary data points would add to the already significant privacy
concerns of financial institutions and borrowers. Several commenters
suggested that the Bureau consider an incremental approach to expanding
the data collection in the future should the statutory fields not be
sufficient to accomplish the original intent of 1071. Several other
stakeholders suggested that if the Bureau includes discretionary data
points, it should provide an exemption from reporting them for smaller
financial institutions.
Community groups and several community development lenders
supported mandatory reporting of the discretionary data points under
consideration, saying that they would help achieve section 1071's
purposes. One stakeholder stated that the discretionary data points
under consideration relate to underwriting decisions and must be
accounted for so credit providers cannot--as they said HMDA reporters
have done for years--hide behind data not collected as justification
for their lending disparities. A community development lender supported
the collection of the discretionary data points, but suggested that the
Bureau not collect number of employees. Some stakeholders suggested
additional discretionary data points.
Regarding data points in general, the SBREFA Panel recommended that
the Bureau consider proposing in the NPRM that applicant-provided data
points be self-reported by the applicant only, without an obligation
for the financial institution to verify the information
[[Page 56436]]
provided by the applicant.\533\ Regarding the discretionary data
points, the SBREFA Panel recommended that if time in business, number
of employees, and NAICS code become part of the proposal, the Bureau
continue to explore ways to minimize the burden to small financial
institutions of collecting and reporting such data; and with respect to
NAICS code specifically, the burden on small business applicants who
need to provide the information.\534\ As to pricing, the Panel
recommended that if this data point becomes part of the proposal, the
Bureau seek comment on potential methods for avoiding
misinterpretations of disparities.\535\
---------------------------------------------------------------------------
\533\ SBREFA Panel Report at 46.
\534\ Id.
\535\ Id.
---------------------------------------------------------------------------
Proposed Rule
The Bureau is proposing to adopt the statutory data points largely
consistent with its proposals under consideration at SBREFA, but with
certain changes as discussed in the section-by-section analyses of the
individual data points below. Consistent with its approach under
consideration in the SBREFA Outline,\536\ the Bureau is proposing
discretionary data points relating to pricing, time in business, NAICS
code, and number of workers. In addition, based on feedback from SERs
and other stakeholders and in the course of developing the proposed
rule, the Bureau identified several additional data points that it
believes would be important to the quality and completeness of the 1071
data collected and would aid significantly in furthering the purposes
of section 1071. The proposed rule would adopt additional discretionary
data points regarding application method, application recipient, denial
reasons, and number of principal owners. In addition, the Bureau is
relying on ECOA section 704B(e)(2)(H), as well as its authority under
704B(g)(1), to make certain clarifications to the statutory data
points. These data points are all discussed in detail in the section-
by-section analyses of proposed Sec. 1002.107(a)(1) through (21)
below.
---------------------------------------------------------------------------
\536\ SBREFA Outline at 34-35.
---------------------------------------------------------------------------
The Bureau continues to believe that discretionary data points for
pricing, time in business, NAICS code, and number of workers would
serve the purposes of 1071, improve the utility of the data for
stakeholders, and potentially reduce the occurrence of
misinterpretations or incorrect conclusions based on analysis of an
otherwise more limited data set. The Bureau also believes that
discretionary data points for application method, application
recipient, denial reasons, and number of principal owners would help to
achieve these goals more effectively.
In proposing these discretionary data points, the Bureau considered
the additional operational complexity and potential reputational harm
that collecting and reporting discretionary data points could impose on
financial institutions. The Bureau has sought to respond to industry
concerns regarding discretionary data points by proposing a limited
number of discretionary data points that would offer the highest value
in light of 1071's statutory purposes. For this reason, the Bureau is
not proposing certain additional discretionary data points suggested by
SERs and other stakeholders such as credit score or applicant's
business structure (see the discussion below). In addition, the Bureau
has not chosen to take an incremental approach to adding data points,
as one stakeholder suggested, or permitting collecting and reporting of
discretionary data points to be phased in over time. The Bureau
believes the information from the proposed discretionary data points
would further section 1071's purposes for the reasons stated above, and
should be collected and reported as soon as possible. In addition, data
from these discretionary data points would be an important part of the
privacy balancing test analysis that would be conducted after the first
year of 1071 data is received.\537\ The Bureau will consider industry
concerns about potential reputational harm that collecting and
reporting discretionary data points could impose on financial
institutions when it conducts the privacy balancing test analysis.
---------------------------------------------------------------------------
\537\ See part VI below.
---------------------------------------------------------------------------
In regard to the specific method by which a financial institution
would collect the 1071 data points, the proposed rule would require a
covered financial institution to compile and maintain data regarding
covered applications from small businesses, and require that the data
be compiled in the manner prescribed for each data point and as
explained in associated Official Interpretations (included in this
proposed rule) and the Filing Instructions Guide (FIG) that the Bureau
anticipates later providing on a yearly basis. The proposed rule would
then explain that the data compiled shall include the items described
in proposed Sec. 1002.107(a)(1) through (21). The Official
Interpretations, sometimes referred to as official comments or official
commentary, provide important guidance on compliance with the
regulation and are discussed in this preamble in relation to each data
point as well as other regulatory provisions. The FIG would provide
instructions on the operational methods for compiling and reporting
data, including which codes to report for different required
information. The FIG would be updated yearly, as is the FIG that is
used with HMDA compilation and reporting.\538\
---------------------------------------------------------------------------
\538\ See generally Fed. Fin. Insts. Examination Council, The
Home Mortgage Disclosure Act, https://ffiec.cfpb.gov/ (last visited
July 28, 2021).
---------------------------------------------------------------------------
The Bureau notes that some of the details contained in the proposed
regulatory text and commentary may also be appropriate for inclusion in
the FIG, and it anticipates that it may choose to relocate some such
details to the FIG when issuing the final rule. For example, proposed
Sec. 1002.107(a)(1) addresses the unique identifier data point. A
portion of proposed comment 107(a)(1)-1 would explain that the unique
identifier must not exceed 45 characters, and may only include standard
numerical and/or alphabetical characters and cannot include dashes,
other special characters, or characters with diacritics. At the final
rule stage, the Bureau might consider removing those details from the
commentary and addressing them instead in the FIG, in order to preserve
flexibility in how the submission platform is ultimately designed and
implemented.
Proposed comment 107(a)-1 would provide general guidance on
complying with Sec. 1002.107(a), and would explain that: (i) A covered
financial institution reports the data even if the credit originated
pursuant to the reported application was subsequently sold by the
institution; (ii) a covered financial institution annually reports data
for covered applications for which final action was taken in the
previous calendar year; and (iii) a financial institution reports data
for a covered application on its small business lending application
register for the calendar year during which final action was taken on
the application, even if the institution received the application in a
previous calendar year. The Bureau believes that these operational
instructions would clarify a financial institution's collection and
reporting requirements and so facilitate compliance. The Bureau also
believes that these instructions would help to ensure the accuracy and
consistency of the data collected and reported.
The Bureau crafted the proposed rule in consideration of the
concerns and input of the SERs and other stakeholders. First, the
proposed rule would generally not require a financial
[[Page 56437]]
institution to verify applicant-provided information, as discussed more
fully in the section-by-section analysis of proposed Sec. 1002.107(b)
below, and has limited the discretionary data points to those that the
Bureau believes would be most useful for the purposes of section 1071.
In addition, the Bureau has considered the costs, including data
quality scrubs, automation and training, that would be imposed by the
collection and reporting of the statutory and discretionary data
points; these are discussed in detail in part VII below. The Bureau has
attempted to craft the collection and reporting requirements to be as
clear and operationally manageable as possible, and requests comment on
potential methods for increasing clarity and manageability.
In regard to concerns from SERs and other stakeholders about being
required to collect applicants' protected demographic information for
purposes of section 1071, the Bureau notes that several SERs reported
collecting this kind of information currently (because they are CDFIs,
or because they are participating in certain SBA or similar loan
guarantee programs). In addition, the Bureau crafted the proposed rule
to provide flexibility for financial institutions in the collection and
reporting of this information. The Bureau is also not proposing an
exemption for small financial institutions from reporting the
discretionary data points, as suggested by some SERs and commenters. As
explained in the section-by-section analysis of proposed Sec.
1002.105(b) above, certain institutions with limited small business
loan originations would be exempt from 1071 collection and reporting
obligations. Furthermore, the Bureau is concerned that the usefulness
of the data collected would be reduced if the data set is incomplete
for some financial institutions. Finally, the Bureau is not proposing
at this time to establish a Federal collection system for protected
demographic or other information for use with 1071 reporting that would
avoid the need for financial institutions to request and store this
information about applicants, as suggested by several SERs.
The Bureau seeks comment on its proposed approach to the collection
and reporting of the 1071 data points, including the specific requests
for input above and in the section-by-section analysis of each of the
proposed data points below.
Proposed Rule--Other Discretionary Data Points Considered But Not
Proposed
As mentioned above, SERs and other stakeholders suggested some
additional data points for the Bureau's consideration, and the Bureau
considered others in the development of this proposed rule. Because of
the operational complexities likely to be posed by each of these
potential data points, as well as the reasons explained below, the
Bureau has chosen not to propose to include any of the following data
points in the 1071 rule. Nonetheless, the Bureau seeks comment on
whether the following potential data points or any others would further
the purposes of section 1071 and thus should be considered for
inclusion in the final rule.
Type of business/entity structure (sole proprietorship, C-
corp, LLC, partnership, etc.). This information could be useful in
providing context to the race, sex, and ethnicity data regarding
applicants' principal owners. However, the Bureau believes that
collecting the number of principal owners, as proposed in Sec.
1002.107(a)(21), would better serve this purpose.
Credit score. Collecting credit score and other credit
information could be particularly useful for the fair lending purpose
of section 1071. However, because of the different types of scores and
different situations in which a financial institution would or would
not access scores, the Bureau believes that this data point could be
quite complicated and involve complex sub-fields, which could pose
operational difficulties for financial institutions in collecting and
reporting this information. These complexities could also make it
difficult for data users to understand and interpret credit score data.
Credit reporting information, including whether credit
information was accessed. This data point could also be complicated and
involve complex sub-fields, making it difficult for financial
institutions to collect and report. As with credit score, these
complexities could also make it difficult for data users to understand
and interpret these data. In addition, it is not clear that this
information would be useful without also collecting credit score.
Percentage ownership of each principal owner and
percentage ownership by women and by minorities. This information could
be useful in providing context to the ethnicity, race, and sex data
regarding applicants' principal owners. However, the Bureau is
concerned that requesting this type of percentage data could be
confusing to applicants and could result in inconsistent responses
across applicants and institutions. The Bureau believes that collecting
the number of principal owners, as proposed in Sec. 1002.107(a)(21),
would better serve this same purpose.
Whether the applicant has an existing relationship with
the financial institution and the nature of that relationship. This
information could provide additional context for a financial
institution's credit decision, and thus could be useful for both of
section 1071's statutory purposes. However, the Bureau believes that
the usefulness of the data collected may not justify the additional
operational complexity of identifying and tracking such relationships
for reporting.
Customer number, and/or unique (but anonymous)
identification number for applicants or associated persons for tracking
of multiple applications. This information could be useful to track
multiple applications by a single small business within a particular
financial institution, whether submitted at one time or over the course
of the year. However, the Bureau believes that the potential
difficulties posed by requiring the reporting of this information--
particularly for applications that have been withdrawn or abandoned--
would not be warranted in light of the utility of the data.
107(a)(1) Unique Identifier
Background
ECOA section 704B(e)(2)(A) requires financial institutions to
collect and report ``the number of the application . . . .'' Regulation
C includes a similar reporting requirement for a universal loan
identifier (ULI),\539\ though some insured credit unions and
depositories whose lending activity falls below applicable thresholds
are partially exempt and only need to report a non-universal loan
identifier (NULI).\540\ Both the ULI and the NULI use only alphanumeric
characters, and do not allow use of identifying information about the
applicant or borrower in the identifier. The ULI is ``unique'' in the
national HMDA reporting market because it uses a unique legal entity
identifier (LEI) for the reporting institution and then the identifier
is required to be unique within that
[[Page 56438]]
institution.\541\ The ULI must be no more than 45 characters and the
NULI must be no more than 22 characters.\542\
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\539\ 12 CFR 1003.4(a)(1)(i).
\540\ 12 CFR 1003.3(d)(5).
\541\ 12 CFR 1003.4(a)(1)(i)(A), (B)(2). The NULI is only
required to be unique within the annual loan/application register in
which the covered loan or application is included. 12 CFR
1003.3(d)(5)(ii).
\542\ The ULI length limit is included in the Bureau's yearly
Filing Instructions Guide. See Bureau of Consumer Fin. Prot., Filing
instructions guide for HMDA Data collected in 2021 (2021), https://s3.amazonaws.com/cfpb-hmda-public/prod/help/2021-hmda-fig.pdf. The
limit for the NULI is in Regulation C Sec. 1003.3(d)(5).
---------------------------------------------------------------------------
SBREFA Proposals Under Consideration and Feedback Received
The Bureau stated in the SBREFA Outline that it was considering
proposing that financial institutions report an alphanumeric
application or loan number of no more than 45 characters that is
unique, within the financial institution, to the referenced extension
(or requested extension) of credit and that remains uniform through the
application and origination stages of the process.\543\ The financial
institution would assign this number to an application, and the number
would be reported as the application number if the credit applied for
was not originated. The same number would be reported as the loan
number if the credit applied for was originated. The application/loan
number would not include any identifying information about the
applicant. The Bureau stated that it was considering proposing a
structure for the method of assigning and reporting the application/
loan number under section 1071 to follow HMDA/Regulation C formatting
and other requirements, which might reduce initial software development
costs.
---------------------------------------------------------------------------
\543\ SBREFA Outline at 26.
---------------------------------------------------------------------------
SERs reported varied practices with respect to assigning
application and loan numbers.\544\ Some SERs stated they do not assign
application numbers; some of those SERs indicated, however, that they
do assign loan numbers at or before origination. Two SERs reported
tracking applications and loans using an identification number assigned
to the customer. One SER expressed concern about reporting actual loan
numbers to the Bureau due to potential identity theft, and requested
that the Bureau permit financial institutions to generate a new
application/loan number specifically for 1071 reporting purposes. One
SER stated that if an applicant requests more than one type of credit
product, a separate application/loan number is assigned to each product
request, while other SERs indicated they use a single application
number even if multiple products are requested.
---------------------------------------------------------------------------
\544\ SBREFA Panel Report at 26-27.
---------------------------------------------------------------------------
The SBREFA Panel recommended that in the NPRM the Bureau consider
proposing to permit financial institutions to report ``dummy''
application/loan numbers assigned specifically for 1071 reporting
purposes, rather than the numbers they use internally.\545\
---------------------------------------------------------------------------
\545\ Id. at 45.
---------------------------------------------------------------------------
Feedback from other stakeholders echoed many of the SERs' concerns,
making clear that many lenders do not assign numbers at the application
stage and others assign them at various points in the process. One
commenter explained that being required to assign an application number
early would disrupt its procedures. Another commenter stated that the
Bureau should provide flexibility in this data point to account for the
wide range of practices.
Proposed Rule
The Bureau is proposing to require that financial institutions
report an alphanumeric identifier starting with the LEI of the
financial institution. This unique alphanumeric identifier would be
required to be unique within the financial institution to the specific
covered application, and would be required to be usable to identify and
retrieve the specific file corresponding to the application for or
extension of credit. The Bureau is also proposing commentary with
additional details, as discussed below.
This proposed unique identifier requirement closely follows the
SBREFA Outline approach for this data point, with certain adjustments
and clarifications. First, the Bureau has chosen to propose the more
precise term of ``unique identifier,'' instead of ``application/loan
number,'' which was the term used in the SBREFA Outline. In addition,
the Bureau had stated that its approach in the SBREFA Outline would
follow Regulation C formatting and other requirements, but did not
explicitly discuss the use of ``dummy'' numbers, as is done with
HMDA.\546\ For clarity, the Bureau is including language in proposed
comment 107(a)(1)-1 that would explain that the identifier does not
have to be the number that the financial institution uses for the
application internally. Proposed comment 107(a)(1)-1 would also provide
the formatting requirements for the unique identifier. The Bureau is
proposing an identifier of 45 characters or fewer, as is currently
required for HMDA.
---------------------------------------------------------------------------
\546\ SBREFA Outline at 26.
---------------------------------------------------------------------------
The Bureau notes that the SBREFA Outline language could be read to
suggest that the financial institution must assign a number to an
application and then keep that number uniform throughout its subsequent
processing of the application; this is not what was intended. The
Bureau is making clear in the proposal that the unique identifier would
not need to stay ``uniform'' throughout the application and subsequent
processing. Proposed comment 107(a)(1)-1 would explain that the
financial institution may assign the unique identifier at any time
prior to reporting the application. Proposed comment 107(a)(1)-1 would
also explain that refinancings or applications for refinancing must be
assigned a different identifier than the transaction that is being
refinanced.
Proposed comment 107(a)(1)-2 would make clear that the unique
identifier must not include any directly identifying information
regarding the applicant or persons (natural or legal) associated with
the applicant. The Bureau is aware that internal identification numbers
assigned by the financial institution to the application or applicant
could be considered directly or indirectly identifying information, and
requests comment on this issue. The Bureau also notes that, as
discussed in part VI.C.6.i, due to privacy risks the Bureau is
proposing to not publish the unique identifier data field in unmodified
form; the Bureau is seeking comment on potential modifications to or
deletion of this data field in the published application-level 1071
data.
Proposed comment 107(a)(1)-2 would also cross-reference proposed
Sec. 1002.111(c) and related commentary, which prohibit any personally
identifiable information concerning any individual who is, or is
connected with, an applicant, in records retained under proposed Sec.
1002.111.
As stated above, the Bureau is proposing to require that the unique
identifier begin with the financial institution's LEI; this requirement
was not stated in the SBREFA Outline. Pursuant to proposed Sec.
1002.109(b)(1)(vi), any covered financial institution that does not
currently use an LEI would be required to obtain and maintain an LEI in
order to identify itself when reporting the 1071 data. Including the
financial institution's LEI in the unique identifiers that it assigns
to its applications should not cause extra operational difficulty once
the programming to do so has been
[[Page 56439]]
implemented. The Bureau believes that including the LEI will increase
the specificity and usefulness of the identifier and the record it
identifies. Although a ``check digit'' is required for the HMDA ULI,
the Bureau is not proposing to require its use in the 1071 unique
identifier. The Bureau believes that, based on its current expectations
for a 1071 reporting platform, a check digit would be unnecessary.
The Bureau's proposal is intended to avoid the potential problems
identified by SERs during the SBREFA process. The method proposed would
accommodate different institutions' numbering systems because the
unique identifier can be created separately from that internal system.
The Bureau's proposed approach would also alleviate the identity theft
concerns raised with respect to reporting actual loan numbers, though
the Bureau is unlikely to release the unique identifier data reported
to the Bureau publicly in any case. In regard to the issue of requests
by the same applicant for more than one credit product at the same
time, the Bureau proposes to treat those as separate applications. See
the section-by-section analysis of proposed Sec. 1002.103 above.
The Bureau seeks comment on its proposed approach to the unique
identifier data point. In addition, the Bureau requests comment on the
use of the LEI in the unique identifier and the possible use of a check
digit.
107(a)(2) Application Date
Background
ECOA section 704B(e)(2)(A) requires financial institutions to
collect and report the ``date on which the application was received.''
SBREFA Proposal Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau stated it was considering
proposing that financial institutions report the application date using
either (i) the date shown on a paper or electronic application form; or
(ii) the day on which a credit request becomes an ``application.''
\547\ The Bureau considered proposing that application date be reported
with a day, month, and year. The Bureau also considered proposing that
financial institutions have a grace period of several days on either
side of the date reported to reduce the compliance burden of
pinpointing an exact date on which an application was received.
---------------------------------------------------------------------------
\547\ Id.
---------------------------------------------------------------------------
Most SERs stated that application date would not be difficult to
report, though some suggested different triggers for the reporting of
application date.\548\ This feedback overlapped with feedback on the
definition of an application. Several SERs suggested the date an
application is completed and submitted for underwriting review should
be the triggering date. Several other SERs expressed support for
reporting the date based on when a credit memorandum is generated. One
SER suggested that each financial institution be permitted to develop
its own process for reporting application date, so long as it is done
consistently. Another SER expressed concern with reporting application
date as a general matter, explaining that a date is not currently
recorded in their system as a matter of practice. Instead of
application date, that SER suggested that financial institutions report
the date they make a decision on the loan. Several SERs were strongly
in favor of the Bureau providing a grace period of several days on
either side of the date reported to reduce compliance burden.
---------------------------------------------------------------------------
\548\ SBREFA Panel Report at 27.
---------------------------------------------------------------------------
Other stakeholders to comment on this data point were generally in
favor of the proposal under consideration, and particularly the grace
period, which they expressed would reduce the compliance burden of
pinpointing an exact date. One stakeholder suggested a 7-day grace
period. One financial institution suggested that application date be
assigned up through and including at closing in order to accommodate
financing requests outside normal business hours.
The SBREFA Panel recommended that the Bureau seek comment on how
best to define ``application date'' in light of how it decides to
propose defining an ``application.'' \549\
---------------------------------------------------------------------------
\549\ Id. at 45.
---------------------------------------------------------------------------
Proposed Rule
The Bureau is proposing to require reporting of application date in
Sec. 1002.107(a)(2) as the date the covered application was received
by the financial institution or the date on a paper or electronic
application form. Proposed Sec. 1002.107(a)(2) is consistent with the
Bureau's proposal under consideration in the SBREFA Outline, with
revised language for clarity. Proposed comments 107(a)(2)-1 and -2
would clarify the need for a financial institution to take a consistent
approach when reporting application date, and provide guidance on how
to report application date for indirect applications. In light of SER
and other stakeholder feedback \550\ supportive of permitting a grace
period for reporting the date of application, the Bureau is proposing a
safe harbor in Sec. 1002.112(c)(4), which would provide that a
financial institution does not violate proposed subpart B if it reports
on its small business lending application register an application date
that is within three calendar days of the actual application date
pursuant to proposed Sec. 1002.107(a)(2).
---------------------------------------------------------------------------
\550\ SER feedback primarily directed at how to define an
application under section 1071, rather than the date reported for
that application, are discussed in connection with the section-by-
section analysis of proposed Sec. 1002.103(a) above.
---------------------------------------------------------------------------
The Bureau seeks comment on its proposed approach to collecting
application date in Sec. 1002.107(a)(2) and associated commentary. As
recommended by the SBREFA Panel, the Bureau also seeks comment on how
best to define this data point in light of the Bureau's proposed
definition of ``covered application'' in Sec. 1002.103.
107(a)(3) Application Method
ECOA section 704B(e)(2)(H) authorizes the Bureau to require
financial institutions to compile and maintain ``any additional data
that the Bureau determines would aid in fulfilling the purposes of
[section 1071].'' The Bureau believes that application method data will
aid in fulfilling the purposes of section 1071, as explained below.
The Bureau did not address the method of application as a potential
data point under consideration in the SBREFA Outline. However, during
the SBREFA process, one CDFI SER suggested collecting information
regarding the way an application was taken (in person, by phone, or
online) in order to monitor for possible discouragement of
applicants.\551\ Relatedly, several SERs that took applications for
credit primarily or entirely online asserted that such channels were
less likely to result in discrimination and more likely to increase
access to credit to women-owned and minority-owned small businesses.
---------------------------------------------------------------------------
\551\ SBREFA Panel Report at 30.
---------------------------------------------------------------------------
In light of this feedback during the SBREFA process, pursuant to
its authority under ECOA section 704B(e)(2)(H), and for the reasons set
forth below, the Bureau is proposing to require financial institutions
to collect and report application method. Proposed Sec. 1002.107(a)(3)
would define this data point as the means by which the applicant
submitted the covered application directly or indirectly to the
financial institution. The Bureau is also proposing commentary to
accompany proposed Sec. 1002.107(a)(3).
[[Page 56440]]
The Bureau believes that data on application method would improve
the market's understanding of how applicants apply for credit which, in
turn, would facilitate fair lending enforcement, including helping
determine whether certain application methods are more or less likely
to be associated with violations of fair lending laws. This proposed
data field would also permit comparisons across financial institutions
for a given application method. In addition, data on application method
supports 1071's statutory purposes by assisting with an understanding
of the business and community development needs of a particular
geographic region. For instance, application method may help users of
1071 data analyze the extent to which financial institutions may be
providing access to credit online or by telephone in ``credit deserts''
where financial institutions do not have branch operations.
The Bureau also believes that collecting data on application method
will aid in analysis of multiple 1071 data points collected and
reported by financial institutions, including the ethnicity, race, and
sex of applicants' principal owners. First, these data will assist the
Bureau and other data users in identifying whether applicants are more
or less likely to provide this (and other) 1071 information in
different application channels. This information may also assist in
determining whether a financial institution has procedures to collect
applicant-provided data at a time and in a manner that is reasonably
designed to obtain a response, as would be required by proposed Sec.
1002.107(c)(1).
Finally, data on application method would assist in analyzing data
reported under, and assessing compliance with, proposed Sec.
1002.107(a)(20), which requires financial institutions to collect
principal owners' ethnicity and race via visual observation or surname
in certain circumstances. Having application method reporting will
allow the Bureau and other data users to determine, for example, which
applications could be subject to data collection via visual observation
or surname (because the financial institution met with the applicant in
person) and, together with information reported under proposed Sec.
1002.107(a)(20), which of those applications did and did not have
information collected that way.
Proposed comment 107(a)(3)-1 would clarify that a financial
institution complies with proposed Sec. 1002.107(a)(3) by reporting
the means by which the applicant submitted the application from one of
the following options: in-person, telephone, online, or mail. Proposed
comment 107(a)(3)-1 would explain how financial institutions are to
choose which application method to report, including via a ``waterfall
approach'' when they have contact with an applicant in multiple ways.
Proposed comment 107(a)(3)-1.i would provide that an financial
institution reports the application method as ``in-person'' if the
financial institution, or another party acting on the financial
institution's behalf, meets with the applicant in person (for example,
in a branch office, at the applicant's place of business, or via
electronic media with a video component). Proposed comment 107(a)(3)-
1.ii would provide that a financial institution reports the application
method as ``telephone'' if the financial institution, or another party
acting on the financial institution's behalf, did not meet with the
applicant in person as described in proposed comment 1002.107(a)(3)-1.i
but communicated with the applicant by telephone or via electronic
media without a video component.
Proposed comment 107(a)(3)-1.iii would provide that a financial
institution reports the application method as ``online'' if it, or
another party acting on the financial institution's behalf, did not
meet with the applicant in person and did not communicate with the
applicant by telephone as described in proposed comments
1002.107(a)(3)-1.i and ii but communicated with the applicant through
an online application, electronic mail, text message, and/or some other
form of online communication. Proposed comment 107(a)(3)-1.iv would
provide that a financial institution reports the application method as
``mail'' if the financial institution, or another party acting on the
financial institution's behalf, did not meet with the applicant in
person and did not communicate with the applicant by telephone, as
described in proposed comments 1002.107(a)(3)-1.i and ii, but
communicated with the applicant in writing via United States mail,
courier or overnight service, or hand-delivery (including hand-delivery
of documents via an overnight drop box or at a teller window).
Proposed comment 107(a)(3)-2 would provide guidance on what
application method a financial institution would report for
interactions with applicants both online and by mail. In short, a
financial institution would report application method based on the
method by which it, or another party acting on its behalf, requested
the ethnicity, race, and sex of the applicant's principal owners
pursuant to proposed Sec. 1002.107(a)(20). Proposed comment 107(a)(3)-
2 also would provide separate examples of when the application method
should be reported as ``online'' and ``mail.''
The Bureau seeks comment on its proposed approach to this data
point.
107(a)(4) Application Recipient
ECOA section 704B(e)(2)(H) authorizes the Bureau to require
financial institutions to compile and maintain ``any additional data
that the Bureau determines would aid in fulfilling the purposes of
[section 1071].'' Although the Bureau did not address application
recipient as a potential data point under consideration in the SBREFA
Outline, the Bureau believes that application recipient data would aid
in fulfilling the purposes of section 1071, as explained below.
Financial institutions employ a wide variety of lending models in
extending credit to small businesses. During the SBREFA process, the
Bureau explored section 1071's requirement to collect and report
certain data for any ``application to a financial institution for
credit,'' which could be read as applying to more than one financial
institution when an intermediary provides the application to another
financial institution that takes final action on the application.\552\
See the section-by-section analysis of proposed Sec. 1002.109(a)(3)
below for a discussion of proposed reporting obligations where multiple
financial institutions are involved in a covered credit transaction.
Financial institutions, of course, may receive applications for credit
directly from small businesses--depending on the institution,
applications may be submitted online, by telephone, by mail, or in
person at a branch location, the applicant's place of business, or some
other place. In addition, some financial institutions may receive
applications routed to them through third parties, such as brokers or
vehicle or equipment dealers. Some financial institutions issue credit
cards branded for particular retailers, for which applications are
taken in person at the retailer's store locations. Some brokers and
dealers may send applications to a single financial institution, while
others may send them to multiple financial institutions at the same
time. In these types of application scenarios involving third parties,
the financial institution may not directly interact with the
[[Page 56441]]
applicant at all during the application process.
---------------------------------------------------------------------------
\552\ ECOA section 704B(b).
---------------------------------------------------------------------------
In the SBREFA Outline, the Bureau noted the wide array of small
business lending models operating today. The Bureau noted that certain
section 1071 requirements might apply to intermediaries in the
application chain.\553\ As discussed in the section-by-section analysis
of proposed Sec. 1002.109(a)(3) below, several SERs voiced support for
aligning reporting requirements for financial institutions that are not
the lender of record with the approach taken for HMDA reporting in the
Bureau's Regulation C. The Bureau did not receive feedback from SERs on
whether data concerning the existence of intermediaries should be
collected. Other stakeholders did urge the Bureau, however, to provide
clear rules for lenders that work with partners, including when lenders
should, and need not, collect 1071 data. Stakeholders also urged the
Bureau to provide clear rules that would work for a broad array of
business models, including lenders working with partners and agents.
---------------------------------------------------------------------------
\553\ SBREFA Outline at 13.
---------------------------------------------------------------------------
The Bureau believes that information regarding how an application
is received would enhance small business lending data and further the
purposes of section 1071. Pursuant to its authority under ECOA section
704B(e)(2)H), the Bureau is thus proposing Sec. 1002.107(a)(4), which
would require financial institutions to collect and report the
application recipient, meaning whether the applicant submitted the
covered application directly to the financial institution or its
affiliate, or whether the applicant submitted the covered application
indirectly to the financial institution via a third party. Proposed
comment 107(a)(4)-1 would clarify that if a financial institution is
reporting actions taken by its agent consistent with proposed comment
109(a)(3)-3, then the agent is considered the financial institution for
the purposes of proposed Sec. 1002.107(a)(4).
The Bureau believes that collecting data on application recipient,
in combination with application method, as discussed above, would
improve the market's understanding of how small businesses interact
with financial institutions when applying for credit which, in turn,
would facilitate fair lending analysis, including identifying risks in
small business lending. Information about application method and
whether the application was submitted directly or indirectly also would
promote the community and business development purposes of the statute
by improving the public's understanding of the structure of small
business lending originations across the market, the methods by which
credit is originated for particular groups or underserved markets, and
trends over time (for example, to the extent applicant preferences
shift from in-person to online interactions). It will also be helpful
for the Bureau and data users to know the relationship between the
covered financial institution and the applicant in the context of
certain other collected and reported data.
The Bureau also believes that collecting and reporting information
on the application recipient may facilitate fair lending analysis
because particular business models may provide more or less reliable
information with respect to the ethnicity, race, and sex of the
principal owners of the applicant. In addition, the Bureau believes
that collecting and reporting information on the application recipient
may assist with an understanding of the business and community
development needs of an area or applicant. For instance, the proposed
collection of application recipient may help users of 1071 data
understand whether financial institutions making credit decisions are
directly interacting with the applicant and/or generally operate in the
same community as the applicant. Finally, the Bureau expects that
financial institutions know and track how they receive applications for
credit from small businesses and thus does not believe that this data
point should be difficult for financial institutions to collect and
report.
The Bureau seeks comment on its proposed approach to this data
point.
107(a)(5) Credit Type
Background
Section 1071 requires financial institutions to collect and report
``the type and purpose of the loan or other credit being applied for.''
\554\ (The credit purpose data point is addressed in proposed Sec.
1002.107(a)(6).) For HMDA reporting, Regulation C requires numerous
data points that indicate the type of credit applied for or originated:
the type of guarantees used; lien order; loan term; the presence of
nontraditional contract terms including balloon, interest only, and
negative amortization payments; variable rate information; open-end
status; and reverse mortgage status.\555\ Section 1071 provides no
additional information or details regarding what aspects of credit type
should be collected and reported.
---------------------------------------------------------------------------
\554\ ECOA section 704B(e)(2)(B).
\555\ Regulation C Sec. 1003.4(a)(2), (14), (25), (27), (28),
(37), and (38).
---------------------------------------------------------------------------
SBREFA Proposals Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau stated it was considering
proposing that financial institutions report the loan/credit type data
point via three sub-components: (1) Type of Loan Product (chosen from a
specified list); (2) Type of Guarantee (chosen from a specified list);
and (3) Loan Term (in months, or using ``Not Applicable'' for products
that do not have a loan term and for applications that did not specify
a loan term). The SBREFA Outline included lists of types of loan
product and types of guarantees.\556\
---------------------------------------------------------------------------
\556\ SBREFA Outline at 26-27.
---------------------------------------------------------------------------
The Bureau explained in the SBREFA Outline that a separate category
for the presence of a guarantee was included in recognition of the fact
that a guaranteed loan is often made as a counteroffer for either a
requested loan by the applicant or because the applicant does not
qualify for a conventional loan.\557\ Having guarantee status captured
as a feature of loan type therefore would provide useful information.
The Bureau also noted that some borrowers specifically request a
government guaranteed loan program and/or receive a loan from a
financial institution that only participates in such a program.\558\
---------------------------------------------------------------------------
\557\ Id.
\558\ Id.
---------------------------------------------------------------------------
For reporting when an application requests more than one type of
loan product, the Bureau stated in the SBREFA Outline that it was
considering whether to propose that (1) financial institutions choose
up to three items from the subcomponent lists for the Loan Type data
point if there is only one application and multiple products/
guarantees/terms were asked for; or (2) financial institutions report
separate applications/originations for each loan type requested or
originated. The Bureau explained that financial institutions would be
able to choose more than one guarantee for originated or approved but
not accepted credit. For loan product and loan term, however, financial
institutions would report only one of each subcomponent on originated
credit or credit approved but not accepted.\559\
---------------------------------------------------------------------------
\559\ Id. at 27.
---------------------------------------------------------------------------
A number of SERs requested certain products be added to the
``product type'' list; this feedback generally aligned with feedback
regarding product coverage (see the section-by-section analysis of
proposed Sec. 1002.104 above). Two SERs suggested that line increases
should be
[[Page 56442]]
excluded. Some SERs requested that the Bureau permit multiple types of
guarantees to be selected for a single application, and one SER
suggested that FHA guarantees be added to the guarantee list. One SER
explained that government guarantees and personal guarantees are
different--the government guarantee being a credit enhancement and a
personal guarantee being a form of collateral.
The SBREFA Panel recommended that the Bureau consider modifying the
product type and guarantee lists in accordance with the various
suggestions made by SERs. The Panel also recommended that the Bureau
seek comment on how financial institutions currently handle increases
in lines of credit and how best to require reporting of this data point
for multiple lines of credit within the same account.\560\
---------------------------------------------------------------------------
\560\ SBREFA Panel Report at 45.
---------------------------------------------------------------------------
The Bureau also received feedback from other stakeholders regarding
this data point. A community group commenter stated that the three data
fields making up this data point are appropriate choices because each
is necessary separately and in combination to help determine whether
lenders are responding to the needs for credit by offering affordable
and sustainable products to traditionally underserved small businesses.
Commenters requesting that additional products be covered by the rule,
such as MCAs, likewise said those products would need to be added to
the loan product list. Another commenter stated that the Bureau should
also expand the number of guarantees that a financial institution can
select because creditors will sometimes stack four or five guarantees
on a single loan product.
One commenter stated that the ``type and purpose of the financing''
are fluid in the application process, and the Bureau should make it
clear that high-level, general, or categorical information is
sufficient for these data points. Other commenters appreciated the
inclusion of ``other,'' ``unknown,'' and ``other/unknown'' in the field
lists to facilitate compliance. One commenter asked that the Bureau
provide clear guidance on how this data point should be reported, and
another stated that reporting this data point should not be costly if
it is defined simply and left unchanged.
Treatment of multiple products requested at the same time.
Regarding how a single request for multiple loan/credit products should
be reported, some commenters supported reporting separate applications
while others supported requiring reporting as a single application. One
commenter suggested that the Bureau should accommodate both approaches.
Another commenter remarked that if a business is applying for multiple
products, the basic information is going to be the same, the only
difference would be which product is funded. This same commenter
suggested that if multiple applications are reported, that will
overinflate the data points as the business does not have three
separate applications, but only one application for different products.
This commenter further pointed out that there are instances where a
business is only applying for a loan but ends up liking the terms of a
line of credit, and asked whether that change in decision would become
a new application.
Proposed Rule
The Bureau is proposing in Sec. 1002.107(a)(5) to require that
financial institutions collect and report the following information
regarding the type of credit applied for or originated: (i) The credit
product; (ii) The type or types of guarantees that were obtained for an
extension of credit, or that would have been obtained if the covered
credit transaction were originated; and (iii) The length of the loan
term, in months, if applicable. These aspects of credit type are
discussed in turn below. This proposal is consistent with the approach
presented in the SBREFA Outline, and would require the financial
institution to choose the credit product and guarantee(s) from a
specified list. (These lists are provided in the commentary
accompanying proposed Sec. 1002.107(a)(5).) The lists include choices
for ``Other'' and ``Not provided by applicant and otherwise
undetermined,'' as appropriate, to facilitate compliance. Based on the
feedback from SERs and other stakeholders, and consistent with the
SBREFA Panel's recommendation to consider modifying the product type
and guarantee lists in accordance with the suggestions made by SERs,
the Bureau has updated the lists to reflect additional credit products
and types of guarantees. The Bureau is also proposing to use the term
``credit type'' for this data point, rather than the SBREFA Outline
term ``loan/credit type,'' for clarity and consistency with terminology
used elsewhere in the proposal.
The Bureau believes that it is reasonable to interpret the
statutory term ``credit type'' to comprise the proposed three data
fields, because they are critical to understanding the nature of small
business credit applied for and provided, as explained below. For the
reasons discussed herein, the Bureau believes that the subcategories of
credit product (including collateral), guarantee type, and loan term
would aid in fulfilling the purposes of section 1071. Financial
institutions generally have all of the information required for this
data point when they process applications (and the reporting regime
would be sufficiently flexible when they do not), so the Bureau does
not believe there is anything in this approach that would impose
particular operational difficulty. Additionally, the Bureau believes it
is reasonable to interpret type of credit ``applied for'' to include
the type of credit actually originated when an application results in
an extension of credit.
The Bureau seeks comment on its proposed approach to the credit
type data point, including the lists of products and guarantees
proposed and the other specific requests for input below.
Credit product. The first data field the Bureau is proposing to
include in the credit type data point is the credit product (i.e., a
commonly understood category of small business lending like term loans
or lines of credit) which the Bureau considers to be an integral part
of the statutory requirement to collect credit type. The Bureau
believes information about the various products sought by applicants
would further the purposes of section 1071 by demonstrating, for
example, how small businesses of different sizes or in different
sectors choose to pursue, or ultimately access, different forms of
credit.
The Bureau distinguishes between secured and unsecured term loans
and lines of credit in its list of credit products because it believes
that whether a term loan or line of credit is collateralized can have
such a significant effect on things like approval rates and pricing
that secured and unsecured products fundamentally differ in kind. For
this reason, the Bureau believes that including information on the use
of collateral in the credit product data field will help data users to
avoid inaccurate interpretations of 1071 data. The Bureau believes that
whether a loan is secured or unsecured will be part of an application
or loan file and, as a result, should not be operationally difficult to
report once a financial institution's 1071 compliance system is set up.
Proposed comment 107(a)(5)-1 would present the instructions for
collecting and reporting credit product and the proposed list of credit
products from which financial institutions would select. Proposed
comment 107(a)(5)-1 would explain that a financial
[[Page 56443]]
institution complies with Sec. 1002.107(a)(5)(i) by selecting the
credit product requested from the list provided in the comment. It
would also explain that if an applicant requests more than one credit
product, the financial institution reports each credit product
requested as a separate application.
The issue of how to collect and report multiple products applied
for at the same time affects several data points, but is most salient
for credit type. The Bureau believes that requiring a separate
application to be reported for each credit product requested would
yield more complete and useful data, and that a financial institution
should not experience operational difficulties in copying the relevant
information, identical for most data points, to separate lines in the
small business lending application register. This issue is discussed
more fully in the section-by-section analysis of proposed Sec.
1002.103(a), which also addresses the Bureau's proposed approach to
multiple lines of credit within the same account.
The Bureau intends the list of credit products provided in proposed
comment 107(a)(5)-1 to align with the most common types of credit
products in small business lending. As explained above, the list for
credit product included in the SBREFA Outline has been amended based on
SER and stakeholder input, as well as other considerations.
Specifically, ``Merchant cash advance'' and ``Other sales-based
financing transaction'' have been added to the list to correspond with
their inclusion as covered credit transactions under proposed Sec.
1002.104. See the section-by-section analysis of proposed Sec.
1002.104 above for a more complete discussion of products covered by
and excluded from the Bureau's proposal. Proposed comment 107(a)(5)-6
would explain when ``other sales-based financing transaction'' is used
for reporting.
Proposed comment 107(a)(5)-1 would also explain that if the credit
product for an application does not appear on the list of products
provided, the financial institution selects ``other'' as the credit
product and reports the specific product via free-form text. The Bureau
believes that allowing financial institutions to choose ``other'' when
the credit product for the application does not appear on the provided
list would facilitate compliance. In addition, collecting this
information on ``other'' credit products would assist the Bureau in
monitoring product trends and key developments in the small business
lending market, which the Bureau could use to inform any future
iterations of the list.
Proposed comment 107(a)(5)-2 would explain that, pursuant to
proposed Sec. 1002.107(c)(1), a financial institution is required to
maintain procedures reasonably designed to collect applicant-provided
data, which includes credit product. However, if a financial
institution is nonetheless unable to collect or otherwise determine
credit product information because the applicant does not indicate what
credit product it seeks and the application is denied, withdrawn, or
closed for incompleteness before a credit product is identified, the
proposed comment would explain that the financial institution reports
that the credit product is ``not provided by applicant and otherwise
undetermined.'' This option is similar to the ``unknown'' response
under consideration during SBREFA, but has been revised to more
accurately reflect the situations in which the response would be
appropriate. The Bureau believes that permitting use of this response
would facilitate compliance and enhance the quality of data collected.
As discussed above, commenting stakeholders supported the flexibility
afforded by this kind of response.
Proposed comment 107(a)(5)-3 would explain how a financial
institution reports a transaction that involves a counteroffer. The
comment would state that if a financial institution presents a
counteroffer for a different credit product than the product the
applicant had initially requested, and the applicant does not agree to
proceed with the counteroffer, a financial institution reports the
application for the original credit product as denied pursuant to
proposed Sec. 1002.107(a)(9). If the applicant agrees to proceed with
consideration of the financial institution's counteroffer, the
financial institution reports the disposition of the application based
on the credit product that was offered, and does not report the
original credit product applied for. The Bureau believes that, in the
complex circumstances created by counteroffers, the meaning of the type
of credit ``applied for'' is ambiguous, and it is reasonable to
interpret the credit product ``applied for'' to mean the credit product
considered via the applicant's response to the counteroffer. For a
discussion of the Bureau's proposed treatment of counteroffers more
generally, see the section-by-section analysis of proposed Sec.
1002.107(a)(9) below.
The Bureau notes that, under its proposal, line increases would be
reportable so that the small business lending market can be tracked
accurately. See the section-by-section analysis of proposed Sec.
1002.103(a) above for additional details. However, the Bureau is not
proposing that line increases be included as a separate item in the
credit product list.
The Bureau seeks comment on its proposed approach to this data
field, including the appropriateness and usefulness of the products
included in the list, whether there are other products that should be
added, and the proposed treatment of counteroffers. The Bureau also
seeks comment on how financial institutions currently handle increases
in lines of credit and whether a line increase should be considered a
credit product, and on whether an overdraft line of credit should be
considered a product separate from a line of credit and thus added to
the product list.
Type of guarantee. The second data field the Bureau is proposing to
include in the credit type data point is guarantee. The Bureau
considers the guarantee obtained for an extension of credit to be part
of the credit ``type'' because it is fundamental to the nature of the
transaction in that it meaningfully impacts terms such as interest
rates, such that guarantee information could help to explain potential
disparities in outcomes and reduce inaccurate conclusions, aiding in
fulfilling the fair lending purpose of section 1071. Indeed, in common
parlance, small business credit transactions are often referred to
using the name of the guarantee (e.g., ``a 7(a) loan,'' referring to
the SBA 7(a) guarantee). Because various types of guarantees are
available for different credit products, the Bureau believes that
guarantee type should constitute a separate data field within the
credit type data point, so that data users can conduct separate
analyses with respect to credit product and guarantees, and to avoid
excessive complexity in the credit product data field. Information on
the distribution of government loan guarantees (such as those provided
in SBA programs) across different geographic areas and applicant groups
should allow a better understanding of how those programs function on
the ground, aiding in fulfilling the business and community development
purpose of section 1071. As with collateral, information on guarantees
is generally a part of an application or loan file and should not be
operationally difficult to report once a financial institution's 1071
compliance system is set up.
Proposed comment 107(a)(5)-4 would present the instructions for
collecting and reporting type of guarantee and the proposed list of
guarantees from which financial institutions would select.
[[Page 56444]]
Proposed comment 107(a)(5)-4 would explain that a financial institution
complies with Sec. 1002.107(a)(5)(ii) by selecting the type or types
of guarantee(s) obtained for an originated covered credit transaction,
or that would have been obtained if the covered credit transaction were
originated, from the list provided in the comment.
The Bureau intends the list of guarantee types provided in proposed
comment 107(a)(5)-4 to align with the most common types of guarantees
used in small business lending. As explained above, the list for
guarantee type included in the SBREFA Outline has been amended based on
SER and stakeholder input. Specifically, ``FHA insurance'' and ``Bureau
of Indian Affairs guarantee,'' which the Bureau believes are often used
with small business credit, have been added.
Proposed comment 107(a)(5)-4 would also explain that the financial
institution may select, if applicable, up to a maximum of five
guarantees for a single application or transaction. In the SBREFA
Outline, the Bureau stated that it was considering allowing financial
institutions to report more than one guarantee for an application or
originated credit.\561\ The Bureau understands that small business
credit may have more than one guarantee, such as an SBA guarantee and a
personal guarantee, and believes that more complete information can be
collected by requiring as many as five to be reported.
---------------------------------------------------------------------------
\561\ SBREFA Outline at 27.
---------------------------------------------------------------------------
Proposed comment 107(a)(5)-4 would also explain that if the type of
guarantee for an application or originated transaction does not appear
on the list of guarantees provided, the financial institution selects
``other guarantee,'' and reports the type of guarantee as free-form
text. As with credit product, the Bureau believes that allowing
financial institutions to choose ``other'' when a guarantee for the
application does not appear on the provided list will facilitate
compliance. In addition, collecting this information on ``other''
guarantee types would assist the Bureau in monitoring trends in usage
of other types of guarantees and key developments in the small business
lending market, which the Bureau could use to inform any future
iterations of the list.
Finally, proposed comment 107(a)(5)-4 would provide that if no
guarantee is obtained or would have been obtained if the covered credit
transaction were originated, the financial institution selects ``no
guarantee.'' Because a small business credit transaction does not
always involve use of a guarantee, the Bureau is not proposing to
include ``not provided by applicant and otherwise undetermined'' as an
option. If no guarantee is identified for an application, the financial
institution would report ``no guarantee.''
In regard to the distinction one SER made between government and
personal guarantees, the Bureau notes that the proposed rule would
identify them as separate options within the data field, thereby
allowing data users to analyze them independently.
The Bureau seeks comment on its proposed approach to this data
field, including the appropriateness and usefulness of the items
listed, and whether there are other guarantees that should be added.
The Bureau also seeks comment on whether five is the appropriate upper
limit for reporting guarantees.
Loan term. The third data field the Bureau is proposing to include
in the credit type data point is the loan term. As with the consumer
lending market, the pricing and sustainability of closed-end credit
transactions for small businesses are associated with term length, and
without awareness of the term of the loan, data users will have less of
an understanding of the types of credit being made available to
applicants. Credit with a one-month term may differ not just in degree
but in kind from credit with a 60-month term. The Bureau thus believes
that the length of the loan term is a fundamental attribute of the type
of credit that applicants are seeking such that it should be treated as
a separate data field within credit type. As with other elements of the
credit type data point, loan term information would allow data users to
reduce inaccurate conclusions or misinterpretations of the 1071 data,
aiding in fulfilling both the fair lending and business and community
development purposes of section 1071. Likewise, the loan term will be
part of the application or loan file and should not be operationally
difficult to report once a financial institution's 1071 compliance
system is set up.
Proposed comment 107(a)(5)-5 would present the instructions for
collecting and reporting loan term. Specifically, it would explain that
a financial institution complies with proposed Sec.
1002.107(a)(5)(iii) by reporting the number of months in the loan term
for the covered credit transaction, and that the loan term is the
number of months after which the legal obligation will mature or
terminate. The comment would further explain how to measure the loan
term and the possible use of rounding.
Proposed comment 107(a)(5)-5 would also make clear that if a credit
product, such as a credit card, does not have a loan term, the
financial institution reports loan term as ``not applicable.'' The
financial institution also reports ``not applicable'' if the
application is denied, withdrawn, or determined to be incomplete before
a loan term has been identified. The Bureau believes that permitting
the use of ``not applicable'' in these situations would facilitate
compliance and aid in the collection of appropriate data. The Bureau
believes that the proposed regulatory text and commentary described
above would alleviate many of the concerns of the SERs and other
commenting stakeholders regarding the credit type data point. The
credit product and guarantee type lists have been updated using their
input and continued Bureau consideration. Multiple types of guarantees
would be permitted by the proposal, and FHA guarantees have been added
to the list.
The Bureau believes the statutory term ``type . . . of the loan''
to be ambiguous, and reasonably interprets the term to include the
credit product, any guarantee obtained, and the term of a closed-end
loan because an accurate and useful record of the ``type'' of loan or
credit would include those data fields. In the alternative, ECOA
section 704B(e)(2)(H) authorizes the Bureau to require inclusion of
``any additional data that the Bureau determines would aid in
fulfilling the purposes of [section 1071],'' and for the reasons
discussed above, the Bureau has also determined that the subcategories
of credit product (including collateral), guarantee type, and loan term
would aid in fulfilling those purposes.
The Bureau seeks comment on its proposed approach to this data
field.
107(a)(6) Credit Purpose
Background
Section 1071 requires financial institutions to collect and report
``the type and purpose of the loan or other credit being applied for.''
\562\ (The credit type data point is addressed in proposed Sec.
1002.107(a)(5).)
---------------------------------------------------------------------------
\562\ ECOA section 704B(e)(2)(B).
---------------------------------------------------------------------------
SBREFA Proposals Under Consideration and Feedback Received
The Bureau stated in the SBREFA Outline that it was considering
proposing that financial institutions report the loan/credit purpose
data point by choosing one or more purposes from a specified list. In
addition to several specific business purposes, the list included
choices for ``Other'' or
[[Page 56445]]
``Unknown'' to facilitate compliance. The Bureau also explained that it
was considering proposing that financial institutions be allowed to
choose up to three purposes when the applicant indicates more than one
purpose.\563\
---------------------------------------------------------------------------
\563\ SBREFA Outline at 28.
---------------------------------------------------------------------------
Some SERs stated that they collect information on loan/credit
purpose, although the information they collect may be different from
that in the loan/credit purpose list in the SBREFA Outline.\564\ One
SER did, however, suggest that the Bureau's purposes list was similar
to their list. Some SERs made suggestions of additional loan/credit
purposes to add to the list, including for inventory loans,
agricultural loans, and contract financing. One SER requested that the
Bureau clarify whether this data point is intended to capture the
purpose of the loan or the type of collateral. Another SER recommended
combining the categories of motor vehicle finance and equipment
finance, explaining that certain financing can span both categories
(such as for a truck and a trailer as a combined purchase). One of the
SERs expressed concern about possible confusion regarding credit with
multiple purposes, and another SER suggested that the Bureau provide
clear instructions on this data point. Another SER suggested that the
Bureau explain how a line of credit should be reported if there can be
multiple lines for different purposes all within the same account.
---------------------------------------------------------------------------
\564\ SBREFA Panel Report at 27.
---------------------------------------------------------------------------
The SBREFA Panel recommended that the Bureau consider modifying the
loan/credit purpose lists in accordance with the various suggestions
made by SERs.\565\
---------------------------------------------------------------------------
\565\ Id. at 45.
---------------------------------------------------------------------------
Like the SERs, the other stakeholders who provided feedback on the
SBREFA Outline stated that they often collect loan purpose information
from applicants, but that the specific loan purposes they use differ
somewhat from those listed in the SBREFA Outline. Stakeholders
supported the inclusion of ``other'' and ``unknown'' in the list of
purposes, and one suggested that the Bureau add ``Not Applicable'' for
products, such as credit cards, that do not have a specific purpose. As
with the SERs, these stakeholders requested clarifications and several
changes to the loan purposes list. One commenter stated that financial
institutions should not have to present the entire list to applicants
where a loan product's terms do not allow the loan to be used for one
or more of the specified purposes. That same commenter suggested that
financial institutions should be allowed to include additional purposes
not on the list, and in the instance an applicant selects an additional
purpose, the financial institution would include it as ``other'' unless
the selected purpose squarely fits within, or is a subset of, a purpose
specified on the Bureau's list.
Proposed Rule
The Bureau is proposing in Sec. 1002.107(a)(6) to require that
financial institutions collect and report the purpose or purposes of
the credit applied for or originated. The Bureau's proposed approach
aligns with the SBREFA Outline approach, with certain adjustments.
First, the Bureau is proposing to use the term ``credit purpose'' for
this data point, rather than ``loan/credit purpose,'' for clarity and
consistency with terminology used elsewhere in the proposal. In
addition, the proposal would provide a more complete description of the
purposes listed, which would clarify the relation between the purpose
of the credit and the form of collateral used. The proposal also
reflects other changes to the list of purposes presented in the SBREFA
Outline, as explained below.
Proposed comment 107(a)(6)-1 would present instructions for
collecting and reporting credit purpose and would provide the proposed
list of credit purposes from which financial institutions would select.
The proposed list is similar to the list in the SBREFA Outline
although, consistent with the SBREFA Panel's recommendation, the Bureau
has made adjustments based on SERs' suggestions, as well as those of
other stakeholders and its own further consideration. First, the items
on the SBREFA list that described types of collateral, such as
commercial real estate, have been updated to more clearly reflect that
the financial institution is collecting and reporting the purpose of
the loan, and not the form of collateral, though the form of collateral
may be referred to in describing that purpose. In addition, the listed
purposes involving real estate now differentiate between dwelling and
non-dwelling real estate. The Bureau believes that this distinction
would help in collecting more precise and useful data. To facilitate
compliance the Bureau is also proposing to add ``not applicable'' to
the purposes list for use when an application is for a credit product
that generally has indeterminate or numerous potential purposes, such
as a credit card. Proposed comment 107(a)(6)-5 would also explain the
use of ``not applicable'' as a response. In addition to the changes
described above, the proposed list of purposes also reflects small
nonsubstantive edits for clarity.
Proposed comment 107(a)(6)-2 would explain that if the applicant
indicates or the financial institution is otherwise aware of more than
one purpose for the credit applied for or originated, the financial
institution would report those purposes, up to a maximum of three,
using the list provided, in any order it chooses. Since an applicant
may have more than one purpose for a credit transaction, the Bureau
believes it is appropriate to require collection and reporting of more
than one credit purpose for this data point in that situation. The
Bureau believes that having financial institutions report up to three
purposes would provide useful and substantive data. The Bureau also
believes that allowing financial institutions discretion as to the
order of the purposes would facilitate compliance.
Proposed comment 107(a)(6)-3 would explain that if a purpose of the
covered credit transaction does not appear on the list of purposes
provided, the financial institution reports ``other'' as the credit
purpose and reports the purpose as free-form text. The Bureau believes
that allowing financial institutions to choose ``other'' when a credit
purpose for the application does not appear on the provided list would
facilitate compliance. In addition, collecting this information on
``other'' credit purposes would assist the Bureau in monitoring trends
in this area and key developments in the small business lending market,
which the Bureau could use to inform any future iterations of the list.
For efficiency and to facilitate compliance, proposed comment
107(a)(6)-3 would also explain that if the application has more than
one ``other'' purpose, the financial institution chooses the most
significant ``other'' purpose, in its discretion, and reports that
``other'' purpose. The comment would then explain that a financial
institution reports a maximum of three credit purposes, including any
``other'' purpose reported.
Proposed comment 107(a)(6)-4 would explain that, pursuant to
proposed Sec. 1002.107(c)(1), a financial institution shall maintain
procedures reasonably designed to collect applicant-provided
information, which includes credit purpose. However, if a financial
institution is nonetheless unable to collect or determine credit
purpose information, the financial institution would report that the
credit purpose is ``not provided by applicant and otherwise
undetermined.'' The Bureau believes that permitting use of this
response would facilitate compliance
[[Page 56446]]
and enhance the quality of data collected.
In order to facilitate compliance, the Bureau is also proposing
comments 107(a)(6)-6 and -7. Proposed comment 107(a)(6)-6 would clarify
that, as explained in proposed comment 104(b)-4, subpart B does not
apply to an extension of credit that is secured by 1-4 individual
dwelling units that the applicant or one or more of the applicant's
principal owners does not, or will not, occupy. Proposed comment
107(a)(6)-7 would clarify the collection and reporting obligations of
financial institutions with respect to the credit purpose data point,
explaining that the financial institution would be permitted, but not
required, to present the list of credit purposes provided in comment
107(a)(6)-1 to the applicant. Proposed comment 107(a)(6)-7 would
further explain that the financial institution would also be permitted
to ask about purposes not included on the list provided in proposed
comment 107(a)(6)-1. Finally, proposed comment 107(a)(6)-7 would
clarify that if an applicant chooses a purpose or purposes that are
similar to purposes on the list provided, but uses different language,
the financial institution would report the purpose or purposes from the
list provided. The Bureau believes that minimizing use of free-form
text here would improve the usefulness of the data collected and
facilitate compliance.
The Bureau believes that, with the modifications discussed above,
the list of credit purposes provided in proposed comment 107(a)(6)-1
appropriately aligns with the purposes of credit sought in the small
business credit market. As explained above, the Bureau has clarified
the distinction between the purpose of the credit and the collateral
involved, as one SER suggested. In addition, the Bureau believes that
the explanations and instructions in the proposed commentary
accompanying Sec. 1002.107(a)(6) should reduce any confusion as to how
a financial institution would comply when an application involves
multiple purposes, and in other situations. In regard to the SER
comment about multiple lines of credit for different purposes within
the same account, see the discussion of ``covered application'' in the
section-by-section analysis of proposed Sec. 1002.103(a) above.
The Bureau seeks comment on its proposed approach to the credit
purpose data point. In addition, the Bureau seeks comment on whether
there are any purposes that should be added to or modified on its
proposed list including, in particular, on the potential usefulness of
including ``agricultural credit'' and ``overdraft line of credit'' in
the credit purposes list. Finally, the Bureau requests comment on
whether further explanations or instructions with respect to this data
point would facilitate compliance.
107(a)(7) Amount Applied For
Background
Section 1071 requires financial institutions to collect and report
``the amount of the credit or credit limit applied for, and the amount
of the credit transaction or the credit limit approved.'' \566\
---------------------------------------------------------------------------
\566\ ECOA section 704B(e)(2)(C).
---------------------------------------------------------------------------
The Bureau notes that for HMDA, Regulation C Sec. 1003.4(a)(7)
requires reporting of ``the amount of the covered loan or the amount
applied for, as applicable,'' which requires reporting of the amount
applied for only when the credit is not originated. Because section
1071 uses the conjunction ``and'' rather than ``or,'' the Bureau reads
section 1071 to require collection and reporting of the amount applied
for regardless of whether the application is ultimately approved or
originated. (The amount approved or originated data point is addressed
in proposed Sec. 1002.107(a)(8).)
SBREFA Proposals Under Consideration and Feedback Received
The Bureau stated in the SBREFA Outline that it was considering
requiring financial institutions to report the amount applied for data
point using the initial amount of credit or credit limit requested by
the applicant at the application stage, or later in the process but
prior to the financial institution's evaluation of the credit
request.\567\ The Bureau further explained in the SBREFA Outline that
this method would not require reporting of amounts discussed before an
application is made to a financial institution, but would capture the
initial amount requested at the application stage or later, and would
reflect the amount of the request that was evaluated by the financial
institution in making a credit decision. In addition, if the applicant
did not request a particular amount, but the financial institution
underwrote the application as being for a specific amount, the
financial institution would report the amount considered for
underwriting. If the particular product applied for would not involve a
specific amount requested or underwritten, the financial institution
would report ``Not Applicable'' for this data point. Finally, the
Bureau suggested in the SBREFA Outline \568\ that when an applicant
responds to a ``firm offer'' that specifies an amount, which may occur
in conjunction with a pre-approved credit solicitation, the amount
applied for would generally be the amount of the firm offer.
---------------------------------------------------------------------------
\567\ SBREFA Outline at 28-29.
\568\ Id.
---------------------------------------------------------------------------
Because of the relationship between the amount applied for and the
amount approved or originated data points, the following summary of SER
feedback includes input on both.\569\ One SER articulated the
importance of capturing data on both the amount applied for and the
amount approved, stating that both data points were necessary to
identify potentially discriminatory practices, such as discouragement,
in the lending process. Another SER explained that the amount applied
for could change during the iterative application process, particularly
with a business that may not have previously had a banking relationship
with the financial institution, but that the amount generally stayed
consistent through underwriting. Other SERs asserted that differences
between the amounts requested and approved were frequent, for a variety
of reasons. One SER stated that they notify applicants of a preliminary
offered amount, which often changes after documentation and
underwriting. One example offered was that disparities between the
amount applicants applied for and the amount the lenders approved may
be attributable to collateral being assessed at a different value than
the amount the applicants initially requested. Some SERs also remarked
that differences in these amounts were often attributable to financial
institutions acting as counselors or advisors to small businesses,
including start-ups, and going back and forth until arriving at an
amount that is appropriate given the customer's needs.
---------------------------------------------------------------------------
\569\ See SBREFA Panel Report at 27-28.
---------------------------------------------------------------------------
One SER (who supported reporting the amount initially applied for
and the amount approved) strongly opposed reporting counteroffers,
stating that negotiation is quite prevalent in small business lending.
Another SER suggested that the Bureau use ranges for reporting the
amount applied for, rather than specific numbers, and that the Bureau
allow a financial institution to report ``not applicable'' if an
applicant does not specify an amount requested. A SER also suggested
there could be other potential complexities in capturing data on credit
amount/limit the applicant applied for and credit amount/limit the
lender approved, such as simultaneous or grouped financings involving
multiple products, different sub-limits for each product or loan, and
[[Page 56447]]
a general credit limit for an entire facility. SERs asked that these
data points be captured in a manner that took these complexities into
account.
The SBREFA Panel recommended that the Bureau seek comment on
potential methods for avoiding misinterpretations of disparities
between the credit amount/limit applied for and the credit amount/limit
approved.\570\
---------------------------------------------------------------------------
\570\ Id.
---------------------------------------------------------------------------
The Bureau also received feedback from other stakeholders regarding
this data point. Industry stakeholders providing feedback on the SBREFA
Outline emphasized that arriving at an applied for amount is a complex,
iterative process and that the reporting requirement should be
flexible. One stakeholder suggested that the Bureau propose to require
reporting of the amount of the request that was evaluated by the
financial institution in making the credit decision. That stakeholder
echoed the comments of others when it explained that the amount of
credit requested can change a great deal in formulating an application.
The stakeholder further explained that some borrowers request a
specific amount immediately, others may not arrive at a number until
after two or three sessions, and still others may float multiple
numbers during several conversations, trying to gauge a loan officer's
reaction. Another stakeholder commented that an applicant's stated
credit desires can be arbitrary and that comparing the initial amount
requested against the amount approved could be misleading and is not a
reliable measure of the health or efficacy of small business lending.
Other stakeholders stated that an applicant will often or usually state
a specific amount early on, but that the amount will usually change
during the process for various appropriate reasons. One stakeholder
explained that small business loans generally are not a quick affair
and require substantial review by and interaction between the lender
and borrower, and business credit that it is uncommon for a small
business applicant's requested credit amount to stay the same from
application to underwriting. One trade association stated that many
small businesses will request a much higher loan amount than what is
ultimately approved after evaluation of collateral, particularly in
transactions involving real estate or equipment, and that for start-ups
and sole proprietorships a lack of sophistication can also lead to
initial requests being unrealistic. That trade association further
explained that in these cases, the financial institution will work with
the applicant to arrive at a more reasonable amount, which could take
place over a period of weeks or months. The trade association then
recommended that the Bureau allow reporting of an amount that is
determined at a later stage than the first request. Finally, another
industry stakeholder requested that the Bureau propose to allow
reporting of the applied for amount using ranges of numbers, stating
that applicants often request credit this way.
A community group stakeholder stated that the Bureau should require
financial institutions to report the initial amount requested at the
time of application, explaining that the amount of credit requested is
important for the purposes of section 1071, which it described as
including enforcing fair lending laws and assessing whether credit
needs are met.
Two stakeholders supported the use of ``not applicable'' when the
credit product does not have a specific amount or limit, and another
stakeholder said that no ``applied for'' credit limit should be
required for open-end products. Two other stakeholders requested that
the Bureau allow the use of ``not applicable'' whenever an applicant
does not request a specific amount.
Proposed Rule
The Bureau is proposing in Sec. 1002.107(a)(7) to require that a
financial institution collect and report ``the initial amount of credit
or the initial credit limit requested by the applicant.'' Proposed
comment 107(a)(7)-1 would explain that a financial institution is not
required to report credit amounts or limits discussed before an
application is made, but must capture the amount initially requested at
the application stage or later. In addition, proposed comment
107(a)(7)-1 would state that if the applicant does not request a
specific amount, but the financial institution underwrites the
application for a specific amount, the financial institution reports
the amount considered for underwriting as the amount applied for.
Finally, proposed comment 107(a)(7)-1 would instruct that if the
applicant requests an amount as a range of numbers, the financial
institution reports the midpoint of that range.
The Bureau is aware that there could be complexity in pinpointing
the specific initial amount requested by an applicant in the fluid
process of a small business credit application, which the Bureau
acknowledges could make this data point difficult for financial
institutions to collect and report. Nonetheless, the statute requires
that the amount applied for be reported, and that information could be
important for both of section 1071's statutory purposes. The Bureau
believes that its proposed regulatory text and commentary, described
above, would provide a flexible compliance regime for this data point
that would accommodate different business practices. A financial
institution would not be required to report amounts discussed before
the application is made, which would accommodate preliminary informal
interactions. In addition, the proposed comment's instruction on how to
report this data point when the applicant requests a range of numbers
would facilitate compliance in that situation and yield data that would
be comparable to the other data collected for this data point (i.e.,
specific numbers and not ranges of numbers). The Bureau believes that
more precise information will be more useful and should not create
extra difficulty for financial institutions to collect.
Furthermore, proposed comment 107(a)(7)-1 would address the method
for reporting when no initial amount is requested by the applicant--
that is, the financial institution reports the amount considered for
underwriting as the amount applied for. The Bureau believes that this
method would aid compliance and yield appropriate data by avoiding the
need to report a preliminary number when a financial institution's
business practices do not result in there being such a number to
report. The Bureau understands that a specific amount is often not
required by many financial institutions for products such as credit
cards, as the financial institution assigns the credit limit as part of
the credit evaluation process.
The SER and stakeholder feedback from SBREFA suggest that mandating
reporting of an amount applied for in all cases could impose undue
compliance burden and complicate Regulation B compliance for entities
that do not, for certain products, currently require that the borrower
request a specific credit amount or credit limit as part of the
financial institution's application process. In light of the
complexities and concerns described by the SERs and other stakeholders,
and the Bureau's understanding that sometimes there is no amount
underwritten to, the Bureau believes that the amount applied for data
point should avoid interfering with this arrangement by allowing use of
``not applicable'' in certain instances. Thus, proposed comment
107(a)(7)-2 would explain that if the particular product applied for
does not involve a
[[Page 56448]]
specific amount requested or underwritten, the financial institution
reports that the requirement is ``not applicable.''
In addition to situations in which no amount applied for is
requested by the financial institution or underwritten to and the
amount applied for would be ``not applicable,'' as described above, the
Bureau understands that there may be situations where the financial
institution requests an amount applied for but the applicant
nonetheless does not provide one. To address this situation, proposed
comment 107(a)(7)-2 would explain that, in compliance with proposed
Sec. 1002.107(c)(1), a financial institution shall maintain procedures
reasonably designed to collect applicant-provided information, which
includes the credit amount initially requested by the applicant.
However, if a financial institution is nonetheless unable to collect or
otherwise determine the amount initially requested, the financial
institution reports that the amount applied for is ``not provided by
applicant and otherwise undetermined.'' The Bureau believes that
providing the reporting flexibilities in proposed comment 107(a)(7)-2,
along with the proposed reporting of the amount presented for
underwriting when appropriate, would facilitate compliance by
accommodating different business practices and would also allow for
collection of useful data.
Proposed comment 107(a)(7)-3 would provide instructions for
reporting the amount applied for in regard to firm offers. ``Firm
offers'' involve solicitations to small businesses when they have been
pre-approved for a term loan, line of credit, or credit card.\571\
Proposed comment 107(a)(7)-3 would explain that when an applicant
responds to a ``firm offer'' that specifies an amount or limit, which
may occur in conjunction with a pre-approved credit solicitation, the
financial institution reports the amount applied for as the amount of
the firm offer, unless the applicant requests a different amount. If
the firm offer does not specify an amount or limit and the applicant
does not request a specific amount, the amount applied for is the
amount underwritten by the financial institution. The Bureau believes
that when the applicant knows the amount of the pre-approval before
responding, that figure could appropriately be considered as the amount
applied for. The Bureau understands that financial institutions often
provide an amount in such solicitations. But if no amount appears in
the pre-approved solicitation, the Bureau considers that an applicant
responding to the firm offer has not requested a specific amount, and
reporting of the amount underwritten would be appropriate. The Bureau's
proposal follows the SBREFA Outline's approach under consideration for
handling firm offers, and the SERs and other stakeholders did not
object to this method. The Bureau seeks comment, however, on whether it
should handle reporting of the amount applied for in connection with
firm offers in a different manner than as set forth in this proposed
comment, such as by requiring reporting of ``not applicable'' in
situations where the firm offer does not specify an amount or limit and
the applicant does not request one.
---------------------------------------------------------------------------
\571\ See 15 U.S.C. 1681a(l); see also Regulation B comment
12(b)(7)-1 (describing offers of credit).
---------------------------------------------------------------------------
Proposed comment 107(a)(7)-4 would explain that when reporting a
covered application that seeks additional credit amounts on an existing
account, the financial institution reports only the additional credit
amount sought, and not any previous amounts sought or extended. The
Bureau believes that this comment would facilitate compliance by
providing clear guidance on reporting in this situation, and that
avoiding double reporting of previous amounts would result in more
appropriate and useful data. The Bureau notes that a request to
withdraw additional credit amounts at or below a previously approved
credit limit amount on an existing open-end line of credit would not be
a covered application, and so proposed comment 107(a)(7)-4 would not
apply to such a situation.
The Bureau believes that the proposed regulatory text and
commentary described above would alleviate many of the concerns of the
SERs and other stakeholders providing feedback on the SBREFA Outline.
The Bureau notes that the proposal would accommodate different business
practices and the often fluid nature of amounts applied for in small
business lending. In regard to concerns about disparities between the
amount applied for and the amount approved or originated, section 1071
requires the collection and reporting of the amount applied for, which
is important for both of section 1071's statutory purposes.
The Bureau seeks comment on its proposed approach to the amount
applied for data point. The Bureau also requests comment on how best to
require reporting of amount applied for in situations involving
multiple products or credit lines under a single credit limit. The
Bureau also requests comment on potential methods for avoiding
misinterpretations of disparities between the amount applied for and
the amount approved or originated. Finally, the Bureau requests comment
on its proposed approach to reporting when a range of numbers is
requested.
107(a)(8) Amount Approved or Originated
Background
Section 1071 requires financial institutions to collect and report
``the amount of the credit or credit limit applied for, and the amount
of the credit transaction or the credit limit approved.'' \572\ (The
amount applied for data point is addressed in proposed Sec.
1002.107(a)(7).) As explained in the section-by-section analysis of
proposed Sec. 1002.107(a)(7) above, the Bureau reads section 1071 to
require collection and reporting of the amount or limit applied for as
well as the amount of the credit transaction or credit limit approved.
---------------------------------------------------------------------------
\572\ ECOA section 704B(e)(2)(C).
---------------------------------------------------------------------------
SBREFA Proposals Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau explained that it was considering
proposing that financial institutions report (1) the amount of the
originated loan for a closed-end origination; (2) the amount approved
for a closed-end loan application that is approved but not accepted;
and (3) the amount of the credit limit approved for open-end products
(regardless of whether the open-end product is originated or approved
but not accepted).\573\ In light of the potential meaning of the
statutory language, the Bureau explained that it was considering
proposing different standards for closed-end and open-end products. In
addition, the financial institution would report ``Not Applicable'' for
this data point for applications that are denied, closed for
incompleteness, or withdrawn by the applicant before a credit decision
is made.
---------------------------------------------------------------------------
\573\ SBREFA Outline at 23.
---------------------------------------------------------------------------
The relevant SBREFA Panel Report section summarized feedback on
both the amount applied for and the amount approved data points. For
ease of reading, the Bureau has included the discussion of both above
in the section-by-section analysis of proposed Sec. 1002.107(a)(7).
The following summary focuses more on the amount approved or originated
data point. One SER articulated the importance of capturing data on
both the amount applied for and the amount approved, stating that both
data points were necessary to identify practices, such as
[[Page 56449]]
discouragement, in the lending process. Other SERs asserted that
differences between the amounts requested and approved were frequent,
for a variety of reasons. One SER stated that they notify applicants of
a preliminary offered amount, which often changes after documentation
and underwriting. One example offered was that disparities between the
amount applicants applied for and the amount the lenders approved may
be attributable to collateral being assessed at a different value than
the amount the applicants initially requested.
One SER (who supported reporting the amount initially applied for
and the amount approved) strongly opposed reporting counteroffers,
stating that negotiation is quite prevalent in small business
lending.\574\ Another SER also suggested there could be other potential
complexities in capturing data on credit amount/limit the applicant
applied for and credit amount/limit the lender approved, such as
simultaneous or grouped financings involving multiple products,
different sub-limits for each product or loan, and a general credit
limit for an entire facility. SERs asked that these data points be
captured in a manner that took these complexities into account.
---------------------------------------------------------------------------
\574\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 27-28.
---------------------------------------------------------------------------
As noted in the feedback summary above, the SBREFA Panel
recommendation addressed both the amount applied for and the amount
approved data points. The Panel recommended that the Bureau seek
comment on potential methods for avoiding misinterpretations of
disparities between the credit amount/limit applied for and the credit
amount/limit approved.\575\
---------------------------------------------------------------------------
\575\ Id. at 46.
---------------------------------------------------------------------------
Few of the stakeholders who provided written feedback on the SBREFA
Outline objected to the reporting method under consideration for amount
approved/originated. One commenter asked that this data point be
reported using ranges of numbers rather than specific amounts, in order
for it to be uniform with the method it suggested for the amount
applied for data point. Other commenters pointed out possible confusion
as to the definitions of closed-end and open-end credit. In addition,
commenters stated that sometimes applicants are provided more than one
approval amount, and one commenter suggested that in such cases the
Bureau should require reporting of the highest approval amount when the
credit is approved but not accepted.
Proposed Rule
The Bureau is proposing in Sec. 1002.107(a)(8) that the amount
approved or originated data point be collected and reported as follows:
(i) For an application for a closed-end credit transaction that is
approved but not accepted, the financial institution collects and
reports the amount approved by the financial institution; (ii) for a
closed-end credit transaction that is originated, the financial
institution collects and reports the amount of credit originated; and
(iii) for an application for an open-end credit transaction that is
originated or approved but not accepted, the financial institution
collects and reports the amount of the credit limit approved.
The Bureau's proposal follows the SBREFA Outline approach for this
data point, with certain adjustments and clarifications. First, for
clarity the proposed rule refers to this data point as ``amount
approved or originated.'' In addition, the Bureau is proposing comment
107(a)(8)-2 to explain that when a financial institution presents
multiple approval amounts from which the applicant may choose, and the
credit is approved but not accepted, the financial institution reports
the highest amount approved. The Bureau believes that reporting the
highest amount approved when credit is approved but not accepted, as
addressed in this proposed comment, would most accurately reflect the
amount of credit that was made available to the applicant in this
situation.
Proposed comment 107(a)(8)-1 would provide general instructions for
the amount approved or originated data point, explaining that a
financial institution would comply with proposed Sec. 1002.107(a)(8)
by reporting the amount approved or originated for credit that is
originated or approved but not accepted. For applications that the
financial institution, pursuant to proposed Sec. 1002.107(a)(9),
reports as denied, withdrawn by the applicant, or incomplete, the
financial institution would report that the amount approved or
originated is ``not applicable.'' The Bureau believes that these
instructions and providing for reporting of ``not applicable'' in
certain circumstances will facilitate compliance for this data point
and elicit accurate and appropriate data.
Proposed comments 107(a)(8)-3 and -4 would provide specific
instructions for identifying and reporting the amount approved or
originated for closed-end transactions, including refinancings. The
Bureau believes that the instructions provided would facilitate
compliance and elicit accurate and useful data.
Proposed comment 107(a)(8)-5 would provide instructions regarding
counteroffers and the amount approved or originated data point,
explaining that if an applicant agrees to proceed with consideration of
a counteroffer for an amount or limit different from the amount for
which the applicant applied, and the covered credit transaction is
approved and originated, the financial institution reports the amount
granted. Proposed comment 107(a)(8)-5 would further explain that if an
applicant does not agree to proceed with consideration of a
counteroffer or fails to respond, the institution reports the action
taken on the application as denied and reports ``not applicable'' for
the amount approved or originated. The proposed comment would then
provide a reference to proposed comment 107(a)(9)-2, which discusses
the action taken data point in relation to counteroffers. For a more
complete discussion of how the proposed rule would treat reporting
obligations for applications involving counteroffers, see the section-
by-section analysis of proposed Sec. 1002.107(a)(9) below (action
taken).
Most of the SER feedback on the amount approved or originated data
point focused on its relation to the amount applied for data point.
That issue is discussed in the section-by-section analysis of proposed
Sec. 1002.107(a)(7) above (amount applied for). One SER also expressed
concern about reporting counteroffers in relation to the amount
approved or originated data point. The Bureau believes that, as
explained above, proposed comment 107(a)(8)-5 provides an appropriate
and manageable method for reporting amount approved or originated in
counteroffer situations. Other stakeholders asked that the Bureau take
into account the complexity of multiple product or account situations.
The Bureau has done so in relation to its treatment of covered
applications, discussed in the section-by-section analysis of proposed
Sec. 1002.103(a) above. In regard to the comment concerning confusion
between closed-end and open-end credit, the Bureau is proposing to
define these terms clearly in the regulatory text at proposed Sec.
1002.102(e) and (n). As for the suggestion that the amount approved or
originated data point be reported using ranges of numbers (for
consistency with its request to report the amount applied for data
point using ranges), the Bureau is not proposing to have financial
institutions report the amount applied for using ranges of numbers,
though it
[[Page 56450]]
does seek comment on this possibility in the section-by-section
analysis of proposed Sec. 1002.107(a)(7) above.
The Bureau reads the statutory language ``the amount of the credit
transaction or the credit limit approved'' to require the amount of the
credit limit approved to be reported for open-end applications, and the
amount of the credit transaction to be reported for closed-end
applications. The Bureau believes the phrase ``the amount of the credit
transaction or the credit limit approved'' to be ambiguous in regard to
closed-end transactions because the most common meaning of the word
``transaction'' in the context for closed-end credit transactions would
be an originated loan. Thus, the Bureau reasonably interprets the
statute as requiring reporting of the amount originated for closed-end
credit transactions. In the alternative, section 1071 authorizes the
Bureau to include any ``additional data that the Bureau determines
would aid in fulfilling the purposes of [section 1071].'' The Bureau
has determined that for closed-end credit transactions that are
originated, reporting of the amount originated would aid in fulfilling
the enforcement of fair lending laws, by indicating the credit that had
been provided to different types of applicants in actual transactions.
The Bureau has also determined that reporting of the amount originated
for closed-end credit transactions would aid in fulfilling the business
and community development purpose of section 1071 by providing a more
complete and accurate picture of the credit actually being provided to
different businesses and communities. In addition, in the alternative,
the Bureau believes that it is appropriate to use its exception
authority under ECOA section 704B(g)(2) to require the amount
originated, rather than the amount approved, for originated closed-end
credit transactions, because collecting data on the amount approved
instead of the amount originated for a closed-end transaction would
compromise the utility and quality of the data being reported, thus
inhibiting the fair lending and business and community development
purposes of section 1071.
Similarly, the Bureau has determined that for closed-end credit
that is approved but not accepted, the amount approved would aid in
fulfilling the purposes of section 1071. Primarily, reporting of the
amount approved for closed-end credit would aid in fulfilling the
enforcement of fair lending laws, by indicating the credit that had
been offered to different types of applicants when the transaction does
not close and there is no amount originated to report. Reporting of the
amount approved for closed-end credit would also aid in fulfilling the
business and community development purpose of section 1071 by providing
a more complete picture of the credit being offered to different
businesses and communities.
The Bureau seeks comment on its proposed approach to the amount
approved or originated data point, including on the specific requests
for input above. As recommended by the SBREFA Panel and explained in
the section-by-section analysis of proposed Sec. 1002.107(a)(7) above,
the Bureau requests comment on potential methods for avoiding
misinterpretations of disparities between the credit amount or limit
applied for and the credit amount or limit originated or approved and
on the possible use of ranges of numbers for reporting the amount
applied for and amount approved or originated data points. In addition,
the Bureau requests comment on whether it would be useful and
appropriate to require reporting of the amount approved as well as the
amount originated for originated closed-end credit transactions.
107(a)(9) Action Taken
Background
ECOA section 704B(e)(2)(D) requires financial institutions to
report the ``type of action taken'' on an application.
SBREFA Proposal Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau stated it was considering
proposing five categories for reporting ``action taken'': Loan
originated, application approved but not accepted, application denied,
incomplete application (closed or denied), and application withdrawn by
the applicant.\576\
---------------------------------------------------------------------------
\576\ SBREFA Outline at 29-30.
---------------------------------------------------------------------------
Action taken categories in general. Most SERs were supportive of
the action taken categories under consideration.\577\ Several SERs
stated that the categories align with information they currently
collect. One SER explained that a single application could pass through
all of these stages and expressed concern that identifying the right
category to report may be subjective and questioned by examiners or
auditors after the fact. Another SER asked for additional clarity on
the difference between denied applications and incomplete applications.
This SER also suggested adding a category for lenders to indicate if an
applicant is rate shopping. The SBREFA Panel recommended that the
Bureau further clarify the circumstances in which each of the action
taken categories should be used.\578\
---------------------------------------------------------------------------
\577\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 28-29.
\578\ Id. at 46.
---------------------------------------------------------------------------
Of the other stakeholders that provided feedback on this issue,
several supported the action taken codes set forth in the SBREFA
Outline. One industry commenter stated that the data point would
generally not be difficult or expensive to report and two commenters
reported currently tracking some similar (though not identical) fields.
One community group commenter underscored the importance of collecting
action taken codes (including approvals and denials) in order to track
demand for credit and identify potential discrimination. The commenter
also noted current available data (Community Reinvestment Act data and
surveys) on small business lending provides limited information on
supply and demand. The commenter stated that capturing incomplete and
withdrawn applications was important as it may reflect discouragement
or discriminatory treatment, and that the approved but not accepted
category could reflect less favorable pricing or loan terms. Two
industry commenters suggested the Bureau further simplify the action
taken categories by eliminating the approved but not accepted and
incomplete categories, and including only originated, abandoned, and
denied categories. One stakeholder suggested adding a field for other
circumstances, such as rate shopping. Several community group
commenters suggested the action taken categories be expanded to include
all the HMDA action taken categories.
Treatment of counteroffers. In response to a question in the SBREFA
Outline about whether counteroffers should be separately identified in
the 1071 data set, several SERs discussed the frequency of
counteroffers in small business lending and the potential utility of
capturing counteroffers in 1071 data. One SER expressed concern with
reporting each adjustment in the application process because, they
said, not all counteroffers are memorialized in writing. In the context
of discussions on the amount approved data point, a SER strongly
opposed reporting counteroffers, stating that negotiation is quite
prevalent in small business lending. The SBREFA Panel recommended the
Bureau seek comment on whether to capture counteroffers in 1071 data,
and if so, the best method for doing so.\579\
---------------------------------------------------------------------------
\579\ Id.
---------------------------------------------------------------------------
Other stakeholders also commented on counteroffers. Several
industry
[[Page 56451]]
commenters stated that counteroffers should not be reported. The
commenters noted that there are often multiple rounds of back-and-forth
communications in small business lending, that capturing counteroffers
is unnecessary as the information is practically captured in the loan
decision and other 1071 data (such as loan amount approved), and that
counteroffers are not necessary to show the availability of credit. If
reported, several industry commenters suggested use of a data flag to
simplify reporting, avoid reporting of potentially numerous
counteroffers in a single application, and avoid the additional costs
for financial institutions to conduct edits and validity checks on each
separate counteroffer. Another industry representative also urged that
if counteroffers are reported, they should be considered a single
application. No community groups commented on this topic.
Proposed Rule
The Bureau is proposing in Sec. 1002.107(a)(9) to require
reporting of the action taken by the financial institution on the
covered application, reported as originated, approved but not accepted,
denied, withdrawn by the applicant, or incomplete. As discussed above,
most SERs and other stakeholders were generally supportive of these
categories. In addition, the Bureau is proposing to categorize all
incomplete applications as a single category of ``incomplete''; while
this proposed approach is not consistent with Regulation C comments
4(a)(8)(i)-4 and -6, the Bureau is concerned about potential errors in
the data if financial institutions report incomplete denials separate
from notices of incompleteness. There may also be some benefit for fair
lending analysis to reserve the denied category solely for credit-
related denials, rather than denials that are based on incompleteness.
As noted below, the Bureau seeks comment on reporting the
``incomplete'' action taken category.
In response to commenter suggestions, the Bureau considered
removing or combining several action taken categories. For example, the
Bureau considered eliminating the approved but not accepted category;
however, because the Bureau believes data collected under this category
would reflect demand for credit, the Bureau is retaining this category
in its proposal. The Bureau also considered removing the category of
incomplete applications. However, because the Bureau believes capturing
data on incomplete applications is essential to identifying potential
discrimination and discouragement during the application process, the
Bureau is retaining this action taken category as well. Finally, the
Bureau considered combining the incomplete and withdrawn categories,
since both actions reflect an applicant's inability or affirmative
decision not to proceed with the request for credit. However, the
Bureau is retaining incomplete and withdrawn as separate categories, as
a high incidence of incomplete applications could signal an issue with
the level of assistance provided by the financial institution (for
example, not providing reasonable support or assistance to ensure an
applicant satisfies all credit conditions; or providing more support to
some applicants than others). As noted below, the Bureau seeks comment
on this issue.
The Bureau is not proposing additional action taken categories
beyond what was considered in the SBREFA Outline. Although some
commenters suggested the Bureau expand the action taken codes to those
currently used in Regulation C (including preapprovals or purchased
loans), the Bureau does not believe those additional fields would be
appropriate or necessary in the context of section 1071 given the
diversity of processes and other complexities in the small business
lending space and because section 1071, unlike HMDA, does not expressly
reference loan purchases.
The Bureau also considered, but is not proposing, adding an action
taken category or flag for counteroffers. As noted by certain SERs and
other commenters, it would be potentially infeasible to capture all of
the proposed 1071 data fields for every back-and-forth counteroffer
with an applicant, and attempting to do so would likely lead to
confusion and data errors. The Bureau also agrees with commenter
feedback that, even without a counteroffer flag or field, the proposed
section 1071 data fields would capture many of the terms of accepted
counteroffers (such as pricing, guarantee, etc.), as well as the amount
initially requested by the applicant. Thus, the Bureau believes the
addition of a counteroffer flag or field would provide limited useful
information beyond what would be captured under the current proposal.
Moreover, while a counteroffer flag or field might be useful as a
screening tool for potential discrimination (for example, if women-
owned businesses or minority-owned businesses are provided
counteroffers or denied at a higher rate than male- or non-Hispanic
white-owned businesses), a flag alone would lack any specificity to
provide further fair lending analysis.
Following the SBREFA Panel's recommendation and feedback from other
stakeholders, proposed comment 107(a)(9)-1 would provide additional
clarity on when a financial institution should select each of the
proposed action taken codes. The financial institution identifies the
applicable action taken code based on final action taken on the covered
application.
Proposed comment 107(a)(9)-2 would provide instructions for
reporting action taken on covered applications that involve a
counteroffer, along with examples. The Bureau's proposed treatment of
counteroffers aligns with how counteroffers are treated under existing
Sec. 1002.9 notification procedures. Specifically, proposed comment
107(a)(9)-2 would state that if a financial institution makes a
counteroffer to grant credit on terms other than those originally
requested by the applicant and the applicant declines to proceed with
the counteroffer or fails to respond, the institution reports the
action taken as a denial on the original terms requested by the
applicant. If the applicant agrees to proceed with consideration of the
financial institution's counteroffer, the financial institution reports
the action taken as the disposition of the application based on the
terms of the counteroffer. This proposed approach to reporting
counteroffers also aligns with how they are reported under Regulation
C.\580\
---------------------------------------------------------------------------
\580\ Regulation C comment 4(a)(8)(i)-9.
---------------------------------------------------------------------------
Proposed comment 107(a)(9)-3 would discuss reporting action taken
for rescinded transactions. Proposed comment 107(a)(9)-4 would clarify
that a financial institution reports covered applications on its small
business lending application register for the year in which final
action is taken. Finally, proposed comment 107(a)(9)-5 would provide
guidance for reporting action taken if a financial institution issues
an approval that is subject to the applicant meeting certain
conditions.
The Bureau seeks comment on proposed Sec. 1002.107(a)(9) that
would require reporting of action taken and the associated commentary.
The Bureau also specifically seeks comment on whether the ``withdrawn
by applicant'' category should be merged with the ``incomplete''
category for purposes of reporting action taken. The Bureau seeks
comment as well on whether the Bureau's proposal to categorize all
incomplete applications as a single category of ``incomplete'' (closed
or denied) should instead be reported consistent with the approach in
[[Page 56452]]
Regulation C, which provides separate categories for denials (including
on the basis of incompleteness) and files closed for incompleteness (if
the financial institution sent a written notice of incompleteness). In
addition, the Bureau seeks comment on whether counteroffers that are
not accepted, such as a credit offer for a lower credit amount than
requested, should be reported as ``approved but not accepted'' rather
than ``denied,'' in order to reflect the availability of credit. As
recommended by the SBREFA Panel, the Bureau also seeks comment on
whether to specifically capture counteroffers in section 1071 data, and
if so, whether to use a counteroffer flag in the data or some other
method.
107(a)(10) Action Taken Date
In addition to requiring financial institutions to collect and
report the type of action they take on an application, as discussed in
the section-by-section analysis of proposed Sec. 1002.107(a)(9) above,
ECOA section 704B(e)(2)(D) requires financial institutions to collect
and report the ``date of such action.''
In the SBREFA Outline, the Bureau indicated that it was considering
proposing that the action taken date be reported with a day, month, and
year, and requested feedback on potential challenges financial
institutions may have in identifying such date for each of the action
taken categories.\581\ The Bureau received limited comments on this
data point during the SBREFA process.\582\ One SER suggested that the
Bureau provide a grace period of several days before and after the
action taken date. Another SER recommended that the date assigned as
the action taken date be to the best of the financial institution's
knowledge or belief given the uncertainty in assigning a particular
date. The Bureau received similar feedback from other stakeholders. Two
industry stakeholders suggested that a grace period or tolerance be
provided to ease compliance burden, similar to the tolerance under
consideration for the ``application date'' data point. One stakeholder
recommended that the action taken date for approved and denied loans be
the exact date such actions occurred.
---------------------------------------------------------------------------
\581\ SBREFA Outline at 30.
\582\ SBEFA Panel Report at 28-29.
---------------------------------------------------------------------------
Proposed Sec. 1002.107(a)(10) would require action taken date to
be reported as the date of the action taken by the financial
institution. Proposed comments 107(a)(10)-1 through -5 would provide
additional details on how to report the action taken date for each of
the action taken categories in proposed Sec. 1002.107(a)(9). For
example, proposed comment 107(a)(10)-1 would explain that for denied
applications, the financial institution reports either the date the
application was denied or the date the denial notice was sent to the
applicant.
The Bureau notes that its proposed approach for this data point
largely mirrors the Regulation C approach for action taken date in
Sec. 1003.4(a)(8)(ii) and related commentary, with modifications to
align with the action taken categories in proposed Sec.
1002.107(a)(9). Regarding the request from a SER and other stakeholders
to adopt a grace period for the action taken date data point, the
Bureau believes that a grace period or tolerance to report the action
taken date would not be necessary, in light of the flexibility already
provided in proposed comments 107(a)(10)-1 through -5. Further, the
Bureau believes that financial institutions generally already have
policies and procedures in place to capture the date an action is taken
in the normal course of their business operations.
Proposed comment 107(a)(10)-4 would explain that for covered credit
transactions that are originated, a financial institution generally
reports the closing or account opening date. That proposed comment also
states that if the disbursement of funds takes place on a date later
than the closing or account opening date, the institution may,
alternatively, use the date of initial disbursement.
The Bureau seeks comment on its proposed approach to the action
taken date data point.
In addition, for originated transactions, the Bureau is considering
whether the date the application was approved should be captured in
addition to, or instead of, the date of closing or account opening. The
Bureau is also considering whether the date of closing or account
opening should be reported separately from the date of disbursement of
funds (for term loans) or funds availability (for lines of credit).
Having these dates reported separately would permit the Bureau and
other data users to determine the length of time elapsed between when
an application is approved, when the closing occurred or the account
was opened, and when the applicant actually received the loan funds or
access to funds. Specifically, the Bureau is concerned that a lengthy
gap between the loan approval date and the date the funds are made
available to applicants could have adverse effects particularly on
certain types of small businesses. For example, in agricultural lending
where planting and harvesting seasons fall within certain time frames,
if loan proceeds are not provided within a certain period of time after
the financial institution receives and approves an application, the
loan proceeds may no longer be of maximum value to the applicant. The
Bureau seeks comment on whether it should adopt data points to capture
application approval date and/or the date funds are disbursed or made
available.
107(a)(11) Denial Reasons
Background
ECOA section 704B(e)(2)(H) authorizes the Bureau to require
financial institutions to compile and maintain ``any additional data
that the Bureau determines would aid in fulfilling the purposes of
[section 1071].'' In addition to requiring financial institutions to
collect and report the action taken date for denied applications, as
discussed in the section-by-section analysis of proposed Sec.
1002.107(a)(10) above, the Bureau is proposing to require financial
institutions to collect and report the principal reason or reasons an
application was denied. The Bureau believes that collection of denial
reason information would aid in fulfilling the purposes of section
1071, as explained below.
SBREFA Proposal Under Consideration and Feedback Received
In the SBREFA Outline, as part of its discussion regarding the
action taken data point, the Bureau requested feedback on whether
financial institutions would prefer to report denial reasons to help
explain the decision on an application, and if so, whether reporting
denial reasons should be mandatory or optional.\583\
---------------------------------------------------------------------------
\583\ SBREFA Outline at 29-30.
---------------------------------------------------------------------------
When asked whether they would prefer reporting denial reasons to
help explain the decision on an application, some SERs expressed
concern about reporting denial reasons.\584\ These SERs asserted that
requiring lenders to report reasons for denial could add more burden
than benefit, may not be useful given the number of possible reasons
for a denial, might not shed light on the actual reasons for a denial,
may be difficult to standardize for uniform reporting, would require
additional processes to ensure accurate reporting, and may present
heightened privacy concerns. One SER expressed a preference to report
denial reasons.
---------------------------------------------------------------------------
\584\ SBREFA Panel Report at 28-29.
---------------------------------------------------------------------------
Feedback received from other stakeholders was mixed. Stakeholders
[[Page 56453]]
opposing reporting denial reasons expressed concerns about the privacy
of applicants' information if such data were released to the public.
For example, they asserted that if denial reasons were released to the
public, such information would make it easy to identify applicants from
small communities and expose an applicant's sensitive business
information like insufficient cashflow. One stakeholder mentioned that
denial reasons may encompass multiple reasons and would therefore be
burdensome to collect and store.
Stakeholders in favor of optional (rather than mandatory) reporting
of denial reasons asserted that reporting this information would be
unnecessary and burdensome and may further push small and mid-size
financial institutions out of small business lending, and suggested
that, if included in the rule, reporting not be made mandatory (that
is, financial institutions would be permitted but not required to
report such information, at the financial institution's discretion).
One stakeholder suggested that rural community banks under $1 billion
be exempted from reporting denial reasons due to data privacy concerns.
Finally, stakeholders in favor of mandatory reporting of denial
reasons asserted that such data provide regulators and the public with
important--and currently unavailable--data necessary to uncover fair
lending issues and identify underwriting factors that need to be
addressed. They stressed that the collection of denial data (via the
action taken data point) accompanied by robust denial reasons will
provide small business applicants with useful and actionable
information. In addition, commenters noted that these data will help
identify barriers to credit for small businesses and provide deeper
insight into the reasons why credit is denied. The SBREFA Panel did not
make any recommendations related to denial reasons.
Proposed Rule
Proposed Sec. 1002.107(a)(11) would require reporting of the
principal reason or reasons the financial institution denied the
covered application. Proposed comment 107(a)(11)-1 would explain that a
financial institution complies with proposed Sec. 1002.107(a)(11) by
reporting the principal reason or reasons it denied the application,
indicating up to four reasons. The financial institution reports only
the principal reason or reasons it denied the application, even if
there are fewer than four reasons. The proposed comment provides an
example to illustrate. The proposed comment would also state that
reasons reported must accurately describe the principal reason or
reasons the financial institution denied the application. Finally, the
proposed comment provides a list of denial reasons from which financial
institutions would select the principal reason or reasons for denying a
covered application.
Proposed comment 107(a)(11)-1 also explains that a financial
institution reports the denial reason as ``other'' where none of the
enumerated denial reasons adequately describe the principal reason or
reasons it denied the application, and the institution reports the
denial reason or reasons as free-form text. The Bureau believes that
allowing financial institutions to choose ``other'' in this situation
would facilitate compliance. In addition, collecting information on
``other'' denials would assist the Bureau in monitoring trends in this
area and key developments in the small business lending market, which
the Bureau could use to inform any future iterations of the list.
Proposed comment 107(a)(11)-2 would clarify that a financial
institution complies with proposed Sec. 1002.107(a)(11) by reporting
that the requirement is not applicable if the action taken on the
application, pursuant to proposed Sec. 1002.107(a)(9), is not a
denial, and provides an example.
The Bureau notes that its proposed approach for this data point
largely mirrors the Regulation C approach for denial reasons in Sec.
1003.4(a)(16) and related commentary, with modifications to align with
the reasons applications are denied in the small business lending
(rather than residential mortgage lending) context.
Pursuant to its authority under ECOA section 704B(e)(2)(H), the
Bureau believes that data regarding denial reasons would further the
purposes of section 1071 by allowing data users to better understand
the rationale behind denial decisions, help identify potential fair
lending concerns, and provide financial institutions with data to
evaluate their business underwriting criteria and address potential
gaps as needed. In addition, robust data on application denial reasons
across applicants, financial institutions, products, and communities
could help target limited resources and assistance to applicants and
communities, thus furthering section 1071's community development
purpose. With respect to fair lending compliance, denial reasons data
would help data users analyze potential denial disparities.
With regard to the potential additional compliance burdens SERs and
other commenters referenced, the Bureau believes that, as a practical
matter, most financial institutions are already documenting the
principal reason or reasons for the denial in an adverse action notice,
or should be prepared to do so if requested.\585\ However, the Bureau
recognizes that if a financial institution is not currently covered by
existing adverse action notice requirements under Regulation B, it may
face greater challenges in reporting this information than financial
institutions that currently provide adverse action notifications. The
concerns raised by SERs and other stakeholders regarding the privacy
implications of denial reasons are addressed in part VI.C.viii below.
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\585\ Existing Sec. 1002.9(a)(3) requires creditors to provide
the specific reasons for action taken or to notify business credit
applicants of their right to request the reasons for denying an
application or taking other adverse action.
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The Bureau also believes that exempting certain financial
institutions from the requirement to report denial reasons, or
permitting financial institutions to report denial reasons voluntarily,
would not be appropriate given the need for consistent and meaningful
data to further the purposes of section 1071. In addition, the Bureau
considered gaps in the existing small business lending data and notes
that available survey data are often not representative across the
industry, does not provide timely information, and does not cover all
entities involved in small business lending.\586\ The Bureau notes that
the 2015 HMDA Final Rule added mandatory reporting of denial reasons to
Regulation C because the Bureau recognized that the collection of
denial reason data could facilitate more efficient and less burdensome
fair lending examinations.\587\
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\586\ See 2020 Small Business Credit Survey. The survey provides
baseline data on the financing and credit positions of small firms
in 2020. It delivers information on small business financing needs,
decisions, and outcomes to policymakers, lenders, and service
providers. However, the survey is not representative because it
surveys only employer firms (with less than 500 employees) and is
subject to the firms' self-reporting. Also, only aggregate denial
reasons are provided, and further breakdowns are unavailable. In
addition, the survey provides a very limited list of denial reasons
to survey respondents that may not correspond to denial reasons from
financial institutions. See also Fed. Deposit Ins. Corp., Small
Business Lending Survey (2018), https://www.fdic.gov/bank/historical/sbls/section5.pdf.
\587\ See 80 FR 66127, 66204-05 (Oct. 28, 2015).
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Finally, the Bureau is aware that certain stakeholders are
concerned that reporting denial reason data may result in fair lending
actions against financial institutions for potential discriminatory
[[Page 56454]]
disparities. The Bureau, however, believes that including denial
reasons in 1071 data might actually reduce this risk, as it would allow
financial institutions to point to potentially legitimate reasons for
disparities.
The Bureau seeks comment on its proposed approach to this data
point, including regarding whether the denial reason categories listed
and explained in proposed comment 107(a)(11)-1 sufficiently cover the
common credit denial reasons in the small business lending industry. If
not, the Bureau seeks input on other denial reason categories to
consider including in the proposed list of denial reasons. The Bureau
also requests further comment on the potential utility of denial reason
data as well as on the potential burdens to industry in reporting
denial reasons, in light of the denial reason categories it is
proposing and the data's ability to aid in fulfilling the purposes of
section 1071.
107(a)(12) Pricing Information
Background
ECOA section 704B(e)(2)(H) authorizes the Bureau to require
financial institutions to compile and maintain ``any additional data
that the Bureau determines would aid in fulfilling the purposes of
[section 1071].'' The Bureau believes that pricing data would serve to
further both the fair lending purpose and the business and community
development purpose of 1071. The majority of small businesses are run
by a single owner without extensive financial experience or expert
staff to navigate the commercial credit marketplace, which lacks many
of the Federal protections found in consumer lending.\588\ Heightened
risks to fair lending and small business development may arise from
different pricing for the same products and the selective marketing of
higher-priced or even predatory and unsustainable products. Because
price-setting is integral to the functioning of any market, any
analysis of the small business lending market--including to enforce
fair lending laws or identify community and business development
opportunities--would be less meaningful without this information.
---------------------------------------------------------------------------
\588\ For example, TILA's standardized disclosure requirements
and limits on linking compensation to loan terms, including pricing,
do not apply to business loans. See, e.g., 15 U.S.C. 1639b,
Regulation Z Sec. 1026.36 (TILA's prohibition on basing loan
originator compensation on loan terms).
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Research conducted for the Department of Commerce has found that
minority-owned businesses tend to pay higher interest rates on business
loans than those that are not minority-owned,\589\ and a recent report
by the Federal Reserve Bank of Atlanta found that minority-owned firms
more frequently applied for potentially higher-cost credit products,
and were also more likely to report challenges in applying for credit
such as being offered high interest rates.\590\ In addition, research
conducted for the SBA has found that Black- and Hispanic-owned
businesses were less likely to have business bank loans and more likely
to use more expensive credit card financing.\591\ The 2020 Small
Business Credit Survey by a collaboration of Federal Reserve Banks
found that small business applicants to nonbank lenders, such as online
lenders and finance companies, were more likely to report high interest
rates or unfavorable terms than applicants to depository
institutions.\592\ To the extent that the recovery from the COVID-19
pandemic and resulting economic crisis is still ongoing when the
Bureau's final 1071 rule becomes effective, and in regard to economic
emergencies affecting small business access to credit that may occur in
the future, tracking pricing in this segment of the market is
particularly important.
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\589\ U.S. Dep't of Com., Minority Business Development Agency,
Disparities in Capital Access between Minority and Non-Minority-
Owned Businesses: The Troubling Reality of Capital Limitations Faced
by MBEs, at 3, 5, 21, 36-37 (2010), https://archive.mbda.gov/page/executive-summary-disparities-capital-access-between-minority-and-non-minority-businesses.html.
\590\ Fed. Reserve Bank of Atlanta, Report on Minority Owned
Firms: Small Business Credit Survey (Dec. 2019), https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2019/20191211-ced-minority-owned-firms-report.pdf.
\591\ Alicia Robb, Financing Patterns and Credit Market
Experiences: A Comparison by Race and Ethnicity for U.S. Employer
Firms, at 47 (2018) (prepared for Off. of Advocacy, Small Bus.
Admin.), https://www.sba.gov/sites/default/files/Financing_Patterns_and_Credit_Market_Experiences_report.pdf.
\592\ However, the survey noted that online lenders tended to
receive applications with lower credit scores so applicant risk
could play a role in higher interest rates for nonbank lenders. See
2020 Small Business Credit Survey at 15.
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The Bureau believes pricing data are important because the
statutory data points alone offer (1) limited insight into underwriting
disparities and (2) no insight into predatory prices or pricing
disparities. For example, they might show that a particular market
segment is expanding and apparently filling an important need, but this
could actually be an area with predatory conduct. Pricing information
would allow the Bureau and others to understand the situation more
accurately. Data collection without pricing information could have the
unintended consequence of incentivizing irresponsible lending, as
providers seeking to increase representation of underserved groups
could be encouraged to adopt high-cost models of lending.
Without information on pricing, data users would be unable to
screen for fair lending pricing risks, and regulators would be less
able to focus their enforcement and supervision resources appropriately
on situations of greater possibility for questionable activities. In
addition, if potential discriminatory conduct is monitored effectively
in regard to loan approvals, but not in regard to pricing, industry
compliance systems may focus solely on approvals and denials and ignore
potential pricing disparities. Having pricing data available under 1071
would also increase transparency and help demonstrate to lenders where
business opportunities exist to offer credit to underserved markets. In
addition, it could demonstrate to small businesses the availability of
more affordable credit.
SBREFA Proposal Under Consideration and Feedback Received
At SBREFA, the Bureau stated that it was considering proposing to
include pricing of originated credit and credit that is approved but
not accepted as a discretionary data point because it could further the
fair lending purpose of section 1071 by enhancing the ability to
effectively and efficiently enforce fair lending laws. In addition, the
Bureau stated that pricing data could add value in promoting market
transparency and new product development opportunities, thus furthering
the business and community development purpose of section 1071. The
Bureau also stated that a pricing data point could be reported on the
basis of annual percentage rate (APR), total cost of credit (TCC),
interest rate and total fees, or some other pricing metric. The SBREFA
Panel recommended that, if pricing were to be part of this proposal,
the Bureau seek comment on potential methods for avoiding
misinterpretations of disparities in pricing data.\593\
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\593\ SBREFA Panel Report at 47.
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During the SBREFA process, SERs provided various comments on the
inclusion of pricing data in the rule.\594\ Feedback relevant to a
specific pricing data point is discussed in the section-by-section
analysis of proposed Sec. 1002.107(a)(12)(i) through (vi) below.
Immediately below, the Bureau
[[Page 56455]]
addresses feedback relevant to reporting pricing information in
general.
---------------------------------------------------------------------------
\594\ Id. at 31-32.
---------------------------------------------------------------------------
Some SERs urged the Bureau to require submission of a pricing
metric, stating, for example, that pricing data are essential to
understanding the operation of the market and the nature of credit
extended. Some SERs supported use of APR as a pricing metric, including
several who stated that they currently calculate APR. One SER (a CDFI)
stated that they disclose APR to applicants now, and that if they are
able to easily collect and report this data point without additional
cost and burden, other FIs should be able to do the same. Several SERs
supported the use of APR to enable comparisons of pricing across
various small business lending products, and suggested the Bureau look
to State-mandated and Truth in Lending Act APR disclosures for guidance
on methodologies. One SER supported the use of APR as the metric if
lenders and not the Bureau did the calculation. Another SER suggested
the Bureau collect detailed pricing information, including APR, but
``hold harmless'' the reporting financial institutions to ensure the
accuracy of the data. Conversely, at least two SERs opposed using APR
as a pricing metric; one cited the burden associated with making that
calculation and the other said pricing information based on APR would
be confusing to small business owners. Several SERs supported reporting
pricing information as interest rate and fees. Two SERs preferred using
TCC. One SER suggested that the Bureau consider allowing financial
institutions to choose which pricing metric they prefer to report.
A large majority of industry stakeholders opposed inclusion of any
discretionary data points, and they were particularly concerned about a
pricing data point. Several stakeholders stated that a pricing data
point would be complex and costly to implement across various product
types. One stakeholder was concerned about contracts that bundle
services with credit, stating that pricing data would not capture the
true economics of the transaction. Several stakeholders were worried
about reputational risk because pricing could be publicly reported
without contextual information such as the nature of the collateral,
credit scores, size of down payment, compensating deposit balances,
bundled services, etc., that would explain the pricing variations. One
commenter opposed including pricing data, but said that if the Bureau
chose to do so it should also allow voluntary submission of some of
this contextual information. One stakeholder stated that pricing of
commercial loans is often complex and cannot be adequately analyzed
with the limited factors proposed, which may lead to erroneous
conclusions and have severe negative impacts on the financial industry
from regulatory and reputational risk standpoints. A community bank
stakeholder commented that community banks price risk on a case-by-case
basis and asserted that if this ability to price risk appropriately is
restricted by uninformed fair lending guidelines, the Bureau risks
removing a large number of community banks from existence. The bank
went on to opine that this could further reduce the ability of
thousands of small businesses to access credit. Another bank stated
that pricing data alone would provide an incomplete picture that could
be easily distorted to suit the political agenda of the user. That bank
was also concerned about disparate impact analysis or similar tools
being used because this could be unfair to the bank or its borrowers
considering the small data set that the reported data of this small
bank represents. Another stakeholder summed up these industry concerns,
stating that pricing is simply too varied across the spectrum of the
industry to include in the 1071 process without sowing confusion among
lenders, borrowers, and the general public, stifling lending activity,
and introducing numerous unintended consequences.
Several SERs, along with industry stakeholders, were concerned
about the Bureau potentially making public pricing data and felt that
this choice could be costly and challenging to carry out. They further
asserted that bad outcomes could result from unjustified fair lending
concerns, such as distortions to the market through interference with
risk-based pricing. Many SERs, along with other industry stakeholders,
noted that pricing is complex, often unique to the applicant's
situation, and may involve extra services bundled with the loan.
Without adequate context, therefore, pricing data could lead to
inaccurate interpretations of the collected data and unfair
reputational damage. One SER stated that the market for small business
credit is price competitive and accordingly pricing information is
unnecessary for section 1071. Another SER said that pricing for some
products may reflect more than just the cost of the loan and may be
high relative to other credit products if the covered financial
institution is a supportive lender working with less established or
higher credit risk applicants over a period of time. Similarly, the
SBREFA Panel Report recommended that the Bureau seek comment in the
proposed rule on potential methods for avoiding misinterpretations of
disparities in pricing.\595\
---------------------------------------------------------------------------
\595\ Id. at 47.
---------------------------------------------------------------------------
Community groups, as well as some community development lenders,
strongly favored inclusion of discretionary data points in general, and
were particularly interested in having pricing data reported to help
achieve 1071's purposes. One stakeholder stated that pricing
information is a critical fair lending tool and would allow regulators,
advocates, and industry to conduct fair lending reviews and monitor the
market for emerging high-cost products. That commenter also stated that
the eventual inclusion of pricing data in HMDA has been critical in
identifying disparate pricing among protected classes. Another
stakeholder suggested that a data collection regime designed to further
fair lending enforcement cannot ignore information about whether high-
cost lenders are targeting business owners of color or women-owned
businesses, or if lenders are charging more to their female borrowers
or customers of color. One community group stated that without pricing
data lenders flooding neighborhoods of color with high-cost loans would
be seen as adequately serving otherwise underserved markets. Another
commenter stated that MCAs have extremely high effective APRs, and
added that if section 1071 data collection indicates that access to
capital is improving but is blind to whether that capital is provided
at 30 percent APR or 300 percent APR, Congress's intent will not be
accomplished.
Regarding 1071's business and community development purpose
specifically, one stakeholder stated that merely by providing price
transparency the Bureau could encourage the development of successful
lending models because policymakers, community organizations,
investors, banks seeking partnerships, and others would be able to see,
for the first time, which business models are successful at reaching
minority-owned, women-owned, and other underserved small businesses.
That commenter went on to state that transparency would also attract
investment capital and partnerships into models that work, and could
lead to a market-based model and a pro-innovation approach to
regulation.
One community development lender that supported inclusion of a
pricing data point encouraged the Bureau to identify one consistent
pricing metric
[[Page 56456]]
that financial institutions must report on and added that because this
could create reporting challenges, especially for smaller institutions,
the Bureau should ensure there is clear guidance and consistency on the
pricing data point. Of the pricing metrics asked about in the SBREFA
Outline, a majority of the community groups and community development
lenders who supported inclusion of a pricing data point preferred use
of APR, though some suggested the Bureau also require reporting of rate
and fees with the APR, as well as rate spread as reported under HMDA.
One community development lender stated that APR is the only
established metric that enables informed comparisons of the cost of
capital over time and between products of different dollar amounts and
term lengths. That lender went on to state that APR is the metric that
people know and expect, because it is the legally required standard for
mortgages, auto loans, credit cards, student loans and personal loans,
including short-term loans. The lender further explained that small
businesses seeking financing from CDFIs or mission-based lenders are
informed about their true cost of capital through an APR disclosure,
and if it can easily collect and report this data point without
additional burdens and costs, other small business lenders should be
able to. Some commenters who favored APR suggested that the Bureau
start with the recent disclosure methods adopted in California and New
York, and that the Bureau use those methods for pricing of MCAs and
factoring specifically.
Industry stakeholders stated that APR would be complicated and
costly to implement, and that if it is used the Bureau should provide
clear guidance, with one stakeholder suggesting the Bureau follow the
Regulation Z method, which sets out instructions for calculating APR.
Another stakeholder stated that for some products, such as inventory
financing, APR would be meaningless. Some industry stakeholders
suggested the Bureau use other metrics--one requested TCC, another
requested rate and fees, and a third asked that the Bureau allow
reporting of a single fixed fee as an option.
Finally, some SERs and industry stakeholders also expressed
privacy-related concerns regarding public disclosure of pricing
information. The Bureau addresses these comments in part VI below
regarding privacy considerations involving publication of the 1071
data.
Proposed Rule
The Bureau is proposing, in Sec. 1002.107(a)(12), to require
financial institutions to report certain pricing information for
covered credit transactions. Specifically, proposed Sec.
1002.107(a)(12)(i)(A) would require financial institutions to report
the interest rate that is or would be applicable to the covered credit
transaction; proposed Sec. 1002.107(a)(12)(ii) would require financial
institutions to report the total origination charges for a covered
credit transaction; proposed Sec. 1002.107(a)(12)(iii) would require
financial institutions to report the broker fees for a covered credit
transaction; proposed Sec. 1002.107(a)(12)(iv) would require financial
institutions to report the total amount of all non-interest charges
that are scheduled to be imposed over the first annual period of the
covered credit transaction; proposed Sec. 1002.107(a)(12)(v) would
require financial institutions to report, for an MCA or other sales-
based financing transactions, the difference between the amount
advanced and the amount to be repaid; and proposed Sec.
1002.107(a)(12)(vi) would require financial institutions to report
information about any prepayment penalties applicable to the covered
credit transaction.
Proposed comment 107(a)(12)-1 would clarify that, for applications
that the financial institution reports as denied, withdrawn by the
applicant, or incomplete, the financial institution reports pricing
information as ``not applicable.'' Proposed Sec. 1002.107(a)(12) would
apply only to credit transactions that either have been originated or
have been approved by the financial institution but not accepted by the
applicant. The Bureau believes that pricing information is generally
available for these transactions because the financial institution
would generally have to determine the price to approve (or originate)
the transaction. But other applications--like those that are denied,
withdrawn by the applicant, or incomplete--would likely have terminated
too early in the application process for pricing information to be
generally available.
The Bureau is proposing to require financial institutions to report
pricing data generally as interest rate and fees rather than APR, TCC,
or another single pricing metric that attempts to combine multiple
aspects of the cost of credit. The Bureau believes that interest rate
and fees provide greater utility to data users than the formula-based
pricing metrics described above, which will aid in fulfilling the
purposes of section 1071. Separately enumerating the interest rate and
certain general categories of fees will allow 1071 data users to more
precisely analyze the components of a credit transaction's price. For
example, 1071 data users could identify potentially discriminatory
price disparities within upfront fees charged to borrowers at
origination that may not be visible in a single pricing metric.
Similarly, information about which components of a transaction's price
may be relatively more expensive would allow users to better identify
business and community development initiatives because they would be
able to target their initiative at the particular component, such as
the interest rate, that appears to be most responsible for the
relatively high price of the transaction.
The diversity of products in the commercial lending space may also
undermine the utility of APR or other single pricing metrics. Many
MCAs, for example, lack either a defined term or a periodic payment
amount. Thus, financial institutions would have to estimate these terms
to calculate an APR.
The Bureau also believes that the interest rate and fees may be
less burdensome for financial institutions to report than other single
pricing metrics. These alternative pricing metrics involve complex
calculations that may be difficult for financial institutions to
perform accurately. And, as noted above, certain types of commercial
financing would require financial institutions to assume or estimate
parts of the pricing formula, further increasing complexity. The
interest rate and fees, in contrast, are typically listed in the credit
contract for a particular transaction.
The Bureau acknowledges that some financial institutions currently
calculate APR for commercial financing transactions, or will do so in
the future, either as a best practice or to comply with State
disclosure laws. In developing the pricing data points in proposed
Sec. 1002.107(a)(12), the Bureau has reviewed definitions and concepts
found in Regulation Z, such as the definition of ``finance charge'' in
Sec. 1026.4. Regulation Z also forms the basis for many parts of State
commercial financing disclosure laws. The Bureau does not intend to
achieve a wholesale incorporation of Sec. 1026.4 into proposed Sec.
1002.107(a)(12), with interpretations of one regulation necessarily
controlling the meaning of the other regulation. In fact, as discussed
below, in many places perfect alignment between proposed
[[Page 56457]]
Sec. 1002.107(a)(12) and Regulation Z would not be feasible or
desirable. But proposed Sec. 1002.107(a)(12) adopts many concepts from
Regulation Z. The Bureau believes that this similarity may limit burden
for financial institutions that are calculating APR for other purposes.
Regarding State commercial financing disclosures, the Bureau
understands that the disclosures under development in New York and
California \596\ rely upon Regulation Z definitions, such as the
finance charge. These States have not fully implemented their
disclosures at the time of this notice and may change their standards
in the future. In addition, other States might adopt new commercial
financing disclosures with different definitions and methodologies. The
Bureau will continue to monitor regulatory developments in the small
business lending market, and seeks comment on ways to reduce burden on
financial institutions with respect to overlaps or conflicts between
State law disclosure requirements and the Bureau's proposal.
---------------------------------------------------------------------------
\596\ Cal. S.B. 1235 (Sept. 30, 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235; 2020 N.Y. Sess. Laws
ch. 369. The New York and California commercial financing disclosure
laws are discussed in more detail below in relevant provisions.
---------------------------------------------------------------------------
As a general matter, the Bureau believes that 1071 data can provide
value to users without reflecting every factor that influences pricing.
For comparison, HMDA data have a long history of utility for fair
lending purposes even though they alone generally do not offer proof of
compliance with fair lending laws.\597\ This proposed rule includes
several important factors that influence pricing, such as the credit
product, the type of guarantee, and the credit purpose. These data
points will help users avoid improper comparisons when examining the
1071 data. The Bureau seeks comment on its proposed approach to this
data point, as well as regarding additional information that could help
reduce misinterpretations of disparities in pricing, including
modifications to the pricing information in proposed Sec.
1002.107(a)(12). For example, the Bureau seeks comment on whether more
information about the nature of the collateral securing the loan is
necessary to understanding pricing data, such as total origination
charges, applicable to a particular transaction.
---------------------------------------------------------------------------
\597\ For example, the FFIEC cautions users of HMDA data that
``HMDA data are generally not used alone to determine whether a
lender is complying with fair lending laws.'' Bureau of Consumer
Fin. Prot., FFIEC Announces Availability of 2020 Data on Mortgage
Lending (2021), https://www.consumerfinance.gov/about-us/newsroom/ffiec-announces-availability-of-2020-data-on-mortgage-lending/; see
also Bureau of Consumer Fin, Prot., Data Point: 2019 Mortgage Market
Activity and Trends, at 36 (2020), https://files.consumerfinance.gov/f/documents/cfpb_2019-mortgage-market-activity-trends_report.pdf (explaining that when examiners for the
Federal banking agencies evaluate an institution's fair lending
risk, they analyze HMDA price data, loan application outcomes, and
explanatory factors, in conjunction with other information and risk
factors, which can be drawn directly from loan files or electronic
records maintained by lenders, in accordance with the Interagency
Fair Lending Examination Procedures).
---------------------------------------------------------------------------
Proposed Rule--107(a)(12)(i) Interest Rate
Proposed Sec. 1002.107(a)(12)(i)(A) would require financial
institutions to report the interest rate that is or would be applicable
to the covered credit transaction. If the interest rate is adjustable,
proposed Sec. 1002.107(a)(12)(i)(B) would require the submission of
the margin, index value, and index name that is or would be applicable
to the covered credit transaction at origination.\598\
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\598\ It should be noted that not all covered credit
transactions include an interest rate. Proposed Sec.
1002.107(a)(12)(v) would apply to certain covered credit
transactions that do not include an interest rate. The discussion of
proposed Sec. 1002.107(a)(12)(iv) below also addresses other
covered credit transactions that may not include an interest rate.
---------------------------------------------------------------------------
Proposed comment 107(a)(12)(i)-1 would clarify that if a covered
credit transaction includes an initial period with an introductory
interest rate, after which the interest rate adjusts, a financial
institution complies by reporting information about the interest rate
applicable after the introductory period. Proposed comment
107(a)(12)(i)-2 would explain that a financial institution reports the
interest rate applicable to the amount of credit approved or originated
reported in proposed Sec. 1002.107(a)(8) if a covered credit
transaction includes multiple interest rates applicable to different
credit features. Lastly, proposed comment 107(a)(12)(i)-3 lists a
number of indices to report and directs that if the index used does not
appear on the list of indices provided, the financial institution
reports ``other'' and provides the name of the index via free-form
text. The Bureau believes that allowing financial institutions to
choose ``other'' when an index that does not appear on the provided
list is used would facilitate compliance. In addition, collecting this
information on ``other'' indices would assist the Bureau in monitoring
trends in this area and key developments in the small business lending
market, which the Bureau could use to inform any future iterations of
the list.
The Bureau is proposing to collect the interest rate on the covered
credit transaction because this information furthers both the fair
lending purpose and the business and community development purpose of
section 1071 by allowing regulators, advocates, and industry to conduct
fair lending reviews and monitor the market for emerging high-cost
products. In addition, the availability of this pricing metric would
provide pricing transparency and could encourage the development of
successful lending models because policymakers, community
organizations, investors, banks seeking partnerships, and others would
be able to see which business models are successful at reaching
minority-owned, women-owned, and other underserved small businesses.
As discussed above, research has found that minority-owned
businesses tend to obtain, or be offered, higher interest rates on
business credit. The collection of interest rate (along with fees) will
allow the Bureau, other government agencies, and other data users to
have insight into the existing market, monitor the market for
potentially troubling trends, and conduct fair lending analyses that
adequately take into account this important metric.
As discussed above, during the SBREFA process, several SERs
supported the use of APR as a pricing metric. The Bureau notes that
certain-State level commercial lending disclosures, notably California
and New York, require the disclosure of APR.\599\ Because the interest
rate must be known to calculate APR, the Bureau believes that proposed
Sec. 1002.107(a)(12)(i) may impose little burden on financial
institutions that already include the interest rate on such disclosures
required by State law, as well as on the contract between the financial
institution and the applicant.
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\599\ Cal. S.B. 1235 (Sept. 30, 2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235; 2020 N.Y. Sess. Laws
ch. 369.
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Proposed Sec. 1002.107(a)(12)(i)(B) would provide that, for
adjustable interest rates based upon an index, a financial institution
must report the margin, index value, and index name that is or would be
applicable to the covered credit transaction at origination. Just as
the disclosure of the interest rate for fixed rate transactions will
allow data users to ascertain the interest rate applicable to the
covered credit transaction throughout its cycle, the Bureau believes
that these three elements will allow data users to do the same for
adjustable rate transactions based upon an index and improve the
[[Page 56458]]
utility of such data. Proposed comment 107(a)(12)(i)-4 would clarify
that a financial institution complies with proposed Sec.
1002.107(a)(12)(i)(B) by reporting the index value at the time the
application is approved by the financial institution. The Bureau seeks
comment on whether the index value should be reported based on a
different time period or if at the time of approval is the most
appropriate measure.
The Bureau seeks comment on proposed Sec. 1002.107(a)(12)(i) and
its commentary, including whether a different measure of pricing would
provide more accurate data, whether additional information about
pricing (for example, amortization type or adjustment frequency) would
provide beneficial data to help ascertain fair lending risk and further
the business and community development purpose of section 1071, and
whether there are additional indices that should be included in the
list from which financial institutions choose to report the applicable
index on adjustable rate transactions.
The Bureau also seeks comment on whether there may be covered
credit transactions where the interest rate may change after
origination based on factors such as if the borrower maintains an
account at the financial institution or if some other condition is met,
and if so, whether additional commentary would be helpful to provide
more guidance on which rate to report in that circumstance.
Proposed Rule--107(a)(12)(ii) Total Origination Charges
Proposed Sec. 1002.107(a)(12)(ii) would require financial
institutions to report the total origination charges for a covered
credit transaction. Total origination charges are the total amount of
all charges payable directly or indirectly by the applicant and imposed
directly or indirectly by the financial institution at or before
origination as an incident to or a condition of the extension of
credit, expressed in dollars.
Proposed comment 107(a)(12)(ii)-1 would clarify that charges
imposed uniformly in cash and credit transactions are not reportable.
Proposed comment 107(a)(12)(ii)-2 would provide guidance on reporting
charges imposed by third parties. Proposed comment 107(a)(12)(ii)-3
would clarify that broker fees are included in the total origination
charges.\600\ Proposed comment 107(a)(12)(ii)-4 would provide guidance
on reporting charges for other products or services paid at or before
origination. And proposed comment 107(a)(12)(ii)-5 would list examples
of reportable charges.
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\600\ For more information on broker fees, see the section-by-
section analysis of proposed Sec. 1002.107(a)(12)(iii) below.
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The Bureau understands that financial institutions charge a variety
of fees when originating credit for small business applicants. For
example, financial institutions may charge fees for processing an
application, for underwriting, for filing a UCC-1 statement, for
obtaining an appraisal, for obtaining a guarantee through a Federal
agency program, and for other activities related to origination.
Depending on the financial institution and the credit product, similar
fees may take different names. One financial institution may describe a
charge as an origination fee, while another describes a similar charge
as an underwriting or documentation fee. Proposed Sec.
1002.107(a)(12)(ii) would provide information about the total amount of
all upfront fees charged for originating and extending credit,
regardless of how such fees are denominated.
Information about the total origination charges would benefit 1071
data users by giving them relatively granular pricing data. Much of the
research on access to credit in the small business lending environment
has lacked information about upfront fees,\601\ or has used less
granular pricing metrics.\602\ Proposed Sec. 1002.107(a)(12)(ii) would
enable users to examine the contribution upfront costs make to the
price of credit in the small business lending market. For example,
users could analyze pricing disparities specifically in upfront costs
charged to borrowers or borrowers in certain communities. Users could
also look at total origination charges to better understand the
relationship between the elements of credit pricing such as by
examining the trade-offs between the interest rate and the upfront
charges. Empowering users to engage in this level of analysis would aid
in fulfilling the fair lending and business and community development
purposes of the statute.
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\601\ See, e.g., Minority Bus. Dev. Agency, U.S. Dep't of Com.,
Disparities in Capital Access between Minority and Non-Minority-
Owned Businesses: The Troubling Reality of Capital Limitations Faced
by MBEs, at 3, 5, 21, 36-37 (2010), https://archive.mbda.gov/page/executive-summary-disparities-capital-access-between-minority-and-non-minority-businesses.html.
\602\ See, e.g., Opportunity Fund, Unaffordable and
Unsustainable: The New Business Lending on Main Street (2016),
https://aofund.org/news/unaffordable-and-unsustainable-new-business-lending/ (analyzing 150 alternative loans (i.e., from nondepository
lenders or marketplaces, generally obtained online) to small
businesses and finding an average APR of 94 percent).
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In developing the total origination charges data point, the Bureau
considered definitions and concepts in existing regulations. In
particular, Regulation Z Sec. 1026.4 contains a measure of the cost of
credit: The finance charge. Regulation Z Sec. 1026.4 defines the
finance charge as ``any charge payable directly or indirectly by the
consumer and imposed directly or indirectly by the creditor as an
incident to or a condition of the extension of credit.'' The finance
charge appears in numerous regulatory provisions governing consumer
financial services, such as disclosures to borrowers in certain
mortgage transactions,\603\ and calculation of the APR.\604\
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\603\ See Regulation Z Sec. 1026.38(o)(2).
\604\ See appendix J to Regulation Z.
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Proposed Sec. 1002.107(a)(12)(ii)'s description of total
origination charges is similar to Regulation Z's definition of the
finance charge. As with the finance charge, proposed Sec.
1002.107(a)(12)(ii) would exclude charges imposed uniformly in cash and
credit transactions.\605\ Proposed Sec. 1002.107(a)(12)(ii) would use
a similar test for including fees and amounts charged by someone other
than the financial institution.\606\ And proposed Sec.
1002.107(a)(12)(ii) adopts the same approach toward including broker
fees in the total origination charges that Regulation Z takes toward
including mortgage broker fees in the finance charge.\607\ With respect
to charges for other products or services that the applicant pays at or
before origination, proposed comment 107(a)(12)(ii)-4 would explain
that such charges are included in the total origination charges only if
the financial institution requires the purchase of such other product
or service. Regulation Z does not adopt a uniform approach to services
bundled with the credit transaction. But charges or premiums for credit
insurance or debt cancellation coverage are included in the finance
charge if the creditor requires the purchase of such additional
services.\608\
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\605\ Compare proposed comment 107(a)(12)(ii)-1, with Regulation
Z comment 4(a)-1.
\606\ Compare proposed comment 107(a)(12)(ii)-2, with Regulation
Z Sec. 1026.4(a)(1).
\607\ Compare proposed comment 107(a)(12)(ii)-3, with Regulation
Z Sec. 1026.4(a)(3).
\608\ Regulation Z Sec. 1026.4(d)(1) and (3).
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Proposed Sec. 1002.107(a)(12)(ii), however, differs in important
ways from Regulation Z's definition of the finance charge. First,
proposed Sec. 1002.107(a)(12)(ii) is narrower than the finance charge.
The finance charge includes certain credit costs that are
[[Page 56459]]
imposed after a financial institution originates a transaction, such as
interest and time-price differential.\609\ Proposed Sec.
1002.107(a)(12)(ii), on the other hand, is limited to charges at or
before origination, because other proposed pricing data points, such as
the interest rate and initial annual charges, capture information about
the cost of credit over the life of the transaction. Second, within its
scope, proposed Sec. 1002.107(a)(12)(ii) is more comprehensive than
the finance charge. The finance charge excludes many upfront costs of
obtaining credit. For example, the finance charge excludes application
fees charged to all applicants for credit, and numerous fees in
transactions secured by real property.\610\ Proposed Sec.
1002.107(a)(12)(ii) contains no similar exclusions. The Bureau believes
that many of the upfront fees omitted from the finance charge, such as
application fees, are typical of small business credit transactions,
and therefore including such charges helps data users to understand
pricing in the small business lending market. Additionally, a measure
of origination charges with numerous exclusions may encourage financial
institutions to shift costs to the excluded fees, where they would be
hidden from users of the 1071 data. Finally, proposed Sec.
1002.107(a)(12)(ii) is simpler than the Regulation Z definition of
finance charge, which the Bureau believes may improve the likelihood
that the information is accurately reported.
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\609\ Id. Sec. 1026.4(b)(1).
\610\ Id. Sec. 1026.4(c)(1) (application fees) and (7) (real-
estate related fees).
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As discussed above, during the SBREFA process, some SERs supported
use of APR as a pricing metric, including several who stated that they
currently calculate APR. Several SERs supported the use of APR to
enable comparisons of pricing across various small business lending
products, and suggested the Bureau look to State-mandated and Truth in
Lending Act APR disclosures for guidance on methodologies. Of the
pricing metrics asked about in the SBREFA Outline, a majority of the
community groups and community development lenders who supported
inclusion of a pricing data point preferred use of APR, though some
suggested the Bureau also require submission of rate and fees with the
APR, as well as rate spread as reported under HMDA. Some commenters who
favored APR suggested that the Bureau start with the recent disclosure
methods adopted in California and New York, and that the Bureau use
those methods for pricing of MCAs and factoring specifically. As
discussed above, the Bureau is proposing to require financial
institutions generally to report interest rate and fees, rather than
APR. But in developing proposed Sec. 1002.107(a)(12)(ii)'s definition
of total origination charges, the Bureau has adapted certain language
and concepts from Regulation Z's definition of the finance charge.
Because the finance charge must be known to calculate APR, including
the APR that would be disclosed under California and New York law,\611\
the Bureau believes that proposed Sec. 1002.107(a)(12)(ii) may impose
less burden on financial institutions and improve the likelihood that
the information is accurately reported as compared to a measure of
total origination charges that had no similarity to the finance charge.
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\611\ The New York and California disclosure laws currently add
various costs to the Regulation Z finance charge depending on the
credit product. See Cal. Dep't of Fin. Prot. & Innovation, Proposed
Commercial Financing Disclosures (S.B. 1235) (Apr. 7, 2021), https://dfpi.ca.gov/wp-content/uploads/sites/337/2021/04/2021-04-07-SB-1235-With-Redlines-FINAL-for-Publication.pdf; 2020 N.Y. Sess. Laws
ch. 369, 801(e).
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For the reasons given above, proposed Sec. 1002.107(a)(12)(ii)
would require financial institutions to report the total amount of all
charges payable directly or indirectly by the applicant and imposed
directly or indirectly by the financial institution at or before
origination as an incident to or a condition of the extension of
credit, expressed in dollars. Proposed Sec. 1002.107(a)(12)(ii) would
apply to credit transactions that either have been originated or have
been approved by the financial institution but not accepted by the
applicant. The Bureau seeks comment on proposed Sec.
1002.107(a)(12)(ii) and its commentary. For example, the Bureau seeks
comment on whether concepts and guidance adapted from Regulation Z,
such as proposed comment 107(a)(12)(ii)-1 on comparable cash
transactions, are applicable in the small business lending context such
that they should be incorporated as drafted. The Bureau also seeks
comment on whether to enumerate certain types of charges separately in
the 1071 data, and whether to include or exclude certain types of
charges in the total origination charges.
Proposed Rule--107(a)(12)(iii) Broker Fees
Proposed Sec. 1002.107(a)(12)(iii) would require financial
institutions to report the broker fees for a covered credit
transaction. Broker fees are the total amount of all charges included
in the total reportable origination charges that are fees paid by the
applicant directly to a broker or to the financial institution for
delivery to a broker, expressed in dollars.
Proposed comment 107(a)(12)(iii)-1 would provide an example of
reporting different types of broker fees. Proposed comment
107(a)(12)(iii)-2 would clarify that financial institutions would use a
``best information readily available'' standard regarding fees paid
directly to a broker by an applicant.
The Bureau believes that small business loan brokers are an
important part of the small business lending market, and may feature
more prominently in certain financing arrangements, such as MCAs. The
existence of brokers creates opportunities for potential practices that
inflate the cost of small business credit. For example, compensation
that is tied to the terms of a loan may encourage brokers to steer
applicants to financial institutions offering less favorable terms.
Because of the potential risks involved in multi-party business
arrangements, the FFIEC's Interagency Fair Lending Examination
Procedures emphasize the importance of understanding the role that
brokers play in a financial institution's lending process.\612\ These
risks may be heightened in the small business lending market because
applicants lack the substantive protections afforded to consumer credit
applicants, such as the prohibition on basing loan originator
compensation on the terms of a transaction.\613\
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\612\ Fed. Fin. Insts. Examination Council, Interagency Fair
Lending Examination Procedures, at 3 (2009), https://www.ffiec.gov/PDF/fairlend.pdf (instructing examiners to consider an institution's
organization of its credit decision-making process, including
identification of the delegation of separate lending authorities and
the extent to which discretion in pricing or setting credit terms
and conditions is delegated to various levels of managers,
employees, or independent brokers or dealers and an institution's
loan officer or broker compensation program).
\613\ Regulation Z Sec. 1026.36 (implementing TILA's
prohibition on basing loan originator compensation on loan terms).
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Accordingly, proposed Sec. 1002.107(a)(12)(iii) would provide
information about the broker fees associated with a transaction.
Although broker fees are included in proposed Sec.
1002.107(a)(12)(iii)'s definition of total origination charges,
separately enumerating the total broker fees would allow users to
better understand the role that brokers play in the price of small
business credit. For example, users could analyze whether broker fees
specifically appear to be creating fair lending risk or higher prices
for certain
[[Page 56460]]
communities. Empowering users to engage in this level of analysis would
aid in fulfilling the fair lending and business and community
development purposes of the statute.
The Bureau believes, however, that financial institutions may have
difficulty reporting broker fees that an applicant pays directly to a
broker. Proposed comment 107(a)(12)(iii)-2 would clarify that a
financial institution would rely on the best information readily
available to the financial institution at the time final action is
taken. Information readily available could include, for example,
information provided by an applicant or broker that the financial
institution reasonably believes regarding the amount of fees paid by
the applicant directly to the broker. The ``best information readily
available'' standard is used in reporting certain HMDA data under
Regulation C,\614\ and the Bureau believes it may also be appropriate
for reporting fees paid directly to a broker by an applicant.
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\614\ See Regulation C comments 4(a)(31)-4 and 4(a)(32)-5.
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For the reasons given above, proposed Sec. 1002.107(a)(12)(iii)
would require financial institutions to report the total amount of all
charges included in proposed Sec. 1002.107(a)(12)(ii) that are fees
paid by the applicant directly to a broker or to the financial
institution for delivery to a broker, expressed in dollars. Proposed
Sec. 1002.107(a)(12)(iii) would apply to credit transactions that
either have been originated or have been approved by the financial
institution but not accepted by the applicant. The Bureau seeks comment
on proposed Sec. 1002.107(a)(12)(iii) and its commentary, including on
the knowledge that financial institutions might have about direct
broker fees and the challenges of reporting such information.
Proposed Rule--107(a)(12)(iv) Initial Annual Charges
Proposed Sec. 1002.107(a)(12)(iv) would require financial
institutions to report the total amount of all non-interest charges
that are scheduled to be imposed over the first annual period of the
covered credit transaction, expressed in dollars.
Proposed comment 107(a)(12)(iv)-1 would provide an example of how
to calculate the amount to report. Proposed comment 107(a)(12)(iv)-2
would highlight that a financial institution should exclude interest
expenses from the initial annual charges reported. Proposed comment
107(a)(12)(iv)-3 would note that a financial institution should not
include any charges for events that are avoidable by the applicant,
including for example, charges for late payment, for exceeding a credit
limit, for delinquency or default, or for paying items that overdraw an
account. Proposed comment 107(a)(12)(iv)-4 would provide examples of
initial annual charges that may be scheduled to be imposed during the
initial annual period, including monthly fees, annual fees, and other
similar charges. Finally, proposed comment 107(a)(12)(iv)-5 would
clarify that a financial institution complies with the provision by
reporting as the default the highest amount for a charge scheduled to
be imposed, and provides an example of how to calculate the amount
reported when the scheduled fee to be imposed may be reduced based upon
a specified occurrence.
The Bureau understands that there are a variety of ways that small
business loans may be structured. This could include whether there is
an interest rate imposed on the transaction, whether there are finance
charges, and whether there are a myriad of other fees that may be
scheduled to be paid or are contingent upon some occurrence. In
addition, the Bureau understands from its market monitoring activity
that covered credit transactions may include scheduled fees that
encompass a substantial part of the cost of the covered credit product,
and without knowledge of those fees, the cost of the credit would be
misleading. The Bureau believes that proposed Sec. 1002.107(a)(12)(iv)
would enable data users to have a more accurate understanding of the
cost of the covered credit transaction than if the data lacked
information about scheduled fees.
As noted above, the Bureau believes that there may be small
business loans that do not include an interest rate, but do include a
monthly finance charge that is imposed on the covered credit
transaction.\615\ If the financial institution were only required to
report the interest rate on these types of transactions, the true cost
of credit would be wholly inaccurate because the monthly finance charge
would not be reported. In addition, small business loans, like consumer
loans, may include a number of other fees, such as annual fees and
other similar charges. The information collected and reported under
proposed Sec. 1002.107(a)(12)(iv) would allow data users to have a
more complete picture of the cost of the covered credit transaction and
promote market transparency, thus furthering the business and community
development purpose of section 1071. In addition, this pricing data
could further the fair lending purpose of section 1071 as it could
enhance the ability to effectively and efficiently enforce fair lending
laws.
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\615\ Proposed comment 107(a)(12)(iv)-2 would clarify that
financial institutions should not report the interest scheduled to
be imposed in the first year under proposed Sec.
1002.107(a)(12)(iv).
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Proposed Sec. 1002.107(a)(12)(iv) would provide that a financial
institution only report charges scheduled to be imposed over the first
annual period of the covered credit transaction. The Bureau believes
that by only requiring scheduled charges to be reported (rather than
the submission of all potential charges, some of which could be
speculative), the data reported will be more accurate than if a
financial institution had to make an educated guess as to what charges
will be imposed over the first annual period. Proposed Sec.
1002.107(a)(12)(iv) would not require a financial institution to
itemize the charges reported thereunder. The Bureau believes that
requiring charges to be itemized could add a considerable amount of
complexity for financial institutions in collecting and reporting the
initial annual charges, given the range of fees that could be charged
and the variations in how they might be imposed. The Bureau seeks
comment on the likelihood that FIs would schedule charges in the second
year of a covered credit transaction and beyond specifically in an
effort to avoid reporting the charges for purposes of 1071.
A financial institution complies with proposed Sec.
1002.107(a)(12)(iv) by not including charges for events that are
avoidable by the applicant; this restriction is explained more fully in
proposed comment 107(a)(12)(iv)-3, which would provide examples of
types of avoidable charges. As noted above, the Bureau believes that
the accuracy of the data reported is enhanced by only including charges
that are scheduled to be imposed and not including potential charges
that are contingent upon an action (or inaction) by the borrower. The
Bureau also believes that only requiring financial institutions to
report such charges for the first year, and not the life of the loan,
will minimize any burden associated with reporting the data. This
information should be included in the contract and, at most, would
require a simple calculation to arrive at the total charges for the
initial annual period. An example of how to calculate the initial
annual charges for the first annual period is found in proposed comment
107(a)(12)(iv)-1. The Bureau also seeks comment on how it should treat
situations where the applicant has
[[Page 56461]]
informed the financial institution that it expects to regularly incur
``avoidable charges,'' for example where an applicant intends to pay
late each month, such that a late fee, which would otherwise be an
avoidable charge and not reportable under this provision, is in effect
no longer contingent. Specifically, the Bureau seeks comment on whether
such charges should be reported as a scheduled charge.
Proposed comment 107(a)(12)(iv)-5 would provide additional
explanation about what amount to report when the financial institution
provides a discount on the charge if certain conditions are met. The
Bureau understands that some financial institutions may provide a
discount on specific charges when certain conditions are met. For
example, a financial institution may provide a discount on a monthly
charge if the borrower maintains a checking account at the financial
institution. In such a circumstance, proposed Sec. 1002.107(a)(12)(iv)
would require the financial institution to report the non-discounted
amount to maintain consistency across the data that is reported by all
financial institutions.
The collection of initial annual charges was not discussed during
the SBREFA process. However, during that process several SERs remarked
that pricing is complex and often unique to the applicant's situation,
and may involve extra services bundled with the loan, and without
adequate context pricing data could lead to inaccurate interpretations
and reputational damage to financial institutions. The Bureau believes
that the submission of initial annual charge data will help to decrease
the likelihood of inaccurate interpretations and provide additional
context by giving a more complete picture of the pricing of each
covered credit transaction.
For the reasons given above, proposed Sec. 1002.107(a)(12)(iv)
would require submission of the total amount of all non-interest
charges that are scheduled to be imposed over the first annual period
of the covered credit transaction, expressed in dollars. The Bureau
seeks comment on proposed Sec. 1002.17(a)(12)(iv) and its commentary,
including whether to include or exclude certain types of charges as
reportable under initial annual charges.
Proposed Rule--107(a)(12)(v) Additional Cost for Merchant Cash Advances
or Other Sales-Based Financing
Proposed Sec. 1002.107(a)(12)(v) would require financial
institutions to report additional cost data for MCAs or other sales-
based financing transactions. Specifically, this cost is the difference
between the amount advanced and the amount to be repaid, expressed in
dollars. Proposed comment 107(a)(12)(v)-1 would provide an example of
the difference between the amount advanced and the amount to be repaid
for an MCA.
As discussed above, the Bureau is proposing several data points to
provide information on pricing in the small business lending market.
These pricing data points would provide information about the interest
rate and fees applicable to a covered credit transaction. Some types of
commercial financing, however, contain pricing terms that are difficult
to reflect in data points about a transaction's interest rate and fees.
For example, under a typical MCA, a merchant receives a cash advance
and promises to repay it (plus some additional amount) to the MCA
provider. MCA providers generally do not provide an interest rate, and
while they may charge fees at origination or during the first year, the
majority of an MCA's cost comes from the additional amount repaid by
the merchant on top of the cash advance. This additional amount may be
expressed as a multiple of the amount advanced in the form of a factor
rate or percentage, or it may be derived by comparing the total payback
amount to the amount actually advanced. This additional amount is
typically not characterized as interest, so it would not be reported
under proposed Sec. 1002.107(a)(12)(i). Nor is this additional amount
characterized as a fee charged at origination or scheduled to be
imposed during the first year after the transaction, so it would not be
reported under proposed Sec. 1002.107(a)(12)(ii) or (iv). Without an
additional pricing data point to capture this additional amount due,
users attempting to analyze MCA pricing for fair lending or business
and community development purposes would miss most of the cost of
credit associated with these transactions. Therefore, the inclusion of
this data point would aid in fulfilling the fair lending and business
and community development purposes of the statute.
At the same time, the Bureau believes that information about the
additional amount repaid by the merchant would impose relatively low
burden on financial institutions. A typical MCA contract lists the
amount of future revenue purchased and the purchase price. A financial
institution could determine the additional amount repaid by computing
the difference between these two numbers.
For the reasons discussed above, proposed Sec. 1002.107(a)(12)(v)
would require financial institutions to report, for an MCA or other
sales-based financing transaction, the difference between the amount
advanced and the amount to be repaid, expressed in dollars. Proposed
Sec. 1002.107(a)(12)(v) would apply to credit transactions that either
have been originated or have been approved by the financial institution
but not accepted by the applicant. The Bureau seeks comment on proposed
Sec. 1002.107(a)(12)(v) and proposed comment 107(a)(12)(v)-1,
including whether to require additional pricing information for MCAs,
and whether MCAs could be structured in ways that evade the proposed
reporting requirement, such as by omitting or making variable the
amount to be repaid.
Proposed Rule--107(a)(12)(vi) Prepayment Penalties
Proposed Sec. 1002.107(a)(12)(vi)(A) would require financial
institutions to report whether the financial institution could have
included a prepayment penalty under the policies and procedures
applicable to the covered credit transaction. Proposed Sec.
1002.107(a)(12)(vi)(B) would require financial institutions to report
whether the terms of the covered credit transaction include a charge
imposed for paying all or part of the transaction's principal before
the date on which the principal is due. Proposed comment
107(a)(12)(vi)-1 would provide additional information on how to
determine whether the applicable policies and procedures allow a
financial institution to include prepayment penalties in the loan
agreement.
The Bureau understands, through its market monitoring function,
that small business loan contracts may include prepayment penalties and
the penalties can be sizable and structured as a percent of the
remaining outstanding balance. The Bureau also understands that there
may be concern among stakeholders, including community groups, that
certain small business applicants may be steered toward loans
containing prepayment penalty terms. The collection of data regarding
which contracts contain a prepayment penalty and whether a prepayment
penalty could have been imposed on specific contract types allows the
data to be analyzed for fair lending purposes to see if certain groups
may be steered into contracts containing prepayment penalties. Assuming
that prepayment penalty data would be part of the publicly available
data, from a market competition standpoint, financial institutions may
want to know how
[[Page 56462]]
frequently their competitors are utilizing prepayment penalties. Thus,
these data could help further the business and community development
purpose of section 1071 by promoting market transparency and new
product development opportunities.
Proposed Sec. 1002.107(a)(12)(vi)(A) would require financial
institutions to report whether the financial institution could have
included a prepayment penalty under the policies and procedures
applicable to the covered credit transaction, while proposed Sec.
1002.107(a)(12)(vi)(B) would require financial institutions to report
whether the terms of the covered credit transaction actually include a
prepayment penalty term. The provisions would allow data users to
determine what percentage of covered credit transactions could contain
a prepayment penalty term, what percentage of such transactions
actually contain the term, and, together with other data points, the
demographic profile of borrowers whose contracts do and do not include
the term. The Bureau believes the two provisions work together to allow
data users to better determine whether certain borrowers are being
steered towards covered credit transactions containing prepayment
penalty terms.
Proposed comment 107(a)(12)(vi)-1 would elaborate on the
requirement to report whether financial institutions could have
included a prepayment penalty in the covered credit transaction to
clarify that the applicable policies and procedures are those that the
financial institutions follows when evaluating applications for the
specific credit type and credit purpose requested. The Bureau believes
this provision will ensure that similar credit products are being
analyzed together and minimize the possibility that potential fair
lending risk is incorrectly identified.
For the reasons given above, proposed Sec. 1002.107(a)(12)(vi)(A)
would require financial institutions to report whether the financial
institution could have included a prepayment penalty under the policies
and procedures applicable to the covered credit transaction. Proposed
Sec. 1002.107(a)(12)(vi)(B) would require financial institutions to
report whether the terms of the covered credit transaction include a
charge imposed for paying all or part of the transaction's principal
before the date on which the principal is due.
The Bureau seeks comment on proposed Sec. 1002.107(a)(12)(vi) and
its commentary, including whether to enumerate other types of
contingent charges separately in the 1071 data to more accurately
reflect the cost of covered credit transactions. The Bureau also seeks
comment on whether there are alternative data that would provide
similar insight into whether certain borrowers are being steered into
covered credit transactions containing prepayment penalty terms or
other similar contingent terms.
107(a)(13) Census Tract
Background
Section 1071 requires financial institutions to collect and report
``the census tract in which is located the principal place of business
of the . . . applicant.'' \616\ This provision is similar to Regulation
C, which requires reporting of the census tract in certain
circumstances if the property securing the loan (or proposed to secure
the loan, if the transaction was not originated) is in a county with a
population of more than 30,000.\617\ Under Regulation C, the financial
institution generally finds the census tract by geocoding using the
address of the property. Geocoding is the process of using a particular
property address to locate its geographical coordinates and the
corresponding census tract.
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\616\ ECOA section 704B(e)(2)(E).
\617\ Regulation C Sec. 1003.4(a)(9)(ii)(C). Regulation C also
requires reporting of the property address for all applications.
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CRA reporting of business loans by depository institutions also
requires reporting of census tract. The Bureau understands that CRA
allows reporting of a census tract based on the address or location
where the proceeds of the credit will be principally applied.\618\
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\618\ See 2015 FFIEC CRA Guide at 16.
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SBREFA Proposals Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau explained that it was considering
proposing that financial institutions report a census tract based on an
address collected in the application, or during review or origination
of the loan.\619\ The financial institution would use the address where
the loan proceeds will principally be applied, if that address is known
to the financial institution, which the Bureau believes would be more
useful to carry out the community development and fair lending purposes
of section 1071. For example, if a financial institution makes a loan
to a small business to buy or improve commercial real estate, the
location of the real estate is more relevant to section 1071's
statutory purposes than the location of the main office. If the
financial institution does not possess that information, the financial
institution would use the location of the small business borrower's
main office or headquarters. If that, too, is unknown, the financial
institution could use another business address associated with the
application. The financial institution would also report which of these
address types it is using, unless that information is unknown: (1) The
address where the loan proceeds will principally be applied; or (2) the
location of the small business borrower's main office or headquarters;
or (3) some other business address, including those for which the
financial institution is unsure about the nature of the address.
---------------------------------------------------------------------------
\619\ SBREFA Outline at 30-31.
---------------------------------------------------------------------------
In response to the SBREFA Outline, SERs explained that they
generally capture the main office address of small business applicants,
which for sole proprietors is frequently a home address; the address
where the loan proceeds will be used is typically captured for
commercial real estate transactions.\620\ Some of the SERs stated that
they do not know the proceeds address, and one suggested that for
simplicity the Bureau should use the business address only.
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\620\ SBREFA Panel Report at 29.
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A number of SERs explained that they have experience geocoding
addresses to obtain census tract information--such as for CDFI Fund
reporting, voluntary CRA reporting, or for reporting mortgage loans
under HMDA--though some did not. Some SERs suggested that a requirement
to report a geocoded census tract for financial institutions that do
not do so now would impose costs on the financial institution and
possibly the borrower. One SER stated that few nondepository
institutions collect or are even familiar with census tract data. One
SER recommended following the format used for CRA reporting of census
tract information, rather than the slightly different format used under
HMDA. Another SER suggested that the Bureau provide simple instructions
for reporting census tract and employ less burdensome geocoding
requirements than exist for HMDA. Several SERs explained that they use
a free service available through the FFIEC to convert addresses they
receive from applicants to census tract data. A few SERs suggested that
the Bureau should provide or support a Federal government-sponsored
system for the secure batch processing of address data to convert to
census tract information that could be used to satisfy geocoding
requirements across multiple reporting regimes including 1071.
[[Page 56463]]
The SBREFA Panel recommended that the Bureau seek comment on the
feasibility and ease of using existing Federal services to geocode
addresses in order to determine census tract for 1071 reporting
purposes (such as what is offered by the FFIEC for use in reporting
HMDA data).\621\
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\621\ Id. at 46.
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Stakeholders commenting on the SBREFA Outline explained that
financial institutions do not currently collect census tract
information unless they need to report it as a CDFI, or for CRA or
HMDA. Some commenters stated that they use the free FFIEC tool for
geocoding, though one commenter pointed out that this service does not
allow batch processing. One commenter requested that financial
institutions be given a safe harbor if the tool used provides an
incorrect coding. The comments, like the SER feedback, did not suggest
a problem with the waterfall approach in the SBREFA Outline. There were
concerns about proceeds locations not having addresses, and proceeds
addresses being unknown to the financial institution, but the waterfall
would allow them to simply use another address. One commenter stated
that not requiring a specific type of address would help avoid
burdening financial institutions. Another commenter stated that it had
no reason to ask applicants about the proceeds address, and one
requested that the Bureau make clear that a financial institution has
no obligation to ask about the proceeds or headquarters address if it
does not do so now. Several commenters stated that allowing use of the
proceeds address was helpful, and would further section 1071's purposes
and reduce burden by allowing use of the same data as reported under
CRA. Two commenters stated that the Bureau should align this data point
with the CRA, and one of these, a community development organization,
stated that the CRA method for reporting census tract was easier than
the HMDA method. This commenter provided statistical evidence
suggesting that the CRA method also yielded more complete data than the
HMDA method.
Proposed Rule
The Bureau is proposing Sec. 1002.107(a)(13) to require financial
institutions to collect and report the census tract data point using a
``waterfall'' approach, which closely aligns with the Bureau's proposal
under consideration in the SBREFA Outline. The proposed rule would
require a financial institution to collect and report the census tract
in which is located: (i) The address or location where the proceeds of
the credit applied for or originated will be or would have been
principally applied; or (ii) If the information in (i) is unknown, the
address or location of the main office or headquarters of the
applicant; or (iii) If the information in both (i) and (ii) is unknown,
another address or location associated with the applicant. In addition,
the proposed rule would require that the financial institution also
indicate which one of the three types of addresses or locations listed
in (i), (ii), or (iii) the census tract is based on. Although the
proposed rule does not specifically require it, the Bureau assumes that
financial institutions or their vendors would generally use a geocoding
tool to convert the appropriate address to a census tract number.
The Bureau believes that its proposed reporting method for the
census tract data point leverages existing industry information
collection practices and would result in useful information to further
section 1071's purposes while avoiding imposing much additional burden
on financial institutions. The waterfall method in the proposed
regulation would achieve these goals by allowing a financial
institution to report an address it already has, with no further
investigation; allowing a financial institution to avoid further
investigation when it is unsure about the nature of the address
reported; and allowing CRA reporters to report the same address for
1071 as they do for CRA; \622\ while also increasing the likelihood of
the proceeds address being reported. The Bureau considers the census
tract of the proceeds address to be particularly useful for both the
fair lending and business and community development purposes of 1071.
---------------------------------------------------------------------------
\622\ As explained above, the Bureau understands that CRA allows
reporting of a census tract based on the address or location where
the proceeds of the credit will be principally applied. The Bureau
also believes that CRA reporting on this data point is reasonably
flexible, and a financial institution would be able to coordinate
the two compliance regimes to report the same census tract.
---------------------------------------------------------------------------
First, the proposed approach would require a financial institution
to report the census tract of the proceeds address if it is available,
but would not require a financial institution to ask about it
specifically. Financial institutions would be able to apply the
waterfall approach to the addresses they are currently collecting; they
would not be required to specifically ask for the proceeds or
headquarters addresses. In addition, the proposed method would allow a
financial institution to report that it is unsure about the nature of
the address if it has no information as to the nature or function of
the business address it possesses. This provision should address
potential concerns about reporters spending time on complex, fact-
specific questions and unintentionally misreporting this data point
when financial institution staff have to determine what kind of address
they are reporting based on insufficient information. The Bureau
believes that this option would be particularly helpful if the
application were denied or withdrawn early in the application process
before the nature of any address provided by the applicant is clear.
Proposed comment 107(a)(13)-1 would provide general instructions on
using the waterfall reporting method, with examples for guidance. The
Bureau believes that this comment would facilitate compliance and seeks
comment on whether any additional instructions or examples would be
useful.
Proposed comment 107(a)(13)-2 would explain that a financial
institution complies with proposed Sec. 1002.107(a)(13) by identifying
the appropriate address or location and the type of that address or
location in good faith, using appropriate information from the
applicant's credit file or otherwise known by the financial
institution. The comment would also make clear that a financial
institution is not required to investigate beyond its standard
procedures as to the nature of the addresses or locations it collects.
The Bureau believes that this guidance strikes the right balance by
allowing flexibility in reporting, and also requiring appropriate good
faith compliance in exercising that flexibility, thereby yielding
quality data.
Proposed comment 107(a)(13)-3 would explain that pursuant to
proposed Sec. 1002.107(c)(1), a financial institution shall maintain
procedures reasonably designed to collect applicant-provided
information, which includes at least one address or location for an
applicant for census tract reporting. However, the comment would
further explain that if a financial institution is nonetheless unable
to collect or otherwise determine any address or location for an
application, the financial institution reports that the census tract
information is ``not provided by applicant and otherwise
undetermined.'' Based on the Bureau's understanding of how financial
institutions currently define an application under their internal
procedures, the Bureau believes it is highly unlikely that a financial
institution would not obtain some type of address for the applicant.
[[Page 56464]]
Nonetheless, the Bureau is proposing to permit financial institutions
to report this data point using the ``not provided by applicant and
otherwise undetermined'' response in order to facilitate compliance in
those rare instances when the financial institution does not have the
data requested. The reference in the comment to proposed Sec.
1002.107(c)(1) would make clear, however, that a financial institution
must maintain procedures reasonably designed to collect at least one
address. As with the previous comment, the Bureau believes that this
comment would strike the right balance by facilitating compliance and
also emphasizing the requirement to collect appropriate data.
The Bureau is proposing a safe harbor in Sec. 1002.112(c)(1),
which would state that an incorrect entry for census tract is not a
violation of ECOA or subpart B if the financial institution obtained
the census tract by correctly using a geocoding tool provided by the
FFIEC or the Bureau. Proposed comment 107(a)(13)-4 would cross-
reference that provision.\623\ See the section-by-section analysis of
proposed Sec. 1002.112(c)(1) below for additional discussion of this
safe harbor.
---------------------------------------------------------------------------
\623\ Proposed comment 112(c)(1)-1 would explain that ``this
safe harbor provision does not extend to a financial institution's
failure to provide the correct census tract number for a covered
application on its small business lending application register, as
required by Sec. 1002.107(a)(13), because the FFIEC or Bureau
geocoding tool did not return a census tract for the address
provided by the financial institution. In addition, this safe harbor
provision does not extend to a census tract error that results from
a financial institution entering an inaccurate address into the
FFIEC or Bureau geocoding tool.''
---------------------------------------------------------------------------
The Bureau notes that section 1071's description of the census
tract data point refers to the census tract for the applicant's
``principal place of business.'' \624\ The Bureau considers the
waterfall approach in proposed Sec. 1002.107(a)(13) to be a reasonable
interpretation of the undefined statutory term ``principal place of
business,'' which the Bureau understands not to have a standard
definition, and thus believes to be ambiguous. First, the Bureau
believes that the address or location of the main office or
headquarters of the applicant fits easily into one of the common
meanings of ``principal place of business.'' In addition, the Bureau
expects that, generally, the address where the loan proceeds will be
applied will also be the main office or headquarters address.\625\ The
primary exception to this principle would be in the case of credit
intended for purchase, construction/, or refinancing of real estate;
under these circumstances, the Bureau reasonably interprets the term
``principal place of business'' to mean, in essence, the principal
location for business activities relating to the extension of credit at
issue. Although ``another address or location associated with the
applicant'' may not always be the principal place of business of the
applicant, the Bureau considers this information to be the financial
institution's best option for reporting data on the principal place of
business when the nature of a location is unknown.
---------------------------------------------------------------------------
\624\ ECOA section 704B(e)(2)(E).
\625\ According to U.S. Census 2017 SUSB data, there are
5,976,761 firms with fewer than 500 employees (which will be used,
for this purpose, as a rough proxy for a ``small business''); those
firms collectively have 6,512,802 establishments (i.e., locations).
This means that, at most, approximately 9 percent of firms with
fewer than 500 employees could have more than one location. See U.S.
Census Bureau, 2017 SUSB Annual Datasets by Establishment Industry,
https://www.census.gov/programs-surveys/susb/data/tables.html (last
visited Aug. 27, 2021). According to the U.S. Census Bureau's Non-
employer Statistics, there are 25,701,671 non-employer firms
(regardless of revenue size). Non-employer firms account for fewer
than 4 percent of all sales, though, and the vast majority are sole
proprietorships. While not impossible, the Bureau believes it is
very unlikely that non-employer firms would have more than one
location. See U.S. Census Bureau, All Sectors: Nonemployer
Statistics by Legal Form of Organization and Receipts Size Class for
the U.S., States, and Selected Geographies: 2017 (2017), https://data.census.gov/cedsci/table?q=NONEMP2017.NS1700NONEMP&tid=NONEMP2017.NS1700NONEMP&hidePreview=true.
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In the alternative, section 1071 authorizes the Bureau to include
any ``additional data that the Bureau determines would aid in
fulfilling the purposes of [section 1071].'' The Bureau has determined
that requiring reporting of the proceeds address would aid in
fulfilling both the fair lending and business and community development
purposes of section 1071 by providing more useful information on the
location of the credit activity for fair lending analysis and
understanding where the business and community development is
occurring. Requiring reporting of another address or location
associated with the applicant when both the proceeds address and the
main office or headquarters address are not available would provide
location data when otherwise none would be present, thus also aiding in
fulfilling both the fair lending and business and community development
purposes of section 1071 by providing more useful information on the
location of the lending for fair lending analysis and understanding
where the business and community development is likely occurring. In
addition, requiring data on the nature of the address reported would
aid in fulfilling both the fair lending and business and community
development purposes of section 1071 by facilitating accurate analyses
of the data reported. Also, in the alternative, the Bureau believes it
would be appropriate to use its exception authority under 704B(g)(2) to
provide that financial institutions would not report the ``main office
or headquarters address'' in certain situations because the Bureau
believes that the proceeds address and ``another address or location
associated with the applicant'' would carry out the purposes of section
1071 more appropriately than requiring the main office or headquarters
address in every situation.
As discussed above, some SERs explained that they generally collect
the main office address of the small business, which for sole
proprietorships will often be a home address, and are generally not
aware of the proceeds address. The Bureau's proposed waterfall approach
accommodates this situation by allowing financial institutions to
report census tract using the address that they have. In regard to
SERs' concerns about the potential burden of geocoding addresses to
obtain census tract, the Bureau notes that there does not appear to be
a viable alternative to collecting and reporting the statutorily
required census tract data without geocoding. While several SERs are
already geocoding applicants' addresses, some SERs were concerned about
the burden associated with geocoding for HMDA and one expressed a
preference for the CRA method of geocoding, as did several other
stakeholders. Accordingly, the Bureau seeks comment on the difference
between geocoding for HMDA and for CRA, and any specific advantages or
disadvantages associated with geocoding under either method. In regard
to a Federal government tool capable of batch processing for geocoding
of addresses, the Bureau is considering the utility of such a tool. The
Bureau notes that the proposed rule would provide a safe harbor for use
of such a Bureau tool, if created, as well as for the currently
existing FFIEC tool. As the SBREFA Panel recommended, the Bureau seeks
comment on the feasibility and ease of using existing Federal services
to geocode addresses in order to determine census tract for 1071
reporting purposes (such as what is offered by the FFIEC for use in
reporting HMDA data).
The Bureau seeks comment on its proposed approach to the census
tract data point. In addition to the specific requests for input above,
the Bureau notes that the waterfall method is intended to allow CRA
reporters to
[[Page 56465]]
provide the same data for both reporting regimes, but requests comment
on whether the proposed method would achieve this goal and, if not,
whether and how this data point should be further coordinated with CRA.
107(a)(14) Gross Annual Revenue
Background
Section 1071 requires financial institutions to collect and report
``the gross annual revenue of the business in the last fiscal year of
the . . . applicant preceding the date of the application.'' \626\
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\626\ ECOA section 704B(e)(2)(F).
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SBREFA Proposal Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau stated that it was considering
proposing that financial institutions report the gross annual revenue
of the applicant during its last fiscal year.\627\ The Bureau stated
that if a financial institution verifies gross annual revenue and bases
its credit decision on that amount, the financial institution would
report the verified amount. If the financial institution does not
verify gross annual revenue, it would report the amount provided by the
applicant.
---------------------------------------------------------------------------
\627\ SBREFA Outline at 31.
---------------------------------------------------------------------------
Many SERs indicated that they collect gross annual revenue
information, although they differed in how much they seek to verify
this information.\628\ Several SERs requested clarification regarding
how gross annual revenue would be reported for startups and other young
businesses. A few SERs stated that they do not capture gross annual
revenue at all or collect it only in limited circumstances. One of
these SERs stated that collecting gross annual revenue would be
challenging; others suggested they could likely estimate gross annual
revenue based on information they do collect.
---------------------------------------------------------------------------
\628\ SBREFA Panel Report at 29.
---------------------------------------------------------------------------
Several SERs explained that they collect gross annual revenue using
different methods and forms of verification for different types of
credit. SERs advocated for allowing gross annual revenue to be reported
as provided by the applicant, without an obligation for the financial
institution to verify that information. A few SERs suggested that
applicants often cannot provide accurate gross annual revenue
information, although one SER suggested that in its experience
applicants are generally able to provide reasonable estimates of gross
annual revenue. Several SERs preferred reporting ranges rather than
precise values. Several SERs also remarked that most businesses take
advantage of tax filing extensions and thus typically do not have
complete financial information for the prior year until many months
later, and asked how that situation should be addressed when requesting
applicants' gross annual revenue for the prior fiscal year.
The SBREFA Panel recommended that, in light of SER feedback
supporting the Bureau's proposal under consideration to not require
financial institutions to verify gross annual revenue information, the
Bureau proceed with that approach in the proposal. The SBREFA Panel
also recommended that the Bureau explore the timing of tax and revenue
reporting and seek comment in the proposal on how that timing can best
be coordinated with the collection and reporting of this data
point.\629\
---------------------------------------------------------------------------
\629\ Id. at 46.
---------------------------------------------------------------------------
The Bureau also received feedback from other stakeholders. Although
one stakeholder commented that gross annual revenue is a consistent
measure, simple to define, and easily computed, other stakeholders were
concerned about the complexity and difficulty of reporting a
specifically defined revenue number. One stakeholder stated that gross
annual revenue was difficult to precisely define given differences in
accounting and tax practices both across and within business
subsectors. Two commenters suggested that reporting this data point
would be complicated by the question of whether a business uses cash
flow or accrual accounting. Other stakeholders requested the reporting
of revenue ranges rather than specific values, and one of these
commenters suggested that reporting a specific number may discourage
some borrowers from applying. Another stakeholder explained that
sometimes an application is denied or withdrawn before the revenue
information is collected. One stakeholder stated that allowing
flexibility in the collection and reporting of this data point would be
very important.
With regard to whether the revenue of affiliates is included in the
gross annual revenue they collect and whether that information is used
for underwriting purposes, stakeholders reported that some collect this
information and some do not, depending on the application and specific
product. One commenter stated that it does not collect such information
unless the affiliate will be liable on the loan. Two stakeholders
stated that the Bureau must require inclusion of affiliate revenue to
make sure that a given business truly is small.
Many stakeholders stated that they generally verify the income
information using profit and loss statements, taxes, bank statements,
and ``third-party technology solutions.'' Some stated that they do not
verify revenue information for specific products, such as credit cards,
and that sometimes it is difficult to verify the revenue of a
particular applicant, as tax information can be complex or dated.
Stakeholders overwhelmingly supported the Bureau's proposal under
consideration not to require verification of revenue, and one
stakeholder objected to requiring the reporting of verified information
even when the lender has verified the revenue.
Stakeholders also expressed concern about collecting gross annual
revenue for start-ups and very small businesses that might not have
useable or clear information. One stakeholder explained that its
members may obtain and rely on applicant bank statements for a
specified time period, and so should be permitted to extrapolate annual
revenue based on partially reported revenue.
Proposed Rule
Proposed Sec. 1002.107(a)(14) would require reporting of the gross
annual revenue of the applicant for its preceding full fiscal year
prior to when the information is collected. The Bureau is proposing to
require reporting of a specific value for gross annual revenue--rather
than a range, for which some SERs and stakeholders expressed a
preference--to simplify the reporting of gross annual revenue
information for financial institutions and because it believes that a
precise value would be more useful for 1071 data users, including the
Bureau.
Consistent with the SBREFA Panel's recommendation and feedback from
SERs and other stakeholders, proposed comment 107(a)(14)-1 would
clarify that a financial institution need not verify gross annual
revenue information provided by the applicant to comply with proposed
Sec. 1002.107(a)(14). The proposed comment would explain that the
financial institution may rely on statements of or information provided
by the applicant in collecting and reporting gross annual revenue. The
proposed comment would also state, however, that if the financial
institution verifies the gross annual revenue provided by the applicant
it must report the verified information. The Bureau believes that a
requirement to verify gross annual revenue could be operationally
difficult for many financial institutions, particularly in situations
in which the financial institution does not collect gross annual
[[Page 56466]]
revenue currently. The Bureau also does not believe, at this time, that
such a requirement is necessary in fulfilling either of section 1071's
statutory purposes. However, the Bureau does believe that reporting
verified revenue when the financial institution already possesses that
information would not be operationally difficult, and would enhance the
accuracy of the information collected.
Proposed comment 107(a)(14)-1 would also provide specific language
that a financial institution could use to ask about an applicant's
gross annual revenue and would explain that a financial institution
could rely on the applicant's answer. The Bureau believes this language
would facilitate compliance for financial institutions that currently
do not collect gross annual revenue, collect it only in limited
circumstances, or would otherwise find its collection challenging, as
some SERs and other stakeholders suggested.
Overall, the Bureau believes that this approach in proposed comment
107(a)(14)-1--clarifying that a financial institution need not verify
applicant-provided gross annual revenue information, and providing
language that a financial institution may use to ask for such
information--should reduce the complexity and difficulty of collecting
gross annual revenue information that some SERs and stakeholders
expressed concern about.
The Bureau believes that situations could arise in which the
financial institution has identified that an applicant is a small
business for the purposes of proposed Sec. 1002.106(b) through, for
example, an initial screening question asking whether the applicant's
gross annual revenue is below $5 million, but then the specific gross
annual revenue amount could not be collected. Therefore, the Bureau is
proposing comment 107(a)(14)-2, which would first clarify that pursuant
to proposed Sec. 1002.107(c)(1), a financial institution shall
maintain procedures reasonably designed to collect applicant-provided
information, including the gross annual revenue of the applicant. The
proposed comment would then state that if a financial institution is
nonetheless unable to collect or determine the specific gross annual
revenue of the applicant, the financial institution reports that the
gross annual revenue is ``not provided by applicant and otherwise
undetermined.'' The Bureau believes that permitting this reporting
flexibility would reduce the complexity and difficulty of reporting
gross annual revenue information, particularly when an application has
been denied or withdrawn early in the process and the gross annual
revenue could not be collected.
Proposed comment 107(a)(14)-3 would clarify that a financial
institution is permitted, but not required, to report the gross annual
revenue for the applicant that includes the revenue of affiliates as
well. The proposed comment would state that, for example, if the
financial institution does not normally collect information on
affiliate revenue, the financial institution reports only the
applicant's revenue and does not include the revenue of any affiliates
when it has not collected that information. The Bureau believes that
permitting, but not requiring, a financial institution to include the
revenue of affiliates will carry out the purposes of section 1071 while
reducing undue burden on financial institutions in collecting gross
annual revenue information. Proposed comment 107(a)(14)-3 would
conclude by explaining that in determining whether the applicant is a
small business under proposed Sec. 1002.106(b), a financial
institution may rely on an applicant's representations regarding gross
annual revenue, which may or may not include affiliates' revenue. The
Bureau notes that proposed comment 106(b)-3 would follow the same
approach to affiliate revenue for purposes of determining whether an
applicant is a small business under proposed Sec. 1002.106(b). The
Bureau believes that this operational equivalence between proposed
Sec. 1002.107(a)(14) and proposed Sec. 1002.106(b) would facilitate
compliance and enhance the consistency of 1071 data.
As mentioned above, some SERs suggested they might be able to
estimate gross annual revenue using information that they now collect,
and one stakeholder suggested that it could extrapolate annual revenue
based on partially reported revenue. The Bureau does not currently
believe that estimation or extrapolation would be likely to result in
sufficiently accurate data for reporting under proposed Sec.
1002.107(a)(14). For example, a seasonal business's bank statements for
its busy season would likely yield an inflated gross annual revenue
when extrapolated to a full year. In addition, the Bureau believes that
the language presented in proposed comment 107(a)(14)-1 would provide a
manageable method for collecting full gross annual revenue when a
financial institution does not do so now. Nonetheless, the Bureau seeks
comment on whether financial institutions should be permitted to
estimate or extrapolate gross annual revenue from partially reported
revenue or other information, and how such estimation or extrapolation
would be carried out. The Bureau also notes that estimation or
extrapolation of gross annual revenue is sufficient for the purposes of
determining small business status under proposed Sec. 1002.106(b),
subject to the requirement under proposed comment 107(a)(14)-1 that a
financial institution must report verified gross annual revenue
information if available.
The Bureau seeks comment on its proposed approach to the gross
annual revenue data point, as well as the specific requests for comment
above. As the SBREFA Panel recommended, the Bureau also seeks comment
on how the timing of tax and revenue reporting can best be coordinated
with the collection and reporting of gross annual revenue. In addition,
the Bureau seeks comment on the effect of cash flow versus accrual
accounting on reporting of gross annual revenue.
107(a)(15) NAICS Code
ECOA section 704B(e)(2)(H) authorizes the Bureau to require
financial institutions to compile and maintain ``any additional data
that the Bureau determines would aid in fulfilling the purposes of
[section 1071].'' The Bureau is proposing in Sec. 1002.107(a)(15) to
require that financial institutions collect and report an applicant's
6-digit NAICS code. The Bureau believes that 6-digit NAICS code data
would aid in fulfilling the purposes of section 1071, as explained
below.
As described above, the SBA customizes its size standards on an
industry-by-industry basis using 1,057 6-digit NAICS codes. The first
two digits of a NAICS code broadly capture the industry sector of a
business. The third digit captures the industry's subsector, the fourth
captures the industry group, the fifth captures the industry code, and
the sixth captures the national industry. The NAICS code thus becomes
more specific as digits increase and the 6-digit code is the most
specific. In its SBREFA Outline, the Bureau stated that it was
considering proposing that financial institutions collect and report
NAICS code as an important metric for fair lending analysis (allowing
separation of dissimilar types of businesses to limit
misinterpretations of the data) and assessing community development
impacts (allowing better measurement of community development
impact).\630\
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\630\ SBREFA Outline at 35.
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As described in detail in the section-by-section analysis of
proposed Sec. 1002.106(b) above, SERs and other
[[Page 56467]]
stakeholders expressed concern about the difficulties in determining
the appropriate NAICS code for businesses and in applying the NAICS-
based standards in determining whether a business loan applicant is a
small business.\631\ In addition, several SERs stated that correctly
classifying an applicant's NAICS code can be difficult, as the business
may change over time, codes may have overlapping definitions, small
businesses often do not know their NAICS code or may operate in
multiple NAICS sectors, and classifications may be prone to human
error. Another SER noted that NAICS codes classifications could be
subject to change based on SBA rulemaking, and thus financial
institutions would need to track such developments. Other SERs stated
that the 2-digit NAICS code is significantly less complex and prone to
less human error than the SBA definition using 6-digit NAICS codes.
---------------------------------------------------------------------------
\631\ SBREFA Panel Report at 31.
---------------------------------------------------------------------------
The SBREFA Panel recommended that the Bureau continue to explore
ways to minimize burden on both the small financial institutions
collecting NAICS code information as well as the small business
applicants who need to provide it, for example the possibility of
collecting the 2-NAICS code rather than the 6-digit code.\632\
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\632\ Id. at 46.
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Proposed Sec. 1002.107(a)(15) would require financial institutions
to collect and report a 6-digit NAICS code appropriate for the
applicant's business. Proposed comment 107(a)(15)-1 would provide
general background on NAICS codes and would state that a financial
institution complies with proposed Sec. 1002.107(a)(15) if it uses the
NAICS codes in effect on January 1 of the calendar year covered by the
small business lending application register that it is reporting.
Proposed comment 107(a)(15)-2 would clarify that, when a financial
institution is unable to collect or determine the applicant's NAICS
code, it reports that the NAICS code is ``not provided by applicant and
otherwise undetermined.''
The Bureau is also proposing that financial institutions be
permitted to rely on NAICS codes obtained from the applicant or certain
other sources, without having to verify that information itself.
Specifically, proposed comment 107(a)(15)-3 would clarify that,
consistent with proposed Sec. 1002.107(b), a financial institution may
rely on applicable applicant information or statements when compiling
and reporting the NAICS code and would provide an example of an
applicant providing a financial institution with the applicant's tax
return that includes the applicant's reported NAICS code. Proposed
comment 107(a)(15)-4 would provide that a financial institution may
rely on a NAICS code obtained through the financial institution's use
of business information products, such as company profiles or business
credit reports, which provide the applicant's NAICS code.
The Bureau believes that NAICS codes would considerably aid in
fulfilling both section 1071's fair lending purpose and its business
and community development purpose, even if having NAICS code is not
necessary for determining whether an applicant is a small business
under the Bureau's proposed alternative size standard. The Bureau
believes that capturing 6-digit NAICS codes in the 1071 data would
facilitate enforcement of fair lending laws. For example, financial
institutions often designate certain industries as high-risk, such as
industries that have high rates of businesses leaving the market or
that deal primarily in cash transactions. The 6-digit NAICS codes would
help ensure that users are comparing applicants with similar profiles,
thereby controlling for factors that might provide non-discriminatory
explanations for disparities in credit and pricing decisions. Moreover,
NAICS codes would be useful for identifying business and community
development needs and opportunities of small businesses, which may
differ widely based on industry, even controlling for other factors.
For example, 6-digit NAICS codes would help data users identify
industries where small businesses face challenges accessing credit and
understand how small businesses in different industries use credit.
Furthermore, disclosing NAICS codes would provide for consistency and
compatibility with other public datasets related to small business
lending activity, which generally use NAICS codes. This ability to
synthesize 1071 data with other datasets would help the public use the
data in ways that advance both the business and community development
and fair lending purposes of section 1071.
The Bureau believes that collecting the full 6-digit NAICS code (as
opposed to the 2-digit sector code) would better enable the Bureau and
other stakeholders to drill down and identify whether disparities arise
at a sector level or more specifically at a U.S. National Industry
level and would also enable the collection of better information on the
specific types of businesses that are accessing, or struggling to
access, credit. For example, a wide variety of businesses, including
those providing car washes, footwear and leather goods repair, and nail
salons, all fall under the 2-digit sector code 81: Other Services
(except Public Administration). Without 6-digit NAICS codes, all of
these business types would be combined into one analysis, potentially
masking different characteristics and different outcomes across these
business types.
The Bureau recognizes that, under its proposal, all financial
institutions subject to reporting would need to gain familiarity with
the NAICS code system, refer to NAICS classifications for all relevant
applications, and report NAICS codes to the Bureau. To address
commenter concerns related to the complexity of determining a correct
NAICS code, the Bureau is proposing (1) a safe harbor to indicate that
an incorrect NAICS code entry is not a violation of subpart B if the
first two digits of the NAICS code are correct and the financial
institution maintains procedures reasonably adapted to correctly
identify the subsequent four digits (see proposed Sec.
1002.112(c)(2)); (2) permitting a financial institution to rely on
applicable applicant information or statements when compiling and
reporting the NAICS code (see proposed comment 107(a)(15)-3); and (3)
permitting a financial institution to rely on a NAICS code obtained
through the financial institution's use of business information
products, such as company profiles, business credit reports, or NAICS
identification tools (see proposed comment 107(a)(15)-4). The proposed
NAICS-specific safe harbor would be available to financial institutions
in addition to the general bona fide error exemption under proposed
Sec. 1002.112(b). See the section-by-section analysis of proposed
Sec. 1002.112(c)(2) below for a detailed discussion of the proposed
safe harbor.
The Bureau seeks comment on its proposal to collect 6-digit NAICS
codes together with the safe harbor described in proposed Sec.
1002.112(c)(2). The Bureau also seeks comment on whether requiring a 3-
digit NAICS code with no safe harbor would be a better alternative.
107(a)(16) Number of Workers
Background
ECOA section 704B(e)(2)(H) authorizes the Bureau to require
financial institutions to compile and maintain ``any additional data
that the Bureau determines would aid in fulfilling the purposes of
[section 1071].'' The Bureau believes that data providing the number of
persons
[[Page 56468]]
working for a small business applicant would aid in fulfilling the
business and community development purpose of section 1071. These data
would allow users to better understand the job maintenance and creation
that small business credit is associated with and help track that
aspect of business and community development.
SBREFA Proposal Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau stated that it was considering
proposing that financial institutions collect and report the number of
employees of the applicant. The Bureau stated that it was considering
proposing that if the financial institution verifies the number of
employees provided by the applicant, the financial institution would
report the verified number. On the other hand, if the financial
institution does not verify the number of employees, it would report
the number provided by the applicant.
Many SERs indicated that they do not collect number of
employees.\633\ One of these SERs stated that they do not support the
inclusion of this data point in an eventual 1071 rule, although they
could collect this information. Several SERs suggested that there could
be particular complexities in accurately capturing this information,
particularly regarding how part-time and seasonal employees and
contractors should be counted. Some SERs stated that they collect
number of employees but do not verify that information.
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\633\ Id. at 31.
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The SBREFA Panel recommended (with respect to both the time in
business and number of employees data points), that if these data
points become part of the proposal, the Bureau continue to explore ways
to minimize the burden to small financial institutions of collecting
and reporting these data points.\634\
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\634\ Id. at 46.
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A large majority of industry stakeholders commenting on the SBREFA
Outline opposed the inclusion of any of the discretionary data points,
including number of employees. One trade association stated that this
data point would frustrate small business applicants, particularly if
they have to apply full-time employee calculation formulas. Several
stakeholders discussed the difficulty of defining a number of employees
data point, suggesting that complex rules would be necessary for how to
count part-time and seasonal employees, as well as contractors. Another
commenter suggested that verifying this information would be extremely
difficult. Industry commenters also explained that most financial
institutions do not collect this information now, and several pointed
out that these data are not useful for evaluating credit risk. Another
stated that number of employees is not a meaningful figure across
industries, given the use of contractors and part-time employees. One
commenter pointed out that the many sole proprietorships and non-
employee firms mean that this number will often be zero. One financial
institution stated that it does collect this information now, but does
not verify it.
Community groups were strongly in favor of including a number of
employees data point. One group stated that the number of employees
data would help provide a greater understanding of microbusinesses,
typically defined in terms ranging from less than five to ten
employees, one or more of whom is the owner. Another suggested that the
Bureau collect the total number of employees and number of owners
separately, which it said would avoid the problem found in PPP data
where owners mistakenly reported themselves as employees. This same
commenter stated that user testing and guidance would be necessary to
ensure that the number of employees is reported accurately and
consistently. However, one community development fund that supported
the collection of the other discretionary data points opposed
collection of the number of employees. This stakeholder stated that
there is little research support for direct job creation/retention as
the primary impact of small business assistance, and that the scholarly
consensus suggests the economic impacts of small firms are related to
their capacity to improve local entrepreneurial networks and create
ecosystems that are desired and sought out by bigger firms. The
commenter then stated that by having covered financial institutions
report on job counts, the Bureau would be implicitly reinforcing the
inaccurate notion that employment is a key dimension of small business
assistance.
Proposed Rule
Proposed Sec. 1002.107(a)(16) would require financial institutions
to report the number of non-owners working for the applicant. Although
some SERs and other stakeholders questioned the usefulness of
employment data for 1071's purposes, the Bureau continues to believe
that this information would be particularly helpful in fulfilling the
business and community development purpose of section 1071. Information
on the number of workers should help data users assess community
development impacts by allowing better understanding of the number of
jobs affected. In addition, in order to avoid mistaken over-reporting
of workers, the proposed regulation would make clear that only non-
owners would be reported as workers.
Proposed comment 107(a)(16)-1 would discuss the collection of the
number of workers. As discussed above, several SERs and other
stakeholders suggested that there could be particular complexities in
accurately capturing this information, particularly regarding how part-
time and seasonal workers and contractors should be counted. To help
alleviate these concerns, the proposed comment would state that in
collecting the number of workers from an applicant, the financial
institution would explain that full-time, part-time, and seasonal
workers, as well as contractors who work primarily for the applicant,
would be counted as workers, but principal owners of the business would
not. If asked, the financial institution would explain that volunteers
would not be counted as workers. This treatment of part-time, seasonal,
contract, and volunteer workers would follow the SBA's method for
counting employees,\635\ with minor simplifications. The Bureau
believes that this guidance would allow financial institutions that
originate SBA-guaranteed loans to use the same number of workers data
for both the loan guarantee program and 1071 reporting. The Bureau
seeks comment on whether further modifications to the number of workers
data point are needed to facilitate this operational simplification.
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\635\ See 13 CFR 121.106(a).
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Proposed comment 107(a)(16)-1 would also explain that workers for
affiliates of the applicant would only be counted if the financial
institution were also collecting the affiliates' gross annual revenue.
The Bureau believes that this coordination between these two data
points would facilitate compliance and yield more consistent data.
The proposed comment would further explain that the financial
institution may rely on statements of or information provided by the
applicant in collecting and reporting number of workers, but if the
financial institution verifies the number of workers provided by the
applicant, it must report the verified information. This guidance would
address the concerns raised about the difficulty of verification. The
Bureau believes that allowing financial institutions to rely on
applicant-
[[Page 56469]]
provided information will sufficiently safeguard accuracy such that the
resulting data will aid in fulfilling the purposes of 1071. However,
the Bureau also believes that reporting the verified number of workers
when the financial institution already possesses that information would
not be operationally difficult, and would enhance the accuracy of the
information collected.
Finally, proposed comment 107(a)(16)-1 would also provide sample
language that a financial institution could use to ask about the number
of workers, if it does not collect the number of workers by another
method. The Bureau understands that, as discussed above, financial
institutions engaged in SBA lending are already collecting employee
information to apply the SBA's size standards. However, SBA lending
represents only a small percentage of the small business credit market.
Given the difficulty for financial institutions in potentially
requesting this information of all applicants, the Bureau provides the
sample language in the proposed comment, which implements the
simplified version of the SBA definition presented earlier in the
proposed comment. The Bureau believes that permitting use of the model
question would facilitate compliance. The Bureau seeks comment on this
method of collection, and on the specific language proposed.
Proposed comment 107(a)(16)-2 would first clarify that a financial
institution shall maintain procedures reasonably designed to collect
applicant-provided information, including the number of workers of the
applicant. The proposed comment would then state that if a financial
institution is nonetheless unable to collect or determine the number of
workers of the applicant, the financial institution reports that the
number of workers is ``not provided by applicant and otherwise
undetermined.'' The Bureau believes that this approach would reduce the
burden on financial institutions that are unable to collect or
determine the number of workers of the applicant, particularly when an
application is denied or withdrawn early in the application process.
The Bureau seeks comment on its proposed approach to the number of
workers data point, as well as on the specific requests for comment
above. The Bureau also seeks comment on whether financial institutions
collect information about the number of workers from applicants using
definitions other than the SBA's, and how the collection of this data
point could best be integrated with those collections of information.
107(a)(17) Time in Business
Background
ECOA section 704B(e)(2)(H) authorizes the Bureau to require
financial institutions to compile and maintain ``any additional data
that the Bureau determines would aid in fulfilling the purposes of
[section 1071].'' The Bureau believes that data providing the time in
business of a small business applicant would aid in fulfilling both the
business and community development and fair lending purposes of section
1071, as explained below.
SBREFA Proposal Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau stated that it was considering
proposing to include as a discretionary data point time in business of
the applicant (as of the date of application), expressed in years, or
months if less than one year.\636\ The Bureau stated that time-in-
business information could help explain differences in underwriting
risk among small business applicants and thus avoid misinterpretation
of the section 1071 dataset by distinguishing potentially riskier new
businesses from less risky established businesses. Time-in-business
information could also provide a better measurement of community
development effects, in terms of number of start-ups or other
relatively new businesses seeking and obtaining financing. The Bureau
stated that a financial institution may choose to verify the time in
business provided by an applicant as part of its normal course of
business. If the financial institution does not verify the time in
business provided by the applicant, the financial institution would
report the time in business provided by the applicant. If the financial
institution does verify the time in business provided by the applicant,
it would report the verified information.
---------------------------------------------------------------------------
\636\ SBREFA Outline at 34-35.
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Many SERs currently collect time-in-business information,
explaining that time-in-business information is valuable for measuring
risk in underwriting.\637\ However, some SERs collect this information
on their application forms or keep it as part of a general narrative in
a credit memorandum about the application, but do not retain it as a
specific data field in their systems. Some SERs capture time-in-
business information by recording the year, or month/day/year, of
incorporation; others capture it as the number of years the applicant
has been in business. One SER stated that they do not support the
inclusion of time in business as a data point in the NPRM, although
they could collect this information.
---------------------------------------------------------------------------
\637\ SBREFA Panel Report at 31.
---------------------------------------------------------------------------
Several SERs stated that they use State incorporation filings to
determine or verify time in business. Some SERs explained that they
view a business as a start-up if it has been in business either less
than two or less than three years. For one SER, time in business is
relevant for the specific line of business for which financing is
sought, rather than the length of time the applicant has been in some
business generally. Another SER suggested that the Bureau use ranges
for time-in-business reporting, similar to a suggested method for
collecting and reporting gross annual revenue.
The SBREFA Panel recommended (with respect to both the time in
business and number of employees data points), that if these data
points become part of the proposal, the Bureau continue to explore ways
to minimize the burden to small financial institutions of collecting
and reporting these data points.\638\
---------------------------------------------------------------------------
\638\ Id. at 46.
---------------------------------------------------------------------------
Community group stakeholders supported the inclusion of the time-
in-business data point, stating that start-ups and younger businesses
often face challenges accessing credit, and having time-in-business
data would be especially critical to exploring gender and racial
disparities and fostering equitable access to affordable loan capital.
Two industry stakeholders supported inclusion, stating that time in
business is a key underwriting factor and could explain credit
disparities. One community group stakeholder agreed, stating that time
in business and other discretionary data points must be accounted for
so credit providers cannot, as they said HMDA reporters have done for
years, hide behind data not collected as justification for their
lending disparities.
A large majority of industry stakeholders opposed all discretionary
data points, including time in business. One industry stakeholder
focused specifically on the time-in-business data point, stating that
there are too many variables in the data point to be easily and clearly
defined for collection. That stakeholder provided examples of
complications in collection of the data point, such as (1) the time the
entity has existed or existed under the current ownership, (2) how much
experience the owners have had in this business or closely related
fields, (3) if the
[[Page 56470]]
experience is in closely related fields how close must they be, (4)
whether the entity has history but is being purchased using loan funds
by ownership with little experience, and (5) whether industry should
report how long the existing management structure has been in place. It
then requested that the Bureau drop this data point or make the options
very simple.
Industry stakeholders reported different ways that they currently
collect and use time-in-business information. Stakeholders report that
the information is not universally collected and may be collected using
different formats, even within a single institution. A trade
association suggested that reporting time in business should be
optional. One stakeholder said that it verifies the data using
Secretary of State or other third-party information, and that an
applicant that does not meet the time-in-business requirement for a
product may be automatically rejected. Two other stakeholders stated
that they focus on the overall experience of the ownership or
management, rather than the age of the business.
Proposed Rule
Proposed Sec. 1002.107(a)(17) would require a financial
institution to collect and report the time the applicant has been in
business, described in whole years, as relied on or collected by the
financial institution. Proposed Sec. 1002.107(a)(17) would require the
data be reported in whole years, rather than ranges of time, as
suggested by a SER and a stakeholder, because a financial institution
would have a definite number of years if it collects this information,
and the Bureau believes that would make the data more granular and
useful.
The Bureau continues to believe that time in business would likely
advance both statutory purposes of 1071. Research illustrates, and
commenters have emphasized, the role that start-ups and new businesses
play in the business ecosystem and in promoting important community
development aims, such as creating new jobs.\639\ Financial
institutions often have special credit policies regarding start-ups and
other young businesses, including whether the institution will extend
credit to start-ups at all, the type(s) of credit products start-ups
and new businesses can apply for, and the amount of credit for which
they can be approved. Studies generally show that start-ups experience
greater difficulty in accessing credit,\640\ and one community group
stakeholder made the same point. In addition, one study suggested that
Black- and Hispanic-owned firms are under-represented in terms of firms
that have external financing, have lower levels of liquidity in their
early years, and have higher rates of exiting the market within the
first three years.\641\ In regard to the facilitation of fair lending
analyses, time-in-business data would provide a useful control in fair
lending analyses to identify similarly situated applicants and
eliminate some false positives, while also allowing monitoring of
potential disparate treatment of minority- and women-owned start-ups
and relatively new businesses. In addition, many SERs reported that
time-in-business information is valuable for measuring risk in
underwriting, and they did not limit this observation to start-ups and
new businesses. The Bureau also believes that collecting time-in-
business information generally, rather than in the first few years,
would provide useful data for understanding the relative maturity of
small businesses in different communities.
---------------------------------------------------------------------------
\639\ See, e.g., Small Bus. Admin., 2018 Small Business
Profiles, at 1-2 (2018), https://www.sba.gov/advocacy/2018-small-business-profiles-states-and-territories?utm_medium=email&utm_source=govdelivery; John
Haltiwanger et al., Who Creates Jobs? Small versus Large versus
Young, The Review of Economics and Statistics, 95(2), at 347-61
(2013), https://direct.mit.edu/rest/article/95/2/347/58100/Who-Creates-Jobs-Small-versus-Large-versus-Young.
\640\ For example, a Federal Reserve Bank of New York report,
based on data from the 2016 Small Business Credit Surveys that
included information from 12 Federal Reserve Banks, provides
statistics on how start-ups are less likely to receive credit as
compared to mature businesses, even with comparable credit scores.
See Fed. Reserve Bank of N.Y., Small Business Credit Survey: Report
on Start-up Firms, at iv (2017), https://www.newyorkfed.org/medialibrary/media/smallbusiness/2016/SBCS-Report-StartupFirms-2016.pdf.
\641\ J.P. Morgan Chase, Small Business Owner Race, Liquidity
and Survival (July 2020), https://www.jpmorganchase.com/content/dam/jpmc/jpmorgan-chase-and-co/institute/pdf/institute-small-business-owner-race-report.pdf.
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The Bureau believes that time-in-business data would benefit data
users, including financial institutions, policymakers, and communities.
Such data would allow data users to better identify the proportion of
small businesses seeking credit that are start-ups or relatively new
businesses, the type(s) of credit that is offered and provided to
start-ups and newer businesses, the geographic makeup of those
businesses, the types of financial institutions that are reaching such
businesses, and where communities might focus business development
efforts. The data may also aid policymakers in addressing issues
impacting the growth of small start-ups. The data, particularly as to
unmet demand, could help interested financial institutions identify
lending opportunities to reach more start-ups and new businesses,
promoting both business and community development.
In addition, as some of the stakeholders suggested, the Bureau
believes that the inclusion of time-in-business data could help
mitigate the concerns of data misrepresentation. For example, data
indicating that a small business applicant is a start-up with little
experience or financial history could provide a legitimate business
explanation for why the financial institution denied the application or
approved it for less credit than was applied for. Therefore, time-in-
business data may help to explain the credit decision made by a
financial institution, which may address any concerns of data
misrepresentation.
The Bureau is not proposing to make this data field optional, as
suggested by a trade association. The Bureau is concerned that, if it
were to do so, very little data would be reported.
As explained above, the SBREFA Panel recommended that the Bureau
explore ways to minimize the burden on small financial institutions of
collecting and reporting the time-in-business data point. SERs and
industry stakeholders reported different ways that they currently
collect and use time-in-business information, reporting that the
information is not universally collected and may be collected using
different formats, even within a single institution. The Bureau
believes that by allowing financial institutions to report the time in
business that they relied on in making their credit decisions, the
burden on the financial institution (of any size) could be reduced,
while the resulting information would still aid in fulfilling the
purposes of section 1071. Although industry commenters overwhelmingly
expressed concern about the burden associated with any discretionary
data points as a general matter, the Bureau believes that time-in-
business information can be made relatively easy for financial
institutions to collect if the Bureau leverages the methods currently
in use by individual financial institutions. As the SERs and
stakeholders explained, many or possibly most financial institutions
already collect time-in-business information for underwriting purposes
or to determine general eligibility, though the format and specific
information collected vary by institution \642\ and may relate to owner
[[Page 56471]]
or management experience rather than business longevity. Therefore, the
Bureau is proposing that financial institutions that collect time-in-
business information be required to report the time in business that
they relied on (or would have relied on, for applications that were
withdrawn prior to a credit decision) in making the credit decision. If
the financial institution collects time-in-business information that
reflects owner or management experience rather than business longevity,
the financial institution would report time in business using the
number it collects and relies on reflecting owner or management
experience. If the financial institution relies on verified
information, it reports the verified information. If it does not verify
the information, it reports the unverified information. Requiring
reporting of time in business ``relied on'' should avoid requiring
financial institutions that collect some version of this information to
change their practices or add extra procedures to collect the Bureau's
version of time in business. In addition, the Bureau believes that
collecting the actual information used by the financial institution to
evaluate the application would aid fair lending analysis. Furthermore,
the Bureau does not believe that the variations among the data
collected by individual institutions would interfere with the business
and community development purpose of 1071, because the information
would still be useful in identifying new ownership, management, and
businesses that may face credit challenges.
---------------------------------------------------------------------------
\642\ Of a limited sample of application forms the Bureau
reviewed from a variety of types of financial institutions, a
majority of forms contained some type of time-in-business field.
When the Bureau looked at lenders that have undergone a small
business fair lending exam from the Bureau, a few (but not the
majority) maintained data on time in business in their existing
systems. Examples of time-in-business reference points include time
of formation or registration, time under current ownership, and
history of financial records, recorded as either month and year or
just year.
---------------------------------------------------------------------------
In addition to providing some financial institutions with the
ability to avoid duplicative information gathering by simply reporting
the time in business relied on, the proposed data point would also
facilitate compliance for financial institutions that do not currently
collect or rely on time-in-business information by allowing them to use
the specific question provided in proposed comment 107(a)(17)-4, as
explained below. The Bureau believes that permitting these two proposed
methods for collection and reporting should accommodate different
institutional practices and reduce operational difficulty for financial
institutions in reporting this data point.
In order to clarify the potential use of the two methods (relied on
or collected) of reporting for the time-in-business data point,
proposed comment 107(a)(17)-1 would provide guidance on how to report
using either method. The proposed comment would explain that,
regardless of which method is used, the financial institution must
report the time in business in whole years, or indicate if a business
has not begun operating yet, or has been in operation for less than a
year. The Bureau believes that this reporting format would inform data
users of the maturity of the applicant businesses and signal which are
start-ups.
Proposed comment 107(a)(17)-1 would further explain that when the
financial institution relies on an applicant's time in business as part
of a credit decision, it reports the time in business relied on in
making the credit decision. However, the comment would further explain
that proposed Sec. 1002.107(a)(17) would not require the financial
institution to rely on an applicant's time in business in making a
credit decision. The Bureau believes that this guidance would make
clear that the requirement to collect and report applicants' time in
business would not change the financial institution's internal business
practices. A financial institution would only be required to report the
time in business relied on in making the credit decision if the
financial institution actually does rely on an applicant's time in
business in making its credit decision.
Proposed comment 107(a)(17)-1 would also explain that the financial
institution may rely on statements or information provided by the
applicant in collecting and reporting time in business; however,
pursuant to proposed Sec. 1002.107(b), if the financial institution
verifies the time in business provided by the applicant, it must report
the verified information. This guidance would apply whether the
financial institution relies on the time in business in making its
credit decision or not, although the Bureau believes that verification
would be very uncommon when the financial institution is not relying on
the information. The Bureau believes that allowing financial
institutions to rely on applicant-provided information will
sufficiently safeguard accuracy such that the resulting data will aid
in fulfilling the purposes of 1071. However, the Bureau also believes
that reporting the verified time in business when the financial
institution already possesses that information would not be
operationally difficult, and would enhance the accuracy of the
information collected and ensure that it was the information that the
financial institution relied on in making the credit decision.
Proposed comment 107(a)(17)-2 would provide instructions on how to
report the time in business relied on in making the credit decision.
The proposed comment would state that when a financial institution
evaluates an applicant's time in business as part of a credit decision,
it reports the time in business relied on in making the credit
decision. For example, the proposed comment would further explain, if
the financial institution relies on the number of years of experience
the applicant's owners have in the current line of business, the
financial institution reports that number of years as the time in
business. Similarly, if the financial institution relies on the number
of years that the applicant has existed, the financial institution
reports the number of years that the applicant has existed as the time
in business. Proposed comment 107(a)(17)-2 would then conclude by
stating that a financial institution reports the length of business
existence or experience duration that it relies on in making its credit
decision, and is not required to adopt any particular definition of
time in business. The Bureau believes that this proposed comment would
provide useful guidance on how a financial institution complies with
Sec. 1002.107(a)(17) when it relies on time in business and would help
such financial institutions avoid unnecessary compliance difficulties
by reporting information that they already possess.
Proposed comment 107(a)(17)-3 would state that a financial
institution relies on an applicant's time in business in making a
credit decision if the time in business was a factor in the credit
decision, even if it was not a dispositive factor. The comment would
provide the example that if the time in business is one of multiple
factors in the financial institution's credit decision, the financial
institution has relied on the time in business even if the financial
institution denies the application because one or more underwriting
requirements other than the time in business are not satisfied. The
Bureau believes that this guidance would help financial institutions to
understand how to comply correctly with proposed Sec. 1002.107(a)(17).
Proposed comment 107(a)(17)-4 would clarify that if the financial
institution does not rely on time in business in considering an
application, pursuant to proposed Sec. 1002.107(c)(1) it shall still
maintain procedures reasonably designed to collect applicant-provided
information, which
[[Page 56472]]
includes the applicant's time in business. The proposed comment would
explain that in collecting time in business from an applicant, the
financial institution complies with proposed Sec. 1002.107(a)(17) by
asking for the number of years that the applicant has been operating
the business it operates now. The proposed comment would further
explain that when the applicant has multiple owners with different
numbers of years operating that business, the financial institution
collects and reports the greatest number of years of any owner. As
discussed above, the Bureau believes that providing this clear
instruction on how to collect the time in business when a financial
institution does not do so now would avoid the potential complications
and difficulties described by the SERs and industry stakeholders in
collecting this data point. In addition, the Bureau notes that, as
would be made clear in proposed comment 107(a)(17)-1, a financial
institution would not need to verify an applicant's response to the
inquiry. Proposed comment 107(a)(17)-4 would then conclude by making
clear that the financial institution does not need to comply with the
instruction if it collects and relies on the time in business by
another method in making the credit decision.
Proposed comment 107(a)(17)-5 would explain that pursuant to
proposed Sec. 1002.107(c)(1) a financial institution shall maintain
reasonable procedures to collect information provided by the applicant,
which includes the time in business of the applicant, but if the
financial institution is unable to collect or determine the time in
business of the applicant, the financial institution reports that the
time in business is ``not provided by applicant and otherwise
undetermined.'' The Bureau believes that permitting use of this
response would facilitate compliance, particularly in situations in
which the application is denied or withdrawn early in the application
process.
The Bureau seeks comment on its proposed approach to this data
point. The Bureau also seeks comment on whether time-in-business
information may be less relevant or collectable for certain products or
situations (such as retailer-branded credit cards acquired at point of
sale) and whether reporting ``not applicable'' should be allowed in
those instances. In addition, the Bureau seeks comment on whether there
should be an upper limit on time in business--for example, to allow
reporting of ``over 20 years'' for any applicant of that duration,
rather than requiring reporting of a specific number of years.
107(a)(18) Minority-Owned Business Status
Background
ECOA section 704B(b) requires financial institutions to inquire
whether applicants for credit are minority-owned businesses and to
maintain a record of the responses to that inquiry separate from the
applications and accompanying information. Section 704B(c) provides
that applicants for credit may refuse to provide information requested
pursuant to 704B(b). The Bureau is proposing Sec. 1002.107(a)(18) to
address how a financial institution would collect and report an
applicant's minority-owned business status.
SBREFA Proposal Under Consideration and Feedback
In the SBREFA Outline, the Bureau stated that it was considering
proposing that financial institutions be permitted to collect and
report minority-owned business status solely based on applicant self-
reporting and that the Bureau was not considering requiring reporting
based on visual observation and/or surname.\643\ The Bureau also stated
that it was considering proposing that the right to refuse under ECOA
section 704B(c) apply to the financial institution's specific inquiries
regarding minority-owned business status as well as women-owned status
and the principal owners' race, sex, and ethnicity
---------------------------------------------------------------------------
\643\ SBREFA Outline at 25-26.
---------------------------------------------------------------------------
Several SERs supported this approach and urged the Bureau to
require collection and reporting of minority-owned business status
based only on the information the applicant provides (i.e., self-
reporting).\644\ SERs also expressed concerns about the difficulties
and costs that may be associated with collecting minority-owned
business status on some basis other than applicant self-reporting. For
example, although many SERs indicated that they review some ownership
information about applicants in order to obtain guarantees or for other
reasons, most of those SERs said that they do not review the accrual of
net profits and losses and some said that they do not review
information related to who controls an applicant. One SER said that
determining ownership is relatively straightforward, but the issue of
control can be subjective. One SER said that it would not be able to
determine who controlled an applicant and that an applicant would need
to self-report that information. Another SER noted that some small
business applicants do not have simple ownership structures. A
different SER stated that some financial institutions do not meet in
person with all of the owners of small business applicants.
---------------------------------------------------------------------------
\644\ SBREFA Panel Report at 26.
---------------------------------------------------------------------------
Other industry stakeholders providing feedback on the SBREFA
Outline also supported collection and reporting of minority-owned
business status based only on applicant self-reporting and noted
several challenges with reporting this data point based on visual
observation and/or surname. Some industry commenters stated that it
would not be possible to report minority-owned business status based on
visual observation and/or surname in at least some circumstances.
Others expressed concerns about the cost and time required to do so.
One industry commenter noted that the tracking of ownership and other
information needed to report based on visual observation and/or surname
would be laborious. Another commenter noted that some financial
institutions do not obtain the information necessary to make the
determinations that would underlie a visual observation requirement
(i.e., information about ownership, control, etc.). One commenter
specifically noted that the statute only requires financial
institutions to ``inquire'' about minority-owned business status.
Conversely, a community group opposed reporting based only on applicant
self-reporting.
Some commenters stated that financial institutions should not be
required to collect or report this information at all, or that they
should not be required to collect or report it in certain situations,
such as when a trust or other entity owns or controls an applicant.
Some SERs and a few other commenters said that the Bureau should
create a tool or otherwise arrange for applicants to self-report, at
least, demographic information (namely, minority-owned business status
and women-owned business status as well as the ethnicity, race, and sex
of principal owners) directly to the Bureau or to a third-party that
maintains a database of such information.
Some SERs were concerned that, if notified of their right to
refuse, applicants may not provide protected demographic information,
thus limiting the usefulness of 1071 data. One SER and several other
commenters similarly agreed with the Bureau's proposal under
consideration to limit the right to refuse to applicants' protected
demographic information only. However, three commenters opined that the
Bureau's approach was too limited and that the right to refuse should
apply to small business status as well as other data
[[Page 56473]]
points. Several SERs requested that the Bureau provide sample language
for use in any disclosure and collection forms in which an applicant's
right to refuse is stated, so that applicants understand why lenders
are requesting protected demographic information and how the
information will be used. Two SERs asked that the Bureau provide sample
language in English as well as in other languages, such as Spanish.
The SBREFA Panel recommended that the Bureau consider creating
sample data collection forms that, to the extent possible, simply and
clearly explain the information being requested for purposes of this
data point. The SBREFA Panel recommended that the Bureau consider
developing sample disclosure language that financial institutions may
use to provide some context as to why applicants are being asked to
provide protected demographic information, in order to encourage
applicants to respond. It also said that the Bureau should additionally
consider providing these sample data collection forms in other
languages, such as Spanish.\645\
---------------------------------------------------------------------------
\645\ Id. at 45.
---------------------------------------------------------------------------
Proposed Rule
Consistent with its approach during the SBREFA process, proposed
Sec. 1002.107(a)(18) would require financial institutions to collect
and report whether an applicant is a minority-owned business. Proposed
Sec. 1002.107(a)(18) would also require financial institutions to
collect and report whether minority-owned business status is being
reported based on previously collected data pursuant to proposed Sec.
1002.107(c)(2). It would also require that when the financial
institution requests minority-owned business status from an applicant,
the financial institution inform the applicant that the financial
institution cannot discriminate on the basis of the applicant's
minority-owned business status, or on whether the applicant provides
this information. Finally, proposed Sec. 1002.107(a)(18) would refer
to proposed appendix F for additional details regarding how financial
institutions are required to collect and report minority-owned business
status. Proposed appendix F would include a requirement that a
financial institution inform an applicant that the applicant is not
required to respond to the financial institution's questions regarding
the applicant's minority-owned business status and women-owned business
status, and a prohibition on financial institutions requiring
applicants to provide this information.\646\ Consistent with the SBREFA
Panel's recommendation, proposed appendix E, which is a sample data
collection form, would include a question about minority-owned business
status and related information to assist applicants with responding to
the question.\647\
---------------------------------------------------------------------------
\646\ Proposed appendix G would include a similar requirement to
notify applicants that they are not required to provide information
regarding principal owners' ethnicity, race, and sex and a similar
prohibition on financial institutions requiring that applicants
provide such information.
\647\ The Bureau seeks additional comment regarding foreign
language forms and notices in the section-by-section analysis of
proposed appendix E below.
---------------------------------------------------------------------------
Proposed comment 107(a)(18)-1 would clarify that a financial
institution would be required to ask an applicant if it is a minority-
owned business for each covered application unless the financial
institution is permitted to report minority-owned business status based
on previously collected data. Additionally, the financial institution
would be required to permit an applicant to refuse to answer the
financial institution's inquiry and to inform the applicant that it is
not required to provide the information. The financial institution
would report the applicant's response, its refusal to answer the
inquiry (such as when the applicant indicates that it does not wish to
provide the requested information), or its failure to respond (such as
when the applicant fails to submit a data collection form) to the
inquiry. See proposed appendix F for additional instructions on how the
Bureau proposes that financial institutions collect and report
minority-owned business status.
Proposed comment 107(a)(18)-2 would explain that a financial
institution must inform the applicant that the financial institution
cannot discriminate on the basis of an applicant's minority-owned
business status or on whether the applicant provides the information.
It would also clarify that a financial institution may combine this
non-discrimination notice regarding minority-owned business status with
the similar non-discrimination notices that a financial institution is
required to provide when requesting women-owned business status and a
principal owner's ethnicity, race, and sex if a financial institution
requests minority-owned business status, women-owned business status,
and/or a principal owner's ethnicity, race, and sex in the same data
collection form or at the same time.
Proposed comment 107(a)(18)-3 would explain how, pursuant to
proposed Sec. 1002.111(b), financial institutions must record an
applicant's response regarding minority-owned business status pursuant
to proposed Sec. 1002.107(a)(18) separate from the application and
accompanying information. This proposed comment would also provide
examples of how responses could be recorded separately from the
application and accompanying information.
Proposed comment 107(a)(18)-4 would state that pursuant to proposed
Sec. 1002.107(c)(1), a financial institution shall maintain procedures
reasonably designed to collect applicant-provided information, which
includes the applicant's minority-owned business status. However, if a
financial institution does not receive a response to its inquiry, the
financial institution would report that the applicant's minority-owned
business status is ``not provided by applicant.''
Proposed comment 107(a)(18)-5 would state that notwithstanding
proposed Sec. 1002.107(b) (regarding verification of applicant-
provided information), a financial institution would report the
applicant's response, its refusal to answer the inquiry, or its failure
to respond to the inquiry pursuant to proposed Sec. 1002.107(a)(18),
even if the financial institution verifies or otherwise obtains an
applicant's minority-owned business status for other purposes.
Moreover, as proposed in the instructions in appendix F, a financial
institution would not be required or permitted to verify the
applicant's response to the financial institution's inquiry pursuant to
proposed Sec. 1002.107(a)(18) regarding minority-owned business
status.
Proposed comment 107(a)(18)-6 would clarify that a financial
institution does not report minority-owned business status based on
visual observation, surname, or any basis other than the applicant's
response to the inquiry that the financial institution makes to satisfy
Sec. 1002.107(a)(18) or, if the financial institution is permitted to
report based on previously collected data, on the basis of the
applicant's response to the inquiry that the financial institution
previously made to satisfy Sec. 1002.107(a)(18).
Proposed comment 107(a)(18)-7 would clarify that a financial
institution may report minority-owned business status based on
previously collected data if the financial institution is permitted to
do so pursuant to proposed Sec. 1002.107(c)(2) and its commentary.
Consistent with its approach during the SBREFA process, the Bureau
is not proposing that financial institutions collect or report
minority-owned
[[Page 56474]]
business status based on visual observation, surname, or any method
other than an applicant-provided response to a specific inquiry asked
for purposes of proposed Sec. 1002.107(a)(18). Similarly, the Bureau
is not proposing that financial institutions be permitted or required
to verify an applicant's response. Although the Bureau is proposing
that financial institutions collect and report a principal owner's
ethnicity and race based on visual observation and/or surname in
certain circumstances, the Bureau believes that there would be
additional complexities and difficulties with attempting to collect and
report minority-owned business status based on visual observation and/
or surname. Some of these additional difficulties arise because the
financial institution may need to determine who controls the applicant
as well as who owns the applicant and who realizes the net profits and
losses. Other difficulties arise from the fact that the financial
institution would need to know how each natural person it meets with in
person fits into the ownership structure of the applicant as well as
its control and profit structures. For example, it would not be
sufficient to know whether a natural person is an owner. The financial
institution also would need to know what percentage of the ownership
interest and control the natural person held and, if that ownership was
not more than 50 percent, the institution would need to know who owned
and controlled the remainder of the applicant. An additional
complication, specific to this data point, arises when the financial
institution is not able to visually observe absent owners. In these
cases, the financial institution may not be able to determine if the
business is a minority-owned business. Thus, even if a financial
institution has an in-person meeting with one or more natural persons
associated with an applicant, it may be difficult or impossible for the
financial institution to determine if an applicant is a minority-owned
business.
The Bureau seeks comment on its proposed approach to this data
point, including the proposed methods of collecting and reporting the
data. The Bureau also requests comment on whether additional
clarification regarding any aspect of this data point is needed. In
particular, the Bureau seeks comment on whether applicants are likely
to have difficulty understanding and determining the information they
are being asked to provide and, if so, how the Bureau may mitigate such
difficulties.
107(a)(19) Women-Owned Business Status
Background
ECOA section 704B(b) requires financial institutions to inquire
whether applicants for credit are women-owned businesses and to
maintain a record of the responses to that inquiry separate from the
applications and accompanying information. Section 704B(c) provides
that applicants for credit may refuse to provide information requested
pursuant to 704B(b). The Bureau is proposing Sec. 1002.107(a)(19) to
address how a financial institution would collect and report an
applicant's women-owned business status.
SBREFA Proposal Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau stated that it was considering
proposing that financial institutions be permitted to collect and
report women-owned business status solely based on applicant self-
reporting and that the Bureau was not considering requiring reporting
based on visual observation and/or surname.\648\ The Bureau also stated
that it was considering proposing that the right to refuse under ECOA
section 704B(c) apply to the financial institution's specific inquiries
regarding minority-owned business status as well as women-owned status
and the principal owners' race, sex, and ethnicity.
---------------------------------------------------------------------------
\648\ SBREFA Outline at 25-26.
---------------------------------------------------------------------------
As with collecting and reporting minority-owned business status,
several SERs supported this approach and urged the Bureau to require
collection and reporting of women-owned business status based only on
the information the applicant provides (i.e., self-reporting).\649\
SERs also expressed concerns about the difficulties and costs that may
be associated with collecting women-owned business status on some basis
other than applicant self-reporting. For example, although many SERs
indicated that they review some ownership information about applicants
in order to obtain guarantees or for other reasons, most of those SERs
said that they do not review the accrual of net profits and losses and
some said that they do not review information related to who controls
an applicant. One SER said that determining ownership is relatively
straightforward, but the issue of control can be subjective. One SER
said that it would not be able to determine who controlled an applicant
and that an applicant would need to self-report that information.
Another SER noted that some small business applicants do not have
simple ownership structures. A different SER stated that some financial
institutions do not meet in person with all of the owners of small
business applicants.
---------------------------------------------------------------------------
\649\ SBREFA Panel Report at 26.
---------------------------------------------------------------------------
As with collecting and reporting minority-owned business status,
other industry stakeholders providing feedback on the SBREFA Outline
also supported collection and reporting of women-owned business status
based only on applicant self-reporting and noted several challenges
with reporting this data point based on visual observation and/or
surname. Some industry commenters stated that it would not be possible
to report women-owned business status based on visual observation and/
or surname in, at least, some circumstances. Others expressed concerns
about the cost and time required to do so. One industry commenter noted
that the tracking of ownership and other information needed to report
based on visual observation and/or surname would be laborious. Another
commenter noted that some financial institutions do not obtain the
information necessary to make the determinations that would underlie a
visual observation requirement (i.e., information about ownership,
control, etc.). One commenter specifically noted that the statute only
requires financial institutions to ``inquire'' about women-owned
business status. Conversely, a community group opposed reporting based
only on applicant self-reporting.
Some commenters stated that financial institutions should not be
required to collect or report this information at all, or that they
should not be required to collect or report it in certain situations,
such as when a trust or other entity owns or controls an applicant.
Some SERs and a few other commenters said that the Bureau should
create a tool or otherwise arrange for applicants to self-report, at
least, demographic information (namely women-owned business status and
minority-owned business status as well as the ethnicity, race, and sex
of principal owners) directly to the Bureau or to a third-party that
maintains a database of such information.
Some SERs were concerned that, if notified of their right to
refuse, applicants may not provide protected demographic information,
thus limiting the usefulness of 1071 data. One SER and several other
commenters similarly agreed with the Bureau's proposal under
consideration to limit the right to refuse to applicants' protected
demographic information only. However, three
[[Page 56475]]
commenters opined that the Bureau's approach was too limited and that
the right to refuse should apply to small business status as well as
other data points. Several SERs requested that the Bureau provide
sample language for use in any disclosure and collection forms in which
an applicant's right to refuse is stated, so that applicants understand
why lenders are requesting protected demographic information and how
the information will be used. Two SERs asked that the Bureau provide
sample language in English as well as in other languages, such as
Spanish.
The SBREFA Panel recommended that the Bureau consider creating
sample data collection forms that, to the extent possible, simply and
clearly explain the information being requested for purposes of this
data point.\650\ The SBREFA Panel recommended that the Bureau consider
developing sample disclosure language that financial institutions may
use to provide some context as to why applicants are being asked to
provide protected demographic information, in order to encourage
applicants to respond.\651\ It also recommended that the Bureau should
consider providing these sample data collection forms in other
languages, such as Spanish.\652\
---------------------------------------------------------------------------
\650\ Id. at 45.
\651\ Id.
\652\ Id.
---------------------------------------------------------------------------
Proposed Rule
Consistent with its approach during the SBREFA process, proposed
Sec. 1002.107(a)(19) would require financial institutions to collect
and report whether an applicant is a women-owned business. Proposed
Sec. 1002.107(a)(19) would also require financial institutions to
collect and report whether women-owned business status is being
reported based on previously collected data pursuant to proposed Sec.
1002.107(c)(2). It would also require that when the financial
institution requests women-owned business status from an applicant, the
financial institution inform the applicant that the financial
institution cannot discriminate on the basis of the applicant's women-
owned business status, or on whether the applicant provides this
information. Finally, proposed Sec. 1002.107(a)(19) would refer to
proposed appendix F for additional details regarding how financial
institutions are required to collect and report women-owned business
status. Proposed appendix F would include a requirement that a
financial institution inform an applicant that the applicant is not
required to respond to the financial institution's questions regarding
the applicant's women-owned business status and minority-owned business
status, and a prohibition on financial institutions requiring
applicants to provide this information. Consistent with the SBREFA
Panel's recommendation, proposed appendix E, which is a sample data
collection form, would include a question about women-owned business
status and related information to assist applicants with responding to
the question.
Proposed comment 107(a)(19)-1 would clarify that a financial
institution would be required to ask an applicant if it is a women-
owned business for each covered application unless the financial
institution is permitted to report women-owned business status based on
previously collected data. Additionally, the financial institution
would be required to permit an applicant to refuse to answer the
financial institution's inquiry and to inform the applicant that it is
not required to provide the information. The financial institution
would report the applicant's response, its refusal to answer the
inquiry (such as when the applicant indicates that it does not wish to
provide the requested information), or its failure to respond (such as
when the applicant fails to submit a data collection form) to the
inquiry. See proposed appendix F for additional instructions on how the
Bureau proposes that financial institutions collect and report women-
owned business status.
Proposed comment 107(a)(19)-2 would explain that a financial
institution must inform the applicant that the financial institution
cannot discriminate on the basis of an applicant's women-owned business
status or on whether the applicant provides the information. It would
also clarify that a financial institution may combine this non-
discrimination notice regarding women-owned business status with the
similar non-discrimination notices that a financial institution is
required to provide when requesting minority-owned business status and
a principal owner's ethnicity, race, and sex if a financial institution
requests minority-owned business status, women-owned business status,
and/or a principal owner's ethnicity, race, and sex in the same data
collection form or at the same time.
Proposed comment 107(a)(19)-3 would explain how, pursuant to
proposed Sec. 1002.111(b), financial institutions must record an
applicant's response regarding women-owned business status pursuant to
proposed Sec. 1002.107(a)(19) separate from the application and
accompanying information. This proposed comment would also provide
examples of how responses could be recorded separately from the
application and accompanying information.
Proposed comment 107(a)(19)-4 would state that pursuant to proposed
Sec. 1002.107(c)(1), a financial institution shall maintain procedures
reasonably designed to collect applicant-provided information, which
includes the applicant's women-owned business status. However, if a
financial institution does not receive a response, the financial
institution would report that the applicant's women-owned business
status is ``not provided by applicant.''
Proposed comment 107(a)(19)-5 would state that notwithstanding
proposed Sec. 1002.107(b) (regarding verification of applicant-
provided information), a financial institution would report the
applicant's response, its refusal to answer the inquiry, or its failure
to respond to the inquiry pursuant to proposed Sec. 1002.107(a)(19),
even if the financial institution verifies or otherwise obtains an
applicant's women-owned business status for other purposes. Moreover,
as proposed in the instructions in appendix F, a financial institution
would not be required or permitted to verify the applicant's response
to the financial institution's inquiry pursuant to proposed Sec.
1002.107(a)(19) regarding women-owned business status. Thus, for
example, under the principle articulated in proposed comment
107(a)(19)-5, a financial institution could not second guess an
applicant's decision to determine whether it is a women-owned business
for purposes of proposed Sec. 1002.107(a)(19) based on the gender
identity of the principal owners. The Bureau seeks comment on whether
it would be useful to expressly codify this application of the
principle in the commentary.
Proposed comment 107(a)(19)-6 would clarify that a financial
institution does not report women-owned business status based on visual
observation, surname, or any basis other than the applicant's response
to the inquiry that the financial institution makes to satisfy proposed
Sec. 1002.107(a)(19) or, if the financial institution is permitted to
report based on previously collected data, on the basis of the
applicant's response to the inquiry that the financial institution
previously made to satisfy proposed Sec. 1002.107(a)(19).
Proposed comment 107(a)(19)-7 would clarify that a financial
institution may report women-owned business status based on previously
collected
[[Page 56476]]
data if the financial institution is permitted to do so pursuant to
proposed Sec. 1002.107(c)(2) and its commentary.
Consistent with its approach during the SBREFA process, the Bureau
is not proposing that financial institutions collect or report women-
owned business status based on visual observation, surname, or any
method other than an applicant-provided response to a specific inquiry
asked for purposes of proposed Sec. 1002.107(a)(19). Similarly, the
Bureau is not proposing that financial institutions be permitted or
required to verify an applicant's response. Although the Bureau is
proposing that financial institutions collect and report a principal
owner's ethnicity and race based on visual observation and/or surname
in certain circumstances, the Bureau believes that there would be
additional complexities and difficulties with attempting to collect and
report women-owned business status based on visual observation and/or
surname. Some of these additional difficulties arise because the
financial institution may need to determine who controls the applicant
as well as who owns the applicant and who realizes the net profits and
losses. Other difficulties arise from the fact that the financial
institution would need to know how each natural person it meets with in
person fits into the ownership structure of the applicant as well as
its control and profit structures. For example, it would not be
sufficient to know whether a natural person is an owner. The financial
institution also would need to know what percentage of the ownership
interest and control the natural person held and, if that ownership was
not more than 50 percent, the institution would need to know who owned
and controlled the remainder of the applicant. An additional
complication, specific to this data point, arises when the financial
institution is not able to visually observe absent owners. In these
cases, the financial institution may not be able to determine if the
business is a women-owned business. Thus, even if a financial
institution has an in-person meeting with one or more natural persons
associated with an applicant, it may be difficult or impossible for the
financial institution to determine if an applicant is a women-owned
business.
The Bureau seeks comment on its proposed approach to this data
point, including the proposed methods of collecting and reporting the
data. The Bureau also requests comment on whether additional
clarification regarding any aspect of this data point is needed. In
particular, the Bureau seeks comment on whether applicants are likely
to have difficulty understanding and determining the information they
are being asked to provide and, if so, how the Bureau may mitigate such
difficulties.
107(a)(20) Ethnicity, Race, and Sex of Principal Owners
Background
ECOA section 704B(e)(2)(G) requires financial institutions to
compile and maintain certain information, including the race, sex, and
ethnicity of an applicant's principal owners. However, section 1071
does not set out what categories should be used when collecting and
reporting this information. The Bureau is proposing Sec.
1002.107(a)(20) to address how a financial institution would collect
and report the ethnicity, race, and sex of an applicant's principal
owners. See the section-by-section analysis of proposed Sec.
1002.102(o) above for a discussion of the definition of a principal
owner.
SBREFA Proposal Under Consideration and Feedback
In the SBREFA Outline, the Bureau stated that it was considering
proposing that financial institutions use the aggregate race, sex, and
ethnicity categories from Regulation C when requesting that applicants
provide race, sex, and ethnicity information of principal owners.\653\
---------------------------------------------------------------------------
\653\ SBREFA Outline at 32.
---------------------------------------------------------------------------
SERs were generally supportive of aligning the race, sex, and
ethnicity categories used for reporting demographic information about
principal owners in 1071 with the aggregate categories used in
Regulation C for HMDA.\654\ However, one SER stated that the Bureau
should consider revisiting the use of male and female as categories for
sex because gender is not binary. Additionally, some other
stakeholders, including community groups and a trade association, were
opposed to using the HMDA aggregate categories for reporting race and
ethnicity. Generally, these commenters opposed the use of the aggregate
categories because, they said, those categories could mask
discrimination and do not provide sufficient detail or context. These
commenters generally supported use of the HMDA disaggregated
subcategories for reporting a principal owner's race and ethnicity.
---------------------------------------------------------------------------
\654\ SBREFA Panel Report at 29-30.
---------------------------------------------------------------------------
Additionally, in the SBREFA Outline, the Bureau stated that it was
considering proposing that the collection and reporting of a principal
owner's race, sex, and ethnicity be based solely on applicant self-
reporting. The Bureau stated in the SBREFA Outline that it anticipated
that requiring reporting based on visual observation and/or surname
could create unwarranted compliance burdens in the context of small
business lending, although the Bureau sought feedback on the potential
challenges, costs, and benefits of implementing such a requirement. The
Bureau also stated in the SBREFA Outline that it was considering
developing a sample data collection form to assist industry in
collecting this information and to communicate an applicant's right to
refuse to provide such information.\655\
---------------------------------------------------------------------------
\655\ SBREFA Outline at 32.
---------------------------------------------------------------------------
SERs generally supported applicants' self-reporting of principal
owners' race, sex, and ethnicity and strongly preferred that financial
institutions not be required to report based on visual observation and/
or surname. Some SERs said financial institutions should not be
required to ``guess'' the race, sex, and ethnicity of principal owners,
remarking, among other things, that doing so is both extremely
difficult and ineffective, and that collecting demographic information
based on visual observation makes staff uncomfortable. Another SER said
that reporting demographic information based on visual observation and/
or surname is likely to introduce both error and bias to the process.
One SER stated that financial institutions do not always meet with all
principal owners of a business in person and that financial
institutions occasionally meet with a manager or officer who might not
be a principal owner. Conversely, another SER stated that when relying
on applicants to self-report demographic information, there are higher
rates of non-FEFF responses in the business lending context compared to
consumer residential lending. This SER suggested that the Bureau will
need to account for this disparity.
Other industry and trade association stakeholders that commented on
the SBREFA Outline also generally supported applicants' self-reporting
of principal owners' race, sex, and ethnicity and strongly preferred
that financial institutions not be required to report this information
based on visual observation and/or surname. Some of these commenters
noted that some financial institutions might not know who a business's
principal owners are, might not collect the information necessary to
determine who they are, or might not meet in person with principal
owners. Others asserted that reporting
[[Page 56477]]
based on visual observation and/or surname increases the cost and time
to process a small business loan, may result in inaccurate data, and
may create awkward situations or customer disputes. One trade
association argued that the statute only requires financial
institutions to ``inquire'' about a principal owner's race, sex, and
ethnicity. However, two community groups stated that financial
institutions should be permitted or required to report based on visual
observation and/or surname when an applicant does not provide the
information, and a CDFI stated that financial institutions should be
required to report race, sex, and ethnicity based on visual observation
and/or surname only when an applicant does not provide the information
and does not refuse to provide the information.
Two industry commenters suggested that the Bureau create a tool or
otherwise arrange for applicants to self-report, at least, demographic
information (namely minority-owned business status and women-owned
business status as well as the race, sex, and ethnicity of principal
owners) directly to the Bureau or to a third-party that maintains a
database of such information.
Some SERs were concerned that, if notified of their right to
refuse, applicants may not provide protected demographic information,
thus limiting the usefulness of 1071 data. One SER and several other
commenters similarly agreed with the Bureau's proposal under
consideration to limit the right to refuse to applicants' protected
demographic information only. However, three commenters opined that the
Bureau's approach was too limited and that the right to refuse should
apply to small business status as well as other data points. Several
SERs requested that the Bureau provide sample language for use in any
disclosure and collection forms in which an applicant's right to refuse
is stated, so that applicants understand why lenders are requesting
protected demographic information and how the information will be used.
Two SERs asked that the Bureau provide sample language in English as
well as in other languages, such as Spanish.
One trade association requested that reporting of a principal
owner's race, sex, and ethnicity not be required in certain situations,
such as when a principal owner is a trust or another entity.
Some SERs and other commenters requested that the Bureau develop a
form to assist financial institutions with collecting the race, sex,
and ethnicity of principal owners. One SER suggested developing a
sample data collection form similar to the one used for HMDA data
collection and including the same disclosures. One commenter noted that
the use of a model form may increase the uniformity and consistency of
reporting such demographic information. Another commenter suggested
that any model form should include an explanation of why the financial
institution is requesting the information and a statement of the
applicant's right to refuse to provide the information.\656\
---------------------------------------------------------------------------
\656\ For additional information related to SBREFA feedback on
the right to refuse, see the section-by-section analyses of proposed
Sec. 1002.107(a)(18) and (19) above.
---------------------------------------------------------------------------
The SBREFA Panel recommended that, in order to assist both small
financial institutions and small business applicants, the Bureau
consider creating sample data collection forms that, to the extent
possible, simply and clearly explain the information being requested
for purposes of this data point. The Panel also recommended that the
Bureau additionally consider providing such sample data collection
forms in other languages, such as Spanish.\657\
---------------------------------------------------------------------------
\657\ SBREFA Panel Report at 46.
---------------------------------------------------------------------------
Proposed Rule
Proposed Sec. 1002.107(a)(20) would require financial institutions
to collect and report the ethnicity, race, and sex \658\ of the
applicant's principal owners as well as whether this information is
being reported based on previously collected data pursuant to proposed
Sec. 1002.107(c)(2). It would also require financial institutions to
report whether the ethnicity and race are being reported by the
financial institution on the basis of visual observation or surname.
Proposed Sec. 1002.107(a)(20) would require financial institutions to
collect and report ethnicity, race, and sex data as prescribed in
proposed appendix G. Proposed appendix G would include a requirement
that a financial institution inform an applicant that the applicant is
not required to respond to the financial institution's questions
regarding its principal owners' ethnicity, race or sex and would also
include a prohibition on financial institutions requiring applicants to
provide this information. Proposed Sec. 1002.107(a)(20) would also
require that when the financial institution requests ethnicity, race,
and sex information from an applicant, the financial institution inform
the applicant that the financial institution cannot discriminate on the
basis of a principal owner's ethnicity, race, or sex, or on whether the
applicant provides this information. Consistent with the SBREFA Panel's
recommendation, the Bureau is proposing a sample data collection form
that financial institutions could use to collect ethnicity, race, and
sex information. See proposed appendix E.
---------------------------------------------------------------------------
\658\ While ECOA section 704B(e)(2)(G) uses ``race, sex, and
ethnicity,'' the Bureau has reordered them to ``ethnicity, race, and
sex'' for purposes of this proposal, so that they appear
alphabetically and for consistency with how they appear in
Regulation C.
---------------------------------------------------------------------------
Proposed Rule--Collecting Ethnicity, Race, and Sex, In General
Proposed comment 107(a)(20)-1 would clarify how a financial
institution collects ethnicity, race, and sex information. It would
state that unless a financial institution is permitted to report
ethnicity, race, and sex information based on previously collected data
pursuant to proposed Sec. 1002.107(c)(2), a financial institution must
ask an applicant to report its principal owners' ethnicity, race, and
sex for each covered application and that the financial institution
must permit an applicant to refuse to answer the financial
institution's inquiry. It would require financial institutions to
inform the applicant that it is not required to provide the
information. Proposed comment 107(a)(20)-1 would further clarify that
the financial institution must report the applicant's responses, its
refusal to answer the inquiries, or its failure to respond to the
inquiries, and explain that in certain situations, discussed in
proposed comments 107(a)(20)-7 and -8 and in appendix G, a financial
institution may also be required to report one or more principal
owners' ethnicity and race (but not sex) based on visual observation
and/or surname. Proposed comment 107(a)(20)-1 would cross-reference
proposed appendix G for additional instructions.
Proposed comment 107(a)(20)-2 would explain that a financial
institution must inform the applicant that the financial institution
shall not discriminate on the basis of a principal owner's ethnicity,
race, or sex or on whether the applicant provides that information. It
would also clarify that a financial institution may combine this non-
discrimination notice with the similar non-discrimination notices that
a financial institution would be required to provide when requesting
minority-owned business status and women-owned business status if a
financial institution requests minority-owned business status, women-
owned business status, and/or a principal owner's ethnicity, race, and
sex in the same data collection form or at the same time.
[[Page 56478]]
Proposed comment 107(a)(20)-3 would explain how, pursuant to
proposed Sec. 1002.111(b), financial institutions must record
applicants' responses regarding a principal owner's ethnicity, race,
and sex pursuant to Sec. 1002.107(a)(20) separate from the application
and accompanying information. This proposed comment would also provide
examples of how responses could be recorded separately from the
application and accompanying information.
Proposed comment 107(a)(20)-4 would clarify that a financial
institution would be required to maintain procedures reasonably
designed to collect applicant-provided information, including the
ethnicity, race, and sex of an applicant's principal owners pursuant to
proposed Sec. 1002.107(c)(1). However, if a financial institution is
nonetheless unable to collect the principal owners' ethnicity, race, or
sex from the applicant and if the financial institution is not required
to report the principal owners' ethnicity and race based on visual
observation and/or surname, the financial institution would report that
the principal owner's ethnicity, race, or sex (as applicable) is ``not
provided by applicant.''
Proposed comment 107(a)(20)-12 would clarify that a financial
institution would neither be required nor permitted to verify the
ethnicity, race, or sex information that the applicant provides for
purposes of proposed Sec. 1002.107(a)(20), even if the financial
institution verifies or otherwise obtains the ethnicity, race, or sex
of the applicant's principal owners for other purposes. Thus, for
example, under the principle articulated in proposed comment
107(a)(20)-12, a financial institution could not second guess an
applicant's decision to provide sex information for the applicant's
principal owners for purposes of Sec. 1002.107(a)(20) based on the
gender identity of the principal owners. The Bureau solicits comment on
whether it would be useful to expressly codify this application of the
principle in the commentary.
Additionally, the proposed comment would explain that, if an
applicant refuses to respond to the inquiry pursuant to proposed Sec.
1002.107(a)(20) or fails to respond to this inquiry, the financial
institution would report that the applicant declined to provide the
information or did not respond to the inquiry (as applicable), unless
the financial institution is required to report ethnicity and race
based on visual observation and/or surname. Finally, the proposed
comment would explain that the financial institution does not report
ethnicity, race, or sex pursuant to proposed Sec. 1002.107(a)(20)
based on information that the financial institution collects for other
purposes.
Proposed comment 107(a)(20)-5 would explain that generally an
applicant determines its principal owners and decides whether to
provide information about principal owners. It would further state
that, nonetheless, a financial institution may be required to report
ethnicity and race information based on visual observation and/or
surname and may need to determine if a natural person with whom the
financial institution meets in person is a principal owner. It would
explain how a financial institution determines who is a principal owner
in the event that the financial institution may be required to report
ethnicity and race information based on visual observation and/or
surname. It would also provide examples of how the financial
institution can make that determination and note that the financial
institution is not required to verify any responses regarding whether a
natural person is a principal owner.
The Bureau seeks comment on these general aspects of collecting and
reporting principal owners' ethnicity, race, and sex, including
comments on the challenges that financial institutions may have
implementing them.
Proposed Rule--Collecting Ethnicity and Race Using Aggregate Categories
and Disaggregated Subcategories
The Bureau is proposing that financial institutions request
principal owners' ethnicity and race using both aggregate categories as
well as disaggregated subcategories.
With respect to ethnicity data collection, the Bureau is proposing
to use the same aggregate categories (i.e., Hispanic or Latino and Not
Hispanic or Latino) and disaggregated subcategories as are used in
Regulation C. With respect to race data collection, the Bureau is
proposing to use the same aggregate categories as are used in
Regulation C: American Indian or Alaska Native; Asian; Black or African
American; Native Hawaiian or Other Pacific Islander; and White.
Regulation C also has disaggregated subcategories for the Asian race
category and the Native Hawaiian or Other Pacific Islander race
category. In addition, with respect to the American Indian or Alaska
Native race category, Regulation C invites an applicant to provide the
name of a principal or enrolled tribe. Similar to HMDA, the Bureau is
proposing to invite an applicant to provide the name of a principal or
enrolled tribe for each principal owner with respect to the Indian or
Alaska Native race category and to adopt the disaggregated
subcategories used in HMDA for the Asian race category and the Native
Hawaiian and Other Pacific Islander race category. In addition, the
Bureau is proposing to add disaggregated subcategories for the Black or
African American race category, which are not used when collecting data
pursuant to Regulation C.
OMB has issued standards for the classification of Federal data on
ethnicity and race.\659\ OMB's government-wide standards provide a
minimum standard for maintaining, collecting, and presenting data on
race and ethnicity for all Federal reporting purposes. These standards
have been developed to provide ``a common language for uniformity and
comparability in the collection and use of data on race and ethnicity
by Federal agencies.'' \660\[thinsp]The OMB standards provide the
following minimum categories for data on ethnicity and race: Two
minimum ethnicity categories (Hispanic or Latino; Not Hispanic or
Latino) and five minimum race categories (American Indian or Alaska
Native; Asian; Black or African American; Native Hawaiian or Other
Pacific Islander; and White). The aggregate categories for ethnicity
and race in Regulation C, which the Bureau is proposing to use in
subpart B, conform to the OMB standards.
---------------------------------------------------------------------------
\659\ Off. of Mgmt. & Budget, Revisions to the Standards for the
Classification of Federal Data on Race and Ethnicity, 62 FR 58782,
58782-90 (Oct. 30, 1997) (OMB Federal Data Standards on Race and
Ethnicity).
\660\ See id.
---------------------------------------------------------------------------
In addition to the minimum data categories for ethnicity and race,
the OMB Federal Data Standards on Race and Ethnicity provide additional
key principles. First, self-identification is the preferred means of
obtaining information about an individual's ethnicity and race, except
in instances where observer identification is more practical.\661\
Second, the collection of greater detail is encouraged as long as any
collection that uses more detail is organized in such a way that the
additional detail can be aggregated into the minimum aggregate
categories for data on ethnicity and race. More detailed reporting,
which can be aggregated to the minimum categories, may be used at the
agencies' discretion. Lastly, Federal agencies must produce as much
detailed information on ethnicity and race as possible; however,
Federal agencies shall not present data on detailed categories if doing
so would
[[Page 56479]]
compromise data quality or confidentiality standards.\662\
---------------------------------------------------------------------------
\661\ See id.
\662\ See id.
---------------------------------------------------------------------------
Although OMB received comments requesting the creation of a
separate Arab or Middle Eastern ethnicity category prior to the
adoption of the OMB Federal Data Standards on Race and Ethnicity in
1997, OMB accepted the Interagency Committee's recommendation not to
include one in the 1997 minimum standards for reporting of Federal data
on race and ethnicity. OMB noted that while it was adopting the
Interagency Committee's recommendation, it believed additional research
was needed to determine the best way to improve data on this population
group.\663\
---------------------------------------------------------------------------
\663\ 62 FR 58782 (Oct. 30, 1997).
---------------------------------------------------------------------------
In 2017, OMB requested comment on the Federal Interagency Working
Group for Research on Race and Ethnicity's (Working Group's) proposals
to update the OMB Federal Data Standards on Race and Ethnicity.\664\
The Working Group proposed adding a Middle Eastern or North African
classification to the Federal Data Standards on Race and Ethnicity and
to issue specific guidelines for the collection of detailed data for
American Indian or Alaska Native, Asian, Black or African American,
Hispanic or Latino, Native Hawaiian or Other Pacific Islander, and
White groups.\665\ The Working Group also considered whether race and
ethnicity should be collected using separate questions versus a
combined question.
---------------------------------------------------------------------------
\664\ 82 FR 12242 (Mar. 1, 2017).
\665\ See OMB Federal Data Standards on Race and Ethnicity.
---------------------------------------------------------------------------
In considering what to propose that financial institutions collect
and report with respect to the ethnicity and race of the applicant's
principal owners, the Bureau believes it is also important to consider
the data standards that the U.S. Census Bureau (Census Bureau) uses in
the Decennial Census. The definition of Hispanic or Latino origin used
in the 2010 and 2020 Census questionnaire refers to a person of Cuban,
Mexican, Puerto Rican, South or Central American, or other Spanish
culture or origin regardless of race.\666\ The 2010 and 2020 Census
disaggregated the Hispanic or Latino ethnicity into four categories
(Mexican, Mexican American, or Chicano; Puerto Rican; Cuban; and
Another Hispanic, Latino or Spanish origin) and included an area where
respondents could provide (i.e., write in) a specific Hispanic, Latino,
or Spanish origin group as additional information.\667\
---------------------------------------------------------------------------
\666\ See U.S. Census Bureau, 2010 Official Questionnaire,
https://www.census.gov/history/pdf/2010questionnaire.pdf (2010
Census Official Questionnaire), and U.S. Census Bureau, 2020
Official Questionnaire, https://www2.census.gov/programs-surveys/decennial/2020/technical-documentation/questionnaires-and-instructions/questionnaires/2020-informational-questionnaire.pdf
(2020 Census Official Questionnaire).
\667\ See 2010 Census Official Questionnaire and 2020 Census
Official Questionnaire.
---------------------------------------------------------------------------
The 2010 and 2020 Census questionnaires listed three of OMB's five
aggregate race categories (American Indian or Alaska Native; Black or
African American; and White). Although the questionnaires do not list
the aggregate race categories for Asian or for Native Hawaiian or Other
Pacific Islander, they do list the related disaggregated subcategories
for the Asian race category (i.e., Asian Indian, Chinese, Filipino,
Japanese, Korean, Vietnamese, Other Asian), and for the Native Hawaiian
and Other Pacific Islander race category (i.e., Native Hawaiian,
Chamorro,\668\ Samoan, Other Pacific Islander). These questionnaires
also included three areas where respondents could write in a specific
race: A specific Other Asian race, a specific Other Pacific Islander
race, or the name of an enrolled or principal tribe in the American
Indian or Alaska Native category.\669\ Additionally, the 2020 Census
allowed respondents to write in a specific origin for the White
category and for the Black or African American category. For
respondents who did not identify with any of the five minimum OMB race
categories, the Census Bureau included a sixth race category--Some
Other Race--on the 2010 and 2020 Census questionnaires. Respondents
could also select one or more race categories and write-in
options.\670\
---------------------------------------------------------------------------
\668\ The questionnaire for the 2010 Census included ``Guamanian
or Chamorro,'' but the questionnaire for the 2020 Census included
only ``Chamorro.''
\669\ See 2010 Census Official Questionnaire and 2020 Census
Official Questionnaire.
\670\ See id.
---------------------------------------------------------------------------
On February 28, 2017, the Census Bureau released its 2015 National
Content Test: Race and Ethnicity Analysis Report. The National Content
Test (NCT) provided the U.S. Census Bureau with empirical research to
contribute to the planning for the content of the 2020 Census' race/
ethnicity questions. The report presented findings to the Census Bureau
Director and executive staff on research conducted to assess optimal
design elements that could be used in question(s) on race and
ethnicity. It noted that Americans view ``race'' and ``ethnicity''
differently than in decades past and that a growing number of people
find the current race and ethnicity categories confusing, or they wish
to see their own specific group reflected on the Census questionnaire.
The NCT's research found that there have been a growing number of
people who do not identify with any of the official OMB race
categories, and that an increasing number of respondents have been
racially classified as ``Some Other Race.'' This was primarily because
of reporting by Hispanics who did not identify with any of the OMB race
categories, but it also noted that segments of other populations, such
as Afro-Caribbean and Middle Eastern or North African populations, did
not identify with any of the OMB race categories.\671\ The 2015
National Content Test: Race and Ethnicity Analysis Report concluded
that optimal design elements that may increase reporting, decrease item
non-response, and improve data accuracy and reliability include: (1) A
combined race and ethnicity question with detailed checkbox options;
(2) a separate ``Middle Eastern or North African'' response category;
and (3) instructions to ``Mark all that apply'' or ``Select all that
apply'' (instead of ``Mark [X] one or more boxes'').\672\
---------------------------------------------------------------------------
\671\ U.S. Census Bureau, 2015 National Content Test: Race and
Ethnicity Analysis Report, Executive Summary, at ix (Feb. 28, 2017),
https://www2.census.gov/programs-surveys/decennial/2020/program-management/final-analysis-reports/2015nct-race-ethnicity-analysis.pdf.
\672\ Id. at 83-85.
---------------------------------------------------------------------------
As discussed above, the Census Bureau did not ultimately
incorporate these design elements into the questionnaire for the 2020
Decennial Census. Instead, the questionnaire continued to ask about
ethnicity and race in two separate questions. While the questionnaire
did not provide detailed check box options for the White race category
or for the Black or African American race category, the questionnaire
did add write-in options and noted examples. For White, it noted
examples of German, Irish, English, Italian, Lebanese, and Egyptian.
For Black or African American, it noted examples of African American,
Jamaican, Haitian, Nigerian, Ethiopian, and Somali.\673\ Nonetheless,
as discussed below, the Bureau is requesting comment on whether the
approach and design elements set forth in the 2015 National Content
Test: Race and Ethnicity Report Analysis (whether in whole or in part)
would improve data collection that otherwise furthers section 1071's
purposes, improve self-identification of race and ethnicity by
applicants and response rates, or impose
[[Page 56480]]
burdens on financial institutions collecting and reporting this
information.
---------------------------------------------------------------------------
\673\ See 2020 Census Official Questionnaire.
---------------------------------------------------------------------------
Consistent with its approach during the SBREFA process, the Bureau
is proposing that financial institutions must permit applicants to
provide a principal owner's ethnicity and race using the aggregate
categories used for HMDA data collection. The Bureau also believes that
aligning the aggregate ethnicity and race categories for 1071 data
collection with the HMDA data collection will promote consistency and
may reduce potential confusion for applicants, financial institutions,
and other users of the data. As noted above, the feedback received on
the SBREFA Outline generally showed that SERs and commenters favored
such consistency.
However, the Bureau is also proposing that applicants must be
permitted to provide a principal owner's ethnicity and race using the
disaggregated subcategories used in HMDA data collection. With respect
to ethnicity data collection, the Bureau is proposing that applicants
must be permitted to provide a principal owner's ethnicity using the
disaggregated subcategories used in HMDA data collection. For race data
collection, the Bureau is proposing that applicants must be permitted
to provide a principal owner's race using the disaggregated
subcategories for the Asian race category and the Native Hawaiian or
Other Pacific Islander race category. Unlike HMDA, the Bureau is also
proposing that applicants must be permitted to provide a principal
owner's race using disaggregated subcategories for the Black or African
American race category. Lastly, similar to HMDA, the Bureau is
proposing to invite an applicant to provide the name of a principal or
enrolled tribe for each principal owner with respect to the American
Indian or Alaska Native race category.
This portion of proposed Sec. 1002.107(a)(20) differs from the
Bureau's SBREFA approach. The Bureau is proposing use of disaggregated
subcategories for 1071 data collection, in part, for consistency with
existing HMDA reporting requirements. Moreover, based on feedback
received during the SBREFA process from SERs and other stakeholders,
the Bureau believes that collection and reporting using disaggregated
subcategories could be beneficial when attempting to identify potential
discrimination or business and community development needs in
particular communities. While the Bureau recognizes that disaggregated
data may not be useful in analyzing potential discrimination where
financial institutions do not have a sufficient number of applicants or
borrowers within particular subgroups to permit reliable assessments of
whether unlawful discrimination may have occurred, disaggregated data
on ethnicity and race may help identify potentially discriminatory
lending patterns in situations in which the numbers are sufficient to
permit such fair lending assessments. Additionally, as suggested in the
2015 National Content Test: Race and Ethnicity Report Analysis, the use
of disaggregated subcategories may increase response rates.
Nonetheless, the Bureau acknowledges the concerns that some SERs
and other stakeholders raised regarding the collection and reporting of
disaggregated data. In particular, the Bureau understands that
including the disaggregated subcategories for four principal owners may
make data collection more difficult in certain situations, such as for
applications taken solely by telephone or for paper applications taken
at retail locations. Given these concerns, the Bureau seeks comment on
whether an accommodation should be made for certain application
scenarios, for example by permitting financial institutions to collect
ethnicity and race information using only the aggregate categories or
to permit financial institutions to collect ethnicity, race, and sex
information on only one principal owner in those scenarios.
Additionally, the Bureau notes that FinCEN's CDD rule excludes from
certain of its requirements point-of-sale transactions for the purchase
of retail goods or services up to a limit of $50,000.\674\ For the
reasons discussed in more detail in the section-by-section analysis of
proposed Sec. 1002.107(c)(1) below, the Bureau is not proposing to
take this approach for the 1071 rule given the different purposes and
requirements of the CDD rule (as well as FinCEN's related customer
identification program (CIP) rule) \675\ and section 1071. Nonetheless,
the Bureau seeks comment on whether covered applications taken at
retail locations, such as credit cards and lines of credit with a
credit limit under a specified amount (such as $50,000), should be
excepted from some or all of the requirement to obtain principal
owners' ethnicity, race, and sex information. For example, should
financial institutions only be required to ask about principal owners'
sex along with aggregate race and ethnicity categories (but not
disaggregated subcategories), or to ask about only one principal
owner's ethnicity, race, and sex for such applications?
---------------------------------------------------------------------------
\674\ 31 CFR 1010.230(h)(1)(i). The CDD exclusion for certain
POS transactions is based on the ``very low risk posed by opening
such accounts at [a] brick and mortar store.'' Fin. Crimes Enf't
Network, U.S. Dep't of Treasury, Guidance: Frequently Asked
Questions Regarding Customer Due Diligence Requirements for
Financial Institutions, at Q 29 (Apr. 3, 2018), https://www.fincen.gov/sites/default/files/2018-04/FinCEN_Guidance_CDD_FAQ_FINAL_508_2.pdf.
\675\ FinCEN's CIP rule does not include a point of sale
exclusion. While the rule permits verification of customer identity
information within a reasonable time after an account is opened, the
collection of required customer information must occur prior to
account opening. See 31 CFR 1020.220(a)(2)(i)(A) and (ii). For
credit card accounts, a bank may obtain identifying information
about a customer from a third-party source prior to extending credit
to the customer. 31 CFR 1020.220(a)(2)(i)(C).
---------------------------------------------------------------------------
The Bureau seeks comment on its proposed use of the HMDA aggregate
categories, the HMDA disaggregated subcategories (including the ability
to provide additional information if an applicant indicates that a
principal owner is Other Hispanic or Latino, Other Asian, or Other
Pacific Islander), and the addition of disaggregated subcategories for
the Black or African American category. Additionally, the Bureau seeks
comment regarding whether it would be helpful or appropriate to provide
additional clarification or to pursue a different approach regarding
the ability of a principal owner to identify as Other Hispanic or
Latino, Other Asian, or Other Pacific Islander or to provide additional
information if a principal owner is Other Hispanic or Latino, Other
Asian, or Other Pacific Islander. The Bureau also seeks comment on
whether any additional or different categories or subcategories should
be used for 1071 data collection, and whether the collection and
reporting of race and ethnicity should be combined into a single
question for purposes of 1071 data collection and reporting. The Bureau
further seeks comment on whether an additional category for Middle
Eastern or North African should be added and, if so, how this category
should be included and defined. In addition, the Bureau seeks comment
on whether disaggregated subcategories should be added for the
aggregate White category, and if so, what disaggregated subcategories
should be added and whether the applicant should be permitted to write
in or otherwise provide other disaggregated subcategories or additional
information. The Bureau seeks comment on whether the approach and
design elements set forth in the 2015 National Content Test: Race and
Ethnicity Report Analysis
[[Page 56481]]
would improve data collection or otherwise further section 1071's
purposes, as well as whether it would pose any particular burdens or
challenges for financial institutions collecting and reporting this
information. Finally, the Bureau seeks comment on whether, similar to
data collection pursuant to Regulation C, financial institutions should
be limited to reporting a specified number of aggregate categories and
disaggregated subcategories and, if so, whether such a limitation
should be described in the sample data collection form.
Proposed comment 107(a)(20)-6 would explain that applicants must be
permitted to provide a principal owner's ethnicity using aggregate
categories and disaggregated subcategories and would also list the
aggregate categories and disaggregated subcategories that applicants
must be permitted to use. Proposed comment 107(a)(20)-6 would also
explain that applicants must be permitted to select one, both, or none
of the aggregate categories and as many disaggregated subcategories as
the applicant chooses, even if the applicant does not select the
corresponding aggregate category. Proposed comment 107(a)(20)-6 would
state that, if an applicant provides ethnicity information for a
principal owner, the financial institution reports all of the aggregate
categories and disaggregated subcategories provided by the applicant,
and it would provide an example. The proposed comment would state that
a financial institution must also permit the applicant to refuse to
provide ethnicity information for one or more principal owners and
explain how a financial institution reports ethnicity information if an
applicant declines to provide the information or fails to respond.
Finally, the proposed comment would explain how a financial institution
reports ethnicity information if an applicant has fewer than four
principal owners, and it would provide an example.
Proposed comment 107(a)(20)-7 would explain that applicants must be
permitted to provide a principal owner's race using aggregate
categories and disaggregated subcategories and would also list the
aggregate categories and disaggregated subcategories that applicants
must be permitted to use. Proposed comment 107(a)(20)-7 would also
explain that applicants must be permitted to select one, more than one,
or none of the aggregate categories and as many disaggregated
subcategories as the applicant chooses, even if the applicant does not
select the corresponding aggregate category. Proposed comment
107(a)(20)-7 would explain that, if an applicant provides race
information for a principal owner, the financial institution reports
all of the aggregate categories and disaggregated subcategories
provided by the applicant, and it would provide an example. The
proposed comment would state that a financial institution must also
permit the applicant to refuse to provide race information for one or
more principal owners and explains how a financial institution reports
race information if an applicant declines to provide the information or
fails to respond. Finally, the proposed comment would explain how a
financial institution reports race information if an applicant has
fewer than four principal owners, and it would provide an example.
Proposed Rule--Collecting Sex
Federal, State, and local government agencies have been moving to
providing options for designating sex beyond the binary options of male
or female. At the Federal level, for example, the Department of State
has announced that it is planning to offer the option of a new gender
marker for non-binary, intersex, and gender non-conforming persons. It
will be available for passports and Consular Reports of Birth Abroad as
an alternative to male or female.\676\ The Food and Drug Administration
includes the gender options female, male, intersex, transgender, and
``prefer not to disclose'' on certain patient forms.\677\ A number of
States and the District of Columbia, as well as some local governments,
offer an alternative sex or gender designation to male and female
(e.g., ``X'') on government-issued documents and forms such as drivers'
licenses and identification cards, and in some cases birth
certificates.\678\
---------------------------------------------------------------------------
\676\ See U.S. Dep't of State, Proposing Changes to the
Department's Policies on Gender on U.S. Passports and Consular
Reports of Birth Abroad (June 30, 2021), https://www.state.gov/proposing-changes-to-the-departments-policies-on-gender-on-u-s-passports-and-consular-reports-of-birth-abroad/ abroad/.
\677\ See Food & Drug Admin., MedWatch forms FDA 3500 and 3500A
(Sept. 12, 2018) (approved under OMB No. 0910-0291), https://www.fda.gov/media/76299/download and https://www.fda.gov/media/69876/download.
\678\ See, e.g., Cal. S.B. 179, Gender identity: female, male or
nonbinary (Oct. 16, 2017), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB179; State of California
Dep't of Motor Vehicles, Driver's License or ID Card Updates,
https://www.dmv.ca.gov/portal/driver-licenses-identification-cards/updating-information-on-your-driver-license-or-identification-dl-id-card/ (last visited July 23, 2021); Colo. Dep't of Revenue, Change
of Sex Designation, https://drive.google.com/file/d/1PeYZd7U43ar6Flg8lFAT1Etg1EPdLVUy/view; State of Connecticut Dep't
of Motor Vehicles, Gender Designation on a License or Identification
Card, https://portal.ct.gov/-/media/DMV/20/29/B-385.pdf; District of
Columbia Dep't of Motor Vehicles, Procedure For Establishing or
Changing Gender Designation on a Driver License or Identification
Card (June 13, 2017), https://dmv.dc.gov/sites/default/files/dc/sites/dmv/publication/attachments/DC%20DMV%20Form%20Gender%20Self-Designation%20English.pdf, DC Driver License or Identification Card
Application (Jan. 2019), https://dmv.dc.gov/sites/default/files/dc/sites/dmv/publication/attachments/DMV%20BOE%20Application_2-25-19.pdf; Maine Bureau of Motor Vehicles, Gender Designation Form
(Nov. 4, 2019), https://www1.maine.gov/sos/bmv/forms/GENDER%20DESIGNATION%20FORM.pdf; State of Nevada Dep't of Motor
Vehicles, Name Changes, https://dmvnv.com/namechange.htm; State of
New Jersey Dep't of Health, Off. of Vital Statistics and Registry,
Request Form and Attestation (REG-L2) to Amend Sex Designation to
Reflect Gender Identity on a Birth Certificate--Adult (Feb. 2019),
https://www.nj.gov/health/forms/reg-l2_1.pdf; 2019 N.J. Sess. Law
Serv. ch. 271; New Mexico Motor Vehicle Div., Request for Sex
Designation Change, https://realfile.tax.newmexico.gov/mvd10237.pdf;
New Mexico Dep't of Health, Request to Change Gender Designation on
a Birth Certificate (Oct. 2019), https://www.nmhealth.org/publication/view/form/5429/; Virginia Dep't of Motor Vehicles,
Driver's License and Identification Card Application (July 1, 2021),
https://www.dmv.virginia.gov/webdoc/pdf/dl1p.pdf; Washington State
Dep't of Licensing, Change of Gender Designation (Nov. 2019),
https://www.dol.wa.gov/forms/520043.pdf; New York City Dep't of
Homeless Services, Off. of Policy, Procedures and Training,
Transgender, Non-binary, and Intersex Clients (July 15, 2019),
https://www1.nyc.gov/assets/dhs/downloads/pdf/dhs_policy_on_serving_transgender_non_binary_and_intersex_clients.pdf
.
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The Supreme Court's opinion last year in Bostock v. Clayton County
concluded that sex discrimination encompasses sexual orientation
discrimination and gender identity discrimination, and that these forms
of discrimination necessarily involve consideration of sex.\679\ It
reached this conclusion in the context of Title VII of the Civil Rights
Act of 1964, as amended,\680\ which prohibits sex discrimination in
employment.\681\ Following the issuance of the Supreme Court's opinion
and building on a 2016 letter the Bureau sent to an advocacy
organization,\682\ the Bureau issued an interpretive rule clarifying
that ECOA's and Regulation B's prohibition on discrimination based on
sex protects against discrimination based on sexual orientation, gender
identity, actual or perceived nonconformity with sex based or gender-
based stereotypes, and the sex of people associated with the
applicant.\683\ Other Federal agencies have similarly clarified that
other statutes that protect against
[[Page 56482]]
discrimination based on sex protect against discrimination based on
sexual orientation and gender identity.\684\
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\679\ See Bostock, 140 S. Ct. 1731.
\680\ 42 U.S.C. 2000e et seq.
\681\ Bostock, 140 S. Ct. 1731.
\682\ See Letter from Bureau of Consumer Fin. Prot., to Serv. &
Advocacy for GLBT Elders (SAGE) (Aug. 30, 2016), https://files.consumerfinance.gov/f/documents/cfpb_sage-response-letter_2021-02.pdf.
\683\ 86 FR 14363 (Mar. 16, 2021).
\684\ See, e.g., 86 FR 32637 (June 22, 2021) (Department of
Education interpreting Title IX of the Education Amendments of
1972); 86 FR 27984 (May 25, 2021) (Department of Health and Human
Services interpreting section 1557 of the Affordable Care Act);
Memorandum from Jeanine M. Worden, Acting Assistant Secretary for
Fair Housing and Equal Opportunity, Implementation of Executive
Order 13988 on the Enforcement of the Fair Housing Act (Feb. 11,
2021), https://www.hud.gov/sites/dfiles/PA/documents/HUD_Memo_EO13988.pdf (Department of Housing and Urban Development
interpreting the Fair Housing Act).
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Some other Federal agencies have also begun to re-consider how they
collect information on sex by including questions about sexual
orientation and gender identity as part of questions about sex. For
example, the Census Bureau released the Household Pulse Survey,\685\
which asked questions about sex assigned at birth, current gender
identity, and sexual orientation. Specifically, the Household Pulse
Survey includes the following three questions:
---------------------------------------------------------------------------
\685\ U.S. Census Bureau, Phase 3.2 Household Pulse Survey
(undated), https://www2.census.gov/programs-surveys/demo/technical-documentation/hhp/Phase_3.2_Household_Pulse_Survey_FINAL_ENGLISH.pdf.
1. What sex were you assigned at birth, on your original birth
certificate? (A respondent could provide a response of male or
female.)
2. Do you currently describe yourself as male, female or
transgender? (A respondent also could provide a response of ``none
of these.'')
3. Which of the following best represents how you think of
yourself?
In response to the third question, a respondent would select
from the following responses: (1) Gay or lesbian; (2) Straight, that
is not gay or lesbian; (3) Bisexual; (4) Something else; or (5) I
don't know.
Other Federal agencies and initiatives have encouraged sexual
orientation and gender identity data collection in health care
settings.\686\
---------------------------------------------------------------------------
\686\ See, e.g., Off. of Disease Prevention & Health Promotion,
Healthy People (2020), https://www.healthypeople.gov/2020/topics-objectives/topic/lesbian-gay-bisexual-and-transgender-health; Off.
of the Nat'l Coordinator of Health Info. Tech., 2021
Interoperability Standards Advisory (2021), https://www.healthit.gov/isa/sites/isa/files/inline-files/2021-ISA-Reference-Edition.pdf; Ctrs. for Disease Control & Prevention,
Collecting Sexual Orientation and Gender Identity Information (Apr.
1, 2020), https://www.cdc.gov/hiv/clinicians/transforming-health/health-care-providers/collecting-sexual-orientation.html.
Additionally, on April 1, 2021, the Department of Health and
Human Services' Administration for Community Living (ACL) published
a notice of its submission of a revised National Survey of Older
Americans Act Participants for OMB review and clearance. ACL
proposed to revise the existing survey to add a new rotating module
on COVID-19. In response to an earlier notice related to the survey,
ACL received a comment asking it to include survey response options
that include ``transgender'' or ``other'' with a write-in option. In
response to comments it received on an earlier notice, ACL indicated
that it was supporting an ad hoc panel that would be reviewing
measures and methodological issues related to measuring sex as a
non-binary construct, gender identity, and sexual orientation. ACL
indicated that it expected the panel to produce a consensus report
in December 2021, and that ACL anticipated using the report as a
basis for testing new survey questions. 86 FR 17153 (Apr. 1, 2021).
---------------------------------------------------------------------------
In light of the Bureau's recent ECOA interpretive rule, the
continued evolution of categories used for sex data collection purposes
at the Federal, State, and local government levels, and feedback on the
SBREFA Outline, the Bureau is proposing to collect information about
sex for purposes of section 1071 more expansively than was under
consideration in the SBREFA Outline. Specifically, the Bureau is
proposing adding an option for ``I prefer to self-describe'' (with the
ability of the applicant to write in or otherwise provide additional
information) for the principal owner's sex to accompany the existing
``male,'' ``female,'' and ``I do not wish to provide this information''
options currently used on the HMDA sample data collection form.
Proposed comment 107(a)(20)-8 would explain that an applicant must
be permitted to provide a principal owner's sex using one or more of
the following categories: Male, Female, and/or that the principal owner
prefers to self-describe their sex. It would further explain that, if
an applicant indicates that a principal owner prefers to self-describe
their sex, the financial institution would be required to permit the
applicant to provide additional information about the principal owner's
sex. The financial institution would report to the Bureau the
additional information provided by the applicant as free-form text.
Proposed comment 107(a)(20)-8 would state that a financial
institution must permit an applicant to select as many categories as
the applicant chooses and that the financial institution reports the
category or categories selected by the applicant, including any
additional information provided by the applicant, or reports that the
applicant refused to provide the information or failed to respond. It
would clarify that a financial institution is not permitted to report
sex based on visual observation, surname, or any basis other than the
applicant-provided information. Finally, proposed comment 107(a)(20)-8
would explain how a financial institution would report sex if an
applicant has fewer than four principal owners, provide an example, and
direct financial institutions to proposed appendix G for additional
information on collecting and reporting a principal owner's sex.
The Bureau seeks comment on its proposed approach to requesting
information about a principal owner's sex, including the opportunity
for self-identification (by allowing the applicant to write in or
otherwise provide additional information). The Bureau also seeks
comment on whether the sample data collection form should list examples
from which the applicant could choose when a principal owner self-
identifies and an applicant writes in or otherwise provides additional
information about the principal owner's sex, such as ``intersex,''
``non-binary,'' or ``transgender.'' The Bureau also seeks comment on
whether, alternatively, sex should be collected solely via the ``I
prefer to self-describe'' option (with the ability to write in or
otherwise provide additional information)--that is, without male and
female being listed as options. The Bureau also seeks comment on
whether applicants should be restricted from designating more than one
category for a principal owner's sex (e.g., from selecting both
``Female'' and ``I prefer to self-describe'').
The Bureau also seeks comment on whether financial institutions
should be required to ask separate questions regarding sex, sexual
orientation, and gender identity and, if so, what categories should be
offered for use in responding to each question. For example, the Bureau
requests comment on whether the sample data collection form should
include the three questions and related responses (described above)
from the Pulse Household Survey questionnaire, or a check box for
``Principal owner identifies as LGBTQ+'' with an accompanying space for
providing additional information. The Bureau also seeks comment on
whether it should adopt a data point to collect an applicant's lesbian,
gay, bisexual, transgender, or queer plus (LGBTQ+)-owned business
status, similar to the way it is proposing to collect minority-owned
business status and women-owned business status as discussed in the
section-by-section analysis of proposed Sec. 1002.107(a)(18) and (19)
above. The Bureau also seeks comment on whether including such
questions would improve data collection or otherwise further section
1071's purposes, as well as whether it would pose any particular
burdens or challenges for industry.
In addition, to ensure that a financial institution's
representation of nondiscrimination on the basis of sex information
provided by the applicant is consistent with the protections afforded
under ECOA and Regulation B, the Bureau seeks comment on whether
ambiguity exists for any responses that
[[Page 56483]]
an applicant might reasonably use to self-describe a principal owner's
sex for purposes of section 1071 (for example, intersex status) and if
clarification may be needed.
Finally, the Bureau also requests information on Federal, State,
and local government initiatives, as well as private sector
initiatives, involving the use of sex categories other than male and
female and the inclusion of questions regarding sexual orientation and
gender identity in demographic information.
Proposed Rule--Collecting Ethnicity and Race via Visual Observation or
Surname in Certain Circumstances
The Bureau is proposing that financial institutions be required to
collect and report at least one principal owner's ethnicity and race
based on visual observation and/or surname in certain circumstances.
Specifically, a financial institution would be required to report at
least one principal owner's ethnicity and race based on visual
observation and/or surname if the financial institution meets in person
with one or more of the applicant's principal owners and the applicant
does not provide ethnicity, race, or sex information for at least one
principal owner in response to the financial institution's inquiry
pursuant to proposed Sec. 1002.107(a)(20).
Although the Bureau indicated in the SBREFA Outline that it was not
considering proposing that financial institutions report a principal
owner's race, sex, and ethnicity based on visual observation and/or
surname, the Bureau asked SERs to provide feedback about the potential
challenges, costs, and benefits of implementing such a requirement for
applicants who do not self-report the information. The Bureau also
asked SERs to provide feedback about how those potential challenges and
costs would change if reporting based on visual observation and/or
surname was required only if the applicant is a sole proprietor but not
if the applicant is an entity. Although many SERs and commenters
opposed reporting ethnicity, race, or sex on the basis of visual
observation and/or surname, some other commenters said that financial
institutions should be required to report based on visual observation
and/or surname in certain circumstances. Additionally, one SER
specifically noted that the Bureau would need to account for lower
self-reporting rates than are achieved for HMDA reporting. Consistent
with this feedback, the Bureau notes that demographic response rates in
the SBA's Paycheck Protection Program (PPP) data are much lower when
compared to ethnicity, race, and sex response rates in HMDA data.\687\
For instance, roughly 71 percent of respondents in the PPP data did not
provide a response for race, compared to only 14.7 percent in the HMDA
data. Roughly 66 percent of respondents in the PPP data did not provide
a response for ethnicity, compared to only 14.3 percent in the HMDA
data.\688\
---------------------------------------------------------------------------
\687\ Small Bus. Admin., Paycheck Protection Program Weekly
Reports 2021, Version 11, at 9 (effective Apr. 5, 2021), https://www.sba.gov/sites/default/files/2021-04/PPP_Report_Public_210404-508.pdf. PPP data was taken from 2021 loans for which the collection
form for principal owner demographics was included on the PPP
application itself and, for most of that time, was featured on the
first page of the application.
\688\ Id.
---------------------------------------------------------------------------
Without a visual observation and/or surname collection requirement,
the Bureau believes that meaningful analysis of the 1071 principal
owner race and ethnicity data could be difficult, significantly
undermining section 1071's fair lending purpose. Comprehensive and
accurate collection and reporting of data is also vital to section
1071's business and community development purpose. Historically, one
challenge under HMDA has been the reluctance of some applicants to
voluntarily provide requested demographic information, such as race and
ethnicity. The requirement in Regulation C to collect race, sex, and
ethnicity on the basis of visual observation or surname is an important
tool to address that challenge, and the Bureau believes that the
requirement has resulted in more robust response rates in the HMDA
data. The Bureau has considered the feedback in response to the SBREFA
Outline and this related information and has determined that not
proposing a requirement to report based on visual observation and/or
surname could diminish the utility of the 1071 data.
Accordingly, the Bureau has determined that the appropriate
approach to further section 1071's purposes is to propose to require
that financial institutions collect at least one principal owner's race
and ethnicity (but not sex) on the basis of visual observation and/or
surname when the applicant does not provide ethnicity, race or sex
information for at least one principal owner and the financial
institution meets in person with one or more principal owners. In other
words, a financial institution would not be required to collect race
and ethnicity via visual observation and/or surname if the applicant
provides any demographic information regarding any principal owner. The
Bureau is concerned that, for applicants with multiple principal
owners, the financial institution may not be able to determine whether
the applicant has provided the demographic information, for example the
sex, of the principal owner who meets in person with the financial
institution or for another principal owner. The Bureau seeks comment on
this proposed approach. The Bureau also seeks comment on whether a
financial institution should be required to collect a principal owner's
ethnicity and/or race via visual observation and/or surname if the
applicant has only one principal owner, the applicant does not provide
the principal owner's information, and the financial institution meets
in person with the principal owner. In this situation, the financial
institution would be able to ``match'' any demographic information that
the applicant provides with the correct the principal owner because
there is only one principal owner.
Proposed comment 107(a)(20)-9 would explain that a financial
institution is required to report ethnicity and race (but not sex)
based on visual observation and/or surname in certain circumstances.
The proposed comment would explain that if a financial institution
meets in person with one or more of an applicant's principal owners and
the applicant does not provide ethnicity, race, or sex information for
at least one principal owner, the financial institution must report at
least one principal owner's ethnicity and race (but not sex) based on
visual observation, surname, or a combination of both visual
observation and surname. It would further explain that a financial
institution is not required to report based on visual observation and/
or surname if the principal owner only meets in person with a third
party through whom the applicant is submitting an application to the
financial institution and would provide an example.
Proposed comment 107(a)(20)-10 would clarify that a financial
institution meets with a principal owner in person if an employee or
officer of the financial institution or one of its affiliates has a
meeting or discussion with the applicant's principal owner about an
application and can visually observe the principal owner. The proposed
comment would also provide examples of situations where the financial
institution meets in person with a principal owner and where it does
not. The Bureau requests comment on this approach and whether
additional or different examples are necessary.
Proposed comment 107(a)(20)-11 would clarify that a financial
institution
[[Page 56484]]
uses only aggregate categories when reporting ethnicity and race based
on visual observation and/or surname and would direct financial
institutions to proposed appendix G for additional information on
collecting and reporting ethnicity and race based on visual observation
and/or surname. However, the Bureau requests comment on whether
financial institutions should be permitted, but not required, to use
the disaggregated subcategories (in addition to the required aggregate
categories) when reporting race and ethnicity based on visual
observation and/or surname.
In addition to the specific matters identified above, the Bureau
seeks comment on its proposed approach to this data point, the proposed
methods of collecting and reporting the data, and requests comment on
whether additional clarification regarding any aspect of this data
point is needed.
107(a)(21) Number of Principal Owners
ECOA section 704B(e)(2)(H) authorizes the Bureau to require
financial institutions to compile and maintain ``any additional data
that the Bureau determines would aid in fulfilling the purposes of
[section 1071].'' The Bureau believes that collection of the number of
principal owners of an applicant would aid in fulfilling the purposes
of section 1071, as explained below.
The Bureau did not address the number of principal owners as a
potential data point under consideration in the SBREFA Outline,
although it did seek feedback on several questions related to the
number of applicants' principal owners.\689\ To facilitate collection
of the ethnicity, race, and sex of applicants' principal owners
pursuant to proposed Sec. 1002.107(a)(20), the Bureau is proposing
that financial institutions collect and report the number of an
applicant's principal owners.
---------------------------------------------------------------------------
\689\ SBREFA Outline at 32-33.
---------------------------------------------------------------------------
Section 1071 uses the term ``principal owner'' but does not define
it. Proposed Sec. 1002.102(o) would define a principal owner as a
natural person who directly owns 25 percent or more of the equity
interests of a business. Thus, under this proposed definition, it is
possible that an applicant would have no principal owners or between
one and four principal owners.
As explained in proposed comment 107(a)(21)-1, a financial
institution would be able to collect an applicant's number of principal
owners by requesting the number of principal owners from the applicant
or by determining the number of principal owners from information
provided by the applicant or that the financial institution otherwise
obtains. If the financial institution asks the applicant to provide the
number of its principal owners pursuant to proposed Sec.
1002.107(a)(21), the financial institution must provide the definition
of principal owner set forth in proposed Sec. 1002.102(o). If
permitted pursuant to proposed Sec. 1002.107(c)(2), a financial
institution could report an applicant's number of principal owners
based on previously collected data.
The Bureau believes that an applicant is likely to know how many
principal owners it has and should not have significant difficulties or
objections to providing this basic piece of information. Moreover, the
Bureau understands that financial institutions are already obtaining
information about principal owners. Further, this additional
information would aid in fulfilling the purposes of section 1071 as it
may provide necessary context for other data points. For example, if an
applicant reports the ethnicity, race, and sex for one principal owner,
having the total number of principal owners would permit the Bureau and
other data users to know whether that owner's demographics represents
the demographics of the entirety of the applicant's principal ownership
or merely one quarter of it. This information would help data users in
fulfilling both the fair lending and business and community development
purposes of section 1071.
Proposed comment 107(a)(21)-2 would clarify the relationship
between the proposed requirement to collect and report the number of
principal owners in proposed Sec. 1002.107(a)(21) with the proposed
requirement to report verified information in proposed Sec.
1002.107(b). The proposed comment would state that the financial
institution may rely on an applicant's statements in collecting and
reporting the number of the applicant's principal owners. The financial
institution would not be required to verify the number of principal
owners provided by the applicant, but if the financial institution
verifies the number of principal owners, then the financial institution
would be required to report the verified number of principal owners.
Proposed comment 107(a)(21)-3 would state that pursuant to proposed
Sec. 1002.107(c)(1), a financial institution is required to maintain
procedures reasonably designed to collect applicant-provided
information, which includes the applicant's number of principal owners.
However, if a financial institution is nonetheless unable to collect or
determine the number of principal owners of the applicant, the
financial institution would report that the number of principal owners
is ``not provided by applicant and otherwise undetermined.''
The Bureau seeks comment on its proposed approach to this data
point. The Bureau also seeks comment on whether the Bureau should
instead, or additionally, require collection and reporting of similar
information about owners (rather than principal owners). For example,
should the Bureau require that financial institutions collect and
report the number of owners that an applicant has that are not natural
persons, in order to obtain a more complete picture of the applicant's
ownership structure?
107(b) Verification of Applicant-Provided Information
ECOA section 704B(e)(1) provides that ``[e]ach financial
institution shall compile and maintain, in accordance with regulations
of the Bureau, a record of the information provided by any loan
applicant pursuant to a request under [section 704B(b)].'' \690\
Section 1071 does not impose any requirement for a financial
institution to verify the information provided by an applicant.
---------------------------------------------------------------------------
\690\ ECOA section 704B(e)(1).
---------------------------------------------------------------------------
In the SBREFA Outline, the Bureau did not include a general
statement about the issue of verification of applicant-provided data
points. For certain data points such as time in business, however, the
Outline did explain that the Bureau was considering proposing that if
the financial institution did not verify the information provided by
the applicant, the financial institution would report the information
provided by the applicant. If the financial institution did verify the
information provided by the applicant, the Outline explained that the
financial institution would report the verified information. The
Outline did not state that the Bureau was considering proposing that a
financial institution would be required to verify any of the applicant-
provided data points.
As explained in the section-by-section analysis of proposed Sec.
1002.107(a) above, a number of SERs urged the Bureau to require
collection and reporting of a number of data points based only on
information as provided by the applicant.\691\ No SERs stated that they
thought verification should be generally required. The industry
stakeholders who commented on this issue asked that the Bureau not
require
[[Page 56485]]
verification of applicant-provided information. The Bureau did not
receive any comments on this issue from community group stakeholders.
---------------------------------------------------------------------------
\691\ SBREFA Panel Report at 26.
---------------------------------------------------------------------------
The Bureau is proposing in Sec. 1002.107(b) that unless otherwise
provided in subpart B, the financial institution would be able to rely
on statements of the applicant when compiling data unless it verifies
the information provided, in which case it would be required to collect
and report the verified information. Proposed comment 107(b)-1 would
explain that a financial institution may rely on statements made by an
applicant (whether made in writing or orally) or information provided
by an applicant when compiling and reporting data pursuant to the 1071
rule for applicant-provided data; the financial institution would not
be required to verify those statements. Proposed comment 107(b)-1 would
further explain, however, that if the financial institution does verify
applicant statements for its own business purposes, such as statements
relating to gross annual revenue or time in business, the financial
institution would report the verified information. The comment would go
on to explain that, depending on the circumstances and the financial
institution's procedures, certain applicant-provided data could be
collected without a specific request from the applicant. For example,
gross annual revenue could be collected from tax return documents. In
addition, the proposed comment would make clear that applicant-provided
data are the data that are or could be provided by the applicant,
including those in proposed Sec. 1002.107(a)(5) through (7), and (13)
through (21). Finally, proposed comment 107(b)-1 would provide a cross
reference to proposed comment 107(c)(2)-3, which would discuss the
possible reuse of certain previously collected data.
The Bureau believes that requiring verification of applicant-
provided data points would greatly increase the operational burden of
the 1071 rule, and that relying on applicant-provided data would ensure
sufficient accuracy to carry out the purposes of section 1071. As
discussed above, section 1071 does not speak to verification; rather it
refers only to compiling and maintaining a record of certain
information provided by an applicant. However, the Bureau believes that
requiring financial institutions to collect and report (for the 1071
rule) information that they have already verified would not add
operational difficulty, and would enhance the accuracy and usefulness
of the data, thereby furthering the purposes of section 1071. The
Bureau is implementing this requirement pursuant to its authority under
ECOA section 704B(g)(1) to prescribe rules in order to carry out,
enforce, and compile data pursuant to section 1071, and as an
interpretation of the statutory phrase ``compile and maintain'' in ECOA
section 704B(e)(1). In the Bureau's view, the verification that the
financial institution chooses to carry out is part of compiling and
maintaining the information provided by the applicant, and this
requirement will improve the quality and usefulness of the resulting
1071 data set.
As discussed above, many SERs and other stakeholders opposed the
inclusion of a verification requirement, and the Bureau has taken their
input into account when crafting this proposed provision.
The Bureau seeks comment on its proposed approach to verification
of the 1071 data points, including the specific guidance that would be
presented in comment 107(b)-1. The Bureau also seeks comment on whether
financial institutions should be required to indicate whether
particular data points being reported have been verified or not.
107(c) Time and Manner of Collection
107(c)(1) In General
Background
Although the definition of ``application'' triggers a financial
institution's duty to collect 1071 data, the application definition
does not necessarily govern when that data must be collected. The
language and structure of section 1071--which applies to
``applications'' from ``applicants''--indicates that the data must be
collected sometime during the application process, but does not provide
further detail.\692\
---------------------------------------------------------------------------
\692\ See, e.g., ECOA section 704B(b) (``[I]n the case of any
application to a financial institution . . . .'') and 704B(c) (``Any
applicant . . . may refuse to provide any information requested . .
. .'') (emphases added)).
---------------------------------------------------------------------------
Financial institutions have expressed concern about when applicant-
provided data must be collected, and particularly the timing of
collecting applicants' protected demographic information (that is,
whether the applicant is a minority-owned business or a women-owned
business, and the ethnicity, race, and sex of the applicant's principal
owners, pursuant to proposed Sec. 1002.107(a)(18) through (20)).
Collecting this protected demographic information from applicants for
purposes of section 1071 has been a particular concern for financial
institutions, as financial institutions currently are generally
prohibited from collecting such information except in narrow
circumstances.\693\ As such, its required collection under section 1071
will be a departure from current practice for most financial
institutions.
---------------------------------------------------------------------------
\693\ See Sec. 1002.5(b).
---------------------------------------------------------------------------
SBREFA Proposal Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau stated that it was not currently
considering specifying a particular time period in which financial
institutions must seek to collect 1071 data from applicants.\694\ It
also conveyed that it was seeking to provide financial institutions
discretion and flexibility to time their 1071 data collection at a
point during the application process that works best for their
processes and relationships with applicants and to avoid unnecessary
costs, while still fulfilling section 1071's purposes. The Bureau also
noted that it had considered possible alternatives of requiring
financial institutions to collect 1071 data within or by a specified
time period, such as simultaneous with the triggering of an
``application,'' before obtaining a ``completed application,'' or
before notifying the applicant of action taken.
---------------------------------------------------------------------------
\694\ SBREFA Outline at 35-36.
---------------------------------------------------------------------------
Most SERs that addressed the issue of timing for data collection
indicated that they plan to collect 1071 data, and particularly
applicants' protected demographic information (as would be required
under proposed Sec. 1002.107(a)(18) through (20)), early in the
application process and likely at the time an application is initially
being submitted.\695\ These SERs felt that the longer they wait to
request 1071 data, the more difficult or infeasible it will be to
gather the information from applicants. Another SER urged the Bureau to
give financial institutions flexibility to explore optimal timing for
collection of 1071-required protected demographic information in order
to maximize the response rate without discouraging applicants from
pursuing the application. This SER suggested that protected demographic
information should be collected during the application process, but
before the application is considered complete. The SBREFA Panel
recommended that the Bureau seek comment on whether it is necessary to
specify a time period specifically for the collection of 1071-required
protected demographic information, and if so, what would be the best
period to designate.\696\
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\695\ SBREFA Panel Report at 32.
\696\ Id. at 47.
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[[Page 56486]]
Nearly all industry stakeholders to comment on this issue supported
the Bureau not specifying a time period, and instead giving financial
institutions discretion to set their own optimal timing for the
collection of applicant-provided 1071 data. The commenters noted that
given the variety of products, financial institutions, and business
models in small business lending, a one-size-fits-all approach would be
unworkable and could disrupt financial institutions' processes. Some
commenters also highlighted the complexity of small business lending
applications and stated that flexible collection would provide greater
simplicity, reduce burden, and allow for more accurate reporting,
particularly where not all the data points are available at the time of
collection. A few commenters sought flexibility due to concerns that if
protected demographic information is collected early on in the process,
an applicant would believe that information would be used to
discriminate against them. One commenter suggested looking at FinCEN's
customer due diligence rule, which allows for information collection at
the time of closing. Although industry commenters generally favored
flexibility, several stated they would likely collect 1071 data as
early as possible in order to ensure data quality and collection. One
stakeholder stated that applicant-provided data would be impossible to
get if an application is withdrawn, incomplete, or denied before the
required data are requested. Another industry commenter suggested the
Bureau allow flexibility, but provide a safe harbor for financial
institutions that collect applicant-provided data points on or with the
application.
Many of the commenters seeking flexibility stated that point-of-
sale (POS) applications would be particularly problematic with a rigid
timing requirement. POS applications include those private label credit
cards or other products offered through retailers in which the
financial institution itself does not interact with the applicant at
the time of application. POS applications are taken in a variety of
different settings and locations, such as at the checkout line, online,
or at customer service desks. Commenters urged that they would need
additional flexibility for a POS application to request 1071 data, such
as at some point reasonably following application submission.
Commenters cited concerns about the accuracy and completeness of data
collected in a POS application: Interactions are with retailer's
employees who may not be able to answer questions about the data
collection, interactions often take place in a public place (which may
lead to erroneous answers or refusals to answer), and the person
submitting a POS application may not have relevant knowledge to respond
to the 1071-required questions, leading to delayed or abandoned
applications. Commenters also expressed concern that reporting of POS
applications would reflect the retailer's lending footprint, not the
financial institution's, and so lead to incorrect assumptions about the
financial institution's lending.
A number of stakeholders, including community groups and several
financial institutions, urged the Bureau to specify a time period for
the collection of 1071 data, stating that failure to do so would
undermine the accuracy of the data. The commenters stated that complete
flexibility would result in inconsistent and unreliable data since
financial institutions would be collecting the data at different stages
of the application process. The commenters stated that financial
institutions that wait to collect the data would have difficulty
obtaining applicant-provided information if the application was
withdrawn, incomplete, or denied. The commenters also noted that
discrimination is likely to occur in the early stages of the
application process, and would not be captured if financial
institutions are permitted to delay data collection. One commenter
stated that requiring collection at the time of application could also
promote non-discriminatory treatment as it would impress upon lenders
and applicants the need for fair treatment. An industry commenter
stated that not specifying a time period may lead to financial
institution regulatory paralysis or confusion about when to collect
1071 data from applicants.
Among commenters that recommended a specific time period for
collection, many suggested collecting applicant-provided data at the
time of an application or otherwise ``upfront.'' One commenter noted
that 1071-required data could be built into the application itself. On
the other hand, several commenters suggested 1071 data should be
collected any time before an application is considered complete or, one
commenter suggested, when financial institutions know that 1071
collection will be required. The commenters stated that this would be
the time period during which applicants are most likely to voluntarily
provide the data, would ensure comparable data across lenders, and
would still provide financial institutions flexibility to account for
various application processes. One commenter suggested testing and
focus groups to determine optimal timing. Otherwise, the commenter
suggested 1071 data be collected before a financial institution
disburses funds to the applicant.
Proposed Rule
The Bureau is proposing Sec. 1002.107(c)(1), which would require a
covered financial institution to maintain procedures to collect
applicant-provided data under proposed Sec. 1002.107(a) at a time and
in a manner that is reasonably designed to obtain a response. The
Bureau agrees with SERs and other stakeholders about the benefits of
providing a flexible approach concerning when applicant-provided data
must be collected during the application process. As noted by some
commenters, given the variety of application processes in the small
business lending space, requiring 1071 data collection to occur within
a narrow window may affect data quality and disrupt financial
institution practices. On the other hand, the Bureau believes that
safeguards are necessary to ensure that financial institutions are not
evading or delaying their obligation to collect 1071 data in a manner
that detrimentally affects response rates. In light of these
considerations, the Bureau is proposing an approach that would maintain
flexibility, but require a financial institution to maintain procedures
to collect applicant-provided data at a time and in a manner that is
reasonably designed to obtain a response. This proposal thus implements
the flexible approach under consideration in the SBREFA Outline, though
with additional safeguards.
Proposed comments 107(c)(1)-1 and -2 would clarify the meaning of
financial institution ``procedures'' and reiterate a financial
institution's latitude to establish procedures concerning the timing
and manner that it collects applicant-provided data, provided that
those procedures are reasonably designed to collect the applicant-
provided data in proposed Sec. 1002.107(a).
Proposed comment 107(c)(1)-3 would clarify what constitutes
``applicant-provided data'' in proposed Sec. 1002.107(c)(1). The
proposed comment would also clarify that applicant-provided data does
not include data that is generated or supplied only by the financial
institution. The Bureau believes this clarification would address
commenter concerns that certain data points collected early in the
process may not be as accurate (or available) as data available at a
later time--for example,
[[Page 56487]]
information on action taken is only available late in the application
process.
Proposed comment 107(c)(1)-4 would provide additional guidance on
financial institutions' procedures that are reasonably designed to
obtain a response. As noted in proposed comment 107(c)(1)-4, a
financial institution would assess on a periodic basis whether its
procedures are reasonably designed. One way a financial institution may
be able to assess whether its procedures are reasonably designed would
be, once 1071 data are made publicly available, to compare its response
rate with similarly situated financial institutions (for example, those
that offer similar products, use a similar lending model, or are of a
similar size).\697\ The Bureau also anticipates that the response rate
will differ depending on the data point: Some applicant-provided data
points (for example, time in business) may have a higher response rate
than other applicant-provided data points (such as a principal owner's
race, sex, and ethnicity). The key is for a financial institution to
assess on a periodic basis whether its procedures are reasonably
designed to obtain a response.
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\697\ As discussed in greater detail in part VI below, the
Bureau is proposing not to determine what data to include in the
public application-level 1071 data until after it receives at least
one full year of 1071 data reported by financial institutions.
Following the compliance date of the final rule, the Bureau proposes
to issue a policy statement setting forth its intended modifications
and deletions to the public application-level 1071 data. Of course,
the Bureau acknowledges that the availability and robustness of a
peer analysis would also depend on the extent to which 1071 data are
made publicly available.
---------------------------------------------------------------------------
Proposed comments 107(c)(1)-5 and -6 would provide examples of
procedures that generally are and are not reasonably designed to obtain
a response. Although the inquiry requires a fact-based determination,
the Bureau believes providing examples and further guidance of
practices that likely are and are not reasonably designed to obtain a
response would facilitate compliance and promote best practices. For
example, the Bureau believes that, as a general matter, once there is a
``covered application,'' the earlier a financial institution seeks to
collect applicant-provided information, the greater the likelihood of
obtaining an applicant response (particularly for covered applications
that are later withdrawn or left incomplete). Thus, the Bureau believes
that, as a general matter, a procedure reasonably designed to obtain a
response is one in which a financial institution requests applicant-
provided data at the time of a covered application. For example, it
could request these data in connection with a written application form,
provided any collection form requesting applicants' protected
demographic information pursuant to proposed Sec. 1002.107(a)(18)
through (20) is separate from the application form and other documents
used to collect other information related to the application, as would
be required by proposed Sec. 1002.111(b). Collecting applicant-
provided data after a covered application is submitted--for example,
while the application is being completed through the submission of
additional documents and verifications--may be reasonably designed to
obtain a response depending on the particular financial institution's
procedures, with earlier collections more likely to be reasonably
designed. The Bureau believes providing such compliance examples would
incentivize early collection and be consistent with the practice many
SERs and other industry commenters indicated they planned to follow in
any event. While some commenters stated that an applicant may be
reluctant to respond to early collection due to concerns that the
information may be used to discriminate against them, the Bureau
believes those concerns can be addressed through the use of a data
collection form (such as the sample collection form in proposed
appendix E) that would explain to applicants the reason the information
is being collected. Moreover, the Bureau notes that financial
institutions regularly collect data required by HMDA and Regulation C
at the time of application without significant issue and that the
sample data collection form in Regulation C similarly provides an
explanation to applicants as to the reason protected demographic
information is being collected.
Conversely, the Bureau believes that, as a general matter, it is
unlikely that small business applicants will respond to data requests
that occur simultaneous with or after notifying an applicant of action
taken on the covered application. Depending on the particular facts,
however, these procedures may be reasonably designed to obtain a
response; for example, if the financial institution has evidence or a
reason to believe that under its procedures the response rate would be
similar to or better than other alternatives. Although a fact-based
determination, proposed comment 107(c)(1)-6 would clarify that such
procedures would generally not be considered ``reasonably designed.''
Proposed comment 107(c)(1)-7 would explain that a financial
institution reports updated applicant-provided data if it obtains more
current data during the application process. Proposed comment
107(c)(1)-8 would provide guidance in the event a financial institution
changes its determination regarding an applicant's status as a small
business.
Many industry commenters discussed the need for additional
flexibility specifically for POS applications. The Bureau understands
that many (though not all) POS applications, particularly those for
smaller credit amounts or to purchase particular goods in a store, are
often submitted on-site at POS and decisioned in real time. Under
proposed Sec. 1002.107(c)(1) and associated commentary, the Bureau
anticipates that most financial institutions would generally collect
applicant-provided 1071 data at POS, and not at some later time after
the credit request has been decisioned and the applicant has left the
store, as suggested by some commenters. Despite the comments on this
issue, the Bureau is not proposing a different approach for collecting
applicant-provided data specifically for POS applications. Commenters
raised concerns about retail employees seeking to collect 1071 required
data in a public setting. However, the Bureau believes that financial
institutions can develop procedures to accommodate collection in this
setting, including (as discussed above) by using the sample collection
form developed by the Bureau. The Bureau also does not believe that any
specialized knowledge is necessary to collect 1071 data, and so
believes that retail employees can collect the information. Although it
is possible that the accuracy of the data collected in POS applications
may be more prone to errors, as some commenters allege, the Bureau
believes that having such data, even with decreased accuracy, would be
preferable to not having any applicant-provided data for such
applications.\698\
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\698\ In order to help identify such transactions, the Bureau is
proposing to collect information about the application recipient.
See proposed Sec. 1002.107(a)(4).
---------------------------------------------------------------------------
Several industry commenters suggested the Bureau look to FinCEN's
customer due diligence (CDD) rule, which excludes from certain of its
requirements POS transactions to provide credit products solely for the
purchase of retail goods/services up to a limit of $50,000.\699\ The
Bureau is not proposing to take this approach given the different
purposes and requirements of the CDD rule and section 1071. The purpose
of the CDD rule is to improve financial transparency and prevent
criminals and terrorists from misusing companies to disguise their
illicit activities and launder their ill-gotten
[[Page 56488]]
gains.\700\ Under the CDD rule, covered financial institutions must
identify and verify the identity of natural persons (known as
beneficial owners) of legal entity customers who own, control, and
profit from companies when those companies open accounts.\701\ The CDD
exclusion for certain POS transactions is based on the ``very low risk
posed by opening such accounts at [a] brick and mortar store.'' \702\
While the CDD rule (and the customer identification program (CIP) rule
\703\) focus on accounts (including certain originated loans),
obtaining data on denials is essential to 1071's purposes. Moreover,
unlike the CDD and CIP rules, which require covered financial
institutions to collect certain essential information, section 1071
only requires that financial institutions seek to collect applicants'
protected demographic information, and permits applicants to refuse to
provide that information. Given these key differences, the Bureau is
not proposing to follow the CIP and CDD rules concerning timing of
collection or the exclusion of certain POS applications.
---------------------------------------------------------------------------
\699\ 31 CFR 1010.230(h)(1)(i).
\700\ See FinCEN, Information on Complying with the Customer Due
Diligence (CDD) Final Rule, https://www.fincen.gov/resources/statutes-and-regulations/cdd-final-rule (last visited Aug. 6, 2021).
\701\ Id.
\702\ FinCEN, Guidance, at Q 29 (Apr. 3, 2018), https://www.fincen.gov/sites/default/files/2018-04/FinCEN_Guidance_CDD_FAQ_FINAL_508_2.pdf.
\703\ FinCEN's CIP rule does not include a point of sale
exclusion. While the rule permits verification of the identity of
the customer within a reasonable time after the account is opened,
the collection of required customer information must occur prior to
account opening. See 31 CFR 1020.220(a)(2)(i)(A) and (ii).
---------------------------------------------------------------------------
The Bureau seeks comment on proposed Sec. 1002.107(c)(1) and
associated commentary. As recommended by the SBREFA Panel, the Bureau
seeks comment on whether it is necessary to specify a time period
specifically for the collection of protected 1071 demographic
information, and if so, what time period the Bureau should designate.
The Bureau also seeks comment on the examples set forth in proposed
comments 107(c)(1)-5 and -6, and whether it would be useful to provide
additional examples of procedures that are and that are not reasonably
designed to obtain a response. In addition, the Bureau seeks comment on
its proposed approach for POS applications, including its proposal that
would not make any particular exceptions for the timing and manner of
1071 data collection for POS applications.
107(c)(2) Previously Collected Data
In the SBREFA Outline, the Bureau emphasized that it was seeking to
provide financial institutions with discretion and flexibility in the
timing of 1071 data collection, in light of considerations including
their relationships with applicants and the need to avoid unnecessary
costs.\704\ The Bureau did not specifically discuss whether a financial
institution could meet its 1071 obligations on a covered application by
reusing certain data it had previously collected from the same
applicant. In response to the Bureau's proposal under consideration
concerning timing of collection of certain 1071 data, however, a
commenter suggested financial institutions provide annual certification
of 1071 data where there is an ongoing customer relationship. The
commenter noted that the data are unlikely to change within a year,
there may be multiple transactions during that time, and it would avoid
financial institutions and applicants having to provide the information
during the application process, saving time and expense.
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\704\ SBREFA Outline at 35-36.
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The Bureau is proposing Sec. 1002.107(c)(2), which would permit,
but not require, a financial institution to reuse previously collected
data to satisfy proposed Sec. 1002.107(a)(13) through (21) if the data
were collected within the same calendar year as the current covered
application and the financial institution has no reason to believe the
data are inaccurate. The Bureau believes that, absent a reason to
suspect otherwise, recently collected 1071 data are likely to be
reliable. Additionally, the Bureau believes that a flexible approach
giving financial institutions discretion to reuse these data is
consistent with the approach the Bureau proposed at SBREFA. Although
proposed Sec. 1002.107(c)(2) would apply to certain data collected
within the same calendar year, nothing prevents a financial institution
from confirming with the applicant whether information collected more
than a year ago from the applicant remains accurate.
Proposed comment 107(c)(2)-1 would provide an example of how
certain previously collected data can be reused by a financial
institution. Proposed comment 107(c)(2)-2 would identify the particular
data that can be reused. The comment would also clarify that other data
required by proposed Sec. 1002.107(a) could not be reused, as those
data points are specific and unique to each covered application.
Proposed comment 107(c)(2)-3 would clarify instances where data have
not been ``previously collected'' and so cannot be reused under
proposed Sec. 1002.107(c)(2).
Proposed comment 107(c)(2)-4 would provide guidance on when
information is considered collected in the same calendar year, and so
may be reused by a financial institution in certain circumstances. In
particular, the proposed comment discusses applications that span more
than one calendar year.
Proposed comment 107(c)(2)-5 would provide clarity and an example
of when a financial institution has reason to believe data may be
inaccurate, and so cannot be reused for a subsequent covered
application. Finally, proposed comments 107(c)(2)-6 and -7 would
provide guidance on when data regarding minority-owned business status,
women-owned business status, and data on the principal owners'
ethnicity, race, and sex may be reused by a financial institution in a
subsequent covered application.
The Bureau seeks comment on Sec. 1002.107(c)(2) and associated
commentary. The Bureau also seeks comment on whether a period of one
calendar year to reuse certain previously collected data is appropriate
or whether it should be extended to a longer period (such as two or
three years). In addition, the Bureau seeks comment on whether
financial institutions should be required to notify applicants that
information they provide (including, in particular, minority-owned
business status, women-owned business status, and the principal owners'
ethnicity, race, and sex) could be reused for subsequent applications.
Section 1002.108 Firewall
Background
ECOA section 704B(d) generally restricts the access of certain
individuals at a financial institution or its affiliates to certain
information provided by an applicant pursuant to section 1071. The
Bureau calls this requirement in 704B(d) a ``firewall.'' More
specifically, 704B(d)(1) states that ``[w]here feasible,'' underwriters
and other officers and employees of a financial institution or its
affiliates ``involved in making any determination concerning an
application for credit'' cannot have access to any information provided
by the applicant pursuant to a request under 704B(b). That is, the
statute limits access not only by underwriters and persons making an
underwriting decision but also by anyone else involved in making any
determination concerning an application. However, it does not expressly
define the term ``feasible'' or provide clarification regarding what it
means to be involved in making any
[[Page 56489]]
determination concerning an application for credit.
Additionally, under ECOA section 704B(d)(2), if the financial
institution determines that an underwriter, employee, or officer
involved in making a determination ``should have access'' to any
information provided by the applicant pursuant to a request under
704B(b), the financial institution must provide a notice to the
applicant of the underwriter's access to such information, along with
notice that the financial institution may not discriminate on the basis
of such information. Section 704B(d)(2) does not expressly define or
describe when an underwriter, employee, or officer ``should have
access,'' nor does it explain the relationship, if any, between when a
financial institution determines that an individual ``should have
access'' under 704B(d)(2) and whether it is ``feasible'' to implement
and maintain a firewall under 704B(d)(1).
The Bureau believes that ECOA section 704B(d) contains significant
ambiguities with respect to how financial institutions, in practical
terms, should determine how to implement a firewall to limit
underwriters', employees', and officers' access to the information
provided by applicants pursuant to section 704B(b). Indeed, based on
feedback from SERs and other commenters, the Bureau believes that in
many instances financial institutions that find it not ``feasible'' to
implement and maintain a firewall will be the same institutions
determining that relevant individuals ``should have access'' to the
information provided by an applicant pursuant to 704B(b). The Bureau
further believes that reading these two provisions in isolation from
each other would result in significant confusion and challenges,
particularly for smaller financial institutions.
Accordingly, the Bureau believes that section 1071's firewall
requirement is best implemented by reading the ``should have access''
language in ECOA section 704B(d)(2) in conjunction with the
``feasibility'' language in 704B(d)(1). In 704B(d)(1), if it is
feasible to implement and maintain a firewall, then underwriters, other
employees, and officers shall not have access to the information
subject to the firewall; but it is not feasible to implement and
maintain a firewall if an underwriter, other employee, or officer
subject to the firewall should have access to that information. If it
is not feasible to implement and maintain a firewall, then that
underwriter, other employee, or officer who should have access is
permitted to have access so long as the financial institution provides
a notice to the applicant.
As discussed in greater detail above in E.2 of the Overview to this
part V, the Bureau also believes that section 1071 is ambiguous with
respect to the meaning of ``any information provided by the applicant
pursuant to a request under subsection (b).'' On the one hand, ECOA
section 704B(b)(1) directs financial institutions to inquire whether a
business is ``a women-owned, minority-owned, or small business,'' so
the phrase could be interpreted as referring only to those three data
points. Section 704B(e), however, indicates that the scope of 704B(b)
is much broader. It instructs financial institutions that ``information
provided by any loan applicant pursuant to a request under subsection
(b) . . . shall be itemized in order to clearly and conspicuously
disclose'' data including the loan type and purpose, the amount of
credit applied for and approved, and gross annual revenue, among
others. In other words, 704B(e) designates all of the information that
financial institutions are required to compile and maintain--not simply
an applicant's status as a women-owned, minority-owned, or small
business--as information provided by an applicant ``pursuant to a
request under subsection (b).'' But information deemed provided
pursuant to 704B(b) is subject not only to the firewall under 704B(d)
but also to a right to refuse under 704B(c) and separate recordkeeping
requirements under 704B(b)(2). Applying these special protections to
many of the data points in 704B(e), such as an applicant's gross annual
revenue or the amount applied for, would be extremely difficult to
implement because this information is critical to financial
institutions' ordinary operations in making credit decisions.
In order to resolve these ambiguities, the Bureau believes that the
best reading of the statute is to give different meanings to the phrase
``any information provided by the applicant pursuant to a request under
subsection (b)'' with respect to ECOA section 704B(e) as opposed to
704B(b)(2), (c), and (d). As relevant here, with respect to the
firewall in ECOA section 704B(d), the Bureau interprets the phrase to
refer to the data points in proposed Sec. 1002.107(a)(18) (minority-
owned business status) and proposed Sec. 1002.107(a)(19) (women-owned
business status), as well as proposed Sec. 1002.107(a)(20) (ethnicity,
race, and sex of principal owners). Each of these data points require
financial institutions to request demographic information that has no
bearing on the creditworthiness of the applicant. Moreover, a financial
institution could not inquire about this demographic information absent
section 1071's mandate to collect and report the information, and ECOA
prohibits a financial institution from discriminating against an
applicant on the basis of the information. The Bureau accordingly
believes that the best effectuation of congressional intent is to apply
section 1071's special-protection provisions to apply to this
demographic information, regardless of whether the statutory authority
to collect it originates in 704B(b)(1) (women-owned business status and
minority-owned business status) or 704B(e)(2)(G) (race, sex, and
ethnicity of principal owners). The Bureau similarly believes that
Congress did not intend these special protections to apply to any of
the other data points proposed in Sec. 1002.107(a), which the
financial institution is permitted to request regardless of coverage
under section 1071, which are not the subject of Federal
antidiscrimination law, and many of which financial institutions
currently use for underwriting purposes.\705\
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\705\ As explained in the Overview to this part V, the Bureau is
not proposing to require financial institutions to maintain and
report a data point on small business status.
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The Bureau is proposing Sec. 1002.108 to implement ECOA section
704B(d) and, pursuant to its authority in 704B(g)(1), to prescribe such
rules and issue such guidance as may be necessary to carry out,
enforce, and compile data pursuant to section 1071.
SBREFA Proposal Under Consideration and Feedback
Information subject to the firewall. In the SBREFA Outline, the
Bureau stated that it was considering proposing that financial
institutions need only limit access under ECOA section 704B(d) to an
applicant's responses to the financial institution's specific inquiries
regarding women-owned and minority-owned business status and the
ethnicity, race, and sex of principal owners, but not to an applicant's
small business status.\706\ As discussed below, many SERs and other
commenters suggested that restricting access to protected demographic
information obtained to comply with section 1071 (i.e., minority-owned
business status, women-owned business status, and the principal owners'
ethnicity, race, and sex) would be difficult for their institutions.
Although these SERs and other commenters generally did not comment on
the scope of information that the Bureau considered proposing be
subject to the firewall (other than to say
[[Page 56490]]
that liming access would be difficult), one commenter said that small
business status should not be subject to the firewall and another
commenter said that it should.
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\706\ SBREFA Outline at 36-37.
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The SBREFA Panel recommended that the Bureau propose clear guidance
on what information is subject to the firewall requirement.\707\
---------------------------------------------------------------------------
\707\ SBREFA Panel Report at 47.
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Feasibility of maintaining a firewall. In the SBREFA Outline, the
Bureau also stated that it was considering how it might apply the
feasibility standard in ECOA section 704B(d)(1) and asked several
questions related to this standard.\708\ Several SERs that take in-
person or paper applications or that have very limited commercial
lending staff stated that it would be costly or impossible for them to
restrict access to applicants' protected demographic information by
underwriters and other persons involved in making determinations
concerning applications from small businesses.\709\ In contrast,
several SERs that operate entirely online said that it would be
relatively easy for them to restrict access to applicants' protected
demographic information. Another SER said that it could restrict access
to protected demographic information for applications received online
(though not for paper applications), but that it would necessitate an
overhaul of its online system.
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\708\ SBREFA Outline at 36-37.
\709\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 33-34.
---------------------------------------------------------------------------
Many other stakeholders providing feedback on the SBREFA Outline
said that it would not be possible to limit access to applicants'
protected demographic information or that attempting to do so would be
costly and time consuming. Some other commenters suggested that
implementing and maintaining a firewall would be impossible for all
financial institutions or certain categories of financial institutions
(i.e., smaller financial institutions, community banks, credit unions).
Generally, these commenters requested exemptions from the firewall
requirement for either all financial institutions or specific
categories of financial institutions. Generally, commenters were
concerned about the costs associated with hiring additional staff,
outsourcing additional functions, or making system changes to implement
and maintain the firewall. However, some commenters indicated that
financial institutions should not be required to change their existing
application or other processes to maintain a firewall and noted that
underwriters and officers who gather information from small business
applicants also make determinations regarding such applications.
Commenters noted that implementing a firewall would necessitate more
points of contact between employees of the financial institution and an
applicant and would require financial institutions to reassign job
duties and retrain existing employees.
Importantly, many comments from SERs and others seemed to reflect
confusion about the intended scope of the firewall. For example, some
SERs and other commenters seemed to think that the firewall would
prohibit employees who were generally aware of an applicant's business
status or of a principal owner's ethnicity, race, and sex, such as due
to participation in outside organizations or activities, from making
any determinations regarding applications. One commenter remarked that
it would be impossible to comply with the firewall requirement if a
financial institution required a principal owner to provide a driver's
license. Additionally, some SERs and other commenters requested
guidance on the scope and applicability of the firewall, indicating
that the SBREFA Outline was not sufficiently clear regarding the
firewall's scope.
The SBREFA Panel recommended that the Bureau propose a clear
feasibility standard that takes into account the costs of establishing
and maintaining a firewall to limit access by underwriters and other
persons.\710\
---------------------------------------------------------------------------
\710\ Id. at 47.
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Providing a notice in lieu of the firewall. In the SBREFA Outline,
the Bureau also stated that it was considering proposing to interpret
ECOA section 704B(d)(2) to permit financial institutions to give
underwriters, employees, and officers access to applicants' responses
regarding women-owned business status, minority-owned business status
and the principal owners' race, sex, and ethnicity when the financial
institution determines that such access is needed for the underwriter,
employee, or officer to perform usual and regularly assigned job
duties.\711\ In such circumstances, the financial institution would
need to comply with the statutory requirement to provide a notice in
lieu of limiting access. The Bureau also stated in the SBREFA Outline
that the financial institution could provide the notice to all small
business applicants or the specific applicant or applicants whose
information will or may be accessed. The Bureau also stated that it was
considering developing sample disclosure language that financial
institutions could use when providing the notice under 704B(d)(2) and
that the notice under 704B(d)(2) need not include language regarding
small business status.
---------------------------------------------------------------------------
\711\ SBREFA Outline at 36-37.
---------------------------------------------------------------------------
SERs and other stakeholders generally were supportive of providing
a notice to applicants in lieu of restricting access to applicants'
protected demographic information obtained for purposes of the 1071
rule. Several stated that it should be permissible to provide a
disclosure or notice to meet the firewall requirement, and others
stated that a financial institution should be permitted to provide a
notice to meet the firewall requirement if the financial institution
itself determines that establishing and maintaining a firewall was not
feasible. However, one industry commenter stated that financial
institutions should not be required to provide a notice to comply with
the firewall requirement, and one SER said that use of the notice
should be optional. This SER suggested that requiring the use of a
notice may cause confusion for the applicant and have the unintended
consequence of causing unfounded claims of discrimination if the
application is denied. One SER cautioned that many people do not read
notices and disclosures, and another SER suggested that financial
institutions would not want to provide a notice because the loan
process already involves too much paperwork.
Several SERs and several other stakeholders indicated a preference
for providing a notice to all applicants, not just those specific
applicants whose protected demographic information was likely to be
accessed by underwriters and others making decisions regarding
applications.
Several stakeholders supported a model notice. One SER as well as
two other commenters asked that, if the Bureau provided sample language
or a model notice, that the Bureau provide it in English as well as in
other languages, such as Spanish. SERs and other stakeholders suggested
a variety of statements that they thought should or should not be
included in sample language or a model notice. They also provided a
variety of suggestions on combining the notice with other documents,
such as the application, sample data collection form, or with other
required notices and disclosures.
One SER requested that the Bureau clarify when a financial
institution would be permitted to provide a notice in lieu of
restricting access to
[[Page 56491]]
applicants' protected demographic information. Some stakeholders
requested additional guidance on the timing and methods for providing a
notice.
The SBREFA Panel recommended that the Bureau propose to permit
financial institutions to provide a notice to applicants instead of
restricting access to applicants' protected demographic information if
it is not feasible for the financial institution to restrict such
access.\712\
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\712\ SBREFA Panel Report at 47.
---------------------------------------------------------------------------
Proposed Rule
The Bureau is proposing Sec. 1002.108 to implement the firewall
provisions in ECOA section 704B(d). Proposed Sec. 1002.108(a) would
provide certain relevant definitions, proposed Sec. 1002.108(b) would
state the general prohibition on access to applicants' protected
demographic information by certain persons, proposed Sec. 1002.108(c)
would explain the exception to that prohibition, and proposed Sec.
1002.108(d) would provide language for the notice necessary in order to
qualify for the exception. The Bureau is also proposing commentary. The
Bureau's proposed approach to Sec. 1002.108 is consistent with its
approach under consideration during the SBREFA process. The Bureau's
general rationale for how it reads the firewall provisions are set
forth in this section-by-section analysis of proposed Sec. 1002.108
above, under Background.
Proposed Sec. 1002.108(b) would state that, unless the exception
under proposed Sec. 1002.108(c) applies, an employee or officer of a
covered financial institution or a covered financial institution's
affiliate shall not have access to an applicant's responses to
inquiries that the financial institution makes pursuant to this subpart
regarding whether the applicant is a minority-owned business under
proposed Sec. 1002.107(a)(18) or a women-owned business under proposed
Sec. 1002.107(a)(19), and regarding the ethnicity, race, and sex of
the applicant's principal owners under proposed Sec. 1002.107(20), if
that employee or officer is involved in making any determination
concerning that applicant's covered application.
Consistent with the SBREFA Panel's recommendation, proposed comment
108(b)-1 would clarify the information that is subject to the
prohibition on access (i.e., the firewall) and provide examples. First,
proposed comment 108(b)-1 would clarify that the prohibition in
proposed Sec. 1002.108(b) would apply only to an applicant's responses
to the inquiries that the covered financial institution makes to
satisfy Sec. 1002.107(a)(18) through (20) and provide examples.
Second, proposed comment 108(b)-1 would clarify that the prohibition in
proposed Sec. 1002.108(b) does not apply to ethnicity or race
information about principal owners that the financial institution
collects via visual observation or surname, or to an applicant's
responses to inquiries regarding minority-owned or women-owned business
status, or principal owners' ethnicity, race, or sex, made for other
purposes and provide an example. It would also clarify that the
prohibition does not apply if an employee or officer generally knows
that an applicant is a minority-owned business or women-owned business,
or knows the ethnicity, race, or sex of any of the applicant's
principal owners due to activities unrelated to the inquiries made to
satisfy the financial institution's obligations under subpart B, as
well as provide an example.
In response to SBREFA feedback requesting additional clarification
and guidance on who would be subject to the firewall, proposed comment
108(b)-2 would clarify the scope of persons subject to the prohibition
and provide examples.
Additionally, the Bureau is proposing to define the phrase
``involved in making any determination concerning a covered
application.'' Proposed Sec. 1002.108(a)(1) would define this phrase
to mean participating in a decision regarding the evaluation of a
covered application, including the creditworthiness of an applicant for
a covered credit transaction. Thus, an employee or officer who
participates in such decision would be subject to the prohibition in
proposed Sec. 1002.108(b), and thus could not have access to an
applicant's responses to the covered financial institution's inquiries
under proposed Sec. 1002.107(a)(18) through (20) with regard to that
covered application, unless the exception in proposed Sec. 1002.108(c)
applies.
Proposed comment 108(a)-1 would provide additional clarification
regarding when an employee or officer is ``involved in making any
determination concerning a covered application.'' In particular, it
would clarify that an employee or officer is involved in making a
determination concerning a covered application if the employee or
officer makes, or otherwise participates in, a decision regarding the
evaluation of a covered application or the creditworthiness of an
applicant for a covered credit transaction. Proposed comment 108(a)-1
would note that this group of employees and officers includes, but is
not limited to, employees and officers who serve as underwriters.\713\
Additionally, it would explain that the decision that the employee or
officer makes or participates in must be about a specific covered
application. An employee or officer would not be involved in making a
determination concerning a covered application if the employee or
officer is involved in making a decision that affects covered
applications generally, the employee or officer interacts with small
businesses prior to them becoming applicants or submitting a covered
application, or the employee or officer makes or participates in a
decision after the financial institution has taken final action on the
application, such as decisions about servicing or collecting a covered
credit transaction.
---------------------------------------------------------------------------
\713\ While ECOA section 704B(d) refers to underwriters and
other officers and employees of a financial institution, or any
affiliate of a financial institution, who are involved in making any
determination concerning an application, the Bureau has clarified
that underwriters are one classification or category of employees
and officers who are involved in making a determination concerning
an application. The Bureau has not separately listed underwriters as
subject to the firewall because doing so is unnecessary given their
inclusion in the larger group of employees and officers who are
involved in making any determination concerning an application.
---------------------------------------------------------------------------
Consistent with the SBREFA Panel's recommendation, proposed Sec.
1002.108(c) would state that the prohibition in proposed Sec.
1002.108(b) shall not apply to an employee or officer if a financial
institution determines that it is not feasible to limit that employee's
or officer's access to one or more of an applicant's responses to the
financial institution's inquiries under Sec. 1002.107(a)(18) through
(20) and the financial institution provides the notice required under
proposed Sec. 1002.108(d) to the applicant. Proposed Sec. 1002.108(c)
would further state that it is not feasible to limit access as required
pursuant to proposed Sec. 1002.108(b) if the financial institution
determines that an employee or officer involved in making any
determination concerning a covered application should have access to
one or more applicants' responses to the financial institution's
inquiries under proposed Sec. 1002.107(a)(18) through (20).
Proposed comment 108(c)-1 would clarify that a financial
institution is not required to limit the access of a particular
employee or officer who is involved in making determinations concerning
covered applications if the financial institution determines that the
particular employee or officer should have access to the information
collected
[[Page 56492]]
pursuant to proposed Sec. 1002.107(a)(18) through (20) and the
financial institution provides the notice required by proposed Sec.
1002.108(d). It would explain that a financial institution can
determine that several employees and officers should have access or
that all of a group of similarly situated employees or officers should
have access, but that a financial institution cannot permit all
employees and officers to have access simply because it has determined
that one or more employees or officers should have access. It would
also provide an example.
Proposed Sec. 1002.108(a)(2) would define the phrase ``should have
access'' to mean that an employee or officer may need to collect, see,
consider, refer to, or otherwise use the information to perform that
employee's or officer's assigned job duties. Proposed comment 108(a)-2
would explain that a financial institution may determine that an
employee or officer should have access for purposes of proposed Sec.
1002.108 if that employee or officer is assigned one or more job duties
that may require the employee or officer to collect (based on visual
observation, surname, or otherwise), see, consider, refer to, or use
information otherwise subject to the prohibition in proposed Sec.
1002.108(b). The employee or officer would not have to be required to
collect, see, consider, refer to or use such information or to actually
collect, see, consider, refer to or use such information. It would be
sufficient if the employee or officer might need to do so to perform
the employee's or officer's assigned job duties. This approach is
similar to the approach under consideration during the SBREFA process,
though in response to feedback received, the proposed definition would
not require that the assigned job duties be usually or regularly
assigned. Thus, an employee or officer would not be subject to the
prohibition if the financial institution determines that the employee
or officer might need to see, consider, refer to, or otherwise use the
information an applicant provided pursuant to proposed Sec.
1002.17(a)(18) through (20) to perform the employee's or officer's
assigned job duties, and the financial institution provides the
required notice to the applicant. Proposed comment 108(a)-2 would
include an example of when a financial institution would be able to
determine that an officer should have access and would state that, if a
financial institution determines that an employee or officer who is
involved in making any determination concerning a covered application
should have access for purposes of Sec. 1002.108, the financial
institution is responsible for ensuring that the employee or officer
only accesses and uses the protected information for lawful purposes.
Additionally, proposed comment 108(a)-2 would explain that a financial
institution may determine that all employees or officers with the same
job description or assigned duties should have access for purposes of
Sec. 1002.108 and provide an example.
Proposed Sec. 1002.108(d) would describe the notice that a
financial institution is required to provide to satisfy the exception
in proposed Sec. 1002.108(c). Proposed Sec. 1002.108(d) would state
that, in order to satisfy the exception set forth in proposed Sec.
1002.108(c), a financial institution shall provide a notice to each
applicant whose responses will be accessed, informing the applicant
that one or more employees or officers involved in making
determinations concerning the covered application may have access to
the applicant's responses to the financial institution's inquiries
regarding whether the applicant is a minority-owned business or a
women-owned business, and regarding the ethnicity, race, and sex of the
applicant's principal owners. Proposed Sec. 1002.108(d) would also
state that the financial institution shall provide this notice when
making the inquiries required under Sec. 1002.107(a)(18) through (20)
and together with the notices required pursuant to Sec.
1002.107(a)(18) through (20).
Proposed comment 108(d)-1 would explain that if a financial
institution determines that one or more employees or officers should
have access pursuant to proposed Sec. 1002.108(c), then the financial
institution must provide the required notice to, at a minimum, the
applicant or applicants whose responses will be accessed by an employee
or officer involved in making determinations regarding the applicant's
or applicants' covered applications. It would also clarify that, as an
alternative, the financial institution could provide the required
notice to a larger group of applicants, including all applicants, if it
determines that one or more officers or employees should have access.
Proposed comment 108(d)-2 would describe the content of the
required notice. It would state that the notice must inform the
applicant that one or more employees and officers involved in making
determinations regarding the applicant's covered application may have
access to the applicant's responses regarding the applicant's minority-
owned business status, its women-owned business status, and its
principal owners' ethnicity, race, and sex. Proposed comment 108(d)-2
would note that the financial institution may, but is not required to,
provide the notice on its data collection form. Additionally, proposed
comment 108(d)-2 would include language for the required notice. A
financial institution would be required to use the language set forth
in proposed comment 108(d)-2 or substantially similar language when
providing the notice.
Comment 108(d)-3 would explain that if a financial institution is
providing the notice required by proposed Sec. 1002.108(d) orally, it
must provide the notice prior to asking the applicant if it is a
minority-owned business or women-owned business and prior to asking for
a principal owner's ethnicity, race, or sex. It would further explain
that, if the notice required by proposed Sec. 1002.108(d) is provided
on the same paper or electronic data collection form as the inquiries
about minority-owned business status, women-owned business status, and
the principal owners' ethnicity, race, or sex, the financial
institution would be required to provide the notice at the top of the
form. If the notice required by proposed Sec. 1002.108(d) is provided
in an electronic or paper document that is separate from the data
collection form, the financial institution would be required to provide
the notice at the same time as the data collection form or prior to
providing the data collection form. Additionally, proposed comment
108(d)-3 would clarify that the notice required pursuant to proposed
Sec. 1002.108(d) must be provided with the non-discrimination notices
required pursuant to proposed Sec. 1002.107(a)(18) through (20) and
would reference proposed appendix E for an example.
The Bureau believes that its proposed approach reflects the
feedback from most SERs and commenters who preferred to be able to give
a notice and did not want to hire additional staff or change processes.
While some commenters did not want to provide a notice, section 1071
requires that a financial institution provide a specific notice to an
applicant if the financial institution determines that an employee or
officer should have access to information otherwise subject to the
firewall requirement. As an alternative to providing a notice, a
financial institution could take the steps necessary to establish and
maintain a firewall.
The Bureau seeks comment on its proposed approach to the firewall
requirement and whether a different approach might result in a better
policy outcome. The Bureau also seeks
[[Page 56493]]
comment on the scope of the proposed firewall and the exception. The
Bureau specifically seeks comment on whether the firewall should apply
to information about principal owners' ethnicity and race that is
obtained via visual observation and/or surname. Finally, the Bureau
generally requests comment on whether additional clarification is
needed regarding the firewall requirement.
Section 1002.109 Reporting of Data to the Bureau
Proposed Sec. 1002.109 would address several aspects of financial
institutions' obligations to report 1071 data to the Bureau. First,
proposed Sec. 1002.109(a) would require 1071 data to be collected on a
calendar year basis and reported to the Bureau by June 1 of the
following year, and would address several related issues. Second,
proposed Sec. 1002.109(b) would detail the information that financial
institutions must provide about themselves when reporting 1071 data to
the Bureau. Finally, proposed Sec. 1002.109(c) would address technical
instructions for submitting data to the Bureau.
The Bureau is proposing Sec. 1002.109 to implement ECOA section
704B(f)(1) and pursuant to its authority under 704B(g)(1) to prescribe
such rules and issue such guidance as may be necessary to carry out,
enforce, and compile data pursuant to section 1071. The Bureau is also
proposing Sec. 1002.109(b) pursuant to 704B(e)(2)(H), which requires
financial institutions to compile and maintain as part of their 1071
data any additional data that the Bureau determines would aid in
fulfilling the purposes of section 1071.
109(a) Reporting to the Bureau
109(a)(1) Annual Reporting
Background
ECOA section 704B(f)(1) provides that ``[t]he data required to be
compiled and maintained under [section 1071] by any financial
institution shall be submitted annually to the Bureau.''
SBREFA Proposal Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau stated it was considering
proposing that financial institutions collect 1071 data on a calendar
year basis, and that financial institutions report 1071 data to the
Bureau by a specified time after the end of each calendar year.\714\
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\714\ SBREFA Outline at 39-40.
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SERs and other stakeholders responded to various aspects of the
Bureau's proposals under consideration in the SBREFA Outline on
reporting 1071 data to the Bureau, including reporting frequency,
reporting period, and submission date.\715\
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\715\ The SER feedback in this section-by-section analysis can
be found in the SBREFA Panel Report at 34.
---------------------------------------------------------------------------
Regarding reporting frequency, stakeholder comments were split. One
SER suggested that data reporting be done on a calendar year basis, to
avoid half-year measurements. Some other stakeholders--including
several industry and trade association stakeholders, and a community
group--also supported reporting no more or less frequently than once a
year. Other stakeholders supported reporting on a more frequent basis
than annually. In that latter group, another SER requested ongoing data
reporting, arguing that more frequent reporting is less burdensome by
permitting financial institutions to submit data as applications are
received or loans are made. Three stakeholders (a community group, a
think tank, and a community development lender trade association) also
supported reporting more frequently than annually, especially for
larger financial institutions, arguing that technology enables near
real-time reporting.
Regarding the reporting period and submission date, several trade
associations supported collecting data on a calendar year basis. A
community group suggested an alternative to calendar-year reporting,
specifically a one-year collection period starting on July 1 and ending
on June 30 the next year. The group argued that this alternative
schedule would help financial institutions avoid overlapping
obligations with the calendar year data collection schedule for HMDA. A
SER cautioned against aligning the annual reporting dates for section
1071 with the reporting dates for HMDA, noting that reporting for both
regimes at the same time could strain resources; other stakeholders
echoed this view. Other stakeholders requested that the Bureau
coordinate reporting dates with other Federal agencies, including those
responsible for collecting data from CDFI Fund participants and banks
subject to CRA reporting.
Regarding reporting 1071 data to the Bureau, several SERs noted
that they already report much of the data that a 1071 rule would seem
likely to require to the Treasury Department's CDFI Fund. One SER
requested that the Bureau coordinate with the CDFI Fund on consistency
of definitions, types of data collection, and timing of reporting, and
that the agencies should consider streamlining reporting requirements
through data sharing.
The SBREFA Panel recommended, regarding this issue as well as other
recordkeeping and reporting issues addressed in the SBREFA Outline,
that the Bureau seek comment on these aspects of a 1071 rule, and how
best to implement them in a manner that minimizes cost and burden to
small financial institutions.\716\
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\716\ Id. at 47.
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Proposed Rule
The Bureau is proposing, in Sec. 1002.109(a)(1)(i), to require
that by June 1 following the calendar year for which data are collected
and maintained as required by proposed Sec. 1002.107, a covered
financial institution shall submit its small business lending
application register in the format prescribed by the Bureau. This
approach to reporting frequency and reporting period is consistent with
both the annual submission schedule specified in the statute as well as
with the approach under consideration at SBREFA.
Regarding reporting frequency, while several stakeholders and one
SER advocated for more frequent reporting (especially via application
programming interface (API)), annual reporting is consistent with what
ECOA section 704B(f)(1) provides and with HMDA for most filers.\717\
The Bureau is concerned that requiring more frequent reporting for 1071
data could be unduly onerous for financial institutions, especially
small financial institutions and those with lower application volumes.
---------------------------------------------------------------------------
\717\ Some financial institutions with over 60,000 covered loans
and applications must file HMDA data on a quarterly basis. 12 CFR
1003.5(a)(ii).
---------------------------------------------------------------------------
Further, the Bureau is not proposing that financial institutions
(small or otherwise) be permitted to submit their 1071 data on a real-
time basis. The Bureau believes that this would add complexity to the
Bureau reporting system. The Bureau is concerned that this approach
could result in financial institutions treating the Bureau as their
official recordkeeping system for their 1071 data. Financial
institutions that were required to update or correct their data as a
result of an audit, examination, or compliance review would need to
make such changes within the Bureau's system, requiring the Bureau to
develop an infrastructure that not only accepts real-time submissions,
but also real-time corrections to prior real-time submissions.
Nonetheless, the Bureau is continuing to explore ways it might
facilitate or streamline reporting, particularly for small financial
[[Page 56494]]
institutions. See the section-by-section analysis of proposed Sec.
1002.109(c) below for additional information.
Regarding the reporting period, the Bureau believes there are
advantages to having data collected and reported on a calendar year
basis. Calendar year reporting may facilitate other aspects of the rule
that depend on data that is typically recorded on a calendar year
basis. For instance, other parts of the rule look to annual data, such
as proposed Sec. 1002.105(b), which would use a financial
institution's loan volumes over the prior two calendar years to
determine coverage. Further, the Bureau understands that financial
institutions would generally prefer to have such data collections occur
on a calendar year basis because such an approach would be generally
consistent with their operations. The Bureau is concerned that
requiring an annual reporting period other than the calendar year--such
as July 1 to June 30--could result in additional challenges for
financial institutions in complying with the rule, which could in turn
make errors in collecting and reporting data to the Bureau more likely.
As discussed in more detail below in the section-by-section
analysis of proposed Sec. 1002.114(b) below, the Bureau is considering
whether to require or permit the initial collection of data under the
eventual 1071 rule to begin, following an appropriate implementation
period, at some point during the year rather than on January 1. For
example, if the compliance date were on July 1, 2024, the Bureau would
permit or require all financial institutions to collect and report data
pursuant to proposed Sec. 1002.109(a) for the period July 1 to
December 31, 2024. After this initial partial collection year,
financial institutions would collect data on a calendar year basis.
Regarding the proposed submission date, several stakeholders
(including community groups) requested a March 1 submission deadline on
the grounds that financial institutions comply with a March 1 deadline
for HMDA despite its relative complexity compared to 1071. The Bureau
is proposing a June 1 submission deadline to give additional time for
the compliance staff of financial institutions to dedicate time and
resources focused on preparing a small business lending application
register, after meeting other reporting obligations with earlier
deadlines, such as under HMDA or CRA. This may be especially important
for smaller financial institutions that will rely on the same staff to
comply with other data reporting regimes and this 1071 rule.
Proposed Sec. 1002.109(a)(1)(ii) would require that an authorized
representative of the covered financial institution with knowledge of
the data submitted certify to the accuracy and completeness of data
submitted pursuant to proposed Sec. 1005.109(a). A similar provision
exists in Regulation C (Sec. 1003.5(a)(i)), and the Bureau believes it
would be appropriate to adopt it here as well. Based on the Bureau's
experience with HMDA and Regulation C, the Bureau believes that having
a specific person responsible for certifying to the accuracy and
completeness of data is likely to lead to financial institutions
providing better quality data.
Proposed Sec. 1002.109(a)(1)(iii) would clarify that when the last
day for submission of data prescribed under proposed Sec.
1002.109(a)(1) falls on a date that is not a business day, a submission
is considered timely if it is submitted no later than the next business
day.
The Bureau seeks comment on its proposed approach to the aspects of
reporting addressed in proposed Sec. 1002.109(a), including that the
reporting frequency be annual, that the reporting period be the
calendar year, and that the submission date be June 1 of the next
calendar year. In particular, the Bureau seeks comment with respect to
proposed Sec. 1002.109(a)(1)(i) on whether requiring the submission of
small business lending application registers by June 1 might give rise
to complications for any persons or entities relying on data from the
registers for other purposes, such as Federal regulators scheduling
examinations.
109(a)(2) Reporting by Subsidiaries
ECOA section 704B(f)(1) states that ``any'' financial institution
obligated to report 1071 data to the Bureau must do so annually; the
statute does not expressly address financial institutions that are
themselves subsidiaries of other financial institutions. In the SBREFA
Outline, the Bureau did not address this issue for section 1071
reporting.
Proposed Sec. 1002.109(a)(2) would state that a covered financial
institution that is a subsidiary of another covered financial
institution shall complete a separate small business lending
application register. The subsidiary shall submit its small business
lending application register, directly or through its parent, to the
Bureau. Proposed comment 109(a)(2)-1 would explain that a covered
financial institution is considered a subsidiary of another covered
financial institution for purposes of reporting data pursuant to
proposed Sec. 1002.109 if more than 50 percent of the ownership or
control of the first covered financial institution is held by the
second covered financial institution. This proposed provision mirrors
one that exists for HMDA reporting under Regulation C in Sec.
1003.5(a)(2). The Bureau believes that this proposed provision would
help facilitate compliance with the 1071 rule by permitting parent
financial institutions to coordinate the reporting of all their
subsidiaries' small business lending data together.
The Bureau seeks comment on this aspect of its proposal.
Additionally, the Bureau seeks comment on proposed Sec. 1002.109(a)(2)
in light of proposed Sec. 1002.105(b), which would define a covered
financial institution as a financial institution that originated at
least 25 covered credit transactions for small businesses in each of
the two preceding calendar years. The Bureau seeks comment on whether
this provision may risk creating ambiguity with respect to compliance
and whether additional safeguards may be required to dissuade financial
institutions from creating subsidiaries for the sole purpose of
avoiding the collection and reporting or section 1071 data. The Bureau
also seeks comment on all other aspects of this proposal.
109(a)(3) Reporting Obligations Where Multiple Financial Institutions
Are Involved in a Covered Credit Transaction
Section 1071's requirement to collect and report data for any
``application to a financial institution for credit'' could be read as
applying to more than one financial institution when an intermediary
provides the application to another institution that takes final action
on the application. It might also apply in cases where one application
is simultaneously sent to multiple financial institutions. This broad
reading may serve a useful function, such as comprehensive reporting by
all financial institutions involved in a small business lending
transaction, but could also generate duplicative compliance costs for
financial institutions and potentially detract from the quality of
reported 1071 data, increasing the risk that certain applications are
reported multiple times.
At SBREFA, in considering ECOA section 704B(f)(1), the Bureau
stated that it was considering proposing that in the situation where
more than one party is involved on the lender side of a single small
business loan or application, section 1071's data collection and
reporting requirements would be limited in the same manner as in
[[Page 56495]]
Regulation C. For HMDA, Regulation C provides (in Sec. 1003.4(a) and
comment 4(a)-3) that if more than one financial institution was
involved in the origination of a covered loan, the financial
institution that made the final credit decision approving the
application before closing or account opening shall report the covered
loan as an origination. If there was an origination, then the financial
institution making the final credit decision approving the application
would be responsible for reporting (even if the financial institution
used credit standards set by another party). If more than one financial
institution approved a loan, and the loan was purchased after closing
by one of the financial institutions approving the loan, the purchaser
(such as an assignee) would report the loan. If there was no
origination and multiple financial institutions received the same
application, then any financial institution that made a credit decision
would be responsible for reporting (even if other financial institution
also reported on the same potential non-originated application).
Several SERs voiced support for aligning reporting requirements for
financial institutions that are not the lender of record with the
approach taken for HMDA reporting in the Bureau's Regulation C. One SER
stressed that imposing section 1071 requirements for loan buyers, who
play an important role in assisting CDFIs but do not make credit
decisions, might risk their continued participation. Another CDFI SER
explained that the institution occasionally participates in pooled loan
purchases and recommended that the Bureau ensure that reporting
obligations for such pooled loans are clear.\718\ Other SERs expressed
concern in adopting the Bureau's approach in Regulation C, noting the
differences between small business and residential loan products, and
advocated for simpler approaches. The SBREFA Panel did not provide a
relevant recommendation.
---------------------------------------------------------------------------
\718\ See the section-by-section analysis of proposed Sec.
1002.104(b) above for further discussion of the proposed treatment
of pooled loans.
---------------------------------------------------------------------------
Comments from other stakeholders included several voicing support
for a HMDA-like approach, praising the Bureau's consistent approach and
interest in limiting duplicative information. However, several comments
advocated against the HMDA approach, generally by proffering other
ideas rather than criticizing the rules or outcomes of the HMDA
approach. Alternative suggestions varied, but included suggesting that
data collection and reporting should be required only for the company
most closely interacting with the loan applicant; if a financial
institution receives a covered application, then the application should
be subject to reporting, regardless of outcome; the financial
institution that funded (or would have funded) the loan should be
required to collect and report; and the financial institution that
conducts the underwriting and determines whether the small business
credit applicant qualifies for credit using its underwriting criteria
should be required to report and collect.
Proposed Sec. 1002.109(a)(3) would provide that only one covered
financial institution shall report each covered credit transaction as
an origination, and that if more than one financial institution was
involved in an origination, the financial institution that made the
final credit decision approving the application shall report the loan
as an origination, if the financial institution is a covered financial
institution.
Proposed Sec. 1002.109(a)(3) would further provide that if there
was no origination, then any covered financial institution that made a
credit decision shall report the application. The Bureau is aware that
under certain lending models as they operate today, financial
institutions may not always be aware of whether another financial
institution originated a credit transaction. The Bureau believes that
information on whether there was an origination should generally be
available, or that lending models can be adjusted to provide this
information at low cost. For example, if an applicant applies to
Financial Institutions A and B, and then withdraws an application with
Financial Institution A, then Financial Institution A should be able to
ascertain whether the applicant obtained credit from Financial
Institution B.
Proposed comment 109(a)(3)-1 would provide general guidance on how
to report originations and applications involving more than one
institution. In short, if more than one financial institution was
involved in the origination of a covered credit transaction, the
financial institution that made the final credit decision approving the
application shall report the covered credit transaction as an
origination. Proposed comment 109(a)(3)-2 would offer examples
illustrating how a financial institution should report a particular
application or originated covered credit transaction. Proposed comment
109(a)(3)-3 would explain that if a covered financial institution made
a credit decision on a covered application through the actions of an
agent, the financial institution reports the application, and provides
an example. State law determines whether one party is the agent of
another. While these proposed comments assume that all of the parties
are covered financial institutions, the same principles and examples
would apply if any of the parties is not a covered financial
institution.
The Bureau seeks comment on this aspect of its proposal. In
particular, the Bureau seeks comment with respect to proposed Sec.
1002.109(a)(3) on whether, particularly in the case of applications
that a financial institution is treating as withdrawn or denied, the
financial institution can ascertain if a covered credit transaction was
originated by another financial institution without logistical
difficulty or significant compliance cost.
109(b) Financial Institution Identifying Information
Beginning in 1989, Regulation C required financial institutions
reporting HMDA data to use a discrete transmittal sheet to provide
information on themselves separate from the loan/application registers
used to submit HMDA data.\719\ The 2015 HMDA final rule replaced the
transmittal sheet requirement with Regulation C Sec. 1003.5(a)(3),
which requires that a financial institution reporting HMDA data to
provide with its submission (i) its name; (ii) the calendar year the
data submission covers; (iii) the name and contact information of a
person who may be contacted with questions about the institution's
submission; (iv) its appropriate Federal agency; (v) the total number
of entries contained in the submission; (vi) its Federal Taxpayer
Identification Number; and (vii) its Legal Entity Identifier
(LEI).\720\ The Bureau and FFIEC publish information on financial
institutions that report HMDA data in the HMDA Reporter Panel, which
includes the required submission information, provided by financial
institutions under Sec. 1003.5(a)(3), as well as other data derived
from this information.\721\
---------------------------------------------------------------------------
\719\ See 54 FR 51356, 51361 (Dec. 15, 1989) (requiring
financial institutions to use the transmittal sheet and loan/
application register in appendix A).
\720\ 80 FR 66128, 66526 (Oct. 28, 2015) (deleting appendix A
and relocating its substantive requirements to Sec. 1003.5(a)(3)).
\721\ See Fed. Fin. Insts. Examination Council, HMDA Reporter
Panel, https://www.ffiec.gov/hmdarawdata/FORMATS/HMDAReporterPanel.pdf (last visited July 27, 2021).
---------------------------------------------------------------------------
The Bureau is proposing to collect information regarding financial
institutions that report 1071 data, similar to the information required
[[Page 56496]]
under Regulation C. Specifically, proposed Sec. 1002.109(b) would
require that a financial institution provide the following information
about itself as part of its submission: (1) Its name; (2) its
headquarters address; (3) the name and business contact information of
a person who may be contacted with questions about the financial
institution's submission; (4) its Federal prudential regulator, if
applicable; (5) its Federal Taxpayer Identification Number; (6) its
LEI; (7) its Research, Statistics, Supervision, and Discount
identification (RSSD ID) number, if applicable; (8) its parent
institution information, if applicable (including the name, LEI, and
RSSD ID number of its immediate parent entity and top-holding parent
entity, if applicable); (9) the type of financial institution, chosen
from a list provided; and (10) whether the financial institution is
voluntarily reporting 1071 data.
As discussed below, the Bureau believes it would be appropriate to
require each of these pieces of information regarding financial
institutions reporting 1071 data. As a practical matter, the Bureau
expects that this information might be provided by a financial
institution when it initially sets up an account with the Bureau's 1071
data submission platform to allow it to file 1071 data as required by
the rule. Thus, this information might exist in the Bureau's 1071 data
submission system and be updated by the financial institution as
needed.
As described in detail below, the Bureau believes that detailed
information on the financial institutions reporting 1071 data is
necessary to carry out, enforce, and compile data under section 1071,
pursuant to ECOA section 704B(f)(1) and (g)(1), and would aid in
fulfilling the purposes of section 1071, pursuant to 704B(e)(2)(H). To
analyze 1071 data, the Bureau and other potential users of the data
would need information on the financial institutions that are taking
covered applications and making covered credit transactions. Fair
lending analysis is based on a review of the decisions financial
institutions make on applications. Similarly, an analysis of the
business and community development needs of a given community is based
on understanding the volume and geography of the lending activities of
specific financial institutions.
With the possible exception of the LEI (in proposed Sec.
1002.109(b)(6) and (8)(ii) and (v)) in certain circumstances, the
Bureau believes that financial institutions already have all the
information that would be required of them under proposed Sec.
1002.109(b), and that being required to provide this information to the
Bureau should not pose any particular difficulties or costs on
financial institutions.
The Bureau seeks comment on its approach to collecting information
on financial institutions, including each of the items listed in
proposed Sec. 1002.109(b)(1) through (10) as well as whether the
Bureau should require the reporting of any other information on
financial institutions. Additional requests for comment specific to
certain pieces of information are included below.
Paragraph 109(b)(1)
During the SBREFA process, in the context of discussing privacy,
some stakeholders expressed an aversion to the collection and
publication of information on financial institutions. Some
stakeholders, including SERs and some larger entities, commented that
the Bureau should not publish the names of financial institutions
reporting 1071 data, asserting that those financial institutions would
face reputational risks. Some stakeholders even appeared to suggest
that the Bureau not collect the names of financial institutions at all.
Proposed Sec. 1002.109(b)(1) would require a financial institution
to provide its name. Regulation C (Sec. 1003.5(a)(2)(i)) requires
financial institutions to provide their names on their transmittal
sheets when filing HMDA data, and the Bureau believes that a similar
requirement would be appropriate here.
The Bureau believes that collecting a financial institution's name
(as well as all the other identifying information in proposed Sec.
1002.109(b)) is necessary to carry out, enforce, and compile data under
section 1071, and would aid in fulfilling the purposes of section 1071.
For both of section 1071's statutory purposes, the identity of the
financial institution taking covered applications and originating
covered credit transactions is critical. Without knowing the financial
institution's name, fair lending enforcement would not be possible.
Analyzing business and community development needs is much improved
when it is possible to identify which financial institutions are
operating in specific geographic areas.
There are additional practical considerations. Examinations for
compliance with section 1071 would be difficult, if not impossible,
without the name of the financial institution associated with a
specific small business lending application register. Further, it would
be difficult for the Bureau to administer a website for 1071 data
submissions without creating logins assigned to specific financial
institutions. Finally, the Bureau is proposing in Sec. 1002.110(c)
that financial institutions' statutory obligation to make 1071 data
available to any member of the public, upon request, pursuant to ECOA
section 704B(f)(2)(B) would be satisfied by the institutions' directing
the public to the Bureau's website for this information. Without the
financial institution's name (and other relevant identifying
information), proposed Sec. 1002.110(c) would not satisfy this
statutory requirement.
Paragraph 109(b)(2)
Proposed Sec. 1002.109(b)(2) would require a financial institution
to provide the physical address of its headquarters location. The
headquarters address of a financial institution would provide
geographic information that would aid in fulfilling the statutory
purposes of section 1071, including, for instance, analyses of the
connection between a financial institution's location and the business
and community development needs where it operates. It will also help
identify and differentiate financial institutions, particularly
nondepository financial institutions, that have similar names.
Paragraph 109(b)(3)
Proposed Sec. 1002.109(b)(3) would require a financial institution
to provide the name and business contact information of a person who
may be contacted with questions about the financial institution's 1071
data submission. Regulation C includes a similar requirement in Sec.
1003.5(a)(3)(iii), and the Bureau believes it would be appropriate to
require such information here. In general, the Bureau has found, from
its experience with HMDA and Regulation C, that requiring the name and
business contact information of a person who may be contacted with
questions generally facilitates communication in the event that follow-
up on a submission is required.
Paragraph 109(b)(4)
Proposed Sec. 1002.109(b)(4) would require a financial institution
that is a depository institution to provide the name of its Federal
prudential regulator, if applicable. Proposed comment 109(b)(4)-1 would
explain how to determine which Federal prudential regulator (i.e., the
OCC, the FDIC, the Board, or the NCUA) a financial institution should
report. Proposed comment 109(b)(4)-2 would provide guidance on when a
financial institution must report a new Federal prudential regulator,
for instance, in the event of a merger or a change of charter.
[[Page 56497]]
Regulation C includes a similar provision in Sec.
1003.5(a)(3)(iv), requiring financial institutions to identify the
appropriate Federal agency. In the Regulation C context, the purpose of
this requirement is to identify the agency to which a financial
institution must report its HMDA data--often the financial
institution's Federal prudential regulator for depository institutions,
and other agencies for nondepository institutions.\722\ Here, the
Bureau believes a requirement to report a financial institution's
Federal prudential regulator would be appropriate for different
reasons. The reporting of a financial institution's Federal prudential
regulator may enable analysts to more easily identify other information
about a financial institution that its Federal prudential regulator may
make publicly available, such as Call Report data; further, such
additional data may be used to perform analyses of the characteristics
of financial institution's 1071 data by regulator. Nondepository
institutions generally do not have Federal prudential regulators and
would not report one under this proposed requirement.
---------------------------------------------------------------------------
\722\ 12 U.S.C. 2803(h).
---------------------------------------------------------------------------
Paragraph 109(b)(5)
Proposed Sec. 1002.109(b)(5) would require a financial institution
to provide its Federal Taxpayer Identification Number (TIN). Proposed
comment 109(b)(5)-1 would explain when a financial institution should
report a new Federal TIN in the event that it obtains a new Federal TIN
(for instance, because the financial institution merges with another
financial institution and adopts the Federal TIN of the other financial
institution).
Regulation C Sec. 1003.5(a)(3)(iv) requires financial institutions
to report Federal TIN with their HMDA submissions, and the Bureau
believes such a requirement would be appropriate here as well. A
financial institution's Federal TIN may be used to identify other
publicly available information on a financial institution, and combine
that data with a financial institution's 1071 register to enhance the
types of analysis that can be conducted to further the two statutory
purposes of section 1071.
Paragraph 109(b)(6)
Proposed Sec. 1002.109(b)(6) would require a financial institution
to provide its LEI. Proposed comment 109(b)(6)-1 would explain what an
LEI is and would make clear that financial institutions that do not
currently have an LEI must obtain one, and that financial institutions
have an ongoing obligation to maintain an LEI in order to satisfy
proposed Sec. 1002.109(b)(6).
An LEI is a unique, 20-digit identifier issued by an entity
endorsed or otherwise governed by the Global LEI Foundation. Regulation
C requires financial institutions to obtain and use an LEI, which
facilitates the analysis of HMDA data and aids in the recognition of
patterns by more precisely identifying financial institutions and
affiliated companies.\723\ The LEI also helps financial institutions
that report HMDA data generate the universal loan identifier used to
identify application or application-level records in Regulation C.
Similarly, in the 1071 context, a financial institution's LEI would
also likely facilitate analyses of 1071 data,\724\ by helping the
Bureau and other stakeholders better understand a financial
institution's corporate structure. The Bureau would also require, in
proposed Sec. 1002.107(a)(1), financial institutions to use their LEIs
to create unique identifiers for covered applications. The Bureau
believes this, in turn, would result in more sophisticated and useful
analyses of the financial institution's 1071 data.
---------------------------------------------------------------------------
\723\ 80 FR 66128, 66248 (Oct. 28, 2015) (noting that, despite
the cost, the Bureau believed that the benefit of all HMDA reporters
using an LEI justified the associated costs by improving the ability
to identify financial institution reporting the data and link it to
its corporate family).
\724\ Id. (``By facilitating identification, this requirement
will help data users achieve HMDA's objectives of identifying
whether financial institutions are serving the housing needs of
their communities, as well as identifying possible discriminatory
lending patterns.'').
---------------------------------------------------------------------------
Paragraph 109(b)(7)
Proposed Sec. 1002.109(b)(7) would require a financial institution
to report its RSSD ID number, if applicable. An RSSD ID is a unique
identifying number assigned to institutions, including main offices and
branches, by the Federal Reserve System. All depository institutions
know and regularly report their RSSD ID numbers on FFIEC regulatory
forms. RSSD ID would help users of the 1071 data to link the data for a
particular financial institution to other regulatory data, including
the connections between a particular financial institution with others.
The Bureau believes that this additional information would result in
more sophisticated and useful analyses of the financial institution's
1071 data.
Proposed comment 109(b)(7)-1 would explain what a RSSD ID number is
and how financial institutions that have one might find it. Financial
institutions that do not have RSSD IDs, typically nondepository
institutions, would not be required to obtain them, and would report
``not applicable'' in that field.
Paragraph 109(b)(8)
Proposed Sec. 1002.109(b)(8) would require a financial institution
to provide certain information on its parent entities, if applicable.
This information would include the name, the LEI (if available), and
the RSSD ID (if available) of the financial institution's immediate
parent entity and the financial institution's top-holding parent
entity.
Proposed comments 109(b)(8)-1 and -2 would provide guidance on how
to identify a financial institution's immediate parent entity and a
financial institution's top-holding parent entity. Proposed comment
109(b)(8)-3 would explain that a financial institution would report its
parent entities' LEIs if they have them, but that no parent entity
would be required to obtain an LEI if it did not already have one.
Proposed comment 109(b)(8)-4 would likewise explain that a financial
institution would report its parent entities' RSSD ID numbers if they
had them.
The Bureau believes that the collection of information on a
financial institution's structure would further both of the statutory
purposes of section 1071. Data on a financial institution's
organizational structure that is self-reported would be more accurate
than generating such information from publicly available sources.\725\
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\725\ Currently, the Bureau, on behalf of the FFIEC and HUD,
generates and publishes information on filers including parent
company and top holder information. See Fed. Fin. Insts. Examination
Council, Public Panel--Data Fields with Values and Definitions,
https://ffiec.cfpb.gov/documentation/2021/panel-data-fields/ (last
visited July 27, 2021).
From 1989 to 1998, Regulation C required financial institutions
to report their parent entity information on transmittal sheets. 54
FR 51356, 51361, 51368 (Dec. 15, 1989) (adding the transmittal sheet
requirement, including parent institution information, to appendix A
to Regulation C); 63 FR 52140, 52141 (Sept. 30, 1998) (stating that
the Board believed that the availability of information from the
FFIEC website makes the continuation of the requirement for parent
company information on the transmittal sheet unnecessary). In 2002,
Regulation C again required financial institutions to report parent
information on transmittal sheets on the grounds that data users
asserted the importance of having the parent institution information
associated with the HMDA data itself, rather than in a separate
database provided by the National Information Center. 67 FR 7221,
7232 (Feb. 15, 2002).
In the 2014 HMDA NPRM, the Bureau proposed to continue requiring
that financial institutions identify their parent companies. The
Bureau stated that because information about parent companies was
not yet available through the LEI, the Bureau believed it was
necessary to maintain this requirement to ensure that financial
institutions' submissions can be linked with those of their
corporate parents. 79 FR 51731, 51861 (Aug. 29, 2014). However,
required reporting of parent company information stopped under the
2015 HMDA final rule on the grounds that once the LEI is fully
implemented, parent entity information was expected to become
available. 80 FR 66128, 66248 (Oct. 28, 2015) (citing Fin. Stability
Bd., LEI Implementation Grp., Fourth Progress Notes on the Global
LEI Initiative, at 4 (Dec. 11, 2012), https://www.financialstabilityboard.org/wp-content/uploads/r_121211.pdf?page_moved=1)(noting that the LEI Implementation Group
is developing proposals for additional reference data on the direct
and ultimate parent(s) of legal entities and on relationship data
more generally). However, the Bureau has subsequently encountered
difficulties using LEI to obtain parent company information, and
thus is proposing here to require that it be provided directly by
financial institutions.
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[[Page 56498]]
Better structural information would, for instance, improve the
accuracy of peer analyses, which would facilitate fair lending
enforcement. Further analyzing trends over time would be useful for
identifying institutions that may give rise to fair lending risk. Given
structural changes to institutions over time, information that enables
the identification of institutions consistently and accurately over
time is important to this trend analysis.
In addition, the Bureau believes that information on a financial
institution's structure would advance the business and community
development purpose of section 1071 by facilitating the analysis of
whether and how corporate structure impacts how a financial institution
provides access to credit to small businesses. In particular, this
structural information could be used to understand how regulation in
one part of a corporate structure impacts unregulated entities within
the same corporate group.
Proposed Sec. 1002.109(b)(8) would result in more accurate and
comprehensive corporate structure information by requiring financial
institutions to provide not only the name of one parent entity, but the
immediate parent entity of the financial institution as well as the
top-holding parent of the financial institution (for some financial
institutions, this would be a bank holding company). For the reasons
set out in the section-by-section analyses of proposed Sec.
1002.109(b)(6) and (7), the reporting of LEI and RSSD ID of parent
entities would improve the ability of regulators and other stakeholders
to map out more precisely and fully the often complex networks of a
financial institution's corporate structure. This more detailed and
accurate structural data, in turn, may be used to perform more
sophisticated and useful analyses of the financial institution's 1071
data. In addition, this information will help the Bureau confirm
whether data are appropriately being reported by financial institutions
on behalf of their subsidiaries pursuant to proposed Sec.
1002.109(a)(2).
With respect to proposed Sec. 1002.109(b)(8), the Bureau seeks
comment on whether it should require any other parent entity
information to be provided by financial institutions reporting 1071
data.
Paragraph 109(b)(9)
Proposed Sec. 1002.109(b)(9) would require a financial institution
to report the type of financial institution it is, selecting the
applicable type or types of institution from a list in proposed comment
109(b)(9)-1. The comment would also explain that a financial
institution shall select all applicable types. The list provided in the
proposed comment includes: (i) Bank or savings association, (ii)
minority depository institution, (iii) credit union, (iv) nondepository
institution, (v) CDFI, (vi) other nonprofit financial institution,
(vii) Farm Credit System institution, (viii) government lender, (ix)
commercial finance company, (x) equipment finance company, (xi)
industrial loan company, (xii) fintech, and (xiii) other. Proposed
comment 109(b)(9)-2 would explain that a financial institution reports
the type of financial institution as ``other'' where none of the
enumerated types of financial institution appropriately describe the
applicable type of financial institution, and the institution reports
the type of financial institution as free-form text.
The Bureau believes that information regarding the type of
financial institution reporting 1071 data would greatly assist in the
analysis conducted by the Bureau and other users of 1071 data.
Information providing further details on types of financial
institutions would help advance the statutory purposes of section 1071;
fair lending analysts might use this information on the financial
institution type (for instance, depository institution compared to
nondepository institutions) as a control variable for their analyses.
The inclusion of this information may also assist in an assessment of
the business and community development needs of an area as it may
provide analysts a means of determining what types of financial
institutions serve certain geographic areas.
In addition, the Bureau believes that this information, combined
with the parent entity information required by proposed Sec.
1002.109(b)(8), would offer more accurate and granular data on
nondepository institutions within the same corporate group as
depository institutions. Currently, the National Information Center
database, which contains information on the structure of corporate
groups that contain banks and other financial institutions, provides
little information on nondepository institutions. As set out in the
section-by-section analysis of proposed Sec. 1002.109(b)(8) above,
information on corporate structure that financial institutions self-
report could fill in reporting gaps, including more specific
information on financial institution types.
With respect to proposed Sec. 1002.109(b)(9), the Bureau seeks
comment on whether it should consider removing, modifying, or adding
any types of financial institutions to the list in proposed comment
109(b)(9)-1, including in order to manage unique privacy interests
(such as, for example, whether a category for captive finance companies
that lend to applicants that share the same branding should be included
on the list). The Bureau further seeks comment on whether it should
consider defining any of the types of financial institutions in the
proposed list, in particular whether and how to define the term
``fintech.''
Paragraph 109(b)(10)
Proposed Sec. 1002.109(b)(10) would require a financial
institution to indicate whether it is not a covered financial
institution under proposed Sec. 1002.105(a) and is thus voluntarily
reporting covered applications.
The Bureau believes it is important to be able to specifically
identify these institutions' transactions in the data set. If reporting
were restricted to only financial institutions required to report, the
1071 data would accurately reflect the overall population of financial
institutions subject to 1071. However, institutions that do not meet
the rule's loan-volume thresholds in proposed Sec. 1002.105(b) may
choose to voluntarily report 1071 data pursuant to proposed Sec.
1002.5(a)(4)(vii) through (ix). Those institutions that voluntarily
report data may not be representative of all potential voluntary
reporters and may differ from required reporters. Without a specific
designation, it may not be possible to distinguish an institution
voluntarily reporting data after a single year of exceeding the loan-
volume threshold from an institution reporting because it has already
exceeded the loan-volume threshold in two consecutive years. The Bureau
believes that users of 1071 data would benefit from being able to use
this information as a control variable, resulting in better fair
lending as well as business and community development analyses, to
account for certain differences that may exist as between required and
voluntary reporters.
[[Page 56499]]
109(c) Procedures for the Submission of Data to the Bureau
ECOA section 704B(g)(1) authorizes the Bureau to prescribe rules
and issue such guidance as may be necessary to carry out, enforce, and
compile data pursuant to section 1071. Section 704B(g)(3) provides for
the Bureau to issue guidance to facilitate compliance with the
requirements of section 1071.
The SBREFA Panel recommended that the Bureau seek comment on the
recordkeeping and reporting issues addressed in the SBREFA
Outline,\726\ including how best to implement them in a manner that
minimizes cost and burden to small financial institutions. The Panel
also recommended that the Bureau explore ways to streamline reporting
for small financial institutions.
---------------------------------------------------------------------------
\726\ SBREFA Panel Report at 47.
---------------------------------------------------------------------------
Proposed Sec. 1002.109(c) would direct financial institutions to a
publicly available website containing the Bureau's Filing Instructions
Guide, which would set out technical instructions for the submission of
data to the Bureau pursuant to proposed Sec. 1002.109. Regulation C
Sec. 1003.5(a)(5) contains a comparable provision, which directs users
to a Bureau website that sets out instructions for the submission of
HMDA data, and the Bureau believes a similar approach would be
appropriate here.
The Bureau intends to develop a system to receive, process, and
publish the data collected pursuant to section 1071 and proposed
subpart B. In doing so, the Bureau will benefit from what it learned in
its multiyear effort in developing the HMDA Platform, through which
entities file data as required under HMDA and Regulation C. The HMDA
Platform satisfies regulatory requirements with an entirely web-based,
open source system,\727\ using a container-based microservices approach
\728\ and modern cloud architectures. It was designed to be
continuously improved to incorporate evolving technologies and better
serve HMDA data users.\729\ Publication of the HMDA data is designed to
meet user needs and includes, for example, a Data Browser to filter and
download datasets and explore the data using an interactive map. As it
did in developing the HMDA Platform, the Bureau's work in developing
the section 1071 data submission system will focus on satisfying all
legal requirements, promoting data accuracy, and reducing burden. Also
as with HMDA, the Bureau anticipates providing a Filing Instructions
Guide and related materials for financial institutions.
---------------------------------------------------------------------------
\727\ See GitHub, CFPB/HMDA Platform, https://github.com/cfpb/hmda-platform (last visited July 22, 2021).
\728\ See DockerHub, HMDA, https://hub.docker.com/u/hmda (last
visited July 22, 2021).
\729\ On March 22-26, 2021, the Bureau hosted a HMDA Virtual
Tech Sprint to explore other potential innovations related to HMDA
data submission and publication. See https://www.consumerfinance.gov/rules-policy/innovation/cfpb-tech-sprints/home-mortgage-disclosure-act-tech-sprint/.
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The Bureau seeks comment on this aspect of the proposal, including
the provision of technical instructions for data submission via a
Bureau website and how best to implement the provisions of this section
in a manner that minimizes cost and burden particularly to small
financial institutions while implementing all statutory obligations.
The Bureau also seeks comment on ways it could streamline reporting for
small financial institutions.
Other Reporting Issues
Regulation C Sec. 1003.5(a)(1)(i) provides that a financial
institution shall submit its annual loan/application register in
electronic format to the appropriate Federal agency. Regulation C does
not provide for the submission of HMDA data by unaffiliated third
parties directly on behalf of financial institutions in the way that a
parent institution may submit HMDA data on behalf of its subsidiary
under Sec. 1003.5(a)(2) and comment 5(a)-3. The Bureau understands
from financial institutions that report HMDA data to the Bureau that
most institutions use third party software vendors in some way to help
them prepare or submit their loan/application registers to the Bureau.
The Bureau seeks comment on whether it should permit third parties
(such as financial software vendors) to submit to the Bureau a small
business lending application register on behalf of a financial
institution, including whether financial institutions should be
required to designate third parties authorized to submit registers on
their behalf.
Section 1002.110 Publication of Data
Proposed Sec. 1002.110 would address several issues surrounding
publication of section 1071 data. First, proposed Sec. 1002.110(a)
would address annual publication of application-level data on the
Bureau's website, subject to deletions or modifications based on the
Bureau's consideration of privacy interests. Second, proposed Sec.
1002.110(b) would state that the Bureau may, at its discretion, compile
and aggregate data submitted by financial institutions and may publish
such compilations or aggregations as the Bureau deems appropriate.
Third, proposed Sec. 1002.110(c) would require a covered financial
institution to publish on its website a statement that its 1071 data,
as modified by the Bureau, are or will be available on the Bureau's
website. Finally, proposed Sec. 1002.110(d) would provide when a
covered financial institution shall make the notice required by
proposed Sec. 1002.110(c) available to the public and how long it
shall maintain the notice on its website.
The Bureau is proposing Sec. 1002.110 to implement ECOA section
704B(f)(2)(B) and (C), which require the Bureau to adopt regulations
addressing the form and manner that 1071 data are made available to the
public, and pursuant to its authority under 704B(g)(1) to prescribe
such rules and issue such guidance as may be necessary to carry out,
enforce, and compile data pursuant to section 1071. The Bureau is also
proposing Sec. 1002.110(b) pursuant to 704B(f)(3), which permits the
Bureau, at its discretion, to compile and aggregate 1071 data, and to
publish such aggregate data.
110(a) Publication of Small Business Lending Application Registers and
Associated Financial Institution Information
ECOA section 704B(f)(2)(C) requires that the Bureau annually make
the 1071 data it receives from financial institutions available to the
public in a such form and in such manner as the Bureau determines by
regulation. The Bureau addressed this issue in the SBREFA Outline as
part of its discussion regarding privacy considerations; \730\ SER and
other stakeholder comments regarding privacy issues are addressed in
part VI below. Proposed Sec. 1002.110(a) would state that the Bureau
shall make available to the public generally the data reported to it by
financial institutions pursuant to proposed Sec. 1002.109, subject to
deletions or modifications made by the Bureau, at its discretion, if
the Bureau determines that the deletion or modification of the data
would advance a privacy interest. (The Bureau is proposing to make such
determinations using a balancing test, as discussed in detail in part
VI below.) The Bureau shall make such data available on an annual
basis, by publishing it on the Bureau's website.
---------------------------------------------------------------------------
\730\ SBREFA Outline at 40-41.
---------------------------------------------------------------------------
The Bureau seeks comment on its proposed approach to implementing
ECOA section 704B(f)(2)(C).
[[Page 56500]]
110(b) Publication of Aggregate Data
ECOA section 704B(f)(3) provides that the Bureau may, at its
discretion ``compile and aggregate data collected under this section
for its own use'' and ``make public such compilations of aggregate
data.'' The Bureau did not address this issue at SBREFA.
Proposed Sec. 1002.110(b) would state that the Bureau may, at its
discretion, compile and aggregate data submitted by financial
institutions pursuant to proposed Sec. 1002.109, and make any
compilations or aggregations of such data publicly available as the
Bureau deems appropriate. The Bureau believes that publication of
certain such compilations and aggregations may provide useful data to
the public to supplement the Bureau's publication of application-level
data pursuant to proposed Sec. 1002.110(a). This is especially true of
application-level data fields that the Bureau may choose, using its
proposed balancing test (described in parts VI.C.1 and .2 below) to
modify or delete before publication pursuant to proposed Sec.
1002.110(a).
The Bureau seeks comment on this aspect of its proposal.
110(c) Statement of Financial Institution's Small Business Lending Data
Available on the Bureau's Website and 110(d) Availability of Statements
Background
ECOA section 704B(f)(2)(B) requires that the data compiled and
maintained by financial institutions shall be ``made available to any
member of the public, upon request, in the form required under
regulations prescribed by the Bureau.''
SBREFA Proposal Under Consideration and Feedback Received
The Bureau stated in the SBREFA Outline that it was considering
proposing an approach in which financial institutions could satisfy
this requirement by referring the public to the Bureau's website where
1071 data would be available.\731\ Under this approach, the 1071 data
would be available with any modifications or deletions required based
on the Bureau's application of the balancing test described in part VI
below. The Bureau also stated that it considered requiring financial
institutions to make their own data available to the public directly,
upon request. However, the Bureau was concerned that this approach
could involve greater burden for financial institutions, lead to
privacy risks resulting from errors by individual financial
institutions implementing any modifications or deletions required by
the Bureau, and be less efficient overall.
---------------------------------------------------------------------------
\731\ Id. at 41-42.
---------------------------------------------------------------------------
One SER and several industry stakeholders expressed strong support
for the Bureau's proposal under consideration that the public be
directed to access 1071 data via the Bureau's website, rather than
requiring financial institutions to provide the data themselves upon
request.\732\ These stakeholders expressed concern that a requirement
that financial institutions themselves provide 1071 data to the public
upon request would be burdensome, adding complexity to the process,
making errors more likely, and giving rise to data privacy risks. One
community group asserted that the Bureau should require financial
institutions to provide 1071 data within 30 days of a request from the
public and, absent this, that the Bureau should make application-level
1071 data available to the public quarterly rather than annually.
---------------------------------------------------------------------------
\732\ SBREFA Panel Report at 34.
---------------------------------------------------------------------------
The SBREFA Panel recommended, regarding this issue as well as other
recordkeeping and reporting issues addressed in the SBREFA Outline,
that the Bureau seek comment on these aspects of a 1071 rule, and how
best to implement them in a manner that minimizes cost and burden to
small financial institutions.\733\
---------------------------------------------------------------------------
\733\ Id. at 47.
---------------------------------------------------------------------------
Proposed Rule
Proposed Sec. 1002.110(c) would require that a covered financial
institution make available to the public on its website, or otherwise
upon request, a statement that the covered financial institution's
small business lending application register, as modified by the Bureau
pursuant to proposed Sec. 1002.110(a), is or will be available on the
Bureau's website. The Bureau is proposing this approach, which is
consistent with its approach under consideration at SBREFA, for the
reasons discussed above, including that this approach would reduce
potential burdens on financial institutions associated with publishing
modified data, would reduce privacy risks resulting from errors by
individual financial institutions implementing any modifications or
deletions required by the Bureau, and would be more efficient overall.
Regulation C (Sec. 1003.5(c)(1)) implements a similar statutory
requirement regarding the form of data reporting and requires financial
institutions to direct any public requests for HMDA data they receive
to the Bureau; \734\ the Bureau believes that a similar provision would
be appropriate here to maintain continuity across reporting regimes,
and because the Bureau believes that this provision would help ensure
consistent implementation of any modification or deletion decisions
that the Bureau determines would advance a privacy interest.
---------------------------------------------------------------------------
\734\ 12 U.S.C. 2803(j)(1).
---------------------------------------------------------------------------
Proposed Sec. 1002.110(c) would also state that a financial
institution shall use language provided by the Bureau, or substantially
similar language, to satisfy this requirement to provide a statement.
Proposed comment 110(c)-1 would provide model language that financial
institutions can use to comply with proposed Sec. 1002.110(c).
Proposed comment 110(c)-2 would provide guidance to financial
institutions that do not have websites.
Proposed Sec. 1002.110(d) would provide that a covered financial
institution shall make the notice required by proposed Sec.
1002.110(c) available to the public on its website when it submits a
small business lending application register to the Bureau pursuant to
proposed Sec. 1002.110(a), and shall maintain the notice for as long
as it has an obligation to retain its small business lending
application registers pursuant to proposed Sec. 1002.111(a).
The Bureau seeks comment on its proposed approach to implementing
ECOA section 704B(f)(3), including how best to implement proposed Sec.
1002.110(c) and (d) in a manner that minimizes cost and burden
particularly on small financial institutions while implementing all
statutory obligations.
Section 1002.111 Recordkeeping
Proposed Sec. 1002.111 would address several aspects of the
recordkeeping requirements for 1071 data. First, proposed Sec.
1002.111(a) would require a covered financial institution to retain
evidence of its compliance with this section, which includes a copy of
its small business lending application register, for at least three
years after submitting the register pursuant to proposed Sec.
1002.109. Second, proposed Sec. 1002.111(b) would require a financial
institution to maintain, separately from the rest of the application
and accompanying information, an applicant's responses to a financial
institution's inquiries required by ECOA section 704B(b)(1) (i.e.,
whether the applicant is a minority-owned business or a women-owned
business, and regarding the ethnicity, race, and sex of the applicant's
principal owners). Finally, proposed Sec. 1002.111(c) would require
that, in compiling and maintaining any records under
[[Page 56501]]
proposed Sec. Sec. 1002.107 and 1002.111(b), or reporting data
pursuant to proposed Sec. 1002.109, a financial institution shall not
include personally identifiable information concerning any individual
who is, or is connected with, an applicant.
The Bureau is proposing Sec. 1002.111 to implement ECOA section
704B(f)(2)(A), which requires financial institutions to compile and
maintain 1071 data for at least three years; 704B(b)(2), which requires
financial institutions to maintain a record of the responses to the
inquiry required by 704B(b)(1), separate from the application and
accompanying information; and 704B(e)(3), which provides that in
compiling and maintaining 1071 data, a financial institution may not
include personally identifiable information concerning an individual
who is, or is connected with, an applicant. The Bureau is also
proposing Sec. 1002.111 pursuant to its authority under 704B(g)(1) to
prescribe such rules and issue such guidance as may be necessary to
carry out, enforce, and compile data pursuant to section 1071.
111(a) Record Retention
ECOA section 704B(f)(2)(A) requires that information compiled and
maintained under section 1071 be retained for not less than three years
after the date of preparation. In the SBREFA Outline, the Bureau stated
that it was considering proposing that a financial institution retain
its 1071 data for at least three years after they are submitted to the
Bureau.\735\ The Bureau received little feedback on this issue; a few
stakeholders opined that the three-year retention period was
acceptable.
---------------------------------------------------------------------------
\735\ SBREFA Outline at 39.
---------------------------------------------------------------------------
The SBREFA Panel recommended, regarding this issue as well as other
recordkeeping and reporting issues addressed in the SBREFA Outline,
that the Bureau seek comment on these aspects of a 1071 rule, and how
best to implement them in a manner that minimizes cost and burden to
small financial institutions.\736\
---------------------------------------------------------------------------
\736\ SBREFA Panel Report at 47.
---------------------------------------------------------------------------
Proposed Sec. 1002.111(a) would require that a financial
institution retain a copy of its small business lending application
register for three years after the register is submitted to the Bureau
pursuant to proposed Sec. 1002.109. This proposed approach is
consistent with the approach that the Bureau considered proposing at
SBREFA. By way of comparison, under Regulation C, financial
institutions must retain the loan/application registers that they
submit to the Bureau for three years.\737\ This reflects the
requirement in HMDA itself that a LAR be retained for three years after
it is made available.\738\
---------------------------------------------------------------------------
\737\ Regulation C Sec. 1003.5(a)(1).
\738\ 12 U.S.C. 2803(j)(6).
---------------------------------------------------------------------------
Proposed comment 111(a)-1 would provide examples of what evidence
of compliance with the proposed provision is likely to include.
Proposed comment 111(a)-2 would require that a creditor that is
voluntarily, under Sec. 1002.5(a)(4)(vii) and (viii), collecting
information pursuant to subpart B but is not required to report that
data to the Bureau, complies with proposed Sec. 1002.111(a) by
retaining evidence of compliance with subpart B for at least three
years after June 1 of the year following the year that data was
collected.
The Bureau seeks comment on its proposed approach to implementing
ECOA section 704B(f)(2)(A), including how best to implement proposed
Sec. 1002.111(a) in a manner that minimizes cost and burden
particularly on small financial institutions while implementing all
statutory obligations.
111(b) Certain Information Kept Separate From the Rest of the
Application
ECOA section 704B(b)(2) requires financial institutions to maintain
a record of the ``responses to [the] inquiry'' required by 704B(b)(1)
separate from the application and accompanying information. As
discussed below and consistent with the approach set forth in E.2 of
the Overview to this part V, the Bureau proposes to interpret the term
``responses to such inquiry'' in 704B(b)(2) to be the applicant's
responses to inquiries regarding protected demographic information--
that is, whether the applicant is a minority-owned business or a women-
owned business, and the ethnicity, race, and sex of the applicant's
principal owners.
In the SBREFA Outline, the Bureau discussed this statutory
provision but did not present a proposal under consideration to address
it. Some SERs quoted this statutory language in written feedback, but
none provided feedback on the particular issue of keeping certain
information separate from the rest of the application. One trade
association stakeholder noted that, under HMDA and Regulation C, banks
are permitted to inquire about and collect required data points (which
include information such as the ethnicity, race, and sex of applicants'
principal owners) on and with the application. This stakeholder urged
the Bureau to permit the same for 1071, and further requested a safe
harbor for a bank that inquires and collects required data points on or
with an application.
The SBREFA Panel recommended, regarding this issue as well as other
recordkeeping and reporting issues addressed in the SBREFA Outline,
that the Bureau seek comment on this aspect of a 1071 rule, and how
best to implement it in a manner that minimizes cost and burden to
small financial institutions.\739\
---------------------------------------------------------------------------
\739\ SBREFA Panel Report at 47-48.
---------------------------------------------------------------------------
Proposed Sec. 1002.111(b) would state that a financial institution
shall maintain, separately from the rest of the application and
accompanying information, an applicant's responses to the financial
institution's inquiries to collect data pursuant to proposed subpart B
regarding whether an applicant for a covered credit transaction is a
minority-owned business under proposed Sec. 1002.107(a)(18) or a
women-owned business under proposed Sec. 1002.107(a)(19), and
regarding the ethnicity, race, and sex of the applicant's principal
owners under proposed Sec. 1002.107(a)(20).
Proposed comment 111(b)-1 would explain that a financial
institution may satisfy this requirement by keeping an applicant's
responses to the financial institution's request pursuant to proposed
Sec. 1002.107(a)(18) through (20) in a file or document that is
discrete or distinct from the application and its accompanying
information. For example, such information could be collected on a
piece of paper that is separate from the rest of the application form.
In order to satisfy the requirement in proposed Sec. 1002.111(b), an
applicant's responses to the financial institution's request pursuant
to proposed Sec. 1002.107(a)(18) through (20) need not be maintained
in a separate electronic system, nor need they be removed from the
physical files containing the application. However, the financial
institution may nonetheless need to keep this information in a
different electronic or physical file in order to satisfy the
requirements of proposed Sec. 1002.108.
As discussed in detail above in E.2 in the Overview of this part V,
the Bureau believes the best reading of the statutory provisions that
mention the inquiry made under ECOA section 704B(b)(1)--in 704B(b)(2)
as well as in 704B(c) regarding the right to refuse and 704B(d)
regarding the firewall--is that they refer to applicants' responses to
the inquiries regarding minority-owned and women-owned business status
in proposed
[[Page 56502]]
Sec. 1002.107(a)(18) and (19), and regarding the ethnicity, race, and
sex of applicants' principal owners in proposed Sec. 1002.107(a)(20).
Each of these three data points require financial institutions to
request demographic information that has no bearing on the
creditworthiness of the applicant. Moreover, a financial institution
could not inquire about this demographic information absent section
1071's mandate to collect and report the information, and ECOA
prohibits a financial institution from discriminating against an
applicant on the basis of the information. The Bureau accordingly
believes that the best effectuation of congressional intent is to apply
section 1071's special-protection provisions to apply to this
demographic information, regardless of whether the statutory authority
to collect it originates in 704B(b)(1) (women-owned business status and
minority-owned business status) or 704B(e)(2)(G) (race, sex, and
ethnicity of principal owners). The Bureau similarly believes that
Congress did not intend these special protections to apply to any of
the other applicant-provided data points proposed in Sec. 1002.107(a),
which the financial institution is permitted to request regardless of
coverage under section 1071, which are not the subject of Federal
antidiscrimination law, and many of which financial institutions
currently use for underwriting purposes.
With respect to the stakeholder's request that the section 1071
rule mirror HMDA's approach to collection of ethnicity, race, and sex
data, the Bureau notes that there is no requirement in HMDA that is
comparable to ECOA section 704B(b)(2)'s requirement that certain
information be kept separate from the application and accompanying
information; Regulation C thus anticipates that the demographic
information required under HMDA can be collected as part of the
application.\740\ The Bureau recognizes from stakeholder comments
identified in the section-by-section analysis of proposed Sec.
1002.107(c)(1) above that there may be potential difficulties in
satisfying the proposed requirements regarding the time and manner of
collecting applicant-provided data while not being able to ask for that
information on the application itself. Proposed comment 111(b)-1 is
intended to clarify, and facilitate compliance with, the statutory
directive that financial institutions must keep certain information
separate from the credit application.
---------------------------------------------------------------------------
\740\ See 80 FR 66128, 66192-93 (Oct. 28, 2015).
---------------------------------------------------------------------------
The Bureau seeks comment on its proposed approach to implementing
ECOA section 704B(b)(2), including how best to implement proposed Sec.
1002.111(b) in a manner that minimizes cost and burden, particularly on
small financial institutions, while implementing all statutory
obligations. The Bureau also seeks comment on whether, for financial
institutions that determine that underwriters or other persons should
have access to applicants' demographic information pursuant to proposed
Sec. 1002.108(b), it should likewise waive the requirement in proposed
Sec. 1002.111(b) to keep that information separate from the
application and accompanying information.
111(c) Limitation on Personally Identifiable Information Retained Under
This Section
Background
ECOA section 704B(e)(3) provides that in compiling and maintaining
any record of information under section 1071, a financial institution
may not include in such record the name, specific address (other than
the census tract), telephone number, electronic mail address, or any
other personally identifiable information (PII) concerning any
individual who is, or is connected with, an applicant.
SBREFA Proposal Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau stated it was considering
proposing a prohibition on including certain PII about any individuals
associated with small business applicants in the small business lending
application register a financial institution is required to compile,
maintain, and report to the Bureau (other than the information
specifically required to be collected and reported pursuant to section
1071, such as the ethnicity, race, and sex of principal owners). The
Bureau also stated that this prohibition would not apply to PII
collected by financial institutions outside of their specific 1071 data
records.\741\
---------------------------------------------------------------------------
\741\ SBREFA Outline at 39.
---------------------------------------------------------------------------
SERs and other stakeholders offered limited feedback on this
issue.\742\ One SER requested clarification on this statutory
provision, specifically asking whether financial institutions were
permitted to keep PII in their own loan-level records. A trade
association supported a ban on including PII in the 1071 data. Another
stated that the Bureau should issue a clarifying provision for
excluding PII in compiling and maintaining any record of information
from the different stages in the process (e.g., bank systems,
regulatory submission file). Two community group stakeholders supported
a prohibition on including personally identifiable information in 1071
data to reduce potential privacy concerns surrounding release of 1071
data.
---------------------------------------------------------------------------
\742\ SBREFA Panel Report at 34.
---------------------------------------------------------------------------
Some stakeholders expressed concern regarding a different issue
related to data privacy. Federal and State laws protect the financial
and data privacy of individuals, typically by imposing obligations on
financial institutions to provide their customers notice and an
opportunity to opt out in advance of the disclosure of their nonpublic
personal information to unaffiliated third parties.\743\ Several
industry stakeholders expressed concern that reporting 1071 data to the
Bureau may cause them to violate other data privacy laws, including
State data privacy laws.
---------------------------------------------------------------------------
\743\ See, e.g., Gramm-Leach-Bliley Act, 15 U.S.C. 6801 et seq.;
Regulation P, 12 CFR part 1016.
---------------------------------------------------------------------------
The SBREFA Panel recommended, regarding this issue as well as other
recordkeeping and reporting issues addressed in the Outline, that the
Bureau seek comment on these aspects of a 1071 rule, and how best to
implement them in a manner that minimizes cost and burden to small
financial institutions.\744\
---------------------------------------------------------------------------
\744\ SBREFA Panel Report at 47.
---------------------------------------------------------------------------
Proposed Rule
The Bureau is proposing in Sec. 1002.111(c) that in compiling and
maintaining any records under proposed Sec. 1002.107 or Sec.
1002.111(b), or reporting data pursuant to proposed Sec. 1002.109, a
financial institution shall not include any name, specific address,
telephone number, email address, or any PII concerning any individual
who is, or is connected with, an applicant, other than as required
pursuant to proposed Sec. 1002.107 or Sec. 1002.111(b). The
prohibition on the inclusion of PII in ECOA section 704B(e)(3), which
covers the ``compiling and maintaining any record of information,''
implicates proposed Sec. Sec. 1002.107, 1002.109, and 1002.111, which
together would address the compilation, maintenance, and reporting of
1071 data by financial institutions.
Proposed comment 111(c)-1 would clarify that the prohibition in
proposed Sec. 1002.111(c) applies to data compiled and maintained
pursuant to Sec. 1002.107, data in the small business lending
application register submitted by the financial institution to the
Bureau under proposed Sec. 1002.109, the version of the
[[Page 56503]]
register that the financial institution maintains under proposed Sec.
1002.111(a), and the separate record of certain information created
pursuant to proposed Sec. 1002.111(b).
Proposed comment 111(c)-2 would address the types of information
(including PII) that a financial institution is prohibited from
including in the data it compiles and maintains pursuant to proposed
Sec. 1002.107, in its records under proposed Sec. 1002.111(b), or in
data reported to the Bureau under proposed Sec. 1002.109. The examples
of types of PII identified in proposed comment 111(c)-2 are
illustrative and not exhaustive.
Proposed comment 111(c)-3 would clarify that the prohibition in
proposed Sec. 1002.111(c) does not extend to the application or any
other records that the financial institution maintains. This comment is
intended to address the request by a SER and another stakeholder that
the Bureau clarify that this prohibition does not extend more broadly
to a financial institution's application or loan-related files.
Proposed comment 111(c)-4 would clarify that the prohibition in
proposed Sec. 1002.111(c) does not bar financial institutions from
providing to the Bureau, pursuant to proposed Sec. 1002.109(b)(3), the
name and business contact information of the person who may be
contacted with questions about the financial institution's submission.
The Bureau seeks comment on its proposed approach to implementing
ECOA section 704B(e)(3), including how best to implement this
requirement in a manner that minimizes cost and burden, particularly on
small financial institutions, while implementing all statutory
obligations. Regarding comments by stakeholders that reporting 1071
data to the Bureau could give rise to a potential conflict with the
data protection and privacy laws prohibiting the disclosure of
nonpublic personal information to unaffiliated third parties, the
Bureau notes that such laws typically provide an exemption for
disclosures made pursuant to Federal and State law.\745\ The Bureau
seeks comment on whether the requirements in this proposed rule could
conflict with other data privacy or data protection laws, and whether
the Bureau might need to use its preemption authority under ECOA,\746\
Regulation B,\747\ and/or section 1041(a)(1) of the Dodd-Frank Act to
ensure that financial institutions do not violate State law in
reporting 1071 data to the Bureau. The Bureau also seeks comment on
whether it should include a provision to preempt any State data privacy
or data protection laws that would prohibit the collection,
maintenance, and reporting to the Bureau of 1071 data.
---------------------------------------------------------------------------
\745\ See, e.g., Gramm-Leach-Bliley Act section 502(e)(8), 15
U.S.C. 6802(e)(8), and Regulation P Sec. 1016.15(a)(7)(i) (stating
that the limitations on disclosing nonpublic personal information to
unaffiliated third parties do not apply if the information is
disclosed to comply with Federal, State, or local laws, rules and
other applicable legal requirements); California Consumer Privacy
Act, Cal. Civ. Code 1798.145(a)(1) (noting that the obligations
imposed on businesses by CCPA ``shall not restrict a business'
ability to . . . comply with federal, state, or local laws'').
\746\ 15 U.S.C. 1691d(f).
\747\ Existing Sec. 1002.11.
---------------------------------------------------------------------------
Section 1002.112 Enforcement
Proposed Sec. 1002.112 would address several issues related to the
enforcement of violations of the requirements of proposed subpart B.
First, proposed Sec. 1002.112(a) would state that a violation of
section 1071 or subpart B of Regulation B is subject to administrative
sanctions and civil liability as provided in sections 704 and 706 of
ECOA. Second, proposed Sec. 1002.112(b) would provide that a bona fide
error in compiling, maintaining, or reporting data with respect to a
covered application is an error that was unintentional and occurred
despite the maintenance of procedures reasonably adapted to avoid such
an error. This proposed provision also addresses the maintenance of
procedures reasonably adapted to avoid such errors. Third, proposed
Sec. 1002.112(c) would identify four safe harbors under which certain
errors--namely, certain types of incorrect entries for census tract,
NAICS code, small business status, and application date--would not
constitute violations of ECOA or Regulation B.
The Bureau is proposing Sec. 1002.112 to implement sections 704
and 706 of ECOA, pursuant to its authority under ECOA section
704B(g)(1) to prescribe such rules and issue such guidance as may be
necessary to carry out, enforce, and compile data pursuant to section
1071 and pursuant to its authority under 704B(g)(2) to adopt exceptions
to any requirement of section 1071 and to exempt any financial
institution or class of financial institutions from the requirements of
section 1071, as the Bureau deems necessary or appropriate to carry out
the purposes of section 1071.
112(a) Administrative Enforcement and Civil Liability
A violation of section 1071 is subject to the enforcement
provisions of ECOA, of which section 1071 is a part. ECOA contains
administrative enforcement provisions in section 704,\748\ and it
provides for civil liability in section 706.\749\ The enforcement
provisions in existing Regulation B (Sec. 1002.16(a)(1) and (2))
cross-reference and paraphrase these administrative enforcement and
civil liability provisions of ECOA.
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\748\ 15 U.S.C. 1691c.
\749\ 15 U.S.C. 1691e.
---------------------------------------------------------------------------
Proposed Sec. 1002.112(a) would provide that a violation of
section 1071 or subpart B of Regulation B is subject to administrative
sanctions and civil liability as provided in sections 704 and 706 of
ECOA, where applicable. Regarding stakeholder concerns about private
litigants bringing actions for non-compliance, the Bureau believes that
its administrative enforcement mechanisms would be appropriate and
adequate to address most instances of non-compliance by financial
institutions that report 1071 data to the Bureau, based on its
experience with Regulation C and HMDA. The Bureau believes that
proposed Sec. 1002.112(b) addresses the concerns raised by
stakeholders that requested that penalties for non-compliance not be
assessed in the first year that 1071 data is collected, given the
likelihood of unintentional errors as covered financial institutions
learn how to implement this rule.
The Bureau seeks comment on its proposed approach to administrative
enforcement and civil liability.
112(b) Bona Fide Errors
SBREFA Proposal Under Consideration and Feedback Received
During the SBREFA process, SERs and other industry stakeholders
expressed concern about private litigants suing them for non-compliance
with the 1071 rule.\750\ In addition, several SERs requested that the
Bureau not assess penalties for the first year of 1071 data collection
and reporting, as it did following the 2015 HMDA final rule; prior to
the compliance date for that rule, the Bureau issued a policy statement
announcing it would not seek penalties for errors for the first
calendar year (2018) of data collected under the amended Regulation
C.\751\ Stakeholders
[[Page 56504]]
asked the Bureau to emulate that approach for 1071. Other stakeholders
expressed concern about the potential consequences of committing what
they viewed as technical or inadvertent errors in collecting or
reporting 1071 data. One financial institution stakeholder suggested
that the 1071 rule adopt or emulate the good faith error provisions set
out in Regulation C, including Sec. 1003.6(b)(1), which provides that
an error in compiling or recording data for a covered loan or
application is not a violation of HMDA or Regulation C if the error was
unintentional and occurred despite the maintenance of procedures
reasonably adapted to avoid such an error. Stakeholders also referred
to the existing error-related exemptions in ECOA and Regulation B.\752\
ECOA's civil liability provision states that creditors will not be
liable for acts done or omitted in good faith in conformity with any
official rule, regulation, or interpretation thereof by the
Bureau.\753\
---------------------------------------------------------------------------
\750\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 34-36.
\751\ Bureau of Consumer Fin. Prot., CFPB Issues Public
Statement On Home Mortgage Disclosure Act Compliance (Dec. 21,
2017), https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-public-statement-home-mortgage-disclosure-act-compliance/
(noting that the Bureau did not intend to require data resubmission
unless data errors were material, or assess penalties with respect
to errors for HMDA data collected in 2018 and reported in 2019).
\752\ See, e.g., Sec. 1002.16(c).
\753\ 15 U.S.C. 1691e(e).
---------------------------------------------------------------------------
Proposed Rule
Proposed Sec. 1002.112(b) would provide that a bona fide error in
compiling, maintaining, or reporting data with respect to a covered
application is an error that was unintentional and occurred despite the
maintenance of procedures reasonably adapted to avoid such an error. A
bona fide error is not a violation of ECOA or subpart B. A financial
institution is presumed to maintain procedures reasonably adapted to
avoid errors with respect to a given data field if the number of errors
found in a random sample of the financial institution's submission for
the data field does not equal or exceed a threshold specified by the
Bureau for this purpose in proposed appendix H. However, an error is
not a bona fide error if either there is a reasonable basis to believe
the error was intentional or there is other evidence that the financial
institution did not maintain procedures reasonably adapted to avoid
such errors.
The Bureau believes that a similar approach to Regulation C,
modified and combined with the approach taken by Federal agencies in
HMDA examinations, would be appropriate here. Regulation C Sec.
1003.6(b)(1) provides that an error in compiling or recording data for
a covered loan or application is not a violation of HMDA or Regulation
C if the error was unintentional and occurred despite the maintenance
of procedures reasonably adapted to avoid such an error. In an
examination of a financial institution for compliance with Regulation
C, a financial institution may make a certain number of unintentional
errors in a testing sample of applications for a given data field in
the institution's loan/application register (LAR), the HMDA analog to
the small business lending application register, before it must
resubmit its LAR. These tolerance thresholds are based on the number of
loans or applications in a LAR as set out in the HMDA tolerances table
in the FFIEC's Interagency HMDA examination procedures.\754\
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\754\ Fed. Fin. Insts. Examination Council, Interagency
Examination Procedures: HMDA (Apr. 2019), https://files.consumerfinance.gov/f/documents/cfpb_supervision-and-examination-manual_hmda-exam-procedures_2019-04.pdf.
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For instance, as described in the HMDA tolerances table, a bank
that submitted 45 applications is subject to a threshold of three
inadvertent errors per data field based on the review of a random
sample of 30 applications in the bank's LAR; a bank that submitted
45,000 applications would be subject to a threshold of four inadvertent
errors per data field based on a sample of 79 applications. The
tolerances thresholds, as a percentage of the random sample of
applications reviewed, become more stringent as the number of total
applications rises.
The Bureau would provide a similar table of thresholds in proposed
appendix H and incorporate it in the bona fide error provision as set
out in proposed Sec. 1002.112(b). Under this proposed provision and
the table of thresholds in proposed appendix H, financial institutions
that report a number of errors equal to or below the applicable
thresholds are presumed to have in place procedures reasonably adapted
to avoid errors; those that report a number of errors above the
applicable thresholds are not presumed to have in place procedures
reasonably adapted to avoid errors. The Bureau believes that this
approach would be broadly consistent with the approach it has taken for
HMDA.\755\ The Bureau also believes that this approach would address
the concerns expressed by stakeholders regarding liability for some
data reporting errors, especially in the earlier years of reporting, as
processes are first being implemented. Moreover, the Bureau believes
that this provision will help to ensure the accuracy of the data
submitted by requiring the maintenance of appropriate procedures; at
the same time, this provision will prevent financial institutions from
being subjected to liability for some difficult-to-avoid errors that
could drive those institutions from the small-business lending market.
Therefore, the Bureau believes this provision is necessary to carry
out, enforce, and compile data pursuant to section 1071, as well as
necessary or appropriate to carrying out section 1071's purposes.
---------------------------------------------------------------------------
\755\ Home Mortgage Disclosure (Regulation C), 80 FR 66128,
66269 (Oct. 28, 2015).
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Proposed comment 112(b)-1 would explain that a financial
institution is presumed to maintain procedures reasonably adapted to
avoid errors with respect to a given data field if the number of errors
found in a random sample of the financial institution's submission for
the data field does not equal or exceed a threshold specified by the
Bureau for this purpose. Proposed comment 112(b)-1 would also explain
that the Bureau's thresholds appear in column C of the table in
proposed appendix H, and that the size of the random sample shall
depend on the size of the financial institution's small business
lending application register, as shown in column A of the table in
appendix H.
Proposed comment 112(b)-2 would provide that, for purposes of
determining bona fide errors under Sec. 1002.112(b), the term ``data
field'' generally refers to individual fields, but that, with respect
to information on the ethnicity or race of an applicant or borrower, or
co-applicant or co-borrower, a data field group may consist of more
than one field. If one or more of the fields within an ethnicity or
race field group have errors, they count as one (and only one) error
for that data field group.
Proposed comment 112(b)-3 would provide that an error that meets
the criteria for one of the four safe harbor provisions in proposed
Sec. 1002.112(c) would not be counted as an error for purposes of
determining whether a financial institution has exceeded the error
threshold for a given data field.
The Bureau seeks comment on its proposed approach to bona fide
errors, including whether the tolerance levels in proposed appendix H
are appropriate.
112(c) Safe Harbors
Proposed Sec. 1002.112(c) would establish four safe harbor
provisions, providing that certain types of errors would not constitute
violations of ECOA or Regulation B. Proposed Sec. 1002.112(c)(1) would
provide a safe harbor for an incorrect entry for census tract obtained
by correct use of a geocoding tool provided by the FFIEC or the Bureau.
Proposed Sec. 1002.112(c)(2) would provide a safe harbor for an
incorrect NAICS code determined by a financial institution under
certain circumstances. Proposed
[[Page 56505]]
Sec. 1002.112(c)(3) would provide a safe harbor for the collection of
applicants' protected demographic information pursuant to proposed
Sec. 1002.107(a)(18) through (20) after an initially erroneous
determination that an applicant is a small business. Proposed Sec.
1002.112(c)(4) would provide a safe harbor for the reporting of an
application date that is within three calendar days of the actual
application date.
As described in further detail below, the Bureau is proposing the
four safe harbors established in proposed Sec. 1002.112(c) pursuant to
its authority under ECOA and as amended by section 1071. Section 703 of
ECOA provides the Bureau the authority to prescribe regulations to
carry out the purposes of ECOA, including such adjustments and
exceptions for any class of transactions that in the judgment of the
Bureau are necessary or proper to effectuate the purposes of ECOA, to
prevent circumvention or evasion thereof, or to facilitate or
substantiate compliance therewith. Section 704B(g)(1) provides that the
Bureau shall prescribe such rules as may be necessary to carry out,
enforce, and compile data pursuant to section 1071. Section 704B(g)(2)
authorizes the Bureau to adopt exceptions to any requirement of section
1071 and to exempt any financial institution or class of financial
institutions from the requirements of section 1071, as the Bureau deems
necessary or appropriate to carry out the purposes of section 1071.
112(c)(1) Incorrect Entry for Census Tract
The Bureau received feedback on the SBREFA Outline,\756\ concerning
a provision in Regulation C providing for a good faith error exemption
in inadvertently selecting the wrong census tract for a property. In
response, the Bureau is proposing Sec. 1002.112(c)(1), which would
provide that an incorrect entry for census tract is not a violation of
ECOA or this subpart if the financial institution obtained the census
tract by correctly using a geocoding tool provided by the FFIEC or the
Bureau. Regulation C Sec. 1003.6(b)(2) contains a similar provision,
and the Bureau believes a similar approach would be appropriate here.
Especially in light of the years that financial institutions have
already been relying on the FFIEC geocoding tool in the HMDA context,
the Bureau believes financial institutions would be justified in
expecting not to be held liable for reporting erroneous information
provided by the FFIEC or Bureau. Additionally, the Bureau believes that
this proposed safe harbor will ultimately improve the accuracy of the
data submitted by encouraging the use of reliable FFIEC geocoding
tools, and preventing financial institutions from being subjected to
liability for some difficult-to-avoid errors that could drive those
institutions either to eschew these useful tools or exit the small
business lending market. Therefore, the Bureau believes this provision
is necessary to carry out, enforce, or compile data pursuant to section
1071, and necessary or appropriate to carry out section 1071's
purposes.
---------------------------------------------------------------------------
\756\ SBREFA Outline at 41-42.
---------------------------------------------------------------------------
Proposed comment 112(c)(1)-1 would explain that the safe harbor
provision under proposed Sec. 1002.112(c)(1) would not extend to a
financial institution's failure to provide the correct census tract
number for a covered application on its small business lending
application register, as required by proposed Sec. 1002.107(a)(13),
because the FFIEC or Bureau geocoding tool did not return a census
tract for the address provided by the financial institution. In
addition, proposed comment 112(c)(1)-1 would explain that this safe
harbor provision would not extend to a census tract error that results
from a financial institution entering an inaccurate address into the
FFIEC or Bureau geocoding tool.
The Bureau seeks comment on its proposed approach to this safe
harbor.
112(c)(2) Incorrect Entry for NAICS Code
As discussed in the section-by-section analysis of proposed Sec.
1002.107(a)(15) above, the Bureau is proposing to require financial
institutions to collect an applicant's 6-digit NAICS code. A financial
institution would be permitted to rely on an applicant's
representations or on other information regarding its NAICS code as
described in proposed comments 107(a)(15)-3 and -4. Proposed Sec.
1002.112(c)(2) would apply when a financial institution does not rely
on such information, but instead the financial institution identifies
the NAICS code for an applicant and the identified NAICS code is
incorrect. Specifically, proposed Sec. 1002.112(c)(2) would provide
that the incorrect entry for that institution-identified NAICS code is
not a violation of subpart B, provided that the first two digits of the
NAICS code are correct and the financial institution maintains
procedures reasonably adapted to correctly identify the subsequent four
digits.
The Bureau is proposing this safe harbor pursuant to its statutory
authority under section 704B(g)(1) and (2). This safe harbor would
address comments from several stakeholders who stated that correctly
classifying an applicant's NAICS code can be difficult, as the business
may change over time, codes may have overlapping definitions, small
businesses often do not know their NAICS code, and classifications may
be prone to human error. The Bureau believes that this proposed safe
harbor would also alleviate concerns about NAICS codes classifications
being subject to change based on SBA rulemaking (in situations where
the SBA does not change the 2-digit sector code). The Bureau believes
that this proposed safe harbor will help to ensure the accuracy of the
data submitted by requiring the maintenance of appropriate procedures
and requiring that the most crucial first two digits be correct in
every instance; at the same time, the proposed safe harbor will prevent
financial institutions from being subjected to liability for some
difficult-to-avoid errors. Therefore, the Bureau believes this
provision is necessary and appropriate to carry out section 1071 and
its purposes.
The Bureau seeks comment on its proposed approach to this safe
harbor. As discussed in the section-by-section analysis of proposed
Sec. 1002.107(a)(15) above, the Bureau seeks comment on its proposal
to collect 6-digit NAICS codes with the safe harbor described in
proposed Sec. 1002.112(c)(2). The Bureau also seeks comment on whether
requiring a 3-digit NAICS code with no safe harbor would be a better
alternative.
112(c)(3) Incorrect Determination of Small Business Status
Proposed Sec. 1002.112(c)(3) would provide that a financial
institution that initially determines that an applicant is a small
business, as defined in proposed Sec. 1002.106(b), but then later
concludes the applicant is not a small business, does not violate ECOA
or Regulation B if it collected information pursuant to subpart B
regarding whether an applicant for a covered credit transaction is a
minority-owned business or a women-owned business, and the ethnicity,
race, and sex of the applicant's principal owners. Proposed Sec.
1002.112(c)(3) would further provide that a financial institution
seeking to avail itself of this safe harbor shall comply with the
requirements of subpart B as otherwise required pursuant to proposed
Sec. Sec. 1002.107, 1002.108, and 1002.111 with respect to the
collected information.
The Bureau is proposing this safe harbor pursuant to its authority
under
[[Page 56506]]
section 703(a) of ECOA, which allows the Bureau to provide for certain
exceptions to Regulation B ``as in the judgment of the Bureau are
necessary or proper to effectuate the purposes of [ECOA], to prevent
circumvention or evasion thereof, or to facilitate or substantiate
compliance therewith.'' The Bureau believes the proposed safe harbor is
needed to address situations where the financial institution initially
determines that an applicant is a small business and believes it is
required under the 1071 rule to collect protected demographic
information, but later concludes that the applicant is not a small
business when it, for example, obtains updated gross annual revenue
information. In such situations, the financial institution may be
uncertain about whether it ``may obtain information required by a
regulation'' under existing Sec. 1002.5(a)(2), which could deter
financial institutions from complying with the 1071 rule. The Bureau
believes that this safe harbor would facilitate compliance with ECOA by
eliminating a situation in which financial institutions might be
deterred from appropriately collecting applicants' protected
demographic information due to the possibility that their understanding
of an applicant's small business status might change during the course
of the application process.
Proposed Sec. 1002.112(c)(3) would make it clear that a financial
institution does not violate the existing Regulation B general
prohibition against inquiring about the race, national origin, or sex
of an applicant as long as the financial institution complies with the
requirements of the subpart B, including the requirements set forth in
proposed Sec. Sec. 1002.107, 1002.108, and 1002.111 with respect to
the collected information. Proposed comment 106(b)-1 would clarify that
the financial institution does not report the application on its small
business lending application register pursuant to Sec. 1002.109.
The Bureau seeks comment on its proposed approach to this safe
harbor.
112(c)(4) Incorrect Application Date
Proposed Sec. 1002.107(a)(2) would require financial institutions
to report application date. In the SBREFA Outline, the Bureau stated
that it was considering proposing providing financial institutions a
grace period of several days on either side of the date reported to
reduce the compliance burden of pinpointing an exact date on which an
application was received.\757\ As discussed in the section-by-section
analysis of proposed Sec. 1002.107(a)(2) above, several SERs and other
stakeholders were strongly in favor of the Bureau providing such a
grace period to reduce compliance burden.
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\757\ Id. at 26.
---------------------------------------------------------------------------
In light of SER and other stakeholder feedback, proposed Sec.
1002.112(c)(4) would provide that a financial institution does not
violate proposed subpart B if it reports on its small business lending
application register an application date that is within three calendar
days of the actual application date pursuant to proposed Sec.
1002.107(a)(2). The Bureau believes that this proposed provision will
ensure the level of accuracy needed for the resulting data to be useful
in carrying out section 1071's purposes and minimize the risk that
financial institutions will be held liable for difficult-to-avoid
errors, which might otherwise affect their participation in the small
business lending market. Therefore, the Bureau believes this provision
is necessary and appropriate to carry out section 1071 and its
purposes. The Bureau seeks comment on its proposed approach to this
safe harbor.
Section 1002.113 Severability
Proposed Sec. 1002.113 would provide that the provisions of
subpart B are separate and severable from one another, and that if any
provision is stayed or determined to be invalid, the remaining
provisions shall continue in effect.
This is a standard severability clause of the kind that is included
in many regulations to clearly express agency intent about the course
that is preferred if such events were to occur.
Section 1002.114 Effective Date, Compliance Date, and Special
Transitional Rules
Proposed Sec. 1002.114 would address when the proposed rule would
be effective and when financial institutions would be required to
comply with the rule, as well as how financial institutions could
choose to comply with the rule during this transitional period.
Proposed Sec. 1002.114(a) would state that this small business lending
data collection rule would become effective 90 days after the final
rule is published in the Federal Register. Proposed Sec. 1002.114(b)
would provide that compliance with the rule would not be required until
approximately 18 months after the final rule is published in the
Federal Register. Proposed Sec. 1002.114(c)(1) would permit covered
financial institutions to begin collecting information pursuant to
proposed Sec. 1002.107(a)(18) through (20) beginning 12 months prior
to the compliance date. Proposed Sec. 1002.114(c)(2) would permit a
financial institution to use a different time period to determine
whether it is a covered financial institution under proposed Sec.
1002.105(b) as of the compliance date.
The Bureau is proposing Sec. 1002.114 pursuant to its authority
under ECOA section 704B(g)(1) to prescribe such rules and issue such
guidance as may be necessary to carry out, enforce, and compile data
pursuant to section 1071. The Bureau is also proposing Sec.
1002.114(c) pursuant to its authority under section 703(a) of ECOA to
prescribe regulations to carry out the purposes of ECOA and provide
exceptions as in the judgment of the Bureau are necessary or proper to
effectuate the purposes of or facilitate or substantiate compliance
with ECOA.
114(a) Effective Date and 114(b) Compliance Date
Background
Section 1071 does not specify an implementation period, though
pursuant to ECOA section 704B(f)(1), financial institutions must report
1071 data to the Bureau on an annual basis. In the SBREFA Outline, the
Bureau noted that it sought to ensure that financial institutions have
sufficient time to implement the 1071 rule, and stated that it was
considering proposing that financial institutions have approximately
two calendar years for implementation.\758\
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\758\ Id. at 42.
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SBREFA Proposal Under Consideration and Feedback Received
SER and stakeholder feedback regarding the two-year period for
implementation under consideration was mixed.\759\ Some found the two-
year period to be adequate, some requested more time, and a few urged
for less. Some provided related feedback about adopting a grace period
for data errors in the first year(s) after the 1071 rule becomes
effective.
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\759\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 36-37.
---------------------------------------------------------------------------
A number of stakeholders agreed that two years was sufficient time
to implement a 1071 rule. SERs generally supported a two-year
implementation period. Several SERs with completely online operations
felt that two years was sufficient time to implement the eventual 1071
rule; some estimated that they could do it in less time. A large number
of industry stakeholders (including national and regional trade
[[Page 56507]]
associations, community banks, fintech lenders, and others) accepted a
two-year implementation period as adequate or said that two years was
the minimum amount of time needed to implement 1071 (though some of
these stakeholders also requested more time, as discussed below). A few
qualified their statements, however, as dependent on the Bureau not
adopting additional data points beyond those discussed in the SBREFA
Outline or not making further changes to the rule once it is finalized.
A number of other stakeholders argued that two years was inadequate
time to implement a 1071 rule. Some other SERs that do not have
primarily online operations and do not have experience with other
Federal data reporting regimes such as HMDA said it would be hard to
project how long implementation would take, but that it could
potentially take three years or more. One SER said that two years would
not be enough as currently there are no data collection vendors for
1071 compliance. Another SER said clear and concise definitions were
important and expressed frustration that definitive answers to
compliance-related questions (whether from the Bureau or third-party
vendors) can be hard to come by, which could stymie implementation
efforts. One SER suggested that it was overly optimistic for other SERs
(mostly CDFIs) to say they would be able to implement 1071 quickly.
Some of the industry stakeholders mentioned above requested more
time, up to three years, and suggested that two years was the bare
minimum they required to implement a 1071 rule, given the need to
create new systems, policies and procedures, to change their products
as needed, and to train personnel in compliance. One large bank trade
association stakeholder requested three years coupled with a two-year
grace period.
Several trade associations representing community banks and credit
unions asserted that two years was inadequate for smaller financial
institutions that had no experience with HMDA or similar reporting
regimes. These commenters suggested tiered implementation, with larger
financial institutions (or HMDA reporters) reporting earlier and
smaller financial institutions later. Similarly, two smaller trade
associations asserted that smaller and mission-based lenders should
have up to three years to implement 1071.
A number of stakeholders argued that two years was too much time to
implement a 1071 rule. Several community group stakeholders opposed a
two-year implementation period as too long and instead supported a one-
year period. These groups opposed a longer implementation period on the
grounds that ten years have elapsed since Dodd-Frank Act was passed and
the need for data to analyze disparities in small business lending is
urgent. A State-level trade association suggested a one-year period for
larger financial institutions and a longer period for smaller financial
institutions.
Some stakeholders requested a grace period associated with the
first year of implementation. A few SERs suggested that the Bureau
adopt a grace period of some kind during which financial institutions
would not be penalized for erring in trying to comply with a 1071
regulation. This grace period would be akin to the first year in which
the 2015 revisions to Regulation C were effective, when examinations
were used to troubleshoot and perfect data reporting rather than
penalize reporters. Two other industry stakeholders similarly requested
a safe harbor for any data collection errors for the first one or two
years following the rule's effective date.
The SBREFA Panel recommended that the Bureau seek comment on the
sufficiency of a two-year implementation period, and in particular what
aspects of a 1071 rule might require more or less time to
implement.\760\ The Panel further recommended that the Bureau seek
comment on ways to facilitate implementation for small financial
institutions, particularly those that have had no experience with any
kind of Federal data reporting regime.
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\760\ Id. at 48.
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Proposed Rule
The Bureau is proposing in Sec. 1002.114(a) that its small
business lending data collection rule become effective 90 days after
the final rule is published in the Federal Register. At that time, the
rule would become part of the Code of Federal Regulations; this would
permit financial institutions to avail themselves of the special
transitional rule in proposed Sec. 1002.114(c)(2), discussed below.
However, pursuant to proposed Sec. 1002.114(b), compliance with the
final rule would not be required until approximately 18 months after
the final rule is published in the Federal Register.
The Bureau's proposed approach is a compromise between the two-year
implementation period under consideration at SBREFA that a slight
majority of stakeholders found acceptable and the shorter one-year
implementation period requested by certain stakeholders. The Bureau
believes that the statutory purposes of section 1071 are better served
by an earlier compliance date that would, in turn, result in earlier
publication of data by the Bureau. The Bureau acknowledges the
preference of various SERs and other stakeholders for a compliance
period of two or more years to comply. The Bureau notes, however, that
some SERs and other industry stakeholders said that they could be ready
in less than two years. The Bureau agrees with the stakeholders that
asserted that a shorter implementation period is preferable given the
length of time that has elapsed since the passage of section 1071 of
the Dodd-Frank Act.
The Bureau notes that it does not anticipate setting the compliance
date at exactly 18 months following publication of the final rule in
the Federal Register. Rather, the Bureau expects to specify a date
certain for a compliance date, which it anticipates will be
approximately 18 months after the final rule is published. Thus, for
example, if the Bureau published the final rule in June 2023, the
Bureau would set the compliance date at January 1, 2025.
If the final rule were published early or late in the year, because
proposed Sec. 1002.114(b) would require compliance approximately 18
months after publication of the final rule, the compliance date would
be set in mid-year. For instance, if the final rule were published in
the Federal Register in March 2023, the compliance date would be in
September 2024. Based on this possibility, the Bureau is considering
whether to permit or require financial institutions to collect data on
a partial year basis in the remainder of the first year following the
compliance date, as the section-by-section analysis of proposed Sec.
1002.109(a)(1) addresses. For example, if the compliance date were July
1, 2024, the Bureau would permit or require all financial institutions
to collect and report data pursuant to proposed Sec. 1002.109(a) for
the period July 1 to December 31, 2024, and financial institutions
would report that data by June 1, 2025 (pursuant to proposed Sec.
1002.109(a)(1)(i)). After 2024, financial institutions would comply
with proposed Sec. 1002.109(a), which requires the collection of 1071
data on a calendar year basis.
The Bureau believes that permitting or requiring a partial year
collection in the initial year of compliance would further the purposes
of section 1071 by expediting the collection and, potentially, the
publication of data to be used to further the fair lending and
community development purposes of the statute.
[[Page 56508]]
The Bureau seeks comment on its proposed effective date of 90 days
following publication of an eventual final rule and its proposed
compliance date of approximately 18 months after the publication of its
final rule to implement section 1071. In particular, the Bureau seeks
comment on which aspects of the Bureau's proposed rule might require
more or less time to implement, and ways in which the Bureau could
facilitate implementation for small financial institutions, especially
those that have had no experience with other Federal data reporting
regimes. The Bureau further seeks comment on two alternatives: (a)
Whether the Bureau should adopt a compliance date of two years after
the publication of the final rule; and (b) whether the Bureau should
adopt different compliance dates based on the size of a financial
institution (e.g., one year for large financial institutions, two years
for smaller institutions).
114(c) Special Transitional Rules
The Bureau is proposing two transitional rules in Sec. 1002.114(c)
to facilitate the compliance of financial institutions with subpart B.
Proposed Sec. 1002.114(c)(1) would permit covered financial
institutions to collect information regarding applicants' minority-
owned business status, women-owned business status, and the race, sex,
and ethnicity of applicants' principal owners under proposed Sec.
1002.107(a)(18) through (20) beginning 12 months prior to the
compliance date. Proposed Sec. 1002.114(c)(2) would provide that to
determine if it is a covered financial institution as of the compliance
date, a financial institution is permitted to use its originations of
covered credit transactions for small businesses in the second and
third preceding calendar years (rather than its originations in the two
immediately preceding calendar years).
The Bureau believes that these transitional rules are necessary to
carry out, enforce, and compile data pursuant to section 1071, will
carry out the purposes of ECOA, and are necessary or proper to
effectuate the purposes of ECOA and facilitate or substantiate
compliance therewith.
114(c)(1) Collection of Information Prior to the Compliance Date
Proposed Sec. 1002.114(c)(1) would provide that a financial
institution that will be a covered financial institution as of the
compliance date in proposed Sec. 1002.114(b) is permitted, but not
required, to collect information regarding whether an applicant for a
covered credit transaction is a minority-owned business under proposed
Sec. 1002.107(a)(18), a women-owned business under proposed Sec.
1002.107(a)(19), and the ethnicity, race, and sex of the applicant's
principal owners under proposed Sec. 1002.107(a)(20) beginning 12
months prior to the compliance date. A financial institution collecting
such information pursuant to proposed Sec. 1002.114(c)(1) must do so
in accordance with the requirements set out in proposed Sec. Sec.
1002.107(18) through (20) and 1002.108. The Bureau believes that this
provision would give financial institutions time to test their
procedures and systems for compiling and maintaining this information
in advance of actually being required to collect and subsequently
report it to the Bureau. Under this proposed provision, financial
institutions would have time to adjust any procedures or systems that
may result in the inaccurate compilation or maintenance of applicants'
protected demographic information, the collection of which is required
by section 1071 but otherwise generally prohibited under ECOA and
Regulation B. (Financial institutions could of course collect the other
information that would be required by this proposed rule at any time,
without needing express permission in Regulation B to do so.) The
Bureau believes that this provision would facilitate compliance and
improve the quality and accuracy of the 1071 data reported to the
Bureau and therefore is necessary to carry out, enforce, and compile
data pursuant to section 1071, and will carry out the purposes of ECOA,
and is necessary or proper to effectuate the purposes of ECOA and
facilitate or substantiate compliance therewith.
The Bureau seeks comment on the approach in this proposal.
114(c)(2) Determining Whether a Financial Institution is a Covered
Financial Institution for Purposes of This Subpart
Proposed Sec. 1002.114(c)(2) would provide that for purposes of
determining whether a financial institution is a covered financial
institution under proposed Sec. 1002.105(b) as of the compliance date
specified in proposed Sec. 1002.114(b), a financial institution would
be permitted, but not required, to use its originations of covered
credit transactions for small businesses in the second and third
preceding calendar years (rather than its originations in the two
immediately preceding calendar years). The Bureau believes that this
proposed provision would provide greater clarity and certainty to
financial institutions as to whether or not they would be covered
financial institutions as of the compliance date. This may be
particularly important for those financial institutions that originate
a volume of covered credit transactions close to the threshold under
proposed Sec. 1002.105(b). The Bureau believes this provision is
necessary to carry out, enforce, and compile data pursuant to section
1071.
The Bureau seeks comment on the approach in this proposal.
Appendix E to Part 1002--Sample Form for Collecting Certain Applicant-
Provided Data Under Subpart B
Background
ECOA section 704B(b) requires financial institutions to inquire
whether applicants are women-owned businesses, minority-owned
businesses, or small businesses, and to maintain a record of the
responses to that inquiry separate from the applications and
accompanying information.
Additionally, ECOA section 704B(e) requires financial institutions
to compile, maintain, and report certain information, including the
ethnicity, race, and sex of an applicant's principal owners. Section
1071 does not set out what categories should be used when collecting
and reporting this information.
ECOA section 704B(c) provides that applicants for credit may refuse
to provide information requested pursuant to 704B(b), including
minority-owned and women-owned business status.
Under ECOA section 704B(d)(2), if a financial institution
determines that an underwriter, employee, or officer involved in making
a determination ``should have access'' to any information provided by
the applicant pursuant to a request under section 704B(b), the
financial institution must provide a notice of ``the access of the
underwriter to such information,'' along with notice that the financial
institution may not discriminate on the basis of such information.
SBREFA Proposal Under Consideration and Feedback Received
In the SBREFA Outline, the Bureau stated that it was considering
developing a sample data collection form to assist industry in
collecting the principal owners' ethnicity, race, and sex and to
communicate an applicant's right to refuse to provide such information.
The Bureau stated in the SBREFA Outline that this sample data
collection form would also include the definition of principal owner
and clarify that it is possible, depending on the factual
circumstances, that no one will
[[Page 56509]]
be identified as a principal owner.\761\ It also stated that the Bureau
was considering proposing simplified applicant-facing materials to aid
industry in collecting minority-owned business status and women-owned
business status. Specifically, for these applicant-facing materials and
industry clarifications, the Bureau stated in the SBREFA Outline that
it was considering proposing the following definitions: (1)
``Ownership'' to mean directly or indirectly having an equity interest
in a business (i.e., directly or indirectly, through any contract,
arrangement, understanding, relationship, or otherwise, owning an
equity interest in the business); (2) ``control'' of a business to
mirror the CDD rule, where it means having significant responsibility
to control, manage, or direct a business; and (3) the ``accrual of net
profit or loss'' with reference to generally accepted accounting
practices and any applicable Internal Revenue Service standards.\762\
Finally, the Bureau stated in the SBREFA Outline that it was
considering developing model disclosures that financial institutions
could use when providing the notice under ECOA section 704B(d)(2).\763\
---------------------------------------------------------------------------
\761\ SBREFA Outline at 32.
\762\ Id. at 19.
\763\ Id. at 38.
---------------------------------------------------------------------------
Some SERs requested that the Bureau develop a uniform collection
form to assist financial institutions with the collection of reporting
of minority-owned business status, women-owned business status, and the
race, sex, and ethnicity of principal owners. One SER suggested
developing a sample data collection form similar to the one used for
HMDA data collection and including the same disclosures. One commenter
noted that the use of a model form may increase the uniformity and
consistency of reporting demographic information. Another commenter
suggested that any model form should include an explanation of why the
financial institution is requesting the information and a statement of
the applicant's right to refuse to provide the information.
One SER asked that, if the Bureau provided sample language for the
notice to be provided pursuant to ECOA section 704B(d)(2), that the
Bureau provide it in English as well as in other languages, such as
Spanish. One SER stated that sample language for a notice should
include a statement that underwriter access to demographic information
is not detrimental and that such access is necessary due to the small
size of the lender.
The SBREFA Panel recommended that the Bureau consider creating
sample data collection forms that, to the extent possible, simply and
clearly explain the information being requested for purposes of the
minority-owned business data point, the women-owned business data
point, and the principal owners' ethnicity, race, and sex data point.
It also said that the Bureau should additionally consider providing
these sample data collection forms in other languages, such as
Spanish.\764\ The Panel also recommended that the Bureau consider
developing sample disclosure language that financial institutions could
use to provide some context as to why applicants are being asked to
provide demographic information, in order to encourage applicants to
respond.\765\
---------------------------------------------------------------------------
\764\ SBREFA Panel Report at 45-46.
\765\ Id. at 43, 47.
---------------------------------------------------------------------------
Proposed Rule
Consistent with the SBREFA Panel's recommendation, the Bureau is
proposing a sample data collection form that financial institutions
could use to collect minority-owned business status, women-owned
business status, and principal owners' ethnicity, race, and sex. As
suggested in the feedback from SERs, the proposed sample data
collection form would be similar to the HMDA data collection form and
would include a notice of the applicant's right to refuse to provide
the information as well as an explanation of why the financial
institution is requesting the information. The sample data collection
form would also include the definitions of minority individual,
minority-owned business, principal owner, and women-owned business as
they would be defined in proposed Sec. 1002.102(l), (m), (o), and (s),
respectively. Although the Bureau is not currently proposing a sample
data collection form in Spanish or any language other than English, the
Bureau requests comment on whether a sample data collection form in
Spanish or in another language other than English would be useful to
financial institutions in the context of their 1071 obligations.
Additionally, to aid financial institutions with the collection of
the information in proposed Sec. 1002.107(a)(21), the sample data
collection form would include a question about the applicant's number
of principal owners.
Finally, consistent with the SBREFA Panel's recommendation, the
Bureau is proposing that the sample data collection form would include
language that a financial institution could use to satisfy the notice
requirement under ECOA section 704B(d)(2) if it determines that one or
more employees or officers should have access to the applicant's
protected demographic information pursuant to proposed Sec.
1002.108(b)(2).
The Bureau is proposing appendix E pursuant to its authority under
ECOA section 704B(g)(1) to prescribe such rules and issue such guidance
as may be necessary to carry out, enforce, and compile data pursuant to
section 1071, in order to facilitate compliance with the statutory
requirements to collect minority-owned and women-owned business status,
and the ethnicity, race, and sex of principal owners pursuant to
704B(b)(1) and (e)(2)(G). Further, the Bureau is proposing appendix E
pursuant to its obligation in 704B(g)(3) to issue guidance to
facilitate compliance with the requirements of section 1071, including
assisting financial institutions in working with applicants to
determine whether the applicants are women-owned or minority-owned
businesses.
The Bureau seeks comment on the proposed sample data collection
form, including the proposed language for the notice under ECOA section
704B(d)(2). The Bureau generally requests comment on whether additional
clarification regarding any aspect of the sample data collection form
or the related notice provided pursuant to 704B(d)(2) is needed. The
Bureau also seeks comment on whether the sample data collection form
should identify the Bureau to applicants as a potential resource in
connection with their applicable legal rights or for additional
information about the data collection, including concerns regarding
non-compliance. In addition, the Bureau seeks comment on whether
financial institutions need additional information on how to adapt this
form for use in digital modes of data collection, and, if so, what
specific information would be most useful.
Appendix F to Part 1002--Instructions for Collecting and Reporting
Small Business Applicants' Minority-Owned and Women-Owned Business
Status Under Subpart B
ECOA section 704B(b) requires financial institutions to inquire
whether applicants for credit are women-owned businesses, minority-
owned businesses, or small businesses and to maintain a record of the
responses to that inquiry separate from the applications and
accompanying information. However, section 1071 does not include
specific instructions on how a financial institution should collect or
report such information.
The Bureau is proposing appendix F to provide instructions to aid
financial
[[Page 56510]]
institutions when collecting minority-owned business status pursuant to
proposed Sec. 1002.107(a)(18) and women-owned business status pursuant
to proposed Sec. 1002.107(a)(19).
The Bureau is proposing appendix F pursuant to its authority under
ECOA section 704B(g)(1) to prescribe such rules and issue such guidance
as may be necessary to carry out, enforce, and compile data pursuant to
section 1071, in order to facilitate compliance with the statutory
requirements to collect minority-owned and women-owned business status
pursuant to 704B(b)(1). Further, the Bureau is proposing appendix F
pursuant to its obligation in 704B(g)(3) to issue guidance to
facilitate compliance with the requirements of section 1071, including
assisting financial institutions in working with applicants to
determine whether the applicants are women-owned or minority-owned
businesses.
The Bureau seeks comment on the proposed instructions, and
generally requests comment on whether additional clarification
regarding any aspect of the proposed instructions is needed. The Bureau
further requests comment on whether additional or different
instructions are needed for financial institutions that choose not to
use a paper data collection form to collect minority-owned business
status or women-owned business status, such as collecting such
information using a web-based or other electronic data collection form,
or over the telephone. The Bureau also seeks comment regarding the
challenges faced by both applicants and financial institutions by the
data collection instructions prescribed in appendix F and specifically
requests comment on ways to improve the data collection of minority-
owned business status and women-owned business status.
Appendix G to Part 1002--Instructions for Collecting and Reporting
Ethnicity, Race, and Sex of Small Business Applicants' Principal Owners
Under Subpart B
ECOA section 704B(e) requires financial institutions to compile,
maintain, and report certain information, including the ethnicity,
race, and sex of an applicant's principal owners, but does not provide
specific instructions on how a financial institution should do so.
The Bureau is proposing appendix G to provide instructions to aid
financial institutions when collecting principal owners' ethnicity,
race, and sex pursuant to proposed Sec. 1002.107(a)(20). The Bureau is
proposing appendix G pursuant to its authority under ECOA section
704B(g)(1) to prescribe such rules and issue such guidance as may be
necessary to carry out, enforce, and compile data pursuant to section
1071, to facilitate compliance with the statutory requirements to
collect the ethnicity, race, and sex of principal owners pursuant to
704B(e)(2)(G), and pursuant to 704B(g)(3), which directs the Bureau to
issue guidance designed to facilitate compliance with the requirements
of section 1071.
The Bureau seeks comment on the proposed instructions, and
generally requests comment on whether additional clarification
regarding any aspect of the proposed instructions is needed. The Bureau
further requests comment on whether additional or different
instructions are needed for financial institutions that chose not to
use a paper data collection form to collect, principal owners'
ethnicity, race, and sex, such as collecting such information using a
web-based or other electronic data collection form or over the
telephone. The Bureau also seeks comment regarding the challenges faced
by both applicants and financial institutions by the data collection
instructions prescribed in appendix G and specifically requests comment
on ways to improve the data collection of principal owners' ethnicity,
race, and sex.
Appendix H to Part 1002--Tolerances for Bona Fide Errors in Data
Reported Under Subpart B
The Bureau is proposing appendix H, which would set out a Threshold
Table, as referred to in proposed Sec. 1002.112(b) and proposed
comment 112(b)-1. As these provisions would explain, a financial
institution is presumed to maintain procedures reasonably adapted to
avoid errors with respect to a given data field if the number of errors
found in a random sample of a financial institution's data submission
for a given data field do not equal or exceed the threshold in column C
of the Threshold Table.
Under the Threshold Table in proposed appendix H, column A would
list the size of the financial institution's small business lending
application register in ranges of application register counts (e.g., 25
to 50, 51-100, 101-130, etc.). The applicable register count range
would then determine both the size of the random sample, under column
B, and the applicable error threshold, under column C. The error
threshold of column C, as proposed comment 112(b)-1 would explain,
identifies the maximum number of errors that a particular data field in
a financial institution's small business lending application register
may contain such that the financial institution is presumed to maintain
procedures reasonably adapted to avoid errors with respect to a given
data field. Column D would be illustrative, showing the error threshold
as a percentage of the random sample size.
Proposed appendix H would also include examples of how financial
institutions would use the Threshold Table.
For the reasons set out in the section-by-section analysis of
proposed Sec. 1002.112(b), the Bureau is proposing appendix H pursuant
to its authority under ECOA section 704B(g)(1) to prescribe such rules
and issue such guidance as may be necessary to carry out, enforce, and
compile data pursuant to section 1071, and its authority under
704B(g)(2) to adopt exceptions to any requirement of section 1071 and
to exempt any financial institution or class of financial institutions
from the requirements section 1071 as the Bureau deems necessary or
appropriate to carry out the purposes of section 1071.
The Bureau seeks comment on this proposed appendix H. In
particular, the Bureau seeks comment on whether the register count
ranges in column A, the random sample sizes in column B, and the error
thresholds in column C are appropriate. The Bureau further seeks
comment on whether a covered financial institution should be required
to correct and resubmit data for a particular data field, if the
institution has met or exceeded the thresholds provided in appendix H.
VI. Public Disclosure of 1071 Data
A. Introduction
Section 1071 of the Dodd-Frank Act amended ECOA to require
financial institutions to collect and report to the Bureau data about
applications for credit for women-owned, minority-owned, and small
businesses, and for those data to be subsequently disclosed to the
public.\766\
---------------------------------------------------------------------------
\766\ See ECOA section 704B(e)(1), (f)(2) (detailing
requirements for compilation, maintenance, and publication of
information).
---------------------------------------------------------------------------
[[Page 56511]]
The Bureau is proposing that financial institutions not compile,
maintain, or submit any name, specific address, telephone number, email
address or any personally identifiable information concerning any
individual who is, or is connected with, an applicant, other than as
would be required pursuant to proposed Sec. 1002.107. Nonetheless,
publication of the data fields proposed in Sec. 1002.107(a) in an
unedited, application-level format could potentially affect the privacy
interests and lead to the re-identification of, and risk of harm to,
small businesses, related natural persons, and financial institutions.
Section 1071 states that the Bureau may, ``at its discretion,
delete or modify data collected under [section 1071] which is or will
be available to the public, if the Bureau determines that the deletion
or modification of the data would advance a privacy interest.'' \767\
For the reasons discussed below, the Bureau is proposing to adopt a
balancing test as the method by which it would implement its
``discretion'' to delete or modify data before making the data
available to the public.
---------------------------------------------------------------------------
\767\ ECOA section 704B(e)(4).
---------------------------------------------------------------------------
However, the Bureau does not yet have any data under section 1071
and the Bureau does not believe that there are any comparable datasets
that it could use as an adequate proxy for 1071 data to which it could
apply the balancing test at this time. The Bureau is thus setting forth
herein a partial analysis under the balancing test, for public comment.
With several exceptions, discussed in part VI.C.6 below, the Bureau is
not at this time proposing specific modifications or deletions for the
public application-level 1071 data. After the Bureau receives at least
one full year of 1071 data from financial institutions following the
compliance date of the final rule, the Bureau intends to issue a policy
statement (informed by comments received on the partial analysis in
this proposal), in which the Bureau would set forth its intended
modifications and deletions.
B. Background
1. SBREFA Outline
In the SBREFA Outline, the Bureau stated it was considering
proposing to use a balancing test for purposes of deciding how to
exercise its discretion to modify or delete data prior to
publication.\768\ The Bureau explained that data would be modified or
deleted if disclosure of the data in unmodified form would pose risks
to privacy interests that are not justified by the benefits of public
disclosure in light of the statutory purposes of section 1071. If the
risks of disclosing unmodified data are not justified by the benefits
under the balancing test, the Bureau explained it would determine
whether modifications could appropriately diminish the risks. The
Bureau further explained that it was considering proposing to apply
this balancing test to the privacy interests of non-natural persons
(e.g., small business applicants or financial institutions), with
respect to protecting sensitive commercial information, as well as the
privacy interests of natural persons (e.g., principal owners), with
respect to protecting personal information.
---------------------------------------------------------------------------
\768\ See SBREFA Outline at 40-41.
---------------------------------------------------------------------------
As an alternative to a balancing test, the Bureau had considered an
approach in which it would modify data prior to publication if an
identified privacy risk crosses some significance threshold, without
assessing that risk against the benefit of disclosure. The Bureau
explained that such an approach, however, could be inconsistent with
the express disclosure purposes of the statute.
2. SBREFA Feedback
The Bureau received feedback on its privacy proposals under
consideration from SERs and other commenters; \769\ the SBREFA Panel
also made recommendations regarding privacy. Comments related to the
design and implementation of the balancing test itself are described
immediately below. Comments addressing general issues related to
benefits, privacy risks, and potential modifications of data fields are
described further below in part VI.C. Comments addressing the benefits
of specific data fields the Bureau considered as part of the SBREFA
process are discussed in the section-by-section analysis of proposed
Sec. 1002.107(a), in part V above. Comments addressing the privacy
risks and potential modifications of specific data fields are discussed
below in part VI.C.
---------------------------------------------------------------------------
\769\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 34-36.
---------------------------------------------------------------------------
With respect to the balancing test itself, several SERs expressed
the view that it would be difficult to balance transparency and
fairness in the marketplace with privacy interests. A SER and another
industry commenter suggested that the balancing test described in the
SBREFA Outline would not adequately protect privacy interests because
it appeared to be subjective, dependent on the limitations of agency
expertise, and subject to change. A community group commenter
maintained that financial institution privacy did not appear to have
been a concern for Congress in section 1071.
One industry commenter recommended that the Bureau consider the
alternative approach of not balancing privacy risks against the
benefits of disclosure because of the heightened privacy risks in the
small business market (relative to consumer privacy risks),
particularly in geographies where re-identification risk is higher.
Another industry commenter expressed the view that excluding community
banks from collection and reporting would provide a more
straightforward approach to protecting privacy. On the other hand, a
community group maintained that the benefits of public disclosure would
always justify any alleged privacy risks.
Commenters also addressed information security concerns and
potential conflicts with other privacy laws. Two SERs raised concerns
that the transmission of 1071 data to the Bureau could give rise to the
risk of a data security breach involving personally identifiable
information or information that would directly identify a small
business. One SER requested that financial institutions be held
harmless if there were a data security breach for which the Bureau was
responsible. Another industry commenter expressed the concern that some
applicants would be hesitant to provide information in light of data
security concerns. Another requested that the Bureau describe and seek
comment on its data security safeguards.
Commenters also addressed procedural issues surrounding the
implementation of the Bureau's privacy analysis. Several industry
commenters requested that the Bureau not bifurcate the analysis of
privacy issues into a separate notice-and-comment rulemaking, which was
the approach the Bureau took with respect to data fields reported under
the 2015 HMDA Final Rule. One commenter stated that a full explanation
of the balancing test design and its application would help financial
institutions consider potential reputational risks associated with data
disclosure. One industry stakeholder stated that the Bureau should take
what the stakeholder described as a transparent approach to decisions
about public disclosure. Another stakeholder stated that if privacy
issues are raised after implementation of a rulemaking, the Bureau
should, as the stakeholder described, promptly limit publication of
data that might be released to the
[[Page 56512]]
public. Other industry commenters maintained that decisions about
modifications or deletions to protect privacy should be published
following notice-and-comment rulemaking, rather than by policy
statement.
The SBREFA Panel recommended that the Bureau offer more detail in
the proposal on the balancing test and its application to the 1071 data
fields.\770\ The Panel also recommended that the Bureau seek comment on
how it should design and implement the balancing test. In addition, the
Panel recommended that the Bureau seek comment on the range of privacy
concerns articulated by SERs, including potential re-identification of
small businesses and financial institutions, as well as the types of
harms and sensitivities the unmodified release of 1071 data could cause
to financial institutions and small business applicants.\771\ Finally,
the Panel recommended that the Bureau seek comment on the potential
benefits of publishing unmodified 1071 data.\772\
---------------------------------------------------------------------------
\770\ See SBREFA Panel Report at 47-48.
\771\ See id.
\772\ See id.
---------------------------------------------------------------------------
C. Design, Implementation, and Application of Balancing Test
In light of the feedback from SERs and other stakeholders, and for
the reasons below, the Bureau is proposing to adopt a balancing test,
consistent with the test described in the SBREFA Outline. As
recommended by the SBREFA Panel, the Bureau is providing additional
detail on the balancing test and how it would be applied to the
proposed 1071 data points; this analysis is in Preliminary Application
of the Balancing Test in part VI.C.6 below. As discussed under
Implementation of the Balancing Test in part VI.C.2 below, however, the
Bureau is not proposing specific modifications or deletions for most of
the proposed data fields because data required for a statistical
analysis of re-identification risk are not yet available.
1. Balancing Test Design
Under ECOA section 704B(e)(4), the Bureau ``may, at its discretion,
delete or modify data collected under this section which is or will be
available to the public, if the Bureau determines that the deletion or
modification of the data would advance a privacy interest.'' \773\
Congress thus provided the Bureau with broad discretion to modify or
delete data prior to public disclosure to advance privacy interests.
The Bureau continues to believe that a balancing test is a reasonable
approach for exercising this discretion and would effectuate the
purposes of section 1071 better than the alternative approaches
discussed in the SBREFA Outline and recommended by some commenters. As
recognized by commenters, exercising this discretion inherently
requires that the Bureau reconcile competing policy interests. A
balancing test approach would help the Bureau consider the privacy
risks and benefits of disclosing data fields, tailor modifications or
deletions of data narrowly to appropriately balance privacy risks and
benefits in the published data, and establish a decision framework that
is responsive to a broad set of stakeholder concerns that might evolve
over time. The Bureau intends to engage with stakeholders, including
through this proposal, to supplement its own expertise in evaluating
privacy interests for these purposes.
---------------------------------------------------------------------------
\773\ ECOA section 704B(e)(4).
---------------------------------------------------------------------------
Alternative approaches recommended by stakeholders are summarized
in part VI.B.2 above. The Bureau is not proposing approaches that do
not consider the benefits of public disclosure because it is concerned
they would result in outcomes inconsistent with the statutory purposes.
For example, deleting all application-level data from public release
and instead publishing aggregate data would advance privacy interests
but would substantially undermine the public disclosure purposes of the
statute.
The Bureau also considered the suggestion that it exercise its
discretion to modify or delete application-level data prior to
publication by exempting classes of financial institutions from public
disclosure. While this would address the privacy interests of those
financial institutions and their customers that might arise in certain
markets, this approach would be too narrow because privacy concerns
that arise for these persons may also arise for others, such as small
businesses and natural persons in other markets. The Bureau is not
proposing an approach that assumes the benefits of disclosure will
always justify risks to privacy interests. The commenter recommending
this approach did not provide a basis for such a conclusion with
respect to individual data fields, or the dataset as a whole.
With respect to the comment that the Bureau not consider the
privacy interests of financial institutions, section 1071 generally
provides that the Bureau may delete or modify data if it determines
that doing so ``would advance a privacy interest.'' \774\ The statute
does not define the term ``privacy interest,'' however, and the Bureau
believes it can reasonably be interpreted broadly, for purposes of
section 1071, to include interests of non-natural persons with respect
to certain commercial information.
---------------------------------------------------------------------------
\774\ See ECOA section 704B(a) (statutory purposes), (e)(4)
(deletion or modification authority), (f)(1) (reporting
requirement), (f)(2)(C) (publication requirement).
---------------------------------------------------------------------------
Whether a non-natural person has cognizable ``privacy interests''
under the Constitution or common law is not a settled legal question
across all areas of the law. Common law recognizes that businesses have
an interest in protecting sensitive commercial information, similar to
the privacy interests enjoyed by natural persons.\775\ Although the
courts have typically described these interests as property interests,
cases sometimes describe these types of interests as privacy
interests.\776\ Some circuits have held that non-natural persons have
constitutionally protected privacy interests,\777\ while other circuits
have rejected this notion.\778\ The Supreme Court has held that
corporations do not have privacy rights on par with natural
persons,\779\ and that corporations do not have ``personal'' privacy
interests; \780\ however, it has not directly addressed the issue of
whether a non-natural person has a cognizable ``privacy interest.'' The
Bureau also understands that the interests of many small businesses may
be closely tied to the privacy interests of natural persons.\781\
---------------------------------------------------------------------------
\775\ See, e.g., Carpenter v. United States, 484 U.S. 19, 26
(1987) (``Confidential information acquired or compiled by a
corporation in the course and conduct of its business is a species
of property to which the corporation has the exclusive right and
benefit . . . .'') (citation omitted).
\776\ See, e.g., Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470,
487 (1974) (``A most fundamental human right, that of privacy, is
threatened when industrial espionage is condoned or is made
profitable.''); E.I. duPont deNemours & Co. v. Christopher, 431 F.2d
1012, 1016 (5th Cir. 1970) (``Commercial privacy must be protected
from espionage which could not have been reasonably anticipated or
prevented.'').
\777\ See, e.g., Tavoulareas v. Wash. Post Co., 724 F.2d 1010,
1023 (D.C. Cir. 1984), vacated on other grounds, 737 F.2d 1170 (D.C.
Cir. 1984).
\778\ See, e.g., Fleck & Assocs., Inc. v. City of Phoenix, 471
F.3d 1100, 1105 (9th Cir. 2006).
\779\ United States v. Morton Salt Co., 338 U.S. 632, 652 (1950)
(``[C]orporations can claim no equality with individuals in the
enjoyment of a right to privacy.'').
\780\ FCC v. AT&T, Inc., 562 U.S. 397, 402-407 (2011). In FCC,
the Court held that corporations lack ``personal privacy'' interests
under FOIA Exemption 6, which uses the term ``personal privacy.''
The Court's opinion was based on the word ``personal'' and limited
to the notion of ``personal privacy.'' The Court stated that it was
not addressing the scope of a non-natural person's ``privacy
interests'' generally under constitutional or common law. Id. at 407
(``[T]his case does not call upon us to pass on the scope of a
corporation's `privacy' interests as a matter of constitutional or
common law.'').
\781\ See, e.g., Providence J. Co. v. FBI, 460 F. Supp. 778, 785
(D.R.I. 1978) (``While corporations have no privacy, personal
financial information is protected, including information about
small businesses when the individual and corporation are
identical.''), rev'd on other grounds, 602 F.2d 1010 (1st Cir.
1979).
---------------------------------------------------------------------------
[[Page 56513]]
The Bureau believes it is appropriate to consider the privacy
interests of non-natural persons under the 1071 balancing test. The
proposed 1071 data points would reveal information about non-natural
persons--including small businesses and financial institutions--and
Congress did not expressly limit the privacy interests the Bureau may
consider to those of natural persons. Nor did Congress expressly limit
the privacy interests the Bureau may consider to those of applicants or
borrowers, as it did in HMDA.\782\ Further, courts have recognized that
non-natural persons have privacy interests in certain contexts. The
Bureau seeks comment on its interpretation of ``privacy interests''
under section 1071 and its proposal to consider the privacy interests
of both financial institutions and non-natural person applicants.
---------------------------------------------------------------------------
\782\ For context, the privacy interests that may be considered
under HMDA are limited to the interests of ``applicants and
mortgagors'' specifically. See 12 U.S.C. 2803(h)(1)(E), (h)(3)(B),
(j)(2)(B). In contrast, section 1071 simply uses the term ``privacy
interest,'' without qualification. See ECOA section 704B(e)(4).
---------------------------------------------------------------------------
Several commenters raised concerns about the information security
implications of reporting data to the Bureau. While the Bureau's
information security procedures are outside the scope of this
rulemaking, the Bureau takes strong measures to mitigate and address
any risks to the security of sensitive data it receives, consistent
with the guidance and standards set for Federal information security
programs, and is committed to protecting the privacy and information
security of the 1071 data it receives from financial institutions. In
addition, the Bureau does not believe a financial institution could be
held legally liable for the exposure of data due to a breach at a
government agency or for reporting data to a government agency if the
institution was legally required to provide the data to the agency and
did so in accordance with other applicable law.
The Bureau acknowledges the concern raised by some SERs and other
stakeholders that some applicants might be hesitant to provide
information in light of data security concerns. However, the Bureau
does not believe that such concerns will broadly discourage applicants
from seeking credit from financial institutions that are responsible
for reporting data to the Bureau.
For the reasons described above, the Bureau proposes to use a
balancing test to exercise its discretion under ECOA section 704B(e)(4)
to delete or modify data collected under section 1071 which is or would
be available to the public where the Bureau determines that the
deletion or modification of the data would advance a privacy interest.
Specifically, the Bureau proposes to modify or, as appropriate, delete
data fields from the public application-level 1071 data where the
release of the unmodified data would create risks to the privacy
interests of applicants, related natural persons, or financial
institutions that would not be justified by the benefits of such
release to the public in light of the statutory purposes of section
1071. In such circumstances, the need to protect the privacy interests
of applicants, related natural persons, or financial institutions would
require that individual data fields be modified or, as appropriate,
deleted. Considering the public disclosure of 1071 data as a whole, the
privacy interests of applicants, related natural persons, or financial
institutions would arise under the balancing test only where the
disclosure of 1071 data may both substantially facilitate the re-
identification of an applicant or related natural person, in the data
and disclose information about such persons, or the identified
financial institution, that is not otherwise public and may be harmful
or sensitive. Thus, disclosure of an unmodified individual data field
may create a risk to privacy interests if such disclosure either would
substantially facilitate the re-identification of an applicant or
related natural person; or would disclose information about applicants
or related natural persons, or an identified financial institution,
that is not otherwise public and that may be harmful or sensitive.\783\
This interpretation implements ECOA section 704(e)(4).
---------------------------------------------------------------------------
\783\ The Bureau is aware that ``re-identification'' risk often
is used in reference to risks applicable to natural persons and that
identification of a small business in the public application-level
1071 data could be characterized as a ``harm'' or ``sensitivity.''
However, for the ease of administrability, the proposed balancing
test analyzes risks to both natural persons and small businesses as
re-identification risks.
---------------------------------------------------------------------------
Where the publication of unmodified application-level 1071 data may
create risks to privacy, the proposed balancing test would require that
the Bureau consider the benefits of disclosure in light of section
1071's purposes and, where these benefits do not justify the privacy
risks the disclosure would create, modify the public application-level
dataset to appropriately balance the privacy risks and disclosure
benefits. The Bureau would delete the data field prior to publishing
the application-level dataset if other modifications would not
appropriately balance the privacy risks and disclosure benefits. An
individual data field would be a candidate for modification or deletion
under the proposed balancing test if its disclosure in unmodified form
would create a risk of re-identification or a risk of harm or
sensitivity.
The Bureau's proposed balancing test generally resembles the
balancing test adopted in the 2015 HMDA Final Rule,\784\ with certain
adjustments for the 1071 context. In particular, the Bureau's proposed
1071 balancing test would consider the privacy interests of not just
applicants, but also related natural persons who might not be
applicants (such as principal owners of a business, where a legal
entity is the applicant), as well as the privacy interests of financial
institutions reporting 1071 data.
---------------------------------------------------------------------------
\784\ See 80 FR 66127, 66133-34 (Oct. 28, 2015).
---------------------------------------------------------------------------
The Bureau's proposed 1071 balancing test would not specifically
consider the risks that a financial institution could be identified in
the public application-level 1071 data. Section 1071 requires financial
institutions to compile and maintain data and provides that such
information be made available to the public upon request.\785\
Accordingly, section 1071 contemplates that the public would know what
application data are associated with particular financial institutions.
Because the statute directly contemplates disclosure of a financial
institution's identity in connection with the public application-level
dataset, the Bureau proposes to disclose financial institution
identity; the re-identification risk element of the analysis would not
apply to financial institutions. However, the Bureau would consider the
risk to a financial institution that the release of 1071 data in
unmodified form would disclose information that may be harmful or
sensitive to a financial institution.
---------------------------------------------------------------------------
\785\ See ECOA section 704B(e), (f)(2)(B).
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As recommended by the SBREFA Panel, the Bureau seeks comment on the
design of its proposed balancing test. The Bureau also seeks comment on
whether the balancing test should apply to the privacy interests of
natural persons generally, rather than just those of natural persons
related to applicants.
2. Implementation of the Balancing Test
As noted above, the SBREFA Panel and other commenters recommended
that the Bureau offer more detail in the proposal on how the Bureau
intends to implement and apply its balancing test
[[Page 56514]]
to the 1071 data fields it is proposing.\786\ Several industry
commenters requested that the Bureau apply the balancing test directly
in the Bureau's 1071 rulemaking, rather than after the Bureau issues a
final rule. Because of data limitations discussed below, the Bureau is
not proposing a full application of the balancing test to most of the
proposed data points. Instead, the Bureau is setting forth and seeking
comment on its analysis of the benefits and harms or sensitivities that
could arise with respect to individual data fields and the dataset as a
whole. The Bureau is not conducting a full analysis of the risks of re-
identification; the Bureau is proposing to determine the extent of re-
identification risk after it has obtained a full year of reported 1071
data. Accordingly, the Bureau is not proposing specific modifications
or deletions for most of the proposed data points, but is instead
seeking comment throughout part VI.C.5 and .6 on the types of
techniques it is considering.
---------------------------------------------------------------------------
\786\ See SBREFA Panel Report at 47.
---------------------------------------------------------------------------
The Bureau is not applying the proposed balancing test fully to the
proposed data fields because the lack of an existing 1071 dataset, or a
sufficiently similar dataset, materially limits its ability to analyze
re-identification risks. Unlike the balancing test elements of
benefits, harms, and sensitivities, the Bureau would analyze the re-
identification risk element, in part, using a statistical analysis.
Specifically, the Bureau would determine whether a particular
combination of data fields in a dataset generates a unique set of
records that can be accurately matched to records in another publicly
available dataset identifying an applicant or a related natural
person.\787\ Where certain data fields significantly contribute to re-
identification risk, the Bureau can use this type of analysis to
determine what modifications can be made to the data fields to reduce
re-identification risk--that is, by reducing the number of unique
combinations produced by data fields--while maintaining as much data
utility as possible.
---------------------------------------------------------------------------
\787\ For purposes of this discussion of the proposed balancing
test analysis, the term ``unique'' can refer to a combination of
values for a particular record or a combination of values shared by
a few records.
---------------------------------------------------------------------------
However, the absence of an existing 1071 dataset or sufficiently
similar data significantly impedes the Bureau's ability to
preliminarily determine whether a proposed 1071 data field,
individually or in combination with others, would substantially
facilitate re-identification, or how specifically to modify data to
reduce that risk. Because there does not exist a dataset sufficiently
similar to what would be published under section 1071, a re-
identification analysis of data other than actual reported 1071 data
would not provide an accurate basis on which the Bureau could apply the
balancing test and modify or delete the data, as appropriate.\788\
Underestimating the degree to which a 1071 data field, individually or
in combination with others, facilitates re-identification risk could
unnecessarily increase privacy risks to an applicant or a related
natural person, while overestimating re-identification risk could
unnecessarily reduce data utility.
---------------------------------------------------------------------------
\788\ The Bureau considered whether it could analyze re-
identification risk using data released under the SBA's Paycheck
Protection Program (PPP) and U.S. Census data. However, estimating
re-identification risk--and making modification and deletion
decisions designed to reduce re-identification risk--based on
existing public data sources would be substantively limited. First,
the more limited scope of the PPP and Census data makes it difficult
to accurately estimate the re-identification risk associated with
all of the data points in the eventual 1071 data. Second, a re-
identification analysis using existing PPP and Census datasets would
not cover the same sets of small businesses that will appear in the
1071 data.
---------------------------------------------------------------------------
In light of these limitations, the Bureau considered deferring all
analysis under the proposed balancing test until after the 1071 rule is
finalized. However, the Bureau is concerned that doing so would reduce
opportunities for public feedback on privacy issues and their
relationship to the general 1071 proposal. Although the Bureau lacks
data that would allow it to perform a complete re-identification
analysis at this time, it believes there is substantial value in
setting forth its preliminary analysis under other aspects of the
balancing test. Specifically, the Bureau has preliminarily analyzed the
benefits and harms or sensitivities associated with the proposed data
fields, the capacity and motives of third parties to match proposed
1071 data fields to other identifiable datasets, and potential
modification techniques it may consider to address privacy risks. The
Bureau's preliminary analysis of these aspects of the balancing test is
set forth below. The Bureau acknowledges that the public will not have
an opportunity to comment on the Bureau's intentions with respect to
specific modifications or deletions for each proposed data field before
a 1071 rule is finalized. However, the Bureau believes this limitation
outweighs the risks of basing modifications or deletions on a
potentially inaccurate re-identification analysis. And while a number
of community groups that provided feedback on the Bureau's SBREFA
Outline asserted that privacy risks would be low, they nonetheless
recognized the role played by modification techniques. The Bureau
agrees that modification techniques could play an important role in
reducing privacy risks. The Bureau's ability to design effective
modifications, however, requires application-level data that are not
currently available.
As noted above, several industry commenters asserted that privacy
decisions should be finalized by notice-and-comment rulemaking, rather
than by policy statement. The Bureau believes, however, that a policy
statement would be an appropriate vehicle for announcing its intentions
with respect to modifications and deletions of 1071 data. First, under
section 1071, the Bureau may delete or modify data at its discretion,
in contrast to other provisions in the statute that require legislative
rulemaking.\789\ Second, the Bureau's proposed approach with respect to
modifications and deletions would not impose compliance obligations on
financial institutions; as discussed in the section-by-section analysis
of proposed Sec. 1002.110 above, the Bureau is proposing to publish
application-level data on its website on behalf of financial
institutions.\790\
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\789\ Compare ECOA section 704B(e)(4), with ECOA section
704B(f)(2).
\790\ Section 1071 requires financial institutions to compile
and maintain data and provides that such information be made
available to the public upon request. See ECOA section 704B(e),
(f)(2)(B).
---------------------------------------------------------------------------
Nonetheless, in the interest of obtaining public feedback on the
qualitative aspects of its balancing test analysis, the Bureau is
including a preliminary detailed analysis for each of the proposed data
points, described under Preliminary Application of the Balancing Test
in part VI.C.6 below. After the first year of 1071 data is reported to
the Bureau, but before the Bureau releases the first year of 1071 data
to the public, it would publish a policy statement setting forth its
intentions with respect to modifications and deletions to the public
application-level 1071 data. Before publishing that policy statement,
the Bureau would conduct a balancing test analysis based on feedback to
this proposal as well as a quantitative analysis of re-identification
risk using reported 1071 data. At this time, the Bureau does not intend
to re-propose its balancing test analysis for public comment prior to
issuing the policy statement, in the interest of making data publicly
available in a timely manner.
While the Bureau is seeking public feedback on its analysis below,
preserving the ability to exercise its
[[Page 56515]]
discretion to modify or delete data through policy statements allows
the Bureau to manage the relationship between privacy risks and
benefits of disclosure more actively. The Bureau believes this
flexibility may be especially important in the event the Bureau becomes
aware of developments that might contribute to privacy risks. The
privacy landscape is constantly evolving, and risks to applicant
privacy created by the publication of the application-level 1071 data
may change as the result of technological advances and other external
developments. For example, a new source of publicly available records
may become accessible, increasing or decreasing privacy risks under the
balancing test, or the Bureau may discover evidence suggesting that
third parties are using the 1071 data in unforeseen, potentially
harmful ways. Potential uses of the application-level 1071 data in
furtherance of the statute's purposes may also evolve, such that the
benefits associated with the disclosure of certain data may increase to
an extent that justifies providing more information to the public in
less modified form. As recommended by the SBREFA Panel, the Bureau
seeks comment on its approach described above for implementing the
balancing test.\791\
---------------------------------------------------------------------------
\791\ See SBREFA Panel Report at 24, 33, 48.
---------------------------------------------------------------------------
3. Disclosure Benefits
In the SBREFA Outline, the Bureau explained that, under the
balancing test it was considering, data would be modified or deleted if
disclosure in unmodified form would pose risks to privacy interests
that are not justified by the benefits of public disclosure in light of
the statutory purposes of section 1071.\792\ The Bureau sought feedback
on the data points generally, as well as the benefits of public
disclosure to financial institutions for each of the data points under
consideration.\793\ Feedback on the benefits of public disclosure of
the data points under consideration during the SBREFA process is
described in the applicable section-by-section analysis of proposed
Sec. 1002.107(a)(1) through (21) in part V above. Feedback on the
benefits of public disclosure of the 1071 dataset as a whole is
described below.
---------------------------------------------------------------------------
\792\ See SBREFA Outline at 40-41.
\793\ See id.
---------------------------------------------------------------------------
Under the proposed balancing test, the Bureau would consider the
benefits of disclosure of the application-level 1071 data to the public
in light of the statutory purposes of section 1071. As described above,
the 1071 data would be the most comprehensive dataset available to
analyze trends within the U.S. small business lending industry. The
Bureau expects that users of 1071 data would rely on this information
to help achieve the statutory purposes of section 1071: (1)
Facilitating the enforcement of fair lending laws; and (2) enabling
communities, governmental entities, and creditors to identify business
and community development needs and opportunities of women-owned,
minority-owned, and small businesses.\794\ This would make 1071 data
the foremost data source that governmental entities, researchers,
economists, industry, and community groups rely on to achieve 1071's
purposes and to analyze the small business lending market. The Bureau
received feedback provided by SERs, other commenters, and the SBREFA
Panel on the potential benefits of disclosure. Comments related to the
overall benefits of data disclosure, the fair lending benefits, and
business and community development benefits are described below.
---------------------------------------------------------------------------
\794\ See ECOA section 704B(a).
---------------------------------------------------------------------------
Some SERs and industry stakeholders generally supported the public
disclosure of 1071 data to promote the monitoring of equal access to
credit for small businesses, and narrowing the information gap between
lenders and borrowers, community groups, and public officials. A number
of SERs expressed the view that data transparency in the small business
lending market is critical to advance the goals of fair lending
enforcement and access to credit for small businesses, especially those
that are minority-owned and women-owned. One SER stated that the data
currently available are limited, and that section 1071 has the
opportunity to address lending disparities. The SER also explained that
data transparency and fairness could address lending practices that
tend to exclude women-owned and minority-owned businesses, exacerbating
a racial wealth gap. An industry stakeholder supported the public
disclosure of 1071 data to promote the monitoring of equal access to
credit for women- and minority-owned businesses.
Several SERs also underscored the importance of public disclosure
of 1071 data in furthering the 1071 rule's business and community
development purpose. One SER stated that the 1071 rule could be a model
for the marketplace and pro-innovation if implemented with checks and
balances. Another SER said that more transparency would help
governments and creditors understand what strategies are successful in
reaching women-owned and minority-owned small businesses and shed light
on the marketplace and pricing overall.\795\ Other SERs emphasized the
importance of publishing pricing information (specifically captured as
APR), together with product type for understanding the cost and
availability of financing products to small businesses, the importance
of NAICS codes or other industry information for determining which
industries are getting funding generally, and the importance of census
tract or other geographic information for understanding the extent of
lending to small businesses in low-to-moderate income
neighborhoods.\796\
---------------------------------------------------------------------------
\795\ See SBREFA Panel Report at 36.
\796\ See id.
---------------------------------------------------------------------------
However, several industry commenters expressed the belief that
there were no, or few, benefits to publishing 1071 data in general, in
addition to raising general concerns about privacy risks, discussed
under Risks to Privacy Interests in part VI.C.4 below. Several
commenters maintained that the benefits of public disclosure would be
limited due to concerns about the data points the Bureau was
considering and the absence of other data points that could, in the
view of these commenters, reduce the risk of misinterpretation of the
data. SERs and industry commenters also questioned the benefits
associated with individual data points, as described in the applicable
section-by-section analysis of proposed Sec. 1002.107(a)(1) through
(21) in part V above.
Community group commenters supported public disclosure of 1071
data. One commenter expressed the view that robust data collection
would allow the public to gain a much greater understanding of gaps in
lending to borrowers in the marketplace, and easily identify unmet
borrowing needs. The commenter explained that the 1071 dataset would
cover more types of loans from more institutions than existing CRA data
(which had been used for similar kinds of analyses in the past),
potentially giving the Bureau a comprehensive view of the small
business lending market. The commenter also explained that data
collection under the proposal would build an understanding of the
credit needs and financing outcomes of small businesses in the lending
marketplace through information from data fields such as amount applied
for, action taken, and amount approved or originated. Additionally,
several community group commenters asserted that transparency through
public disclosure would benefit responsible financial institutions by
allowing them
[[Page 56516]]
to distinguish themselves from others and providing a means for
discovering and addressing problematic practices earlier.
The Bureau has considered these comments and the ways in which
public disclosure of the proposed 1071 data fields would facilitate the
enforcement of fair lending laws. Market transparency through
publication of the application-level 1071 data would help to identify
potential fair lending violations and address discrimination in small
business lending. For example, the ability to compare pricing is a
central outcome in many fair lending analyses, which often aim to
determine if similarly situated applicants face higher prices due to a
prohibited basis under ECOA, such as ethnicity, race, and sex. In
supporting the inclusion of pricing as a discretionary data point, one
community group explained that collecting data on price would
facilitate enforcement of fair lending laws by identifying
discrimination in lending through information on whether an application
was approved and at what price. The 1071 data would also be used by
public officials, researchers, and community groups to identify
potentially discriminatory lending patterns and to enforce anti-
discrimination statutes. For example, data on action taken would be
used in fair lending analyses to identify potential disparities in
denial rates among similarly situated applicants. Additionally, public
disclosure of the 1071 data fields would enable data users to advocate
that financial institutions maintain robust fair lending policies and
practices and could also increase the prospect of self-correction when
financial institutions conduct their own analyses to assess potential
fair lending risks. At the same time, greater transparency could
provide explanatory context for lending decisions, which may help
protect responsible lenders from inaccurate assumptions based on more
limited public data.
Moreover, data users, such as community groups, researchers, and
public officials, would be able to use 1071 data to help determine
whether certain types of credit are disproportionately available to
different groups. For example, one community group commenter explained
that because credit cards and other types of high-interest credit are
widely used by small businesses, information on the types of credit
applied for or originated could reveal the extent to which women-owned
or minority-owned small businesses can access term loans or are served
disproportionately by credit cards or other small business credit
products that generally carry higher interest rates. The same commenter
also explained that data users may be able to use the 1071 data to
investigate whether certain products or businesses are
disproportionately supported by government guarantee programs in
business and community development and possibly help to develop more
targeted programs.
The Bureau has also considered the ways in which publication of the
application-level 1071 data would promote the business and community
development purpose of 1071. The Bureau believes that the public
application-level 1071 data would provide useful and robust data,
allowing data users to appropriately and efficiently focus resources on
particular areas of need. For example, reporting of information about
rates of denial, and the associated reasons for denial of a business
credit application, combined with data fields commonly used to help
make underwriting decisions, such as gross annual revenue and time in
business, would improve the public's ability to generally understand
financial institutions' decision-making and to identify underserved
areas of the market. The Bureau also believes that the public
application-level 1071 data could yield information helpful in
understanding the economic health of communities. NAICS codes, for
example, could provide information about rates at which particular
types of businesses are applying for and receiving credit in general,
and which types of lending products are being requested, when combined
with credit type. This information would also allow data users to
identify trends in the small business market that could provide
evidence as to the health of the overall economy. Understanding these
potential indicators would also help public officials focus efforts to
help creditors serve the lending needs of communities and give
government officials information to efficiently distribute resources to
vulnerable small business applicants. Finally, pricing information,
such as total origination charges for different types of credit, would
also allow data users to better understand pricing decisions and the
cost of credit to small businesses. Information about credit purpose
would allow data users to better understand why small businesses are
using credit, thus helping communities determine whether creditors are
serving the small business lending needs of their communities and also
helping public officials to target public investment to better attract
private investment and innovation. As recommended by the SBREFA Panel,
the Bureau seeks comment on its understanding of the benefits of public
disclosure of the 1071 data described above.\797\
---------------------------------------------------------------------------
\797\ See id. at 48.
---------------------------------------------------------------------------
4. Risks to Privacy Interests
The Bureau has considered the risks to privacy that may be created
by the public disclosure of the 1071 data that would be reported to the
Bureau under the proposal. Based on its analysis to date, the Bureau
believes that public disclosure of the unmodified application-level
dataset, as a whole, might create risks to privacy interests under the
1071 balancing test. As described in more detail below, this is due to
the presence of unique data fields in the dataset that the Bureau
believes could create re-identification risk and the presence of
individual data fields that the Bureau believes would create a risk of
harm or sensitivity. Accordingly, the Bureau intends to consider
whether modifications or deletions to the public application-level 1071
data would reduce these risks to privacy and appropriately balance them
with the benefits of disclosure for section 1071's purposes.
As recommended by the SBREFA Panel, the Bureau seeks comment on the
range of privacy concerns articulated by SERs, including potential re-
identification of small businesses and financial institutions, as well
as the types of harms and sensitivities the unmodified release of 1071
data could cause to financial institutions and small business
applicants, which are described further below.\798\
---------------------------------------------------------------------------
\798\ See id. at 47.
---------------------------------------------------------------------------
i. Re-Identification Risk
In the Bureau's SBREFA Outline, the Bureau explained that, while
information that directly identifies natural persons, such as name,
address, date of birth, or Social Security number would not be
collected pursuant to section 1071 requirements, publication of 1071
data under consideration in an unmodified, application-level format
potentially could be used to re-identify small business applicants and
related natural persons or potentially harm their privacy
interests.\799\ One SER stated that there has not been a single
demonstrated incident of re-identification using HMDA data, and that
privacy concerns could be addressed through modification techniques.
However, many SERs and several industry stakeholders explained that
1071 data would facilitate the re-
[[Page 56517]]
identification of natural persons and businesses, particularly in low-
density geographies, like rural areas. Some stakeholders stated that it
would be difficult to predict whether re-identification could arise,
particularly as technology evolves.
---------------------------------------------------------------------------
\799\ See SBREFA Outline at 40.
---------------------------------------------------------------------------
The Bureau is concerned about two re-identification scenarios.
First, a third party may use common data fields to match a 1071 record
to a record in another dataset that contains the identity of the
applicant or related natural person. The Bureau uses the term
``adversary'' when referring to such third parties.\800\ Second, an
adversary may rely on pre-existing personal knowledge to recognize an
applicant's record in the unmodified 1071 data.
---------------------------------------------------------------------------
\800\ The term is not intended to indicate that the adversary's
motives are necessarily malicious or adverse to the interests of
others. See, e.g., Nat'l Inst. of Standards & Tech., De-
Identification of Personal Information (2015), https://nvlpubs.nist.gov/nistpubs/ir/2015/NIST.IR.8053.pdf (using the term
``adversary'').
---------------------------------------------------------------------------
Re-identification based on matching. Under the first scenario, it
may be possible to match a 1071 record to an identified dataset, either
directly or through a combination of intermediate datasets.\801\ The
1071 data that would be reported under the proposal, like the data
reported under HMDA and Regulation C, may contain data fields that
create re-identification risk.\802\ However, successfully re-
identifying a 1071 record would require several steps and may present a
significant challenge.
---------------------------------------------------------------------------
\801\ For purposes of this discussion, an identified dataset is
one that directly identifies a natural or non-natural person.
\802\ HMDA data have a large number of records with unique
combinations of data fields. See 84 FR 649, 654 n.33 (Jan. 31, 2019)
(citing a 2005 Board study finding that more than 90 percent of the
loan records in a given year's HMDA data are unique--that is, an
individual lender reported only one loan in a given census tract for
a specific loan amount).
---------------------------------------------------------------------------
First, an adversary generally would have to isolate a record that
is unique within the 1071 data. A 1071 record is unique when the values
of the data fields associated with it are shared by zero or few other
1071 records. As discussed above, the Bureau believes actual 1071 data
are needed to perform an accurate re-identification analysis. Thus, the
Bureau does not intend to apply the balancing test until after it has
analyzed re-identification risk with at least a full year of reported
1071 data.
A 1071 record having unique combinations of values would not
automatically result in its re-identification; an adversary would also
have to find a record corresponding to the applicant or related natural
person in another dataset by matching similar combinations of data
fields. Once a 1071 record has been matched to a corresponding record,
an adversary would possess any additional fields found in the
corresponding record but not found in the 1071 record, such as,
possibly, the identity of the applicant. However, even after
accomplishing such a match, an adversary might not have accurately re-
identified the true applicant to whom the 1071 record relates. For
example, if the corresponding record is not the only record in the
other dataset that shares certain data fields with the unique 1071
record, an adversary would have to make a probabilistic determination
as to which corresponding record belongs to the applicant.
As described below and addressed with respect to individual data
fields in part VI.C.6 further below, the Bureau expects that the census
tract and NAICS code data fields may significantly contribute to re-
identification risk. Geographic and industry information are publicly
available in a variety of sources and in a form that directly
identifies businesses or in a way that could be derived with reasonable
accuracy. This information is also likely to produce unique instances
in the data, both when used separately and also, especially, when
combined. Other data fields may result in unique combinations
(particularly when combined with census tract), but the Bureau would
need actual 1071 data to analyze their contribution to uniqueness.
In the 1071 context, the Bureau believes that particularly relevant
sources of identified data for matching purposes are UCC filings,
property records, and titles. The Bureau believes that such filings
could pose a serious re-identification risk because of the availability
of information about the lender, the applicant, and the date of
transaction. The proposed 1071 data fields in unmodified form would
identify the financial institution as well as the action taken date or
application date. If the action taken date is on or near the UCC filing
date, for example, an adversary might be able to use the date and
financial institution on the UCC filings to identify the applicants of
originated loans in the public application-level 1071 data. The UCC
filing also typically will have the address of the borrower.
Combinations of lender, action taken date, and census tract might
result in unique combinations of data fields that an adversary could
connect to a publicly available source of information to re-identify
the applicant. Therefore, the Bureau believes identity of the financial
institution and the action taken date (and application date, which
could be a proxy for action taken date) may significantly contribute to
re-identification risk. UCC filings may also, although to a lesser
extent, contain detailed information on the type of loan and the amount
approved.
With respect to 1071 loans secured by residential and commercial
property, publicly available real estate transaction records and
property tax records would be particularly relevant sources of
identified data, as the Bureau described in its proposed policy
guidance on the disclosure of loan-level HMDA data.\803\ Because some
of the data fields in such public records are also present in the 1071
data, the Bureau believes that the publication of application-level
1071 data without any modifications would create a risk that these
public records could be directly matched to a 1071 record to re-
identify an applicant. In addition, a business's own website, public
directories, or websites that review businesses typically include the
business's location, time in business, and information that could be
used to derive information about the business's owners.
---------------------------------------------------------------------------
\803\ See 82 FR 44586, 44593 (Sept. 25, 2017). The Bureau
explained that, although there is variance by jurisdiction, such
records are often available electronically and typically identify a
borrower through documents such as the mortgage or deed of trust.
These documents typically include the loan amount, the financial
institution, the borrower's name, and the property address, and may
include other information.
---------------------------------------------------------------------------
UCC filings also frequently include the name of the lender, the
name of the business, and the date that the filing was submitted.
Though the availability differs by State, UCC filings are often
searchable in State databases, and are a source of data frequently
mined by data brokers. UCC statements are often filed against specific
collateral and business assets generally, especially for products like
general lines of credit. These types of filings would be available more
broadly than just for loans with very specific collateral (like
equipment or vehicles). Such filings could pose a serious re-
identification risk because of the availability of information about
the lender, the applicant, and the date of transaction.
Identified public data records in loan-level datasets for programs
like the SBA's 7(a), 8(a), 504, and PPP programs, as well as State-
level registries of women-owned and minority-owned businesses for
contracting purposes, may also contribute to re-identification risk.
These datasets include information such as loan program guarantee
information, industry or NAICS code, demographic information about the
business owners, time in business, and
[[Page 56518]]
number of workers. Time in business and number of workers could also
likely significantly contribute to re-identification risk, especially
in combination with other data fields like census tract and NAICS code.
Other publicly available sources of data similar to those included
in the proposed 1071 data, but only for certain types of credit,
include loan-level performance datasets made available by the
Government-Sponsored Enterprises (GSEs). The GSE datasets include
information such as borrower demographic information, loan program
guarantee information, pricing data, loan term, loan purpose, and the
year of action taken. Asset-backed securities datasets for securitized
mortgage and auto loans are made available by the Securities and
Exchange Commission through the Electronic Data Gathering, Analysis,
and Retrieval (EDGAR) system. These datasets include information about
the lender, the date of action taken, pricing data, loan term, loan
amount applied for and approved. These datasets are available online
with limited restrictions on access. But these datasets do not include
the name of the borrower; as described above, this means that an
adversary who is able to match a record in one of these datasets to a
record in the 1071 data would need to make an additional match to an
identified dataset to re-identify an applicant. And some of these
datasets contain restrictions on use, such as a prohibition on
attempting to re-identify borrowers.
Private datasets, which could be made available in identified or
de-identified form, that could be matched to the 1071 data are also
available. For example, data brokers collect information about small
businesses from a wide range of sources and sell it for a variety of
purposes, including marketing, identity verification, and fraud
detection.\804\ These datasets typically include data collected from
commercial, government, and other publicly available sources and may
contain data about the business, including industry code, information
about geography, and estimates of gross annual income, number of
workers, and information about related natural persons, including the
race and ethnicity of business owners. Some of these datasets contain
restrictions on use, such as requiring a legitimate business purpose,
and some may prohibit attempts to re-identify borrowers.
---------------------------------------------------------------------------
\804\ See generally Fed. Trade Comm'n, Data Brokers: A Call for
Transparency and Accountability (May 2014), https://www.ftc.gov/system/files/documents/reports/data-brokers-call-transparency-accountability-report-federal-trade-commission-may-2014/140527databrokerreport.pdf (describing the types of products offered
and the data sources used by data brokers).
---------------------------------------------------------------------------
In addition to considering the steps an adversary would need to
complete to re-identify the 1071 data and the various data sources that
may be required to accomplish re-identification, including their
limitations, the Bureau also has considered the capacity, incentives,
and characteristics of potential adversaries, including those that may
attempt re-identification for harmful purposes. In particular, a
potential competitor of a small business or a firm with other
commercial interests may seek information about a business's expansion
strategy or financial condition, including whether it was able to
obtain credit approval. This could be part of routine market monitoring
or to gain a specific commercial advantage.
These potential adversaries could possess the resources to use
private datasets in addition to publicly available records to re-
identify the 1071 data. However, the Bureau has considered the extent
to which much of the commercial benefit to be obtained by re-
identifying the 1071 data may be more readily available from private
datasets to which these potential adversaries already have access
without the need for recourse to the 1071 data. In many cases,
information from other datasets may be timelier than that found in the
1071 data.\805\ Furthermore, some of these potential adversaries may
refrain from re-identifying the 1071 data for reputational reasons or
because they have agreed to restrictions on using data from the
additional datasets described above for re-identification purposes.
---------------------------------------------------------------------------
\805\ Cf. 82 FR 44586, 44594 (Sept. 25, 2017) (explaining that
the delay between action taken and publication of reported HMDA data
ranges from three to 15 months).
---------------------------------------------------------------------------
Additionally, while some academics, researchers, and journalists
might use de-identified 1071 data, some may be interested in re-
identifying the 1071 data for research purposes. These persons may
differ in their capacity to re-identify an applicant in the 1071 data.
However, as mentioned above, some private datasets may have contractual
terms prohibiting their use for re-identification purposes and
therefore these persons may be restricted from actually using the 1071
data to re-identify applicants. Further, those academics or journalists
with significant resources may be affiliated with organizations that
have reputational or institutional interests that would not be served
by re-identifying the 1071 data. These factors may reduce the risk of
re-identification by such persons.
The Bureau has considered whether parties intending to commit
identity theft or financial fraud may have the incentive and capacity
to re-identify the 1071 data. As discussed under Risk of Harm or
Sensitivity in part VI.C.4.ii below, the Bureau believes that the 1071
data would be of minimal use for these purposes. Further, these
potential adversaries are not law abiding and may have easier, albeit
illegal, ways to secure data for these purposes than attempting to re-
identify application-level 1071 data.
Re-identification based on personal knowledge. In addition to the
possibility of re-identifying applicants through matching 1071 data to
other datasets, some potential adversaries may be able to re-identify a
particular applicant or related natural person in the 1071 data by
relying on personal knowledge about the applicant or natural person.
The unmodified 1071 data would include location and demographic
information, such as the race, sex, and ethnicity of principal owners,
and industry information. These types of information may be likely to
be known to a potential adversary who is familiar with a specific
applicant or related natural person. Therefore, such a potential
adversary may be able to re-identify a known applicant or related
natural person without attempting to match a 1071 record to another
data source. This potential adversary could include a customer,
competitor, or person with other commercial ties to the applicant, or a
neighbor or acquaintance of a related natural person, and the interest
in re-identification may range from mere curiosity to the desire to
embarrass or otherwise harm the applicant. These potential adversaries
may possess a high level of specific knowledge about the
characteristics of a particular applicant or related natural person.
Adversaries who can re-identify an applicant or natural person based on
personal knowledge would be able to complement their existing knowledge
with the full 1071 application-level data, and therefore could
contribute to risks of harm or sensitivity.
Pre-existing personal knowledge possessed by such a potential
adversary would be limited to information about a subset of applicants
and related natural persons. Thus, any re-identification attempt by
such an adversary would likely target or impact a more limited number
of applicants or natural persons, compared to the large numbers of
applicants or natural persons who could be re-identified by
[[Page 56519]]
adversaries possessing sophisticated matching techniques.\806\
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\806\ There may be more potential adversaries with personal
knowledge than those with the ability to do any kind of
sophisticated matching to other datasets, but it is not possible to
predict.
---------------------------------------------------------------------------
Although the Bureau believes that location, protected demographic
information, and industry information may be more likely to be known
than other information in the 1071 data, it is impossible to predict
the exact content of any pre-existing personal knowledge that such a
potential adversary may possess. This uncertainty creates challenges
for evaluating the degree to which individual data fields contribute to
the risk of re-identification by such a potential adversary. For these
reasons, the discussions of re-identification risk in the Bureau's
analysis of data points below generally focus on the risk of re-
identification based on matching, not on personal knowledge. The Bureau
seeks comment on how the Bureau could assess re-identification risk
arising from adversaries with personal knowledge.
Applications that do not result in originations. In its final
policy guidance on the disclosure of loan-level HMDA data, the Bureau
explained that the risk of re-identification to applicants is
significantly lower for applications that do not result in originated
loans.\807\ The Bureau explained that the lack of public information
about applications significantly reduces the likelihood that an
adversary could match the record of a HMDA loan application that was
not originated to an identified record in another dataset. The Bureau
has not identified any publicly available information about
applications for business loans. As discussed under Implementation of
the Balancing Test in part VI.C.2 above, the Bureau lacks data
necessary to perform a complete re-identification analysis at this
time. However, the unmodified 1071 data might contain data fields that
facilitate the re-identification of applicants. For example, the census
tract and NAICS code data fields could result in unique combinations
that an adversary could use to match to an identified public record,
such as a business directory.\808\
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\807\ See 84 FR 649, 658 (Jan. 31, 2019); see also 82 FR 44586,
44593 n.55 (Sept. 25, 2017).
\808\ In addition, as the Bureau believed in the HMDA context,
some of the information contained in the unmodified 1071 data for
applicants may permit an adversary to re-identify an applicant
despite the lack of publicly available records. For example, if an
applicant withdraws an application and obtains a loan secured by the
same property from another institution, it may be possible to link
the 1071 data for the withdrawn application with the data for the
origination, as much of the property and applicant information would
be identical. See 84 FR 649, 658 (Jan. 31, 2019); see also 82 FR
44586, 44593 n.55 (Sept. 25, 2017).
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Overlap between HMDA and 1071 data generally. As noted above in the
section-by-section analysis of proposed Sec. 1002.104(a), the Bureau
anticipates that some applications would be reported under both HMDA
and 1071.\809\ The public loan-level HMDA dataset contains data fields
in addition to, or that overlap with, the proposed 1071 data fields,
and the proposed 1071 data includes data fields that are not included
in the public loan-level HMDA dataset. The Bureau recognizes that, in
cases of overlap, some 1071 data fields may require additional analysis
with respect to risks of harm or sensitivity and re-identification
posed by such overlap. When the Bureau performs a full re-
identification analysis, it intends to consider the potential for
applications reported under 1071 to be matched to loans reported under
HMDA. The Bureau seeks comment on this issue and the implications of
potential re-identification risk and potential risk of harm or
sensitivity for applications reported under both section 1071 and HMDA.
---------------------------------------------------------------------------
\809\ Applications involving certain investment properties would
be excluded from 1071 reporting. As discussed in the section-by-
section analysis of proposed Sec. 1002.104(b) above, proposed
comment 104(b)-4 would exclude an extension of credit that is
secured by 1-4 individual dwelling units that the applicant or one
or more of the applicant's principal owners does not, or will not,
occupy.
---------------------------------------------------------------------------
ii. Risk of Harm or Sensitivity
In the SBREFA process, the Bureau sought feedback on the nature and
scope of privacy interests of non-natural persons (e.g., small business
applicants and financial institutions) and natural persons (e.g.,
principal owners of small businesses) that the Bureau should consider
under its potential balancing test, including the types of sensitive
commercial information that could be exposed by publishing the data
points (individually or in combination) under consideration.\810\
---------------------------------------------------------------------------
\810\ See SBREFA Outline at 40-41.
---------------------------------------------------------------------------
A number of SERs and other stakeholders addressed the risk of harm
or sensitivity from the disclosure of 1071 data in unmodified
form.\811\ Several SERs and other stakeholders stated that the
disclosure of 1071 data could create a risk of harm or sensitivity for
small businesses and related natural persons. Several SERs stated that
public knowledge of borrowing activity (even without any other
potential harms) would be very concerning to some small businesses as
some small business owners consider that information sensitive or
deeply personal. Some stakeholders stated that the disclosure of a
banking relationship could raise harm or sensitivity concerns because
it might lead to adverse inferences about the business's financial
condition. One SER stated that small business owners valued their
privacy just as much as consumers. Several industry commenters stated
that 1071 data might reveal information about a small business's
strategy or financial condition, as well as information about the
personal characteristics or financial conditions of related natural
persons, which the commenters stated could contribute to identity
theft.
---------------------------------------------------------------------------
\811\ In this section, we summarize comments about harm and
sensitivity that relate to the 1071 data generally. In the
individual data field sections below, we summarize comments about
risks of harm and sensitivity that relate to particular data fields.
---------------------------------------------------------------------------
Several community group stakeholders stated, in contrast, that the
risk of harm or sensitivity from publishing 1071 data would be minimal
because some of the data are already publicly available. These
stakeholders also stated that financial institutions likely exaggerate
privacy concerns of small businesses or natural persons. With respect
to concerns that publication of data could facilitate targeted
marketing of predatory lending products, a community group stated that
rather than fostering predatory practices, public disclosure would
deter them by enabling the public to identify problematic pricing or
loan terms and conditions and prevent them from becoming more
widespread.
In addition to addressing the risks of harm and sensitivity to
small businesses, several SERs and other stakeholders addressed
potential risks of harm and sensitivity to financial institutions from
the disclosure of 1071 data. Several SERs stated that 1071 data could
be used to generate marketing lists and that this would result in
creditors taking other financial institutions' customers away. One SER
stated that, because of this, financial institutions may stop lending
to small businesses in certain markets. In contrast, two SERs stated
that it was relatively easy to obtain information on other financial
institutions' small business lending activity. Two SERs stated that
they were more concerned about the privacy of small business applicants
or borrowers than the privacy of financial institutions, but that both
mattered. In addition, one industry stakeholder expressed concern that
disclosing the type or purpose of financing and the amount applied for
and approved could facilitate re-identification of borrowers,
particularly in rural areas or small towns. The commenter also
expressed concern that disclosing this information could harm
[[Page 56520]]
community banks located in such areas. The commenter stated that this
could happen because small businesses in such areas are likely to
perceive that this information could cause them to be re-identified,
and that they would respond by seeking financing with a large creditor
in another town or online, rather than their community bank.
A few industry commenters expressed concern that the 1071 data
could reveal information such as a financial institution's client
lists, terms and conditions, insights about the financial institution's
strategy in particular geographic areas, or, for certain financial
institutions, sensitive supply management data. A community group
commenter stated that public disclosure of 1071 data would not have
significant negative effects on competition and could provide lenders
with insights that could allow them to become more competitive.
Some SERs expressed concern that 1071 data could be used against
financial institutions in litigation by class action attorneys or to
harm their public reputations. One SER expressed concern that public
disclosure of 1071 data could cause financial institutions to face more
litigation, which, in the SER's view, would increase the cost of credit
for small businesses. Another SER expressed concern that data users
could misinterpret pricing information. For example, according to the
SER, data users might infer discrimination based on higher pricing for
an applicant, when the pricing was in fact unrelated to the applicant's
race. The SER stated that the purpose of section 1071 was to help small
businesses and asserted that releasing full 1071 data would present an
opportunity for third parties to sue or criticize financial
institutions.
Several industry commenters stated that data about loan terms would
be sensitive because they would invite criticism of or litigation over
disparities without accounting for various legitimate business reasons
for disparities and increase compliance costs. Other industry
commenters stated that publication of 1071 data would lead financial
institutions to artificially lower prices, standardize underwriting, or
reduce access to credit to limit exposure to fair lending litigation or
reputational risk. One community group stated that it did not believe
the purposes of section 1071 required the Bureau to take into account
such financial institution concerns about litigation or reputational
risk, compliance costs, or impacts on underwriting. One industry
stakeholder stated that the Bureau could address these risks by
providing clear guidance about how it would use 1071 data in its fair
lending supervisory program.
The Bureau has considered whether, if an application-level record
in the public 1071 data were to be re-identified, 1071 data reported to
the Bureau would disclose information about an applicant, related
natural person, or financial institution that is not otherwise public
and may be harmful or sensitive.\812\ Specifically, the Bureau has
evaluated whether the 1071 data could be used for harmful purposes such
as fraud or identity theft or the targeted marketing of products and
services that may pose risks that are not apparent. The Bureau has also
evaluated whether the 1071 data could cause competitive harm to small
business applicants or to financial institutions. Furthermore, even
where the disclosure of the data field is unlikely to lead to financial
or other tangible harms, the Bureau has evaluated whether certain 1071
data fields may be viewed as sensitive if associated with a particular
applicant, related natural person, or financial institution. In
evaluating the potential sensitivity of a data field, the Bureau has
considered whether disclosure of the data field could cause dignitary
or reputational harm to small business applicants and related natural
persons. The Bureau has also evaluated whether disclosure of the data
field could cause reputational harm to financial institutions.
---------------------------------------------------------------------------
\812\ To the extent a section 1071 record could be associated
with an identified applicant or related natural person, and
successfully matched to another de-identified dataset to re-identify
such a dataset, harmful or sensitive information in that dataset
that is not otherwise public may also be disclosed.
---------------------------------------------------------------------------
As discussed above and as noted by several community group
stakeholders, some identifiable information about small business
lending is currently available to the general public. Such information
is available both in public records and in private datasets with
varying barriers to access and restrictions on use. In evaluating the
risk of harm or sensitivity created by the publication of the
application-level 1071 data, the Bureau's analysis has considered the
degree to which such disclosure would increase this risk relative to
the risk that already exists, absent the public availability of 1071
data. Accordingly, the Bureau has considered whether the data that
would be reported to the Bureau are typically publicly available in an
identifiable form. The Bureau has also considered whether there are any
barriers to accessing such data or restrictions on its use. In general,
the Bureau believes that, where a data field is already publicly
available, the risk of harm or sensitivity from the disclosure of that
data field in the 1071 data is reduced.\813\
---------------------------------------------------------------------------
\813\ However, where a data field is already publicly available,
disclosing that data field in the 1071 data may enable the matching
of 1071 data to other datasets that may not be controlled by the
Bureau, which could substantially facilitate re-identification or
the disclosure of harmful or sensitive information.
---------------------------------------------------------------------------
In evaluating the risk of harm or sensitivity created by the
publication of the application-level 1071 data, the Bureau also has
considered the likelihood that the application-level 1071 data would be
re-identified. As discussed under Re-Identification Risk in part
VI.C.4.i above, the Bureau generally believes that successful re-
identification of application-level 1071 data would require several
steps and may present a significant challenge. To the extent that the
risk that re-identification would be accomplished is low, the risk of
disclosing harmful or sensitive information would be reduced.
The Bureau agrees with commenters who stated that the disclosure of
1071 data could potentially create a risk of harm or sensitivity not
only to natural persons, such as the owner of a small business that is
a sole proprietorship, but also to non-natural persons. As discussed
under Balancing Test Design in part VI.C.1 above, when considering the
risk of harm or sensitivity, the Bureau's proposed balancing test would
consider the risks to non-natural persons, including financial
institutions.
The Bureau has considered whether the 1071 data could be used for
harmful purposes such as fraud or identity theft or the targeted
marketing of products and services that may pose risks that are not
apparent. As noted above, several SERs and other stakeholders stated
that the 1071 data could potentially be used for these purposes. The
Bureau's preliminary view is that the unmodified application-level 1071
data would be of minimal use for purposes of perpetrating identity
theft or financial fraud against applicants or related natural persons.
The 1071 data would not include information typically required to open
new accounts in the name of a small business's principal owner, such as
Social Security number, date of birth, place of birth, passport number,
or driver's license number. Additionally, the 1071 data would not
include information useful to perpetrate existing account fraud, such
as account numbers or passwords.\814\
---------------------------------------------------------------------------
\814\ As noted above, however, to the extent a section 1071
record could be associated with an identified applicant or related
natural person and could also successfully be matched to a de-
identified dataset to re-identify such a dataset, harmful or
sensitive information in that dataset that is not otherwise public
may also be disclosed.
---------------------------------------------------------------------------
[[Page 56521]]
However, while the Bureau believes that the unmodified 1071 data
would be of minimal use for perpetrating fraud or identity theft, the
Bureau acknowledges that almost any information relating to a small
business could, theoretically, be used for these purposes. As a result,
the unmodified 1071 data could provide at least some additional data
that could be used for these purposes. For example, the 1071 data could
potentially be used in a phishing attack against an applicant by a
perpetrator purporting to be the financial institution, or for
knowledge-based authentication purposes.\815\ While much information
that may be useful for phishing or knowledge-based authentication--such
as the name of the financial institution and the date of action taken--
may already be available from UCC filings, the 1071 data may contain
additional information that may be useful for such purposes, such as
information about the type of loan and loan terms. However, some of
this information may also be available from private data sources. The
Bureau also notes that, based on the Bureau's expertise and analysis,
the publication of HMDA data--which contains many data fields that are
similar to data fields that would be disclosed under section 1071--has
not resulted in any measurable increase in fraud or identity theft
against mortgage applicants.
---------------------------------------------------------------------------
\815\ Knowledge-based authentication (KBA) is a method of
authentication which seeks to prove the identity of someone
accessing a service, such as an account at a financial institution.
KBA requires the knowledge of information about someone to prove
that a person attempting to access a service is that person.
---------------------------------------------------------------------------
As several of the SERs and other stakeholders suggested, the Bureau
has also considered whether the unmodified application-level 1071 data
would provide information that is not already public and could be used
for the targeted marketing of products and services that may pose risks
that are not apparent. Although the 1071 data could be used to market
products and services that would be beneficial for small businesses--
perhaps increasing competition among creditors that could help small
businesses receive better terms--they could also be used to target
potentially vulnerable small businesses with marketing for products and
services that may pose risks that are not apparent. While, as a
community group stakeholder stated, the 1071 dataset may generally be
useful for identifying predatory lending practices in the small
business lending market, the Bureau believes that the targeted
marketing of products that may pose risks that are not apparent is a
harmful purpose for which 1071 data could potentially be used.
For example, data users might perceive certain 1071 data to reveal
negative information about an applicant's financial condition or
vulnerability to scams relating to debt relief or credit repair.
Information about a loan might also be used for a practice known as
``stacking,'' in which some creditors have been alleged to obtain lead
lists based on publicly available information and offer follow-on loans
or advances that add to the debt burden carried by small businesses.
Some creditors might also use the data for deceptive marketing
practices. However, the utility of the 1071 data for predatory
marketing practices may be limited by the delay between action taken on
a loan and publication of the application-level 1071 data.
As several of the SERs and other stakeholders suggested, the Bureau
has also considered whether the unmodified 1071 data would result in
competitive harm to small business applicants or related natural
persons. The 1071 data, if re-identified, may disclose some general
information about a small business's use of credit that is not
currently available to the general public. As discussed in the
individual data field sections below, the Bureau acknowledges that
certain 1071 data points in unmodified form could reflect negatively on
the financial condition of a business or its owners.
As several of the SERs and other stakeholders recommended, the
Bureau has also considered whether the unmodified 1071 data would
result in competitive harm to financial institutions. As discussed
below with respect to the financial institution identifying information
that would be reported pursuant to proposed Sec. 1002.109(b), the
Bureau is proposing to identify the financial institution in the public
application-level 1071 data. Therefore, the 1071 data could reveal
general information about a financial institution's lending practices
that is not widely available to the general public. Data fields such as
census tract, NAICS code, credit type, and pricing could disclose
information about where a financial institution is doing business, what
industries it is doing business with, what kinds of products it is
offering, and what kinds of prices it is charging, respectively.
Additionally, as several SERs stated, if a small business applicant
were to be re-identified, a financial institution's competitors could
identify the small businesses to which the financial institution is
offering or providing credit.
The Bureau acknowledges that the increased transparency into small
business lending provided by 1071 data could reveal general information
about a financial institution's lending practices that is not widely
available to the general public, and that this information could be
useful to others, including other financial institutions. For example,
if the 1071 data were re-identified, a financial institution could
potentially offer credit to a particular small business at a lower
price than they received from another financial institution. However,
the Bureau does not believe the unmodified application-level 1071 data
would include key inputs for or be detailed enough to substantially
facilitate the reverse-engineering of a financial institution's
proprietary lending models. (For example, it would not include
information about an applicant's credit history.) Financial institution
concerns with disclosure of information about general lending practices
are discussed in greater detail under Balancing Risks and Benefits in
part VI.C.5 below.
As noted above, an industry commenter expressed concern that
disclosing information about applicants in rural areas could lead them
to seek financing elsewhere. However, from the perspective of a small
business, seeking financing with a lender in another community would
not necessarily reduce the risk that someone in the small business's
community may ultimately re-identify them in the 1071 data because the
1071 data would be reported with respect to the location of the
business, as discussed in the section-by-section analysis of proposed
Sec. 1002.107(a)(13) above (census tract). As discussed above, with
respect to the concern about re-identification risk to applicants and
related natural persons, the Bureau would determine the extent of re-
identification risk when it has obtained a full year of reported 1071
data and would state its intentions, at that time, about whether
certain 1071 data fields should be modified or deleted prior to public
disclosure.
Some SERs expressed the concern, further detailed above, that 1071
data could harm financial institutions by increasing the amount of
litigation against financial institutions. The Bureau acknowledges this
risk, which is discussed in greater detail under Balancing Risks and
Benefits in part VI.C.5 below, and in part VI.C.6.xviii with respect to
the application of the proposed balancing test to financial institution
identifying information.
In addition to considering whether the disclosure of a data field
could lead to financial or other tangible harms,
[[Page 56522]]
such as those described above, the Bureau has also considered whether
the 1071 data fields might be viewed as sensitive. As noted above,
several SERs and other stakeholders stated that disclosure of the
unmodified 1071 data would divulge data that may be sensitive to
applicants, related natural persons, or financial institutions. In
assessing whether a data field creates a risk of sensitivity, the
Bureau has evaluated whether its disclosure could lead to dignitary or
reputational harm to small business applicants or related natural
persons. For example, as several industry commenters stated, if the
1071 data were re-identified, the data could reveal information that
casts a negative light on a small business's financial condition, such
as the fact that a loan was denied due to a business's credit
characteristics or cashflow. This information could be embarrassing to
the small business and its owners.
The Bureau has also evaluated whether the disclosure of a data
field could cause reputational harm to financial institutions. As noted
above, some SERs expressed concern that 1071 data could harm a
financial institution's reputation by leading data users to draw
unfounded inferences about discrimination. The Bureau notes that
several of the 1071 data fields, if disclosed in unmodified form, would
help address this concern by serving as control variables. For example,
many financial institutions consider a small business's revenue when
assessing the risk of extending credit. As a result, disclosing gross
annual revenue data would help ensure that data users who are
evaluating potential disparities in underwriting or pricing can compare
small businesses with similar revenues, thereby controlling for a
factor that might provide a legitimate explanation for some
disparities. The Bureau also notes that it does not expect that 1071
data alone could generally be used to determine whether a lender is
complying with fair lending laws. The Bureau expects that, when
regulators conduct fair lending examinations, they would analyze
additional information before reaching a determination about an
institution's compliance with fair lending laws.
In assessing the risk of sensitivity, the Bureau has also
considered general societal and cultural expectations with respect to
what information is available to the general public. For example,
disclosing gross annual revenue in unmodified form could disclose
sensitive information because it could reflect the financial condition
of a small business or, where a small business is a sole
proprietorship, a natural person. This type of information about a
business's or natural person's financial condition is typically not
available to the general public.
The Bureau also acknowledges the comments stating that some small
businesses and their owners would consider the very fact that they
sought credit sensitive, or would consider the disclosure of a banking
relationship sensitive because others may draw adverse inferences about
the small business's financial condition. These are concerns about
sensitivity that would result merely from the re-identification of the
applicant, rather than from the disclosure of particular data fields.
The Bureau seeks to address these concerns by mitigating the risk of
re-identification, as described under Re-Identification Risk in part
VI.C.4.i above.
The Bureau seeks comment on its approach to assessing the risks of
harm and sensitivity presented by the disclosure of unmodified 1071
data.
5. Balancing Risks and Benefits
Under the approach described in the SBREFA Outline, the Bureau
would delete or modify 1071 data if disclosure of the data in
unmodified form would pose risks to privacy interests that are not
justified by the benefits of public disclosure in light of the
statutory purposes of section 1071.\816\ If the risks of disclosing
unmodified data are not justified by the benefits under the balancing
test, the Bureau would determine whether modifications or deletions
could appropriately balance the risks and benefits. In the SBREFA
Outline, the Bureau explained that it was considering various
approaches that would appropriately advance privacy interests while
still providing users with data useful to fulfilling the purposes of
section 1071. The Bureau explained that these approaches could include
various statistical disclosure limitation techniques when justified
under the balancing test, such as those that mask the precise value of
data points to prevent the disclosure of certain data elements. The
Bureau also sought feedback generally on how it could mitigate concerns
arising from re-identification risk.\817\
---------------------------------------------------------------------------
\816\ See SBREFA Outline at 41.
\817\ Id. at 40-41.
---------------------------------------------------------------------------
Several community group commenters stated that the Bureau should
make as much data publicly available as possible to maximize data
utility. One commenter stated that privacy concerns could be addressed
through the prohibition on collecting personally identifiable
information and increasing coverage of 1071 reporters and products. But
this commenter, several SERs, and many other industry commenters
expressed support for modifying or deleting the data from the public
application-level 1071 data to balance privacy risks with the benefits
of public disclosure. Commenters provided a wide variety of feedback on
what kind of techniques would be appropriate, including publishing data
in ranges, aggregating data, differential privacy, and data-
swapping.\818\ In addition, several industry commenters recommended
that the Bureau reduce rule coverage to limit harms, such as by using
asset thresholds and exclusions for types of financial institutions. By
contrast, a community group commenter recommended that the Bureau
expand the rule's coverage to increase the number of observations and
reduce re-identification risk. One SER recommended a process by which
covered financial institutions could identify certain application
records that might present heightened re-identification risk and
trigger further analysis by the Bureau before full application-level
data are published.\819\ Another SER suggested that the Bureau set a
minimum sample size before publishing application-level data for some
rural markets to avoid harm.\820\
---------------------------------------------------------------------------
\818\ See SBREFA Panel Report at 35-36.
\819\ See id. at 35.
\820\ See id.
---------------------------------------------------------------------------
Balancing risks and benefits generally. As noted previously, the
Bureau intends to apply the proposed balancing test after it receives
the first year of data reported pursuant to an eventual 1071 rule. For
data fields the public disclosure of which the Bureau believes would
create risks to privacy interests of applicants, related natural
persons, or financial institutions, either because a field increases
re-identification risk or poses a risk of harm or sensitivity, the
Bureau intends to assess these risks against the benefits of
disclosure. Where the Bureau determines that the disclosure of an
individual data field, alone or in combination with other fields, would
create risks to privacy that are not justified by the benefits of
disclosure to 1071's purposes, the Bureau would consider whether it
could appropriately balance the privacy risks and disclosure benefits
through modification techniques or whether the field should be deleted
from the public dataset. The Bureau also would evaluate the risks and
benefits of disclosing a data field in light of modifications or
deletions considered for other data fields.
[[Page 56523]]
The Bureau is mindful of the connection between the risk of re-
identification and the risk of harm or sensitivity. To the extent that
the risk of re-identification created by disclosure of the 1071 data is
reduced, the risk of disclosing harmful or sensitive information also
would be reduced. Conversely, to the extent that the public
application-level 1071 data would not disclose information that is
harmful or sensitive, the consequences of re-identification would be
reduced. Where the Bureau determines that modification of a data field
is appropriate, the Bureau's consideration of the available forms of
modification for the 1071 data would also be informed by the
operational challenges associated with various forms of modification
and the need to make application-level data available to the public in
a timely manner.
The Bureau is also aware of concerns raised by SERs and other
stakeholders, described under Risk of Harm or Sensitivity in part
VI.C.4.ii above, that disclosing the proposed 1071 data in unmodified
form could increase risks of litigation or reputational harm to
financial institutions, and reveal information that could cause
competitive harm to financial institutions. However, in applying the
balancing test, the Bureau generally intends to give significant weight
to the benefits of disclosure relative to these risks.
In general, the Bureau believes that deleting or modifying data
because the data would disclose general information about a financial
institution's lending practices--compared with information that could
substantially facilitate, for example, the reverse-engineering of a
financial institution's proprietary lending models--would be
inconsistent with section 1071. As noted above, the statute directly
contemplates disclosure of financial institution identity in connection
with the public application-level dataset.\821\ Each of the data fields
prescribed by the statute--with the exception of the application
number--could provide some insight into a financial institution's
lending practices. If the Bureau were to exclude data on this basis, it
would exclude virtually all of the statutorily required 1071 data
points from the public data. This would significantly frustrate both of
the statutory purposes of section 1071 because it would prevent the
public from using the data to identify potential fair lending
violations, and it would prevent communities and creditors from using
the 1071 data to identify business and community development needs and
opportunities of small businesses.\822\ For example, this information
could benefit more competitive creditors, as well as small businesses
in obtaining credit at a lower cost.
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\821\ See ECOA section 704B(f)(2)(B).
\822\ See ECOA section 704B(a).
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While the Bureau acknowledges financial institutions' concern about
the litigation and reputational risks involving section 1071 data, the
Bureau does not believe that this concern justifies the exclusion of
data from public disclosure. One of the statutory purposes of section
1071 is to facilitate enforcement of fair lending laws, which authorize
enforcement by parties other than the Bureau.\823\ Additionally,
section 1071 contemplates that financial institutions would make their
own application-level data available to the public, which necessarily
entails their identification.\824\
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\823\ See, e.g., ECOA section 706 (providing for civil
liability).
\824\ See ECOA section 704B(f)(2).
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Modification techniques generally. In light of the purposes of
section 1071, the Bureau intends to modify or delete the 1071 data only
as needed under the balancing test prior to public disclosure. The
Bureau recognizes, as explained by community groups, that
modifications, to varying degrees, may negatively impact the utility of
the data for the fair lending and business and community development
purposes of the statute. However, the proposed balancing test is
designed to ensure that decisions to modify or delete the public
application-level 1071 data take these benefits into account. Below,
the Bureau addresses general issues related to modification techniques
in the context of this proposal. These techniques are discussed in
greater detail with respect to specific data points further below.
Where no specific modification technique is described with respect to
particular data points, the Bureau has not identified an obvious
modification technique other than potentially swapping, suppression, or
deletion, which are discussed below under Other techniques.
While certain information that directly identifies applicants or
related natural persons generally would not be collected under the
proposal, the Bureau does not believe this feature of the proposal
would be sufficient to eliminate privacy risks that would arise from
publishing the data in unmodified form, as discussed in greater detail
under Risks to Privacy Interests in part VI.C.4 above. The Bureau also
does not believe that privacy risks can be adequately resolved through
rule coverage (e.g., using asset thresholds and exclusions for types of
financial institutions). While some re-identification risk could be
reduced by increasing the number of loans reported to the Bureau, the
Bureau does not believe the effects of doing so are necessarily
predictable because re-identification risk depends on the
characteristics of the data. Further, increasing the number of loans
would not address risks of harm or sensitivity to re-identified
applicants or natural persons. Suggestions for addressing privacy risks
through exemptions are discussed under Balancing Test Design in part
VI.C.1 above.
Aggregate data. The Bureau does not intend to address privacy risks
for application-level 1071 data through aggregate disclosures at this
time. As discussed in the section-by-section analysis of proposed Sec.
1002.110(a) above, and as required by section 1071, the Bureau is
proposing to make available to the public the information submitted to
it by financial institutions pursuant to proposed Sec. 1002.109,
subject to deletions or modifications made by the Bureau. As discussed
in the section-by-section analysis of proposed Sec. 1002.110(b) above,
and as authorized by the statute, the Bureau may, at its discretion,
compile and aggregate information submitted by financial institutions
pursuant to proposed Sec. 1002.109, and make any compilations or
aggregations of such data publicly available as the Bureau deems
appropriate. The Bureau initially anticipates making the data collected
under section 1071 available at the application level--with appropriate
potential modifications and deletions--rather than providing aggregate
data with counts and averages for each data field. The Bureau may
consider releasing aggregated data in the future, after it determines
whether narrower modifications or deletions could address privacy
risks. The Bureau received some suggestions to consider ``differential
privacy'' techniques.\825\ Such techniques are typically used in
connection with aggregate statistics to reduce the identifiability of
more granular data. The Bureau seeks comment on whether differential
privacy techniques might be appropriate for application-level data.
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\825\ Differential privacy provides a way to measure the
contribution of any one record to the aggregate statistics disclosed
in a way that makes re-identification risk easily quantifiable and
allows those involved in the data production to keep re-
identification risk under a certain risk tolerance.
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Recoding. The Bureau intends to consider various methods to
``recode'' the proposed data fields as necessary
[[Page 56524]]
under the balancing test. Recoding techniques decrease the number of
distinct categories for a data field. In the context of the 1071 data
fields, recoding would involve providing the value of a data field in a
higher-level category that increases the number of records within a
given combination. Some data fields like census tract and NAICS code
have structures that permit recoding without developing new 1071-
specific recoding categories. For example, if the Bureau were to
determine that the re-identification risk presented by the census tract
data field does not justify the benefits of unmodified disclosure, the
Bureau could instead provide geography at the county level, for
example, since census tracts are designed to be non-overlapping
subdivisions of a county.
The Bureau also intends to consider recoding through the use of
bins or intervals of values for data fields that, in unmodified form,
would have continuous values (such as data fields for amount applied
for, amount approved, gross annual revenue, or number of workers).
Unmodified continuous data fields can be highly identifying, depending
on the data field, but binning these values can reduce the risk of re-
identification substantially. An additional approach for continuous
data fields would be to top- or bottom-code the data field to prevent
extreme values from being released that may be particularly
identifiable. This approach could be performed alone or in conjunction
with recoding the data into intervals.
Other techniques. The Bureau might also consider ``targeted
suppression'' techniques. Targeted suppression makes certain values of
data points unavailable for records when a certain combination of
values is held by too few records. The Bureau might consider, for
example, treating certain values of data points as ``not available'' if
the application is the only small business application from a
particular census tract. Targeted suppression can be applied in several
ways. One way would be to remove the value of a field that makes the
record identifiable. For example, if census tract and NAICS code
identify a record, the microdata could delete the value of the NAICS
code for any applications that are in cells deemed sensitive. A second
approach could leave the census tract and NAICS code but suppress the
values of other data points. This method would reduce the potential
harm if the record were re-identified. A third approach could be to
remove the record from the dataset entirely. In general, suppression is
a more common approach for aggregate data than for application-level
data.
One drawback to targeted suppression is that it complicates data
analysis for any end user. For example, with respect to the public
application-level 1071 data, a data user would be presented with
millions of rows, but in certain rows and for certain data points,
values would be missing.\826\ Another drawback is that suppression
would need to be done in a way such that the remaining unmodified data
do not provide a user with the ability to back out the modified field,
sometimes involving complementary suppression or deleting values of
other applications to ensure that the missing value cannot be
reengineered. The Bureau seeks comment on whether targeted suppression
techniques could preserve the benefits of the public application-level
1071 data, and, if so, what the Bureau should consider as the minimum
cell size to implement targeted suppression.
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\826\ Data users would need to carefully understand the method
behind the modifications and plan analyses to account for the fact
that the suppressed data would necessarily not reflect all small
business loans in a given year.
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The Bureau seeks comment on other modification techniques, such as
``data swapping'' (sometimes called ``switching''). Data swapping
involves finding two records that are similar on several dimensions and
swapping the values for other data fields between the two records. In
effect, data swapping would require that the Bureau preserve certain
data fields while swapping others. Another set of techniques for
addressing privacy risks for continuous data would involve adding
``random noise'' to the reported values. For example, under ``additive
noise techniques,'' a random value is added to the existing value of
the data field. Under ``multiplicative noise techniques,'' the true
value is multiplied by a random value. The Bureau seeks comment on
whether such techniques would preserve the benefits of the public
application-level 1071 data. A drawback to these approaches is that
data would be released with values that do not match the true values of
the underlying data.\827\ Data users would need to take such
modifications into account when performing any analyses.\828\
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\827\ For example, with respect to the amount applied for data
field, a recoding technique would release the values of the data
field in broad categories, for instance ``$100,000-$150,000.'' In
such case, the broader category provides less information but
reflects the true value of the underlying data. Noise addition, by
contrast, would involve the Bureau manipulating (in a standardized
and documented way) the actual values of loan amount. An
application's loan amount may be released as $85,000 in the public
dataset when the true value was $78,000.
\828\ Even if, for instance with additive random noise, the data
maintain the underlying average value, users would need to take into
account the change in the variance associated with the modification.
While the Bureau can provide all the required information to make
these adjustments, they would require a level of data analysis
sophistication that may not be possessed by all potential users of
the eventual 1071 data.
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The Bureau has considered the SER recommendation for allowing
financial institutions to identify records that might present
heightened re-identification risk. The Bureau appreciates this
suggestion but is not proposing it because privacy risks are likely
common to many types of applicants, related natural persons, and
financial institutions and such risks should be addressed in a broader
context, such as through this proposal. The Bureau's proposed process
for obtaining public input on the balancing test is discussed under
Implementation of the Balancing Test in part VI.C.2 above.
6. Preliminary Application of the Balancing Test to Public Application-
Level 1071 Data
As explained above, the Bureau does not yet have data under section
1071 and does not believe that there are comparable datasets that it
could use as an adequate proxy for 1071 data to which it could apply
the balancing test at this time. However, as recommended by the SBREFA
Panel, the Bureau is providing additional detail on how it would apply
the balancing test to the 1071 data fields as set forth in the
proposal.\829\
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\829\ See SBREFA Panel Report at 48.
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In accordance with the proposed balancing test described above,
privacy risks may not be justified by the benefits of disclosure if
disclosing the data field in unmodified form would substantially
facilitate the re-identification of applicants and related natural
persons, or disclose information about an applicant, related natural
persons, or a financial institution that is not otherwise public and
may be harmful or sensitive. The Bureau has proposed modifications or
deletions for the proposed financial institution identifying
information (other than contact information for natural persons), and
the proposed use of free-form text for certain data. The Bureau also is
proposing not to disclose the proposed unique identifier in unmodified
form. However, because the Bureau is not conducting a full re-
identification analysis at this time, it has not determined whether the
privacy risks of disclosing the other proposed data fields
[[Page 56525]]
in unmodified form in the public application-level 1071 data would be
justified by the benefits of disclosure. Accordingly, the Bureau has
not yet determined whether data fields--other than those for the
proposed unique identifier data point, the proposed financial
institution identifying information, and the proposed free-form text
that would be used to report some of the data--should be deleted,
modified, or published in unmodified form.
The Bureau is setting forth its preliminary analysis below to
provide transparency and obtain public feedback. The Bureau seeks
comment on its analysis of the public disclosure benefits and privacy
risks for each data field. Specifically, the Bureau seeks comment on
the following issues with respect to each data field, individually or
in combination with others: (1) Whether there are additional benefits
of unmodified public disclosure in light of the purposes of the
statute; (2) whether disclosure in unmodified form would reveal
additional information that might be considered harmful or sensitive by
an applicant, related natural person, or financial institution; and (3)
whether disclosure in unmodified form would significantly contribute to
the risk that an applicant or related natural person might be re-
identified. The Bureau seeks comment on other modification techniques
it could use, and whether deletion would appropriately balance the
benefits of disclosure with privacy risks.
i. Unique Identifier
Proposed Sec. 1002.107(a)(1) would require financial institutions
to collect and report an alphanumeric identifier, starting with the
legal entity identifier of the financial institution, unique within the
financial institution to the specific covered application, and which
can be used to identify and retrieve the specific file or files
corresponding to the application for or extension of credit.
Disclosing the unique identifier in the public application-level
1071 data in unmodified form would help data users conducting fair
lending analysis or seeking to identify business and community
development needs or opportunities. This data field would allow data
users to run analyses that quickly compare specific records to detect
trends or disparities. The unique identifier would also provide data
users a way to identify, distinguish, and organize credit and
application data, which is invaluable for data processing.
Disclosing the unique identifier in the 1071 data in unmodified
form by itself would likely disclose minimal, if any, information about
an applicant or related natural person that may be harmful or sensitive
if such person were re-identified, or that may be harmful or sensitive
to an identified financial institution. As noted above, section 1071
prohibits financial institutions from including in 1071 records certain
personally identifiable information that directly identifies a natural
person applicant or someone connected with the applicant.\830\ In
addition the Bureau is proposing to prohibit financial institutions
from reporting information that would directly identify a small
business. For these reasons, the Bureau does not expect that the unique
identifier would be considered harmful or sensitive.
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\830\ ECOA section 704B(e)(3).
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A few industry stakeholders expressed concern that small businesses
could be identified if application or loan numbers were added to UCC
filings. Although publicly available datasets do not presently include
the unique identifier data field, financial institution legal entity
identifiers are publicly available, and the Bureau is aware of rare
instances in which a loan number is included in UCC filings. In
addition, as the Bureau noted in its policy guidance on the disclosure
of loan-level HMDA data, many jurisdictions publicly disclose real
estate transaction records in an identified form, and the Bureau
believes many financial institutions include loan numbers on these
publicly recorded documents.\831\
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\831\ See 82 FR 44586, 44599 (Sept. 25, 2017); see also 84 FR
649, 660 (Jan. 31, 2019).
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The Bureau believes inclusion of the proposed unique identifier,
rather than application or loan numbers, would limit the possibility of
using application or loan number to match 1071 data to those publicly
recorded documents, thus reducing risk of re-identification. However,
there is a risk that, after financial institutions begin to report data
under section 1071, they may replace the loan numbers currently
assigned to small business loans with the unique identifier and, if
they do, the unique identifier could be included on publicly recorded
documents. Especially considering the uniqueness of the identifiers,
this data field on a publicly recorded document could be used to match
a 1071 record to an identified public record directly and reliably.
In light of these potential re-identification risks, the Bureau
proposes not to publish the proposed unique identifier data field in
unmodified form. The Bureau seeks comment on whether there are
modifications that would appropriately balance identified privacy risks
and disclosure benefits. The Bureau is considering the feasibility of
disclosing a separate unique identifier that the Bureau could create.
The Bureau is also considering deleting the data field from the public
application-level 1071 data, but seeks comment on whether the proposed
deletion would create challenges for users of the data and, if so, how
the Bureau could address those challenges other than by creating a
separate unique identifier. The Bureau notes that some of the benefits
of the unique identifier in analyzing the data could be achieved
through the Bureau's proposed disclosure of LEI, as discussed in part
VI.C.6.xviii below. The Bureau also notes that the universal loan
identifier reported to the Bureau under HMDA, which is similar in
function to the proposed unique identifier, is currently excluded from
the public loan-level HMDA data.\832\
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\832\ See 84 FR 649, 660 (Jan. 31, 2019).
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The Bureau seeks comment on this analysis as well as its proposal
not to publish the unique identifier in unmodified form.
ii. Application Date
Proposed Sec. 1002.107(a)(2) would require financial institutions
to collect and report the date the covered application was received by
the financial institution or the date shown on a paper or electronic
application form.
Disclosing application date in the public application-level 1071
data in unmodified form would allow data users to monitor trends over
time in small business lending. Application date also would provide a
disaggregated piece of temporal data that can be used to identify
seasonality in small business lending (for example, when combined with
the pricing data fields to show interest rates charged to applicants
over a specific date range). In fair lending analyses, application date
would provide data users with the means to compare level of service
(from application date to action taken date) and identify potential
disparities on a prohibited basis between applications. Application
date could also act as a control for factors that may provide a
legitimate explanation for some disparities, such as interest rates
during different time periods or differences in general economic
conditions or institutional practices over time.
By itself, disclosing application date in the 1071 data in
unmodified form would likely disclose minimal, if any, information
about an applicant or
[[Page 56526]]
related natural person that may be harmful or sensitive if such person
were re-identified, or that may be harmful or sensitive to an
identified financial institution. It is conceivable that an adversary
such as a competitor or other market participant may find it helpful to
understand when a business is seeking credit; for example, to better
understand the business's strategy and cash flow needs. In addition,
marketers and creditors could use this information to target products
to entities recently in the market for credit, either to deploy new
funds or to refinance out of a current loan. However, the Bureau does
not believe that disclosing the application date would otherwise
disclose sensitive information about a small business or its owner, or
any information that would be used for harmful purposes. Any utility of
this data field for such purposes would be curtailed by the time lag in
public release of the 1071 data.
The Bureau has not identified publicly available datasets that
include data fields an adversary could directly match to the
application date field. However, an adversary may be able to infer a
likely origination date based on typical time lags between application,
credit decision, and origination, potentially enabling matching to
other datasets that record these later dates.
If the Bureau determines that application date should be modified,
the Bureau may consider disclosing the application date at a higher
level; for example, disclosing the month and year but not the specific
date. In light of the potential re-identification risk arising from
this data field, the Bureau seeks comment on whether there are other
specific modifications it should consider, and whether deletion would
balance the risks and benefits of disclosure.
The Bureau seeks comment on this analysis.
iii. Application Method and Application Recipient
Proposed Sec. 1002.107(a)(3) would require financial institutions
to collect and report the means by which the applicant submitted the
covered application directly or indirectly to the financial
institution. A financial institution would report whether the applicant
submitted the application in person, by telephone, by mail, or online.
Proposed Sec. 1002.107(a)(4) would require financial institutions to
collect and report whether the applicant submitted the covered
application directly to the financial institution or its affiliate, or
whether the applicant submitted the covered application indirectly to
the financial institution via a third party.
Disclosing application method and whether the application was
submitted indirectly in the public application-level 1071 data would
further the fair lending enforcement purpose of the statute.
Application method information would allow the public to better
understand the role of the financial institution as a creditor and
would facilitate pricing analyses by helping the public identify
potential factors in pricing outcomes. In addition, proposed Sec.
1002.107(a)(20) would require the collection of race or ethnicity
information for the applicant's principal owner(s) using visual
observation or surname in certain circumstances. If the Bureau
finalizes this proposal, application method information would provide
context for the information collected.
Information about application method and whether the application
was submitted directly or indirectly also would promote the community
and business development purposes of the statute. This information
would improve the public's understanding of the structure of small
business lending originations across the market, the methods by which
credit is originated for particular groups or underserved markets, and
trends over time (for example, the extent to which applicant
preferences shift from in-person to online interactions).
Disclosing application method and whether the application was
submitted directly or indirectly, in unmodified form, would likely
disclose minimal, if any, information about an applicant or related
natural person that may be harmful or sensitive if such person were re-
identified. If applicants or related natural persons were re-
identified, application method is likely to be of relatively limited
utility to an adversary because it conveys little information about a
natural person's characteristics or a business's financial condition.
While adversaries interested in targeted marketing could direct future
marketing efforts to a business using the same application channel, it
is likely that marketing firms already possess strategic information
about the best methods for establishing contact. Unmodified disclosure
of application method and whether the application was submitted
indirectly may reveal information that financial institutions regard as
harmful or sensitive, but, as discussed under Risk of Harm or
Sensitivity in part VI.C.4.ii above, the Bureau does not believe that
disclosure would permit the reverse-engineering of a financial
institution's proprietary lending models.
The Bureau has not identified publicly available datasets that
include data fields an adversary could directly match to the
application method or application recipient data fields in unmodified
form in the public application-level 1071 data with respect to an
applicant or related natural person. While the Bureau's HMDA data and
the GSE loan-level datasets include acquisition channel information in
loan-level data, these datasets do not identify applicants or related
natural persons. Therefore, an adversary would face challenges in using
application method or application recipient information to match a
section 1071 record to an identified publicly available record.
However, the Bureau seeks comment on whether there are other
identifiable application/loan-level datasets that include this
information or whether HMDA data or the GSE loan-level datasets could
be matched to other identifiable datasets.
The Bureau seeks comment on this analysis.
iv. Credit Type
Proposed Sec. 1002.107(a)(5) would require financial institutions
to collect and report to the Bureau certain information about the type
of credit applied for or originated. The proposal would require
financial institutions to report three categories of information that
together constitute the type of credit. First, the proposal would
require financial institutions to report the type of credit
product.\833\ Second, the proposal would require financial institutions
to report the type or types of guarantees that were obtained for an
extension of credit, or that would have been obtained if the covered
credit transaction had been originated.\834\ Third, the proposal would
require financial institutions to report the
[[Page 56527]]
length of the loan term, in months, if applicable.
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\833\ A financial institution would be required to select the
credit product requested from the following list: Term loan--
unsecured, term loan--secured, line of credit--unsecured, line of
credit--secured, credit card, merchant cash advance, other sales-
based financing transaction, other, or not provided by applicant and
otherwise undetermined. A financial institution reporting ``other''
would be required to enter the type of credit product as free-form
text. The Bureau analyzes free-form text under the proposed
balancing test in part VI.C.6.xix below.
\834\ A financial institution would be required to select the
type of guarantee from the following list: Personal guarantee--
owner(s), personal guarantee--non-owner(s), SBA guarantee--7(a)
program, SBA guarantee--504 program, SBA guarantee--other, USDA
guarantee, FHA insurance, Bureau of Indian Affairs guarantee, other
Federal guarantee, State or local government guarantee, other
guarantee, or no guarantee. A financial institution reporting
``other guarantee'' would be required to enter the type of guarantee
as free-form text. The Bureau analyzes the free-form text under the
balancing test in a separate subsection below.
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Disclosing data about the type of credit product, type of
guarantee, and loan term in the public application-level 1071 data in
unmodified form would facilitate enforcement of fair lending laws by
allowing data users to determine whether any disparities in
underwriting or pricing may be due to differences in these features of
a loan.
Disclosing these data would also be useful for identifying business
and community development needs. These data would enable the public to
understand whether certain types of credit are disproportionately
available to certain groups. For example, information about the
presence or lack of collateral would provide more information about
lending patterns in different geographic areas and for different groups
of applicants. Furthermore, each of the credit type data fields would
help the public avoid misinterpretations of the 1071 data. In addition,
information on the distribution of government loan guarantees (such as
those provided in SBA programs) across different geographic areas and
groups of applicants could provide information about how those programs
function on the ground, aiding in fulfilling the business and community
development purpose of section 1071. Information about the type of
guarantee would also allow communities, governmental entities, and
creditors to monitor the use of personal guarantees, which carry
additional risk to the guarantors and businesses. Finally, information
about loan term would provide insights into the pricing and
sustainability of closed-end credit transactions.
The Bureau believes that data about the type of credit product,
type of guarantee, and loan term could disclose information that may be
harmful or sensitive to applicants or related natural persons. A
business's competitors could use these data fields--in conjunction with
the loan amount and pricing data fields--to draw inferences about the
business's financial condition based on whether the business obtained
credit on favorable or unfavorable terms. The type of guarantee data
fields could indicate heightened credit risk for the applicant.\835\
Credit type data also could be used for targeted marketing of products
and services that may pose risks that are not apparent to the business
or related natural persons.
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\835\ For example, the ``SBA guarantee--7(a) program'' data
field could indicate heightened credit risk because this program is
intended for businesses that have been unsuccessfully applying for
credit or have had some other difficulty in accessing credit.
---------------------------------------------------------------------------
Disclosure of the type of credit product, type of guarantee, and
loan term in unmodified form may reveal information that financial
institutions regard as harmful or sensitive, such as the types of
products they offer or the government programs in which they
participate. However, as discussed under Risk of Harm or Sensitivity in
part VI.C.4.ii above, the Bureau does not believe that disclosure of
these data fields would permit the reverse-engineering of a financial
institution's proprietary lending models. Furthermore, general
information about the types of credit a financial institution is
offering is widely available on creditor websites and in marketing
materials.
The Bureau is aware that certain identified datasets include
application-level information on the type of credit product, type of
guarantee, or loan term. Government lending programs, such as the SBA's
7(a) and 504 programs, publish loan-level data that indicate the term
of the loan and whether the loan is a term loan or a line of credit. In
some States, UCC filings may include some information related to the
type of collateral. In the Bureau's view, the existing public
availability of this information decreases the potential harm or
sensitivity of disclosing information about the type of credit product,
type of guarantee, and loan term in the 1071 data.
The Bureau has identified publicly available datasets that include
data fields an adversary could directly match to the credit type data
fields in unmodified form in the public application-level 1071 data
with respect to an applicant or related natural person. As noted above,
information about the type of credit product, loan term, and type of
collateral is found in many publicly available datasets, including data
from government lending programs and, in some States, UCC filings.
Therefore, in many cases, an adversary could use this information,
combined with other fields, to match a section 1071 record to an
identified publicly available record.
If the Bureau determines that the type of guarantee should be
modified, the Bureau may consider disclosing values that are more
general than the values reported to the Bureau. For example, the Bureau
could disclose ``Federal guarantee'' instead of disclosing the specific
program. If the Bureau determines that the loan term should be
modified, the Bureau may consider recoding loan term data into bins--
for example, using intervals of two or five years--to reduce the
potential for re-identification risk.
The Bureau seeks comment on this analysis.
v. Credit Purpose
Proposed Sec. 1002.107(a)(6) would require financial institutions
to collect and report to the Bureau the purpose or purposes of the
credit applied for or originated.\836\
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\836\ A financial institution would be required to report the
credit purpose or purposes by selecting the purpose or purposes of
the covered credit transaction applied for or originated from the
following list: Purchase, construction/improvement, or refinance of
owner-occupied dwelling(s); purchase, construction/improvement, or
refinance of non-owner-occupied dwelling(s); purchase, construction/
improvement, or refinance of non-dwelling real estate; purchase,
construction/improvement, or refinance of owner-occupied, non-
dwelling real estate; purchase, refinance, or rehabilitation/repair
of motor vehicle(s) (including light and heavy trucks); purchase,
refinance, or rehabilitation/repair of equipment; working capital
(includes inventory or floor planning); business start-up; business
expansion; business acquisition; refinance existing debt (other than
refinancings listed above); line increase; other; not provided by
applicant and otherwise undetermined; or not applicable. A financial
institution reporting ``other'' would be required to enter the
purpose or purposes as free-form text. The Bureau analyzes free-form
text under the proposed balancing test in part VI.C.6.xix below.
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Disclosing the purpose of the credit in the public application-
level 1071 data in unmodified form would facilitate enforcement of fair
lending laws. Because financial institutions may generally consider
credit used for certain purposes to be riskier than credit used for
other purposes, data about the purpose of the credit would help ensure
that users can compare applicants with similar profiles, thereby
controlling for factors that might provide non-discriminatory
explanations for some disparities in credit and pricing decisions.
Disclosing data about the purpose of the credit would also be useful
for identifying business and community development needs and
opportunities of small businesses. Information about the purpose of the
credit would help the public understand whether small businesses face
barriers accessing credit that they would be seeking to use for a
particular purpose. In conjunction with NAICS code and census tract,
information about the purpose of the credit could help the public
understand whether small businesses in certain industries or in certain
communities face unique challenges accessing credit to, for example,
purchase equipment or expand their businesses.
Disclosing the purpose of the credit in the 1071 data in unmodified
form by itself would likely disclose minimal, if any, information about
an applicant or
[[Page 56528]]
related natural person that may be harmful or sensitive if such person
were re-identified, or that may be harmful or sensitive to an
identified financial institution. However, information about the
purpose of the credit could be useful to adversaries such as a small
business's competitors, potential acquirers, or new market entrants,
since it contains information about a business's strategy and
performance, such as whether a business is expanding or conducting an
acquisition. Nonetheless, this information would generally not be
detailed enough to cause small businesses competitive harm. The value
of this information to a small business's competitors is also likely to
be mitigated by the delay between the date of action taken on a loan
and the publication of the application-level 1071 data.
Disclosure of credit purpose in unmodified form may also reveal
information that financial institutions regard as harmful or sensitive,
such as information that a financial institution offers credit that is
used for certain purposes. However, as discussed under Risk of Harm or
Sensitivity in part VI.C.4.ii above, the Bureau does not believe that
disclosure would permit the reverse-engineering of a financial
institution's proprietary lending models.
The Bureau has not identified publicly available datasets that
include data fields an adversary could directly match to the credit
purpose data fields in unmodified form in the public application-level
1071 data with respect to an applicant or related natural person.
Identified public datasets pertaining to small business loans generally
do not contain information about the purpose of the credit. Therefore,
an adversary would have difficulty using the credit purpose data fields
to match a section 1071 record to an identified publicly available
record accurately.
The Bureau seeks comment on this analysis.
vi. Amount Applied for
Proposed Sec. 1002.107(a)(7) would require financial institutions
to collect and report to the Bureau the initial amount of credit or the
initial credit limit requested by the applicant.
Disclosing amount applied for in the public application-level 1071
data in unmodified form would help facilitate enforcement of fair
lending laws by allowing data users to control for other variables in
the data. Several industry representatives expressed concern that these
data could lead to misinterpretations based on perceived disparate
treatment as opposed to the complex nature of commercial lending. For
example, financial institutions may consider different or additional
underwriting criteria, depending on the amount applied for.
Applications for large lines of credit might require an in-depth cash-
flow analysis, while a smaller line of credit may be underwritten, in
part, based on a business's (or business owner's) credit scores. In
conjunction with amount approved or originated, this data field would
allow data users to determine the difference between the amount an
applicant requested, and the amount approved or originated. This
information would also help data users identify potentially
discriminatory lending patterns and distinguish them from legitimate
business factors when combined with other data. This type of
information is important to consider in fair lending analyses since the
amount applied for may affect the likelihood of denial or the price of
an approved loan.
Amount applied for would also help data users understand lending
disparities. For example, data users would be able to identify
potential fair lending violations where certain small businesses
disproportionately receive less credit than applied for on a prohibited
basis. Finally, the amount applied for would help communities,
governmental entities, and creditors monitor the demand for credit.
Specifically, when combined with NAICS code and census tract, the
amount applied for could help data users assess the demand for credit
in particular industries and communities and enable data users to
devise strategies for narrowing or eliminating potential inequalities.
Disclosing amount applied for in the 1071 data in unmodified form
would likely disclose information about an applicant or related natural
person that may be harmful or sensitive if such person were re-
identified. Business owners might view details about the amount applied
for as sensitive, particularly where they are concerned about the risk
of being re-identified as an applicant for credit. In addition, the
amount applied for could also lead to targeted marketing of products or
services that pose risks that are not apparent, because it could help
lenders target small businesses that received less credit than they
requested with offers for loans at higher rates or fees. The amount
applied for is generally not included in other publicly available data,
so it would likely not be useful to adversaries seeking to match 1071
data with other publicly available data. However, the Bureau believes
amount applied for would be useful to an adversary. For example, a
significant shortfall between the amount applied for and the amount
approved could be used either by an applicant's competitor or by a
consumer, to infer that the business has a relatively weak financial
position. With information on whether or not a business is granted a
loan, an adversary might gain insight into the scale of a business's
objectives based on the amount applied for and/or approved. The
relative scarcity of this information at present would also increase
the value to adversaries of re-identification. In addition, as
discussed under Risk of Harm or Sensitivity in part VI.C.4.ii above,
the Bureau does not believe that disclosure would permit the reverse-
engineering of a financial institution's proprietary lending models.
The Bureau has not identified publicly available datasets that
include data fields an adversary could directly match to the amount
applied for data field in unmodified form in the public application-
level 1071 data with respect to an applicant or related natural person.
If the Bureau determines that the amount applied for should be
modified, the Bureau may consider recoding the data into bins. For
example, the Bureau could recode the amount applied for into bins of
$25,000.
The Bureau seeks comment on this analysis.
vii. Amount Approved or Originated
Proposed Sec. 1002.107(a)(8) would require financial institutions
to collect and report to the Bureau: (i) For an application for a
closed-end credit transaction that is approved but not accepted, the
amount approved by the financial institution; or (ii) for a closed-end
credit transaction that is originated, the amount of credit originated;
or (iii) for an application for an open-end credit transaction that is
originated or approved but not accepted, the amount of the credit limit
approved.
Disclosing amount approved or originated in the public application-
level 1071 data in unmodified form would allow users to identify
potentially discriminatory lending patterns in which small business
applicants might be receiving less credit due to a prohibited basis.
These data would also enable data users to devise strategies for
narrowing or eliminating these inequalities. Additionally, in
conjunction with amount applied for, disclosure of these data fields
would allow data users to determine if there is a difference between
the amount requested and the amount approved or originated. This
information would help data users identify any potentially
discriminatory lending patterns in
[[Page 56529]]
which small businesses might disproportionately receive less credit
than what they applied for on a prohibited basis. As described above,
when combined with the amount applied for, these data also could
provide significant value as a control in fair lending analysis.
Additionally, due to the sometimes complex nature of underwriting in
commercial lending, when combined with credit purpose these data would
allow users to identify potential discrimination when comparing loan
applications for similar purposes.
The amount approved or originated would also be useful for business
and community development purposes. Disparities with respect to the
provision of credit can significantly impede the growth of women-owned
and minority-owned businesses. When combined with census tract, these
data could help users understand whether women-owned and minority-owned
businesses are experiencing issues accessing credit in their
communities (separate from the question of whether potential fair
lending violations are occurring). When combined with NAICS codes,
these data could help users understand whether women-owned and
minority-owned businesses in particular industries are struggling to
access credit. In addition, these data would allow data users to
approximate the size of the small business lending market.
Like the amount applied for data field, disclosing amount approved
or originated in the 1071 data in unmodified form would likely disclose
information about an applicant or related natural person that might be
harmful or sensitive if such person were re-identified, or that might
be harmful or sensitive to an identified financial institution. The
Bureau believes that information about the amount approved or
originated could be useful to potential adversaries. For example, for
creditors, these data fields would provide some insight into
competitors' lending practices, particularly when combined with other
data points such as gross annual revenue, number of workers, time in
business, and pricing. These data might allow creditors to make general
inferences about the relative risk appetites of their competitors.
However, as discussed under Risk of Harm or Sensitivity in part
VI.C.4.ii above, the Bureau does not believe that disclosure would
permit the reverse-engineering of a financial institution's proprietary
lending models.
The Bureau has identified publicly available datasets that include
data fields an adversary could directly match to the amount approved or
originated data fields in unmodified form in the public application-
level 1071 data with respect to an applicant or related natural person.
Credit amount approved or originated is often widely available in
public datasets, such as loan-level data for the SBA 7(a) and 504
programs, as well as property records and UCC filings. Therefore, in
unmodified form, adversaries would be able to match the amount of
credit approved or originated to an existing public record.
If the Bureau determines that the amount approved or originated
should be modified, the Bureau may consider recoding the data into
bins. For example, the Bureau could recode the data into bins of
$25,000.
The Bureau seeks comment on this analysis.
viii. Action Taken (Type) and Denial Reasons
Proposed Sec. 1002.107(a)(9) and (11) would require financial
institutions to collect and report to the Bureau the action taken by
the financial institution on the covered application, reported as
originated, approved but not accepted, denied, withdrawn by the
applicant, or incomplete; and if applicable, for denied applications,
the principal reason or reasons the financial institution denied the
covered application.\837\
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\837\ As discussed in the section-by-section analysis of
proposed Sec. 1002.107(a)(12) above, the list of denial reasons
would include the following: Business credit characteristics,
personal credit characteristics (of business owner(s) or
guarantor(s)), use of loan proceeds (i.e., a non-permissible
purpose), cash flow, collateral (insufficient or inappropriate or
unacceptable), time in business, government criteria, aggregate
exposure of business and its principal owner(s), unverifiable
information, other, or not applicable. A financial institution
reporting ``other'' would be required to enter the denial reason or
reasons as free-form text. The Bureau analyzes free-form text under
the proposed balancing test in part VI.C.6.xix below.
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Disclosing action taken and denial reasons in the public
application-level 1071 data in unmodified form would provide important
data on credit outcomes for small businesses, including women-owned and
minority-owned small businesses, that apply for credit. Data provided
by these data fields would allow data users to examine the rates of
originations, approvals, denials, and incomplete and withdrawn
applications, and whether they differ among groups protected under
ECOA. Of the stakeholders that provided feedback on this issue, several
supported the collection of action taken and denial reason data in
order to track demand for credit and identify potential discrimination.
Information that credit was originated or was approved, but not
accepted, would help data users determine whether there are potential
disparities in the terms and conditions received by women-owned and
minority-owned small businesses. Information that an application was
incomplete or withdrawn would highlight potential issues of
discouragement, level of assistance disparities, or other
discriminatory treatment that could cause women-owned or minority-owned
small businesses to walk away from the lending process or otherwise
fail to complete the application. One commenter stated that capturing
incomplete and withdrawn applications was important as it may reflect
discouragement or discriminatory treatment, and that the approved but
not accepted category could reflect less favorable pricing or loan
terms. For example, when combined with amount approved or originated,
data users could also identify issues of possible discouragement where
lenders have potentially under-funded loan applications from women-
owned and minority-owned businesses.
Denial reasons would help data users examine reasons for credit
denials particularly for women-owned and minority-owned businesses. For
example, when combined with action taken date, denial reasons could
help identify potential denial reasons disproportionately affecting
protected classes, which may be useful to identify discrimination and
enable data users to potentially develop strategies for narrowing or
eliminating inequalities. These data would also be useful as a way to
compare similarly situated applicants, which could be useful to both
identify and explain potential disparities. Disclosing action taken and
denial reasons would also be useful for business and community
development purposes. The type of action taken would provide insights
into the supply of credit. Data users would be able to monitor rates of
credit denial, which can provide information on the willingness of
creditors to lend, when combined with other data. Granular denial
reason codes would also provide useful actionable information to small
business applicants generally. For example, where small businesses are
denied loans because of insufficient collateral, or time in business,
data users could help direct programs and investment targeted
specifically to these businesses in a particular community. When
combined with census tract, analysis of denial reasons by geographical
area could help identify whether small businesses in certain areas are
experiencing higher rates of
[[Page 56530]]
denial and the specific reasons for denial.
During the SBREFA process, stakeholders commented that disclosure
of denial reasons would be embarrassing for applicants and might
discourage them from applying for credit.\838\ Several industry
commenters believed that reporting reasons for denial would reveal
information that would be very harmful or sensitive for businesses or
natural persons. The Bureau agrees that this information could be
harmful or sensitive for applicants or related natural persons.
---------------------------------------------------------------------------
\838\ See SBREFA Panel Report at 34-35.
---------------------------------------------------------------------------
Commenters also described sensitivities associated with originated
loans, such as concerns that some small business owners could be
reluctant to be perceived as needing credit in the first place. One
industry stakeholder believed that disclosure of action taken would
allow competitors to reverse engineer a financial institution's credit
scoring model. The Bureau does not believe disclosing the fact that
credit was sought, in and of itself, likely would be harmful or
sensitive to small businesses because credit is widely used by small
businesses. Furthermore, the harm or sensitivity of disclosing
information that credit was originated is mitigated by the publication
of originated loan details in UCC filings, for instance. Additionally,
as discussed under Risk of Harm or Sensitivity in part VI.C.4.ii above,
the Bureau does not believe that disclosure of action taken would
permit the reverse-engineering of a financial institution's proprietary
lending models.
The Bureau has not identified publicly available datasets that
include data fields an adversary could directly match to data fields
for denied applications (and reasons for denial) in unmodified form in
the public application-level 1071 data with respect to an applicant or
related natural person. However, at a category level, these data fields
could tell adversaries which records it may be possible to match
against other databases that include originated loans, as opposed to
unoriginated loan records that cannot be matched in this way. Credit
denials or credit offered but not originated are generally not
disclosed to the public. Specifically, most of these data fields
included in this data point are not found in publicly available sources
of records that contain the identity of an applicant; the only data
field that would be consistently available would be for originated
loans. Without such an identified publicly available record to match
with, there would likely be difficulty in attempting to re-identify an
applicant by matching a 1071 record using these data fields.
However, as discussed under Re-Identification Risk in part VI.C.4.i
above, adversaries may be able to use other data fields, such as census
tract, NAICS code, and identified public information, such as business
directories, to determine the identity of an applicant or related
natural person. Thus, if applicants and related natural persons could
be re-identified, an adversary could learn information about
application denials for these businesses and use this information for a
variety of purposes.
The Bureau seeks comment on this analysis. In light of the
potential harm or sensitivity arising from the disclosure of
application denials and the reasons for denial, the Bureau seeks
comment on whether there are specific modifications it should consider,
and whether modifying these data fields by grouping them, or deleting
these data fields, would appropriately balance the privacy risks and
benefits of disclosure, in light of the purposes of section 1071.
ix. Action Taken Date
Proposed Sec. 1002.107(a)(10) would require financial institutions
to collect and report the date of the action taken by the financial
institution.
Disclosing action taken date in the public application-level 1071
data in unmodified form would allow data users to monitor trends over
time in small business lending more precisely than they could if only
the year were disclosed.\839\ When combined with application date,
information about the date of action taken would enable data users to
determine the length of time, for different groups, between when
businesses applied for credit and when they received the credit
decision. This information would have benefits for fair lending
analysis, allowing data users to determine whether certain groups
experience different processing times (for example, longer processing
for women-owned business, or faster denials for minority-owned
businesses). The action taken date also would help ensure that users
evaluating potential disparities in pricing or other terms and
conditions can compare applicants that obtained loans on similar dates,
thereby controlling for factors that might provide a legitimate
explanation for some disparities, such as different market interest
rates or different institutional practices over different time periods.
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\839\ Whether or not the Bureau discloses the date of action
taken, the application-level data will indicate the year in which
action was taken, because the 1071 data would be disclosed annually
based on the date of action taken.
---------------------------------------------------------------------------
Disclosing action taken date in the 1071 data in unmodified form
would likely disclose minimal, if any, information about an applicant
or related natural person that may be harmful or sensitive if such
person were re-identified, or that may be harmful or sensitive to an
identified financial institution.
The Bureau has identified publicly available datasets that include
data fields an adversary could directly match to the action taken date
data field in unmodified form in the public application-level 1071 data
with respect to an applicant or related natural person. Public
availability of the action taken date depends on the type of action
taken. For example, the approval date of originated loans is widely
publicly available in SBA 7(a), 504, and other program loan-level
records that identify borrowers, and the date of executed agreements is
often available for property records and UCC filings, which could be
closely related to action taken date. For originated loans, action
taken date would substantially facilitate matching with publicly
available datasets that identify borrowers. Additionally, the 1071 data
could identify the lender as well as the application date and action
taken date. Where action taken date is on or near the UCC filing date,
for example, an adversary might be able to use the date and lender on
the UCC filings to identify the borrowers of originated loans in the
eventual 1071 data. Action taken date may be less useful in re-
identifying applicants of loans that were not originated because the
action taken date for such loans is rarely publicly available.
If the Bureau determined that action taken date should be modified,
the Bureau may consider disclosing the date at a higher level; for
example, disclosing the month in which action was taken, but not the
specific date. This could reduce the re-identification risk from
sources such as UCC filings that may include the specific date of
action taken. In light of the potential re-identification risk arising
from this data field, the Bureau seeks comment on whether there are
other specific modifications it should consider and whether deletion
would balance the risks and benefits of disclosure.
The Bureau seeks comment on this analysis.
x. Pricing Information
Proposed Sec. 1002.107(a)(12) would require financial institutions
to collect and report to the Bureau the following
[[Page 56531]]
information regarding the pricing of a covered credit transaction that
is originated or approved but not accepted, as applicable: (i) The
interest rate; \840\ (ii) total origination charges, defined as the
total amount of all charges payable directly or indirectly by the
applicant and imposed directly or indirectly by the financial
institution at or before origination as an incident to or a condition
of the extension of credit; (iii) broker fees, defined as the total
amount of all origination charges that are fees paid by the applicant
directly to a broker or to the financial institution for delivery to a
broker; (iv) initial annual charges, defined as the total amount of all
non-interest charges that are scheduled to be imposed over the first
annual period of the covered credit transaction; (v) additional costs
for merchant cash advances or other sales-based financing, defined as,
for a merchant cash advance or other sales-based financing transaction,
the difference between the amount advanced and the amount to be repaid;
and (vi) prepayment penalties.\841\
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\840\ If the interest rate is fixed, the proposal would require
the financial institution to report the interest rate that is or
would be applicable to the covered credit transaction. If the
interest rate is adjustable, the proposal would require the
financial institution to report the margin, index value, and index
name that is or would be applicable to the covered credit
transaction at origination. The proposal would also require the
financial institution to report the index used by selecting the
index used from a specified list. If the index used does not appear
on the list of indices provided, the financial institution would
report ``other'' and provide the name of the index as free-form
text. The Bureau analyzes free-form text under the proposed
balancing test in part VI.C.6.xix below.
\841\ The proposal would require the financial institution to
report whether the financial institution could have included a
charge to be imposed for paying all or part of the transaction's
principal before the date on which the principal is due under the
policies and procedures applicable to the covered credit
transaction. The proposal also would require the financial
institution to report whether the terms of the covered credit
transaction include a charge imposed for paying all or part of the
transaction's principal before the date on which the principal is
due.
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The Bureau believes that these pricing data fields would serve to
further both the fair lending purpose and the business and community
development purpose of section 1071. The statutory data points alone
offer limited insight into underwriting disparities and no insight into
predatory prices or pricing disparities. For example, the statutory
data points alone might show that a particular market segment is
expanding and apparently filling an important need, but this could
actually be an area with predatory conduct. Pricing information would
allow the Bureau and others to understand the situation more
accurately. Data collection without pricing information could have the
unintended consequence of incentivizing irresponsible lending, as
providers seeking to increase representation of underserved groups
could be encouraged to adopt high-cost models of lending.
Without information on pricing, data users would be unable to
screen for fair lending pricing risks and prioritize fair lending
enforcement resources. In addition, if potential discriminatory conduct
is monitored effectively with regard to loan approvals, but not with
regard to pricing, industry compliance systems may focus solely on
approvals and denials and ignore potential pricing disparities. Having
pricing data available in the public application-level 1071 data would
also increase transparency and demonstrate to responsible lenders where
business opportunities exist to offer credit to underserved markets.
Pricing data could also help small businesses identify where credit may
be available on better terms. The Bureau provides additional analysis
of the benefits of the pricing data fields in the section-by-section
analysis of proposed Sec. 1002.107(a)(12) above, including proposed
Sec. 1002.107(a)(12)(i) through (vi).
During the SBREFA process, several industry commenters expressed
concern that pricing data could lead financial institutions to
artificially flatten prices or create misperceptions about disparities
among applicants, in light of the complexity of underwriting decisions.
One industry commenter stated that pricing data could present ``privacy
risk'' to applicants in rural communities, without specifying the
nature of the risk. Several SERs stated that pricing data may be
sensitive to financial institutions. One of these SERs suggested that
even aggregate pricing information would be commercially sensitive data
for a financial institution. While acknowledging other SERs' concerns,
a few SERs stated that information on competitors' pricing is
relatively easy to obtain now.
The Bureau believes that information about the interest rates and
fees charged in connection with credit represents basic information
about the features of a product generally would present low risk of
harm or sensitivity. Disclosure of pricing data in unmodified form may
reveal information that some applicants or related natural persons may
regard as harmful or sensitive, such as a reflection of their perceived
credit risk. However, the Bureau received feedback during the SBREFA
process that multiple factors contribute to pricing for small business
credit. Disclosure of pricing data in unmodified form may also reveal
information that financial institutions regard as harmful or sensitive,
such as the prices a financial institution charges for certain types of
credit. However, as discussed under Risk of Harm or Sensitivity in part
VI.C.4.ii above, the Bureau does not believe that disclosure of pricing
information would permit the reverse-engineering of a financial
institution's proprietary lending models.
The Bureau has identified publicly available datasets that include
data fields an adversary could directly match to the pricing data
fields in unmodified form in the public application-level 1071 data
with respect to an applicant or related natural person. Identified data
about the interest rate and fees charged for a given loan are available
from a limited number of publicly available datasets, such as data for
the SBA 7(a) and 504 programs. Additionally, the PPP loan program has a
uniform 1 percent interest rate.
During the SBREFA process, one industry stakeholder stated that, if
pricing data are collected, the Bureau should publish them along with
demographic information only in aggregate form, such as at an industry
or multi-firm level, rather than the application level. The commenter
stated that publication of pricing information along with demographic
information risks creating the perception of potential fair lending
violations that are not based on adequate analysis. The Bureau notes
that 1071 data alone (including pricing data) generally could not be
used to determine whether a lender is complying with fair lending laws.
For example, HMDA data have a long history of utility for fair lending
purposes even though they alone generally do not offer proof of
compliance with fair lending laws. Additionally, in the section-by-
section analysis of proposed Sec. 1002.107(a)(12) above, the Bureau
seeks comment on additional information that could help reduce
misinterpretations of disparities in pricing, including modifications
to the pricing information under proposed Sec. 1002.107(a)(12).
If the Bureau determines that pricing data should be modified, the
Bureau may consider recoding the pricing information data fields into
bins. For example, the Bureau may consider recoding interest rates into
bins of 0.25 percentage points or origination fees into bins of $500.
The Bureau may also consider top-coding pricing data fields, which
would mask particularly high values.
The Bureau seeks comment on this analysis.
[[Page 56532]]
xi. Census Tract
Proposed Sec. 1002.107(a)(13) would require financial institutions
to collect and report the census tract in which is located: (1) The
address or location where the proceeds of the credit applied for or
originated will be or would have been principally applied; or, (2) if
this information is unknown, the address or location of the main office
or headquarters of the applicant; or, (3) if this information is also
unknown, another address or location associated with the applicant. In
addition to reporting the census tract, the financial institution would
be required to indicate which one of these three types of addresses or
locations the census tract is based on.
Disclosing census tract data in the public application-level 1071
data in unmodified form would aid in fulfilling both the fair lending
and business and community development purposes of section 1071 by
providing more useful information on the location of the credit
activity for fair lending analysis and understanding where the business
and community development is occurring. With respect to fair lending
enforcement, a measure of geography at the neighborhood or community
level is necessary to identify redlining--the illegal practice in which
those in a certain area or neighborhood are denied access to credit,
are charged higher prices, or are otherwise not given the same access
to credit as those in other areas, on the basis of race or for some
other prohibited reason. Additionally, because differences in the level
of competition in the local credit market may contribute to differences
in interest rates or approval rates for otherwise similarly situated
small businesses, census tract data would help ensure that users can
compare applicants with similar profiles, thereby controlling for
factors that might provide non-discriminatory explanations for some
disparities in credit and pricing decisions.
The inclusion of a geographic indicator, such as census tract, that
identifies the appropriate community--not merely the appropriate county
or State--would further the statute's community and business
development purposes. Census tract data would enable data users to
monitor credit conditions in particular communities and identify
communities that are underserved by the small business credit market.
In addition, requiring data on the nature of the address reported would
aid in fulfilling both the fair lending and business and community
development purposes of section 1071 by facilitating accurate analyses
of the data reported.
Disclosing the census tract in the 1071 data in unmodified form
would likely disclose minimal, if any, information about an applicant
or related natural person that may be harmful or sensitive if such
person were re-identified, or that may be harmful or sensitive to an
identified financial institution. The Bureau is aware that, for sole
proprietors, the main office address of small business applicants is
frequently a home address. However, the actual street address would not
be reported or disclosed. In addition, small businesses commonly make
their locations available in the normal course of their business by
disclosing their addresses.
If the address reflects where the proceeds of the credit will be or
would have been principally applied, disclosing the census tract may
reveal some information about an applicant's business strategy,
particularly if paired with the loan purpose data field. For example,
the data could indicate that a small business is pursuing or was
pursuing an expansion to a particular address. However, the value of
this information to a small business's competitors is likely to be
mitigated by the delay between the date of action taken on a loan and
the publication of the application-level 1071 data. Disclosure of the
census tract in unmodified form may also reveal information that
financial institutions regard as harmful or sensitive, such as a
financial institution's trade area. However, as discussed under Risk of
Harm or Sensitivity in part VI.C.4.ii above, the Bureau does not
believe that disclosure would permit the reverse-engineering of a
financial institution's proprietary lending models.
During the SBREFA process, several industry stakeholders stated
that geographic identifiers such as census tract would have a high
potential to contribute to the re-identification of businesses or
natural persons, especially in small towns or rural areas, where only
one or two businesses may be located in a census tract. Several
industry commenters expressed concern about re-identification risks
arising from the combination of the census tract data fields with other
data fields, noting that it might be difficult to predict which data
fields could contribute to re-identification. One commenter stated that
tax assessor and UCC records could be used to re-identify businesses in
rural areas, and that adversaries with personal knowledge of businesses
in rural areas could learn about a business's or natural person's
sensitive financial characteristics. Some SERs stated that the
combination of geographic identifiers and information about a small
business's industry could make it easy to re-identify businesses in
remote or rural areas.\842\ Two industry stakeholders stated that
census tract and data about the type and purpose of financing would
contribute to the re-identification of businesses or natural persons.
One of these commenters also stated that combining geographic
identifiers with data on the amount applied for or approved could
contribute to re-identification. One industry commenter stated that
census tract, combined with gross annual revenue and NAICS code, could
facilitate re-identification of applicants in areas with low
populations. A community group stakeholder stated that increasing the
universe of financial institutions reporting 1071 data would mitigate
privacy concerns about disclosing census tract.
---------------------------------------------------------------------------
\842\ See SBREFA Panel Report at 34-35.
---------------------------------------------------------------------------
The Bureau has identified publicly available datasets that include
data fields an adversary could directly match to the census tract data
field in unmodified form in the public application-level 1071 data with
respect to an applicant or related natural person. The Bureau expects
that, in most cases, the census tract that financial institutions would
report to the Bureau would be based on the address or location of the
main office or headquarters of the applicant, either because that is
where the proceeds of the credit will be applied or because the
financial institution does not know the location or address where the
proceeds of the credit will be applied, but does know the main office
or headquarters address. The Bureau believes that, for many small
businesses, this address or location is likely to be publicly available
on the internet from sources such as the business's website and review
websites. Information about a business's location is also likely
available from loan-level data for public loan programs as well as from
private datasets, such as from data brokers. Therefore, in many cases,
the Bureau believes an adversary could use the census tract data
fields, combined with other fields, to match a section 1071 record to
an identified publicly available record.
Disclosing the census tract is likely to produce unique instances
in the data--particularly when combined with the 6-digit NAICS code, if
the 6-digit NAICS code is disclosed in unmodified form. There are
currently 73,057 census tracts and 1,057 6-digit NAICS codes,\843\
[[Page 56533]]
which produce over 77 million combinations. With so many possible
combinations, there would likely be many instances in the 1071 data
where the census tract and 6-digit NAICS code form a unique
combination. Regarding the comment that increasing the universe of
financial institutions reporting 1071 data would mitigate privacy
concerns about disclosing census tract, the Bureau's proposals
regarding the coverage of the 1071 rule are addressed elsewhere in this
proposed rule.
---------------------------------------------------------------------------
\843\ See U.S. Census Bureau, 2010 Census Tallies, https://www.census.gov/geographies/reference-files/time-series/geo/tallies.html (last visited Aug. 23, 2021) (2010 Census Tallies)
(number of census tracts); Off. of Mgmt. & Budget, North American
Industry Classification System (NAICS) Updates for 2022, 86 FR
35350, 35352 (July 2, 2021) (number of 6-digit NAICS codes).
---------------------------------------------------------------------------
During the SBREFA process, several commenters suggested ways the
Bureau might modify census tract data to reduce privacy risk. Several
industry commenters recommended that the Bureau disclose geographical
data on the county or State level to reduce re-identification risk. One
SER recommended the reporting of geographic data only at the State
level or higher. The SER stated that even county-level data in some
areas could potentially lead to re-identification of applicants or
borrowers.
A joint comment from a number of community groups recommended that
the Bureau consider modifying data with a low number of observations in
a census tract to be reported at the zip code or county level. One SER
recommended that the Bureau establish a minimum sample size before
publishing application-level data for some rural markets to avoid
privacy risks. A community group stakeholder recommended masking
techniques such as moving data from a census tract with few
observations to a contiguous or nearby census tract. This commenter
also recommended that the Bureau consider switching records for
similarly situated applicants between nearby census tracts to make it
impossible to reconnect individual applicants while preserving the
benefits of the data.
If the Bureau were to modify census tract, it might consider
disclosing a broader location category, such as county or State. Census
tracts are defined by the U.S. Census Bureau, and the next-largest
geographic identifier in the Census Bureau's hierarchy of geographic
identifiers is county. The next-largest geographic identifier after
county is State. While likely reducing re-identification risk
substantially, disclosing the county or State instead of the census
tract would also reduce the utility of the 1071 data. There are 73,057
census tracts, as noted above, but only 3,143 counties,\844\ suggesting
a significant loss of geographic detail in modifying census tract. The
Bureau could potentially use a geographic designation larger than
census tract but smaller than county. However, since the use of Census
Bureau-defined geographies is widespread, using modifications that
already reflect standard Census Bureau-defined geographies
significantly improves the utility of the data to data users.
---------------------------------------------------------------------------
\844\ See 2010 Census Tallies.
---------------------------------------------------------------------------
The Bureau seeks comment on this analysis. The Bureau seeks comment
on how disclosing the county, State, or some other geographic
identifier--rather than the census tract--would affect the benefits of
disclosure, the potential for harm or sensitivity, and the potential
for re-identification of applicants or related natural persons.
xii. Gross Annual Revenue
Proposed Sec. 1002.107(a)(14) would require financial institutions
to collect and report to the Bureau the gross annual revenue of the
applicant for its preceding full fiscal year prior to when the
information is collected.
Disclosing gross annual revenue in the public application-level
1071 data in unmodified form would facilitate enforcement of fair
lending laws. Many creditors use gross annual revenue to help define
whether a business is a small business and set revenue thresholds for
assigning risk. Information about gross annual revenue would help
ensure that users who are evaluating potential disparities in
underwriting or pricing can compare small businesses with similar
revenues, thereby controlling for a factor that might provide a
legitimate explanation for some disparities. Disclosing gross annual
revenue would also be useful for identifying business and community
development needs and opportunities of small businesses. And because
gross annual revenue is often used as a proxy for the size of a small
business, these data could allow users to determine the availability of
credit for small businesses of various sizes--including the very
smallest businesses, which may face unique challenges accessing credit.
Disclosing gross annual revenue in the 1071 data in unmodified form
would likely disclose information about an applicant or related natural
person that may be harmful or sensitive if such person were re-
identified. One SER stated during the SBREFA process that, in the case
of sole proprietorships, gross annual revenue can serve as a proxy for
the small business owner's personal income. The Bureau believes that
disclosing gross annual revenue in unmodified form would likely
disclose sensitive information because it could reflect the financial
condition of a small business or, where a small business is a sole
proprietorship, a natural person. With respect to the risk of harm or
sensitivity to financial institutions, other creditors might use gross
annual revenue data to learn more about the types of small businesses
with which their competitors do business. However, as discussed under
Risk of Harm or Sensitivity in part VI.C.4.ii above, the Bureau does
not believe that disclosure would permit the reverse-engineering of a
financial institution's proprietary lending models.
Gross annual revenue data are likely to be of interest to potential
adversaries. As described below, gross annual revenue data are not
available on a widespread basis from identified public databases.
Competitors of the small business, other commercial entities,
creditors, researchers, or persons with criminal intent all may have an
interest in using these data to monitor the size or performance of an
applicant that may be a rival, partner, or target of inquiry,
investigation, or illegal activity.
The Bureau has identified publicly available datasets that include
data fields an adversary could directly match to the gross annual
revenue data field in unmodified form in the public application-level
1071 data with respect to an applicant or related natural person. Gross
annual revenue data are available from private databases. Gross annual
revenue data are also available from data for New York State's women-
and minority-owned business certification program, in which it is
recoded into bins. However, these data are not available from
identified public databases on a widespread basis.
During the SBREFA process, a community group stakeholder
recommended that the Bureau consider reporting gross annual revenue in
categories rather than specific amounts. An industry commenter
recommended that the Bureau delete gross annual revenue from the public
application-level 1071 data to protect the privacy of an applicant or
related natural person. If the Bureau determines that gross annual
revenue should be modified, the Bureau may consider recoding gross
annual revenue data into bins by, for example, disclosing the data in
ranges of $25,000. The Bureau may also consider top-coding gross annual
revenue, which would mask particularly high values, thereby reducing
the identifiability of application data from businesses with especially
high gross annual revenue.
[[Page 56534]]
The Bureau seeks comment on this analysis.
xiii. NAICS Code
Proposed Sec. 1002.107(a)(15) would require financial institutions
to collect and report to the Bureau a 6-digit North American Industry
Classification System (NAICS) code appropriate for the applicant.\845\
---------------------------------------------------------------------------
\845\ As discussed above in the section-by-section analysis of
proposed Sec. 1002.107(a)(15), the SBA customizes its size
standards on an industry-by-industry basis using 1,057 6-digit NAICS
codes. The first two digits of a NAICS code broadly capture the
industry sector of a business. The third digit captures the
industry's subsector, the fourth captures the industry group, and
the fifth captures the industry code. The NAICS code thus becomes
more specific as digits increase and the 6-digit long code is the
most specific. For example, NAICS code 453910 describes a pet supply
store, for which the 2-digit industry sector is the 44-45 ``Retail
Trade'' sector. See Small Bus. Admin., Table of Small Business Size
Standards Matched to North American Industry Classification System
Codes, https://www.sba.gov/sites/default/files/2019-08/SBA%20Table%20of%20Size%20Standards_Effective%20Aug%2019%2C%202019_Rev.pdf.
---------------------------------------------------------------------------
Disclosing 6-digit NAICS codes in the public application-level 1071
data in unmodified form would be useful for identifying business and
community development needs and opportunities of small businesses. Such
business and community development needs and opportunities may differ
widely based on industry, even controlling for other factors. For
example, 6-digit NAICS codes would help data users understand how small
businesses in different industries use credit as well as identify
industries in which small businesses face challenges accessing credit.
Furthermore, disclosing NAICS codes would provide for consistency and
compatibility with other public datasets related to small business
lending activity, which generally use NAICS codes. This ability to
synthesize 1071 data with other datasets would help the public use the
data in ways that would advance both the fair lending and business and
community development purposes of section 1071.
Disclosing 6-digit NAICS codes in the 1071 data in unmodified form
would also facilitate enforcement of fair lending laws in other ways.
Financial institutions often designate certain industries as high-risk,
such as industries that have high rates of businesses leaving the
market or that deal primarily in cash transactions. The 6-digit NAICS
codes would help ensure that users can compare applicants with similar
profiles, thereby controlling for factors that might provide non-
discriminatory explanations for some disparities in credit and pricing
decisions. The Bureau also believes that using the SBA's 6-digit NAICS
codes (as opposed to the 2-digit code) would enable the public to
identify whether disparities arise at a sector level and would provide
more specific information on the types of businesses that are accessing
or struggling to access credit.\846\
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\846\ For example, a wide variety of businesses, including those
providing car washes, footwear and leather goods repair, and nail
salons all fall under the 2-digit sector code 81: Other Services
(except Public Administration).
---------------------------------------------------------------------------
Including 6-digit NAICS codes in the public application-level 1071
data in unmodified form by itself would likely disclose minimal, if
any, information about an applicant or related natural person that may
be harmful or sensitive if such person were re-identified, or that may
be harmful or sensitive to an identified financial institution. The 6-
digit NAICS codes are unlikely to be harmful or sensitive to a small
business because information about a small business's industry is
likely to be apparent to anyone interacting with it. Disclosure of the
6-digit NAICS codes in unmodified form may reveal information that
financial institutions regard as harmful or sensitive, such as the
industries with which the financial institution does business. However,
as discussed under Risk of Harm or Sensitivity in part VI.C.4.ii above,
the Bureau does not believe that disclosure would permit the reverse-
engineering of a financial institution's proprietary lending models.
During the SBREFA process, several industry commenters stated that
NAICS codes would increase re-identification risk for small businesses,
particularly in combination with geographic identifiers, such as census
tract. The Bureau has identified publicly available datasets that
include data fields an adversary could directly match to the NAICS code
data field in unmodified form in the public application-level 1071 data
with respect to an applicant or related natural person. A business's
NAICS code is likely to be publicly available in loan-level data for
public loan programs such as the 7(a), 8(a), or PPP programs and in
private datasets. In addition, even where the specific NAICS code may
not be publicly available, it could be derived with reasonable accuracy
from other public information that is available for most businesses,
such as business directories, a business's website, or from personal
observation by members of the community where a business is located.
Therefore, in many cases, an adversary could use 6-digit NAICS codes,
combined with other fields, to match a section 1071 record to an
identified publicly available record.
The 6-digit NAICS code data field is likely to produce unique
instances in the data, especially when combined with census tract, if
census tract is disclosed in unmodified form. There are currently
73,057 census tracts and 1,057 6-digit NAICS codes,\847\ which produce
over 77 million combinations. With so many possible combinations, there
would likely be many instances in the 1071 data where the census tract
and 6-digit NAICS code form a unique combination.
---------------------------------------------------------------------------
\847\ See 2010 Census Tallies (number of census tracts); Off. of
Mgmt. & Budget, North American Industry Classification System
(NAICS) Updates for 2022, 86 FR 35350, 35352 (July 2, 2021) (number
of 6-digit NAICS codes).
---------------------------------------------------------------------------
If the Bureau determines that the 6-digit NAICS code should be
modified, the Bureau may consider disclosing NAICS codes at a higher
level by disclosing the 2-digit, 3-digit, or 4-digit NAICS code instead
of the 6-digit code. Disclosing NAICS code at a higher level would
reduce re-identification risk but would also reduce the utility of the
data. There are 1,057 6-digit NAICS codes, as noted above, but there
are only 99 3-digit subsectors and 20 broad 2-digit sectors.\848\ As a
result, disclosing NAICS code at a higher level would reduce the
specificity of the information in the 1071 data about the small
business's industry.
---------------------------------------------------------------------------
\848\ Off. of Mgmt. & Budget, North American Industry
Classification System (NAICS) Updates for 2022, 86 FR 35350, 35352
(July 2, 2021).
---------------------------------------------------------------------------
The Bureau seeks comment on this analysis. The Bureau specifically
seeks comment on how disclosing the 2-, 3-, or 4-digit NAICS code--
rather than the 6-digit NAICS code--would affect the benefits of
disclosure, the potential harm and sensitivity, and potential for re-
identification for this data field.
xiv. Number of Workers
Proposed Sec. 1002.107(a)(16) would require financial institutions
to collect and report to the Bureau the number of non-owners working
for the applicant.
Disclosing number of workers in the public application-level 1071
data in unmodified form would be useful for identifying business and
community development needs and opportunities of small businesses. This
information would give the public a greater understanding of how the
business and community development needs and opportunities of small
businesses may differ based on the number of workers. The number of
workers would help the public understand, for example, the extent to
which ``non-employer'' businesses, which do not have
[[Page 56535]]
employees besides the owner, and ``microbusinesses,'' which are
typically defined as having fewer than 10 employees, may face unique
challenges accessing credit or may use credit in different ways.
Identifying the number of workers would also allow data users to
understand the number of jobs supported by loans to a business.
Disclosing the number of workers would also advance the fair lending
purpose of section 1071. This information would help ensure that users
of the 1071 data who are evaluating potential disparities in
underwriting or pricing can compare small businesses with a similar
number of workers, thereby controlling for a factor that might provide
a legitimate explanation for some disparities.
Disclosing number of workers in the application-level 1071 data in
unmodified form would likely disclose minimal, if any, information
about an applicant or related natural person that may be harmful or
sensitive if such person were re-identified, or that may be harmful or
sensitive to an identified financial institution. Financial
institutions may use data about the number of workers to learn more
about the types of small businesses with which their competitors do
business. However, as discussed under Risk of Harm or Sensitivity in
part VI.C.4.ii above, the Bureau does not believe that disclosure would
permit the reverse-engineering of a financial institution's proprietary
lending models.
Furthermore, information about the number of workers is also likely
to be publicly available for many businesses. State registries of
businesses may include information about a business's number of
workers. Private databases also commonly include this information,
which is often verified by the business. Further, loan-level records
from SBA loan programs include a field for the number of jobs supported
by a loan, which in some instances may reflect the business's number of
workers. In the Bureau's view, the public availability of this
information decreases any potential sensitivity or harm of disclosing
number of workers in the application-level 1071 data. At the same time,
the Bureau believes that the utility of number of workers data in the
public application-level 1071 data to potential adversaries would be
low due to the widespread public availability of this information.
The Bureau has identified publicly available datasets that include
data fields an adversary could directly match to the number of workers
data field in unmodified form in the public application-level 1071 data
with respect to an applicant or related natural person. As noted above,
information about a business's number of workers is found in many
publicly available datasets in which the business's name is identified,
including State business registries, commercial databases, and loan-
level records from SBA loan programs. Therefore, in many cases, an
adversary could use number of workers, combined with other fields, to
match a section 1071 record to an identified publicly available record.
Data on a business's number of workers may easily produce unique
combinations, particularly when combined with other data fields in the
public application-level 1071 data and particularly for businesses with
higher numbers of workers, which are more likely to be unique in the
dataset.
If the Bureau determines that the number of workers data field
should be modified, the Bureau may consider recoding the data into
bins. The Bureau could also top-code number of workers, given that
larger values in the 1071 data are more likely to be unique.
The Bureau seeks comment on this analysis.
xv. Time in Business
Proposed Sec. 1002.107(a)(17) would require financial institutions
to collect and report to the Bureau the time the applicant has been in
business, described in whole years, as relied on or collected by the
financial institution.
Disclosing time in business in the public application-level 1071
data in unmodified form would advance both the fair lending and
business and community development purposes of section 1071. As
discussed in greater detail above in the section-by-section analysis of
proposed Sec. 1002.107(a)(17), start-ups and new businesses play an
important role in the business ecosystem, particularly with respect to
job creation. Time in business data would allow data users to better
identify the proportion of small businesses seeking credit that are
start-ups or relatively new businesses, the types of credit that are
offered and provided to start-ups and newer businesses, the geographic
makeup of those businesses, the types of financial institutions that
are reaching such businesses, and where communities might focus
business development efforts. The data may also aid policymakers in
addressing issues impacting the growth of small start-ups. The data,
particularly as to unmet demand, could help interested financial
institutions identify lending opportunities to reach more start-ups and
new businesses, promoting both business and community development.
Disclosing time in business would also facilitate the enforcement
of fair lending laws. Because lenders generally perceive younger
businesses as having higher credit risk, time in business data would
help ensure that users can compare applicants with similar profiles,
thereby controlling for factors that might provide non-discriminatory
explanations for some disparities in credit and pricing decisions.
Disclosing time in business in the 1071 data in unmodified form
would likely disclose minimal, if any, information about an applicant
or related natural person that may be harmful or sensitive if such
person were re-identified, or that may be harmful or sensitive to an
identified financial institution. During the SBREFA process, one
industry commenter recommended that the Bureau delete time in business
from the public application-level 1071 data, citing general concerns
that the data field could facilitate re-identification and disclose
previously non-public information to competitors.\849\ However, while
financial institutions may use time in business data to learn more
about the types of small businesses with which their competitors do
business, the Bureau does not believe that disclosure would permit the
reverse-engineering of a financial institution's proprietary lending
models, as discussed under Risk of Harm or Sensitivity in part
VI.C.4.ii above. Information about time in business is also likely to
be publicly available for many businesses. Businesses typically
disclose their date of establishment in public registration filings.
Many commercial databases also include this information. In the
Bureau's view, the existing public availability of this information
decreases any potential harm or sensitivity of disclosing time in
business in the public application-level 1071 data.
---------------------------------------------------------------------------
\849\ The commenter did not make clear whether it was referring
to competitors of a small business or competitors of a financial
institution.
---------------------------------------------------------------------------
The Bureau has identified publicly available datasets that include
data fields an adversary could directly match to the time in business
data field in unmodified form in the public application-level 1071 data
with respect to an applicant or related natural person. As noted above,
information about time in business is found in many publicly available
datasets, including State business registries and commercial databases.
Therefore, in many cases, an adversary could use time in business,
combined with other fields, to match a section 1071 record to an
identified
[[Page 56536]]
publicly available record. Time in business data may easily produce
unique combinations, particularly when combined with other data fields
in the public application-level 1071 data, and particularly for larger
time in business values, which are more likely to be unique in the
dataset.
If the Bureau determines that the time in business data field
should be modified, it may consider recoding time in business into
bins--for example, using two- or five-year intervals--to reduce the
identifiability of a specific length of time in business. The Bureau
could also top-code time in business at a value such as 25 years, given
that larger values are more likely to be unique. With regard to the
industry commenter's recommendation that the Bureau delete time in
business from the public application-level 1071 data based on re-
identification concerns, the Bureau's determination about whether this
field should be modified or deleted will be based on the re-
identification analysis that it will conduct once it receives at least
a full year of actual data reported by financial institutions.
The Bureau seeks comment on this analysis. The Bureau specifically
seeks comment on what intervals the Bureau should use if it were to
recode time in business into bins and what value the Bureau should use
if it were to top-code this data field.
xvi. Minority-Owned Business Status and Women-Owned Business Status
Proposed Sec. 1002.107(a)(18) and (19) would require financial
institutions to collect and report to the Bureau whether the applicant
is a minority-owned business or a women-owned business and whether
minority-owned business status or women-owned business status is being
reported based on previously collected data pursuant to proposed Sec.
1002.107(c)(2).\850\
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\850\ The collection and reporting of women-owned and minority-
owned business status is proposed to be based on applicants' self-
reporting and would rely on the meanings of ``ownership'' and
``control'' defined in the CDD rule.
---------------------------------------------------------------------------
Disclosing women-owned and minority-owned business status in the
public application-level 1071 data in unmodified form is central to
furthering the fair lending purpose of section 1071 and would promote
the business and community development purpose of the statute by
identifying opportunities for further development of women-owned and
minority-owned small businesses. In fair lending analyses, knowing
whether a business is women-owned or minority-owned would help data
users identify potential discriminatory lending patterns. Publishing
information on women-owned or minority-owned business status in the
public application-level 1071 data would help data users examine and
identify potential disparities in small business lending. For example,
when combined with action taken, data users would be able to identify
if women-owned and minority-owned small businesses are denied for
credit at disproportionate rates. In addition, when combined with
pricing information, data users would be able to identify if women-
owned and minority-owned businesses are receiving credit at higher
prices. Additionally, these data would allow communities, governmental
entities, and creditors to determine areas where women-owned and
minority-owned small businesses are underserved relative to other small
businesses and to focus resources to identify business and community
development opportunities for women-owned and minority-owned small
businesses. Disclosing women-owned and minority-owned business status
could also help communities, governmental entities, and creditors
determine whether or not initiatives to increase access to credit for
women-owned and minority-owned businesses are succeeding.
Disclosing women-owned and minority-owned business status in the
1071 data in unmodified form would likely disclose minimal, if any,
information about an applicant or related natural person that may be
harmful or sensitive if such person were re-identified, or that may be
harmful or sensitive to an identified financial institution. While some
applicants or related natural persons may regard this information as
harmful or sensitive, the Bureau believes this information generally
would present low risk of harm or sensitivity. The Bureau also believes
that this information already may be available to the general public,
as discussed in the paragraph below, and that this information would
have relatively limited utility for adversaries if an applicant or
related natural person were re-identified.
However, in many cases, an adversary could use women-owned or
minority-owned business status, in combination with other 1071 data, to
match a section 1071 record to an identified publicly available record.
The Bureau has identified publicly available datasets that include data
fields an adversary could directly match to the minority- or women-
owned status data fields in unmodified form in the public application-
level 1071 data with respect to an applicant or related natural person.
Women-owned business status and minority-owned business status is
likely to be publicly available for many businesses. Many businesses
also publicly register or certify with the SBA or State or local
authorities as a women-owned or minority-owned business to access
government programs. For example, businesses are identified as woman or
minority-owned in the public loan-level SBA 7(a) and PPP data, and
demographic status indicators are available in loan-level 8(a) records.
Additionally, businesses' websites may have information about their
owners that could be used to derive women-owned and minority-owned
business status information. Private commercial databases also often
contain this information, either imported from public records or
estimated using software based on owner names (or both).
The Bureau invites comment on this analysis.
xvii. Ethnicity, Race, and Sex of Principal Owners and Number of
Principal Owners
Proposed Sec. 1002.107(a)(20) would require financial institutions
to collect and report to the Bureau the ethnicity, race, and sex of the
applicant's principal owner(s); \851\ whether ethnicity and race are
being collected by the financial institution on the basis of visual
observation or surname; \852\ and whether ethnicity, race, or sex are
being reported based on previously collected data pursuant to proposed
Sec. 1002.107(c)(2). Unless a financial institution is permitted to
report ethnicity, race, and sex information based on previously
collected data pursuant to proposed Sec. 1002.107(c)(2), a financial
institution must ask an applicant about its principal owners'
ethnicity, race, and sex for each application. A financial institution
must permit an applicant to
[[Page 56537]]
refuse to answer the financial institution's inquiry and report its
refusal to answer the inquiry, or its failure to respond to the
inquiry.
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\851\ Financial institutions would report ethnicity and race
using the aggregate categories and disaggregated subcategories
listed in proposed comments 107(a)(20)-5 and -6, respectively.
Financial institutions would report sex as described in proposed
comment 107(a)(20)-7, which prescribes that financial institutions
shall report sex using the following categories: ``Male,''
``Female,'' ``I prefer to self-describe'' (with accompanying free-
form text), and ``I do not wish to provide this information.'' The
Bureau analyzes free-form text under the proposed balancing test in
part VI.C.6.xix below.
\852\ Unless a financial institution is permitted to report
ethnicity, race, and sex information based on previously provided
data pursuant to proposed Sec. 1002.107(c)(2), a financial
institution would be required to ask an applicant to report its
principal owners' ethnicity, race, and sex for each application. In
certain situations, discussed in proposed comments 107(a)(20)-7 and
-8 and in proposed appendix G, a financial institution may also be
required to report the ethnicity and race of one or more principal
owner(s) based on visual observation and/or surname.
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Disclosing the ethnicity, race, and sex of the applicant's
principal owner(s) in the public application-level 1071 data in
unmodified form would be central to furthering the fair lending purpose
of section 1071 and would promote the business and community
development purpose of the statute by identifying opportunities for
further development of women-owned and minority-owned small businesses.
In fair lending analyses, data on the ethnicity, race, and sex of an
applicant's principal owner(s) would be used to identify potential risk
of discrimination under fair lending laws. These data would be
essential for this purpose when analyzed in conjunction with data
fields such as action taken, credit amount approved or originated, and
pricing. For example, when combined with the type of action taken,
ethnicity, race, and sex data of an applicant's principal owner(s)
would help data users identify whether women-owned and minority-owned
applicants are denied at higher rates on a prohibited basis. In
addition, as discussed above with women-owned and minority-owned
business status, when combined with pricing information, data on
ethnicity, race, and sex of an applicant's principal owner(s) would
help data users identify if women-owned and minority-owned businesses
are receiving credit at higher prices. In addition, because the Bureau
is proposing to require that financial institutions report ethnicity
and race using the aggregate categories and disaggregated subcategories
listed in proposed comments 107(a)(20)-5 and -6, respectively, such
data would enable data users to identify potential discrimination or
challenges accessing credit by particular ethnic and racial minorities.
Data on ethnicity, race, and sex of the applicant's principal
owner(s) would also be essential for the business and community
development purpose of section 1071. These data would allow
communities, governmental entities, and creditors to determine areas
where women-owned and minority-owned small businesses are underserved
relative to other small businesses. In addition, such demographic
information about small business applicants would allow communities,
governmental entities, and creditors to focus resources to identify
business and community development opportunities for women-owned and
minority-owned small businesses. For example, in conjunction with NAICS
codes, these data would help data users identify challenges facing
women-owned businesses and businesses owned by individuals from
different ethnic and racial groups in particular industries. This
information could also help communities and lenders focus investment
and resources in traditionally underserved demographic groups.
In general, disclosing the ethnicity, race, and sex of the
applicant's principal owner(s) in the 1071 data in unmodified form
would likely disclose minimal, if any information about an applicant or
related natural person that may be harmful or sensitive if such person
were re-identified, or that may be harmful or sensitive to an
identified financial institution. As noted similarly above for the data
fields on women-owned and minority-owned business status, while some
applicants or related natural persons may regard this information as
harmful or sensitive, the Bureau believes this information generally
would present low risk of harm or sensitivity. The Bureau also notes
that this information may be already available to the general public,
and that this information would have relatively limited utility for
adversaries if an applicant or related natural person were re-
identified.
The Bureau has identified publicly available datasets that include
data fields an adversary could directly match to the ethnicity, race,
and sex of the applicant's principal owner(s) data fields in unmodified
form in the public application-level 1071 data with respect to an
applicant or related natural person. Information about the ethnicity,
race, and sex of the applicant's principal owner(s) is available to the
general public in some datasets.\853\ For example, certain State
business registries, including those required to access women-owned and
minority-owned business programs, provide this information. Other
public record databases such as for SBA 8(a) and PPP loan programs also
include ethnicity, race, and sex data alongside the borrower's name.
Private databases often include information about the owners of
businesses, which can be used to estimate ethnicity, race, and sex
based on owner name. Therefore, in many cases, an adversary could use
the ethnicity, race, and sex of the applicant's principal owner(s),
combined with other fields, to directly or indirectly match a section
1071 record to an identified publicly available record.
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\853\ Regulation B generally prohibits a creditor from inquiring
about such protected demographic information in connection with a
credit transaction unless otherwise required by Regulation B, ECOA,
or other State or Federal law, regulation, order, or agreement. See
Sec. 1002.5(a)(2). Relatedly, ECOA states that it is not
discrimination for a financial institution to inquire about women-
owned or minority-owned business status, or the race, sex, and
ethnicity of principal owners pursuant to section 1071. 15 U.S.C.
1691(b).
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As discussed in the section-by-section analysis of proposed Sec.
1002.107(a)(20) in part V above, the Bureau is proposing that financial
institutions would report sex as described in proposed comment
107(a)(20)-7, which prescribes that financial institutions shall report
sex using the following categories: ``Male,'' ``Female,'' ``I prefer to
self-describe'' (with accompanying free-form text), and ``I do not wish
to provide this information.'' As such, if finalized, the Bureau would
permit an applicant to self-describe their sex by selecting ``I prefer
to self-describe'' with using free-from text. As discussed in part
VI.C.6.xix below, the Bureau is proposing to delete free-form text from
the public application-level 1071 data. However, the Bureau seeks
comment on whether there are additional specific modifications it
should consider with regard to applicants who choose to self-describe
their sex.
As discussed in the section-by-section analysis of proposed Sec.
1002.107(a)(20) in part V above, the Bureau is seeking comment in this
proposal about the reporting of sexual orientation and gender identity
of principal owners--specifically, whether separate questions regarding
sex, sexual orientation, and gender identity should be asked and, if
so, what categories should be offered on the sample data collection
form for use by applicants in responding to each question. The Bureau
seeks comment on whether disclosing that one or more principal owners
of an applicant has answered any of these questions, and how, could
cause heightened sensitivity or risk of harm and whether there are
specific modifications the Bureau should consider if such data points
are included in the final rule.
The Bureau seeks comment on this analysis.
xviii. Financial Institution Identifying Information
Proposed Sec. 1002.109(b) would require a financial institution to
provide the Bureau with certain information with its submission of its
small business lending application register: (1) Its name; (2) its
headquarters address; (3) the name and business contact information of
a person who may be contacted with questions about the financial
institution's submission; (4) its Federal prudential regulator, if
applicable; (5) its Federal Taxpayer Identification Number; (6) its
LEI; (7) its RSSD ID, if applicable; (8)
[[Page 56538]]
parent entity information,\854\ if applicable; (9) the type of
financial institution that it is, indicated by selecting the
appropriate type or types of institution from the list provided or
entering free-form text; \855\ and (10) whether the financial
institution is voluntarily reporting covered applications for covered
credit transactions.
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\854\ Parent entity information would include the name of the
immediate parent entity, the LEI of the immediate parent entity, if
available, the RSSD ID number of the immediate parent entity, if
available, the name of the top-holding parent entity, the LEI of the
top-holding parent entity, if available, and the RSSD ID number of
the top-holding parent entity, if available.
\855\ The list would include the following types: Bank or
savings association, minority depository institution, credit union,
nondepository institution, community development financial
institution (CDFI), other nonprofit financial institution, Farm
Credit System institution, government lender, commercial finance
company, equipment finance company, industrial loan company,
fintech, and ``other'' (reported as free-form text). The Bureau
analyzes free-form text under the proposed balancing test in part
VI.C.6.xix below.
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Regulation C requires financial institutions to report similar
information when submitting their loan-level HMDA data. Regulation C
also requires financial institutions to report the calendar year of
submission and the total number of entries in their loan-level HMDA
data. Regulation C does not require financial institutions to submit
their headquarters address, RSSD ID, or financial institution type or
indicate whether they are reporting data voluntarily. With the
exception of contact information for a person who can be reached about
the financial institution's submission, the information financial
institutions are required to submit with their HMDA submissions under
Sec. 1003.5(a)(3) is publicly available through the FFIEC website.
Financial institution identifying information other than individual
contact information. For the reasons described below, the Bureau
preliminarily determines that the privacy risks of disclosing the
financial institution identifying information data fields in unmodified
form, other than data fields containing the information for the
financial institution's point of contact for its 1071 data submission
(i.e., the name and business contact information of a person who may be
contacted with questions about the submission), would be justified by
the benefits of disclosure for section 1071's purposes. As such, the
Bureau proposes to disclose such information to the public as reported,
without modification. The Bureau seeks comment on this determination.
Disclosing the financial institution identifying information, other
than individual contact information, in the public application-level
1071 data in unmodified form would facilitate the enforcement of fair
lending laws. The purposes of section 1071 in large part concern
evaluating the practices of individual financial institutions and
disclosing their identifying information allows the public to evaluate
their lending practices. Identifying their Federal regulator would also
facilitate fair lending enforcement by enabling the public to
communicate with the regulator in connection with administrative
enforcement of fair lending laws. Disclosing RSSD ID and parent
institution information would enable the public to map corporate
relationships for financial institutions, which is also important for
fair lending enforcement.
Disclosing financial institution identifying information, including
financial institution type, would enable the public to evaluate which
financial institutions are reaching underserved areas of the market and
the extent to which different types of financing is available from
different types of institutions. And as described more fully in the
section-by-section analysis of proposed Sec. 1002.109(b) above,
financial institution identifying information would promote the fair
lending and community and business development purposes of the statute
by allowing users to identify financial institutions precisely and draw
appropriate conclusions from the data.
Several SERs and industry commenters expressed concern that
disclosing financial institution identifying information would lead to
frivolous litigation and unfounded reputational risks, and would
increase the cost of credit or limit credit availability for small
businesses.\856\
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\856\ One industry commenter stated that financial institutions
might respond to perceived reputational risks by eliminating certain
product offerings or modifying underwriting practices in a way that
reduces the overall diversity of small business products.
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Disclosing financial institution identifying information in the
1071 data in unmodified form would likely disclose minimal, if any,
information about an applicant or related natural person that may be
harmful or sensitive if such person were re-identified. While some
businesses might view their identification as an applicant as harmful
or sensitive, the Bureau does not believe revealing the name of the
financial institution would significantly increase such risks. In
addition, this information is already largely available from other
identified public records, such as UCC filings. For the same reason,
the Bureau does not believe revealing the name of the financial
institution would significantly increase risk of fraud or identity
theft to businesses or related natural persons caused by adversaries
impersonating the financial institution.
Disclosing financial institution identifying information in the
1071 data in unmodified form would not, by itself, reveal information
that is harmful or sensitive, given financial institutions' commercial
interests. Additionally, other public records, such as public HMDA
data, tax records, and commercial databases disclose Federal Taxpayer
Identification number, RSSD ID, and LEI.\857\ Disclosing financial
institution identifying information in unmodified form may reveal
information that financial institutions regard as harmful or sensitive,
but, as discussed under Risk of Harm or Sensitivity in part VI.C.4.ii
above, the Bureau does not believe that disclosure of the information
in the public application-level 1071 data would permit the reverse-
engineering of a financial institution's proprietary lending models.
The Bureau acknowledges, however, that this information could, in some
circumstances, lead to reputational risks and increased costs for
financial institutions, which might be passed on to their customers in
the form of increased costs or decreased access to credit.
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\857\ The FFIEC publishes transmittal sheet information,
including LEI and Federal Taxpayer Identification number, on its
website. Fed. Fin. Insts. Examination Council, Public Transmittal
Sheet--Schema, https://ffiec.cfpb.gov/documentation/2020/public-ts-schema/ (last visited July 23, 2021).
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Several SERs were concerned that publishing financial institution
identifying information could increase re-identification risk of
applicants and related natural persons.\858\ One industry stakeholder
provided feedback that customers of captive wholesale finance companies
with applicant bases limited to franchises or licensees of a particular
distributor or manufacturer would face unique re-identification risks.
The commenter explained that, in many instances, these applicants may
be the financial institution's only customer in a particular State, or
one of only a very small number of customers in the State, heightening
the privacy concerns for publication of data tied to these financial
institutions.
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\858\ See SBREFA Panel Report at 34.
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The Bureau has identified publicly available datasets that include
data fields an adversary could directly match
[[Page 56539]]
to financial institution identifying information data fields in
unmodified form in the public application-level 1071 data with respect
to an applicant or related natural person. Other identified public
records, such as UCC filings, disclose financial institution name.
Therefore, in many cases, an adversary could use identifying financial
institution data fields, combined with other 1071 data fields, to match
a section 1071 record to an identified public record. Because the
Bureau does not intend to perform a re-identification analysis of the
1071 data fields until 1071 data are reported, it has not determined
the extent to which financial institution identifying information or
other data fields could contribute to record uniqueness.\859\
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\859\ As discussed under Balancing Test Design in part VI.C.1
above, while the proposed balancing test would consider the risk of
harm or sensitivity to financial institutions, it would not consider
re-identification risk with respect to financial institutions
because the statute contemplates the disclosure of their identity.
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With respect to concerns raised regarding captive wholesale finance
companies, the Bureau acknowledges that financial institution
identifying information in unmodified form in the public application-
level 1071 data could, in combination with other data fields like
census tract, NAICS codes, and credit type or purpose, facilitate re-
identification of applicants that have a common name, without requiring
that adversaries match 1071 records to other identified datasets. As
discussed in the section-by-section analysis of proposed Sec.
1002.104(b) above, the Bureau proposes to exclude trade credit and
other transactions from the scope of covered credit transactions. This
might eliminate some transactions involving such lenders. The Bureau
seeks comment on the circumstances under which a transaction involving
a captive wholesale finance company would be covered by the proposal
notwithstanding the exemption.
To the extent there are such transactions, the Bureau seeks comment
on the instances in which captive wholesale finance companies lend
exclusively to businesses that are publicly branded in a way that can
be easily matched to the identity of the financial institution. As
discussed in the section-by-section analysis of proposed Sec.
1002.109(b) above, the Bureau also seeks comment on whether a final
rule could include certain categories of financial institution types
that would allow the Bureau to easily identify such financial
institutions in the unmodified 1071 dataset without an application-
level analysis. Finally, the Bureau seeks comment on whether there are
particular modification techniques that would reduce re-identification
risks and risks of harm or sensitivity for applicants and related
natural persons who might be re-identified in the public application-
level 1071 data.
The Bureau has considered whether a modification of the 1071 data
available to the public short of deleting financial institution
identifying information (other than individual contact information)
would appropriately balance identified privacy risks and disclosure
benefits of this data field. Several SERs stated that a solution to
their concerns about financial institution privacy would be for the
Bureau not to release the names of financial institutions when
publishing 1071 data.\860\
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\860\ See SBREFA Panel Report at 36.
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The Bureau proposes to disclose financial institution identifying
information, other than individual contact information, to the public
as reported, without modification. The Bureau preliminarily determines
that risks to privacy interests from the disclosure of this data field
in unmodified form would be justified by the benefits of disclosure for
section 1071's purposes. As described above, while the Bureau has not
conducted a uniqueness analysis, it is very likely that disclosure of
financial institution identifying information would substantially
facilitate the re-identification of applicants or related natural
persons. If such persons were re-identified, disclosure of other 1071
data fields would likely create a risk of harm or sensitivity. In
addition, the disclosure of other proposed 1071 data fields in
combination with identifying financial institution name likely would
reveal information that may be harmful or sensitive to financial
institutions. The Bureau nonetheless determines that these risks to
privacy would be justified by the benefits of disclosure in light of
section 1071's purposes.
The Bureau also seeks comment on this analysis and its proposal to
disclose these fields without modification in the public application-
level 1071 data.
Individual contact information. Proposed Sec. 1002.109(b)(1)(iii)
would require financial institutions to report the name and business
contact information of a person who may be contacted with questions
about the financial institution's submission. In contrast to the other
financial institution identifying information described above, the
Bureau preliminarily determines that the privacy risks of disclosure in
unmodified form of this data field would not be justified by the
benefits of disclosure for section 1071's purposes. As such, the Bureau
proposes to delete such information from the publicly available data.
The Bureau seeks comment on this determination.
Disclosing individual contact information in the public
application-level 1071 data in unmodified form would enable the public
to contact natural persons at financial institutions about the
technical aspects of a financial institution's submission of
application-level data. However, the Bureau does not believe this would
promote the fair lending or community or business development purposes
of section 1071 because the Bureau, not the general public, will
coordinate with this person to ensure proper submission of data.
Moreover, the person designated by the financial institution to respond
to questions about the submission might not necessarily be designated
by the financial institution for engaging with the general public.
Disclosing individual contact information in the 1071 data in
unmodified form would likely not disclose any information about an
applicant or related natural person if such person were re-identified.
However, disclosing the name and contact information of natural persons
designated by the financial institution would disclose information that
may be harmful or sensitive to identified financial institutions and
its employees. Financial institutions have a legitimate interest in
protecting the identities of their employees from the public,
consistent with their job functions, and persons identified for
purposes of questions about the financial institution's submission to
the Bureau might not necessarily be responsible for engaging with the
general public.
The Bureau has considered whether a modification of the 1071 data
available to the public other than exclusion of individual contact
information would appropriately balance identified privacy risks and
disclosure benefits of this data field. Because disclosure of this data
field in unmodified form would not promote the purposes of section 1071
and would likely reveal information that would be harmful or sensitive
to a financial institution and its employees, the Bureau does not
believe there is a modification that would appropriately balance the
privacy risks and disclosure benefits for this data field. Accordingly,
the Bureau preliminarily determines that deleting individual contact
information would appropriately balance the privacy risks and
disclosure benefits of this data field.
[[Page 56540]]
The Bureau seeks comment on this analysis as well as its proposed
deletion.
xix. Free-Form Text
Proposed Sec. 1002.107(a) would require financial institutions to
use free-form text to report certain data fields where a financial
institution reports information that is not included in a list of data
fields provided. Under proposed Sec. 1002.107(a)(5), (6), (11), (12),
and (20), free-form text could be used to report credit type (product
and guarantee information); credit purpose; denial reasons; pricing
(the interest rate index used); and ethnicity, race, and sex.\861\
Financial institutions also would have flexibility in describing
identifying information that would be provided under proposed Sec.
1002.109(b). Free-form text used to report ethnicity, race, and sex
would be completed based on information provided by applicants; all
other free-form text would be completed based on information provided
by the financial institution.
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\861\ For example, the proposal would require financial
institutions to report credit purpose by choosing one or more
purposes from a specified list. Financial institutions selecting
``other'' would be required to report that other purpose as free-
form text.
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Free-form text would allow the reporting of any information,
including information that may be harmful or sensitive to applicants,
related natural persons, and possibly the interests of financial
institutions. Such information might also create a significant risk of
re-identification for applicants or related natural persons. Given the
expected amount of 1071 data reported each year, it will not be
feasible for the Bureau to review the free-form text submitted before
publishing the application-level 1071 data. The Bureau believes at this
time that, under the balancing test, deleting free-form text from the
public application-level 1071 data, other than with respect to the
financial institution identifying information described in part
VI.C.6.xviii above, would appropriately balance the benefits of
disclosure with the risks to the privacy interests of applicants,
related natural persons, and financial institutions.
The Bureau seeks comment on this analysis as well as its proposed
deletion.
VII. Dodd-Frank Act Section 1022(b)(2) Analysis
The Bureau is considering the potential benefits, costs, and
impacts of the proposed rule. The Bureau requests comment on the
preliminary discussion presented below, as well as submissions of
additional data that could inform the Bureau's consideration of the
benefits, costs, and impacts of the proposed rule. In developing the
proposed rule, the Bureau has consulted with or offered to consult with
the prudential regulators (the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation, the National
Credit Union Administration, and the Office of the Comptroller of the
Currency), the Department of Agriculture, the Department of Housing and
Urban Development, the Department of Justice, the Department of the
Treasury, the Economic Development Administration, the Farm Credit
Administration, the Federal Trade Commission, the Financial Crimes
Enforcement Network, the Minority Business Development Agency, and the
Small Business Administration regarding, among other things,
consistency with any prudential, market, or systemic objectives
administered by such agencies.
In the Dodd-Frank Act, which was enacted ``[t]o promote the
financial stability of the United States by improving accountability
and transparency in the financial system,'' Congress directed the
Bureau to adopt regulations governing the collection of small business
lending data. Under section 1071, covered financial institutions must
compile, maintain, and submit certain specified data points regarding
applications for credit for women-owned, minority-owned, and small
businesses, along with ``any additional data that the Bureau determines
would aid in fulfilling the purposes of [section 1071].'' Under the
proposed rule, covered financial institutions would be required to
collect and report the following data points: (1) A unique identifier,
(2) application date, (3) application method, (4) application
recipient, (5) credit type, (6) credit purpose, (7) amount applied for,
(8) amount approved or originated, (9) action taken, (10) action taken
date, (11) denial reasons, (12) pricing information, (13) census tract,
(14) gross annual revenue, (15) NAICS code, (16) number of workers,
(17) time in business, (18) minority-owned business status, (19) women-
owned business status, (20) ethnicity, race, and sex of principal
owners, and (21) the number of principal owners.
Under the proposed rule, financial institutions would be required
to report data on small business credit applications under section 1071
if they originated at least 25 covered credit transactions in each of
the two preceding calendar years. The Bureau is proposing to define an
application as an oral or written request for a covered credit
transaction that is made in accordance with the procedures used by a
financial institution for the type of credit requested, with some
exceptions. The Bureau is proposing to define the term covered credit
transaction as an extension of business credit that is not an excluded
transaction. Loans, lines of credit, credit cards, and merchant cash
advances (including such credit transactions for agricultural purposes
and those that are also covered by HMDA \862\ (that is, HMDA-reportable
transactions)) would all fall within the transactional scope of this
proposed rule. The Bureau is broadly proposing to not cover the
following types of transactions: Factoring, leases, consumer-designated
credit used for business purposes, credit secured by certain investment
properties, trade credit, public utilities credit, securities credit,
and incidental credit. Additionally, the Bureau is proposing that a
business is a small business if and only if its gross annual revenue
for its preceding fiscal year is $5 million or less.
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\862\ 12 U.S.C. 2801 et seq.
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A. Statement of Need
Congress directed the Bureau to adopt regulations governing the
collection of small business lending data. Specifically, section 1071
of the Dodd-Frank Act amended ECOA to require financial institutions to
compile, maintain, and submit to the Bureau certain data on
applications for credit for women-owned, minority-owned, and small
businesses. Congress enacted section 1071 for the purpose of
facilitating enforcement of fair lending laws and enabling communities,
governmental entities, and creditors to identify business and community
development needs and opportunities of women-owned, minority-owned, and
small businesses. The Bureau is issuing this proposed rule to implement
the section 1071 mandate.
Small businesses play a key role in fostering community development
and fueling economic growth both nationally and in their local
communities.\863\ However, comprehensive data on loans to small
businesses currently are limited. The largest sources of information on
lending by depository institutions are the FFIEC and NCUA Call Reports
and reporting under the CRA. Under the FFIEC Call Report and CRA
reporting regimes, small loans to businesses of any size are used in
whole or in part as a proxy for loans to small businesses. The FFIEC
Call Report captures banks'
[[Page 56541]]
and savings associations' total outstanding number and amount of small
loans to businesses (that is, loans originated under $1 million to
businesses of any size; small loans to farms are those originated under
$500,000) by institution.\864\ The CRA requires banks and savings
associations with assets over a specified threshold (currently $1.305
billion) to report data on loans to businesses with origination amounts
of $1 million or less; reporters are asked to indicate whether the
borrower's gross annual revenue is $1 million or less, if they have
that information.\865\ Under the CRA, banks and savings associations
report aggregate numbers and values of originations at an institution
level and at various geographic levels. The NCUA Call Report captures
credit unions' total originations, but not applications, on all loans
over $50,000 to members for commercial purposes, regardless of any
indicator about the business's size.\866\ Some federally funded loan
programs, such as the SBA's 7(a) or 504 programs and the CDFI Fund
require reporting of loan-level data, but only for loans that received
support under those programs. Nondepository institutions do not report
small business lending applications under any of these reporting
regimes. There are no similar sources of information about lending to
small businesses by nondepository institutions.
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\863\ See generally White Paper.
\864\ See FFIEC Call Report at Schedule RC-C Part II.
\865\ See 2015 FFIEC CRA Guide at 11, 13. Small business loans
are defined for CRA purposes as loans whose original amounts are $1
million or less and that were reported on the institution's Call
Report or Thrift Financial Report (TFR) as either ``Loans secured by
nonfarm or nonresidential real estate'' or ``Commercial and
industrial loans.'' Small farm loans are defined for CRA purposes as
loans whose origination amounts are $500,000 or less and were
reported as either ``Loans to finance agricultural production and
other loans to farmers'' or ``Loans secured by farmland.''
\866\ See Nat'l Credit Union Admin., Call Report Form 5300 (June
2020), https://www.ncua.gov/files/publications/regulations/form-5300-june-2020.pdf.
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There are also a variety of non-governmental data sources, issued
by both private and nonprofit entities, that cover small businesses
and/or the small business financing market. These include datasets and
surveys published by commercial data and analytics firms, credit
reporting agencies, trade associations, community groups, and academic
institutions. See part II.B for additional information on these
sources. While these non-public sources of data on small businesses may
provide a useful supplement to existing Federal sources of small
business lending data, these private and nonprofit sources often do not
have lending information, may rely on unverified research based on
public internet sources, and/or narrowly limit use cases for parties
accessing data. Further, commercial datasets are generally not free to
public users and can be costly, raising equity issues for stakeholders
who cannot afford access.
Under the proposed rule, covered financial institutions would be
required to compile, maintain, and submit data regarding the race, sex,
and ethnicity of the principal owners of the business and whether a
small business is women-owned or minority-owned. No other source of
data comprehensively collects this type of demographic information on
small business loan applications.
Section 1071 requires financial institutions to report detailed
application-level data to the Bureau, and to make it available to the
public upon request. Such information will constitute a public good
that illuminates the lending activities of financial institutions and
the small business lending market in general. In particular, the public
provision of application-level data will: (1) Provide small businesses
and financial institutions with additional information to improve
credit market outcomes and (2) allow members of the public, public
officials, and other stakeholders to better assess compliance with
antidiscrimination statutes.
First, the data made public pursuant to the proposed rule will
provide information that could help to improve credit outcomes in the
small business lending market. As discussed above, market-wide data on
small business credit transactions is currently limited. Neither the
public nor private sectors provide extensive data on credit products or
terms. Small business owners have access to very little information on
typical rates or products offered by different lenders. As a result,
small business owners are limited in their ability to shop for the
credit product that best suits their needs at the best price. The
information made public pursuant to the proposed rule will provide
extensive data on product types and credit terms that community
development groups or commercial services could use to provide better
information to small businesses. For example, a commercial provider
could provide small businesses with information on what products
lenders typically offer and at what rates. These data will allow small
business owners to more easily compare credit terms and evaluate credit
alternatives. By engaging in more informed shopping, small business
owners may achieve better credit outcomes.
Furthermore, financial institutions can analyze data to understand
small business lending market conditions and determine how best to
provide credit to borrowers. However, financial institutions are not
able to conduct very granular or comprehensive analyses because the
data on small business lending are limited. The data made public
pursuant to the proposed rule will allow financial institutions to
better understand the demand for small business credit products and the
conditions under which they are being supplied by other covered
financial institutions. The data will help enable institutions to
identify potentially profitable opportunities to extend credit. Small
business owners, as a result, could benefit from increased credit
availability.
Second, while data made public pursuant to the proposed rule may
not constitute conclusive evidence of credit discrimination on its own,
the data will enable members of the public, regulators, and other
stakeholders to better assess compliance with antidiscrimination
statutes. Application-level data that include information on business
owners' race, sex, and ethnicity, as well as whether the business is
women- or minority-owned, are necessary for the public to evaluate a
lender's practices for potential risks of violating antidiscrimination
statutes. However, as described above, there are currently no
application-level data comprehensive enough or that contain the
required demographic information to enable the public to conduct these
kinds of analyses. The data made public pursuant to the proposed rule
will be comprehensive and contain the necessary data fields for such
analysis. Users will be able to examine whether, for example, a lender
denies applications from women- or minority-owned businesses at higher
rates than those that are not or whether these businesses are charged
higher prices. This kind of transparency can place appropriate pressure
on lenders to ensure that there is equity in their credit provision.
Additionally, data collected under the proposed rule will contain the
data fields that allow users to conduct more accurate fair lending
analyses by comparing applications for credit products with similar
characteristics.
B. Baseline for the Consideration of Costs and Benefits
The Bureau has discretion in any rulemaking to choose an
appropriate scope of consideration with respect to potential benefits
and costs and an appropriate baseline. The Bureau
[[Page 56542]]
interpreted section 1071 to mean that obligations for financial
institutions to collect, maintain, and submit data ``do not arise until
the Bureau issues implementing regulations and those regulations take
effect.'' \867\ Accordingly, this analysis considers the benefits,
costs, and impacts of the major provisions of the proposed rule against
a pre-section 1071 rule baseline, i.e., the current state of the world
before the Bureau's section 1071 rule is implemented. Under this
baseline, the Bureau assumes that institutions are complying with
regulations that they are currently subject to, including reporting
data under HMDA and CRA. The Bureau believes that such a baseline will
also provide the public with better information about the benefits and
costs of this rule.
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\867\ See Letter from Leonard Kennedy, General Counsel, CFPB, to
Chief Executive Officers of Financial Institutions under Section
1071 of the Dodd-Frank Act (Apr. 11, 2011), https://files.consumerfinance.gov/f/2011/04/GC-letter-re-1071.pdf.
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C. Basic Approach of the Bureau's Consideration of Benefits and Costs
and Data Limitations
Pursuant to section 1022(b)(2)(A) of the Dodd-Frank Act,\868\ in
prescribing a rule under the Federal consumer financial laws (which
include ECOA and title X of the Dodd-Frank Act), the Bureau is required
to consider the potential benefits and costs to ``consumers'' and
``covered persons,'' including the potential reduction of access by
consumers to consumer financial products or services resulting from
such rule, and the impact of proposed rules on covered persons as
described under section 1026 of the Dodd-Frank Act \869\ (i.e.,
depository institutions and credit unions with $10 billion or less in
total assets), and the impact on consumers in rural areas.
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\868\ 12 U.S.C. 5512(b)(2)(A).
\869\ 12 U.S.C. 5516.
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As mentioned above, section 1022(b)(2)(A) refers to ``consumers''
and ``covered persons''; the Dodd-Frank Act defines the term
``consumer'' as an individual or someone acting on behalf of an
individual, while a ``covered person'' is one who engages in offering
or providing a ``consumer financial product or service,'' which means a
financial product or service that is provided to consumers primarily
for ``personal, family, or household purposes.'' \870\ In the 1071
rulemaking, however, the only parties directly affected by the rule are
small businesses (rather than individual consumers) and the financial
institutions from whom they seek credit (rather than covered persons).
Accordingly, a section 1022(b)(2)(A) analysis that considers only the
costs and benefits to individual consumers and to covered persons would
not meaningfully capture the costs and benefits of the rule.
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\870\ 12 U.S.C. 5481(4) through (6).
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Below, the Bureau conducts the statutorily required analysis with
respect to the rule's effects on consumers and covered persons.
Additionally, the Bureau is electing to conduct this same analysis with
respect to small businesses and the financial institutions required to
compile, maintain, and submit data fields under the proposed rule. This
discussion relies on data that the Bureau has obtained from industry,
other regulatory agencies, and publicly available sources. However, as
discussed further below, the data limit the Bureau's ability to
quantify the potential costs, benefits, and impacts of the proposed
rule.
1. Analysis With Respect to Consumers and Covered Persons
The proposed rule implements a data collection regime in which
certain covered financial institutions must compile, maintain, and
submit data with respect to applicants for credit for small businesses.
The rule does not directly impact consumers or consumers in rural
areas, as those terms are defined by the Dodd-Frank Act. Some covered
persons, including some that are depository institutions or credit
unions with $10 billion or less in total assets, will be directly
affected by the rule not in their capacity as covered persons (i.e., as
offerors or providers of consumer financial products or services) but
in their separate capacity as covered financial institutions that offer
commercial credit. The costs, benefits, and impact of the rule on those
entities are discussed below.
2. Costs to Covered Financial Institutions
Regarding the costs to covered financial institutions, the proposed
rule generally establishes which financial institutions, transactions,
and data points would be covered under section 1071. In order to
precisely quantify the costs to covered financial institutions, the
Bureau would need representative data on the operational costs that
financial institutions would incur to gather and report 1071 data, one-
time costs for financial institutions to update or create reporting
infrastructure in response to the proposed rule, and information on the
level of complexity of financial institutions' business models and
compliance systems. Currently, the Bureau does not believe that data on
section 1071 reporting costs with this level of granularity are
systematically available from any source. The Bureau has made
reasonable efforts to gather data on section 1071 reporting costs.
Through outreach efforts with industry, community groups, and other
regulatory agencies, the Bureau has obtained some information about
potential ongoing operational and one-time compliance costs, and the
discussion below uses this information to quantify certain costs of the
proposed rule. The Bureau believes that the discussion constitutes the
most comprehensive assessment to date of the potential costs of section
1071 reporting by financial institutions. However, the Bureau
recognizes that these estimations may not fully quantify the costs to
covered financial institutions, especially given the wide variation of
section 1071 reporting costs among financial institutions. The Bureau
continues to seek data from available sources in order to better
quantify the costs to covered financial institutions.
The Bureau categorizes costs required to comply with the proposed
rule into ``one-time'' and ``ongoing'' costs. ``One-time'' costs refer
to expenses that the financial institution would incur initially and
only once to implement changes required in order to comply with the
requirements of the new rule. ``Ongoing'' costs are expenses incurred
as a result of the ongoing reporting requirements of the rule, accrued
on an annual basis. In considering the costs and impacts of the
proposed rule, the Bureau has engaged in a series of efforts to
estimate the cost of compliance by covered entities. The Bureau
conducted a One-Time Cost Survey, discussed in more detail in part
VII.E.1 below, to learn about the one-time implementation costs
associated with implementing section 1071 and adapted ongoing cost
calculations from previous rulemaking efforts. The Bureau evaluated the
potential one-time costs of implementing the procedures necessary and
the potential ongoing costs of annually reporting under the proposed
rule in part VII.F.3 below. The discussion below provides details on
the Bureau's approach in performing these institution-level analyses.
The Bureau realizes that costs vary by institution due to many factors,
such as size, operational structure, and product complexity, and that
this variance exists on a continuum that is impossible to fully
represent. In order to conduct a cost consideration that is both
practical and meaningful, the Bureau has chosen an approach that
focuses on three
[[Page 56543]]
representative types of financial institutions. For each type, the
Bureau has produced reasonable estimates of the costs of compliance
given the limitations of the available data. Part VII.F.3 below
provides additional details on this approach. More elaboration is
available in the SBREFA Outline and the SBREFA Panel Report.
3. Costs to Small Businesses
The Bureau has estimated the costs to small businesses in addition
to those for covered financial institutions. The Bureau expects the
direct costs of the proposed rule to small businesses will be
negligible, especially compared to the overall cost of credit.
Therefore, the Bureau focuses its analysis on whether and how the
Bureau expects financial institutions to pass on the costs of
compliance with the proposed rule to small businesses and any possible
effects on the availability of small business credit. According to
economic theory, in a competitive framework where financial
institutions are profit maximizers, the affected financial institutions
would pass on to small business applicants the marginal (i.e.,
variable) cost per application or origination, and either absorb the
one-time and increased fixed costs of complying with the rule or exit
the market if the one-time and fixed costs are sufficiently high. As
discussed below, the Bureau estimates that these costs would be
relatively low. Further, the Bureau received feedback through the One-
Time Cost Survey process on how creditors might react to increased
compliance costs due to the proposed rule. The results generally
suggest that covered financial institutions will generally pass the
increased cost of compliance on to small businesses and would not exit
the market. The Bureau received similar feedback during the SBREFA
process.
4. Benefits to Small Businesses and Covered Financial Institutions
Quantifying benefits to small businesses presents substantial
challenges. As discussed above, Congress enacted section 1071 for the
purpose of facilitating enforcement of fair lending laws and enabling
communities, governmental entities, and creditors to identify business
and community development needs and opportunities of women-owned,
minority-owned, and small businesses. The Bureau is unable to readily
quantify any of these benefits with precision, both because the Bureau
does not have the data to quantify all benefits and because the Bureau
is not able to assess completely how effective the implementation of
section 1071 will be in achieving those benefits. The Bureau believes
that its proposals appropriately implement the statutory mandate of
section 1071 to effectuate the section's stated purposes. As discussed
further below, as a data reporting rule, most provisions of the
proposal would benefit small businesses in indirect ways. Nevertheless,
the Bureau believes that the impact of enhanced transparency would
substantially benefit small businesses. For example, the proposed rule
would facilitate the detection (and thus remediation) of
discrimination; promote public and private investment in certain under-
served markets; and promote competitive markets. Quantifying and
monetizing these benefits would require identifying all possible uses
of section 1071 data, establishing causal links to the resulting public
benefits, and then quantifying the magnitude of these benefits. The
Bureau seeks comment on whether there are additional data sources
available regarding the benefits to small businesses of the proposed
rule. The Bureau is particularly interested in the quantifiable impact
of increased transparency on financial institution behavior, and the
need for public and private investment. The Bureau is unaware of data
that would enable reliable quantitative estimates of all of these
effects.
Similar issues arise in attempting to quantify the benefits to
covered financial institutions. Certain benefits to covered financial
institutions are difficult to quantify. For example, the Bureau
believes that the section 1071 data will reduce the compliance burden
of fair lending reviews for lower risk financial institutions by
reducing the ``false positive'' rates during fair lending
prioritization by regulators. The Bureau also believes that data made
public pursuant to the proposed rule will allow financial institutions
to better understand the demand for small business credit products and
the conditions under which they are being supplied by other covered
financial institutions. The Bureau believes that such benefits to
financial institutions could be substantial. Nevertheless, quantifying
them would require data that are currently unavailable.
In light of these data limitations, the discussion below generally
provides a qualitative consideration of the benefits and impacts of the
proposed rule. General economic principles, together with the limited
data available, provide insight into these benefits and impacts. Where
possible, the Bureau makes quantitative estimates based on these
principles and the data that are available. The Bureau seeks comment on
the appropriateness of the approach described above, including
additional data relevant to the benefits to small businesses and
covered financial institutions.
D. Coverage of the Proposed Rule
The proposed rule provides that financial institutions (both
depository and nondepository) that meet all the other criteria for a
``financial institution'' in proposed Sec. 1002.105(a) would only be
required to collect and report section 1071 data if they originated at
least 25 covered credit transactions in each of the two preceding
calendar years. See proposed Sec. 1002.105(b).
As discussed above, market-wide data on small business lending are
currently limited. The Bureau is unaware of any comprehensive data
available on originations for all financial institutions, which would
be needed in order to precisely identify all institutions covered by
the rule. To estimate coverage of the proposed rule, the Bureau uses
publicly available data for two groups of financial institutions:
Depository and nondepository institutions.
To estimate coverage of depository institutions, the Bureau relies
on NCUA Call Reports to estimate coverage for credit unions, including
for those that are not federally insured, and FFIEC Call Reports and
the CRA data to estimate coverage for banks and savings associations.
For the purposes of the analysis in this part VII, the Bureau estimates
the number of depository institutions that would have been required to
report in 2019, based on the estimated number of originations of
covered products for each institution in 2017 and 2018.\871\ The Bureau
accounts for mergers and acquisitions between 2017 and 2019 by assuming
that any depository institutions that merged in those years report as
one institution.
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\871\ The Bureau uses 2019 instead of 2020 to estimate coverage
during a year unaffected by pandemic conditions.
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As discussed above, the NCUA Call Report captures data on all loans
over $50,000 to members for commercial purposes, regardless of any
indicator about the business's size and including number and dollar
value of originations. For the purposes of estimating the impacts of
the proposed rule, the Bureau uses the annual number of originated
commercial loans to members reported by credit unions as a proxy for
the annual number of originated covered credit transactions under the
[[Page 56544]]
proposed rule.\872\ These are the best data available for estimating
the number of credit unions that may be covered by the proposed rule.
However, the Bureau acknowledges that the true number of covered credit
unions may be different than what is presented here. For example, this
proxy may overestimate the number of credit unions that would be
covered if some commercial loans to members are not covered because the
member is taking out a loan for a large business. Alternatively, this
proxy may underestimate the number of credit unions that would be
covered by the proposed rule if credit unions originate a substantial
number of covered credit transactions with origination values under
$50,000.
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\872\ For this analysis, the Bureau includes all types of
commercial loans to members except construction and development
loans. This includes loans secured by multifamily residential
property; loans secured by farmland; loans secured by owner-
occupied, non-farm, non-residential property; loans secured by non-
owner occupied, non-farm, non-residential property; loans to finance
agricultural production and other loans to farmers; commercial and
industrial loans; unsecured commercial loans; and unsecured
revolving lines of credit for commercial purposes.
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As discussed above, the FFIEC Call Report captures banks' and
savings associations' outstanding number and amount of small loans to
businesses (i.e., loans originated under $1 million to businesses of
any size; small loans to farms are those originated under $500,000).
The CRA requires banks and savings associations with assets over a
specified threshold ($1.322 billion as of 2021) \873\ to report loans
to businesses in original amounts of $1 million or less. For the
purposes of estimating the impacts of the proposed rule, the Bureau
follows the convention of using small loans to businesses as a proxy
for loans to small businesses and small loans to farms as a proxy for
loans to small farms.\874\ These are the best data available for
estimating the number of banks and savings associations that may be
covered by the proposed rule. However, the Bureau acknowledges that the
true number of covered banks and savings associations may be different
than what is presented here. For example, this proxy would overestimate
the number of banks and savings associations covered by the rule if a
significant number of small loans to businesses and farms are to
businesses or farms that are considered large under the definition of a
small business in the proposed rule. Alternatively, this proxy would
underestimate the number of banks and savings associations covered by
the rule if a significant number of businesses and farms that are small
under the proposed rule take out loans that are larger than $1 million
or $500,000, for businesses and farms, respectively.
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\873\ See Fed. Fin. Insts. Examination Council, Community
Reinvestment Act, 2021 Reporting Criteria (Dec. 16, 2020), https://www.ffiec.gov/cra/reporter21.htm.
\874\ The FFIEC Call Reports do not collect information on small
loans to businesses made for the purposes of funding multifamily
property. In order to account for these loans in the coverage
estimates, for each bank or savings association, the Bureau adds the
number of multifamily loans originated for business purposes with
origination amounts under $1 million reported in the HMDA data to
the estimated number of small business lending originations. While
multifamily loans for business purposes have been reportable in HMDA
data for some time, these loans have only been identifiable with
data fields available since 2018. For simplicity, the Bureau assumes
that a bank or savings association made the same number of
multifamily loans for business purposes with origination amounts
under $1 million in 2017 as it did in 2018.
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Although banks and savings associations reporting under the CRA are
required to report the number of originations of small loans to
businesses and farms, the Bureau is not aware of any comprehensive
dataset that contains originations made by banks and savings
associations below the CRA reporting threshold. To fill this gap, the
Bureau simulated plausible values for the annual number and dollar
value of originations for each bank and savings association that falls
below the CRA reporting threshold for 2017, 2018, and 2019.\875\ The
Bureau generated simulated originations in order to account for the
uncertainty around the exact number and value of originations for these
banks and saving associations. To simulate these values, the Bureau
assumes that these banks have the same relationship between outstanding
and originated small loans to businesses and farms as banks and savings
associations above the CRA reporting threshold. First, the Bureau
estimated the relationship between originated and outstanding numbers
and balances of small loans to businesses and farms for CRA reporters.
Then the Bureau used this estimate, together with the outstanding
numbers and balances of small loans to businesses and farms of non-CRA
reporters, to simulate these plausible values of originations. The
Bureau has documented this methodology in more detail in its
Supplemental estimation methodology for institutional coverage and
market-level cost estimates in the small business lending data
collection notice of proposed rulemaking released concurrently with
this proposal.\876\
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\875\ Based on FFIEC Call Report data as of December 2019, of
the 5,177 banks and savings associations that existed in 2019, only
about 11 percent were required to report under CRA. That is, only
about 11 percent of banks and savings associations had assets below
$1.284 billion, the CRA reporting threshold in 2019. See Fed. Fin.
Insts. Examination Council, 2019 Reporting Criteria, https://www.ffiec.gov/cra/reporter19.htm (last visited Aug. 5, 2021).
\876\ This document is available at https://www.consumerfinance.gov/data-research/research-reports/supplemental-estimation-methodologies-small-business-lending-data-collection-nprm/.
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Below, the Bureau reports a range of values for the estimated
number of depository institutions covered under the proposed rule. The
range represents a 95 percent confidence interval over the number of
credit unions, banks and savings associations that would be covered
under the proposed rule. The Bureau presents this range to reflect the
uncertainty associated with the estimate and notes that the uncertainty
is driven by the lack of data on originations by banks and savings
associations below the CRA reporting threshold.
The Bureau estimates that about 992 nondepository institutions will
be covered by the proposed rule: About 340 nondepository CDFIs; about
100 MCA providers; about 30 fintech companies; about 300 commercial
finance companies; about 100 governmental lending entities; about 50
nondepository mortgage providers; and 72 Farm Credit System
members.\877\ See part II.D above for more detail on how the Bureau
arrived at these estimates.
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\877\ The Bureau provides estimates for the majority of
nondepository institutions but knows an exact number of members of
the Farm Credit System.
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Based on 2019 data from FFIEC and NCUA Call Reports and the CRA
data, using the methodology described above, the Bureau estimates that
the number of depository institutions that would be required to report
under the proposed rule would be between approximately 4,000 and 4,200.
The Bureau estimates that between 3,600 and 3,800 banks and savings
associations and about 400 credit unions would be required to report
under the proposed rule.
The Bureau has attempted to use the best available data and methods
to estimate the number of financial institutions that would be covered
by the proposed rule. The Bureau seeks comment on whether there are
additional data sources that could provide better estimates of
coverage. The Bureau also seeks comment on its Supplemental estimation
methodology for institutional coverage and market-level cost estimates
in the small business lending data collection notice of proposed
rulemaking describing the methods used to estimate coverage.
[[Page 56545]]
E. Methodology for Generating Cost Estimates
The Bureau used previous HMDA rulemaking estimates as the basis for
its review of 1071 data collection and reporting tasks that would
impose one-time and ongoing costs. In developing its ongoing cost
methodology to estimate the impacts of its 2015 HMDA final rule, the
Bureau used interviews with financial institutions to understand the
processes of complying with a regulation that requires collecting and
reporting credit application data and to generate estimates of how
changes to the reporting requirements would impact the ongoing costs of
collecting and reporting mortgage application data.\878\ To analyze the
potential impacts of this proposed rule, the Bureau adapted its
methodology from its HMDA rulemaking activities to the small business
lending market.
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\878\ Home Mortgage Disclosure (Regulation C), 80 FR 66128,
66269 (Oct. 28, 2015).
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The Bureau expects that the tasks required for data collection,
checking for accuracy, and reporting under the proposed rule would be
similar to those under HMDA. The similarities in data collection and
reporting tasks allowed the Bureau to leverage its previous rulemaking
experience in its analysis of the potential impacts of this proposed
rule.
However, there are significant differences between the home
mortgage and small business lending market. For example, small business
lending is generally less automated, and has a wider variety of
products, smaller volumes, and smaller credit amounts. The Bureau used
the SBREFA process, research using publicly available information, and
the Bureau's general expertise regarding the small business lending
market to determine how these differences would change the tasks
required for data collection, checking for accuracy, and reporting.
During the HMDA rulemaking process, the Bureau identified seven key
aspects or dimensions of compliance costs with a data collection and
reporting rule: (1) The reporting system used; (2) the degree of system
integration; (3) the degree of system automation; (4) the tools for
geocoding; (5) the tools for performing completeness checks; (6) the
tools for performing edits; and (7) the compliance program. The Bureau
assumes that financial institutions will set up their 1071 reporting in
a manner similar to how HMDA reporting was implemented.\879\ The Bureau
presented this list of key aspects or dimensions of compliance costs in
its SBREFA Outline, but did not receive specific feedback or
suggestions about these areas of compliance costs.
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\879\ For example, the Bureau assumes that financial
institutions will integrate their small business data management
system with their other data systems the same way that similar
institutions integrated their HMDA management system.
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The Bureau found during the HMDA rulemaking process that,
generally, the complexity of a financial institution's approach across
dimensions was consistent--that is, a financial institution generally
would not use less complex approaches on some dimensions and more
complex approaches on others.\880\ This allowed the Bureau to classify
financial institutions, including depository institutions and
nondepository institutions, into three broad tiers according to the
overall level of complexity of their compliance operations. Using very
similar assumptions to HMDA, the Bureau's estimation of the costs of
this proposed rule also assumed that complexity across dimensions of a
financial institution's small business lending data collection and
reporting system is consistent.
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\880\ 80 FR 66128, 66269 (Oct. 28, 2015).
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Table 3 below summarizes the typical approach to those seven key
aspects or dimensions of compliance costs across three representative
types of financial institutions based on level of complexity in
compliance operations. Financial institutions that are Type A have the
lowest level of complexity in compliance operations, while Type B and
Type C have the middle and highest levels of complexity, respectively.
[[Page 56546]]
[GRAPHIC] [TIFF OMITTED] TP08OC21.002
In previous HMDA rulemakings, the Bureau found that the number of
loan applications received was largely correlated with overall
complexity of financial institutions' compliance operations.\882\ The
Bureau used this observation from HMDA, in addition to early outreach
to financial institutions and data from Call Reports and publicly
available data from the CDFI Fund, to generate assumptions about the
number of annual small business lending applications processed by each
FI type. The Bureau assumes that Type A FIs receive fewer than 300
applications per year, Type B FIs receive between 300 and 2,000
applications per year, and Type C FIs receive more than 2,000
applications per year. The Bureau assumes that, for types A and B, one
out of two small business applications will result in an origination.
Thus, the Bureau assumes that Type A FIs originate fewer than 150
products per year and Type B FIs originate between 150 and 1,000
products per year. The Bureau assumes that Type C FIs originate one out
of three applications and more than 1,000 per year.\883\
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\881\ The Bureau expects the development of a market for small
business data management systems similar to HMDA management systems
that financial institutions will license or purchase from third
parties.
\882\ 80 FR 66128, 66270 (Oct. 28, 2015).
\883\ The Bureau chose the 1:2 and 1:3 application to
origination ratios based on two sources of information. First see
Biz2Credit, Small Business Loan Approval Rates Rebounded in May
2020: Biz2Credit Small Business Lending Index (May 2020), https://cdn.biz2credit.com/appfiles/biz2credit/pdf/report-may-2020.pdf,
which shows that, in December of 2019, large banks approved small
business loans at a rate of 27.5 percent, while small banks and
credit unions had approval rates of 49.9 percent and 40.1 percent.
Additionally, and supported by the Bureau's data from supervisory
exams, the Bureau chose a 33 percent approval rate as a conservative
measure among these estimates for complex financial institutions
(Type C FIs).
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The Bureau understands that costs vary by financial institution due
to many factors, such as size, operational structure, and product
complexity. Due to data limitations, the Bureau is unable to capture
many of the ways in which costs vary by institution, and therefore uses
these representative financial institutions with the above assumptions
for its analysis. In order to aggregate costs to a market level, the
Bureau must map financial institutions onto its types using discrete
volume categories.
For the ongoing costs discussion in part VII.F.3.ii below, the
Bureau discusses costs in the context of representative institutions
for ease of
[[Page 56547]]
exposition. The Bureau assumes that a representative Type A FI receives
100 small business credit applications per year, a representative Type
B FI receives 400 applications per year, and a representative Type C FI
receives 6,000 applications per year. The Bureau further assumes that a
representative Type A FI originates 50 covered credit transactions per
year, a representative Type B FI originates 200 covered credit
transactions per year, and a representative Type C FI originates 3,000
covered credit transactions per year.
The Bureau presented an earlier version of this cost calculation
methodology in the SBREFA Outline and during the SBREFA process.\884\
In general, SERs provided minimal feedback on the overall structure of
the categorization of financial institutions and activities required to
collect, check, and report data under the proposed rule.\885\ The
Bureau has made two changes to its methodology in response to SER
feedback. One SER stated that the methodology would benefit from an
additional category of complexity between Types B and C. To address
this issue, while the Bureau did not add an additional category of
complexity, it has increased the number of applications assumed for
Type A FIs and Type B FIs so that these institutions cover more of the
small business credit market. The Bureau has adjusted the categories of
applications for Type A FIs and Type B FIs to 100 and 400 (from 75 and
300, respectively). Several SERs also suggested that the ratio of
applications per originated loans used in the SBREFA Outline was too
high. The Bureau has accordingly updated its assumptions to assume two
applications per origination (instead of its original three-to-one
ratio) for Type A FIs and Type B FIs.
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\884\ SBREFA Outline at 52-56.
\885\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 37-38.
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The Bureau seeks comment on its methodologies, as described in this
part VII.E (including parts VII.E.1, VII.E.2, and VII.E.3 below), for
estimating one-time costs of implementation, estimating ongoing costs
of implementation, and generating market-level estimates of one-time
and ongoing costs.
1. Methodology for Estimating One-Time Costs of Implementation of the
Proposed Rule
The Bureau has identified the following eight categories of one-
time costs that would likely be incurred by financial institutions to
develop the infrastructure to collect and report data under the
proposed rule:
1. Preparation/planning
2. Updating computer systems
3. Testing/validating systems
4. Developing forms/applications
5. Training staff and third parties (such as dealers and brokers)
6. Developing policies/procedures
7. Legal/compliance review
8. Post-implementation review of compliance policies and procedures
Conversations with financial institutions have informed the
Bureau's understanding of one-time costs. Financial institutions will
likely have to spend time and resources understanding the regulation,
developing the required policies and procedures for their employees to
follow, and engaging a legal team to review their draft policies and
procedures. Additionally, financial institutions may require new
equipment, such as new computer systems that can store and check the
required data points; new or revised application forms or related
materials to collect any data that would be required under the proposed
rule that they do not currently collect, including minority-owned and
women-owned business status and the ethnicity, race, and sex of
applicants' principal owners, and to provide any related disclosures
required by the rule. Some financial institutions mentioned that they
may store, check, and report data using third-party providers such as
Fiserv, Jack Henry, LaserPro, or Fidelity Information Systems (FIS),
while others may use more manual methods of data storage, checking, and
reporting using software applications such as Microsoft Excel.
Financial institutions would also engage in a one-time training of all
small business lending staff to ensure that employees understand the
new policies and procedures. After all new policies and procedures have
been implemented and systems/equipment deployed, financial institutions
will likely undertake a final internal review to ensure that all the
requirements of the section 1071 regulation have been satisfied.
The Bureau presented the one-time cost categories in the SBREFA
Outline and during the SBREFA process.\886\ The SERs generally
confirmed that the eight categories listed above accurately capture the
components of one-time costs.
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\886\ SBREFA Outline at 49-52.
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The Bureau conducted a survey regarding one-time implementation
costs for section 1071 compliance targeted at FIs who extend small
business credit.\887\ The Bureau developed the survey instrument based
on guidance from industry on the potential types of one-time costs
institutions might incur if required to report under a 1071 rule and
tested the survey instrument on a small set of FIs, incorporating their
feedback prior to implementation. Estimates from survey respondents
form the basis of the Bureau's estimates for one-time costs in
assessing the potential impact of this proposed rule. The survey was
broadly designed to ask about the one-time costs of reporting data
under a regime that only includes mandatory data points, uses a
reporting structure similar to HMDA, uses the Regulation B definition
of an ``application,'' and uses the respondent's own internal small
business definition. The survey was divided into three sections:
Respondent Information, One-Time Costs, and the Cost of Credit to Small
Entities.
---------------------------------------------------------------------------
\887\ The One-Time Cost Survey was released on July 22, 2020;
the response period closed on October 16, 2020. The OMB control
number for this collection is 3170-0032.
---------------------------------------------------------------------------
In the Respondent Information section, the Bureau obtained basic
information about the respondent, including information on the type of
institution, its size, and its volume of small business lending. (The
Bureau did not, however, obtain the actual name or other directly
identifying information about respondents.) The One-Time Costs section
of the survey measured the total hours, staff costs, and non-salary
expenses associated with the different tasks comprising one-time costs.
Using the reported costs of each task, the Bureau estimated the total
one-time cost for each respondent. The Cost of Credit to Small Entities
section dealt with the respondent's anticipated response to the
increased compliance costs of being covered by the rule in order to
understand the impacts of the regulation on its small business lending
activity, including any anticipated potential changes to underwriting
standards, volume, prices, product mix, or market participation.
The Bureau worked with several major industry trade associations to
recruit their members to respond to the survey. A total of 105
financial institutions responded to the survey.
To estimate one-time costs, the Bureau needed information on a
financial institution's one-time costs by category and number of
originations. Of the 105 total respondents, 49 answered these
questions. The Bureau will henceforth refer to these respondents as the
``cost estimation sample.'' Of these respondents, 42 (86 percent) self-
[[Page 56548]]
reported that they were a depository institution (bank or credit
union). The remaining seven (14 percent) were nondepository
institutions. Table 4 presents the self-reported asset size of the 42
depository institution respondents in the cost estimation sample.\888\
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\888\ Nondepository institutions also reported assets. The
Bureau separately reports asset category for depository institutions
because asset sizes are not as comparable between depositories and
nondepositories. The Bureau does not report asset sizes for
nondepository respondents because there were too few respondents to
report separately without risking re-identification of respondents.
[GRAPHIC] [TIFF OMITTED] TP08OC21.003
For the purposes of estimating one-time costs, the Bureau
distinguishes between depository institutions and nondepository
institutions. The majority of nondepository institutions are not
currently subject to any data reporting requirements, with the notable
exception of nondepository CDFIs. The Bureau anticipates that covered
financial institutions that are not currently subject to data reporting
requirements will need to make more changes to their existing business
operations in order to comply with the requirements of the new rule.
This expectation is confirmed by the higher estimated one-time costs
for nondepository institutions relative to depository institutions
discussed in part VII.F.3.i.
The Bureau categorizes depository institution respondents in the
cost estimation sample into four groups according to the respondents'
self-reported total originations. The first group contains the two
depository institutions that reported fewer than 25 originations; the
Bureau assumes these institutions would not report under the proposed
rule. The second group contains ten depository institutions that
reported between 25 and 149 originations. The Bureau categorizes these
as Type A DIs (that is, a DI that is Type A as defined above.) The
third group contains the 19 depository institutions that reported
between 150 and 999 originations. The Bureau categorizes these as Type
B DIs. The final group contains the 11 depository institutions that
reported 1,000 or more originations. The Bureau categorizes these as
Type C DIs.
There are not enough nondepository institutions in the cost
estimation sample to separate nondepository institutions into Types A,
B, and C and obtain meaningful estimates. Instead, the Bureau is
relying on the assumption that nondepository institutions (referred to
as Non-DIs for purposes of this analysis) will incur the same one-time
costs regardless of complexity.
The Bureau estimated the one-time costs for each of the four
categories of financial institutions (Type A DI, Type B DI, Type C DI,
and Non-DI) using the following methodology.
For each of the eight categories of one-time costs, the Bureau
asked financial institutions to estimate and report the total number of
hours that junior, mid-level, and senior staff would spend on each
task, along with any additional non-salary expenses. If a respondent
did not provide estimates for any component (i.e., staff hours or non-
salary expenses) of any category, it is not counted as part of the cost
estimation sample. If a respondent provided estimates for some
components but did not provide an estimate for a particular component
(e.g., non-salary expenses for preparation/planning) then the Bureau
assumed that the respondent estimated zero for that component.
The Bureau asked survey respondents to report the average hourly
wage for junior, mid-level, and senior/executive staff involved in the
one-time cost categories. However, for the purposes of estimating one-
time costs, the Bureau assumed a constant wage across financial
institutions for each level of staff. For junior staff, the Bureau used
$16.18, the 10th percentile hourly wage estimate for ``loan officers''
according to the 2020 Occupational Employment Statistics compiled by
the Bureau of Labor Statistics.\889\ For mid-level staff, the Bureau
used $36.99, the mean hourly wage estimate for ``loan officers.'' For
senior staff, the Bureau used $64.35, the 90th percentile hourly wage
estimate for ``loan officers.'' To account for non-monetary
compensation, the Bureau also scaled these hourly wages up by 43
percent.\890\ The Bureau assumed a total hourly compensation of $23.14
for junior staff, as compared to $28.76, the mean of the junior wages
[[Page 56549]]
reported by respondents. The Bureau assumed a total hourly compensation
of $52.90 for mid-level staff, as compared to $48.94, the mean of the
mid-level wages reported by respondents. The Bureau assumed a total
hourly compensation of $92.02, as compared to $90.19, the mean of the
senior/executive wages reported by respondents.
---------------------------------------------------------------------------
\889\ See Bureau of Labor Statistics, U.S. Dep't of Labor,
Occupational Employment and Wage Statistics (May 2020), https://www.bls.gov/oes/current/oes132072.htm.
\890\ The March 2020 Employer Costs for Employee Compensation
from the Bureau of Labor Statistics documents that wages and
salaries are, on average, 70 percent of employee compensation for
private industry workers. The Bureau inflates the hourly wage to
account for 100 percent of employee compensation ((100/70) - 1) *
100 = 43 percent). See Bureau of Labor Statistics, U.S. Dep't of
Labor, Employer Costs for Employee Compensation (Mar. 2020), https://www.bls.gov/news.release/archives/ecec_06182020.pdf.
---------------------------------------------------------------------------
For each respondent in the cost estimation sample, the Bureau
calculated the cost of each one-time cost category as the sum of the
junior wage multiplied by the reported junior hours, the mid-level wage
multiplied by the reported mid-level hours, and the senior wage
multiplied by the reported senior hours and the reported non-salary
expenses. The total cost for the respondent was the sum of the costs
across all eight categories.
After calculating the total costs for each respondent, the Bureau
identified outliers within the four groups of financial institutions
(Type A DI, Type B DI, Type C DI, and Non-DI) using the interquartile
range method, a standard outlier identification method. For each group
of financial institutions, an observation is considered an outlier if
the estimated total cost is greater than 1.5*(P75-
P25) + P75 or less than P25-
1.5*(P75-P25) where P75 and
P25 are the 75th and 25th percentiles, respectively, of
total costs within that group. Using this method, the Bureau identified
one outlier in each Type A DI, Type B DI, and Type C DI group and no
outliers in the Non-DI group.
In addition to the total estimated one-time costs, the Bureau is
interested in the hours, non-salary expenses, and total costs
associated with each of the different one-time cost categories. For
each group, the Bureau estimated each component of one-time costs by
taking the mean of the estimated component within the group, after
excluding outliers. For example, the estimated number of junior hours
required by DIs of Type A to update computer systems is the mean number
of junior hours reported by the nine DIs of Type A that were in the
cost estimation sample, excluding one outlier. The Bureau estimated the
cost associated with each category as the sum of the junior wage
multiplied by the estimated junior hours, the mid-level wage multiplied
by the estimated mid-level hours, and the senior wage multiplied by the
estimated senior hours, and the estimated non-salary expenses.
2. Methodology for Estimating Ongoing Costs of Implementation of the
Proposed Rule
The Bureau identified 15 specific data collection and reporting
activities that would impose ongoing costs. Table 5 presents the full
list of 15 activities. Activities 1 through 3 can broadly be described
as data collection activities: These tasks are required to intake data
and transfer it to the financial institution's small business data
entry system. Activities 4 through 10 are related to reporting and
resubmission: These tasks are required to collect required data,
conduct internal checks, and report data consistent with the proposed
rule. Activities 11 through 13 are related to compliance and internal
audits: Employee training, and internal and external auditing
procedures required to ensure data consistency and reporting in
compliance with the rule. Finally, activities 14 and 15 are related to
1071 examinations by regulators: These tasks will be undertaken to
prepare for and assist during regulatory compliance examinations.
BILLING CODE 4810-25-P
[GRAPHIC] [TIFF OMITTED] TP08OC21.004
[[Page 56550]]
Table 6 provides an example of how the Bureau calculated ongoing
compliance costs associated with each compliance task. The table shows
the calculation for each activity and notes whether the task would be a
``variable cost,'' which would depend on the number of applications the
institution receives, or a ``fixed cost'' that does not depend on the
number of applications. Table 6 shows these calculations for a Type A
FI, or the institution with the least amount of complexity. Table 7
below summarizes the activities whose calculation differs by
institution complexity and shows the calculations for Type B FIs and
Type C FIs (where they differ from those for a Type A FI).\891\
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\891\ In this table, the term ``variable'' means the complance
cost depends on the number of applications. The term ``fixed'' means
the compliance cost does not depend on the number of applications
(even if there are other factors upon which it may vary).
[GRAPHIC] [TIFF OMITTED] TP08OC21.005
BILLING CODE 4810-25-C
[[Page 56551]]
Many of the activities in Table 6 require time spent by loan
officers and other financial institution employees. To account for time
costs, the calculation used the hourly compensation of a loan officer
multiplied by the amount of time required for the activity. The Bureau
used a mean hourly wage of $36.99 for loan officers, based on data from
the Bureau of Labor Statistics.\892\ To account for non-monetary
compensation, the Bureau scaled this hourly wage by 43 percent to
arrive at a total hourly compensation of $52.90 for use in these
calculations.\893\ The Bureau used assumptions from its 2015 HMDA final
rule analysis, updated to reflect differences between mortgage lending
and small business lending, to estimate time spent on ``ongoing
tasks.'' \894\ As an example of a time calculation, the Bureau
estimated that transcribing the required data points would require
approximately 11 minutes per application for a Type A FI. The
calculation multiplied the number of minutes by the number of
applications and the hourly compensation to arrive at the total cost,
on an annual basis, of transcribing data. As another example, the
Bureau estimated that ongoing training for loan officers to comply with
a financial institution's 1071 policies and procedures would take about
two hours per loan officer per year. The cost calculation multiplies
the number of hours by the number of loan officers and by the hourly
compensation.
---------------------------------------------------------------------------
\892\ These data reflect the mean hourly wage for ``loan
officers'' according to the 2020 Occupational Employment Statistics
compiled by the Bureau of Labor Statistics. See Bureau of Labor
Statistics, U.S. Dep't of Labor, Occupational Employment and Wages
(May 2020), https://www.bls.gov/oes/current/oes132072.htm.
\893\ The March 2020 Employer Costs for Employee Compensation
from the Bureau of Labor Statistics documents that wages and
salaries are, on average, 70 percent of employee compensation for
private industry workers. The Bureau inflates the hourly wage to
account for 100 percent of employee compensation ((100/70) - 1) *
100 = 43 percent). Bureau of Labor Statistics, U.S. Dep't of Labor,
Employer Costs for Employee Compensation (Mar. 2020), https://www.bls.gov/news.release/archives/ecec_06182020.pdf.
\894\ Home Mortgage Disclosure Act (Regulation C), 80 FR 66128
(Oct. 28, 2015).
Some differences, for example, are reflected in the number of
applications, the number of data points per application, and the
number of loan officers for the representative institutions.
---------------------------------------------------------------------------
To arrive at the amount of time required per application for each
of the 15 tasks covered financial institutions would conduct to
collect, check, and report 1071 data, the Bureau began with the
assumptions made for each task for the 35 data points under the 2015
HMDA final rule and then adjusted these required times relative to the
number of data points required under the proposed 1071 rule. The
proposed rule would require covered financial institutions to collect
21 data points for each covered application. Several of these data
points have multiple components. For example, the credit type data
point has three subcomponents of product type, the type of guarantee,
and the term. The data points for pricing information and the
ethnicity, race, and sex of principal owners also have multiple
subcomponents.
Some activity costs in Table 6 depend on the number of
applications. It is important to differentiate between these variable
costs and fixed costs because the type of cost impacts whether and to
what extent covered institutions might be expected to pass on their
costs to small business loan applicants in the form of higher interest
rates or fees (discussed in more detail in part VII.F.4 below). Data
collection, reporting, and submission activities such as geocoding
data, standard annual edits and internal checks, researching questions,
and resolving question responses are variable costs. All other
activities are fixed cost because they do not depend on the overall
number of applications being processed. An example of a fixed cost
calculation is exam preparation, where the hourly compensation is
multiplied by the number of total hours required by loan officers to
prepare for 1071-related compliance examinations.
Table 7 shows where and how the Bureau assumed Type B FIs and Type
C FIs differ from Type A FIs in its ongoing cost methodology. Type B
FIs and Type C FIs use more automated procedures, which result in
different cost calculations. For example, for Type B FIs and Type C
FIs, transferring data to the data entry system and geocoding
applications are done automatically by business application data
management software licensed annually by the financial institution. The
relevant address is submitted for geocoding via batch processing,
rather than done manually for each application. The additional ongoing
geocoding costs reflect the time spent by loan officers on ``problem''
applications--that is, a percentage of overall applications that the
geocoding software misses--rather than time spent on all applications.
However, Type B FIs and Type C FIs have the additional ongoing cost of
a subscription to a geocoding software or service as well as a data
management software that represents an annual fixed cost of reporting
1071 application data. This is an additional ongoing cost that less
complex Type A FIs will not incur. The Bureau expects that Type A FIs
will use free geocoding software available from the FFIEC or the
Bureau, which may include a new batch function that could be developed
by either the FFIEC or the Bureau.
Additionally, audit procedures differ between the three
representative institution types. The Bureau expects a Type A FI would
not conduct an internal audit but would pay for an annual external
audit. A Type B FI would be expected to conduct a simple internal audit
for data checks and also pay for an external audit on an annual basis.
Type C FIs would have a sophisticated internal audit process in lieu of
an external audit.
BILLING CODE 4810-25-P
[[Page 56552]]
[GRAPHIC] [TIFF OMITTED] TP08OC21.006
Table 8 below shows major assumptions that the Bureau made for each
activity for each type of financial institution. Table 8 provides the
total number of hours the Bureau assumes are required for each task
that requires labor. For example, the Bureau assumes that transcribing
data for 100 applications will require 18 hours of labor. The table
also shows the assumed fixed cost of software and audits, as well as
areas where the Bureau assumes there will be cost savings due to
technology. In several cases, the activity does not apply to financial
institutions of a certain type, and are therefore not displayed.
[[Page 56553]]
[GRAPHIC] [TIFF OMITTED] TP08OC21.007
BILLING CODE 4810-25-C
3. Methodology for Generating Market-Level Estimates of One-Time and
Ongoing Costs
To generate market-level cost estimates, the Bureau relied on the
estimates of the volume of small business lending originations
described in part VII.D above. As with institutional coverage, the
Bureau separates market-level cost estimates into estimates for
depository institutions and for nondepository institutions.
For depository institutions, the Bureau estimated which
institutions of those that existed at the end of 2019 would likely be
covered or not covered by the proposed rule. An institution
[[Page 56554]]
would be required to report data on applications received in 2019 if it
originated at least 25 covered originations in each of the preceding
two years (i.e., 2017 and 2018). If two depository institutions merged
between the end of 2017 and the end of 2019, the Bureau assumes that
those institutions would report as one entity. The Bureau then
categorized each institution as a Type A DI, Type B DI, or Type C DI
based on its originations in 2019. Depository institutions with 0 to
149 covered originations in 2019 are categorized as Type A. Depository
institutions with 150 to 999 covered originations are categorized as
Type B. Depository institutions with 1,000 or more covered originations
are categorized as Type C. For each depository institution, the Bureau
assigns the appropriate estimated one-time cost, ongoing fixed cost,
ongoing variable cost per application, and applications per origination
estimates associated with its institution type. The estimated number of
annual applications for each institution is the estimated number of
originations multiplied by the number of applications per origination
for that institution type. The annual ongoing cost for each institution
is the ongoing fixed cost plus the ongoing variable cost per
application multiplied by the estimated number of applications.
To generate market-level estimates, the Bureau first calculates the
estimated one-time and annual ongoing costs for each depository
institution covered by the proposed rule based on the estimated number
of originations for that institution in 2019. The Bureau then sums over
the covered depository institutions to find market-level statistics of
total costs. As with coverage estimates, the Bureau presents a range of
estimates for market-level statistics. The range reflects the
uncertainty associated with the estimate of costs for banks and savings
associations below the CRA reporting threshold. The Bureau has
documented how it calculated these ranges in its Supplemental
estimation methodology for institutional coverage and market-level cost
estimates in the small business lending data collection notice of
proposed rulemaking.\895\
---------------------------------------------------------------------------
\895\ See https://www.consumerfinance.gov/data-research/research-reports/supplemental-estimation-methodologies-small-business-lending-data-collection-nprm/.
---------------------------------------------------------------------------
The Bureau is unaware of institution-level data on originations by
nondepository institutions that are comprehensive enough to estimate
costs using the same method as that for depository institutions.
Therefore, to generate market-level estimates for nondepository
institutions, the Bureau relies on the estimates discussed above and
several key assumptions. The Bureau assumes that fintech lenders and
MCAs are Type C FIs because they generally have more automated systems
and originate more products. The Bureau assumes that the remaining
nondepository institutions are Type B FIs. The Bureau assumes that each
nondepository receives the same number of applications as the
representative institution for each type, as described above. Hence,
the Bureau assumes that fintech lenders and MCAs each receive 6,000
applications per year and all other nondepository institutions receive
400 applications per year. As explained above, the Bureau also assumes
that all nondepository institutions have the same one-time costs.
F. Potential Benefits and Costs to Covered Financial Institutions and
Small Businesses
1. Benefits to Small Businesses
The proposed rule could benefit small businesses by collecting data
that further the two statutory purposes of section 1071. Those purposes
are to facilitate the enforcement of fair lending laws and enable
communities, governmental entities, and creditors to identify business
and community development needs and opportunities of women-owned,
minority-owned, and small businesses. Some of the benefits to small
businesses discussed below stem from the public release of the data
collected under the proposed rule. As discussed in more detail in part
VI, the Bureau is proposing to exercise its discretion under ECOA
section 704B(e)(4) to delete or modify data collected under section
1071 which are or will be available to the public where the Bureau
determines that the deletion or modification of the data would advance
a privacy interest. The below discussion considers the benefits of
unmodified data released for public consumption, but the Bureau
acknowledges that the benefits derived from public disclosure may be
lower if modifications are made that reduce the utility of the public
dataset.
Data collected under the proposed rule would constitute the largest
and most comprehensive data in the United States on credit availability
for small businesses. These data would provide important insight into
possible discriminatory lending patterns in the small business lending
market. Regulators could use the data to gauge fair lending risks and
prioritize examinations of lenders that have a higher likelihood of
violating antidiscrimination statutes. This would lead to a more
efficient use of government resources in enforcing fair lending
provisions. Furthermore, the public nature of the dataset would allow
for members of the public to review the public dataset for possible
violations of antidiscrimination statutes. The increased ability to
perform fair lending analyses would benefit women-owned and minority-
owned small businesses both directly, in the form of remediation when
lenders ultimately are found to have violated fair lending laws, and
indirectly, with increased access resulting from the scrutiny placed on
financial institutions.
Central to the fair lending benefit of the dataset is the proposed
collection of the action taken data point. Existing datasets that
collect transaction-level data only contain data on originated small
business loans. Application-level data, combined with the collection of
action taken data, could allow users to construct approval or denial
rates, for example, for particular lenders. Such analyses could
indicate whether, for example, women-owned or minority-owned small
businesses are being denied credit at higher rates than other small
businesses.
The proposed rule would also include several data points on the
pricing of covered credit transactions that are originated or approved
but not accepted. Data users could examine, for example, whether women-
owned or minority-owned small businesses are charged higher interest
rates, origination charges, or initial annual charges than similarly
situated businesses that are not women- or minority-owned. The proposed
rule would also require information on prepayment penalties, which is
an area of increasing concern due to the potential for predatory
lending practices.\896\ Users could examine whether women-owned or
minority-owned small firms are more likely to have prepayment penalties
on extended credit.
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\896\ Such concerns have led California, for example, to include
prepayment policies as a required component of pricing disclosures
in commercial financing (see Cal. S.B. 1235 (Sept. 30, 2018),
https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB1235).
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Several data points included in the proposed rule would contribute
to more accurate fair lending analyses by allowing users to compare
credit products with similar characteristics. For example, there are
likely differences in approval rates and prices for covered credit
transactions based on credit amount applied for and approved, all
[[Page 56555]]
three aspects of credit type (type of credit product, types of
guarantees, and loan term), and credit purpose, since these factors
influence the risk of extending credit. Many creditors also consider
characteristics about the small business, such as industry, gross
annual revenue, or time in business during their underwriting or
pricing processes. Supply and demand for small business credit also
varies over time and by location, so the inclusion of census tract,
application date, and action taken date could lead to more accurate
analyses. More accurate screening for fair lending risk would, for
example, reduce the false positive rate observed during fair lending
prioritization and increase the efficiency of fair lending reviews.
Creditors would also likely use the data to understand small
business lending market conditions more effectively and at a more
granular level than is possible with existing data sources, such as
Call Reports, data from public lending programs, or privately purchased
data. Data collected under the proposed rule, combined with the
institution's existing information on the small business lending
market, could help creditors to identify potentially profitable
opportunities to extend credit. For example, creditors could use the
census tract information to find areas of high credit demand into which
they could consider expanding. Small business owners would benefit from
increased credit availability.
Governmental entities will likely use the data to develop solutions
that achieve policy objectives. For example, loan guarantees provided
by the SBA's 7(a) and 504 programs are designed to increase the
availability of business credit for businesses that otherwise have
difficulty accessing credit. Governmental entities could use the
comprehensive data on applications for covered credit transactions
collected under the proposed rule to identify additional opportunities
to create new--or tailor existing--programs to advance their small
business lending policy objectives.
The data collected under the proposed rule would be the most
extensive data on credit access for women-owned and minority-owned
small businesses, and such information will help various data users in
understanding the needs and opportunities of women-owned and minority-
owned small businesses. For example, governmental entities often create
programs that specifically target women-owned and minority-owned
businesses, such as those that reserve government contracts, those that
provide grants, or those specifically targeted at women-owned and
minority-owned small firms. Governmental entities could use data
collected under the proposed rule to alter existing programs or create
new ones to meet the needs of these business owners. Private lenders
could also use the data to find untapped markets of credit demand from
women-owned and minority-owned small businesses.
As one of the premier data sources on the small business credit
market, data collected under the proposed rule would also facilitate
rigorous academic research. HMDA data, which are similar in many ways
to the data that will be collected under the proposed rule, have been
analyzed in many scholarly publications. The data collected under
section 1071 will provide academics and other researchers a clearer
window into potential discrimination in the small business credit
market, as well as a better understanding of small business credit
market trends and dynamics. Like in the case of HMDA, data collected
under the proposed rule will be more broadly used to understand how
business owners make borrowing decisions, respond to higher prices, and
respond to risk.\897\
---------------------------------------------------------------------------
\897\ For examples of how HMDA data has facilitated research on
the mortgage market, see, e.g., Bureau of Consumer Fin. Prot., Data
Point: Asian American and Pacific Islanders in the Mortgage Market
(July 2021), https://files.consumerfinance.gov/f/documents/cfpb_aapi-mortgage-market_report_2021-07.pdf; Bureau of Consumer
Fin. Prot., Manufactured Housing Finance: New Insights from the Home
Mortgage Disclosure Act Data (May 2021), https://files.consumerfinance.gov/f/documents/cfpb_manufactured-housing-finance-new-insights-hmda_report_2021-05.pdf; Neil Bhutta & Benjamin
J. Keys, Moral Hazard during the Housing Boom: Evidence from Private
Mortgage Insurance, The Review of Fin. Studies (2021), https://academic.oup.com/rfs/advance-article/doi/10.1093/rfs/hhab060/6279755; Sumit Agarwal et al., The Effectiveness of Mandatory
Mortgage Counseling: Can One Dissuade Borrowers from Choosing Risky
Mortgages? (Nat'l Bureau of Econ. Research, Working Paper No. 19920,
2014), https://www.nber.org/system/files/working_papers/w19920/w19920.pdf; Alexei Alexandrov & Sergei Koulayev, No Shopping in the
U.S. Mortgage Market: Direct and Strategic Effects of Providing
Information (Bureau of Consumer Fin. Prot., Off. of Research Working
Paper No. 2017-01, 2018), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2948491.
---------------------------------------------------------------------------
The proposed data points would provide the above benefits in
several ways. The action taken and pricing information data points
would allow various entities to monitor the tightness of the small
business credit market and identify areas where there are high denial
rates for small business credit or where it is provided only at high
cost, especially to women-owned or minority-owned small businesses.
Data on census tract, NAICS code, gross annual revenue, and number of
workers will provide insight into the availability of small business
credit by geography, industry, and business size. Credit type and
credit purpose would provide more information on how small women-owned
and minority-owned businesses use credit and whether their use differs
from that of other small businesses. Time in business information would
allow data users to understand the credit needs of young small
businesses, and specifically young women-owned and minority-owned small
businesses. Recent research has shown that women-owned and minority-
owned businesses face different financing challenges early in the
business lifecycle than other firms, primarily driven by less access to
external financing.\898\
---------------------------------------------------------------------------
\898\ See, e.g., JPMorgan Chase & Co. Inst., Small business
ownership and liquid wealth (Mar. 2021), https://www.jpmorganchase.com/institute/research/small-business/small-business-ownership-and-liquid-wealth-report.
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The Bureau seeks comment on its analysis of potential benefits to
small businesses as described herein.
2. Benefits to Covered Financial Institutions
The proposed rule would provide some benefits to some covered
financial institutions--i.e., the financial institutions that would be
required to collect and report 1071 data on small business applications
for credit. The first is some reduction of the compliance burden of
fair lending reviews for lower risk financial institutions, by reducing
the ``false positive'' rates during fair lending review prioritization
by regulators. Currently, financial institutions are subject to fair
lending reviews by regulators to ensure that they are complying with
the ECOA in their small business lending processes. Data reported under
the proposed rule would allow regulators to prioritize fair lending
reviews of financial institutions with higher risk of fair lending
violations, which reduces the burden on institutions with lower fair
lending risk. Covered financial institutions would also be able to use
the data to monitor, identify, and address their own fair lending risks
and thereby avoid liability from enforcement actions and adverse exam
findings requiring remedial action.
The proposed data collection could also provide an unprecedented
window into the small business lending market, and such transparency
may benefit financial institutions covered by the rule. Comprehensive
information on small business credit applications and originations are
currently unavailable.
[[Page 56556]]
The data made public pursuant to the proposed rule could allow
financial institutions to better understand the demand for small
business credit products and the conditions under which they are being
supplied by other covered financial institutions.
The Bureau seeks comment on its analysis of potential benefits to
covered persons as described herein.
3. Costs to Covered Financial Institutions
i. One-Time Costs to Covered Financial Institutions
Using the methodology described in part VII.E.1 above, Table 9
shows the estimated total expected one-time costs for financial
institutions covered by the proposed rule as well as a breakdown by the
eight component categories that comprise the one-time costs for Type A
DIs, Type B DIs, and Type C DIs, and Non-DIs.
Table 10 shows the estimated number of junior, mid-level, and
senior staff hours and non-salary expenses for each component activity
for Type A DIs. Tables 11 through 13 show the same estimates for Type B
DIs, Type C DIs and Non-DIs respectively. As discussed above, the
Bureau estimates all one-time costs to covered financial institutions
using the One-Time Cost Survey results.
BILLING CODE 4810-25-P
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[GRAPHIC] [TIFF OMITTED] TP08OC21.009
[[Page 56557]]
[GRAPHIC] [TIFF OMITTED] TP08OC21.010
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[[Page 56558]]
[GRAPHIC] [TIFF OMITTED] TP08OC21.012
BILLING CODE 4810-25-C
The Bureau estimates that updating computer systems would be the
biggest driver of one-time costs for Type A DIs, and Type B DIs and
Non-DIs. Type A DIs and Type B DIs would be expected to spend similar
amounts on updating computer systems, but Type A DIs would rely
somewhat more on staff.
The Bureau expects that Non-DIs would have the highest one-time
costs and the highest costs to update computer systems. To update
computer systems, Non-DIs would rely on mid-level staff hours and
third-party vendors. Non-DIs would also spend relatively more on
preparation and planning than Type A DIs or Type B DIs. These estimates
are consistent with the expectation that Non-DIs will incur higher
costs because they are less likely to already report data to
regulators.
The Bureau estimates that the biggest drivers of one-time costs for
Type C DIs would be preparation and planning and post-implementation
review. These depository institutions would generally rely on mid-level
staff hours to implement the required one-time changes and, in
particular, would rely on mid-level staff hours for these two key
activities. The Bureau estimates that Type C DIs will spend the most of
all financial institution types on staff hours to implement one-time
changes and the least on non-salary expenses.
The Bureau estimates that one-time costs would be higher for Type A
DIs than for Type B DIs. These two types of depository institutions
have similar estimated costs for most activities, but Type A DIs are
expected to spend more on testing/validating systems and legal/
compliance review.
These estimates are generally consistent with feedback from SERs
during the SBREFA process. Several SERs stated that changes to their
computer systems would contribute to their one-time costs.\899\
However, some SERs estimated larger one-time costs than the Bureau and
others estimated smaller one-time costs. One SER (a commercial finance
company) said that many financial institutions in their industry have
no experience reporting data such as will be required under the 1071
rule and that their current developer estimates that the costs just to
develop, test, and integrate their system could be up to $200,000.
Another SER (a fintech) stated that they do not anticipate any one-time
costs. Two SERs estimated that one-time costs would be between $15,000
and $25,000 without a detailed breakdown of those costs. One SER
provided a detailed breakdown of costs and estimated that total one-
time costs would be $27,000.
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\899\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 38-39.
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As mentioned above, the Bureau realizes that one-time costs vary by
institution due to many factors, and that this variance exists on a
continuum that is impossible to fully represent. The Bureau focuses on
representative types of financial institutions in order to generate
practical and meaningful estimates of costs. As a result, the Bureau
expects that individual financial institutions would have slightly
different one-time costs than the average estimates presented here.
The One-Time Cost Survey instructed respondents to assume that
covered institutions would be required to report data at the
application level on small business financing that constitutes
``credit'' for purposes of ECOA for the 13 statutorily mandated data
points one time per year, and be responsible for validating the
accuracy of all data. Respondents were further instructed to use their
own institution's internal definition of small business, assume the
Regulation B definition of an application, and assume a reporting
structure similar to that under HMDA. Finally, respondents were
instructed to not include any costs associated with creating a
firewall. As such, respondents estimated one-time costs assuming that
the proposed rule would be different in some ways from what the Bureau
has ultimately proposed here. One SER provided feedback during the
SBREFA Panel that it was hard to estimate one-time costs in the survey
without knowing all the details of the proposed rule.
The Bureau estimates that the overall market impact of one-time
costs for depository institutions would be between $218,000,000 and
$229,000,000.\900\ Using a 7 percent discount rate and a five-year
amortization window, the annualized
[[Page 56559]]
one-time costs for depository institutions would be $53,200,000 to
$55,800,000. The Bureau estimates that the overall market impact of
one-time costs for nondepository institutions would be $94,400,000.
Using a 7 percent discount rate and a five-year amortization window,
the annualized one-time costs for nondepository institutions would be
$23,000,000. As a frame of reference for these market-level one-time
cost estimates, the estimated total non-interest expenses from the
FFIEC and NCUA Call Reports for depository institutions that the Bureau
estimates would be covered under the proposed rule was about $439
billion in 2019. The upper bound estimate of total one-time costs is
approximately 0.05 percent of the total annual non-interest expenses.
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\900\ The Bureau notes that the variation in this range comes
primarily from the uncertainty in the number of originations made by
small banks and savings associations. The range does not fully
account for the uncertainty associated with estimates of the one-
time costs for each type of institution.
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The Bureau seeks comment on its analysis of one-time costs to
covered financial institutions as described herein. In particular, the
Bureau seeks comment on how to adjust the estimates of one-time costs
to account for differences between what respondents to the survey were
asked to assume and the proposed rule.
ii. Ongoing Costs to Covered Financial Institutions
Using the methodology described in part VII.E.2, Table 14 shows the
total expected annual ongoing costs of the proposed rule as well as a
breakdown by the component 15 activities that comprise the ongoing
costs for Type A FIs, Type B FIs, and Type C FIs. The bottom of the
table shows the total estimated annual 1071 ongoing compliance cost for
each type of institution, along with the total cost per application the
financial institution processes. To produce the estimates in Table 14,
the Bureau used the calculations described in Tables 6 and 7 above and
the assumptions for each activity in Table 8. In the following
analysis, the Bureau provides examples of these cost calculations for
the largest drivers of ongoing costs.
[GRAPHIC] [TIFF OMITTED] TP08OC21.013
The Bureau estimates that a representative low complexity
institution (i.e., a Type A FI) would incur around $7,386 in total
annual ongoing costs, or about $74 in total cost per application
processed (assuming a representative 100 applications per year). For
financial institutions of this type, the largest driver of ongoing
costs is the fixed cost of the external audit, $3,500. Besides the
audit cost, the largest drivers of the ongoing costs are activities
that require employee time to complete. Activities like transcribing
data, transferring data to the data management software, standard edits
and internal checks, and training all require loan officer time. The
Bureau expects training (activity number 11) to annually require
approximately $638 for 6 representative loan officers to engage in two
hours of training. The Bureau expects other time-dependent activities
to cost around $1,000 each. For
[[Page 56560]]
example, the Bureau assumes that Type A FIs will spend around 18 hours
transferring data to 1071 data management software (activity number 3)
based on estimates of the required time to transfer data to HMDA data
management software. At the assumed hourly compensation, our estimate
is around $1,013 for the Type A FI institutions to transfer data. An
assumption of around 17 total hours to conduct standard annual editing
checks (activity number 5) with some savings assumed due to an online
submission platform that automatically checks for errors, results in an
estimated annual ongoing cost of $490.
The Bureau estimates that a representative middle complexity
institution (i.e., a Type B FI), which is somewhat automated, would
incur approximately $35,476 in additional ongoing costs per year, or
around $89 per application (assuming a representative 400 applications
per year). The largest components of this ongoing cost are the expenses
of the small business application management software and geocoding
software (activity 10) in the form of an annual software subscription
fee, and the external audit of the data (activity number 13). Using
interviews of financial institutions conducted to determine compliance
costs with HMDA, the Bureau found mid-range HMDA data management
systems to be approximately $8,000 in annual costs; the Bureau believes
that cost would be comparable in the small business lending context and
thus applies that estimate here. This analysis assumes that the
subscription purchase would be separate from HMDA management systems,
but the development of a software to jointly manage HMDA and small
business lending-related data would likely result in cost savings for
both products. The Bureau also estimates that a Type B FI would spend
around $5,000 on external audits of their small business loan
application data. The Type B FI incurs employee time-related fixed
costs conducting internal checks ($10,576), training ($3,189), and
prepping for examinations ($4,227) but saves time and expense on data
entry and geocoding by using data management software. As an example,
the Bureau expects Type B FIs to have two full-time employees spend 40
hours each to prepare for an examination (activity number 14) resulting
in a cost of $4,227, and have employees spend around 12 hours assisting
with an examination (activity number 15) costing $672 annually.
The Bureau estimates a representative high complexity institution
(i.e., a Type C FI), would incur $243,266 of annual ongoing costs, or
$41 per application (assuming a representative 6,000 application per
year). The largest driver of costs for a Type C FI is the employee time
required to conduct an internal audit. The assumed 2,304 hours of
employee time results in nearly $122,000 of ongoing costs annually.
Exam preparation, training, and standard annual and internal checks
would be expected to cost $25,365, $26,262, and $26,181 each year,
respectively. The Bureau also assumes that a Type C institution would
need a subscription to a small business data management software near
the upper bound of the range found in interviews with financial
institutions, of $13,271.
The Bureau estimates that the total annual ongoing costs for
depository institutions would be between about $310,000,000 and
$330,000,000 per year, about $192,000,00 to $201,000,000 of which would
be annual variable costs. The Bureau estimates that the total annual
ongoing costs for nondepository institutions would be about
$62,300,000, about $13,700,000 of which would be annual variable costs.
To understand the impacts of these cost estimates on the profits of
depository institutions, the Bureau estimates the average total net
income across all products per small business origination for all DIs
by type.\901\ There is no comprehensive published source of data on
profits earned on small business credit transactions. The Bureau
presents estimates of total net income per origination as an indication
of a financial institution's ability to cover the additional expenses
associated with the proposed rule. The Bureau estimates that banks and
savings associations of Type A have an average net income per
origination between $105,000 and $119,000. Credit Unions of Type A have
an average net income per origination of $272,000. Assuming two
applications per origination, a bank or savings association of Type A
has a net income per application of approximately $53,000 to $60,000
and a credit union of the same type has a net income per application of
about $136,000. The Bureau estimates that banks and savings
associations of Type B have an average net income per origination
between $50,000 and $57,000 or a net income per application between
$25,000 and $29,000. The Bureau estimates that credit unions of Type B
have an average net income per origination of $218,000 or an average
net income per application of $109,000. The Bureau estimates that banks
and savings associations of Type C have a net income per origination
between $237,000 and $267,000, or, assuming three applications per
origination, a net income per application between $79,000 and $89,000.
The Bureau estimates that credit unions of Type C have an average net
income per origination of $8,000, and average net income per
application of about $3,000.
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\901\ There are no broadly available data on profit per
application for nondepository institutions. The Bureau uses the
FFIEC Bank and NCUA Credit Union Call Report data from December 31,
2019, accessed on June 25, 2021. The Bureau uses the same internal
estimates of small business loan originations as discussed in part
VI.B above and total net income across all products. For estimates
of net income per origination and per application, the Bureau uses
only net income per origination for depository institutions with
over 25 originations in 2019.
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The Bureau presented early versions of these ongoing cost estimates
in the SBREFA Outline and to SERs during the SBREFA process. Since
then, the Bureau has adjusted its estimates to match the total number
of data points in the proposed rule relative to the SBREFA Outline. The
Bureau also adjusted its estimates in response to SER feedback.\902\
Several SERs provided feedback that audit costs in the SBREFA Outline
were likely too low for the lowest complexity (i.e., Type A)
institution. The Bureau adjusted the Type A FI external audit costs to
match estimates provided to the Bureau from a SER of $3,500, an
increase from the original $500-$1,000 expected. The Bureau continues
to assume the representative low complexity institution employs only an
external audit but acknowledges feedback from SERs that this is not
necessarily true for all Type A institutions.
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\902\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 39.
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The Bureau also seeks additional comment on the cost estimates
above. During the Small Business Panel Review Process, several SERs
indicated other areas where costs estimates should be adjusted. A
number of SERs remarked that the annual training costs estimates were
likely too low. One SER estimated that training costs should be around
20 percent higher and several suggested that the number of employees
the Bureau is assuming for training costs on an annual basis is too
low. One SER, for example, stated that everyone who interacts with
customers will need to be trained and several indicated that the scope
of employees who will require training includes administrative and
management staff, as well as those directly involved in the credit
process. One SER stated that the hourly compensation the Bureau was
using for
[[Page 56561]]
cost calculations is assuming employees are too junior given the
complexity of the process and should be around $25 higher. Another
suggested that the transcribing data costs estimate is too low. One SER
remarked that researching questions and the annual subscription cost of
1071 data management or geocoding software is too low. While the Bureau
has not made specific changes in response to these suggestions, the
Bureau seeks comment on its estimation methodology and cost estimates.
In accordance with the balancing test discussed in part VI above, the
Bureau expects to publicly release data collected under the rule,
potentially with certain data modified or deleted. A more fulsome
discussion of potential risks and harms from the publication of a
public 1071 data can be found in part VI.C above, but in this section
the Bureau acknowledges several potential costs to covered entities
that stem from the publication of a public dataset under the proposed
rule.
With the publicly disclosed data, users would be able to assess
fair lending risks at the institution and market level, furthering
section 1071's fair lending purpose. Several commenters to the Bureau's
2017 RFI expressed concerns, however, about costs related to these
analyses.\903\ During the SBREFA process, some SERs were concerned that
published 1071 data could be used against financial institutions in
litigation by class action attorneys or to harm their public
reputations.\904\ Depending on the extent of publicly disclosed data,
the Bureau expects that some financial institutions could incur ongoing
costs related to responding to reports of disparities in their small
business lending practices. Some financial institutions could also
experience reputational risks associated with high profile reports of
existing disparities where more fulsome analysis of its business
practices would conclude that the disparities do not support a finding
of discrimination on a prohibited basis. In anticipation of needing to
respond to outside analysis and potential reputational risks, it is
possible that some financial institutions may choose to change their
product offerings available to small businesses, underwriting or
pricing practices, or overall participation in the small business
lending market. These costs are difficult to quantify, but the Bureau
seeks comment on the extent of the possible costs posed by litigation
or reputational harm as a result of the proposed rule.
---------------------------------------------------------------------------
\903\ 82 FR 22318 (May 15, 2017).
\904\ For example, one SER was concerned that published 1071
data could lead to increased litigation and thus a higher cost of
credit for small businesses. Another SER expressed concern that
pricing information could be misinterpreted by users of 1071 data
(for example, according to the SER, higher pricing for one race
might be used to infer discrimination when the pricing was in fact
unrelated to the race of the applicant). Such a misinterpretation
may cause reputational damage and consequently decrease
applications.
---------------------------------------------------------------------------
The Bureau also received feedback that financial institutions could
face potential costs with the publication of a public dataset under the
proposed rule either because potential clients would be concerned about
their data being collected or because of the additional competitive
pressure brought by a publicly available dataset. During the SBREFA
process, a number of SERs were concerned that full disclosure of all
1071 data would result in the re-identification of small business
applicants and potentially harm their privacy interests. Several SERs
asserted that public knowledge of borrowing activity (even without any
other potential harms) would be very concerning to some small
businesses as some small business owners consider that information
sensitive or deeply personal. Relatedly, one SER said that the
collection of 1071 data, including personal or demographic information,
could seem like an invasion of privacy by the financial institution,
particularly to minorities, and thus prospective applicants may decide
to seek financing elsewhere. A number of these SERs stated that 1071
data could be used to generate marketing lists, resulting in a
financial institution's competitors stealing small business customers.
Several SERs were concerned about the Bureau potentially making public
pricing data. Several SERs were particularly focused on information
regarding pricing and pricing structure being commercially sensitive to
financial institutions. The Bureau seeks comment on this class of
potential costs to covered financial institutions.
The Bureau seeks comment on its analysis of ongoing costs to
covered financial institutions as described herein.
4. Costs to Small Businesses
The Bureau expects that any direct costs of the proposed rule on
small businesses would stem from additional fields that the applicant
may have to complete on credit applications due to the proposed rule
compared to the baseline application process. This could include
information such as the race, ethnicity, and sex of business owners or
number of workers that are not typically required on business credit
applications. However, the Bureau expects that the cost of completing
these fields on applications to be negligible, especially compared to
the overall cost of credit. Therefore, the Bureau focuses the rest of
the discussion on the costs of small businesses to whether and how the
Bureau expects financial institutions to pass on the costs of
compliance with the proposed rule to small businesses and any possible
effects on the availability of small business credit.
Three types of costs (one-time, fixed ongoing, and variable
ongoing) have the potential to influence the price and availability of
credit to small businesses. In a competitive marketplace, standard
microeconomics suggests that lenders will extend loans up to the point
at which the revenue from granting an additional loan is equal to the
additional cost associated with the financial institution providing the
loan. One-time costs and fixed ongoing costs affect the overall
profitability of a lender's loan portfolio but do not affect the added
profit from extending an additional loan. Variable ongoing costs,
however, affect the profitability of each additional loan and will
influence the number of loans a lender provides. Based on the Bureau's
available evidence, it expects that the variable ongoing costs will be
passed on in full to small business credit applicants in the form of
higher prices or fees and does not expect there to be a significant
reduction in small businesses' ability to access credit.
One-time and fixed ongoing costs affect the overall profitability
of the loan portfolio and will be considered in the lender's decision
to remain in the small business credit market or the market for
specific small business credit products. A financial institution would
find it worthwhile to incur the one-time costs associated with
complying with the proposed rule if it expects to generate enough
profit over multiple years to cover those costs. Each year, a financial
institution would find it worthwhile to continue extending credit if
the total expected revenue from its chosen quantity of loans is greater
than the sum of its ongoing fixed and variable costs. A financial
institution would find it worthwhile to exit the market, even if it had
already incurred the one-time costs, if the total expected revenue from
that year were less than the total expected ongoing costs. During the
SBREFA process, the Bureau asked panelists how they would respond to
the cost of complying with the proposed rule.\905\ One nondepository
institution participant did indicate that smaller firms in their
industry may stop participating if one-time costs are too
[[Page 56562]]
high, particularly if small business lending is a secondary aspect of
their business model.\906\ Another nondepository institution
participant indicated that significantly increasing the time between
application and decision could occur due to the proposed requirements,
which they said would threaten their ability to compete with other
lenders.
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\905\ SBREFA Outline at 50-52.
\906\ The SER feedback discussed herein can be found in the
SBREFA Panel Report at 40.
---------------------------------------------------------------------------
In the One-Time Cost Survey, the Bureau asked respondents to rank a
list of potential actions they may take in response to the compliance
costs of implementing section 1071. Respondents ranked the following
list: ``Raise rates or fees on small business products''; ``Raise
rates/fees on other credit products''; ``Accept lower profits''; ``Exit
some geographic markets''; ``Tighten underwriting standards''; ``Offer
fewer or less complex products''; ``No longer offer small business
credit products''; or ``Other'' with two write-in options. Respondents
ranked these options from ``1'' to ``9'' indicating their most to least
likely responses, where ``1'' was the most likely.
In order to analyze these responses, the Bureau pooled data only
from respondents that answered both the ranking question and the number
of originations question. The Bureau implemented these restrictions to
the pool to eliminate responses from institutions that would not be
required to report under the proposed rule. Of the 105 total
respondents to the One-Time Cost Survey, 44 ranked every option and
reported more than 25 originations in the last year. The Bureau will
henceforth refer to these respondents as the ``impacts of
implementation'' sample.
Table 15 presents the potential responses to implementing section
1071 and the average ranking assigned by respondents in the impacts of
implementation sample. The responses are listed in order of most to
least likely on average, where a lower average ranking number means
that respondents ranked that response most likely. Consistent with
economic theory, respondents reported that they would be most likely to
raise rates or fees on small business products and other credit
products. On average, respondents reported that they would be least
likely to exit some geographic markets or cease offering small business
credit products.
[GRAPHIC] [TIFF OMITTED] TP08OC21.014
The Bureau expects that the variable ongoing costs would be passed
on in full to small business credit applicants in the form of higher
prices or fees. This expectation is consistent with both standard
microeconomic theory and feedback from SERs during the SBREFA process
and respondents to the One-Time Cost Survey. Per application, the
variable costs are approximately $28, $24, and $7 for Type A FIs, Type
B FIs, and Type C FIs, respectively. Even if the variable costs were
passed on in full to small business applicants in the form of higher
interest rates or fees associated with a loan or line of credit (or
even applicants in the form of application fees), the Bureau expects
that this would comprise a small portion of the total cost of the
average loan to the small business applicant.
As discussed above, the Bureau believes financial institutions
would decide to remain in or exit the small business credit market
based on the revenue generated from small business credit relative to
the sum of one-time costs, fixed ongoing costs, and variable ongoing
costs. The Bureau's total estimated one-time and ongoing costs are non-
negligible and could potentially result in exit from the market by
financial institutions that do not regularly originate many covered
credit transactions. The Bureau's proposed coverage threshold of 25
covered credit transactions in two consecutive years could prevent some
low-volume financial institutions from leaving the small business
credit market in response to the compliance costs of the proposed rule.
For example, the Bureau estimates that a Type A DI would incur one-time
costs of $58,400 and fixed ongoing costs of $4,536. A depository
institution that originates very few covered transactions every year
may exit the market if it does not expect that profits, even over
several years, would cover that one-time cost or if it does not expect
annual revenues to exceed the annual ongoing costs. However, based on
the net income per application estimates discussed above, the Bureau
believes that institutions that are covered under the proposed rule
(i.e., above the proposed coverage threshold) will earn enough revenue
to exceed these costs. Furthermore, the Bureau's findings during the
SBREFA process and the respondents to the One-Time Cost Survey
(discussed above) additionally support the Bureau's conclusion that the
increase in compliance costs will likely be passed through to customers
in the form of increased fees, rather than result in financial
institutions leaving the small business credit market.\907\
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\907\ As stated in the SBREFA Panel Report at 40, ``[g]enerally,
SERs did not suggest that they would leave the small business
lending market in response to increased costs under the eventual
1071 rule.''
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[[Page 56563]]
The Bureau seeks comment on other potential costs to small
businesses not discussed here. The Bureau seeks comment on its analysis
of costs to small businesses as described herein.
5. Alternatives Considered
This section discusses two categories of alternatives considered:
Other methods for defining a covered financial institution and limiting
the data points to those mandated by section 1071. The Bureau uses the
methodologies discussed in parts VII.D and VII.E to estimate the
impacts of these alternatives.
First, the Bureau considered multiple reporting thresholds for
purposes of defining a covered financial institution. In particular,
the Bureau considered whether to exempt financial institutions with
fewer than 50 or 100 originations in each of the two preceding calendar
years instead of 25 originations, as proposed. The Bureau also
considered whether to exempt depository institutions with assets under
$100 million or $200 million from section 1071's data collection and
reporting requirements.
Under a 50-origination threshold, the Bureau estimates that about
2,900 to 3,100 depository institutions would report, which is
approximately 1,100 fewer depository institutions relative to the
proposed threshold of 25 originations. The Bureau estimates that about
2,700 to 2,900 banks and savings associations and about 200 credit
unions would be covered under a 50-origination threshold. The Bureau
does not have sufficient information to estimate how many fewer
nondepository institutions would report under this alternative
threshold. The Bureau estimates that the total one-time costs across
all financial institutions associated with a 50-origination threshold
would be about $252,000,000 to $264,000,000, a decrease of about
$60,000,000 relative to the 25-origination threshold. The Bureau
estimates that the total annual ongoing costs associated with this
threshold would be about $357,000,000 to $374,000,000, a decrease of
about $17,000,000 per year relative to the 25-origination threshold.
Under a 100-origination threshold, the Bureau estimates that about
1,800 to 2,000 depository institutions would report, which is
approximately 2,200 fewer depository institutions relative to the
proposed threshold of 25 originations. The Bureau estimates that about
1,700 to 1,900 banks and savings associations and about 100 credit
unions would be covered under a 100-origination threshold The Bureau
estimates that the total one-time costs across all financial
institutions associated with a 100-origination threshold would be about
$192,000,000 to $203,000,000, a decrease of $120,000,000 relative to
the 25-origination threshold. The Bureau estimates that the total
annual ongoing costs associated with this threshold would be about
$332,000,000 to $347,000,000, a decrease of about $40,000,000 to
$45,000,000 per year relative to the 25-origination threshold. Again,
the Bureau does not have sufficient information to estimate how many
fewer nondepository institutions would be required to report under this
alternative.
The Bureau also considered $100 million and $200 million asset-
based thresholds for depository institutions. For the purposes of
considering these alternatives, the Bureau estimates how institutional
coverage and costs would be different if the Bureau required a 25-
origination threshold in addition to an asset-based threshold for
depository institutions. The Bureau assumes that the alternative
proposal would have been that a depository institution would be
required to report its small business lending activity for 2019 if it
had more than 25 originations in 2017 and 2018 and had assets over the
asset-based threshold on December 31, 2018. The Bureau further assumes
that if two institutions merged in 2019 then the resulting institution
would be required to report if the sum of the separate institutions'
assets on December 31, 2018 exceeded the asset-based threshold.
Under a $100 million asset-based threshold, the Bureau estimates
that between 3,500 and 3,600 depository institutions would report,
approximately 500 to 600 fewer depository institutions relative to a
25-origination threshold with no asset-based threshold. The Bureau
estimates that about 3,100 to 3,300 banks and savings associations and
about 300 credit unions would be covered under a 25-origination and
$100 million asset-based threshold. The Bureau estimates that the total
one-time costs across all financial institutions associated with the
addition of a $100 million asset threshold would be about $284,000,000
to $291,000,000, a decrease of between $28,000,000 and $32,000,000
relative to the proposed rule. The Bureau estimates that the total
annual ongoing costs associated with this threshold would be about
$366,000,000 to $384,000,000, a decrease of about $7,000,000 to
$9,000,000 per year relative to the 25-origination threshold with no
asset-based threshold.
Under a $200 million asset-based threshold, the Bureau estimates
that between 2,600 and 2,700 depository institutions would report,
approximately 1,400 to 1,500 fewer depository institutions relative to
a 25-origination threshold with no asset-based threshold. The Bureau
estimates that about 2,300 to 2,400 banks and savings associations and
about 300 credit unions would be covered under a 25-origination and
$200 million asset-based threshold. The Bureau estimates that the total
one-time costs across all financial institutions associated with the
addition of a $200 million asset threshold would be about $240,000,000
to $244,000,000, a decrease of between $73,000,000 and $80,000,000
relative to the proposed rule. The Bureau estimates that the total
annual ongoing costs associated with this threshold would be about
$348,000,000 to $363,000,000, a decrease of about $25,000,000 to
$29,000,000 per year relative to the 25-origination threshold with no
asset-based threshold.
Second, the Bureau considered the costs and benefits for limiting
its data collection to the data points required by the section 1071. In
addition to the statutorily required data points enumerated in section
1071, the statute also requires financial institutions to collect and
report any additional data that the Bureau determines would aid in
fulfilling the purposes of section 1071. The Bureau is proposing
several additional data points that rely solely on this authority.
Specifically, the Bureau is proposing to require that financial
institutions collect and report data on application channel,
application recipient, denial reasons (for denied applications only),
pricing information (for applications that are originated or approved
but not accepted), NAICS code, number of workers, time in business, and
number of principal owners. The Bureau has considered the impact of
instead proposing only the collection of those data points required by
statute.
Requiring the collection and reporting of only the statutory data
points would result in a reduction in the fair lending benefit of the
data compared to the proposed rule. For example, not collecting pricing
information would obscure possible fair lending risk by covered
financial institutions. Potential discriminatory behavior is not
limited to the action taken on an application, but rather includes the
terms and conditions under which applicants can access credit. If the
Bureau did not collect pricing information, it would not be able to
evaluate potential discriminatory behaviors on the basis of price. As
[[Page 56564]]
mentioned in part VII.F.1 above, several of the data points the Bureau
is proposing under its ECOA section 704B(e)(2)(H) authority are useful
in creating more accurate fair lending analyses. A reduction in the
rule's ability to facilitate the enforcement of fair lending laws would
negatively impact small businesses and small business owners relative
to the proposed rule.
Limiting the rule's data collection to only the data points
required under the statute would also reduce the ability of the rule to
support the business and community development purpose of the section
1071. Not including pricing information would significantly reduce the
ability of communities, governmental entities, and creditors to
understand credit conditions available to small businesses. Not
including NAICS code or time in business would reduce the ability of
governmental entities to tailor programs that can specifically benefit
young businesses or businesses in certain industries. This reduction in
benefits might be disproportionately borne by women-owned and minority-
owned small businesses.
Only requiring the collection and reporting of the statutory data
points would have reduced the annual ongoing cost of complying with the
proposed rule. Under this alternative, the estimated total annual
ongoing costs for Type A FIs, Type B FIs, and Type C FIs would be
$6,833; $34,004 and $233,209, respectively. Per application, the
estimated ongoing cost would be $68, $85, and $39 for Type A FIs, Type
B FIs, and Type C FIs, respectively. The estimated total annual market-
level ongoing cost of reporting would be between $363,000,000 and
$382,000,000 or about $10,000,000 per year less than under the proposed
rule. As discussed above, respondents to the One-Time Cost Survey were
instructed to assume that they would only report the mandatory data
fields. Hence, the Bureau can only estimate how ongoing costs would be
different under this alternative.
G. Potential Impact on Depository Institutions and Credit Unions With
$10 Billion or Less in Total Assets
As discussed above, the proposed rule would exclude financial
institutions with fewer than 25 originated covered credit transactions
in both of the two preceding calendar years. The Bureau believes that
the benefits of the proposed rule to banks, savings associations, and
credit unions with $10 billion or less in total assets will be similar
to the benefits to covered financial institutions as a whole, discussed
above. Regarding costs, other than as noted here, the Bureau also
believes that the impact of the proposed rule on banks, savings
associations, and credit unions with $10 billion or less in total
assets will be similar to the impact for covered financial institutions
as a whole. The primary difference in the impact on these institutions
is likely to come from differences in the level of complexity of
operations, compliance systems, and software, as well as number of
product offerings and volume of originations of these institutions.
Based on FFIEC and NCUA Call Report data for December 2019, 10,375
of 10,525 banks, savings associations, and credit unions had $10
billion or less in total assets. The Bureau estimates that between
3,900 and 4,000 of such institutions would be subject to the proposed
rule. The Bureau estimates that the market-level impact of the proposed
rule on annual ongoing costs for banks, savings associations, and
credit unions with $10 billion or less in assets would be between
$151,000,000 and $171,000,000. Regarding one-time costs, the Bureau
estimates that the market-level impact of the proposed rule for banks,
savings associations, and credit unions with $10 billion or less in
assets would be between $209,000,000 and $220,000,000. Using a 7
percent discount rate and a five-year amortization window, the
estimated annualized one-time costs would be between $51,000,000 and
$54,000,000.
The Bureau seeks comment on its analysis of the potential impact on
depository institutions and credit unions with $10 billion or less in
total assets as described herein.
H. Potential Impact on Small Businesses in Rural Areas
The proposed rule would not directly impact small businesses in
rural areas. However, as with all small businesses, small businesses in
rural areas may bear some indirect costs of the proposal. This would
occur if financial institutions serving rural areas are covered by the
proposed rule and if those institutions pass on some or all of their
cost of complying with the proposed rule to small businesses.
The source data from CRA submissions that the Bureau uses to
estimate institutional coverage and market estimates provide
information on the county in which small business borrowers are
located. However, approximately 89 percent of banks did not report CRA
data in 2019, and as a result the Bureau does not believe the reported
data are robust enough to estimate the locations of the small business
borrowers for the banks that do not report CRA data. The Credit Union
Call Report data do not provide any information on the location of
credit union borrowers. Nonetheless, the Bureau is able to provide some
geographical estimates of institutional coverage based on depository
institution branch locations.
The Bureau used the FDIC's Summary of Deposits to identify the
location of all brick and mortar bank and savings association branches
and the NCUA Credit Union Branch Information to identify the location
of all credit union branch and corporate offices.\908\ A bank, savings
association, or credit union branch was defined as rural if it is in a
rural county, as specified by the USDA's Urban Influence Codes.\909\ A
branch is considered covered by the proposed rule if it belongs to a
bank, savings association, or credit union that the Bureau estimated
would be included under the proposed threshold of 25 originations in
2017 and 2018. Using the estimation methodology discussed in part VII.D
above, the Bureau estimates that about 90 to 92 percent of rural bank
and savings association branches and about 95 percent of non-rural bank
and savings association branches would be covered under the proposed
rule. The Bureau estimates that about 27 percent of rural credit union
branches and about 29 percent of non-rural credit union branches would
be covered under the proposed rule.\910\
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\908\ See Fed. Deposit Ins. Corp., Summary of Deposits (SOD)--
Annual Survey of Branch Office Deposits (last updated June 1, 2021),
https://www.fdic.gov/regulations/resources/call/sod.html. The NCUA
provides data on credit union branches in the quarterly Call Report
Data files. See Nat'l Credit Union Admin., Call Report Quarterly
Data, https://www.ncua.gov/analysis/credit-union-corporate-call-report-data/quarterly-data (last visited Aug. 5, 2021).
\909\ This is the same methodology as used in the Bureau's rural
counties list. See Bureau of Consumer Fin. Prot., Rural and
underserved counties list, https://www.consumerfinance.gov/compliance/compliance-resources/mortgage-resources/rural-and-underserved-counties-list/ (last visited July 28, 2020).
\910\ The Bureau notes that most credit union branches do not
belong covered credit unions because most credit unions did not
report any small business loans in the NCUA Call Report data. Of the
5,437 credit unions that existed in December 2019, 4,359 (or 81.5
percent) reported no small business originations in 2017 or 2018.
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In a competitive framework in which financial institutions are
profit maximizers, financial institutions would pass on variable costs
to future small business applicants, but absorb one-time costs and
increased fixed costs in the short run.\911\ Based on previous
[[Page 56565]]
HMDA rulemaking efforts and feedback through the SBREFA process, the
following seven operational steps affect variable costs: Transcribing
data, resolving reportability questions, transferring data to a data
entry system, geocoding, researching questions, resolving question
responses, and checking post-submission edits. Overall, the Bureau
estimates that the impact of the proposed rule on variable costs per
application is $28 for a Type A FI, $24 for type B FIs, and $7 for Type
C FIs. The covered financial institutions that serve rural areas will
attempt to pass these variable costs on to future small business
applicants. Amortized over the life of the loan, this expense would
represent a negligible increase in the cost of a covered credit
transaction.
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\911\ If markets are not perfectly competitive or financial
institutions are not profit maximizers, then what financial
institutions pass on may differ. For example, they may attempt to
pass on one-time costs and increases in fixed costs, or they may not
be able to pass on variable costs. Furthermore, some financial
institutions may exit the market in the long run. However, other
financial institutions may also enter the market in the long run.
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The One-Time Cost Survey can shed light on how financial
institutions that serve rural communities will respond to the proposed
rule. The Bureau asked respondents to the survey to report whether
their institution primarily served rural or urban communities or an
even mix. All respondents in the impacts of implementation sample
answered this question. Of the 44 respondents in the impacts of
implementation sample, 13 primarily serve rural communities, 15
primarily serve urban communities, and 16 serve an even mix. Table 16
presents the potential responses to implementing section 1071 and the
average ranking assigned by respondents that serve rural communities,
urban communities, an even mix, and all of the respondents in the
impacts of implementation sample. The responses are listed in order of
most to least likely on average across all respondents, where a lower
average ranking number means that respondents ranked that response most
likely. Respondents that primarily serve rural communities or an even
mix rank raising rates or fees on small business or other credit
products as the most likely response. These institutions also rank
exiting some geographic markets and no longer offering small business
credit products as the least likely response to the proposed rule.
[GRAPHIC] [TIFF OMITTED] TP08OC21.015
The Bureau thus does not anticipate any material adverse effect on
credit access in the long or short term to rural small businesses.
The Bureau seeks comment on its analysis of potential impacts on
small businesses in rural areas as described herein.
VIII. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act (RFA) \912\ generally requires an
agency to conduct an initial regulatory flexibility analysis (IRFA) and
a final regulatory flexibility analysis (FRFA) of any rule subject to
notice-and-comment rulemaking requirements. These analyses must
``describe the impact of the proposed rule on small entities.'' \913\
An IRFA or FRFA is not required if the agency certifies that the rule
will not have a significant economic impact on a substantial number of
small entities.\914\ The Bureau also is subject to certain additional
procedures under the RFA involving the convening of a panel to consult
with small business representatives prior to proposing a rule for which
an IRFA is required.\915\ The Bureau has not certified that the
proposed rule would not have a significant economic impact on a
substantial number of small entities within the meaning of the RFA.
Accordingly, the Bureau convened and chaired a Small Business Review
Panel under SBREFA to consider the impact of the proposed rule on small
entities that would be subject to that rule and to obtain feedback from
representatives of such small entities. The Small Business Review Panel
for this rulemaking is discussed below in part VIII.A. The Bureau is
also publishing an IRFA. Among other things, the IRFA estimates the
number of small entities that will be subject to the proposed rule and
[[Page 56566]]
describes the impact of that rule on those entities. The IRFA for this
rulemaking is set forth below in part VIII.B.
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\912\ 5 U.S.C. 601 et seq.
\913\ 5 U.S.C. 603(a). For purposes of assessing the impacts of
the proposed rule on small entities, ``small entities'' is defined
in the RFA to include small businesses, small not-for-profit
organizations, and small government jurisdictions. 5 U.S.C. 601(6).
A ``small business'' is determined by application of SBA regulations
and reference to the NAICS classifications and size standards. 5
U.S.C. 601(3). A ``small organization'' is any ``not-for-profit
enterprise which is independently owned and operated and is not
dominant in its field.'' 5 U.S.C. 601(4). A ``small governmental
jurisdiction'' is the government of a city, county, town, township,
village, school district, or special district with a population of
less than 50,000. 5 U.S.C. 601(5).
\914\ 5 U.S.C. 605(b).
\915\ 5 U.S.C. 609.
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A. Small Business Review Panel
Under section 609(b) of the RFA, as amended by SBREFA and the Dodd-
Frank Act,\916\ the Bureau must seek, prior to conducting the IRFA,
information from representatives of small entities that may potentially
be affected by its proposed rules to assess the potential impacts of
that rule on such small entities.\917\ Section 609(b) sets forth a
series of procedural steps with regard to obtaining this information.
The Bureau first notifies the Chief Counsel for Advocacy of the SBA
(Chief Counsel) and provides the Chief Counsel with information on the
potential impacts of the proposed rule on small entities and the types
of small entities that might be affected.\918\ Not later than 15 days
after receipt of the formal notification and other information
described in section 609(b)(1) of the RFA, the Chief Counsel then
identifies the small entity representatives, the individuals
representative of affected small entities for the purpose of obtaining
advice and recommendations from those individuals about the potential
impacts of the proposed rule.\919\ The Bureau convenes a Small Business
Review Panel for such rule consisting wholly of full-time Federal
employees of the office within the Bureau responsible for carrying out
the proposed rule, OIRA within the OMB, and the Chief Counsel.\920\ The
Small Business Review Panel reviews any material the Bureau has
prepared in connection with the SBREFA process and collects the advice
and recommendations of each individual small entity representative
identified by the Bureau after consultation with the Chief Counsel on
issues related to sections 603(b)(3) through (b)(5) and 603(c) of the
RFA.\921\ No later than 60 days after the date the Bureau convenes the
Small Business Review Panel, the panel reports on the comments of the
small entity representatives (SERs) and its findings as to the issues
on which the Small Business Review Panel consulted with the SERs, and
the report is made public as part of the rulemaking record.\922\ Where
appropriate, the Bureau modifies the proposed rule or the IRFA in light
of the foregoing process.\923\
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\916\ 5 U.S.C. 609(b).
\917\ Id.
\918\ 5 U.S.C. 609(b)(1).
\919\ 5 U.S.C. 609(b)(2).
\920\ 5 U.S.C. 609(b)(3).
\921\ 5 U.S.C. 609(b)(4). As described in part VIII.B below,
sections 603(b)(3) through (5) and 603(c) of the RFA, respectively,
require a description of and, where feasible, provision of an
estimate of the number of small entities to which the proposed rule
will apply; a description of the projected reporting, record
keeping, and other compliance requirements of the proposed rule,
including an estimate of the classes of small entities which will be
subject to the requirement and the type of professional skills
necessary for preparation of the report or record; an
identification, to the extent practicable, of all relevant Federal
rules which may duplicate, overlap, or conflict with the proposed
rule; and a description of any significant alternatives to the
proposed rule which accomplish the stated objectives of applicable
statutes and which minimize any significant economic impact of the
proposed rule on small entities. 5 U.S.C. 603(b)(3) through (5),
(c).
\922\ 5 U.S.C. 609(b)(5).
\923\ 5 U.S.C. 609(b)(6).
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On August 10, 2020, the Bureau provided the Chief Counsel (as well
as OIRA) with the formal notification and other information required
under section 609(b)(1) of the RFA. To obtain feedback from small
entities to inform the Small Business Review Panel pursuant to section
609(b)(2) and (4) of the RFA, the Bureau, in consultation with the
Chief Counsel, identified several categories of small entities that may
be subject to the proposed rule for purposes of the IRFA: Depository
institutions; fintech lenders and MCA providers; commercial finance
companies; nondepository CDFIs; nondepository lenders of other 5+ unit
mortgages; Farm Credit System members; and governmental lending
entities. Section 3 of the IRFA, in part VIII.B.3 below, describes in
greater detail the Bureau's analysis of the number and types of
entities that may be affected by the proposed rule. Having identified
the categories of small entities that may be subject to the proposed
rule for purposes of an IRFA, the Bureau then, in consultation with the
Chief Counsel and OIRA, selected 20 SERs to participate in the SBREFA
process. As discussed in section 7 of the SBREFA Panel Report,\924\
described below, the SERs included representatives from each of the
categories identified by the Bureau and comprised a diverse group of
individuals with regard to geography and type of locality (i.e., rural,
urban, suburban, or metropolitan areas).
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\924\ See SBREFA Panel Report at 15.
---------------------------------------------------------------------------
On October 15, 2020, the Bureau formally convened the Small
Business Review Panel pursuant to section 609(b)(3) of the RFA.
Afterwards, to collect the advice and recommendations of the SERs under
section 609(b)(4) of the RFA, the Small Business Review Panel held a
total of four Panel Outreach Meetings with the SERs during October 19-
22, 2020, conducted online via video conference. To help SERs and to
facilitate an informed and detailed discussion of the proposals under
consideration, discussion questions for the SERs were included
throughout the Bureau's SBREFA Outline.\925\ In advance of the Panel
Outreach Meetings, the Bureau, SBA's Office of Advocacy, and OIRA held
a series of video conferences with the SERs to describe the Small
Business Review Process, obtain important background information about
each SER's current business practices, and begin discussions on
selected portions of the proposals under consideration. All 20 SERs
participated in the Panel Outreach Meetings. The Panel also invited
SERs to submit written feedback by November 9, 2020; the Bureau
received written feedback from 15 of the SERs.\926\
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\925\ These questions also appeared in a shorter Discussion
Guide for Small Entity Representatives. Bureau of Consumer Fin.
Prot., Small Business Advisory Review Panel, Consumer Financial
Protection Bureau, Small Business Lending Data Collection
Rulemaking, Discussion Guide for Small Entity Representatives (Sept.
15, 2020), https://files.consumerfinance.gov/f/documents/cfpb_1071-sbrefa_discussion-guide_2020-09.pdf.
\926\ This written feedback is attached as appendix A to the
SBREFA Panel Report.
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The Bureau also invited other stakeholders to submit feedback on
the SBREFA Outline, which was due by December 14, 2020. See generally
SBREFA Outline. Feedback from these other stakeholders was not
considered by the Panel and is not reflected in the Panel Report. See
part III above for additional information.
On December 15, 2020, the Bureau publicly released the written
SBREFA Panel Report.\927\ The SBREFA Panel Report includes the
following:
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\927\ Bureau of Consumer Fin. Prot., Consumer Financial
Protection Bureau Releases Report on Implementing the Dodd-Frank
Act's Small Business Lending Data Collection Requirement (Dec. 15,
2021), https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-releases-report-on-implementing-the-dodd-frank-acts-small-business-lending-data-collection-requirement/.
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Background information on the proposals under consideration at the
time; information on the types of small entities that would be subject
to those proposals and on the SERs who were selected to advise the
Panel; a summary of the Panel's outreach to obtain the advice and
recommendations of those small entity representatives; a discussion of
the comments and recommendations of the small entity representatives;
and a discussion of the Panel's findings, focusing on the statutory
elements required under section 603 of the RFA.\928\
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\928\ 5 U.S.C. 609(b)(5).
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In preparing this proposed rule and the IRFA, the Bureau has
considered the
[[Page 56567]]
feedback from SERs through the SBREFA process and the findings and
recommendations in the SBREFA Panel Report. The section-by-section
analysis of the proposed rule in part V above and the IRFA discuss this
feedback and the specific findings and recommendations of the Panel, as
applicable. The SBREFA process provided the Panel and the Bureau with
an opportunity to identify and explore opportunities to minimize the
burden of the proposed rule on small entities while achieving the
rule's purposes. It is important to note, however, that the Panel
prepared the SBREFA Panel Report at a preliminary stage of the
proposal's development and that the SBREFA Panel Report--in particular,
the Panel's findings and recommendations--should be considered in that
light. Also, any options identified in the SBREFA Panel Report for
reducing the proposed rule's regulatory impact on small entities were
expressly subject to further consideration, analysis, and data
collection by the Bureau to ensure that the options identified were
practicable, enforceable, and consistent with section 1071 of the Dodd-
Frank Act and its statutory purposes. The proposed rule and the IRFA
reflect further consideration, analysis, and data collection by the
Bureau.
B. Initial Regulatory Flexibility Analysis
Under RFA section 603(a), an IRFA ``shall describe the impact of
the proposed rule on small entities.'' \929\ Section 603(b) of the RFA
sets forth the required elements of the IRFA. Section 603(b)(1)
requires the IRFA to contain a description of the reasons why action by
the agency is being considered.\930\ Section 603(b)(2) requires a
succinct statement of the objectives of, and the legal basis for, the
proposed rule.\931\ The IRFA further must contain a description of and,
where feasible, an estimate of the number of small entities to which
the proposed rule will apply.\932\ Section 603(b)(4) requires a
description of the projected reporting, recordkeeping, and other
compliance requirements of the proposed rule, including an estimate of
the classes of small entities that will be subject to the requirement
and the types of professional skills necessary for the preparation of
the report or record.\933\ In addition, the Bureau must identify, to
the extent practicable, all relevant Federal rules which may duplicate,
overlap, or conflict with the proposed rule.\934\ Furthermore, the
Bureau must describe any significant alternatives to the proposed rule
which accomplish the stated objectives of applicable statutes and which
minimize any significant economic impact of the proposed rule on small
entities.\935\ Finally, as amended by the Dodd-Frank Act, RFA section
603(d) requires that the IRFA include a description of any projected
increase in the cost of credit for small entities, a description of any
significant alternatives to the proposed rule which accomplish the
stated objectives of applicable statutes and which minimize any
increase in the cost of credit for small entities (if such an increase
in the cost of credit is projected), and a description of the advice
and recommendations of representatives of small entities relating to
the cost of credit issues.\936\
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\929\ 5 U.S.C. 603(a).
\930\ 5 U.S.C. 603(b)(1).
\931\ 5 U.S.C. 603(b)(2).
\932\ 5 U.S.C. 603(b)(3).
\933\ 5 U.S.C. 603(b)(4).
\934\ 5 U.S.C. 603(b)(5).
\935\ 5 U.S.C. 603(c).
\936\ 5 U.S.C. 603(d)(1); Dodd-Frank Act section 1100G(d)(1),
124 Stat. 2112.
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1. Description of the Reasons Why Agency Action Is Being Considered
As discussed in part I above, section 1071 of the Dodd-Frank Act
amended ECOA to require that financial institutions collect and report
to the Bureau certain data regarding applications for credit for women-
owned, minority-owned, and small businesses.\937\ Section 1071's
statutory purposes are (1) to facilitate enforcement of fair lending
laws, and (2) to enable communities, governmental entities, and
creditors to identify business and community development needs and
opportunities of women-owned, minority-owned, and small businesses.
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\937\ ECOA section 704B.
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Section 1071 specifies a number of data points that financial
institutions are required to collect and report, and also provides
authority for the Bureau to require any additional data that the Bureau
determines would aid in fulfilling its statutory purposes. Section 1071
also contains a number of other requirements, including those that
address restricting the access of underwriters and other persons to
certain 1071 data, publication of 1071 data, and the Bureau's
discretion to modify or delete data prior to publication in order to
advance a privacy interest.
As discussed throughout this notice, Congress amended ECOA by
adding section 1071, which directs the Bureau to adopt regulations
governing the collection and reporting of small business lending data.
Section 1071 directs the Bureau to prescribe such rules and issue such
guidance as may be necessary to carry out, enforce, and compile data
pursuant to section 1071, and permits the Bureau to adopt exceptions to
any requirement or to exempt financial institutions from the
requirements of section 1071 as the Bureau deems necessary or
appropriate to carry out the purposes of section 1071.
In addition, as discussed in part II above, currently available
data on small business lending are fragmented, incomplete, and not
standardized, making it difficult to make meaningful comparisons across
products, financial institutions, and over time. This hinders attempts
by policymakers and other stakeholders to understand the size, shape,
and dynamics of the small business lending marketplace, including the
interaction of supply and demand, as well as potentially problematic
lending practices, gaps, or trends in funding that may be holding back
some communities.\938\
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\938\ While Call Report and CRA data provide some indication of
the level of supply of small business credit, the lack of data on
small business credit applications makes demand for credit by small
businesses more difficult to assess, including with respect to local
markets or protected classes.
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Data collected under the proposed rule would constitute the largest
and most comprehensive data in the United States on credit availability
for small businesses. The proposed data collection would also provide
an unprecedented window into the small business lending market, and
such transparency will benefit financial institutions covered by the
rule. The public data published under the proposed rule would allow
financial institutions to better understand the demand for small
business credit products and the conditions under which they are being
supplied by other lenders. Lenders would likely use the data to
understand small business lending market conditions more effectively
and at a more granular level than is possible with existing data
sources, such as Call Reports, data from public lending programs, or
privately purchased data. Data collected under the proposed rule could
enable lenders to identify promising opportunities to extend credit.
The proposed rule will also provide some reduction of the
compliance burden of fair lending reviews for lower risk financial
institutions by reducing the ``false positive'' rates during fair
lending review prioritization by regulators. Currently, financial
institutions are subject to fair lending reviews by regulators to
ensure that they
[[Page 56568]]
are complying with the ECOA in their small business lending processes.
Data reported under the proposed rule will allow regulators to
prioritize fair lending reviews of lenders with higher risk of
potential fair lending violations, which reduces the burden on
institutions with lower fair lending risk.
The proposed rule effectuates Congress's specific mandate to the
Bureau to adopt rules to implement section 1071. For a further
description of the reasons why agency action is being considered, see
the background discussion for the proposed rule in part II above.
2. Succinct Statement of the Objectives of, and Legal Basis for, the
Proposed Rule
This rulemaking has multiple objectives. The proposed rule is
intended to advance the two statutory purposes of section 1071, which
are (1) facilitating enforcement of fair lending laws and (2) enabling
communities, governmental entities, and creditors to identify business
and community development needs and opportunities of women-owned,
minority-owned, and small businesses. To achieve these objectives, the
proposed rule would require covered financial institutions to collect
and report certain data on applications for covered credit transactions
for small businesses, including minority-owned and women-owned small
businesses. The data to be collected and reported would include a
number of statutorily required data fields regarding small business
applications, as well as several additional data fields that the Bureau
preliminarily determines would help fulfill the purposes of section
1071. The Bureau would make available to the public, annually on the
Bureau's website, the data submitted to it by financial institutions,
subject to deletions or modifications made by the Bureau, at its
discretion, if the Bureau determines that such deletions or
modifications would advance a privacy interest.
As described above, the Dodd-Frank Act amended ECOA by adding
section 1071, which directs the Bureau to adopt regulations governing
the collection and reporting of small business lending data. ECOA
section 704B(g)(1) grants the Bureau general rulemaking authority,
providing that the Bureau shall prescribe such rules and issue such
guidance as may be necessary to carry out, enforce, and compile data
pursuant to section 1071. Section 704B(g)(2) also permits the Bureau to
adopt exceptions to any requirement of section 1071 and to
conditionally or unconditionally exempt any financial institution or
class of financial institutions from the requirements of section 1071,
as the Bureau deems necessary or appropriate to carry out the purposes
of section 1071. In addition, section 703(a) of ECOA authorizes the
Bureau to prescribe regulations to carry out the purposes of ECOA.
Much of section 1071 establishes requirements or obligations for
financial institutions that the Bureau would implement in this proposed
rule. ECOA section 704B(e)(2) requires that the information compiled
and maintained be itemized in order to clearly and conspicuously
disclose an enumerated list of data points. Section 704B(e)(2)(H)
requires financial institutions to collect and report any additional
data that the Bureau determines would aid in fulfilling the purposes of
section 1071. Other parts of section 1071 require the Bureau to adopt
regulations to implement certain requirements, including how financial
institutions must compile and maintain data pursuant to section 1071,
and the form of information made available by financial institutions to
the public and the form and manner that the Bureau itself should make
1071 data available to the public generally. Additional section 1071
provisions give the Bureau the discretionary authority to delete or
modify 1071 data before making it available to the public if the Bureau
determines that the deletion or modification of the data would advance
a privacy interest, and to compile and aggregate 1071 data for its own
use, as well as to make public such compilations of aggregate data. The
legal basis for the proposed rule is discussed in detail in the legal
authority analysis in part IV and in the section-by-section analyses in
part V above.
3. Description of and, Where Feasible, Provision of an Estimate of the
Number of Small Entities to Which the Proposed Rule Will Apply
As discussed in the SBREFA Panel Report,\939\ for the purposes of
assessing the impacts of the proposed rule on small entities, ``small
entities'' is defined in the RFA to include small businesses, small
nonprofit organizations, and small government jurisdictions.\940\ A
``small business'' is determined by application of SBA regulations in
reference to the North American Industry Classification System (NAICS)
classification and size standards.\941\ Under such standards, the
Bureau identified several categories of small entities that may be
subject to the proposed provisions: Depository institutions; fintech
lenders and MCA providers; commercial finance companies; nondepository
CDFIs; nondepository lenders of other 5+ unit mortgages; Farm Credit
System members; and governmental lending entities. The NAICS codes
covered by these categories are described below.
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\939\ See SBREFA Panel Report at 41-42.
\940\ 5 U.S.C. 601(6).
\941\ The current SBA size standards are found on SBA's website,
Small Bus. Admin., Table of size standards (Aug. 19, 2019), https://www.sba.gov/content/table-small-businesssize-standards.
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The following table provides the Bureau's estimate of the number
and types of entities that may be affected by the proposed rule:
[[Page 56569]]
[GRAPHIC] [TIFF OMITTED] TP08OC21.016
The following paragraphs describe the categories of entities that
the Bureau expects would be affected by the proposed rule.
Depository institutions (banks and credit unions): The Bureau
estimates that there are about 4,100 banks, savings associations, and
credit unions engaged in small business lending that originate enough
covered transactions to be covered by the proposed rule.\942\ These
companies potentially fall into four different industry categories,
including ``Commercial Banking'' (NAICS 522110), ``Savings
Institutions'' (NAICS 522120), ``Credit Unions'' (NAICS 522130), and
``Credit Card Issuing'' (NAICS 522210). All of these industries have a
size standard threshold of $600 million in assets. The Bureau estimates
that about 2,700 of these institutions are small entities according to
this threshold. See part VII.D above for more detail on how the Bureau
arrived at these estimates.
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\942\ The Bureau notes that the category of depository
institutions also includes CDFIs that are also depository
institutions.
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Fintech lenders and MCA providers: As discussed in more detail in
part II.D above, the Bureau estimates that there are about 130 fintech
lenders and MCA providers engaged in small business lending that
originate enough covered transactions to be covered by the proposed
rule. These companies span multiple industries, including ``All Other
Nondepository Credit Intermediation'' (NAICS 522298), ``Consumer
Lending'' (NAICS 522291), ``Financial Transactions, Processing,
Reserve, and Clearinghouse Activities'' (NAICS 522320), and ``Data
Processing, Housing and Related Services'' (NAICS 518210). All of these
industries have a size standard threshold of $35 million in sales
(NAICS 518210) or $41.5 million in sales (all other NAICS). The
[[Page 56570]]
Bureau assumes that about 90 percent, or 117, of these entities are
small according to these size standards.
Commercial finance companies: As discussed in more detail in part
II.D above, the Bureau estimates that there are about 300 commercial
finance companies, including captive and independent financing, engaged
in small business lending that originate enough covered credit
transactions to be covered by the proposed rule. These companies span
multiple industries, including ``Software Publishers'' (NAICS 511210),
``Commercial Air, Rail, and Water Transportation Equipment Rental and
Leasing'' (NAICS 532411), ``Other Commercial and Industrial Machinery
and Equipment Rental and Leasing'' (NAICS 532490), ``Sales financing''
(NAICS 522220) and ``Consumer Lending'' (NAICS 522291). These
industries have size standard thresholds of $41.5 million in sales
(NAICS 511210 and 522220) or $35 million in sales (NAICS 532411,
532490, and 522291). The Bureau assumes that about 90 percent, or 270,
commercial finance companies are small according to these size
standards.
Nondepository CDFIs: As discussed in more detail in part II.D
above, the Bureau estimates that there are 240 nondepository CDFIs
engaged in small business lending that originate enough covered credit
transactions to be covered by the proposed rule. CDFIs generally fall
into ``Activities Related to Credit Intermediation (Including Loan
Brokers)'' (NAICS 522390), ``Miscellaneous Intermediation'' (NAICS
523910), ``Civic and Social Organizations'' (NAICS 813410), and
``Mortgage and Nonmortgage Loan Brokers'' (NAICS 522310). These
industries have size standard thresholds of $8 million in sales (NAICS
522310, 813410), $22 million in sales (NAICS 522390), and $41.5 million
in sales (NAICS 523910). The Bureau assumes that about 95 percent, or
228, nondepository CDFIs are small entities.
Nondepository lenders of other 5+ unit mortgages: As discussed in
more detail in part II.D above, the Bureau estimates that there are
about 50 nondepository mortgage lenders engaged in small business
lending that originate enough covered credit transactions to be covered
by the proposed rule. These institutions are in either ``Real estate
credit'' (NAICS 522292) or ``Mortgage and Nonmortgage Loan Brokers''
(NAICS 522310). These industries both have a size standard threshold of
$41.5 million. The Bureau estimates that about 90 percent, or 45,
nondepository mortgage lenders are small entities.
Farm Credit System members: The Bureau estimates that there are 72
members of the Farm Credit System (banks and associations) that are
engaged in small business lending and that originate enough covered
credit transactions to be covered by the proposed rule.\943\ These
institutions are in the ``All Other Nondepository Credit
Intermediation'' (NAICS 522298) industry. The size standard for this
industry is $41.5 million in sales. The Bureau estimates that 18
members of the Farm Credit System are small entities.
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\943\ Fed. Farm Credit Banks Funding Corp., Farm Credit 2019
Annual Information Statement of the Farm Credit System, at 7 (Feb.
28, 2020), https://www.farmcreditfunding.com/ffcb_live/serve/public/pressre/finin/report.pdf?assetId=395570. The Bureau notes that Farm
Credit System banks do not report FFIEC Call Reports and are thus
not counted in the number of banks and savings associations
discussed above.
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Governmental lending entities: As discussed in more detail in part
II.D above, the Bureau estimates that there are about 100 governmental
lending entities engaged in small business lending that originate
enough covered credit transactions to be covered by the proposed rule.
``Small governmental jurisdictions'' are the governments of cities,
counties, towns, townships, villages, school districts, or special
districts, with a population of less than fifty thousand. The Bureau
assumes that none of the governmental lending entities covered by the
proposed rule are considered small.
4. Projected Reporting, Recordkeeping, and Other Compliance
Requirements of the Proposed Rule, Including an Estimate of the Classes
of Small Entities Which Will Be Subject to the Requirement and the Type
of Professional Skills Necessary for the Preparation of the Report
Reporting requirements. ECOA section 704B(f)(1) provides that
``[t]he data required to be compiled and maintained under [section
1071] by any financial institution shall be submitted annually to the
Bureau.'' Section 1071 requires financial institutions to collect and
report information regarding any application for ``credit'' made by
women-owned, minority-owned, and small businesses. The Bureau is also
proposing that the following transactions are not covered by the rule:
leases, factoring, consumer-designated credit, credit secured by
certain properties, trade credit, public utilities credit, securities
credit, and incidental credit.
Under the proposed rule, financial institutions would be required
to report data on small business credit applications if they originated
at least 25 covered transactions in each of the previous two calendar
years. The Bureau is proposing that 1071 data collection be done on a
calendar-year basis and submitted to the Bureau by a specified time
after the end of each calendar year. The section-by-section analyses of
the proposed rule in part V above discuss the required data points and
the scope of the proposed rule in greater detail. More information is
also available in section 3 of the SBREFA Panel Report.
Recordkeeping requirements. ECOA section 704B(f)(2)(A) requires
that information compiled and maintained under section 1071 be
``retained for not less than 3 years after the date of preparation.''
The Bureau is proposing that financial institutions retain 1071 data
for at least three years after it is submitted to the Bureau. Further,
704B(f)(2) generally requires that the information compiled and
maintained by financial institutions, and submitted annually to the
Bureau, be made available to the public. Publication of these data
would fill existing gaps in the public's general understanding of the
small business lending environment and help identify potential fair
lending concerns regarding small businesses as well as the needs and
opportunities for both business and community development. In
accordance with 704B(e)(3), the Bureau is also proposing a prohibition
on including certain personally identifiable information about any
individuals associated with small business applicants in the data that
a financial institution is required to compile, maintain, and report to
the Bureau, other than information specifically required to be
collected and reported (such as the race, sex, and ethnicity of
principal owners). Financial institutions must, unless subject to an
exception, limit the access of a certain officers and employees to
applicants' responses to the inquiries regarding women-owned and
minority-owned business status, as well as the race, sex, and ethnicity
of principal owners. In addition, applicants' responses to the
inquiries regarding women-owned and minority-owned business status, as
well as the race, sex, and ethnicity of principal owners, must be
maintained separately from the application and accompanying
information.
Costs to small entities. The Bureau expects that the proposed rule
may impose one-time and ongoing costs on small-entity providers of
credit to small businesses. The Bureau has preliminarily identified
eight categories of one-time costs that make up the components
necessary for a financial
[[Page 56571]]
institution to develop the infrastructure to collect and report data
required by the eventual 1071 rule. Those categories are preparation/
planning; updating computer systems; testing/validating systems;
developing forms/applications; training staff and third parties (such
as dealers and brokers); developing policies/procedures; legal/
compliance review; and post-implementation review of compliance
policies and procedures. The Bureau conducted a survey regarding
potential one-time implementation costs for section 1071 compliance
targeted at financial institutions who extend small business credit.
The Bureau used the results of this survey to estimate the one-time
costs for financial institutions covered by the proposed rule using the
methodology described in part VII.E.1 above. The Bureau estimates that
depository institutions with the lowest level of complexity in
compliance operations (i.e., Type A DIs) would incur one-time costs of
$58,400. The Bureau estimates that depository institutions with a
middle level of complexity in compliance operations (i.e., Type B DIs)
would incur one-time costs of $44,500. The Bureau estimates that
depository institutions with the highest level of complexity in
compliance operations (i.e., Type C DIs) would incur one-time costs of
$75,700. Finally, the Bureau estimates that Non-DIs would incur one-
time costs of $95,200.
The Bureau estimates that the overall market impact of one-time
costs for small depository institutions will be between $143,000,000
and $153,000,000.\944\ The Bureau estimates that the overall market
impact of one-time costs for Non-DIs will be $63,000,000.
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\944\ The Bureau notes that the variation in this range comes
primarily from the uncertainty in the number of originations made by
small banks and savings associations. The range does not fully
account for the uncertainty associated with estimates of the one-
time costs for each type of institution.
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Adapting ongoing cost methodology from previous HMDA rulemaking
efforts, the Bureau identified 15 specific data collection and
reporting activities that would impose ongoing costs to financial
institutions covered by the rule.\945\ The Bureau estimated that
financial institutions with the lowest level of complexity in
compliance operations (i.e. Type A FIs) would incur around $7,386 in
total annual ongoing costs, or about $74 in total cost per application
processed (assuming a representative 100 applications per year). For
financial institutions of this type, the largest drivers of the ongoing
costs are activities that require employee time to complete. Activities
like transcribing data, transferring data to the data management
software, standard edits and internal checks, and training all require
loan officer time. The Bureau estimates that financial institutions
with a middle level of complexity in compliance operations (i.e. Type B
FIs), which is somewhat automated, would incur approximately $35,476 in
additional ongoing costs per year, or around $89 per application
(assuming a representative 400 applications per year). The largest
components of this ongoing cost are the expenses of the small business
application management software and geocoding software (in the form of
an annual software subscription fee) and the external audit of the
data. The Bureau estimates that financial institutions with the highest
level of complexity in compliance operations (i.e. Type C FIs), which
is significantly automated, would incur approximately $243,266 in
additional ongoing costs per year, or around $41 per application
(assuming a representative 6,000 applications per year). The largest
components of this ongoing cost are the cost of an internal audit,
transcribing data, and annual edits and internal checks.
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\945\ The Bureau applied the same methodology for the ongoing
costs for small entities as that found in part VII.E.2 above.
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The Bureau estimates that the overall market impact of ongoing
costs for small entities will be between $112,000,000 and $126,000,000
per year.
Estimate of the classes of small entities that will be subject to
the requirement and the type of professional skills necessary for the
preparation of the report or record. Section 603(b)(4) of the RFA also
requires an estimate of the type of professional skills necessary for
the preparation of the reports or records. The recordkeeping and
compliance requirements of the proposed rule that would affect small
entities are summarized above. Based on outreach with financial
institutions, vendors, and governmental agency representatives, the
Bureau classified the operational activities that financial
institutions would likely use for Section 1071 data collection and
reporting into 15 operational ``tasks'' which can be further grouped
into four ``primary tasks.'' These are:
1. Data collection: Transcribing data, resolving reportability
questions, and transferring data to a 1071 data management system.
2. Reporting and resubmission: Geocoding, standard annual edit and
internal checks, researching questions, resolving question responses,
checking post-submission edits, filing post- submission documents, and
using vendor data management software.
3. Compliance and internal audits: Training, internal audits, and
external audits.
4. Section 1071-related exams: Exam preparation and exam
assistance.
All these tasks are related to the preparation of reports or
records and most of them are performed by compliance personnel in the
compliance department of financial institutions. For some financial
institutions, however, the data intake and transcribing stage could
involve loan officers or processors whose primary function is to
evaluate or process loan applications. For example, at some financial
institutions the loan officers would take in information from the
applicant to complete the application and input that information into
the reporting system. However, the Bureau believes that such roles
generally do not require any additional professional skills related to
recordkeeping or other compliance requirements of this proposed rule
that are not otherwise required during the ordinary course of business
for small entities.
The type of professional skills required for compliance varies
depending on the particular task involved. For example, data
transcribing requires data entry skills. Transferring data to a data
entry system and using vendor data management software requires
knowledge of computer systems and the ability to use them. Researching
and resolving reportability questions requires a more complex
understanding of the regulatory requirements and the details of the
relevant line of business. Geocoding requires skills in using the
geocoding software, web systems, or, in cases where geocoding is
difficult, knowledge of the local area in which the property is
located. Standard annual editing, internal checks, and post-submission
editing require knowledge of the relevant data systems, data formats,
and section 1071 regulatory requirements in addition to skills in
quality control and assurance. Filing post-submission documents
requires skills in information creation, dissemination, and
communication. Training, internal audits, and external audits require
communications skills, educational skills, and regulatory knowledge.
Section 1071-related exam preparation and exam assistance involve
knowledge of regulatory requirements, the relevant line of business,
and the relevant data systems.
[[Page 56572]]
The Standard Occupational Classification (SOC) code has compliance
officers listed under code 13-1041. The Bureau believes that most of
the skills required for preparation of the reports or records related
to this proposal are the skills required for job functions performed in
this occupation. However, the Bureau recognizes that under this general
occupational code there is a high level of heterogeneity in the type of
skills required as well as the corresponding labor costs incurred by
the financial institutions performing these functions. During the
SBREFA process, some SERs noted that, for instance, high-level
corporate officers such as CEOs and senior vice presidents could be
directly involved in some regulatory tasks. As such, the Bureau seeks
comment regarding the skills required for the preparation of the
records related to this proposed rule.
The Bureau acknowledges the possibility that certain aspects of the
proposed rule may require some small entities to hire additional
compliance staff. The Bureau has no evidence that such additional staff
will possess a qualitatively different set of professional skills than
small entity staff employed currently for compliance purposes. It is
possible, however, that compliance with the proposed rule may emphasize
certain skills. For example, new data points may increase demand for
skills involved in researching questions, standard annual editing, and
post-submission editing. Nevertheless, the Bureau believes that
compliance would still involve the general set of skills identified
above. The recordkeeping and reporting requirements associated with
this proposal would also involve skills for information technology
system development, integration, and maintenance. Financial
institutions required to report data under HMDA often use data
management systems called HMDA Management Systems (HMS) for existing
regulatory purposes. A similar software for reporting the data required
under the proposed rule could be developed by the institution
internally or purchased from a third-party vendor. It is possible that
other systems used by financial institutions, such as loan origination
systems, might also need to be upgraded to capture new data fields
required to be collected and reported under the proposed rule. The
professional skills required for this one-time upgrade would be related
to software development, testing, system engineering, information
technology project management, budgeting and operation.
5. Identification, to the Extent Practicable, of All Relevant Federal
Rules Which May Duplicate, Overlap, or Conflict With the Proposed Rule
The proposed rule contains requirements related to the collection
and reporting of small business lending information by certain
financial institutions and publication by the Bureau. In its SBREFA
Outline, the Bureau identified certain other Federal statutes and
regulations that relate in some fashion to these areas and has
considered the extent to which they may duplicate, overlap, or conflict
with this proposal.\946\ The SBREFA Panel Report included an updated
list of these Federal statutes and regulations, as informed by SER
feedback.\947\ Each of the statutes and regulations identified in the
SBREFA Panel Report is discussed below.
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\946\ Rules are duplicative or overlapping if they are based on
the same or similar reasons for the regulation, the same or similar
regulatory goals, and if they regulate the same classes of industry.
Rules are conflicting when they impose two conflicting regulatory
requirements on the same classes of industry.
\947\ See SBREFA Panel Report at app. C.
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ECOA, implemented by the Bureau's Regulation B (12 CFR part 1002),
prohibits creditors from discriminating in any aspect of a credit
transaction, including a business-purpose transaction, on the basis of
race, color, religion, national origin, sex (including sexual
orientation and gender identity), marital status, age (if the applicant
is old enough to enter into a contract), receipt of income from any
public assistance program, or the exercise in good faith of a right
under the Consumer Credit Protection Act. The Bureau has certain
oversight, enforcement, and supervisory authority over ECOA
requirements and has rulemaking authority under the statute.
Regulation B generally prohibits creditors from inquiring about an
applicant's race, color, religion, national origin, or sex (including
sexual orientation and gender identity), with limited exceptions,
including if it is required by law. Regulation B requires creditors to
request information about the race, ethnicity, sex, marital status, and
age of applicants for certain dwelling-secured loans and to retain that
information for certain periods. Regulation B requires this data
collection for credit primarily for the purchase or refinancing of a
dwelling occupied or to be occupied by the applicant as a principal
residence, where the extension of credit will be secured by the
dwelling, and requires the data to be maintained by the creditor for 25
months for purposes of monitoring and enforcing compliance with ECOA/
Regulation B and other laws. Section 1071 of the Dodd-Frank Act amended
ECOA to require financial institutions to compile, maintain, and submit
to the Bureau certain data on credit applications by women-owned,
minority-owned, and small businesses.
The Small Business Act,\948\ administered through the SBA, defines
a small business concern as a business that is ``independently owned
and operated and which is not dominant in its field of operation'' and
empowers the Administrator to prescribe detailed size standards by
which a business concern may be categorized as a small business. The
SBA has adopted more than one thousand industry-specific size
standards, classified by 6-digit NAICS codes, to determine whether a
business concern is ``small.'' In addition, the Small Business Act
authorizes loans for qualified small business concerns for purposes of
plant acquisition, construction, conversion, or expansion, including
the acquisition of land, material, supplies, equipment, and working
capital. The SBA sets the guidelines that govern the ``7(a) loan
program,'' determining which businesses financial institutions may lend
to through the program and the type of loans they can provide. The
Bureau's proposed rule would include reporting on SBA lending and
guarantee programs.
---------------------------------------------------------------------------
\948\ 15 U.S.C. 631 et seq.
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The CRA, implemented through regulations issued by the OCC, the
Board, and the FDIC, requires some institutions to collect, maintain,
and report certain data about small business, farm, and consumer
lending to ensure they are serving their communities. The purpose of
the CRA is to encourage institutions to help meet the credit needs of
the local communities in which they do business, including low- and
moderate-income neighborhoods. The Bureau has been working with the CRA
regulatory agencies to ensure that a 1071 rule and the CRA do not
conflict and that 1071 data can be used as part of the CRA compliance
process.
The Riegle Community Development and Regulatory Improvement Act of
1994\949\ authorized the Community Development Financial Institution
Fund (CDFI Fund). The Department of the Treasury administers the
regulations that govern the CDFI Fund. A certified CDFI is a
specialized financial institution that works in markets that are
underserved by traditional financial institutions, including regulated
institutions such as community
[[Page 56573]]
development banks and credit unions, and non-regulated institutions
such as loan and venture capital funds. The CDFI program includes an
annual mandatory Certification and Data Collection Report. The Bureau
is proposing to require that financial institutions reporting 1071 data
identify if they are CDFIs.
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\949\ 12 U.S.C. 4701 et seq.
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HMDA, implemented by the Bureau's Regulation C (12 CFR part 1003),
requires lenders who meet certain coverage tests to collect, report,
and disclose detailed information to their Federal supervisory agencies
about mortgage applications and loans at the transaction level. The
HMDA data are a valuable source for regulators, researchers,
economists, industry, and advocates assessing housing needs, public
investment, and possible discrimination as well as studying and
analyzing trends in the mortgage market for a variety of purposes,
including general market and economic monitoring. There may be some
overlap between what is required to be reported under HMDA and what is
proposed to be covered by section 1071 for certain credit applications
secured by dwellings.
The Currency and Foreign Transactions Reporting Act,\950\ as
amended by the USA PATRIOT Act,\951\ and commonly referred to as the
Bank Secrecy Act, authorized the Financial Crimes Enforcement Network
(FinCEN), a bureau of the Department of the Treasury, to combat money
laundering and promote financial security. FinCEN regulations require
covered financial institutions to establish and maintain written
procedures that are reasonably designed to identify and verify
beneficial owners of legal entity customers, which is sometimes called
the customer due diligence (CDD) rule.
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\950\ Public Law 91-508, tit. II, 84 Stat. 1118 (1970).
\951\ Public Law 107-56, 115 Stat. 272 (2001).
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The Federal Credit Union Act, implemented by the NCUA (12 CFR part
1756), requires Federal credit unions to make financial reports as
specified by the agency. The NCUA requires quarterly reports of the
total number of outstanding loans, total outstanding loan balance,
total number of loans granted or purchased year-to-date, total amount
granted or purchased year-to-date for commercial loans to members, not
including loans with original amounts less than $50,000. The NCUA also
requires quarterly reports of the total number and total outstanding
balance (including the guaranteed portion) of loans originated under an
SBA loan program.
The Federal Deposit Insurance Act,\952\ implemented by the FDIC (12
CFR part 304), requires insured banks and savings associations to file
Call Reports in accordance with applicable instructions. These
instructions require quarterly reports of loans to small businesses,
defined as loans for commercial and industrial purposes to sole
proprietorships, partnerships, corporations, and other business
enterprises and loans secured by non-farm non-residential properties
with original amounts of $1 million or less. In accordance with
amendments by the Federal Deposit Insurance Corporation Improvement Act
of 1991,\953\ the instructions require quarterly reports of loans to
small farms, defined as loans to finance agricultural production, other
loans to farmers, and loans secured by farmland (including farm
residential and other improvements) with original amounts of $500,000
or less. The Bureau intends to work with the FDIC to ensure that a 1071
rule and the Federal Deposit Insurance Act do not conflict.
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\952\ 12 U.S.C. 1811 et seq.
\953\ Public Law 102-242, 105 Stat. 2236 (1991).
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The Bureau requests comment to identify any additional such Federal
statutes or regulations that impose duplicative, overlapping, or
conflicting requirements on financial institutions and potential
changes to the proposed rules in light of duplicative, overlapping, or
conflicting requirements.
6. Description of Any Significant Alternatives to the Proposed Rule
Which Accomplish the Stated Objectives of Applicable Statutes and
Minimize Any Significant Economic Impact of the Proposed Rule on Small
Entities
In drafting this proposed rule, the Bureau considered multiple
financial institution reporting thresholds. In particular, the Bureau
considered whether to exempt financial institutions with fewer than 50
or 100 originations of covered credit transactions for small businesses
in each of the two preceding calendar years, instead of 25 originations
as proposed. The Bureau also considered whether to exempt depository
institutions with assets under $100 million or $200 million from
section 1071's data collection and reporting requirements. The Bureau
understands that some burden reduction may result from a threshold
higher than 25 loans. However, the Bureau is concerned that a higher
threshold would result in the elimination of data that are important in
fulfilling the purposes of section 1071. Therefore, the Bureau is
proposing an originations threshold of at least 25 covered transactions
in each of the previous two calendar years.
The following table shows the estimated impact that different
reporting thresholds the Bureau considered would have had on financial
institution coverage. For the purposes of considering the asset-based
threshold alternatives, the Bureau estimates how institutional coverage
and costs would be different if the Bureau required a 25-origination
threshold in addition to an asset-based threshold for depository
institutions. For the asset-based threshold alternatives, the Bureau
assumes that the alternative proposal would have been that a depository
institution would be required to report its small business lending
activity for 2019 if it had more than 25 originations in both 2017 and
2018 and had assets over the asset-based threshold on December 31,
2018. The Bureau further assumes that if two institutions merged in
2019 then the resulting institution would be required to report if the
sum of the separate institutions' assets on December 31, 2018 exceeded
the asset-based threshold.
[[Page 56574]]
[GRAPHIC] [TIFF OMITTED] TP08OC21.017
Further, the Bureau is proposing a number of discretionary data
points (i.e., data points that are not expressly listed in section 1071
but that the Bureau is proposing to add pursuant to its authority under
ECOA section 704B(e)(2)(H)) in this rule. The Bureau concluded that
seven discretionary data points (application channel, application
recipient, pricing, number of principal owners, NAICS code, number of
workers, and time in business) would help the data collection fulfill
the purposes of section 1071.
During the SBREFA process, SERs provided detailed feedback on the
discretionary data points that the Bureau is considering.\954\ One SER
stated that the cost of collecting and reporting the discretionary data
points under consideration would be significant, and another SER stated
that the Bureau should include as few data points as possible to avoid
unnecessary costs. Another SER stated that the Bureau should finalize a
rule with just the statutorily required data points and avoid adding
any discretionary data points. Other SERs favored or opposed the
inclusion of some or all of the individual discretionary data points
under consideration during the SBREFA process.
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\954\ The SER feedback discussed herein can be found in the
SBREFA Panel Report at 30-32.
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The Bureau understands that discretionary data points may introduce
additional burden to small entities. However, the Bureau has
preliminarily determined that these data points would aid in fulfilling
the statutory purposes of section 1071--facilitating enforcement of
fair lending laws and enabling communities, governmental entities, and
creditors to identify business and community development needs and
opportunities of women-owned, minority-owned, and small businesses. The
Bureau seeks comment on the likely impact of the proposed rule on the
compliance cost to small entities.
7. Discussion of Impact on Cost of Credit for Small Entities
Three types of costs (one-time, fixed ongoing, and variable
ongoing) have the potential to influence the price and availability of
credit to small businesses. In a competitive marketplace, standard
microeconomics suggests that lenders will extend loans up to the point
at which the value of granting an additional loan is equal to the
additional cost associated with the financial institution providing the
loan. One-time costs and fixed ongoing costs affect the overall
profitability of a lender's loan portfolio but do not affect the
profitability of extending an additional loan. Variable ongoing costs,
however, affect the profitability of each additional loan and will
influence the number of loans a lender provides. Based on the Bureau's
available evidence, it expects that the variable ongoing costs to
comply with the proposed rule will be passed on in full to small
business credit applicants in the form of higher prices or fees to
small businesses.
During the SBREFA process, the Bureau asked SERs how they would
respond to the cost of complying with the proposals under
consideration.\955\ One nondepository SER did indicate that smaller
firms in their industry may stop participating if one-time costs are
too high, particularly if small business lending is a secondary aspect
of their business model.\956\ Another nondepository SER indicated that
significantly increasing the time between application and decision
could occur due to the proposed requirements, which they said would
threaten their ability to compete with other lenders. When asked if
they expected the costs of the eventual 1071 rule to be passed on in
the form of higher rates and fees, a number of SERs (from banks, credit
unions, and nondepositories) indicated that they expected to do so at
their institutions. However, a number of other SERs indicated that they
did not believe an eventual 1071 rule would result in higher rates or
fees. Several depository institution SERs said that they would be able
to absorb the costs in their operating budgets as they have with
previous regulations.
---------------------------------------------------------------------------
\955\ SBREFA Outline at 50.
\956\ The SER feedback discussed in this section-by-section
analysis can be found in the SBREFA Panel Report at 40.
---------------------------------------------------------------------------
In the One-Time Cost Survey, the Bureau asked respondents to rank a
list of potential actions they may take in response to the compliance
costs of implementing section 1071.\957\ Respondents ranked the
following list: ``Raise rates or fees on small business products'';
``Raise rates/fees on other credit products''; ``Accept lower
profits''; ``Exit some geographic markets''; ``Tighten underwriting
standards''; ``Offer fewer or less complex products''; ``No longer
offer small business credit products''; or ``Other'' with two write-in
options. Respondents ranked these options from ``1'' to ``9''
indicating their most to least likely responses. Respondents also had
the opportunity to write in their own responses. Consistent with
economic
[[Page 56575]]
theory, respondents reported that they would be most likely to raise
rates or fees on small business products and other credit products. On
average, respondents reported that they would be least likely to exit
some geographic markets or cease offering small business credit
products. Accordingly, the Bureau expects the likely impact of an
eventual 1071 rule on the cost of credit to small entities to be higher
rates and fees because financial institutions pass on the variable
ongoing costs of the required data collection. The Bureau estimates
that $28, $24, and $7 in variable costs would be passed through per
application to Type A, B, and C FIs, respectively. To put these values
in context, the Bureau estimates that the per application net income is
in a range of $53,000-$60,500; $25,000-$28,500; and $79,000-$89,000 for
banks and savings associations of Types A, B, and C, respectively.
---------------------------------------------------------------------------
\957\ See One-Time Cost Survey at 11.
---------------------------------------------------------------------------
IX. Paperwork Reduction Act
Under the Paperwork Reduction Act of 1995 (PRA),\958\ Federal
agencies are generally required to seek approval from the Office of
Management and Budget (OMB) for information collection requirements
prior to implementation. Under the PRA, the Bureau may not conduct nor
sponsor, and, notwithstanding any other provision of law, a person is
not required to respond to, an information collection unless the
information collection displays a valid control number assigned by OMB.
---------------------------------------------------------------------------
\958\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
As part of its continuing effort to reduce paperwork and respondent
burden, the Bureau conducts a preclearance consultation program to
provide the general public and Federal agencies with an opportunity to
comment on the information collection requirements in accordance with
the PRA. This helps ensure that the public understands the Bureau's
requirements or instructions, respondents can provide the requested
data in the desired format, reporting burden (time and financial
resources) is minimized, information collection instruments are clearly
understood, and the Bureau can properly assess the impact of
information collection requirements on respondents.
The proposed rule would amend 12 CFR part 1002 (Regulation B),
which implements the ECOA. The Bureau's OMB control number for
Regulation B is 3170-0013. This proposed rule would revise the
information collection requirements contained in Regulation B that OMB
has approved under that OMB control number.
Under the proposal, the Bureau would add four information
collection requirements to Regulation B:
1. Compilation of reportable data (proposed Sec. 1002.107),
including a notice requirement (in proposed Sec. 1002.107(a)(18)
through (20)).
2. Reporting data to the Bureau (proposed Sec. 1002.109).
3. Firewall notice requirement (proposed Sec. 1002.108(d)).
4. Recordkeeping (proposed Sec. 1002.111).
The information collection requirements in this proposed rule would
be mandatory. Certain data fields would be modified or deleted by the
Bureau, in its discretion, to advance a privacy interest before the
1071 data are made available to the public (as permitted by section
1071 and the Bureau's proposed rule). The data that are not modified or
deleted would be made available to the public and are not considered
confidential. The rest of the data would be considered confidential if
the information:
Identifies any natural persons who might not be applicants
(e.g., owners of a business where a legal entity is the applicant); or
Implicates the privacy interests of financial
institutions.
The collections of information contained in this proposed rule, and
identified as such, have been submitted to OMB for review under section
3507(d) of the PRA. A complete description of the information
collection requirements (including the burden estimate methods) is
provided in the information collection request (ICR) that the Bureau
has submitted to OMB under the requirements of the PRA. Please send
your comments to the Office of Information and Regulatory Affairs, OMB,
Attention: Desk Officer for the Bureau of Consumer Financial
Protection. Send these comments by email to [email protected]
or by fax to 202-395-6974. If you wish to share your comments with the
Bureau, please send a copy of these comments as described in the
Addresses section above. The ICR submitted to OMB requesting approval
under the PRA for the information collection requirements contained
herein is available at www.regulations.gov as well as on OMB's public-
facing docket at www.reginfo.gov.
Title of Collection: Regulation B: Equal Credit Opportunity Act.
OMB Control Number: 3170-0013.
Type of Review: Revision of a currently approved collection.
Affected Public: Private Sector; Federal and State Governments.
Estimated Number of Respondents: 188,800.
Estimated Total Annual Burden Hours: 5,688,000.
Comments are invited on: (a) Whether the collection of information
is necessary for the proper performance of the functions of the Bureau,
including whether the information will have practical utility; (b) the
accuracy of the Bureau's estimate of the burden of the collection of
information, including the validity of the methods and the assumptions
used; (c) ways to enhance the quality, utility, and clarity of the
information to be collected; and (d) ways to minimize the burden of the
collection of information on respondents, including through the use of
automated collection techniques or other forms of information
technology. Comments submitted in response to this proposal will be
summarized and/or included in the request for OMB approval. All
comments will become a matter of public record.
If applicable, the notice of final rule will display the control
number assigned by OMB to any information collection requirements
proposed herein and adopted in the final rule.
List of Subjects in 12 CFR Part 1002
Banks, Banking, Civil rights, Consumer protection, Credit, Credit
unions, Marital status discrimination, National banks, Penalties.
Authority and Issuance
For the reasons set forth in the preamble, the Bureau proposes to
amend Regulation B, 12 CFR part 1002, as set forth below:
PART 1002--EQUAL CREDIT OPPORTUNITY ACT (REGULATION B)
0
1. The authority citation for part 1002 is revised to read as follows:
Authority: 12 U.S.C. 5512, 5581; 15 U.S.C. 1691b. Subpart B is
also issued under 15 U.S.C. 1691c-2.
Subpart A--General
0
2. Sections 1002.1 through 1002.16 are designated as subpart A under
the heading set forth above.
0
3. Section 1002.5 is amended by revising paragraph (a)(4) introductory
text and adding paragraphs (a)(4)(vii) through (ix) to read as follows:
Sec. 1002.5 Rules concerning requests for information.
(a) General rules--
* * * * *
(4) Other permissible collection of information. Notwithstanding
paragraph (b) of this section, a creditor may collect
[[Page 56576]]
information under the following circumstances provided that the
creditor collects the information in compliance with appendices F and G
to this part, or appendix B to 12 CFR part 1003, as applicable:
* * * * *
(vii) A creditor that was required to report small business lending
data pursuant to Sec. 1002.109 for any of the preceding five calendar
years but is not currently a covered financial institution under Sec.
1002.105(b) may collect information pursuant to subpart B of this part
for a covered application as defined in Sec. 1002.103 regarding
whether the applicant is a minority-owned business or a women-owned
business, and the ethnicity, race, and sex of the applicant's principal
owners if it complies with the requirements of subpart B as otherwise
required for covered financial institutions pursuant to Sec. Sec.
1002.107, 1002.108, 1002.111, 1002.112, and 1002.114 for that
application.
(viii) A creditor that exceeded the loan-volume threshold in the
first year of the two-year threshold period provided in Sec.
1002.105(b) may, in the second year, collect information pursuant to
subpart B of this part for a covered application as defined in Sec.
1002.103 regarding whether the applicant is a minority-owned business
or a women-owned business, and the ethnicity, race, and sex of the
applicant's principal owners if it complies with the requirements of
subpart B as otherwise required for covered financial institutions
pursuant to Sec. Sec. 1002.107, 1002.108, 1002.111, 1002.112, and
1002.114 for that application.
(ix) A creditor that is not currently a covered financial
institution under Sec. 1002.105(b), and is not otherwise a creditor to
which Sec. 1002.5(a)(4)(vii) or (viii) applies, may collect
information pursuant to subpart B of this part for a covered
application as defined in Sec. 1002.103 regarding whether an applicant
for a covered credit transaction is a minority-owned business or a
women-owned business, and the ethnicity, race, and sex of the
applicant's principal owners for a transaction if it complies with the
requirements of subpart B as otherwise required for covered financial
institutions pursuant to Sec. Sec. 1002.107 through 1002.112 and
1002.114 for that application.
* * * * *
0
4. Subpart B is added to read as follows:
Subpart B--Small Business Lending Data Collection
Sec. 1002.101 Authority, purpose, and scope.
Sec. 1002.102 Definitions.
Sec. 1002.103 Covered applications.
Sec. 1002.104 Covered credit transactions and excluded
transactions.
Sec. 1002.105 Covered financial institutions and exempt
institutions.
Sec. 1002.106 Business and small business.
Sec. 1002.107 Compilation of reportable data.
Sec. 1002.108 Firewall.
Sec. 1002.109 Reporting of data to the Bureau.
Sec. 1002.110 Publication of data.
Sec. 1002.111 Recordkeeping.
Sec. 1002.112 Enforcement.
Sec. 1002.113 Severability.
Sec. 1002.114 Effective date, compliance date, and special
transitional rules.
Sec. 1002.101 Authority, purpose, and scope.
(a) Authority and scope. This subpart to Regulation B is issued by
the Bureau pursuant to section 704B of the Equal Credit Opportunity Act
(15 U.S.C. 1691c-2). Except as otherwise provided herein, this subpart
Applies to covered financial institutions, as defined in Sec.
1002.105(b), other than a person excluded from coverage of this part by
section 1029 of the Consumer Financial Protection Act of 2010, title X
of the Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376, 2004 (2010).
(b) Purpose. This subpart implements section 704B of the Equal
Credit Opportunity Act, which is intended:
(i) To facilitate enforcement of fair lending laws; and
(ii) To enable communities, governmental entities, and creditors to
identify business and community development needs and opportunities of
women-owned, minority-owned, and small businesses.
Sec. 1002.102 Definitions.
In this subpart:
(a) Affiliate means, with respect to a financial institution, any
company that controls, is controlled by, or is under common control
with, another company, as set forth in the Bank Holding Company Act of
1956 (12 U.S.C. 1841 et seq.). With respect to a business or an
applicant, affiliate shall have the same meaning as in 13 CFR 121.103.
(b) Applicant means any person who requests or who has received an
extension of business credit from a financial institution.
(c) Business is defined in Sec. 1002.106(a).
(d) Business credit shall have the same meaning as in Sec.
1002.2(g).
(e) Closed-end credit transaction means an extension of credit that
is not an open-end credit transaction under paragraph (n) of this
section.
(f) Covered application is defined in Sec. 1002.103.
(g) Covered credit transaction is defined in Sec. 1002.104.
(h) Covered financial institution is defined in Sec. 1002.105(b).
(i) Credit shall have the same meaning as in Sec. 1002.2(j).
(j) Dwelling shall have the same meaning as in Regulation C, 12 CFR
1003.2(f).
(k) Financial institution is defined in Sec. 1002.105(a).
(l) Minority individual means a natural person who is American
Indian or Alaska Native, Asian, Black or African American, Native
Hawaiian or Other Pacific Islander, and/or Hispanic or Latino.
(m) Minority-owned business means a business for which more than 50
percent of its ownership or control is held by one or more minority
individuals, and more than 50 percent of its net profits or losses
accrue to one or more minority individuals.
(n) Open-end credit transaction means an open-end credit plan as
defined in Regulation Z, 12 CFR 1026.2(a)(20), but without regard to
whether the credit is consumer credit, as defined in Sec.
1026.2(a)(12), is extended by a creditor, as defined in Sec.
1026.2(a)(17), or is extended to a consumer, as defined in Sec.
1026.2(a)(11).
(o) Principal owner means a natural person who directly owns 25
percent or more of the equity interests of a business.
(p) Small business is defined in Sec. 1002.106(b).
(q) Small business lending application register or register means
the data reported, or required to be reported, annually pursuant to
Sec. 1002.109.
(r) State shall have the same meaning as in Sec. 1002.2(aa).
(s) Women-owned business means a business for which more than 50
percent of its ownership or control is held by one or more women, and
more than 50 percent of its net profits or losses accrue to one or more
women.
Sec. 1002.103 Covered applications.
(a) Covered application. Except as provided in paragraph (b) of
this section, covered application means an oral or written request for
a covered credit transaction that is made in accordance with procedures
used by a financial institution for the type of credit requested.
(b) Circumstances that are not covered applications. A covered
application does not include:
(1) Reevaluation, extension, or renewal requests on an existing
business credit account, unless the request seeks additional credit
amounts.
[[Page 56577]]
(2) Inquiries and prequalification requests.
Sec. 1002.104 Covered credit transactions and excluded transactions.
(a) Covered credit transaction means an extension of business
credit that is not an excluded transaction under paragraph (b) of this
section.
(b) Excluded transactions. The requirements of this subpart do not
apply to:
(1) Trade credit. A financing arrangement wherein a business
acquires goods or services from another business without making
immediate payment to the business providing the goods or services.
(2) Public utilities credit. Public utilities credit as defined in
Sec. 1002.3(a)(1).
(3) Securities credit. Securities credit as defined in Sec.
1002.3(b)(1).
(4) Incidental credit. Incidental credit as defined in Sec.
1002.3(c)(1), but without regard to whether the credit is consumer
credit, as defined in Sec. 1002.2(h).
Sec. 1002.105 Covered financial institutions and exempt institutions.
(a) Financial institution means any partnership, company,
corporation, association (incorporated or unincorporated), trust,
estate, cooperative organization, or other entity that engages in any
financial activity.
(b) Covered financial institution means a financial institution
that originated at least 25 covered credit transactions for small
businesses in each of the two preceding calendar years. For purposes of
this definition, if more than one financial institution was involved in
the origination of a covered credit transaction, only the financial
institution that made the credit decision approving the application
shall count the origination for purposes of this paragraph (b).
Sec. 1002.106 Business and small business.
(a) Business has the same meaning as the term ``business concern or
concern'' in 13 CFR 121.105.
(b) Small business has the same meaning as the term ``small
business concern'' in 15 U.S.C. 632(a), as implemented in 13 CFR
121.101 through 121.107. Notwithstanding the size standards set forth
in 13 CFR 121.201, for purposes of this subpart, a business is a small
business if and only if its gross annual revenue, as defined in Sec.
1002.107(a)(14), for its preceding fiscal year is $5 million or less.
Sec. 1002.107 Compilation of reportable data.
(a) Data format and itemization. A covered financial institution
shall compile and maintain data regarding covered applications from
small businesses. The data shall be compiled in the manner prescribed
below and as explained in associated Official Interpretations and the
Filing Instructions Guide for this subpart for the appropriate year.
The data compiled shall include the items described in paragraphs
(a)(1) through (21) of this section.
(1) Unique identifier. An alphanumeric identifier, starting with
the legal entity identifier of the financial institution, unique within
the financial institution to the specific covered application, and
which can be used to identify and retrieve the specific file or files
corresponding to the application for or extension of credit.
(2) Application date. The date the covered application was received
by the financial institution or the date shown on a paper or electronic
application form.
(3) Application method. The means by which the applicant submitted
the covered application directly or indirectly to the financial
institution.
(4) Application recipient. Whether the applicant submitted the
covered application directly to the financial institution or its
affiliate, or whether the applicant submitted the covered application
indirectly to the financial institution via a third party.
(5) Credit type. The following information regarding the type of
credit applied for or originated:
(i) Credit product. The credit product.
(ii) Guarantees. The type or types of guarantees that were obtained
for an extension of credit, or that would have been obtained if the
covered credit transaction were originated.
(iii) Loan term. The length of the loan term, in months, if
applicable.
(6) Credit purpose. The purpose or purposes of the credit applied
for or originated.
(7) Amount applied for. The initial amount of credit or the initial
credit limit requested by the applicant.
(8) Amount approved or originated. (i) For an application for a
closed-end credit transaction that is approved but not accepted, the
amount approved by the financial institution; or
(ii) For a closed-end credit transaction that is originated, the
amount of credit originated; or
(iii) For an application for an open-end credit transaction that is
originated or approved but not accepted, the amount of the credit limit
approved.
(9) Action taken. The action taken by the financial institution on
the covered application, reported as originated, approved but not
accepted, denied, withdrawn by the applicant, or incomplete.
(10) Action taken date. The date of the action taken by the
financial institution.
(11) Denial reasons. For denied applications, the principal reason
or reasons the financial institution denied the covered application.
(12) Pricing information. The following information regarding the
pricing of a covered credit transaction that is originated or approved
but not accepted, as applicable:
(i) Interest rate. (A) If the interest rate is fixed, the interest
rate that is or would be applicable to the covered credit transaction;
or
(B) If the interest rate is adjustable, the margin, index value,
and index name that is or would be applicable to the covered credit
transaction at origination;
(ii) Total origination charges. The total amount of all charges
payable directly or indirectly by the applicant and imposed directly or
indirectly by the financial institution at or before origination as an
incident to or a condition of the extension of credit, expressed in
dollars;
(iii) Broker fees. The total amount of all charges included in
paragraph (a)(12)(ii) of this section that are fees paid by the
applicant directly to a broker or to the financial institution for
delivery to a broker, expressed in dollars;
(iv) Initial annual charges. The total amount of all non-interest
charges that are scheduled to be imposed over the first annual period
of the covered credit transaction, expressed in dollars;
(v) Additional cost for merchant cash advances or other sales-based
financing. For a merchant cash advance or other sales-based financing
transaction, the difference between the amount advanced and the amount
to be repaid, expressed in dollars; and
(vi) Prepayment penalties. (A) Notwithstanding whether such a
provision was in fact included, whether the financial institution could
have included a charge to be imposed for paying all or part of the
transaction's principal before the date on which the principal is due
under the policies and procedures applicable to the covered credit
transaction; and
(B) Notwithstanding the response to paragraph (a)(20)(iv)(A) of
this section, whether the terms of the covered credit transaction do in
fact include a charge imposed for paying all or part of the
transaction's principal before the date on which the principal is due.
(13) Census tract. The census tract in which is located:
[[Page 56578]]
(i) The address or location where the proceeds of the credit
applied for or originated will be or would have been principally
applied; or
(ii) If the information in paragraph (a)(13)(i) of this section is
unknown, the address or location of the main office or headquarters of
the applicant; or
(iii) If the information in both paragraphs (a)(13)(i) and (ii) of
this section is unknown, another address or location associated with
the applicant.
(iv) The financial institution shall also indicate which one of the
three types of addresses or locations listed in paragraphs (a)(13)(i),
(ii), or (iii) of this section the census tract is based on.
(14) Gross annual revenue. The gross annual revenue of the
applicant for its preceding full fiscal year prior to when the
information is collected.
(15) NAICS code. A 6-digit North American Industry Classification
System (NAICS) code appropriate for the applicant.
(16) Number of workers. The number of non-owners working for the
applicant.
(17) Time in business. The time the applicant has been in business,
described in whole years, as relied on or collected by the financial
institution.
(18) Minority-owned business status. Whether the applicant is a
minority-owned business and whether minority-owned business status is
being reported based on previously collected data pursuant to Sec.
1002.107(c)(2). The financial institution shall collect and report
minority-owned business status as prescribed in appendix F to this
part. When requesting minority-owned business status from an applicant,
the financial institution shall inform the applicant that the financial
institution cannot discriminate on the basis of minority-owned business
status, or on whether the applicant provides this information.
(19) Women-owned business status. Whether the applicant is a women-
owned business and whether women-owned business status is being
reported based on previously collected data pursuant to Sec.
1002.107(c)(2). The financial institution shall collect and report
women-owned business status as prescribed in appendix F to this part.
When requesting women-owned business status from an applicant, the
financial institution shall inform the applicant that the financial
institution cannot discriminate on the basis of women-owned business
status, or on whether the applicant provides this information.
(20) Ethnicity, race, and sex of principal owners. The ethnicity,
race, and sex of the applicant's principal owners and whether
ethnicity, race, and sex are being reported based on previously
collected data pursuant to Sec. 1002.107(c)(2). The data compiled for
purposes of this paragraph (a)(20) shall also include whether ethnicity
and race are being reported based on visual observation or surname. The
financial institution shall collect and report principal owners'
ethnicity, race, and sex information as prescribed in appendix G to
this part. When requesting ethnicity, race, and sex information from an
applicant, the financial institution shall inform the applicant that
the financial institution cannot discriminate on the basis of a
principal owner's ethnicity, race, or sex, or on whether the applicant
provides this information.
(21) Number of principal owners. The number of the applicant's
principal owners.
(b) Verification of applicant-provided information. Unless
otherwise provided in this subpart, the financial institution may rely
on statements of the applicant when compiling data unless it verifies
the information provided, in which case it shall use the verified
information.
(c) Time and manner of collection--(1) In general. A covered
financial institution shall maintain procedures to collect applicant-
provided data under paragraph (a) of this section at a time and in a
manner that is reasonably designed to obtain a response.
(2) Previously collected data. A covered financial institution is
permitted, but not required, to reuse previously collected data to
satisfy paragraphs (a)(13) through (21) of this section if:
(i) The data were collected within the same calendar year as the
current covered application; and
(ii) The financial institution has no reason to believe the data
are inaccurate.
Sec. 1002.108 Firewall.
(a) Definitions. For purposes of this section, the following terms
shall have the following meanings:
(1) Involved in making any determination concerning a covered
application means participating in a decision regarding the evaluation
of a covered application, including the creditworthiness of an
applicant for a covered credit transaction.
(2) Should have access means that an employee or officer may need
to collect, see, consider, refer to, or otherwise use the information
to perform that employee's or officer's assigned job duties.
(b) Prohibition on access to certain information. Unless the
exception under paragraph (c) of this section applies, an employee or
officer of a covered financial institution or a covered financial
institution's affiliate shall not have access to an applicant's
responses to inquiries that the financial institution makes pursuant to
this subpart regarding whether the applicant is a minority-owned
business under Sec. 1002.107(a)(18) or a women-owned business under
Sec. 1002.107(a)(19), and regarding the ethnicity, race, and sex of
the applicant's principal owners under Sec. 1002.107(a)(20), if that
employee or officer is involved in making any determination concerning
that applicant's covered application.
(c) Exception to the prohibition on access to certain information.
The prohibition in paragraph (b) of this section shall not apply to an
employee or officer if the financial institution determines that it is
not feasible to limit that employee's or officer's access to an
applicant's responses to the financial institution's inquiries under
Sec. 1002.107(a)(18) through (20) and the financial institution
provides the notice required under paragraph (d) of this section to the
applicant. It is not feasible to limit access as required pursuant to
paragraph (b) of this section if the financial institution determines
that an employee or officer involved in making any determination
concerning a covered application should have access to one or more
applicants' responses to the financial institution's inquiries under
Sec. 1002.107(a)(18) through (20).
(d) Notice. In order to satisfy the exception set forth in
paragraph (c) of this section, a financial institution shall provide a
notice to each applicant whose responses will be accessed, informing
the applicant that one or more employees or officers involved in making
determinations concerning the covered application may have access to
the applicant's responses to the financial institution's inquiries
regarding whether the applicant is a minority-owned business or a
women-owned business, and regarding the ethnicity, race, and sex of the
applicant's principal owners. The financial institution shall provide
the notice required by this paragraph (d) when making the inquiries
required under Sec. 1002.107(a)(18) through (20) and together with the
notices required pursuant to Sec. 1002.107(a)(18) through (20).
Sec. 1002.109 Reporting of data to the Bureau.
(a) Reporting to the Bureau--(1) Annual reporting. (i) On or before
June 1 following the calendar year for which data are compiled and
maintained as required by Sec. 1002.107, a covered
[[Page 56579]]
financial institution shall submit its small business lending
application register in the format prescribed by the Bureau.
(ii) An authorized representative of the covered financial
institution with knowledge of the data shall certify to the accuracy
and completeness of the data reported pursuant to this paragraph (a).
(iii) When the last day for submission of data prescribed under
paragraph (a)(1) falls on a date that is not a business day, a
submission shall be considered timely if it is submitted no later than
the next business day.
(2) Reporting by subsidiaries. A covered financial institution that
is a subsidiary of another covered financial institution shall complete
a separate small business lending application register. The subsidiary
shall submit its small business lending application register, directly
or through its parent, to the Bureau.
(3) Reporting obligations where multiple financial institutions are
involved in a covered credit transaction. If a covered application
results in an origination, only one covered financial institution shall
report the covered credit transaction. If more than one financial
institution is involved in the origination of a covered credit
transaction, the financial institution that makes the final credit
decision approving the application shall report the loan as an
origination (if that financial institution is a covered financial
institution). If there was no origination, then any covered financial
institution that made a credit decision shall report the application.
(b) Financial institution identifying information. A financial
institution shall provide each of the following with its submission:
(1) Its name.
(2) Its headquarters address.
(3) The name and business contact information of a person who may
be contacted with questions about the financial institution's
submission.
(4) Its Federal prudential regulator, if applicable.
(5) Its Federal Taxpayer Identification Number (TIN).
(6) Its Legal Entity Identifier (LEI).
(7) Its Research, Statistics, Supervision, and Discount
identification (RSSD ID) number, if applicable.
(8) Parent entity information, if applicable, including:
(i) The name of the immediate parent entity;
(ii) The LEI of the immediate parent entity, if available;
(iii) The RSSD ID number of the immediate parent entity, if
available;
(iv) The name of the top-holding parent entity;
(v) The LEI of the top-holding parent entity, if available; and
(vi) The RSSD ID number of the top-holding parent entity, if
available.
(9) The type of financial institution that it is, indicated by
selecting the appropriate type or types of institution from the list
provided.
(10) Whether the financial institution is voluntarily reporting
covered applications for covered credit transactions.
(c) Procedures for the submission of data to the Bureau. The Bureau
shall make available a Filing Instructions Guide, containing technical
instructions for the submission of data to the Bureau pursuant to this
section, as well as any related materials, available at [a designated
Bureau website].
Sec. 1002.110 Publication of data.
(a) Publication of small business lending application registers and
associated financial institution information. The Bureau shall make
available to the public generally the data reported to it by financial
institutions pursuant to Sec. 1002.109, subject to deletions or
modifications made by the Bureau, at its discretion, if the Bureau
determines that the deletion or modification of the data would advance
a privacy interest. The Bureau shall make such data available on an
annual basis, by publishing it on the Bureau's website at [a designated
Bureau website].
(b) Publication of aggregate data. The Bureau may, at its
discretion, compile and aggregate data submitted by financial
institutions pursuant to Sec. 1002.109, and make any compilations or
aggregations of such data publicly available as the Bureau deems
appropriate.
(c) Statement of financial institution's small business lending
data available on the Bureau's website. A covered financial institution
shall make available to the public on its website, or otherwise upon
request, a statement that the covered financial institution's small
business lending application register, as modified by the Bureau
pursuant to Sec. 1002.110(a), is or will be available on the Bureau's
website at [a designated Bureau website]. A financial institution shall
use language provided by the Bureau, or substantially similar language,
to satisfy the requirement to provide a statement pursuant to this
paragraph (c).
(d) Availability of statements. A covered financial institution
shall make the notice required by paragraph (c) of this section
available to the public on its website when it submits a small business
lending application register to the Bureau pursuant to Sec.
1002.109(a)(1), and shall maintain the notice for as long as it has an
obligation to retain its small business lending application registers
pursuant to Sec. 1002.111(a).
Sec. 1002.111 Recordkeeping.
(a) Record retention. A covered financial institution shall retain
evidence of compliance with this subpart, which includes a copy of its
small business lending application register, for at least three years
after the register is required to be submitted to the Bureau pursuant
to Sec. 1002.109.
(b) Certain information kept separate from the rest of the
application. A financial institution shall maintain, separately from
the rest of the application and accompanying information, an
applicant's responses to the financial institution's inquiries pursuant
to this subpart regarding whether an applicant for a covered credit
transaction is a minority-owned business under Sec. 1002.107(18) or a
women-owned business under Sec. 1002.107(19), and regarding the
ethnicity, race, and sex of the applicant's principal owners under
Sec. 1002.107(20).
(c) Limitation on personally identifiable information in records
retained under this section. In compiling and maintaining any records
under Sec. 1002.107 or paragraph (b) of this section, or reporting
data pursuant to Sec. 1002.109, a financial institution shall not
include any name, specific address, telephone number, email address, or
any personally identifiable information concerning any individual who
is, or is connected with, an applicant, other than as required pursuant
to Sec. 1002.107 or paragraph (b) of this section.
Sec. 1002.112 Enforcement.
(a) Administrative enforcement and civil liability. A violation of
section 704B of the Act or this subpart is subject to administrative
sanctions and civil liability as provided in sections 704 (15 U.S.C.
1691c) and 706 (15 U.S.C. 1691e) of the Act, where applicable.
(b) Bona fide errors. A bona fide error in compiling, maintaining,
or reporting data with respect to a covered application is one that was
unintentional and occurred despite the maintenance of procedures
reasonably adapted to avoid such an error. A bona fide error is not a
violation of the Act or this subpart. A financial institution is
presumed to maintain procedures reasonably adapted to avoid such errors
with respect to a given data field if the number of errors found in a
random
[[Page 56580]]
sample of the financial institution's submission for the data field
does not equal or exceed a threshold specified by the Bureau for this
purpose in appendix H to this part. However, an error is not a bona
fide error if either there is a reasonable basis to believe the error
was intentional or there is other evidence that the financial
institution does not or has not maintained procedures reasonably
adapted to avoid such errors.
(c) Safe harbors. (1) Incorrect entry for census tract. An
incorrect entry for census tract is not a violation of the Act or this
subpart if the financial institution obtained the census tract by
correctly using a geocoding tool provided by the FFIEC or the Bureau.
(2) Incorrect entry for NAICS code. If a financial institution
identifies the NAICS code for an applicant itself, without the
applicant or another source providing the NAICS code, and the
identified NAICS code is incorrect, the incorrect entry for the NAICS
code is not a violation of the Act or this subpart provided that the
first two digits of the NAICS code are correct and the financial
institution maintains procedures reasonably adapted to correctly
identify the subsequent four digits.
(3) Incorrect determination of small business status. A financial
institution that initially determines that an applicant for a covered
credit transaction is a small business, as defined in Sec.
1002.106(b), but later concludes the applicant is not a small business,
does not violate the Act or this regulation if the financial
institution collected information pursuant to this subpart regarding
whether an applicant for a covered credit transaction is a minority-
owned business or a women-owned business, and the ethnicity, race, and
sex of the applicant's principal owners. A financial institution
seeking to avail itself of this safe harbor shall comply with the
requirements of this subpart As otherwise required pursuant to
Sec. Sec. 1002.107, 1002.108, and 1002.111 with respect to the
collected information.
(4) Incorrect application date. A financial institution does not
violate the Act or this subpart if it reports on its small business
lending application register an application date that is within three
calendar days of the actual application date pursuant to Sec.
1002.107(a)(2).
Sec. 1002.113 Severability.
The provisions of this subpart are separate and severable from one
another. If any provision is stayed or determined to be invalid, the
remaining provisions shall continue in effect.
Sec. 1002.114 Effective date, compliance date, and special
transitional rules.
(a) Effective date. The effective date for this subpart is [90 days
after the date of publication of the final rule in the Federal
Register].
(b) Compliance date. The compliance date for this subpart is
[approximately 18 months after the date of publication of the final
rule in the Federal Register].
(c) Special transitional rules--(1) Collection of information prior
to the compliance date. A financial institution that will be a covered
financial institution as of the compliance date in paragraph (b) of
this section is permitted, but not required, to collect information
regarding whether an applicant for a covered credit transaction is a
minority-owned business under Sec. 1002.107(a)(18), a women-owned
business under Sec. 1002.107(a)(19), and the ethnicity, race, and sex
of the applicant's principal owners under Sec. 1002.107(a)(20)
beginning [12 months prior to the compliance date]. A financial
institution collecting such information pursuant to this paragraph
(c)(1) must do so in accordance with the requirements set out in
Sec. Sec. 1002.107(18) through (20) and 1002.108.
(2) Determining whether a financial institution is a covered
financial institution for purposes of this subpart. For purposes of
determining whether a financial institution is a covered financial
institution under Sec. 1002.105(b) as of the compliance date specified
in paragraph (b) of this section, a financial institution is permitted,
but not required, to use its to use its originations of covered credit
transactions for small businesses in the second and third preceding
calendar years (rather than its originations in the two immediately
preceding calendar years).
0
5. Appendices E through H are added to read as follows:
Appendix E to Part 1002--Sample Form for Collecting Certain Applicant-
Provided Data under Subpart B
BILLING CODE 4810-25-P
[[Page 56581]]
[GRAPHIC] [TIFF OMITTED] TP08OC21.018
[[Page 56582]]
[GRAPHIC] [TIFF OMITTED] TP08OC21.019
[[Page 56583]]
BILLING CODE 4825-25-C
Appendix F to Part 1002--Instructions for Collecting and Reporting
Small Business Applicants' Minority-Owned Business Status and Women-
Owned Business Status Under Subpart B
Covered financial institutions are required by subpart B of this
part to collect certain information from small business applicants
about covered applications, including whether the applicant is a
minority-owned business or a women-owned business. This appendix
provides instructions for collecting that information.
1. Unless a financial institution is reporting based on
previously collected data as discussed in Instruction 11, the
financial institution must ask the applicant about its minority-
owned business status and women-owned business status for each of
the applicant's covered applications. However, the financial
institution cannot require an applicant to provide this information.
2. Generally, a financial institution must ask the applicant
whether it is a minority-owned business and whether it is a women-
owned business on a paper or electronic data collection form that is
separate from the application form and other documents used to
collect other information related to the application. See the sample
data collection form in appendix E for sample language. For a
covered application taken solely by telephone or another medium that
does not involve providing any paper or electronic documents, the
financial institution must ask the applicant about its minority-
owned business status and women-owned business status orally if the
financial institution is not reporting based on previously collected
data. The financial institution may combine these business status
questions with questions regarding principal owners' ethnicity,
race, and sex pursuant to Sec. 1002.107(a)(20) and a question about
the applicant's number of principal owners pursuant to Sec.
1002.107(a)(21). See the sample data collection form in appendix E.
3. When asking the questions regarding minority-owned business
status and women-owned business status (regardless of whether they
are asked on a paper form, electronically, or orally), the financial
institution also must provide the applicant with definitions of the
terms ``minority individual,'' ``minority-owned business,'' and
``women-owned business'' as set forth in Sec. 1002.102(l), (m), and
(s). The financial institution satisfies this requirement if it
provides the definitions of minority individual, minority-owned
business, and women-owned business set forth in the sample data
collection form in appendix E.
4. A financial institution may inform the applicant that Federal
law requires it to ask for an applicant's minority-owned business
status and women-owned business status to help ensure that all small
business applicants for credit are treated fairly and that
communities' small business credit needs are being fulfilled. The
financial institution must inform the applicant that it is not
required to respond to the financial institution's questions
regarding the applicant's minority-owned business status and women-
owned business status. The financial institution also must inform
the applicant that the financial institution cannot discriminate on
the basis of minority-owned business status or women-owned business
status, or on the basis of whether the applicant provides this
information.
5. A financial institution must report the answers to the
minority-owned business status and women-owned business status
questions that the applicant provided on the paper or electronic
data collection form the financial institution uses to satisfy the
requirements of Sec. 1002.107(a)(18) and (19) without regard to any
answers provided for other purposes. If the financial institution
asks the minority-owned business status and women-owned business
status questions orally, the financial institution must report the
answers the applicant provided in response to the inquiries the
financial institution makes to satisfy the requirements of Sec.
1002.107(a)(18) and (19) without regard to any answers provided for
other purposes. For example, if a financial institution uses a paper
data collection form to ask an applicant if it is a minority-owned
business or women-owned business for purposes of Sec.
1002.107(a)(18) and (19) and the applicant responds that it is not a
minority-owned business or a women-owned business, the financial
institution must report that the applicant is not a minority-owned
business or a women-owned business, even if the applicant indicates
that it is a minority-owned business for other purposes, such as for
a special purpose credit program or a Small Business Administration
program.
6. A financial institution is neither required nor permitted to
verify the minority-owned business status or women-owned business
status that the applicant provides.
7. If the applicant declines to provide information on the
applicant's minority-owned business status or women-owned business
status (such as by checking only the ``I do not wish to provide this
information'' box on a paper or electronic data collection form or
stating orally that it does not wish to provide this information),
the financial institution must report that the applicant declined to
provide information on the applicant's minority-owned business
status or women-owned business status, as applicable.
8. If the applicant does not respond to the financial
institution's inquiry regarding its minority-owned business status
(such as by leaving the response blank or failing to submit a data
collection form), the financial institution must report that the
information was not provided by the applicant. Similarly, if the
applicant does not respond to the financial institution's inquiry
regarding its women-owned business status, the financial institution
must report that the information was not provided by the applicant.
9. If the applicant both provides a substantive response to a
question requesting business status (that is, checks either ``yes''
or ``no'') and also checks the ``I do not wish to provide this
information'' box for that question, the financial institution
reports the minority-owned business status or women-owned business
status provided by the applicant (rather than reporting that the
applicant declined to provide the information).
10. A financial institution does not report minority-owned
business status or women-owned business status based on visual
observation, surname, or any basis other than the applicant's
responses to the inquiries that the financial institution makes to
satisfy Sec. 1002.107(a)(18) and (19) or, as discussed in
Instruction 11, on the basis of the applicant's responses to the
inquiries that the financial institution previously made to satisfy
Sec. 1002.107(a)(18) and (19).
11. Section 1002.107(c)(2) and its commentary set forth when a
financial institution is permitted to report information based on
previously collected data. If the financial institution is permitted
to report minority-owned business status or women-owned business
status based on previously collected data, the financial institution
may but is not required to do so.
12. If a financial institution reports minority-owned business
status or women-owned business status based on previously collected
data, the financial institution must also report that it is
providing that information based on previously collected data.
Appendix G to Part 1002--Instructions for Collecting and Reporting
Ethnicity, Race, and Sex of Small Business Applicants' Principal Owners
Under Subpart B
Covered financial institutions are required by subpart B of this
part to collect certain information from small business applicants
about covered applications, including the ethnicity, race, and sex
of the applicant's principal owners. This appendix provides
instructions for collecting that information.
General Instructions
1. Unless a financial institution is reporting based on
previously collected data as discussed in Instructions 26 through
29, the financial institution must ask the applicant for the
ethnicity, race, and sex of its principal owners for each of the
applicant's covered applications. However, a financial institution
cannot require an applicant or any principal owner to provide this
information.
2. Generally, a financial institution must ask the applicant
about the ethnicity, race, and sex of the applicant's principal
owners on a paper or electronic data collection form that is
separate from the application form and other documents used to
collect other information related to the application. See the sample
data collection form in appendix E for sample language. For a
covered application taken solely by telephone or another medium that
does not involve providing any paper or electronic documents, the
financial institution must ask the applicant for the principal
owners' ethnicity, race, and sex orally if the financial institution
is not reporting based on previously collected data. A financial
institution may combine the questions regarding the principal
owners' ethnicity, race, and sex with a question regarding the
applicant's number of principal owners pursuant to Sec.
1002.107(a)(21) and questions regarding the applicant's minority-
owned business status and women-owned
[[Page 56584]]
business status pursuant to Sec. 1002.107(a)(18) and (19). See the
sample data collection form in appendix E.
3. When asking about principal owners' ethnicity, race, and sex,
the financial institution must also provide the applicant with the
definition of the term ``principal owner'' as set forth in Sec.
1002.102(o). The financial institution satisfies this requirement if
it provides the definition of principal owner set forth in the
sample data collection form in appendix E.
4. A financial institution may inform the applicant that Federal
law requires it to ask for the principal owners' ethnicity, race,
and sex to help ensure that all small business applicants for credit
are treated fairly and that communities' small business credit needs
are being fulfilled. The financial institution must inform the
applicant that the applicant is not required to respond to the
financial institution's questions regarding the principal owner's
ethnicity, race, and sex. The financial institution also must inform
the applicant that the financial institution cannot discriminate on
the basis of a principal owner's ethnicity, race, or sex, or on
whether the applicant provides this information.
5. If it is possible that a financial institution will meet in
person with one or more of the applicant's principal owners and the
financial institution is not reporting based on previously collected
data, the financial institution must inform the applicant that if
the applicant does not provide any ethnicity, race, or sex
information for at least one principal owner, the financial
institution is required to report ethnicity and race on the basis of
visual observation and/or surname for at least one of the principal
owners that the financial institution has met in person. If a
financial institution collects ethnicity, race, and sex information
using a paper or electronic data collection form, the financial
institution may satisfy this requirement by providing a statement on
that form. See the sample data collection form in appendix E. If a
financial institution meets in person with a natural person
representing an applicant but does not know if the natural person is
a principal owner, the financial institution must ask or otherwise
determine if that person is a principal owner. See comment
107(a)(20)-10 for examples of when a financial institution has and
has not met in person with one or more principal owners. As
described in Instruction 23, financial institutions do not report a
principal owner's sex based on visual observation or surname.
Instructions Regarding Ethnicity, Race, and Sex Categories
6. When asking for a principal owner's sex, a financial
institution must allow the applicant to respond using the sex
categories set forth in the sample data collection form in appendix
E and discussed in comment 107(a)(20)-8. These categories must
include the option to self-identify using free-form text on a paper
or electronic form or using language that informs the applicant of
the opportunity to self-identify when taking the application by
means other than a paper or electronic data collection form, such as
by telephone.
7. When asking for a principal owner's ethnicity and race, a
financial institution must allow the applicant to respond using the
aggregate and disaggregated ethnicity and race categories and
subcategories as set forth in the sample data collection form in
appendix E and discussed in comments 107(a)(20)-6 and -7. The
disaggregated subcategories must include the ``other'' disaggregated
subcategories that provide the option to self-identify using free-
form text on a paper or electronic data collection form or using
language that informs the applicant of the opportunity to self-
identify when taking the application by means other than a paper or
electronic data collection form, such as by telephone.
8. A financial institution must permit an applicant to identify
its principal owners as being of a particular Hispanic or Latino
disaggregated subcategory (Cuban, Mexican, Puerto Rican, Other
Hispanic or Latino) or of a particular Asian disaggregated
subcategory (Asian Indian, Chinese, Filipino, Japanese, Korean,
Vietnamese, Other Asian) or of a particular Native Hawaiian or Other
Pacific Islander disaggregated subcategory (Guamanian or Chamorro,
Native Hawaiian, Samoan, Other Pacific Islander) or of a particular
Black or African American disaggregated subcategory (African
American, Ethiopian, Haitian, Jamaican, Nigerian, Somali, or Other
Black or African American) or of a particular American Indian or
Alaska Native enrolled or principal tribe. An applicant must be
permitted to select a disaggregated ethnicity or race subcategory
even if the applicant does not also select the corresponding
aggregate ethnicity or aggregate race category. For example, if an
applicant selects only the ``Mexican'' disaggregated subcategory,
the financial institution reports ``Mexican'' for the ethnicity of
the applicant but does not also report ``Hispanic or Latino.''
9. A financial institution must offer the applicant the option
of selecting more than one ethnicity, race, and sex for each
principal owner. If an applicant selects more than one ethnicity,
race, or sex for a principal owner, the financial institution must
report each selected designation. The financial institution must
also report any additional information that the applicant has
provided as free-form text in the appropriate data reporting field.
For example, if the applicant chooses to self-identify a principal
owner's sex and provides additional information, the financial
institution must report that information as free-form text in the
appropriate data reporting field. Similarly, if an applicant
indicates that a principal owner is Other Asian and provides
additional information, such as writing in Cambodian, the financial
institution must report that information as free-form text in the
appropriate data reporting field.
10. If an applicant provides ethnicity, race, or sex information
for one or more principal owners, the financial institution must
report the ethnicity, race, and sex as provided by the applicant.
For example, if an applicant selects ``Asian'' for a principal
owner's race, the financial institution reports ``Asian'' for the
race of that principal owner. Similarly, if the applicant selects
``Asian'' and ``Native Hawaiian'' for a particular principal owner,
the financial institution reports that principal owner's race as
``Asian'' and ``Native Hawaiian,'' even though ``Native Hawaiian''
is not a disaggregated subcategory for the aggregate ``Asian''
category.
11. A financial institution is neither required nor permitted to
verify the ethnicity, race, or sex information that the applicant
provides.
Instructions for Reporting if the Applicant Fails To Provide or
Declines To Provide Responses to a Financial Institution's Inquiries
12. Except as noted in Instruction 17, if the applicant declines
to provide a principal owner's ethnicity, race, or sex (such as by
answering these questions by checking only the ``I do not wish to
provide this information'' box on a paper or electronic data
collection form or stating orally that it does not wish to provide
this information), the financial institution must report that the
applicant declined to provide this information. The financial
institution only reports that the applicant declined to provide
information if the applicant specifically declines to provide that
information. See Instruction 13 for reporting if the applicant does
not respond rather than specifically declines to provide
information.
13. Except as noted in Instruction 17, if the applicant does not
respond to a request about a principal owner's ethnicity, race, or
sex, the financial institution must report that the information was
not provided by the applicant. For example, if the financial
institution provides the applicant with a paper data collection form
and asks the applicant to complete and return the form but the
applicant does not return it, the financial institution reports that
the principal owner's ethnicity, race, and sex was not provided by
the applicant. Similarly, if the financial institution provides an
electronic data collection form, the applicant indicates that it has
two principal owners, the applicant provides ethnicity, race, and
sex for the first principal owner, and the applicant does not check
any of the boxes (including the ``I do not wish to provide this
information'' boxes) for the second principal owner's ethnicity,
race, and sex, the financial institution reports the ethnicity,
race, and sex that the applicant provided for the first principal
owner and reports that ethnicity, race, and sex for the second
principal owner were not provided by the applicant.
14. If an applicant provides some but not all of the requested
ethnicity, race, and sex information, the financial institution
reports the information that was provided by the applicant and
reports that the applicant declined to provide or did not provide
(as applicable) the remainder of the information. For example,
assume an applicant indicates that it has two principal owners and
provides ethnicity, race, and sex information for the first
principal owner and provides only ethnicity for the second principal
owner. Further assume that the applicant does not indicate that it
does not wish to provide race or sex information for the second
principal owner. In this case, the financial institution reports the
ethnicity, race, and sex
[[Page 56585]]
information provided for the first principal owner. The financial
institution also reports the ethnicity provided for the second
principal owner, and reports that the applicant did not provide race
and sex information for the second principal owner.
15. If an applicant provides any ethnicity, race, or sex
information for any principal owner, the financial institution does
not report any additional information based on visual observation
and/or surname. For example, if an applicant indicates that it has
four principal owners and provides sex information for one principal
owner and no other ethnicity, race, or sex information, the
financial institution reports the sex information provided for one
principal owner. It reports either that the applicant did not
provide or declined to provide (as applicable) the ethnicity and
race information for one principal owner and the ethnicity, race,
and sex information for the other principal owners. The financial
institution does not report any ethnicity or race information based
on visual observation or surname, even if it is has met in person
with one or more principal owners.
16. If an applicant provides information in response to the
question requesting a given principal owner's ethnicity, race, or
sex and also checks the ``I do not wish to provide this
information'' box for that question or otherwise indicates that the
applicant does not wish to provide the information, the financial
institution reports the information on ethnicity, race, or sex that
was provided by the applicant (rather than reporting that the
applicant declined to provide the information). For example, if an
applicant is completing a paper data collection form and provides
information that a principal owner is female and also checks a box
to indicate that the applicant does not wish to provide information
regarding that principal owner's sex, the financial institution
reports the principal owner's sex as female.
Instructions for Collecting Ethnicity and Race Information via Visual
Observation and/or Surname if the Applicant Declines To Provide
Information or Does Not Respond
17. If an applicant does not provide any ethnicity, race, or sex
information for any of its principal owners or declines to provide
all of the requested ethnicity, race, or sex information, and during
the application process the financial institution meets in person
with at least one principal owner of that applicant, the financial
institution must collect the ethnicity and race of the principal
owner(s) with whom it meets on the basis of visual observation and/
or surname. For example, assume a financial institution provides
electronic data collection forms to applicants, and an applicant
fails to complete and submit the data collection form. Assume that
the financial institution is not permitted to report based on
previously collected data. Also, assume that the financial
institution meets in person with two of the applicant's four
principal owners at the same time during the application process.
The financial institution reports the ethnicity and race information
for the two principal owners it met with in person based on visual
observation and/or surname. Additionally, as noted in Instruction
21, the financial institution reports that it is reporting this
information based on visual observation and/or surname. The
financial institution reports that the applicant did not provide sex
information for these two principal owners. It also reports that the
applicant did not provide ethnicity, race, and sex information for
the other two principal owners. For additional information on when a
financial institution has or has not met in person with a principal
owner, see comment 107(a)(20)-10.
18. For purposes of determining whether reporting based on
visual observation and/or surname is required, a financial
institution is considered to have met in person with a principal
owner if the financial institution has a meeting via an electronic
medium with the principal owner and can visually observe the
principal owner using a video component. For additional information
on when a financial institution has or has not met in person with a
principal owner, see comment 107(a)(20)-10. For additional
information on when reporting based on visual observation and/or
surname is required, see comment 107(a)(20)-9.
19. A financial institution is not required to report ethnicity
and race information based on visual observation and/or surname if
the financial institution only meets in person with one or more
principal owners after the application process is complete, for
example, at loan closing or account opening. In those circumstances,
the financial institution may report that the information was not
provided by the applicant or that the applicant declined to provide
the information, as applicable.
20. A financial institution is required to collect race and
ethnicity information based on visual observation and/or surname at
only one meeting with one or more principal owners. If the financial
institution meets in person with another principal owner at a
different meeting, the financial institution is permitted, but not
required, to also collect the other principal owner's race and
ethnicity information via visual observation and/or surname. For
example, assume that a financial institution meets in person with
one of an applicant's principal owners on June 1 and records that
principal owner's ethnicity and race. Also, assume that the
financial institution meets in person with all four of the
applicant's principal owners on June 10. The financial institution
is permitted, but not required, to record the other principal
owners' ethnicity and race information based on the meeting that
occurs on June 10, because it already recorded one principal owner's
ethnicity and race based on the meeting that occurred on June 1.
21. If a financial institution reports ethnicity and race based
on visual observation and/or surname and is not relying on
previously collected data, the financial institution also must
report that the information was collected on the basis of visual
observation and/or surname. If a financial institution is relying on
previously collected data that the financial institution collected
via visual observation and/or surname, the financial institution
reports that it is reporting the information based on previously
collected data, and that it is providing the information based on
visual observation and/or surname.
22. When a financial institution reports ethnicity and race on
the basis of visual observation and/or surname, the financial
institution must select only from the following aggregate
categories: Ethnicity (Hispanic or Latino; not Hispanic or Latino);
race (American Indian or Alaska Native; Asian; Black or African
American; Native Hawaiian or Other Pacific Islander; White).
23. A financial institution never reports sex based on visual
observation or surname. If an applicant declines or otherwise does
not provide a principal owner's sex, the financial institution
reports that the applicant declined to provide that information or
that the information was not provided by the applicant, as
applicable.
Instructions Regarding Persons who Are Not Principal Owners and When an
Applicant Has Fewer Than Four Principal Owners
24. A financial institution does not report a guarantor's
ethnicity, race, and sex unless the guarantor is also a principal
owner of the applicant.
25. Because there are data reporting fields for four principal
owners, when submitting data to the Bureau, a financial institution
will need to report that the requirement to report ethnicity, race,
and sex is not applicable for some principal owners if the applicant
has fewer than four principal owners. For example, if an applicant
has only one principal owner (i.e., only one natural person directly
owns 25 percent or more of the applicant's equity interests), the
financial institution reports that the requirement to report
ethnicity, race, and sex is not applicable in the data fields for
principal owners two through four.
Instructions for Reporting Based on Previously Collected Data
26. Section 1002.107(c)(2) and its commentary set forth when a
financial institution is permitted to report information based on
previously collected data. If the financial institution is permitted
to report ethnicity, race, or sex information based on previously
collected data, the financial institution may but is not required to
do so.
27. If a financial institution reports ethnicity, race, or sex
information based on previously collected data, the financial
institution must also report that it is providing that information
based on previously collected data.
28. If a financial institution reports one or more principal
owner's ethnicity, race, or sex information based on previously
collected data, the financial institution does not need to collect
any additional ethnicity, race, or sex information. However, the
financial institution may need to report that the applicant did not
provide or declined to provide information when the financial
institution previously collected the data, as applicable.
29. If a financial institution is reporting a principal owner's
ethnicity and/or race based on data that the financial institution
previously collected via visual observation and/or surname, the
financial institution
[[Page 56586]]
reports that it is reporting ethnicity and race based on previously
collected data and based on visual observation and/or surname.
Additionally, the financial institution reports that the applicant
declined to provide information about the principal owner's sex or
that the applicant did not provide the principal owner's sex, as
applicable, and reports that the financial institution is reporting
sex based on previously collected data.
Appendix H to Part 1002--Tolerances for Bona Fide Errors in Data
Reported Under Subpart B
As set out in Sec. 1002.112(b) and in comment 112(b)-1, a
financial institution is presumed to maintain procedures reasonably
adapted to avoid errors with respect to a given data field if the
number of errors found in a random sample of a financial
institution's data submission for a given data field do not equal or
exceed the threshold in column C of the following table (Table 1,
Tolerance Thresholds for Bona Fide Errors):
[GRAPHIC] [TIFF OMITTED] TP08OC21.020
The size of the random sample, under column B, shall depend on
the size of the financial institution's small business lending
application register, as shown in column A of the Threshold
Table.\959\
---------------------------------------------------------------------------
\959\ For a financial institution with fewer than 30 entries in
its small business lending application register, the full sample
size is the financial insitution's total number of entries. The
threshold number for such financial institution's remains three.
Accordingly, the threshold percentage will be higher for financial
institions with fewer than 30 in their registers.
---------------------------------------------------------------------------
The thresholds in column C of the Threshold Table reflect the
number of unintentional errors a financial institution may make
within a particular data field (e.g., loan amount or gross annual
revenue) in a small business lending application register that would
be deemed bona fide errors for purposes of Sec. 1002.112(b).
For instance, a financial institution that submitted a small
business lending application register containing 45 applications
would be subject to a threshold of three errors per data field. If
the financial institution had made two errors in reporting loan
amount and two errors reporting gross annual income, all of these
errors would be covered by the bona fide error provision of Sec.
1002.112(b) and would not constitute a violation of the Act or this
part. If the same financial institution had made four errors in
reporting loan amount and two errors reporting gross annual income,
the bona fide error provision of Sec. 1002.112(b) would not apply
to the four loan amount errors but would still apply to the two
gross annual income errors.
Even when the number of errors in a particular data field do not
equal or exceed the threshold in column C, if either there is a
reasonable basis to believe that errors in that field were
intentional or there is other evidence that the financial
institution did not maintain procedures reasonably adapted to avoid
such errors, then the errors are not bona fide errors under Sec.
1002.112(b). To illustrate, assume that a financial institution has
incorrectly coded withdrawn applications as denials to such an
extent that it likely prevents reliable fair lending analysis of
underwriting disparities. If so, the errors would not be deemed bona
fide errors under Sec. 1002.112(b) and would violate the Act and
this part.
For purposes of determining bona fide errors under Sec.
1002.112(b), the term ``data field'' generally refers to individual
fields. However, with respect to information on the ethnicity or
race of an applicant or borrower, or co-applicant or co-borrower, a
data field group may consist of more than one field. If one or more
of the fields within an ethnicity or race field group have errors,
they count as one (and only one) error for that data field group.
0
6. In Supplement I to part 1002:
0
a. Under Section 1005.5--Rules Concerning Requests for Information,
revise Paragraph 5(a)(2) by revising the heading and adding comment -4,
and revise Paragraph 5(a)(4) including the heading.
0
b. Add Section 1002.102--Definitions; Section 1002.103--Covered
Applications; Section 1002.104--Covered Credit Transactions and
Excluded Transactions; Section 1002.105--Covered Financial Institutions
and Exempt Institutions; Section 1002.106--Business and Small Business;
Section 1002.107--Compilation of Reportable Data; Section 1002.108--
Firewall; Section 1002.109--Reporting of Data to the Bureau; Section
1002.110--Publication of Data; Section 1002.111--Recordkeeping; and
Section 1002.112--Enforcement.
The revisions and additions read as follows:
Supplement I to Part 1002--Official Interpretations
Section 1002.5--Rules Concerning Requests for Information
5(a) General rules.
* * * * *
5(a)(2) Required collection of information.
* * * * *
4. Information required by subpart B. Subpart B of this part
generally requires creditors that are covered financial institutions
as defined in Sec. 1002.105(a) to collect and report information
about the
[[Page 56587]]
ethnicity, race, and sex of the principal owners of applicants for
certain small business credit, as well as whether the applicant is
minority-owned or women-owned as defined in Sec. 1002.102(m) and
(s), respectively.
5(a)(4) Other permissible collection of information.
1. Other permissible collection of information. Information
regarding ethnicity, race, and sex that is not required to be
collected pursuant to Regulation C, 12 CFR part 1003, or subpart B
of this part, may nevertheless be collected under the circumstances
set forth in Sec. 1002.5(a)(4) without violating Sec. 1002.5(b).
The information collected pursuant to 12 CFR part 1003 must be
retained pursuant to the requirements of Sec. 1002.12. The
information collected pursuant to subpart B of this part must be
retained pursuant to the requirements set forth in Sec. 1002.111.
* * * * *
Section 1002.102--Definitions
102(j) Dwelling.
1. Consistency with Regulation C. Bureau interpretations that
appear in supplement I to part 1003 containing official commentary
in connection with Sec. 1003.2(f) are applicable to the definition
of a dwelling in Sec. 1002.102(j).
2. Dwelling under subpart A. The definition of dwelling under
Sec. 1002.14(b)(2) applies to relevant provisions under subpart A,
and Sec. 1002.102(j) is not intended to repeal, abrogate, annul,
impair, or interfere with any existing interpretations, orders,
agreements, ordinances, rules, or regulations adopted or issued
pursuant to Sec. 1002.14(b)(2).
102(l) Minority individual.
1. Purpose of definition. The definition of minority individual
is used only when an applicant determines if it is a minority-owned
business pursuant to Sec. Sec. 1002.102(m) and 1002.107(a)(18). A
financial institution provides an applicant with the definition of
minority individual when asking the applicant to determine if its
business is a minority-owned business, as defined in Sec.
1002.102(m). An applicant determines if the natural persons who own
and control and to whom the business's profits or losses accrue are
minority individuals when the applicant provides its minority-owned
business status pursuant to Sec. 1002.107(a)(18). Separately,
pursuant to Sec. 1002.107(a)(20) and related commentary, a
financial institution may be required to report a principal owner's
ethnicity and race based on visual observation and/or surname.
However, the definition of minority individual in Sec. 1002.102(l)
is not used when determining the race or ethnicity of a principal
owner.
2. Multi-racial and multi-ethnic individuals. For purposes of
subpart B of this part, a natural person who is multi-racial or
multi-ethnic is a minority individual. For example, a natural person
who is both Asian and White is a minority individual.
3. Relationship to disaggregated subcategories used to determine
ethnicity and race of principal owners. The term ``minority
individual'' is defined in Sec. 1002.102(l) using aggregate
ethnicity (Hispanic or Latino) and race (American Indian or Alaska
Native, Asian, Black or African American, and Native Hawaiian or
Other Pacific Islander) categories. Separately an applicant may
provide a principal owner's ethnicity and race using aggregate
categories and/or disaggregated subcategories for purposes of Sec.
1002.107(a)(20). However, as discussed in comment 107(a)(20)-11, a
financial institution may only use aggregate ethnicity and race
categories when required to report a principal owner's ethnicity and
race based on visual observation and/or surname.
102(m) Minority-owned business.
1. In general. In order to be a minority-owned business for
purposes of subpart B of this part, a business must satisfy both
prongs of the definition of minority-owned business. First, one or
more minority individuals must own or control more than 50 percent
of the business. However, it is not necessary that one or more
minority individuals both own and control more than 50 percent of
the business. For example, a business that is owned entirely by
minority individuals, but is not controlled by any minority
individuals satisfies the first prong of the definition. If a
business does not satisfy this first prong of the definition, it is
not a minority-owned business. Second, 50 percent or more of the net
profits or losses must accrue to one or more minority individuals.
If a business does not satisfy this second prong of the definition,
it is not a minority-owned business, regardless of whether it
satisfies the first prong of the definition.
2. Purpose of definition. The definition of minority-owned
business is used only when an applicant determines if it is a
minority-owned business for purposes of Sec. 1002.107(a)(18). A
financial institution provides an applicant with the definition of
minority-owned business when asking the applicant to provide its
minority-owned business status pursuant to Sec. 1002.107(a)(18),
but the financial institution is neither permitted nor required to
make its own determination regarding the applicant's minority-owned
business status.
3. Further clarifications of terms used in the definition of
minority-owned business. In order to assist an applicant when
determining whether it is a minority-owned business, a financial
institution may provide the applicant with the definitions of
ownership, control, and accrual of net profits or losses and related
concepts set forth in comments 102(m)-4 through -6. A financial
institution may assist an applicant when the applicant is
determining its minority-owned business status but is not required
to do so. For purposes of reporting an applicant's status, a
financial institution relies on the applicant's determinations of
its ownership, control, and accrual of net profits and losses.
4. Ownership. For purposes of determining if a business is a
minority-owned business, a natural person owns a business if that
natural person directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise, has an equity
interest in the business. Examples of ownership include being the
sole proprietor of a sole proprietorship, directly or indirectly
owning or holding the stock of a corporation or company, directly or
indirectly having a partnership interest in a business, or directly
or indirectly having a membership interest in a limited liability
company. Indirect as well as direct ownership are used when
determining ownership for purposes of Sec. Sec. 1002.102(m) and
1002.107(a)(18). Thus, where applicable, ownership must be traced
through corporate or other indirect ownership structures. For
example, assume that the applicant is company A. If company B owns
60 percent of applicant company A and a natural person owns 100
percent of company B, the natural person owns 60 percent of
applicant company A. Similarly, if a natural person directly owns 20
percent of applicant company A and is an equal partner in
partnership B that owns the remaining 80 percent of applicant
company A, the natural person owns 60 percent of applicant company A
(i.e., 20 percent due through direct ownership and 40 percent
indirectly through partnership B). A trustee is considered the owner
of the trust. Thus, if a trust owns a business and the trust has two
co-trustees, each co-trustee owns 50 percent of the business.
5. Control. A natural person controls a business if that natural
person has significant responsibility to manage or direct the
business. A natural person controls a business if the natural person
is an executive officer or senior manager (e.g., a chief executive
officer, chief financial officer, chief operating officer, managing
member, general partner, president, vice president, or treasurer) or
regularly performs similar functions. Additionally, a business may
be controlled by two or more minority individuals if those
individuals collectively control the business, such as constituting
a majority of the board of directors or a majority of the partners
of a partnership.
6. Accrual of net profits or losses. A business's net profits
and losses accrue to a natural person if that natural person
receives the net profits or losses, is legally entitled or required
to receive the net profits or losses, or is legally entitled or
required to recognize the net profits or losses for tax purposes.
102(o) Principal owner.
1. Natural person. Only a natural person can be a principal
owner of a business for purposes of subpart B of this part.
Entities, such as trusts, partnerships, limited liability companies,
and corporations, are not principal owners for this purpose.
Additionally, a natural person must directly own an equity share of
25 percent or more in the business in order to be a principal owner.
Unlike the determination of ownership for purposes of collecting and
reporting minority-owned business status and women-owned business
status, indirect ownership is not considered when determining if
someone is a principal owner for purposes of collecting and
reporting principal owners' ethnicity, race, and sex or the number
of principal owners. Thus, when determining who is a principal
owner, ownership is not traced through multiple corporate structures
to determine if a natural person owns 25 percent or more of the
equity interests. For example, if natural person A directly owns 20
percent of a business, natural person B directly owns 20 percent,
and partnership C owns 60 percent, the business does not have any
owners who
[[Page 56588]]
satisfy the definition of principal owner set forth in Sec.
1002.102(o), even if natural person A and natural person B are the
only partners in the partnership C. Similarly, if natural person A
directly owns 30 percent of a business, natural person B directly
owns 20 percent, and trust D owns 50 percent, natural person A is
the only principal owner as defined in Sec. 1002.102(o), even if
natural person B is the sole trustee of trust D.
2. Purpose of definition. A financial institution shall provide
an applicant with the definition of principal owner when asking the
applicant to provide the number of its principal owners pursuant to
Sec. 1002.107(a)(21) and the ethnicity, race, and sex of its
principal owners pursuant to Sec. 1002.107(a)(20). If a financial
institution meets in person with a natural person about a covered
application, the financial institution may be required to determine
if a natural person with whom it meets is a principal owner in order
to collect and report the principal owner's ethnicity and race based
on visual observation and/or surname. (See comments 107(a)(20)-5 and
-9.) Additionally, if an applicant does not provide the number of
its principal owners in response to the financial institution's
request pursuant to Sec. 1002.107(a)(21), the financial institution
may need to determine and report the number of the applicant's
principal owners based on other documents or information. (See
comments 107(a)(21)-1 through -3.)
102(s) Women-owned business.
1. In general. In order to be a women-owned business for
purposes of subpart B of this part, a business must satisfy both
prongs of the definition of women-owned business. First, one or more
women must own or control more than 50 percent of the business.
However, it is not necessary that one or more women both own and
control more than 50 percent of the business. For example, a
business that is owned entirely by women, but is not controlled by
any women satisfies the first prong of the definition. If a business
does not satisfy this first prong of the definition, it is not a
women-owned business. Second, 50 percent or more of the net profits
or losses must accrue to one or more women. If a business does not
satisfy this second prong of the definition, it is not a women-owned
business, regardless of whether it satisfies the first prong of the
definition.
2. Purpose of definition. The definition of women-owned business
is used only when an applicant determines if it is a women-owned
business pursuant to Sec. 1002.107(a)(19). A financial institution
provides an applicant with the definition of women-owned business
when asking the applicant to provide its women-owned business status
pursuant to Sec. 1002.107(a)(19), but the financial institution is
neither permitted nor required to make its own determination
regarding the applicant's women-owned business status.
3. Further clarifications of terms used in the definition of
women-owned business. In order to assist an applicant when
determining whether it is a women-owned business, a financial
institution may provide the applicant with the definitions of
ownership, control, and accrual of net profits or losses and related
concepts set forth in comments 102(s)-4 through -6. A financial
institution may assist an applicant when the applicant is
determining its women-owned business status but is not required to
do so. For purposes of reporting an applicant's status, a financial
institution relies on the applicant's determinations of its
ownership, control, and accrual of net profits and losses.
4. Ownership. For purposes of determining if a business is a
women-owned business, a natural person owns a business if that
natural person directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise, has an equity
interest in the business. Examples of ownership include being the
sole proprietor of a sole proprietorship, directly or indirectly
owning or holding the stock of a corporation or company, directly or
indirectly having a partnership interest in a business, or directly
or indirectly having a membership interest in a limited liability
company. Indirect as well as direct ownership are used when
determining ownership for purposes of Sec. Sec. 1002.102(s) and
1002.107(a)(19). Thus, where applicable, ownership must be traced
through corporate or other indirect ownership structures. For
example, assume that the applicant is company A. If company B owns
60 percent of the applicant company A and a natural person owns 100
percent of company B, the natural person owns 60 percent of the
applicant company A. Similarly, if a natural person directly owns 20
percent of the applicant company A and is an equal partner in a
partnership B that owns the remaining 80 percent of the applicant
company A, the natural person owns 60 percent of applicant company A
(i.e., 20 percent due through direct ownership and 40 percent
indirectly through partnership B). A trustee is considered the owner
of the trust. Thus, if a trust owns a business and the trust has two
co-trustees, each co-trustee owns 50 percent of the business.
5. Control. A natural person controls a business if that natural
person has significant responsibility to manage or direct the
business. A natural person controls a business if the natural person
is an executive officer or senior manager (e.g., a chief executive
officer, chief financial officer, chief operating officer, managing
member, general partner, president, vice president, or treasurer) or
regularly performs similar functions. Additionally, a business may
be controlled by two more women if those women collectively control
the business, such as constituting a majority of the board of
directors or a majority of the partners of a partnership.
6. Accrual of net profits or losses. A business's net profits
and losses accrue to a natural person if that natural person
receives the net profits or losses, is legally entitled or required
to receive the net profits or losses, or is legally entitled or
required to recognize the net profits or losses for tax purposes.
Section 1002.103--Covered Applications
103(a) In general.
1. In general. Subject to the requirements of subpart B of this
part, a financial institution has latitude to establish its own
application process or procedures, including designating the type
and amount of information it will require from applicants.
2. Procedures used. The term ``procedures'' refers to the actual
practices followed by a financial institution as well as its stated
application procedures. For example, if a financial institution's
stated policy is to require all applications to be in writing on the
financial institution's application form, but the financial
institution also makes credit decisions based on oral requests, the
financial institution's procedures are to accept both oral and
written applications.
3. Consistency with subpart A. Bureau interpretations that
appear in this supplement I in connection with Sec. Sec. 1002.2(f)
and 1002.9 are generally applicable to the definition of a covered
application in Sec. 1002.103. However, the definition of a covered
application in Sec. 1002.103 does not include inquiries and
prequalification requests. The definition of a covered application
also does not include reevaluation, extension, or renewal requests
on an existing business credit account, unless the request seeks
additional credit amounts. See Sec. 1002.103(b).
4. Requests for multiple covered credit transactions at one
time. Assuming the requirements of a covered application are met, if
an applicant makes a request for two or more covered credit
transactions at the same time, the financial institution reports
each request for a covered credit transaction as a separate covered
application. For example, if an applicant requests both a term loan
and a line of credit on an application form, the financial
institution reports each request for a covered credit transaction as
a separate covered application. Section 1002.107(c)(2) sets forth
the requirements for reusing certain data required under Sec.
1002.107(a) across multiple applications.
5. Initial request for a single covered credit transaction that
results in the origination of multiple covered credit transactions.
Assuming the requirements of a covered application are met, if an
applicant initially makes a request for one covered credit
transaction, but over the course of the application process requests
and obtains multiple covered credit transactions, each covered
credit transaction must be reported as a separate covered
application.
6. Requests for multiple lines of credit at one time. Assuming
the requirements of a covered application are met, if an applicant
requests multiple lines of credit on a single credit account, it is
reported as one or more covered applications based on the procedures
used by the financial institution for the type of credit account.
For example, if a financial institution treats a request for
multiple lines of credit at one time as sub-components of a single
account, the financial institution reports the request as a single
covered application. If, on the other hand, the financial
institution treats each line of credit as a separate account, then
the financial institution reports each request for a line of credit
as a separate covered application, as set forth in comment 103(a)-4.
7. Changes in whether there is a covered credit transaction. In
certain circumstances, an applicant may change the type of product
[[Page 56589]]
requested during the course of the application process. Assuming
other requirements of a covered application are met, if an applicant
initially requests a product that is not a covered credit
transaction, but during the application process decides to seek
instead a product that is a covered credit transaction, the
application is a covered application and must be reported. If, on
the other hand, an applicant initially requests a product that is a
covered credit transaction, but then during the application process
decides instead to seek a product that is not a covered credit
transaction, the application is not a covered application and thus
is not reported. If an applicant initially requests a product that
is a covered credit transaction, the financial institution
counteroffers with a product that is not a covered credit
transaction, and the applicant declines to proceed or fails to
respond, the application is reported as a covered application. For
example, if an applicant initially applies for a term loan, but
then, after consultation with the financial institution, decides
that a lease would better meet its needs and decides to proceed with
that product, the application is not a covered application and thus
is not reported. However, if an applicant initially applies for a
term loan, the financial institution offers to consider the
applicant only for a lease, and the applicant refuses, the
transaction is a covered application that must be reported.
103(b) Circumstances that are not covered applications.
1. In general. The circumstances set forth in Sec. 1002.103(b)
are not covered applications for purposes of subpart B of this part,
even if considered applications under subpart A of this part.
However, in no way are the exclusions in Sec. 1002.103(b) intended
to repeal, abrogate, annul, impair, change, or interfere with the
scope of the term application in Sec. 1002.2(f) as applicable to
subpart A.
2. Reevaluation, extension, or renewal requests that do not
request additional credit amounts. An applicant's request to change
one or more terms of an existing account does not constitute a
covered application, unless the applicant is requesting additional
credit amounts on the account. For example, an applicant's request
to extend the duration on a line of credit or to remove a guarantor
would not be a covered application.
3. Reevaluation, extension, or renewal requests that request
additional credit amounts. An applicant's request for additional
credit amounts on an existing account that is a covered credit
transaction constitutes a covered application. For example, an
applicant's request for a line increase on an existing line of
credit, made in accordance with a financial institution's procedures
for the type of credit requested, would be a covered application. As
discussed in comment 107(a)(7)-4, when reporting a covered
application that seeks additional credit amounts on an existing
account, the financial institution need only report the additional
credit amount sought, and not the entire credit amount. For example,
if an applicant currently has a line of credit account for $100,000,
and seeks to increase the line to $150,000, the financial
institution reports the amount applied for as $50,000.
4. Reviews or evaluations initiated by the financial
institution. For purposes of subpart B of this part, the term
covered application does not include evaluations or reviews of
existing accounts initiated by the financial institution because the
applicant has not made the request. For example, if a creditor
conducts periodic reviews of its existing lines of credit and
decides to increase the applicant's line by $10,000, it is not a
covered application because the applicant never made a request for
the additional credit amounts. However, if such an evaluation or
review of an existing account by a financial institution results in
the financial institution inviting the applicant to apply for
additional credit amounts on an existing account that is a covered
credit transaction, and the applicant does so, the applicant's
request constitutes a covered application for purposes of subpart B
of this part. Similarly, the term covered application also does not
include solicitations and firm offers of credit.
5. Inquiries and prequalification requests. An inquiry is a
request by a prospective applicant for information about credit
terms offered by the financial institution. A prequalification
request is a request by a prospective applicant for a preliminary
determination on whether the prospective applicant would likely
qualify for credit under a financial institution's standards or for
a determination on the amount of credit for which the prospective
applicant would likely qualify. Inquiry and prequalification
requests are not covered applications under subpart B of this part,
even though in certain circumstances inquiries and prequalification
requests may constitute applications under subpart A.
Section 1002.104--Covered Credit Transactions and Excluded
Transactions
104(a) Covered credit transaction.
1. General. The term ``covered credit transaction'' includes all
business credit (including loans, lines of credit, credit cards, and
merchant cash advances) unless otherwise excluded under Sec.
1002.104(b).
104(b) Excluded transactions.
1. Factoring. The term ``covered credit transaction'' does not
cover factoring as described herein. For the purpose of this
subpart, factoring is an accounts receivable purchase transaction
between businesses that includes an agreement to purchase, transfer,
or sell a legally enforceable claim for payment for goods that the
recipient has supplied or services that the recipient has rendered
but for which payment has not yet been made. This description of
factoring is not intended to repeal, abrogate, annul, impair, or
interfere with any existing interpretations, orders, agreements,
ordinances, rules, or regulations adopted or issued pursuant to
comment 9(a)(3)-3. A financial institution shall report an extension
of business credit incident to a factoring arrangement that is
otherwise a covered credit transaction as a ``Other sales-based
financing transaction'' under Sec. 1002.107(a)(5).
2. Leases. The term ``covered credit transaction'' does not
cover leases as described herein. A lease, for the purpose of this
subpart, is a transfer from one business to another of the right to
possession and use of goods for a term, and for primarily business
or commercial (including agricultural) purposes, in return for
consideration. A lease does not include a sale, including a sale on
approval or a sale or return, or a transaction resulting in the
retention or creation of a security interest.
3. Consumer-designated credit. The term ``covered credit
transaction'' does not include consumer-designated credit used for
business purposes. A transaction qualifies as consumer-designated
credit if the financial institution offers or extends the credit
primarily for personal, family, or household purposes. For example,
an open-end credit account used for both personal and business
purposes is not business credit for the purpose of subpart B of this
part unless the financial institution designated or intended for the
primary purpose of the account to be business-related.
4. Credit secured by certain investment properties. The term
``covered credit transaction'' does not include an extension of
credit that is secured by 1-4 individual dwelling units that the
applicant (or one or more of the applicant's principal owners) does
not, or will not, occupy. A financial institution should determine
whether the property to which the covered credit transaction or
application relates is or will be used as an investment property.
For purposes of this comment, a property is an investment property
if the applicant or one or more of the applicant's principal owners
does not or will not occupy the property. For example, if an
applicant purchases a property, does not occupy the property, and
generates income by renting the property, the property is an
investment property for purposes of this comment. Similarly, if an
applicant purchases a property, does not occupy the property, and
does not generate income by renting the property, but intends to
generate income by selling the property, the property is an
investment property. A property is an investment property if the
applicant does not or will not occupy the property, even if the
applicant does not consider the property as owned for investment
purposes. For example, if a corporation purchases a property that is
a dwelling under Sec. 1002.102(j), that it does not occupy, but
that is for the long-term residential use of its employees, the
property is an investment, even if the corporation considers the
property as owned for business purposes rather than investment
purposes, does not generate income by renting the property, and does
not intend to generate income by selling the property at some point
in time. If the property is for transitory use by employees, the
property would not be considered a dwelling under Sec. 1002.102(j).
104(b)(1) Trade credit.
1. General. Trade credit, as defined in Sec. 1002.104(b)(1), is
excluded from the definition of a covered credit transaction. An
example of trade credit involves a supplier that finances the sale
of equipment, supplies, or inventory. However, an extension of
business credit by a financial institution other than the supplier
for the financing of such items is not trade credit.
2. Trade credit under subpart A. The definition of trade credit
under comment
[[Page 56590]]
9(a)(3)-2 applies to relevant provisions under subpart A, and Sec.
1002.104(b)(1) is not intended to repeal, abrogate, annul, impair,
or interfere with any existing interpretations, orders, agreements,
ordinances, rules, or regulations adopted or issued pursuant to
comment 9(a)(3)-2.
Section 1002.105--Covered Financial Institutions and Exempt
Institutions
105(a) Financial institution.
1. Examples. Section 1002.105(a) defines a financial institution
as any partnership, company, corporation, association (incorporated
or unincorporated), trust, estate, cooperative organization, or
other entity that engages in any financial activity. This definition
includes, but is not limited to, banks, savings associations, credit
unions, online lenders, platform lenders, community development
financial institutions, lenders involved in equipment and vehicle
financing (captive financing companies and independent financing
companies), commercial finance companies, organizations exempt from
taxation pursuant to 26 U.S.C. 501(c), and governments or
governmental subdivisions or agencies.
2. Motor vehicle dealers. Pursuant to Sec. 1002.101(a), subpart
B of this part excludes from coverage persons defined by section
1029 of the Consumer Financial Protection Act of 2010, title X of
the Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376, 2004 (2010).
105(b) Covered financial institution.
1. Preceding calendar year. The definition of covered financial
institution refers to preceding calendar years. For example, in
2026, the two preceding calendar years are 2024 and 2025.
Accordingly, in 2026, Financial Institution A does not meet the
loan-volume threshold in Sec. 1002.105(b) if did not originate at
least 25 covered credit transactions for small businesses both
during 2024 and during 2025.
2. Origination threshold. A financial institution qualifies as a
covered financial institution based on total covered credit
transactions originated for small businesses, rather than covered
applications received from small businesses. For example, if in both
2024 and 2025, Financial Institution B received 30 covered
applications from small businesses and originated 20 covered credit
transactions for small businesses, then for 2026, Financial
Institution B is not a covered financial institution.
3. Annual consideration. Whether a financial institution is a
covered financial institution in a particular year depends on its
small business lending activity in the preceding two calendar years.
Therefore, whether a financial institution is a covered financial
institution is an annual consideration for each year that data may
be compiled and maintained for purposes of subpart B of this part. A
financial institution may be a covered financial institution for a
given year of data collection (and the obligations arising from
qualifying as a covered financial institution shall continue into
subsequent years, pursuant to Sec. Sec. 1002.110 and 1002.111), but
the same financial institution may not be a covered financial
institution for the following year of data collection. For example,
Financial Institution C originated 30 covered transactions for small
businesses in both 2024 and 2025. In 2026, Financial Institution C
is a covered financial institution and therefore is obligated to
compile and maintain applicable 2026 small business lending data
under Sec. 1002.107(a). During 2026, Financial Institution C
originates 10 covered transactions for small businesses. In 2027,
Financial Institution C is not a covered financial institution with
respect to 2027 small business lending data, and is not obligated to
compile and maintain 2027 data under Sec. 1002.107(a) (although
Financial Institution C may volunteer to collect and maintain 2027
data pursuant to Sec. 1002.5(a)(4)(vii) and as explained in comment
105(b)-7). Pursuant to Sec. 1002.109(a), Financial Institution C
shall submit its small business lending application register for
2026 data in the format prescribed by the Bureau by June 1, 2027
because Financial Institution C is a covered financial institution
with respect to 2026 data, and the data submission deadline of June
1, 2027 applies to 2026 data.
4. Merger or acquisition--coverage of surviving or newly formed
institution. After a merger or acquisition, the surviving or newly
formed financial institution is a covered financial institution
under Sec. 1002.105(b) if it, considering the combined lending
activity of the surviving or newly formed institution and the merged
or acquired financial institutions (or acquired branches or
locations), satisfies the criteria included in Sec. 1002.105(b).
For example, Financial Institutions A and B merge. The surviving or
newly formed financial institution meets the threshold in Sec.
1002.105(b) if the combined previous components of the surviving or
newly formed financial institution (A plus B) would have reported at
least 25 covered credit transactions for small businesses for each
of the two preceding calendar years. Similarly, if the combined
previous components and the surviving or newly formed financial
institution would have reported at least 25 covered transactions for
small businesses for the year previous to the merger as well as 25
covered transactions for small businesses for the year of the
merger, the threshold described in Sec. 1002.105(b) would be met
and the surviving or newly formed financial institution would be a
covered institution under Sec. 1002.105(b) for the year following
the merger. Comment 105(b)-5 discusses a financial institution's
responsibilities with respect to compiling and maintaining (and
subsequently reporting) data during the calendar year of a merger.
5. Merger or acquisition--coverage specific to the calendar year
of the merger or acquisition. The scenarios described below
illustrate a financial institution's responsibilities specifically
for data from the calendar year of a merger or acquisition. For
purposes of these illustrations, an ``institution that is not
covered'' means either an institution that is not a financial
institution, as defined in Sec. 1002.105(a), or a financial
institution that is not a covered financial institution, as defined
in Sec. 1002.105(b).
i. Two institutions that are not covered financial institutions
merge. The surviving or newly formed institution meets all of the
requirements necessary to be a covered financial institution. No
data are required to be compiled, maintained, or reported for the
calendar year of the merger (even though the merger creates an
institution that meets all of the requirements necessary to be a
covered financial institution).
ii. A covered financial institution and an institution that is
not covered merge. The covered financial institution is the
surviving institution, or a new covered financial institution is
formed. For the calendar year of the merger, data are required to be
compiled, maintained, and reported for covered applications from the
covered financial institution and is optional for covered
applications from the financial institution that was previously not
covered.
iii. A covered financial institution and an institution that is
not covered merge. The institution that is not covered is the
surviving institution and remains not covered after the merger, or a
new institution that is not covered is formed. For the calendar year
of the merger, data are required to be compiled and maintained (and
subsequently reported) for covered applications from the previously
covered financial institution that took place prior to the merger.
After the merger date, compiling, maintaining, and reporting data is
optional for applications from the institution that was previously
covered.
iv. Two covered financial institutions merge. The surviving or
newly formed financial institution is a covered financial
institution. Data are required to be compiled and maintained (and
subsequently reported) for the entire calendar year of the merger.
The surviving or newly formed financial institution files either a
consolidated submission or separate submissions for that calendar
year.
6. Foreign applicability. As discussed in comment 1(a)-2,
Regulation B (including subpart B) generally does not apply to
lending activities that occur outside the United States.
7. Voluntary collection and reporting. Section 1002.5(a)(4)(vii)
through (ix) permits a creditor that is not a covered financial
institution under Sec. 1002.105(b) to voluntarily collect and
report information regarding covered applications in certain
circumstances. If a creditor is voluntarily collecting information
for covered applications regarding whether the applicant is a
minority-owned business under Sec. 1002.107(a)(18) or a women-owned
business under Sec. 1002.107(a)(19), and regarding the ethnicity,
race, and sex of the applicant's principal owners under Sec.
1002.107(20), it shall do so in compliance with Sec. Sec. 1002.107,
1002.108, 1002.111, 1002.112, and 1002.114 as though it were a
covered financial institution. See also comment 5(a)(4)-1. If a
creditor is voluntarily reporting those covered applications to the
Bureau, it shall do so in compliance with Sec. Sec. 1002.109 and
1002.110 as though it were a covered financial institution.
Section 1002.106--Business and Small Business
106(b) Small business.
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1. Change in determination of small business status--business is
ultimately not a small business. If a financial institution
initially determines an applicant is a small business as defined in
Sec. 1002.106 based on available information and collects data
required by Sec. 1002.107(a)(18) through (20) but later concludes
that the applicant is not a small business, the financial
institution may process and retain the data without violating the
Act or this regulation if it meets the requirements of Sec.
1002.112(c)(3). The financial institution shall not report the
application on its small business lending application register
pursuant to Sec. 1002.109.
2. Change in determination of small business status--business is
ultimately a small business. Consistent with Sec. 1002.107(a)(14),
a financial institution need not independently verify gross annual
revenue. If a financial institution initially determines that the
applicant is not a small business as defined in Sec. 1002.106, but
later concludes the applicant is a small business, the financial
institution shall endeavor to compile, maintain, and report the data
required under Sec. 1002.107(a) in a manner that is reasonable
under the circumstances. For example, if the applicant initially
provides a gross annual revenue of $5.5 million (that is, above the
threshold for a small business as defined in Sec. 1002.106(b)), but
during the course of underwriting the financial institution
discovers the applicant's gross annual revenue was in fact $4.75
million (meaning that the applicant is within the definition of a
small business under Sec. 1002.106(b)), the financial institution
is required to report the covered application pursuant to Sec.
1002.109. In this situation, the financial institution shall take
reasonable steps upon discovery to compile, maintain, and report the
data necessary under Sec. 1002.107(a) to comply with subpart B of
this part for that covered application. Thus, in this example, even
if the financial institution's procedure is typically to request
applicant-provided data together with the application form, in this
circumstance, the financial institution shall seek to collect the
data during the application process necessary to comply with subpart
B in a manner that is reasonable under the circumstances. The
financial institution remains subject to Sec. 1002.107(c)(1)
related to the time and manner of collecting applicant-provided
data.
3. Affiliate revenue. As explained in comment 107(a)(14)-3, a
financial institution is permitted, but not required, to report the
gross annual revenue for the applicant that includes the revenue of
affiliates as well. As explained in comment 107(a)(14)-1, pursuant
to Sec. 1002.107(b), if the financial institution verifies the
gross annual revenue provided by the applicant, it must report the
verified information. Likewise, a financial institution is permitted
to rely on an applicant's representations regarding gross annual
revenue (which may or may not include the affiliate's revenue) for
purposes of determining small business status under Sec.
1002.106(b). However, if the applicant provides updated gross annual
revenue information (see comment 107(c)(1)-7), or the financial
institution verifies the gross annual revenue information, the
financial institution must use the updated or verified information
in determining small business status.
Section 1002.107--Compilation of Reportable Data
107(a) Data format and itemization.
1. General. Section 1002.107(a) describes a covered financial
institution's obligation to compile and maintain data regarding the
covered applications it receives from small businesses.
i. A covered financial institution reports these data even if
the credit originated pursuant to the reported application was
subsequently sold by the institution.
ii. A covered financial institution annually reports data for
covered applications for which final action was taken in the
previous calendar year.
iii. A financial institution reports data for a covered
application on its small business lending application register for
the calendar year during which final action was taken on the
application, even if the institution received the application in a
previous calendar year.
2. Filing Instructions Guide. Additional details and procedures
for compiling data pursuant to Sec. 1002.107 are included in the
Filing Instructions Guide, which is available at [a designated
Bureau website].
107(a)(1) Unique identifier.
1. Unique within the financial institution. A financial
institution complies with Sec. 1002.107(a)(1) by compiling and
reporting an alphanumeric application or loan identifier unique
within the financial institution to the specific application. The
identifier must not exceed 45 characters, and must begin with the
financial institution's Legal Entity Identifier (LEI), as defined in
comment 109(b)(6)-1. Separate applications for the same applicant
must have separate identifiers. The identifier may only include
standard numerical and/or alphabetical characters and cannot include
dashes, other special characters, or characters with diacritics. The
financial institution may assign the unique identifier at any time
prior to reporting the application. Refinancings or applications for
refinancing must be assigned a different identifier than the
transaction that is being refinanced. A financial institution with
multiple branches must ensure that its branches do not use the same
identifiers to refer to multiple applications.
2. Does not include directly identifying information. The unique
identifier must not include any directly identifying information
about the applicant or persons (natural or legal) associated with
the applicant. See also Sec. 1002.111(c) and related commentary.
107(a)(2) Application date.
1. Consistency. Section 1002.107(a)(2) requires that, in
reporting the date of covered application, a financial institution
shall report the date it received the covered application, as
defined under Sec. 1002.103, or the date shown on a paper or
electronic application form. Although a financial institution need
not choose the same approach for its entire small business lending
application register, it should generally be consistent in its
approach by, for example, establishing procedures for how to report
this date within particular scenarios, products, or divisions. If
the financial institution chooses to report the date shown on an
application form and the institution retains multiple versions of
the application form, the institution reports the date shown on the
first application form satisfying the application definition
provided under Sec. 1002.103.
2. Indirect applications. For an application that was not
submitted directly to the financial institution or its affiliate (as
described in Sec. 1002.107(a)(4)), the institution may report the
date the application was received by the party that initially
received the application, the date the application was received by
the financial institution, or the date shown on the application
form. Although a financial institution need not choose the same
approach for its entire small business lending application register,
it should generally be consistent in its approach by, for example,
establishing procedures for how to report this date within
particular scenarios, products, or divisions.
107(a)(3) Application method.
1. General. A financial institution complies with Sec.
1002.107(a)(3) by reporting the means by which the applicant
submitted the application from one of the following options: In-
person, telephone, online, or mail.
i. In-person. A financial institution reports the application
method as ``in-person'' if the financial institution, or another
party acting on the financial institution's behalf, meets with the
applicant in person (for example, in a branch office, at the
applicant's place of business, or via electronic media with a video
component).
ii. Telephone. A financial institution reports the application
method as ``telephone'' if the financial institution, or another
party acting on the financial institution's behalf, did not meet
with the applicant in person as described in comment 1002.107(a)(3)-
1.i but communicated with the applicant by telephone or via audio-
based electronic media without a video component.
iii. Online. A financial institution reports the application
method as ``online'' if the financial institution, or another party
acting on the financial institution's behalf, did not meet with the
applicant in person and did not communicate with the applicant by
telephone as described in comments 1002.107(a)(3)-1.i and ii, but
communicated with the applicant through an online application,
electronic mail, text message, and/or some other form of online
communication.
iv. Mail. A financial institution reports the application method
as ``mail'' if the financial institution, or another party acting on
the financial institution's behalf, did not meet with the applicant
in person and did not communicate with the applicant by telephone,
as described in comments 1002.107(a)(3)-1.i and ii, but communicated
with the applicant in writing via United States mail, courier or
overnight service, or hand-delivery (including hand-delivery of
documents via an overnight drop box or at a teller window).
2. Reporting for interactions with applicants involving both
mail and online. If
[[Page 56592]]
a financial institution, or another party acting on the financial
institution's behalf, communicated with the applicant both online as
described in comment 1002.107(a)(3)-1.iii and by mail as described
in 1002.107(a)(3)-1.iv, the financial institution reports the
application method based on the method by which it, or another party
acting on its behalf, requested the ethnicity, race, and sex of the
applicant's principal owners pursuant to Sec. 1002.107(a)(20). For
example, if a financial institution requests the ethnicity, race,
and sex information through an online form, it reports the
application method as ``online.'' If the financial institution
requests the ethnicity, race, and sex information via a paper form
sent to the applicant by mail, it reports the application method as
``mail.'' If the financial institution requests the ethnicity, race,
and sex information electronically online or via an electronic
document that is emailed to the applicant, that the applicant then
prints and returns to the financial institution by mail, the
financial institution reports the application method as ``online''
(because that is the method by which the financial institution
requested the ethnicity, race, and sex information).
107(a)(4) Application recipient.
1. Agents. If a financial institution is reporting actions taken
by its agent consistent with comment 109(a)(3)-3, the agent is
considered the financial institution for the purposes of Sec.
1002.107(a)(4). For example, assume that an applicant submitted an
application to Financial Institution A, and Financial Institution A
made the credit decision acting as Financial Institution B's agent
under State law. Financial Institution B reports the origination and
indicates that the application was submitted directly to Financial
Institution B.
107(a)(5) Credit type.
1. Reporting credit product--in general. A financial institution
complies with Sec. 1002.107(a)(5)(i) by selecting the credit
product requested from the list below. If an applicant requests more
than one credit product, the financial institution reports each
credit product requested as a separate application. If the credit
product requested or originated is not included on this list, the
financial institution selects ``other,'' and reports the credit
specific product as free-form text.
i. Term loan--unsecured.
ii. Term loan--secured.
iii. Line of credit--unsecured.
iv. Line of credit--secured.
v. Credit card.
vi. Merchant cash advance.
vii. Other sales-based financing transaction.
viii. Other.
ix. Not provided by applicant and otherwise undetermined.
2. Credit product not provided by the applicant and otherwise
undetermined. Pursuant to Sec. 1002.107(c)(1), a financial
institution is required to maintain procedures reasonably designed
to collect applicant-provided data, which includes credit product.
However, if a financial institution is nonetheless unable to collect
or otherwise determine credit product information because the
applicant does not indicate what credit product it seeks and the
application is denied, withdrawn, or closed for incompleteness
before a credit product is identified, the financial institution
reports that the credit product is ``not provided by applicant and
otherwise undetermined.''
3. Reporting credit product involving counteroffers. If a
financial institution presents a counteroffer for a different credit
product than the product the applicant had initially requested, and
the applicant does not agree to proceed with the counteroffer, the
financial institution reports the application for the original
credit product as denied pursuant to Sec. 1002.107(a)(9). If the
applicant agrees to proceed with consideration of the financial
institution's counteroffer, the financial institution reports the
disposition of the application based on the credit product that was
offered and does not report the original credit product applied for.
See comment 107(a)(9)-2.
4. Guarantees. A financial institution complies with Sec.
1002.107(a)(5)(ii) by selecting the type or types of guarantees that
were obtained for an originated covered credit transaction, or that
would have been obtained if the covered credit transaction was
originated, from the list below. The financial institution selects,
if applicable, up to a maximum of five guarantees for a single
application or transaction. If the type of guarantee does not appear
on the list, the financial institution selects ``other guarantee''
and reports the type of guarantee as free-form text. If no guarantee
is obtained or would have been obtained if the covered credit
transaction was originated, the financial institution selects ``no
guarantee.''
i. Personal guarantee--owner(s).
ii. Personal guarantee--non-owner(s).
iii. SBA guarantee--7(a) program.
iv. SBA guarantee--504 program.
v. SBA guarantee--other.
vi. USDA guarantee.
vii. FHA insurance.
viii. Bureau of Indian Affairs guarantee
ix. Other Federal guarantee.
x. State or local government guarantee.
xi. Other guarantee.
xii. No guarantee.
5. Loan term. A financial institution complies with Sec.
1002.107(a)(5)(iii) by reporting the number of months in the loan
term for the covered credit transaction. The loan term is the number
of months after which the legal obligation will mature or terminate.
The financial institution does not include in the loan term the time
that elapses, if any, between the settlement of the transaction and
the first payment period. For example, if a loan closes on April 12,
but the first payment is not due until June 1 and includes the
interest accrued in May (but not April), the financial institution
does not include the month of April in the loan term. The financial
institution may round the loan term to the nearest full month or may
count only full months and ignore partial months, as it so chooses.
If a credit product, such as a credit card, does not have a loan
term, the financial institution reports that the loan term is ``not
applicable.'' The financial institution also reports ``not
applicable'' if the application is denied, withdrawn, or determined
to be incomplete before a loan term has been identified.
6. Other sales-based financing transaction. For an extension of
business credit incident to a factoring arrangement that is
otherwise a covered credit transaction, a financial institution
selects ``other sales-based financing transaction'' as the credit
product. See comment 104(b)-1.
107(a)(6) Credit purpose.
1. General. A financial institution complies with Sec.
1002.107(a)(6) by selecting the purpose or purposes of the covered
credit transaction applied for or originated from the list below.
i. Purchase, construction/improvement, or refinance of owner-
occupied dwelling(s).
ii. Purchase, construction/improvement, or refinance of non-
owner-occupied dwelling(s).
iii. Purchase, construction/improvement, or refinance of non-
owner-occupied, non-dwelling real estate.
iv. Purchase, construction/improvement, or refinance of owner-
occupied, non-dwelling real estate.
v. Purchase, refinance, or rehabilitation/repair of motor
vehicle(s) (including light and heavy trucks).
vi. Purchase, refinance, or rehabilitation/repair of equipment.
vii. Working capital (includes inventory or floor planning).
viii. Business start-up.
ix. Business expansion.
x. Business acquisition.
xi. Refinance existing debt (other than refinancings listed
above).
xii. Line increase.
xiii. Other.
xiv. Not provided by applicant and otherwise undetermined.
xv. Not applicable.
2. More than one purpose. If the applicant indicates or the
financial institution is otherwise aware of more than one purpose
for the credit applied for or originated, the financial institution
reports those purposes, up to a maximum of three, using the list
provided, in any order it chooses. For example, if an applicant
refinances a non-dwelling commercial building it owns and uses the
funds to purchase a motor vehicle and expand the business it runs in
a part of that building, the financial institution reports that the
three purposes of the credit are purchase, construction/improvement,
or refinance of owner-occupied, non-dwelling real estate; purchase,
refinance, or rehabilitation/repair of motor vehicle(s) (including
light and heavy trucks); and business expansion. If an application
has more than three purposes, the financial institution reports any
three of those purposes. In the example above, if the funds were
also used to purchase equipment, the financial institution would
select only three of the relevant purposes to report.
3. ``Other'' credit purpose. If a purpose of an application does
not appear on the list of purposes provided, the financial
institution reports ``other'' as the credit purpose and reports the
credit purpose as free-form text. If the application has more than
one ``other'' purpose, the financial institution chooses the most
significant ``other'' purpose, in its discretion, and reports that
``other'' purpose.
[[Page 56593]]
The financial institution reports a maximum of three credit
purposes, including any ``other'' purpose reported.
4. Credit purpose not provided by applicant and otherwise
undetermined. Pursuant to Sec. 1002.107(c)(1), a financial
institution shall maintain procedures reasonably designed to collect
applicant-provided information, which includes credit purpose.
However, if a financial institution is nonetheless unable to collect
or determine credit purpose information, the financial institution
reports that the credit purpose is ``not provided by applicant and
otherwise undetermined.''
5. Not applicable. If the application is for a credit product
that generally has indeterminate or numerous potential purposes,
such as a credit card, the financial institution may report credit
purpose as ``not applicable.''
6. Excluded dwellings. As explained in comment 104(b)-4, subpart
B of this part does not apply to an extension of credit that is
secured by 1-4 individual dwelling units that the applicant or one
or more of the applicant's principal owners does not, or will not,
occupy.
7. Collecting credit purpose. Pursuant to Sec. 1002.107(c)(1),
a financial institution shall maintain procedures reasonably
designed to collect applicant-provided information, including credit
purpose. The financial institution is permitted, but not required,
to present the list of credit purposes provided in comment
107(a)(6)-1 to the applicant. The financial institution is also
permitted to ask about purposes not included on the list provided in
comment 107(a)(6)-1. If the applicant chooses a purpose or purposes
not included on the provided list, the financial institution follows
the instructions in comment 107(a)(6)-3 regarding reporting of
``other'' as the credit purpose. If an applicant chooses a purpose
or purposes that are similar to purposes on the list provided, but
uses different language, the financial institution reports the
purpose or purposes from the list provided.
107(a)(7) Amount applied for.
1. Initial amount requested. A financial institution complies
with Sec. 1002.107(a)(7) by reporting the initial amount of credit
or the credit limit initially requested by the applicant. The
financial institution is not required to report credit amounts or
limits discussed before an application is made, but must capture the
amount initially requested at the application stage or later. If the
applicant does not request a specific amount, but the financial
institution underwrites the application for a specific amount, the
financial institution reports the amount considered for underwriting
as the amount applied for. If the applicant requests an amount as a
range of numbers, the financial institution reports the midpoint of
that range.
2. No amount requested. Pursuant to Sec. 1002.107(c)(1), a
financial institution shall maintain procedures reasonably designed
to collect applicant-provided information, which includes the credit
amount initially requested by the applicant. However, if a financial
institution is nonetheless unable to collect or otherwise determine
the amount initially requested, the financial institution reports
that the amount applied for is ``not provided by applicant and
otherwise undetermined.'' If the particular product applied for does
not involve a specific amount requested or underwritten, the
financial institution reports that the requirement is ``not
applicable.''
3. Firm offers. When an applicant responds to a ``firm offer''
that specifies an amount or limit, which may occur in conjunction
with a pre-approved credit solicitation, the financial institution
reports the amount applied for as the amount of the firm offer,
unless the applicant requests a different amount. If the firm offer
does not specify an amount or limit and the applicant does not
request a specific amount, the amount applied for is the amount
underwritten by the financial institution.
4. Additional amounts on an existing account. When reporting a
covered application that seeks additional credit amounts on an
existing account, the financial institution reports only the
additional credit amount sought, and not any previous amounts
extended. See comment 103(b)-3.
107(a)(8) Amount approved or originated.
1. General. A financial institution complies with Sec.
1002.107(a)(8) by reporting the amount approved or originated for
credit that is originated or approved but not accepted. For
applications that the financial institution, pursuant to Sec.
1002.107(a)(9), reports as denied, withdrawn by the applicant, or
incomplete, the financial institution reports that the amount
approved or originated is ``not applicable.''
2. Multiple approval amounts. A financial institution may
sometimes approve an applicant for more than one credit amount,
allowing the applicant to choose which amount the applicant prefers
for the extension or line of credit. When multiple approval amounts
are offered for a closed-end credit transaction for which the action
taken is approved but not accepted, and the applicant does not
accept the approved offer of credit in any amount, the financial
institution reports the highest amount approved. If the applicant
accepts the offer of closed-end credit, the financial institution
reports the amount originated. When multiple approval amounts are
offered for an open-end credit transaction for which the action
taken is approved but not accepted, and the applicant does not
accept the approved offer of credit in any amount, the financial
institution reports the highest amount approved. If the applicant
accepts the offer of open-end credit, the financial institution
reports the actual credit limit established.
3. Amount approved or originated--closed-end credit transaction.
For an originated closed-end credit transaction, the financial
institution reports the principal amount to be repaid. This amount
will generally be disclosed on the legal obligation.
4. Amount approved or originated--refinancing. For a
refinancing, the financial institution reports the amount of credit
approved or originated under the terms of the new debt obligation.
5. Amount approved or originated--counteroffer. If an applicant
agrees to proceed with consideration of a counteroffer for an amount
or limit different from the amount for which the applicant applied,
and the covered credit transaction is approved and originated, the
financial institution reports the amount granted. If an applicant
does not agree to proceed with consideration of a counteroffer or
fails to respond, the institution reports the application as denied
and reports ``not applicable'' for the amount approved or
originated. See comment 107(a)(9)-2.
107(a)(9) Action taken.
1. General. A financial institution complies with Sec.
1002.107(a)(9) by selecting the action taken by the financial
institution on the application from the following list: originated,
approved but not accepted, denied, withdrawn by the applicant, or
incomplete. A financial institution identifies the applicable action
taken code based on final action taken on the covered application.
i. Originated. A financial institution reports that the covered
credit transaction was originated if the financial institution made
a credit decision approving the application and that credit decision
results in an extension of credit.
ii. Approved but not accepted. A financial institution reports
an application as approved but not accepted if the financial
institution made a credit decision approving the application, but
the applicant or the party that initially received the application
fails to respond to the financial institution's approval within the
specified time, or the covered credit transaction was not otherwise
consummated or the account was not otherwise opened.
iii. Denied. A financial institution reports that the
application was denied if it made a credit decision denying the
application before an applicant withdraws the application, before
the file is closed for incompleteness, or before the application is
denied for incompleteness.
iv. Withdrawn by the applicant. A financial institution reports
that the application was withdrawn if the application is expressly
withdrawn by the applicant before the financial institution makes a
credit decision approving or denying the application, before the
file is closed for incompleteness, or before the application is
denied for incompleteness.
v. Incomplete. A financial institution reports incomplete if the
financial institution took adverse action on the basis of
incompleteness under Sec. 1002.9(c)(1)(i) or provided a written
notice of incompleteness under Sec. 1002.9(c)(2), and the applicant
did not respond to the request for additional information within the
period of time specified in the notice.
2. Treatment of counteroffers. If a financial institution makes
a counteroffer to grant credit on terms other than those originally
requested by the applicant (for example, for a shorter loan
maturity, with a different interest rate, or in a different amount)
and the applicant declines the counteroffer or fails to respond, the
institution reports the action taken as a denial on the original
terms requested by the applicant. If the applicant agrees to proceed
with consideration of the financial institution's counteroffer, the
financial institution reports the action taken
[[Page 56594]]
as the disposition of the application based on the terms of the
counteroffer. For example, assume an applicant applies for a term
loan and the financial institution makes a counteroffer to proceed
with consideration of a line of credit. If the applicant declines to
be considered for a line of credit, the financial institution
reports the application as a denied request for a term loan. If, on
the other hand, the applicant agrees to be considered for a line of
credit, then the financial institution reports the action taken as
the disposition of the application for the line of credit. For
instance, using the same example, if the financial institution makes
a credit decision approving the line of credit, but the applicant
fails to respond to the financial institution's approval within the
specified time by accepting the credit offer, the financial
institution reports the application on the line of credit as
approved but not accepted.
3. Treatment of rescinded transactions. If a borrower
successfully rescinds a transaction after closing but before a
financial institution is required to submit its small business
lending application register containing the information for the
application under Sec. 1002.109, the institution reports the
application as approved but not accepted.
4. Treatment of pending applications. A financial institution
does not report any application still pending at the end of the
calendar year; it reports such applications on its small business
lending application register for the year in which final action is
taken.
5. Treatment of conditional approvals. If a financial
institution issues an approval that is subject to the applicant
meeting certain conditions, the financial institution reports the
action taken as provided below dependent on whether the conditions
are solely customary commitment or closing conditions or if the
conditions include any underwriting or creditworthiness conditions.
Customary commitment or closing conditions include, for example, a
clear-title requirement, proof of insurance policies, a
subordination agreement from another lienholder, or property titling
of associated accounts. Underwriting or creditworthiness conditions
include, for example, conditions that constitute a counteroffer
(such as a demand for a higher down-payment), satisfactory loan-to-
value ratios, or verification or confirmation, in whatever form the
institution requires, that the applicant meets underwriting
conditions concerning applicant creditworthiness, including
documentation or verification of revenue, income or assets.
i. Conditional approval--denial. If the approval is conditioned
on satisfying underwriting or creditworthiness conditions, those
conditions are not met, and the financial institution takes adverse
action on some basis other than incompleteness, the financial
institution reports the action taken as denied.
ii. Conditional approval--incompleteness. If the approval is
conditioned on satisfying underwriting or creditworthiness
conditions that the financial institution needs to make the credit
decision, and the financial institution takes adverse action on the
basis of incompleteness under Sec. 1002.9(c)(1)(i), or has sent a
written notice of incompleteness under Sec. 1002.9(c)(2) and the
applicant did not respond within the period of time specified in the
notice, the financial institution reports the action taken as
incomplete.
iii. Conditional approval--approved but not accepted. If the
approval is conditioned on satisfying conditions that are solely
customary commitment or closing conditions and the conditions are
not met, the financial institution reports the action taken as
approved but not accepted. If all the conditions (underwriting,
creditworthiness, or customary commitment or closing conditions) are
satisfied and the financial institution agrees to extend credit but
the covered credit transaction is not originated (for example,
because the applicant withdraws), the financial institution reports
the action taken as approved but not accepted.
iv. Conditional approval--withdrawn by the applicant. If the
applicant expressly withdraws before satisfying all underwriting or
creditworthiness conditions and before the institution denies the
application or before the institution closes the file for
incompleteness, the financial institution reports the action taken
as withdrawn.
107(a)(10) Action taken date.
1. Reporting action taken date for denied applications. For
applications that are denied, a financial institution reports either
the date the application was denied or the date the denial notice
was sent to the applicant.
2. Reporting action taken date for applications withdrawn by
applicant. For applications that are withdrawn by the applicant, the
financial institution reports the date the express withdrawal was
received, or the date shown on the notification form in the case of
a written withdrawal.
3. Reporting action taken date for applications that are
approved but not accepted. For applications approved by a financial
institution but not accepted by the applicant, the financial
institution reports any reasonable date, such as the approval date,
the deadline for accepting the offer, or the date the file was
closed. A financial institution should generally be consistent in
its approach to reporting by, for example, establishing procedures
for how to report this date for particular scenarios, products, or
divisions.
4. Reporting action taken date for originated covered credit
transactions. For covered credit transactions that are originated, a
financial institution generally reports the closing or account
opening date. If the disbursement of funds takes place on a date
later than the closing or account opening date, the institution may,
alternatively, use the date of initial disbursement. A financial
institution should generally be consistent in its approach to
reporting by, for example, establishing procedures for how to report
this date in different scenarios, products, or divisions.
5. Reporting action taken date for incomplete applications. For
files closed for incompleteness or denied for incompleteness, the
financial institution reports either the date the action was taken
or the date the denial or incompleteness notice was sent to the
applicant.
107(a)(11) Denial reasons.
1. Reason for denial--in general. A financial institution
complies with Sec. 1002.107(a)(11) by reporting the principal
reason or reasons it denied the application, indicating up to four
reasons. The financial institution reports only the principal reason
or reasons it denied the application, even if there are fewer than
four reasons. For example, if a financial institution denies an
application due to insufficient cashflow, unacceptable collateral,
and unverifiable business information, the financial institution is
required to report these three reasons. The reasons reported must
accurately describe the principal reason or reasons the financial
institution denied the application. A financial institution reports
denial reasons by selecting its principal reason or reasons for
denying the application from the following list:
i. Credit characteristics of the business. A financial
institution reports the denial reason as ``credit characteristics of
the business'' if it denies the application based on an assessment
of the business's ability to meet its current or future credit
obligations. Examples include business credit score, history of
business bankruptcy or delinquency, and/or a high number of recent
business credit inquiries.
ii. Credit characteristics of the principal owner(s) or
guarantor(s). A financial institution reports the denial reason as
``credit characteristics of the principal owner(s) or guarantor(s)''
if it denies the application based on an assessment of the principal
owner(s) or guarantor(s)'s ability to meet its current or future
credit obligations. Examples include principal owner(s) or
guarantor(s)'s credit score, history of charge offs, bankruptcy or
delinquency, low net worth, limited or insufficient credit history,
or history of excessive overdraft.
iii. Use of loan proceeds. A financial institution reports the
denial reason as ``use of loan proceeds'' if it denies an
application because, as a matter of policy or practice, it limits
lending to certain kinds of businesses, particular product lines
within a business class, or certain industries it has identified as
high risk. For example, if an application for credit to establish a
cannabis dispensary is denied by a financial institution because it
has classified all cannabis-related business as ``high risk,'' the
financial institution reports the reason for denial as ``use of loan
proceeds.''
iv. Cashflow. A financial institution reports the denial reason
as ``cashflow'' when it denies an application due to insufficient or
inconsistent cashflow.
v. Collateral. A financial institution reports the denial reason
as ``collateral'' when it denies an application due to insufficient,
inappropriate, or unacceptable collateral.
vi. Time in business. A financial institution reports the denial
reason as ``time in business'' when it denies an application due to
insufficient time or experience in a line of business. For example,
a credit applicant establishes a business and applies for credit
[[Page 56595]]
five months later. The financial institution may determine that the
applicant has insufficient experience in the business under the
institution's underwriting standards and deny the application.
vii. Government criteria. Certain loan programs are backed by
government agencies that have specific eligibility requirements.
When those requirements are not met by an applicant, and the
financial institution denies the application, the financial
institution reports the denial reason as ``government criteria.''
For example, if an applicant cannot meet a government-guaranteed
loan program's requirement to provide a guarantor or proof of
insurance, the financial institution reports the reason for the
denial as ``government criteria.''
viii. Aggregate exposure. Aggregate exposure is a measure of the
total exposure or level of indebtedness of the business and its
principal owner(s) associated with an application. A financial
institution reports the denial reason as ``aggregate exposure''
where the total debt associated with the application is deemed high
or exceeds certain debt thresholds set by the financial institution.
For example, if an application for unsecured credit exceeds the
maximum amount a financial institution is permitted to approve per
applicant, as stated in its credit guidelines, and the financial
institution denies the application for this reason, the financial
institution reports the reason for denial as ``aggregate exposure.''
ix. Unverifiable information. A financial institution reports
the denial reason as ``unverifiable information'' when it is unable
to verify information on an application, and denies the application
for that reason. The unverifiable information must be necessary for
the financial institution to make a credit decision based on its
procedures for the type of credit requested. Examples include
unverifiable assets or collateral, unavailable business credit
report, and unverifiable business ownership composition.
x. Other. A financial institution reports the denial reason as
``other'' where none of the enumerated denial reasons adequately
describe the principal reason or reasons it denied the application,
and the institution reports the denial reason or reasons as free-
form text.
2. Reason for denial--not applicable. A financial institution
complies with Sec. 1002.107(a)(11) by reporting that the
requirement is not applicable if the action taken on the
application, pursuant to Sec. 1002.107(a)(9), is not a denial. For
example, if the application resulted in an originated covered credit
transaction, or the application was approved but not accepted, the
financial institution complies with Sec. 1002.107(a)(11) by
reporting not applicable.
107(a)(12) Pricing information.
1. General. For applications that a financial institution,
pursuant to Sec. 1002.107(a)(9), reports as denied, withdrawn by
the applicant, or incomplete, the financial institution reports that
pricing information is ``not applicable.''
107(a)(12)(i) Interest rate.
1. Interest rate--introductory period. If a covered credit
transaction includes an initial period with an introductory interest
rate, after which the interest rate adjusts upwards or shifts from a
fixed to variable rate, a financial institution complies with Sec.
1002.107(a)(12)(i) by reporting information about the interest rate
applicable after the introductory period. For example, if a
financial institution originates a covered credit transaction with a
fixed, initial interest rate of 0 percent for six months following
origination, after which the interest rate will adjust according to
a Prime index rate plus a 3 percent margin, the financial
institution reports the 3 percent margin, Prime's value, and Prime
as the name of the index used to adjust the interest rate.
2. Multiple interest rates. If a covered credit transaction
includes multiple interest rates applicable to different credit
features, a financial institution complies with Sec.
1002.107(a)(12)(i) by reporting the interest rate applicable to the
amount of credit approved or originated reported in Sec.
1002.107(a)(8). For example, if a financial institution originates a
credit card with different interest rates for purchases, balance
transfers, cash advances, and overdraft advances, the financial
institution reports the interest rate applicable for purchases.
3. Index names. A financial institution complies with Sec.
1002.107(a)(12)(i) by selecting the index used from the following
list: Wall Street Journal Prime, 6-month CD rate, 1-year T-Bill, 3-
year T-Bill, 5-year T-Note, 12-month average of 10-year T-Bill, Cost
of Funds Index (COFI)-National, Cost of Funds Index (COFI)-11th
District. If the index used does not appear on the list of indices
provided, the financial institution reports ``other'' and provides
the name of the index via free-form text.
4. Index value. For covered transactions with an adjustable
interest rate, a financial institution complies with Sec.
1002.107(a)(12)(i)(B) by reporting the index value that is
applicable at the time the application was approved by the financial
institution. For covered credit transactions that include an initial
period with an introductory interest rate, after which the interest
rate adjusts upwards or shifts from a fixed to variable rate, a
financial institution complies with Sec. 1002.107(a)(12)(i)(B) by
reporting the index value applicable at the time the application was
approved by the financial institution of the rate in effect after
the introductory interest rate is complete.
107(a)(12)(ii) Total origination charges.
1. Charges in comparable cash transactions. Charges imposed
uniformly in cash and credit transactions are not reportable under
Sec. 1002.107(a)(12)(ii). In determining whether an item is part of
the total origination charges, a financial institution should
compare the covered credit transaction in question with a similar
cash transaction. A financial institution financing the sale of
property or services may compare charges with those payable in a
similar cash transaction by the seller of the property or service.
2. Charges by third parties. A financial institution includes
fees and amounts charged by someone other than the financial
institution in the total charges reported if the financial
institution:
i. Requires the use of a third party as a condition of or an
incident to the extension of credit, even if the applicant can
choose the third party; or
ii. Retains a portion of the third-party charge, to the extent
of the portion retained.
3. Special rule; broker fees. A financial institution complies
with Sec. 1002.107(a)(12)(ii) by including fees charged by a broker
(including fees paid by the applicant directly to the broker or to
the financial institution for delivery to the broker) in the total
origination charges reported even if the financial institution does
not require the applicant to use a broker and even if the financial
institution does not retain any portion of the charge. For more
information on broker fees, see commentary for Sec.
1002.107(a)(12)(iii).
4. Bundled services. Total origination charges include all
charges imposed directly or indirectly by the financial institution
at or before origination as an incident to or a condition of the
extension of credit. Accordingly, a financial institution complies
with Sec. 1002.107(a)(12)(ii) by including charges for other
products or services paid at or before origination in the total
origination charges reported if the financial institution requires
the purchase of such other product or service as a condition of or
an incident to the extension of credit.
5. Origination charges--examples. Examples of origination
charges may include application fees, credit report fees, points,
appraisal fees, and other similar charges.
107(a)(12)(iii) Broker fees.
1. Amount. A financial institution complies with Sec.
1002.107(a)(12)(iii) by including the fees reported in Sec.
1002.107(a)(12)(ii) that are fees paid by the applicant directly to
the broker or to the financial institution for delivery to the
broker. For example, a covered transaction has $3000 of total
origination charges. Of that $3000, $250 are fees paid by the
applicant directly to a broker and an additional $300 are fees paid
to the financial institution for delivery to the broker. The
financial institution complies with Sec. 1002.107(a)(12)(iii) by
reporting $550 in the broker fees reported.
2. Fees paid directly to a broker by an applicant. A financial
institution complies with Sec. 1002.107(a)(12)(iii) by relying on
the best information readily available to the financial institution
at the time final action is taken. Information readily available
could include, for example, information provided by an applicant or
broker that the financial institution reasonably believes regarding
the amount of fees paid by the applicant directly to the broker.
107(a)(12)(iv) Initial annual charges.
1. Charges during the initial annual period. The total initial
annual charges include all charges scheduled to be imposed during
the initial annual period following origination. For example, if a
financial institution originates a covered credit transaction with a
$50 monthly fee and a $100 annual fee, the financial institution
complies with Sec. 1002.107(a)(12)(iv) by reporting $700 in the
initial annual charges reported.
2. Interest excluded. A financial institution complies with
Sec. 1002.107(a)(12)(iv) by excluding any interest expense from the
initial annual charges reported.
[[Page 56596]]
3. Avoidable charges. A financial institution complies with
Sec. 1002.107(a)(12)(iv) by only including scheduled charges and
excluding any charges for events that are avoidable by the applicant
from the initial annual charges reported. Examples of avoidable
charges include charges for late payment, for exceeding a credit
limit, for delinquency or default, or for paying items that overdraw
an account.
4. Initial annual charges--examples. Examples of charges
scheduled to be imposed during the initial annual period may include
monthly fees, annual fees, and other similar charges.
5. Scheduled charges with variable amounts. A financial
institution complies with Sec. 1002.107(a)(12)(iv) by reporting as
the default the highest amount for a charge scheduled to be imposed.
For example, if a covered credit transaction has a $75 monthly fee,
but the fee is reduced to $0 if the applicant maintains an account
at the financial institution originating the covered credit
transaction, the financial institution complies with Sec.
1002.107(a)(12)(iv) by reporting $900 ($75x12) in the initial annual
charges reported.
107(a)(12)(v) Additional cost for merchant cash advances or
other sales-based financing.
1. Merchant cash advances. Section 1002.107(a)(12)(v) requires a
financial institution to report the difference between the amount
advanced and the amount to be repaid for a merchant cash advance or
other sales-based financing transaction. For example, in a merchant
cash advance, a financial institution reports the difference between
the purchase price and the amount to be repaid, using the amounts
provided in the contract between the financial institution and the
applicant.
107(a)(12)(vi) Prepayment penalties.
1. Policies and procedures applicable to the covered credit
transaction. The policies and procedures applicable to the covered
credit transaction include the practices that the financial
institution follows when evaluating applications for the specific
credit type and credit purpose requested. For example, assume that a
financial institution's written procedures permit it to include
prepayment penalties in the loan agreement for its term loans
secured by non-owner occupied commercial real estate. For such
transactions, the financial institution includes prepayment
penalties in some loan agreements but not others. For an application
for, or origination of, a term loan secured by non-owner occupied
commercial real estate, the financial institution reports under
Sec. 1002.107(12)(vi)(A) that a prepayment penalty could have been
included under the policies and procedures applicable to the
transaction, regardless of whether the term loan secured by non-
owner occupied commercial real estate actually includes a prepayment
penalty.
107(a)(13) Census tract.
1. General. A financial institution complies with Sec.
1002.107(a)(13) by reporting a census tract number as defined by the
U.S. Census Bureau, which includes State and county numerical codes.
A financial institution complies with Sec. 1002.107(a)(13) if it
uses the boundaries and codes in effect on January 1 of the calendar
year covered by the small business lending application register that
it is reporting. The financial institution reports census tract
based on the following:
i. Proceeds address. A financial institution complies with Sec.
1002.107(a)(13) by reporting a census tract based on the address or
location where the proceeds of the credit applied for or originated
will be or would have been principally applied, if known. For
example, a financial institution would report a census tract based
on the address or location of the site where the proceeds of a
construction loan will be applied.
ii. Main office or headquarters address. If the address or
location where the proceeds of the credit applied for or originated
is unknown, a financial institution complies with Sec.
1002.107(a)(13) by reporting a census tract number based on the
address or location of the main office or headquarters of the
applicant, if known. For example, the address or location of the
main office or headquarters of the applicant may be the home address
of a sole proprietor or the office address of a sole proprietor or
other applicant.
iii. Another address or location. If neither the address or
location where the proceeds of the credit applied for or originated
will be or would have been principally applied nor the address or
location of the main office or headquarters of the applicant are
known, a financial institution complies with Sec. 1002.107(a)(13)
by reporting a census tract number based on another address or
location associated with the applicant.
iv. Type of address used. In addition to reporting the census
tract, pursuant to Sec. 1002.107(a)(13)(iv) a financial institution
must report which one of the three types of addresses or locations
listed in Sec. 1002.107(a)(13)(i) through (iii) and described in
comments 107(a)(13)-1.i through iii that the census tract is
determined from.
2. Financial institution discretion. A financial institution
complies with Sec. 1002.107(a)(13) by identifying the appropriate
address or location and the type of that address or location in good
faith, using appropriate information from the applicant's credit
file or otherwise known by the financial institution. A financial
institution is not required to make inquiries beyond its standard
procedures as to the nature of the addresses or locations it
collects.
3. Address or location not provided by applicant and otherwise
undetermined. Pursuant to Sec. 1002.107(c)(1), a financial
institution shall maintain procedures reasonably designed to collect
applicant-provided information, which includes at least one address
or location for an applicant for census tract reporting. However, if
a financial institution is nonetheless unable to collect or
otherwise determine any address or location for an application, the
financial institution reports that the census tract information is
``not provided by applicant and otherwise undetermined.''
4. Safe harbor. As described in Sec. 1002.112(c)(1) and comment
112(c)(1)-1, a financial institution that obtains an incorrect
census tract by correctly using a geocoding tool provided by the
FFIEC or the Bureau does not violate the Act or subpart B of this
part.
107(a)(14) Gross annual revenue.
1. Collecting gross annual revenue. A financial institution may
rely on statements of or information provided by the applicant in
collecting and reporting gross annual revenue. However, pursuant to
Sec. 1002.107(b), if the financial institution verifies the gross
annual revenue provided by the applicant, it must report the
verified information. The financial institution may use the
following language to ask about gross annual revenue, if it does not
collect gross annual revenue by another method, and may rely on the
applicant's answer:
What was the gross annual revenue of the business applying for
credit in its last full fiscal year? Gross annual revenue is the
amount of money the business earned before subtracting taxes and
other expenses. You may provide gross annual revenue calculated
using any reasonable method.
2. Gross annual revenue not provided by applicant and otherwise
undetermined. Pursuant to Sec. 1002.107(c)(1), a financial
institution shall maintain procedures reasonably designed to collect
applicant-provided information, which includes the gross annual
revenue of the applicant. However, if a financial institution is
nonetheless unable to collect or determine the gross annual revenue
of the applicant, the financial institution reports that the gross
annual revenue is ``not provided by applicant and otherwise
undetermined.''
3. Affiliate revenue. A financial institution is permitted, but
not required, to report the gross annual revenue for the applicant
that includes the revenue of affiliates as well. For example, if the
financial institution does not normally collect information on
affiliate revenue, the financial institution reports only the
applicant's revenue and does not include the revenue of any
affiliates when it has not collected that information. Similarly, in
determining whether the applicant is a small business under Sec.
1002.106(b), a financial institution may rely on an applicant's
representations regarding gross annual revenue, which may or may not
include the affiliate's revenue.
107(a)(15) NAICS code.
1. General. NAICS stands for North American Industry
Classification System. The Office of Management and Budget has
charged the Economic Classification Policy Committee with the
maintenance and review of NAICS. A financial institution complies
with Sec. 1002.107(a)(15) if it uses the NAICS codes in effect on
January 1 of the calendar year covered by the small business lending
application register that it is reporting.
2. NAICS not provided by applicant and otherwise undetermined.
Pursuant to Sec. 1002.107(c)(1), a financial institution shall
maintain procedures reasonably designed to collect applicant-
provided information, which includes NAICS code. However, if a
financial institution is nonetheless unable to collect or otherwise
determine the applicant's NAICS code, the financial institution
reports that the NAICS code is ``not provided by applicant and
otherwise undetermined.''
[[Page 56597]]
3. Reliance on statements by applicant. Consistent with Sec.
1002.107(b), a financial institution may rely on statements of or
information provided by the applicant in collecting and reporting
the NAICS code. For example, a financial institution may rely on the
NAICS code on an applicant's tax return that the applicant has
otherwise provided to the financial institution.
4. Reliance on other information. A financial institution may
rely on a NAICS code obtained through the financial institution's
use of business information products, such as company profiles or
business credit reports, which provide the applicant's NAICS code.
5. Safe harbor. A financial institution that identifies an
incorrect NAICS code does not violate the Act or subpart B of this
part under the circumstances described in Sec. 1002.112(c)(2).
107(a)(16) Number of workers.
1. Collecting number of workers. In collecting the number of
workers from an applicant, a financial institution shall explain
that full-time, part-time and seasonal employees, as well as
contractors who work primarily for the applicant, would be counted
as workers, but principal owners of the business would not. If
asked, the financial institution shall explain that volunteers would
not be counted as workers, and workers for affiliates of the
applicant would only be counted if the financial institution were
also collecting the affiliates' gross annual revenue. The financial
institution may rely on statements of or information provided by the
applicant in collecting and reporting number of workers. However,
pursuant to Sec. 1002.107(b), if the financial institution verifies
the number of workers provided by the applicant, it must report the
verified information. The financial institution may use the
following language to ask about the number of workers, if it does
not collect the number of workers by another method, and may rely on
the applicant's answer:
Counting full-time, part-time and seasonal workers, as well as
contractors who work primarily for the business applying for credit,
but not counting principal owners of the business, how many people
work for the business applying for credit?
2. Number of workers not provided by applicant and otherwise
undetermined. Pursuant to Sec. 1002.107(c)(1), a financial
institution shall maintain procedures reasonably designed to collect
applicant-provided information, which includes the number of workers
of the applicant. However, if a financial institution is nonetheless
unable to collect or determine the number of workers of the
applicant, the financial institution reports that the number of
workers is ``not provided by applicant and otherwise undetermined.''
107(a)(17) Time in business.
1. As relied on or collected. A financial institution complies
with Sec. 1002.107(a)(17) by reporting the time the applicant has
been in business as relied on in making the credit decision or
collected by the financial institution. The financial institution
must report the time in business in whole years and indicate if a
business has not begun operating yet or has been in operation for
less than a year. When the financial institution relies on an
applicant's time in business as part of a credit decision, it
reports the time in business relied on in making the credit
decision. (See comments 107(a)(17)-2 and -3 below regarding
reporting of the time in business relied on.) However, Sec.
1002.107(a)(17) does not require the financial institution to rely
on an applicant's time in business in making a credit decision. The
financial institution may rely on statements of or information
provided by the applicant in collecting and reporting time in
business. However, pursuant to Sec. 1002.107(b), if the financial
institution verifies the time in business provided by the applicant,
it must report the verified information.
2. Time in business relied on. When a financial institution
evaluates an applicant's time in business as part of a credit
decision, it reports the time in business relied on in making the
credit decision. For example, if the financial institution relies on
the number of years of experience the applicant's owners have in the
current line of business, the financial institution reports that
number of years as the time in business. Similarly, if the financial
institution relies on the number of years that the applicant has
existed, the financial institution reports the number of years that
the applicant has existed as the time in business. The financial
institution reports the length of business existence or experience
duration that it relies on in making its credit decision, and is not
required to adopt any particular definition of time in business.
3. Multiple factors considered. A financial institution relies
on an applicant's time in business in making a credit decision if
the time in business was a factor in the credit decision, even if it
was not a dispositive factor. For example, if the time in business
is one of multiple factors in the financial institution's credit
decision, the financial institution has relied on the time in
business even if the financial institution denies the application
because one or more underwriting requirements other than the time in
business are not satisfied.
4. Collecting time in business. If the financial institution
does not rely on time in business in considering an application,
pursuant to Sec. 1002.107(c)(1) it shall still maintain procedures
reasonably designed to collect applicant-provided information, which
includes the applicant's time in business. In collecting time in
business from an applicant, the financial institution complies with
Sec. 1002.107(a)(17) by asking for the number of years that the
applicant has been operating the business it operates now. When the
applicant has multiple owners with different numbers of years
operating that business, the financial institution collects and
reports the greatest number of years of any owner. (However, the
financial institution does not need to comply with this instruction
if it collects and relies on the time in business by another method
in making the credit decision.)
5. Time in business not provided by applicant and otherwise
undetermined. Pursuant to Sec. 1002.107(c)(1), a financial
institution shall maintain procedures reasonably designed to collect
applicant-provided information, which includes the time in business
of the applicant. However, if a financial institution is nonetheless
unable to collect or determine the time in business of the
applicant, the financial institution reports that the time in
business is ``not provided by applicant and otherwise
undetermined.''
107(a)(18) Minority-owned business status.
1. General. Unless a financial institution is permitted to
report minority-owned business status based on previously collected
data pursuant to Sec. 1002.107(c)(2), a financial institution must
ask an applicant whether it is a minority-owned business for each
covered application. The financial institution must permit an
applicant to refuse to answer the financial institution's inquiry
and must inform the applicant that the applicant is not required to
provide the information. The financial institution must report the
applicant's response, its refusal to answer the inquiry (such as
when the applicant indicates that it does not wish to provide the
requested information), or its failure to respond to the inquiry
(such as when the applicant fails to submit a data collection form).
See appendix F for additional instructions on collecting and
reporting minority-owned business status.
2. Notice of non-discrimination. When requesting minority-owned
business status from an applicant, a financial institution must
inform the applicant that the financial institution cannot
discriminate on the basis of the applicant's minority-owned business
status, or on whether the applicant provides its minority-owned
business status. A financial institution may combine this non-
discrimination notice regarding minority-owned business status with
the similar non-discrimination notices that a financial institution
is required to provide when requesting women-owned business status
and a principal owner's ethnicity, race, and sex if a financial
institution requests minority-owned business status, women-owned
business status, and/or a principal owner's ethnicity, race, and sex
in the same data collection form or at the same time.
3. Recording an applicant's response regarding minority-owned
business status separate from the application. A financial
institution must record an applicant's response to the financial
institution's inquiry pursuant to Sec. 1002.107(a)(18) separate
from the application and accompanying information. See comment
111(b)-1. If the financial institution provides a paper or
electronic data collection form, the data collection form must not
be part of the application form or any other document that the
financial institution uses to provide or collect any information
other than women-owned business status, minority-owned business
status, principal owners' ethnicity, race, and sex, and the number
of the applicant's principal owners. See the sample data collection
form in appendix E. For example, if the financial institution sends
the data collection form via email, the data collection form should
be a separate attachment to the email or accessed through a separate
link in the email. If the financial
[[Page 56598]]
institution uses a web-based data collection form, the form should
be on its own page.
4. Minority-owned business status not provided by applicant.
Pursuant to Sec. 1002.107(c)(1), a financial institution shall
maintain procedures reasonably designed to collect applicant-
provided information, which includes the applicant's minority-owned
business status. However, if a financial institution does not
receive a response to the financial institution's inquiry for
purposes of Sec. 1002.107(a)(18), the financial institution reports
that the applicant's minority-owned business status is ``not
provided by applicant.''
5. No verification. Notwithstanding Sec. 1002.107(b), a
financial institution must report the applicant's response, the
applicant's refusal to answer the inquiry, or the applicant's
failure to respond to the inquiry pursuant to Sec. 1002.107(a)(18),
even if the financial institution verifies or otherwise obtains an
applicant's minority-owned business status for other purposes.
6. No reporting based on visual observation or surname. A
financial institution does not report minority-owned business status
based on visual observation, surname, or any basis other than the
applicant's response to the inquiry that the financial institution
makes to satisfy Sec. 1002.107(a)(18) or, if the financial
institution is permitted to report based on previously collected
data, on the basis of the applicant's response to the inquiry that
the financial institution previously made to satisfy Sec.
1002.107(a)(18).
7. Previously collected data. A financial institution may report
minority-owned business status based on previously collected data if
the financial institution is permitted to do so pursuant to Sec.
1002.107(c)(2) and its commentary.
107(a)(19) Women-owned business status.
1. General. Unless a financial institution is permitted to
report women-owned business status based on previously collected
data pursuant to Sec. 1002.107(c)(2), a financial institution must
ask an applicant whether it is a women-owned business for each
covered application. The financial institution must permit an
applicant to refuse to answer the financial institution's inquiry
and must inform the applicant that the applicant is not required to
provide the information. The financial institution must report the
applicant's response, its refusal to answer the inquiry (such as
when the applicant indicates that it does not wish to provide the
requested information), or its failure to respond to the inquiry
(such as when the applicant fails to submit a data collection form).
See appendix F for additional instructions on collecting and
reporting women-owned business status.
2. Notice of non-discrimination. When requesting women-owned
business status from an applicant, a financial institution must
inform the applicant that the financial institution cannot
discriminate on the basis of the applicant's women-owned business
status, or on whether the applicant provides its women-owned
business status. A financial institution may combine this non-
discrimination notice regarding women-owned business status with the
similar non-discrimination notices that a financial institution is
required to provide when requesting minority-owned business status
and a principal owner's ethnicity, race, and sex if a financial
institution requests minority-owned business status, women-owned
business status, and/or a principal owner's ethnicity, race, and sex
in the same data collection form or at the same time.
3. Recording an applicant's response regarding women-owned
business status separate from the application. A financial
institution must record an applicant's response to the financial
institution's inquiry pursuant to Sec. 1002.107(a)(19) separate
from the application and accompanying information. See comment
111(b)-1. If the financial institution provides a paper or
electronic data collection form, the data collection form must not
be part of the application form or any other document that the
financial institution uses to provide or collect any information
other than women-owned business status, minority-owned business
status, principal owners' ethnicity, race, and sex, and the number
of the applicant's principal owners. See the sample data collection
form in appendix E. For example, if the financial institution sends
the data collection form via email, the data collection form should
be a separate attachment to the email or accessed through a separate
link in the email. If the financial institution uses a web-based
data collection form, the form should be on its own page.
4. Women-owned business status not provided by applicant.
Pursuant to Sec. 1002.107(c)(1), a financial institution shall
maintain procedures reasonably designed to collect applicant-
provided information, which includes the applicant's women-owned
business status. However, if a financial institution does not
receive a response to the financial institution's inquiry for
purposes of Sec. 1002.107(a)(19), the financial institution reports
that the applicant's women-owned business status is ``not provided
by applicant.''
5. No verification. Notwithstanding Sec. 1002.107(b), a
financial institution must report the applicant's response, the
applicant's refusal to answer the inquiry, or the applicant's
failure to respond to the inquiry pursuant to Sec. 1002.107(a)(19),
even if the financial institution verifies or otherwise obtains an
applicant's women-owned business status for other purposes.
6. No reporting based on visual observation or surname. A
financial institution does not report women-owned business status
based on visual observation, surname, any basis other than the
applicant's response to the inquiry that the financial institution
makes to satisfy Sec. 1002.107(a)(19) or, if the financial
institution is permitted to report based on previously collected
data, on the basis of the applicant's response to the inquiry that
the financial institution previously made to satisfy Sec.
1002.107(a)(19).
7. Previously collected data. A financial institution may report
women-owned business status based on previously collected data if
the financial institution is permitted to do so pursuant to Sec.
1002.107(c)(2) and its commentary.
107(a)(20) Ethnicity, race, and sex of principal owners.
1. General. Unless a financial institution is permitted to
report ethnicity, race, and sex information based on previously
collected data pursuant to Sec. 1002.107(c)(2), a financial
institution must ask an applicant to report its principal owners'
ethnicity, race, and sex for each covered application. The financial
institution must permit an applicant to refuse to answer the
financial institution's inquiries and must inform the applicant that
it is not required to provide the information. The financial
institution must report the applicant's responses, its refusal to
answer the inquiries, or its failure to respond to the inquiries. In
certain situations, discussed in comments 107(a)(20)-9 and -10 and
in appendix G, a financial institution may also be required to
report one or more principal owners' ethnicity and race based on
visual observation and/or surname. However, a financial institution
shall not report a principal owner's sex based on visual
observation, surname, or any basis other than the applicant-provided
information (including previously collected data if permitted
pursuant to Sec. 1002.107(c)(2)). See appendix G for additional
instructions on collecting and reporting the ethnicity, race, and
sex of principal owners.
2. Notice of non-discrimination. When requesting a principal
owner's ethnicity, race, and sex from an applicant, a financial
institution must inform the applicant that the financial institution
cannot discriminate on the basis of a principal owner's ethnicity,
race, or sex, or on whether the applicant provides the information.
A financial institution may combine this non-discrimination notice
with the similar non-discrimination notices that a financial
institution is required to provide when requesting minority-owned
business status and women-owned business status if a financial
institution requests minority-owned business status, women-owned
business status, and/or a principal owner's ethnicity, race, and sex
in the same data collection form or at the same time.
3. Recording an applicant's responses regarding principal
owners' ethnicity, race, and sex separate from the application. A
financial institution must record an applicant's response to the
financial institution's inquiries pursuant to Sec. 1002.107(a)(20)
separate from the application and accompanying information. See
comment 111(b)-1. If the financial institution provides a paper or
electronic data collection form, the data collection form must not
be part of the application form or any other document that the
financial institution uses to provide or collect any information
other than women-owned business status, minority-owned business
status, principal owners' ethnicity, race, and sex, and the number
of the applicant's principal owners. See the sample data collection
form in appendix E. For example, if the financial institution sends
the data collection form via email, the data collection form should
be a separate attachment to the email or accessed through a separate
link in the email. If the financial institution uses a web-based
data collection form, the form should be on its own page.
4. Ethnicity, race, or sex of principal owners not provided by
applicant. Pursuant to Sec. 1002.107(c)(1), a financial institution
[[Page 56599]]
shall maintain procedures reasonably designed to collect applicant-
provided information, which includes the ethnicity, race, and sex of
an applicant's principal owners. However, if a financial institution
is nonetheless unable to collect the principal owners' ethnicity,
race, or sex from the applicant, and if the financial institution is
not required to report based on visual observation or surname, the
financial institution reports that the principal owner's ethnicity,
race, or sex (as applicable) is ``not provided by applicant.''
5. Determining who is a principal owner. Generally, an applicant
determines its principal owners and decides whether to provide
information about those principal owners. However, as discussed in
comments 107(a)(20)-9 and -10 and appendix G, a financial
institution may be required to report ethnicity and race information
based on visual observation and/or surname if the applicant does not
provide ethnicity, race, or sex information for at least one
principal owner and the financial institution meets in person with
one or more principal owners. Thus, a financial institution may need
to determine if a natural person that it meets with in person is a
principal owner. In that case, the financial institution may either
ask the natural person who is acting on behalf of an applicant
whether that natural person is a principal owner, or it may
independently determine if the natural person is a principal owner.
For example, if a financial institution has collected information
regarding an applicant's ownership structure and obtained the name
or identity of the natural person for other purposes, it may use
this information to independently determine whether the natural
person who meets in person with the financial institution is a
principal owner. If a financial institution asks if a natural person
is a principal owner, the financial institution can rely on an
applicant's or natural person's response, unless the financial
institution has knowledge to the contrary. The financial institution
is not required to verify any responses regarding whether a natural
person is a principal owner.
6. Ethnicity. i. Aggregate categories. A financial institution
must permit an applicant to provide a principal owner's ethnicity
for purposes Sec. 1002.107(a)(20) using one or more of the
following aggregate categories:
A. Hispanic or Latino.
B. Not Hispanic or Latino.
ii. Disaggregated subcategories. A financial institution must
permit an applicant to provide a principal owner's ethnicity for
purposes of Sec. 1002.107(a)(20) using one or more the following
disaggregated subcategories, regardless of whether the applicant has
indicated that the relevant principal owner is Hispanic or Latino
and regardless of whether the applicant selects any aggregate
categories: Cuban; Mexican; Puerto Rican; or Other Hispanic or
Latino. If an applicant indicates that a principal owner is Other
Hispanic or Latino, the financial institution must permit the
applicant to provide additional information regarding the principal
owner's ethnicity, such as indicating, for example, that the
principal owner is Argentinean, Colombian, Dominican, Nicaraguan,
Salvadoran, or Spaniard. If an applicant chooses to provide
additional information regarding a principal owner's ethnicity, such
as indicating that a principal owner is Argentinean, a financial
institution must report that additional information as free-form
text in the appropriate data reporting field.
iii. Selecting multiple categories. The financial institution
must permit the applicant to select one, both, or none of the
aggregate categories and as many disaggregated subcategories as the
applicant chooses. A financial institution must permit an applicant
to select a disaggregated subcategory even if the applicant does not
select the corresponding aggregate category. A financial institution
must also permit the applicant to refuse to provide ethnicity
information for one or more principal owners. If an applicant
provides ethnicity information for a principal owner, the financial
institution reports all of the aggregate categories and
disaggregated subcategories provided by the applicant. For example,
if an applicant selects both aggregate categories and four
disaggregated subcategories for a principal owner, the financial
institution reports the two aggregate categories that the applicant
selected and all four of the disaggregated subcategories that the
applicant selected.
iv. Information not provided by applicant. Unless a financial
institution is required to report based on visual observation and/or
surname (see comments 107(a)(20)-9 and -10 and appendix G), if an
applicant refuses or fails to provide ethnicity information for a
principal owner, the financial institution reports that the
applicant declined to provide the information or failed to respond,
as applicable. Because there are data reporting fields for four
principal owners, when submitting data to the Bureau, a financial
institution will need to report that the requirement to report
ethnicity is not applicable for some principal owners if the
applicant has fewer than four principal owners. For example, if an
applicant has only one principal owner, the financial institution
reports that the requirement to report ethnicity is not applicable
in the data fields for principal owners two through four.
7. Race. i. Aggregate categories. A financial institution must
permit an applicant to provide a principal owner's race for purposes
of Sec. 1002.107(a)(20) using one or more of the following
aggregate categories:
A. American Indian or Alaska Native.
B. Asian.
C. Black or African American.
D. Native Hawaiian or Other Pacific Islander.
E. White.
ii. Disaggregated subcategories. The financial institution must
permit an applicant to provide a principal owner's race for purposes
of Sec. 1002.107(a)(20) using one or more of the disaggregated
subcategories as listed in this comment 107(a)(20)-7.ii and set
forth in the sample data collection form in appendix E, regardless
of whether the applicant has selected the corresponding aggregate
category.
A. The Asian aggregate category includes the following
disaggregated subcategories: Asian Indian; Chinese; Filipino;
Japanese; Korean; Vietnamese; and Other Asian. An applicant must
also be permitted to provide the principal owner's race using one or
more of these disaggregated subcategories regardless of whether the
applicant indicates that the principal owner is Asian and regardless
of whether the applicant selects any aggregate categories.
Additionally, if an applicant indicates that a principal owner is
Other Asian, the financial institution must permit the applicant to
provide additional information about the principal owner's race,
such as providing information, for example, that the principal owner
is Cambodian, Hmong, Laotian, Pakistani, or Thai.
B. The Black or African American category includes the following
disaggregated subcategories: African American; Ethiopian; Haitian;
Jamaican; Nigerian; Somali; or Other Black or African American. An
applicant must also be permitted to provide the principal owner's
race using one or more of these disaggregated subcategories
regardless of whether the applicant indicates that the principal
owner is Black or African American and regardless of whether the
applicant selects any aggregate categories. Additionally, if an
applicant indicates that a principal owner is Other Black or African
American, the financial institution must permit the applicant to
provide additional information about the principal owner's race,
such as providing information, for example, that the principal owner
is Barbadian, Ghanaian, or South African.
C. The Native Hawaiian or Other Pacific Islander includes the
following disaggregated subcategories: Guamanian or Chamorro; Native
Hawaiian; Samoan; and Other Pacific Islander. An applicant must also
be permitted to provide the principal owner's race using one or more
of these disaggregated subcategories regardless of whether the
applicant indicates that the principal owner is Native Hawaiian or
Other Pacific Islander and regardless of whether the applicant
selects any aggregate categories. Additionally, if an applicant
indicates that a principal owner is Other Pacific Islander, the
financial institution must permit the applicant to provide
additional information about the principal owner's race, such as
providing information, for example, that the principal owner is
Fijian or Tongan.
D. If an applicant chooses to provide additional information
regarding a principal owner's race, such as indicating that a
principal owner is Cambodian, Barbadian, or Fijian, a financial
institution must report that additional information as free-form
text in the appropriate data reporting field.
E. In addition to permitting an applicant to indicate that a
principal owner is American Indian or Alaska Native, a financial
institution must permit an applicant to provide the name of an
enrolled or principal tribe. An applicant must be permitted to
provide the name of an enrolled or principal tribe regardless of
whether the applicant indicates that the principal owner is American
Indian or Alaska Native. If an applicant chooses to provide the name
of an enrolled or principal tribe, a financial institution must
report that information as free-form text in the appropriate data
reporting field.
[[Page 56600]]
iii. Selecting multiple categories. The financial institution
must permit the applicant to select as many aggregate categories and
disaggregated subcategories as the applicant chooses. A financial
institution must permit an applicant to select one or more
disaggregated subcategories even if the applicant does not select an
aggregate category. A financial institution must also permit the
applicant to refuse to provide this information for one or more
principal owners. If an applicant provides race information for a
principal owner, the financial institution reports all of the
aggregate categories and disaggregated subcategories provided by the
applicant. For example, if an applicant selects two aggregate
categories and five disaggregated subcategories for a principal
owner, the financial institution reports the two aggregate
categories that the applicant selected and the five disaggregated
subcategories that the applicant selected.
iv. Information not provided by applicant. Unless the financial
institution is required to report based on visual observation and/or
surname (see comments 107(a)(20)-9 and -10 and appendix G), if an
applicant refuses or fails to provide race information for a
principal owner, the financial institution reports that the
applicant declined to provide the information or failed to respond,
as applicable. Because there are data reporting fields for four
principal owners, when submitting data to the Bureau, a financial
institution must report that the requirement to report race is not
applicable for some principal owners if the applicant has fewer than
four principal owners. For example, if an applicant has only one
principal owner (i.e., only one natural person directly owns 25
percent or more of the applicant's equity interests), the financial
institution reports that the requirement to report race is not
applicable in the data reporting fields for principal owners two
through four.
8. Sex. A financial institution must permit an applicant to
provide a principal owner's sex for purposes of Sec.
1002.107(a)(20) using one or more of the following categories: Male,
Female, and/or that the principal owner prefers to self-describe
their sex. Additionally, if an applicant indicates that a principal
owner prefers to self-describe their sex, the financial institution
must permit the applicant to provide additional information about
the principal owner's sex. A financial institution must permit an
applicant to select as many categories as the applicant chooses. A
financial institution reports the category or categories selected by
the applicant, any additional information provided by the applicant
(reported as free-form text in the appropriate data reporting
field), or reports that the applicant refused to provide the
information or failed to respond. A financial institution is not
permitted to report sex based on visual observation, surname, or any
basis other than the applicant-provided information. Because there
are data reporting fields for four principal owners, when submitting
data to the Bureau a financial institution must report that the
requirement to report sex is not applicable for some principal
owners if the applicant has fewer than four principal owners. For
example, if an applicant has only one principal owner, the financial
institution reports that the requirement to report sex is not
applicable in the data fields for principal owners two through four.
See appendix G for additional information on collecting and
reporting a principal owner's sex.
9. Reporting based on visual observation and/or surname. If a
financial institution meets in person with one or more of an
applicant's principal owners and the applicant does not provide
ethnicity, race, or sex information for at least one principal
owner, the financial institution must report at least one principal
owner's ethnicity and race (but not sex) based on visual
observation, surname, or a combination of both visual observation
and surname. (See comment 107(a)(20)-10 for additional information
regarding what constitutes an in-person meeting with an applicant's
principal owners.) However, a financial institution is not required
to report based on visual observation and/or surname if the
principal owner only meets in person with a third party through whom
it is submitting an application to the financial institution. For
example, a financial institution is not required to report based on
visual observation and/or surname when an employee or officer of an
equipment dealer or retailer that is not an affiliate of the
financial institution meets in person with a principal owner.
10. Meeting in person with a principal owner. i. In-person
meetings. A financial institution meets in person with a principal
owner if an employee or officer of the financial institution or one
of its affiliates has a meeting or discussion with the applicant's
principal owner about an application and can visually observe the
principal owner. The following provides a non-exhaustive list of
examples to illustrate when a financial institution meets in person
with a principal owner for purposes of the requirement to collect
principal owners' race and ethnicity information based on visual
observation and/or surname if not provided by the applicant:
A. A principal owner comes to a financial institution's branch
or office and meets with the financial institution's loan officer to
discuss the status of a pending application.
B. A principal owner comes to a financial institution's branch
or office and meets in person with one or more employees or officers
of a financial institution in order to complete an application and
related paperwork.
C. A principal owner contacts a financial institution's loan
officer using an electronic communication method with a video
component and, using the video component, meets with the loan
officer to discuss outstanding documentation needed for a pending
application.
ii. Not in-person meetings. The following provides a non-
exhaustive list of examples to illustrate when a financial
institution does not meet in person with a principal owner for
purposes of the requirement to collect principal owners' race and
ethnicity information via visual observation and/or surname if not
provided by the applicant:
A. A principal owner drops off documents at a financial
institution's branch or office or provides the applicant's name and
drops off documents without engaging in any discussion regarding a
covered application.
B. A principal owner meets in person with an employee or officer
of the financial institution to discuss something other than a
covered application, such as another financial product.
C. The financial institution meets with a principal owner after
the application process is complete, such as at account opening or
loan closing.
D. A financial institution meets with a principal owner before
the applicant submits an application.
11. Use of aggregate categories when reporting based on visual
observation or surname. When reporting ethnicity and race based on
visual observation and/or surname, the financial institution uses
only the aggregate ethnicity and race categories. See appendix G for
additional information on collecting and reporting based on visual
observation and/or surname.
12. No verification of ethnicity, race, and sex of principal
owner. Notwithstanding Sec. 1002.107(b), a financial institution is
neither required nor permitted to verify the ethnicity, race, or sex
information that the applicant provides for purposes of Sec.
1002.107(a)(20), even if the financial institution verifies or
otherwise obtains the ethnicity, race, or sex of the applicant's
principal owners for other purposes. Additionally, if an applicant
refuses to respond to the inquiry pursuant to Sec. 1002.107(a)(20)
or fails to respond to this inquiry, the financial institution
reports that the applicant declined to provide the information or
did not respond to the request to provide the information (as
applicable), unless the financial institution is required to report
ethnicity and race based on visual observation and/or surname. The
financial institution does not report ethnicity, race, or sex based
on information that the financial institution collects for other
purposes.
107(a)(21) Number of principal owners.
1. General. A financial institution may request an applicant's
number of principal owners from the applicant or may determine the
number of principal owners from information provided by the
applicant or that the financial institution otherwise obtains. If
the financial institution asks the applicant to provide the number
of its principal owners pursuant to Sec. 1002.107(a)(21), a
financial institution must provide the definition of principal owner
set forth in Sec. 1002.102(o). If permitted pursuant to Sec.
1002.107(c)(2), a financial institution may also report an
applicant's number of principal owners based on previously collected
data.
2. Number of principal owners provided by applicant;
verification of number of principal owners. The financial
institution may rely on statements or information provided by the
applicant in collecting and reporting the number of the applicant's
principal owners. However, pursuant to Sec. 1002.107(b), if the
financial institution verifies the number of principal owners
provided by the applicant, it must report the verified information.
The financial institution is not required to verify the number of
principal owners, but if the financial institution verifies the
number of
[[Page 56601]]
principal owners in making the credit decision, then the financial
institution reports the verified number of principal owners.
3. Number of principal owners not provided by applicant and
otherwise undetermined. Pursuant to Sec. 1002.107(c)(1), a
financial institution shall maintain procedures reasonably designed
to collect applicant-provided information, which includes the number
of principal owners of the applicant. However, if a financial
institution is nonetheless unable to collect or otherwise determine
the applicant's number of principal owners, the financial
institution reports that the number of principal owners is ``not
provided by applicant and otherwise undetermined.''
107(b) Verification of applicant-provided information.
1. Reliance on statements or information provided by an
applicant. A financial institution may rely on statements made by an
applicant (whether made in writing or orally) or information
provided by an applicant when compiling and reporting data pursuant
to subpart B of this part for applicant-provided data; the financial
institution is not required to verify those statements. However, if
the financial institution does verify applicant statements for its
own business purposes, such as statements relating to gross annual
revenue or time in business, the financial institution reports the
verified information. Depending on the circumstances and the
financial institution's procedures, certain applicant-provided data
can be collected without a specific request from the applicant. For
example, gross annual revenue may be collected from tax return
documents. Applicant-provided data are the data required that are or
could be provided by the applicant, including Sec. 1002.107(a)(5)
through (7) and (13) through (21). See comment 107(c)(2)-3.
107(c) Time and manner of collection.
107(c)(1) In general.
1. Procedures. The term ``procedures'' refers to the actual
practices followed by a financial institution as well as its stated
policies or procedures. For example, if a financial institution's
stated policy is to collect applicant-provided data on or with a
paper application form, but the financial institution's employees
encourage applicants to skip the page that asks whether the
applicant is a minority-owned business or a women-owned business
under Sec. 1002.107(a)(18) and (19), the financial institution's
procedures are not reasonably designed to obtain a response.
2. Latitude to design procedures. A financial institution has
flexibility to establish procedures concerning the timing and manner
that it collects applicant-provided data that work best for its
particular lending model and product offerings, provided that those
procedures are reasonably designed to collect the applicant-provided
data in Sec. 1002.107(a).
3. Applicant-provided data. Applicant-provided data are the data
required that are or could be provided by the applicant, including
Sec. 1002.107(a)(5) (credit type), Sec. 1002.107(a)(6) (credit
purpose), Sec. 1002.107(a)(7) (amount applied for), Sec.
1002.107(a)(13) (address or location for purposes of determining
census tract), Sec. 1002.107(a)(14) (gross annual revenue), Sec.
1002.107(a)(15) (NAICS code, or information about the business such
that the financial institution can determine the applicant's NAICS
code), Sec. 1002.107(a)(16) (number of workers), Sec.
1002.107(a)(17) (time in business), Sec. 1002.107(a)(18) (minority-
owned business status), Sec. 1002.107(a)(19) (women-owned business
status), Sec. 1002.107(a)(20) (ethnicity, race, and sex of the
applicant's principal owners), and Sec. 1002.107(a)(21) (number of
principal owners). Applicant-provided data does not include data
that are generated or supplied only by the financial institution,
including Sec. 1002.107(a)(1) (unique identifier), Sec.
1002.107(a)(2) (application date), Sec. 1002.107(a)(3) (application
method), Sec. 1002.107(a)(4) (application recipient), Sec.
1002.107(a)(8) (amount approved or originated), Sec. 1002.107(a)(9)
(action taken), Sec. 1002.107(a)(10) (action taken date), Sec.
1002.107(a)(11) (denial reasons), Sec. 1002.107(a)(12) (pricing
data), and Sec. 1002.107(a)(13) (census tract, based on address or
location provided by the applicant). Depending on the circumstances
and the financial institution's procedures, certain applicant-
provided data can be collected without a specific request from the
applicant. For example, credit type may be collected based on the
type of product chosen by the applicant or NAICS code may be
collected from an applicant's tax return that the applicant has
otherwise provided to the financial institution.
4. Reasonably designed--generally. Whether a financial
institution's procedures are reasonably designed to collect
applicant-provided data depends on the financial institution's
particular lending model and product offerings. A financial
institution shall reassess on a periodic basis, based on available
data, whether its procedures are reasonably designed to obtain a
response. For example, a financial institution may be able to assess
whether its procedures are reasonably designed by comparing its
response rate with similarly situated financial institutions (for
instance, those that offer similar products, use a similar lending
model, or are of a similar size). A financial institution is
permitted, but not required, to develop different procedures for
different applicant-provided data, so long as the procedures used
are reasonably designed to obtain a response. A financial
institution is permitted, but not required, to make more than one
attempt to obtain applicant-provided data if the applicant does not
respond to an initial request.
5. Examples of procedures that are generally reasonably designed
to obtain a response. Although a fact-based determination, the
following procedures reflect practices concerning the time or manner
of collection that are generally reasonably designed to obtain a
response:
i. Timing of collection. A financial institution requests
applicant-provided data early in the application process; for
example, at the time of a covered application, as defined in Sec.
1002.103. The earlier in the application process, the more likely
the timing of collection is reasonably designed to obtain a
response.
ii. Manner of collection. A financial institution requests
applicant-provided data on the same form or in connection with other
required information. For example, a financial institution requests
applicant-provided data as part of a written application form or on
a separate data collection form provided with the written
application form. See also comments 107(a)(18)-3, 107(a)(19)-3, and
107(a)(20)-3, which discuss the use of a separate data collection
form for collecting minority-owned business status, women-owned
business status, and the ethnicity, race, and sex of an applicant's
principal owners.
6. Examples of procedures that are generally not reasonably
designed to obtain a response. The following procedures reflect
practices concerning the time or manner of collection that are
generally not reasonably designed to obtain a response. Depending on
the particular facts, however, these procedures may be reasonably
designed to obtain a response; for example, if the financial
institution has evidence or a reason to believe that under its
procedures the response rate would be similar to or better than
other alternatives.
i. Timing of collection. A financial institution requests
applicant-provided data simultaneous with or after notifying an
applicant of its action taken on a covered application.
ii. Manner of collection. A financial institution requests
applicant-provided data in a manner that imposes unnecessary
applicant burden or is inconsistent with the rest of its application
process. For example, collecting application information related to
the creditworthiness determination in electronic form, but mailing a
paper form to the applicant seeking the data required under Sec.
1002.107(a) that the financial institution does not otherwise need
for its creditworthiness determination and requiring the applicant
to mail it back.
7. Updated applicant-provided data. A financial institution
reports updated applicant-provided data if it obtains more current
data during the application process. For example, if an applicant
states it has 100 non-owners working for the business, but then the
applicant notifies the financial institution that the number is
actually 75, the financial institution reports 75 non-owners working
for the business. For reporting of verified applicant-provided
information, see Sec. 1002.107(b) and comment 107(b)-1.
8. Change in determination of small business status. If a
financial institution changes its determination regarding an
applicant's status as a small business under Sec. 1002.106(b), it
must follow the procedures described in comments 106(b)-1 and -2.
107(c)(2) Previously collected data.
1. In general. A financial institution may reuse certain
previously collected data if the requirements of Sec.
1002.107(c)(2) are met. In that circumstance, a financial
institution need not seek to collect the data anew in connection
with a subsequent covered application. For example, if an applicant
applies for and is granted a term loan, and
[[Page 56602]]
then subsequently applies for a credit card in the same calendar
year, the financial institution need not request again the data set
forth in Sec. 1002.107(c)(2). Similarly, if an applicant applies
for more than one covered credit transaction at one time, a
financial institution need only ask once for the data set forth in
Sec. 1002.107(c)(2).
2. Data that can be reused. Subject to the requirements of Sec.
1002.107(c)(2) and comment 107(c)(2)-3, a financial institution may
reuse the following data: Sec. 1002.107(a)(13) (census tract),
Sec. 1002.107(a)(14) (gross annual revenue), Sec. 1002.107(a)(15)
(NAICS code), Sec. 1002.107(a)(16) (number of workers), Sec.
1002.107(a)(17) (time in business), Sec. 1002.107(a)(18) (minority-
owned business status), Sec. 1002.107(a)(19) (women-owned business
status), Sec. 1002.107(a)(20) (ethnicity, race, and sex of
principal owners), and Sec. 1002.107(a)(21) (number of principal
owners). A financial institution is not, however, permitted to reuse
other data, such as Sec. 1002.107(a)(6) (credit purpose).
3. Previously reported data without a substantive response.
Section 1002.107(c)(2) permits a financial institution to reuse
certain previously collected data to satisfy Sec. 1002.107(a)(13)
through (21), if certain conditions are met. Data have not been
``previously collected'' within the meaning of this provision if the
applicant did not provide a substantive response to the financial
institution's request for that data and the financial institution
was not otherwise able to obtain the requested data (for example,
from the applicant's credit report, tax returns, or through visual
observation or surname collection for race and ethnicity
information).
4. Collection in the same calendar year. Pursuant to Sec.
1002.107(c)(2)(i), data can be reused if they are collected in the
same calendar year. For applications that span more than one
calendar year, the following applies:
i. If the data are collected in connection with a covered
application in one calendar year, but then final action was taken on
the application in the following calendar year, the financial
institution may consider the data as collected in the year that
final action was taken on the application.
ii. If data are collected in connection with a covered
application in one calendar year, a financial institution may reuse
that data pursuant to Sec. 1002.107(c)(2) in a subsequent
application initiated in the same calendar year, even if final
action was taken on the subsequent application in the following
calendar year.
5. Reason to believe data are inaccurate. Whether a financial
institution has reason to believe data are inaccurate pursuant to
Sec. 1002.107(c)(2)(ii) depends on the particular facts and
circumstances. For example, a financial institution may have reason
to believe data on the applicant's women-owned business status,
minority-owned business status, and ethnicity, race, and sex of
principal owners may be inaccurate if it knows that the applicant
has had a change in ownership.
6. Minority-owned business status and women-owned business
status. If the financial institution asked the applicant to provide
its minority-owned business status or women-owned business status
for purposes of Sec. 1002.107(a)(18) and (19) and the applicant
refused to provide the information (such as by selecting ``I do not
wish to provide this information'' on a data collection form or by
telling the financial institution that it did not wish to provide
the information), the financial institution may use that response
when reporting data for a subsequent application pursuant to Sec.
1002.107(c)(2). However, if the applicant failed to respond (such as
by leaving the response to the question blank or by failing to
return a data collection form), the financial institution must
inquire about the applicant's minority-owned business status or
women-owned business status, as applicable, because the data were
not previously obtained.
7. Principal owners' ethnicity, race, and sex. If the financial
institution asked the applicant to provide its principal owners'
ethnicity, race, or sex for purposes Sec. 1002.107(a)(20) and the
applicant refused to provide the information (such as by selecting
``I do not wish to provide this information'' on a data collection
form or by telling the financial institution that it did not wish to
provide the information) or if the financial institution reported
ethnicity and race based on visual observation and/or surname, the
financial institution may use these data when reporting information
for a subsequent application under Sec. 1002.107(c)(2). However, if
the applicant failed to respond (such as by leaving the response to
the question blank or by failing to return a data collection form)
and the financial institution did not report ethnicity and race
based on visual observation and/or surname, the financial
institution must inquire about the ethnicity, race, and sex of the
applicant's principal owners, as applicable, because the data were
not previously obtained.
Section 1002.108--Firewall
108(a) Definitions.
1. Involved in making any determination concerning a covered
application. An employee or officer is involved in making a
determination concerning a covered application if the employee or
officer makes, or otherwise participates in, a decision regarding
the evaluation of a covered application or the creditworthiness of
an applicant for a covered credit transaction. This includes, but is
not limited to, employees and officers serving as underwriters. The
decision that an employee or officer makes or participates in must
be about a specific covered application. An employee or officer is
not involved in making a determination concerning a covered
application if the employee or officer is involved in making a
decision that affects covered applications generally, or interacts
with small businesses prior to them becoming applicants or
submitting a covered application. This group might include officers
and employees who develop policies and procedures, program systems,
or conduct marketing. Additionally, an employee or officer is not
involved in making a determination concerning a covered application
if the employee or officer makes or participates in a decision after
the financial institution has taken final action on the application,
such as a decision about servicing or collecting a covered credit
transaction. Furthermore, an officer or employee is not involved in
making a determination concerning a covered application for purposes
of Sec. 1002.108 if the officer or employee simply uses a check box
form to confirm whether an applicant has submitted all necessary
documents or handles a minor or clerical matter during the
application process, such as suggesting or selecting a time for an
appointment with an applicant.
2. Should have access. i. General. A financial institution may
determine that an employee or officer should have access for
purposes of Sec. 1002.108 if that employee or officer is assigned
one or more job duties that may require the employee or officer to
collect (based on visual observation, surname, or otherwise), see,
consider, refer to, or use information otherwise subject to the
prohibition in Sec. 1002.108(b). The employee or officer does not
have to be required to collect, see, consider, refer to or use such
information or to actually collect, see, consider, refer to or use
such information. It is sufficient if the employee or officer might
need to do so to perform the employee's or officer's assigned job
duties. For example, if a loan officer's job description states that
the loan officer may need to collect ethnicity and race information
based on visual observation and/or surname or if the loan officer is
assigned the task of assisting applicants with the completion of
data collection forms, the financial institution may determine that
the loan officer should have access. If a financial institution
determines that an employee or officer who is involved in making any
determination concerning a covered application should have access
for purposes of Sec. 1002.108, the financial institution is
responsible for ensuring that the employee or officer only accesses
and uses the protected information for lawful purposes.
ii. When a group of employees or officers should have access. A
financial institution may determine that all employees or officers
with the same job description or assigned duties should have access
for purposes of Sec. 1002.108. If a job description assigns one or
more tasks that may require access to one or more applicants'
responses to the financial institution's inquiries under Sec.
1002.107(a)(18) through (20), the financial institution may
determine that all employees and officers who share that job
description should have access for purposes of Sec. 1002.108. For
example, if the job description for the position of loan officer
states that a loan officer may have to distribute, collect, and help
applicants complete a data collection form that asks about the
applicant's minority-owned business status, women-owned business
status, and its principal owners' ethnicity, race, and sex, the
financial institution may determine that all employees and officers
who have been assigned the position of loan officer should have
access for purposes of Sec. 1002.108.
108(b) Prohibition on access to certain information.
[[Page 56603]]
1. Scope of information subject to the prohibition. i. When the
prohibition applies. The prohibition in Sec. 1002.108(b) applies
only to an applicant's responses to the inquiries that the covered
financial institution makes to satisfy Sec. 1002.107(a)(18) through
(20). For example, if a financial institution satisfies Sec.
1002.107(a)(18) through (20) by using a paper data collection form
to ask an applicant if it is a minority-owned business, if it is a
women-owned business, and for the ethnicity, race, and sex of its
principal owners, the prohibition applies to the responses that the
applicant provides on the paper data collection form and any other
paper or electronic records that the financial institution creates
based on the applicant's responses provided on the paper data
collection form. Similarly, if a financial institution satisfies
Sec. 1002.107(a)(18) through (20) by asking an applicant about its
minority-owned business status, its women-owned business status, and
the ethnicity, race, and sex of its principal owners during a
telephone call, the prohibition applies to the responses to those
inquiries provided during that telephone call and to any records
created on the basis of those responses.
ii. When the prohibition does not apply. Because the prohibition
in Sec. 1002.108(b) only applies to the applicant's responses to
the inquiries that the financial institution makes to satisfy Sec.
1002.107(a)(18) through (20), the prohibition does not apply to
ethnicity or race information about principal owners that the
financial institution collects via visual observation or surname.
Additionally, the prohibition in Sec. 1002.108(b) does not apply to
an applicant's responses to inquiries regarding minority-owned or
women-owned business status, or principal owners' ethnicity, race,
or sex, made for other purposes. Thus, an employee or officer who
obtains information to determine if an applicant is eligible for a
Small Business Administration program for women-owned businesses may
make determinations concerning the applicant's covered application
without regard to whether the exception in Sec. 1002.108(c) is
satisfied. Additionally, Sec. 1002.108(b) does not prohibit an
employee or officer from making a determination regarding a covered
application if the employee or officer generally knows that an
applicant is a minority-owned business or women-owned business or
knows the ethnicity, race, or sex of any of the applicant's
principal owners due to activities unrelated to the inquiries made
to satisfy the financial institution's obligations under subpart B
of this part. Thus, an employee or officer who knows, for example,
that an applicant is a minority-owned business due to social
relationships or other professional relationships with the applicant
or any of its principal owners may make determinations concerning
the applicant's covered application.
2. Scope of persons subject to the prohibition. The prohibition
in Sec. 1002.108(b) applies to an employee or officer of a covered
financial institution or its affiliate if the employee or officer is
involved in making any determination concerning a covered
application. For example, if a financial institution is affiliated
with company B and an employee of company B is involved in making a
determination regarding a covered application on behalf of the
financial institution, then the financial institution must comply
with Sec. 1002.108 with regard to company B's employee. Section
1002.108 does not require a financial institution to limit the
access of employees and officers of third parties who are not
affiliates of the financial institution. Section 1002.108 does not
require a financial institution to limit the access of third parties
(who are not employees or officers of the financial institution or
its affiliates) through whom the financial institution receives
covered applications.
108(c) Exception to the prohibition on access to certain
information.
1. General. A financial institution is not required to limit the
access of a particular employee or officer who is involved in making
determinations concerning covered applications if the financial
institution determines that the particular employee or officer
should have access to the information collected pursuant to Sec.
1002.107(a)(18) through (20) and the financial institution provides
the notice required by Sec. 1002.108(d). A financial institution
can also determine that several employees and officers should have
access or that all of a group of similarly situated employees or
officers should have access. See comment 108(a)-2. However, the
financial institution cannot permit all employees and officers to
have access simply because it has determined that one or more
employees or officers should have access. For example, a financial
institution may determine that a single compliance officer or all of
its compliance officers should have access and then permit one or
all of its compliance officers, respectively, to have access.
However, the financial institution cannot permit other employees or
officers to have access unless it independently determines that they
should have access.
108(d) Notice.
1. General. If a financial institution determines that one or
more employees or officers should have access pursuant to Sec.
1002.108(c), the financial institution must provide the required
notice to, at a minimum, the applicant or applicants whose responses
will be accessed by an employee or officer involved in making
determinations regarding the applicant's or applicants' covered
applications. Alternatively, the financial institution may also
provide the required notice to larger group of applicants, including
all applicants, if it determines that one or more officers or
employees should have access.
2. Content of the required notice. The notice must inform the
applicant that one or more employees and officers involved in making
determinations regarding the applicant's covered application may
have access to the applicant's responses regarding the applicant's
minority-owned business status, women-owned business status, and its
principal owners' ethnicity, race, and sex. The financial
institution may, but is not required to, provide the notice on its
data collection form. If the financial institution provides the
notice on an electronic or paper data collection form, the notice
must use language substantially similar to the following:
``Employees and officers making determinations concerning an
application, such as loan officers and underwriters, may have access
to the information provided on this form.'' If the financial
institution provides the notice orally, it must use language
substantially similar to the following: ``Employees and officers
making determinations concerning your application, such as loan
officers and underwriters, may have access to your responses
regarding your minority-owned business status, your women-owned
business status, and your principal owners' ethnicity, race, or
sex.''
3. Timing for providing the notice. If the financial institution
is providing the notice orally, it must provide the notice required
by Sec. 1002.108(d) prior to asking the applicant if it is a
minority-owned business or women-owned business and prior to asking
for a principal owner's ethnicity, race, or sex. If the notice is
provided on the same paper or electronic data collection form as the
inquiries about minority-owned business status, women-owned business
status, and the principal owners' ethnicity, race, or sex, the
notice must appear at the top of the form. If the notice is provided
in an electronic or paper document that is separate from the data
collection form, the notice must be provided at the same time as the
data collection form or prior to providing data collection form.
Additionally, the notice must be provided with the non-
discrimination notices required pursuant to Sec. 1002.107(a)(18)
through (20). See appendix E.
Section 1002.109--Reporting of Data to the Bureau
109(a) Reporting to the Bureau.
109(a)(2) Reporting by subsidiaries.
1. Subsidiaries. A covered financial institution is considered a
subsidiary of another covered financial institution for purposes of
reporting data pursuant to Sec. 1002.109 if more than 50 percent
of the ownership or control of the first covered financial
institution is held by the second covered financial institution.
109(a)(3) Reporting obligations where multiple financial
institutions are involved in a covered credit transaction.
1. General. The following provides guidance on how to report
originations and applications involving more than one institution.
The discussion below assumes that all of the parties are covered
financial institutions. However, the same principles apply if any of
the parties is not a covered financial institution. See also comment
109(a)(3)-2 (providing examples of transactions involving more than
one financial institution) and comment 109(a)(3)-3 (discussing how
to report actions taken by agents).
i. Only one financial institution reports each originated
covered credit transaction as an origination. If more than one
financial institution was involved in the origination of a covered
credit transaction, the financial institution that made the final
credit decision approving the application reports the covered
[[Page 56604]]
credit transaction as an origination. It is not relevant whether the
covered credit transaction closed or, in the case of an application,
would have closed in the financial institution's name. If more than
one financial institution approved an application prior to closing
or account opening and one of those financial institutions purchased
the covered credit transaction after closing, the financial
institution that purchased the covered credit transaction after
closing reports the covered credit transaction as an origination. If
a financial institution reports a transaction as an origination, it
reports all of the information required for originations, even if
the covered credit transaction was not initially payable to the
financial institution that is reporting the covered credit
transaction as an origination.
ii. In the case of an application for a covered credit
transaction that did not result in an origination, a financial
institution reports the action it took on that application if it
made a credit decision on the application or was reviewing the
application when the application was withdrawn or closed for
incompleteness. It is not relevant whether the financial institution
received the application directly from the applicant or indirectly
through another party, such as a broker, or whether another
financial institution also reviewed and reported an action taken on
the same application.
2. Examples. The following scenarios illustrate how a financial
institution reports a particular application or originated covered
credit transaction. The illustrations assume that all of the parties
are covered financial institutions. However, the same principles
apply if any of the parties is not a covered financial institution.
i. Financial Institution A received a covered application from
an applicant and forwarded that application to Financial Institution
B. Financial Institution B reviewed the application and approved the
covered credit transaction prior to closing. The covered credit
transaction closed in Financial Institution A's name. Financial
Institution B purchased the covered credit transaction from
Financial Institution A after closing. Financial Institution B was
not acting as Financial Institution A's agent. Since Financial
Institution B made the final credit decision prior to closing,
Financial Institution B reports the application as an origination.
Financial Institution A does not report the application.
ii. Financial Institution A received a covered application from
an applicant and forwarded that application to Financial Institution
B. Financial Institution B reviewed the application before the
covered credit transaction would have closed, but the application
did not result in an origination because Financial Institution B
denied the application. Financial Institution B was not acting as
Financial Institution A's agent. Since Financial Institution B made
the credit decision, Financial Institution B reports the application
as a denial. Financial Institution A does not report the
application. If, under the same facts, the application was withdrawn
before Financial Institution B made a credit decision, Financial
Institution B would report the application as withdrawn and
Financial Institution A would not report the application.
iii. Financial Institution A received a covered application from
an applicant and approved the application before closing the loan in
its name. Financial Institution A was not acting as Financial
Institution B's agent. Financial Institution B later purchased the
covered credit transaction from Financial Institution A. Financial
Institution B did not review the application before closing.
Financial Institution A reports the application as an origination.
Financial Institution B has no reporting obligation for this
transaction.
iv. Financial Institution A received a covered application from
an applicant. If approved, the covered credit transaction would have
closed in Financial Institution B's name. Financial Institution A
denied the application without sending it to Financial Institution B
for approval. Financial Institution A was not acting as Financial
Institution B's agent. Since Financial Institution A made the credit
decision before the loan would have closed, Financial Institution A
reports the application. Financial Institution B does not report the
application.
v. Financial Institution A reviewed a covered application and
made the credit decision to approve a covered credit transaction
using the underwriting criteria provided by a third party (e.g.,
another financial institution or party). The third party did not
review the application and did not make a credit decision prior to
closing. Financial Institution A was not acting as the third party's
agent. Financial Institution A reports the application. The third
party has no reporting obligation for this application. Assume the
same facts, except that Financial Institution A made a credit
decision to approve the application, and the applicant chose not to
accept the covered credit transaction from Financial Institution A.
Financial Institution A reports the application as approved but not
accepted and the third party does not report the application.
vi. Financial Institution A reviewed and made the credit
decision on a covered application based on the criteria of a third-
party insurer or guarantor (for example, a government or private
insurer or guarantor). Financial Institution A reports the action
taken on the application.
vii. Financial Institution A received a covered application and
forwarded it to Financial Institutions B and C. Financial
Institution A made a credit decision, acting as Financial
Institution D's agent, and approved the application. Financial
Institution B made a credit decision approving the application, and
Financial Institution C made a credit decision denying the
application. The applicant did not accept the covered credit
transaction from Financial Institution D. Financial Institution D
reports the application as approved but not accepted. Financial
Institution A does not report the application. The applicant
accepted the offer of credit from Financial Institution B, and
credit was extended. Financial Institution B reports the
origination. Financial Institution C reports the application as
denied.
3. Agents. If a covered financial institution made a credit
decision on a covered application through the actions of an agent,
the financial institution reports the application. For example,
acting as Financial Institution A's agent, Financial Institution B
approved an application prior to closing and a covered credit
product was originated. Financial Institution A reports the covered
credit product as an origination. State law determines whether one
party is the agent of another.
109(b) Financial institution identifying information.
Paragraph 109(b)(4).
1. Federal prudential regulator. For purposes of Sec.
1002.109(b)(4), Federal prudential regulator means, if applicable,
the Federal prudential regulator for a financial institution that is
a depository institution as determined pursuant to section 3q of the
Federal Deposit Insurance Act (12 U.S.C. 1813(q)), including the
Office of the Comptroller of the Currency, the Federal Deposit
Insurance Corporation, or the Board of Governors of the Federal
Reserve System; or the National Credit Union Administration Board
for financial institutions that are Federal credit unions.
2. Change in Federal prudential regulator. If the Federal
prudential regulator for a financial institution changes (as a
consequence of a merger or a change in the institution's charter,
for example), the institution must identify its new Federal
prudential regulator in its data submission under Sec. 1002.109 for
the calendar year of the change. For example, if a financial
institution's Federal prudential regulator changes in February 2026,
it must identify its new Federal prudential regulator in the annual
submission for its 2026 data (which is due by June 1, 2027) pursuant
to Sec. 1002.109(b)(4).
Paragraph 109(b)(5).
1. Federal Taxpayer Identification Number. If a financial
institution obtains a new Federal Taxpayer Identification Number
(TIN), it should provide the new number in its subsequent data
submission. For example, if two financial institutions that
previously reported data under subpart B of this part merge and the
surviving institution retained its Legal Entity Identifier but
obtained a new TIN, then the surviving institution should report the
new TIN with its data submission. For example, if a financial
institution's TIN changes in February 2026, it must identify its new
TIN in the annual submission for its 2026 data (which is due by June
1, 2027) pursuant to Sec. 1002.109(b)(5).
Paragraph 109(b)(6).
1. Legal Entity Identifier (LEI). A Legal Entity Identifier is a
utility endorsed by the LEI Regulatory oversight committee, or a
utility endorsed or otherwise governed by the Global LEI Foundation
(GLEIF) (or any successor of the GLEIF) after the GLEIF assumes
operational governance of the global LEI system. A financial
institution complies with Sec. 1002.109(b)(6) by reporting its
current LEI number. A financial institution that does not currently
possess an LEI number must obtain an LEI number, and has an ongoing
obligation to maintain the LEI number. The GLEIF website provides a
list of LEI issuing
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organizations. A financial institution may obtain an LEI, for
purposes of complying with Sec. 1002.109(b)(6), from any one of the
issuing organizations listed on the GLEIF website.
Paragraph 109(b)(7).
1. RSSD ID number. The RSSD ID is a unique identifying number
assigned to institutions, including main offices and branches, by
the Board of Governors of the Federal Reserve System. A financial
institution's RSSD ID may be found on the website of the National
Information Center, which provides comprehensive financial and
structure information on banks and other institutions for which the
Federal Reserve Board has a supervisory, regulatory, or research
interest including both domestic and foreign banking organizations
that operate in the United States. If a financial institution does
not have an RSSD ID, it reports that this information is not
applicable.
Paragraph 109(b)(8).
1. Immediate parent entity. An entity is the immediate parent of
a financial institution for purposes of Sec. 1002.109(b)(8)(i)
through (iii) if it is a separate entity that directly owns more
than 50 percent of the financial institution.
2. Top-holding parent entity. An entity is the top-holding
parent of a financial institution for purposes of Sec.
1002.109(b)(8)(iv) through (vi) if it ultimately owns more than 50
percent of the financial institution, and the entity itself is not
controlled by any other entity. If the immediate parent entity and
the top-holding parent entity are the same, the financial
institution reports that Sec. 1002.109(b)(8)(iv) through (vii) are
not applicable.
3. LEI. For purposes of Sec. 1002.109(b)(8)(ii) and (v), a
financial institution shall report the LEI of a parent entity if the
parent entity has an LEI number. If a financial institution's parent
entity does not have an LEI, the financial institution reports that
this information is not applicable.
4. RSSD ID numbers. For purposes of Sec. 1002.109(b)(8)(iii)
and Sec. 1002.109(b)(8)(vi), a financial institution shall report
the RSSD ID number of a parent entity if the entity has an RSSD ID
number. If a financial institution's parent entity does not have an
RSSD ID, the financial institution reports that this information is
not applicable.
Paragraph 109(b)(9).
1. Type of financial institution. A financial institution
complies with Sec. 1002.109(b)(9) by selecting the applicable type
or types of financial institution from the list below. A financial
institution shall select all applicable types.
i. Bank or savings association.
ii. Minority depository institution.
iii. Credit union.
iv. Nondepository institution.
v. Community development financial institution (CDFI).
vi. Other nonprofit financial institution.
vii. Farm Credit System institution.
viii. Government lender.
ix. Commercial finance company.
x. Equipment finance company.
xi. Industrial loan company.
xii. Fintech.
xiii. Other.
2. Use of ``other'' for type of financial institution. A
financial institution reports type of financial institution as
``other'' where none of the enumerated types of financial
institution appropriately describe the applicable type of financial
institution, and the institution reports the type of financial
institution as free-form text. A financial institution that selects
at least one type from the list is permitted, but not required, to
also report ``other'' (with appropriate free-form text) if there is
an additional aspect of its business that is not one of the
enumerated types set out in comment 109(b)(9)-1.
Paragraph 109(b)(10).
1. Financial institutions that voluntarily report covered
applications under subpart B of this part. A financial institution
that is not a covered financial institution pursuant to Sec.
1002.105(b) but that elects to voluntarily compile, maintain, and
report data under Sec. Sec. 1002.107 through 1002.109 (see comment
1002.105(b)-6) complies with Sec. 1002.109(b)(10) by selecting
``voluntary reporter.''
109(c) Procedures for the submission of data to the Bureau.
1. Filing Instructions Guide. The Bureau includes in the Filing
Instructions Guide additional details and procedures for the
submission of data to the Bureau pursuant to Sec. 1002.109, as well
as any related materials, which are available at [a designated
Bureau website].
Section 1002.110--Publication of Data
110(c) Statement of financial institution's small business
lending data available on the Bureau's website.
1. Statement. A financial institution shall provide the
statement required by Sec. 1002.110(c) using the following, or
substantially similar, language:
Small Business Lending Data Notice
Data about our small business lending are available online for
review at the Consumer Financial Protection Bureau's website at [a
designated Bureau website]. The data show the geographic
distribution of our small business lending applications; information
about our loan approvals and denials; and demographic information
about the principal owners of our small business applicants. The
Bureau may delete or modify portions of our data prior to posting it
if the Bureau determines that doing so would advance a privacy
interest. Small business lending data for many other financial
institutions are also available at this website.
2. website. A financial institution without a website complies
with Sec. 1002.110(c) by making a written statement using the
language in comment 110(c)-1, or substantially similar language,
available upon request.
Section 1002.111--Recordkeeping
111(a) Record retention.
1. Evidence of compliance. Section 1002.111(a) requires a
financial institution to retain evidence of compliance with subpart
B of this part for at least three years after its small business
lending application register is required to be submitted to the
Bureau pursuant to Sec. 1002.109. In addition to the financial
institution's small business lending application register, such
evidence of compliance is likely to include, but is not limited to,
the applications for credit from which information in the register
is drawn, as well as the files or documents that, under Sec.
1002.111(b), are kept separate from the applications for credit.
2. Record retention for creditors under Sec. 1002.5(a)(4)(vii)
and (viii). A creditor that is voluntarily, under Sec.
1002.5(a)(4)(vii) and (viii), collecting information pursuant to
subpart B of this part complies with Sec. 1002.111(a) by retaining
evidence of compliance with subpart B for at least three years after
June 1 of the year following the year that data was collected.
111(b) Certain information kept separate from the rest of the
application.
1. Separate from the application. A financial institution may
satisfy the requirement in Sec. 1002.111(b) by keeping an
applicant's responses to the financial institution's request
pursuant to Sec. 1002.107(a)(18) through (20) in a file or document
that is discrete or distinct from the application and its
accompanying information. For example, such information could be
collected on a piece of paper that is separate from the rest of the
application form. In order to satisfy the requirement in Sec.
1002.111(b), an applicant's responses to the financial institution's
request pursuant to Sec. 1002.107(a)(18) through (20) need not be
maintained in a separate electronic system, nor need they be removed
from the physical files containing the application. However, the
financial institution may nonetheless need to keep this information
in a different electronic or physical file in order to satisfy the
requirements of Sec. 1002.108.
111(c) Limitation on personally identifiable information in
records retained under this section.
1. Small business lending application register. The prohibition
in Sec. 1002.111(c) applies to data compiled and maintained
pursuant to Sec. 1002.107, data in the small business lending
application register submitted by the financial institution to the
Bureau under Sec. 1002.109, the version of the register that the
financial institution maintains under Sec. 1002.111(a), and the
separate record of certain information created pursuant to Sec.
1002.111(b).
2. Examples. Section 1002.111(c) prohibits a financial
institution from including any name, specific address (other than
the census tract required under Sec. 1002.107(a)(13)), telephone
number, or email address in the data it compiles and maintains
pursuant to Sec. 1002.107, in its records under Sec. 1002.111(b),
or in data reported to the Bureau under Sec. 1002.109. It likewise
prohibits a financial institution from including any personally
identifiable information concerning any individual who is, or is
connected with, an applicant, except as required pursuant to Sec.
1002.107 or Sec. 1002.111(b). Examples of such personally
identifiable information that a financial institution may not
include in its small business lending application register include,
but are not limited to, the following: Date of birth, Social
Security number, official government-issued driver's license or
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identification number, alien registration number, government
passport number, or employer or taxpayer identification number.
3. Other records. The prohibition in Sec. 1002.111(c) does not
extend to the application or any other records that the financial
institution maintains.
4. Name and business contact information for submission. The
prohibition in Sec. 1002.111(c) does not bar financial institutions
from providing to the Bureau, pursuant to Sec. 1002.109(b)(3), the
name and business contact information of the person who may be
contacted with questions about the financial institution's
submission under Sec. 1002.109.
Section 1002.112--Enforcement
112(b) Bona fide errors.
1. Tolerances for bona fide errors. Section 1002.112(b) provides
that a financial institution is presumed to maintain procedures
reasonably adapted to avoid errors with respect to a given data
field if the number of errors found in a random sample of the
financial institution's data submission for the data field does not
equal or exceed a threshold specified by the Bureau for this
purpose. The Bureau's thresholds appear in column C of the table in
appendix H. The size of the random sample, set out in column B,
shall depend on the size of the financial institution's small
business lending application register, as shown in column A of the
table in appendix H. A financial institution has not maintained
procedures reasonably adapted to avoid errors if either there is a
reasonable basis to believe the error was intentional or there is
other evidence that the financial institution has not maintained
procedures reasonably adapted to avoid errors. To illustrate, assume
that a financial institution has incorrectly coded withdrawn
applications as denials to such an extent that it likely prevents
reliable fair lending analysis of underwriting disparities. If so,
the errors would not be deemed bona fide errors under Sec.
1002.112(b) and would violate the Act and this Regulation.
2. Tolerances and data fields. For purposes of determining
whether an error is bona fide under Sec. 1002.112(b), the term
``data field'' generally refers to individual fields. However, with
respect to information on the ethnicity and race of an applicant's
principal owner, a data field group consists of more than one field.
If one or more of the fields within an ethnicity or race field group
have errors, they count as one (and only one) error for that data
field group. For instance, in the ethnicity data field group, if an
applicant indicates that one of its principal owners is Cuban, but
the financial institution reports that the principal owner is
Mexican and Puerto Rican, the financial institution has made errors
in two fields within the ethnicity data field group for that
principal owner. For purposes of the error threshold table in
appendix H, the financial institution is deemed to have made one
error. However, a financial institution that makes, for example, one
error in the race data field group and one error in the ethnicity
field group regarding a particular principal owner has made two
errors for purposes of the error threshold table in appendix H.
3. Tolerances and safe harbors. An error that meets the criteria
for one of the four safe harbor provisions in Sec. 1002.112(c) is
not counted as an error for purposes of determining whether a
financial institution has exceeded the relevant error threshold in
appendix H for a given data field.
112(c) Safe harbors.
1. Information from a Federal agency--census tract. Section
1002.112(c)(1) provides that an incorrect entry for census tract is
not a violation of the Act or subpart B of this part, if the
financial institution obtained the census tract using a geocoding
tool provided by the FFIEC or the Bureau. However, this safe harbor
provision does not extend to a financial institution's failure to
provide the correct census tract number for a covered application on
its small business lending application register, as required by
Sec. 1002.107(a)(13), because the FFIEC or Bureau geocoding tool
did not return a census tract for the address provided by the
financial institution. In addition, this safe harbor provision does
not extend to a census tract error that results from a financial
institution entering an inaccurate address into the FFIEC or Bureau
geocoding tool.
2. Applicability of NAICS code safe harbor. A financial
institution is permitted to rely on an applicant's representations
or on other information regarding the NAICS code as described in
comments 107(a)(15)-3 and -4. The safe harbor in Sec.
1002.112(c)(2) applies when a financial institution does not rely on
such information, but instead the financial institution identifies
the NAICS code for an applicant and the NAICS code is incorrect.
Where the incorrect NAICS code entry is due to an unintentional
error, the safe harbor in Sec. 1002.112(c)(2) may apply in addition
to the bona fide error provision in Sec. 1002.112(b), provided its
requirements are met.
* * * * *
Dated: August 31, 2021.
David Uejio,
Acting Director, Bureau of Consumer Financial Protection.
[FR Doc. 2021-19274 Filed 9-30-21; 4:15 pm]
BILLING CODE 4810-25-P
