CFPB Releases Small Business Lending Final Rule

CUNA and NAFCU both criticize rule as Republicans move to block its implementation.

The CFPB on Thursday issued its long-awaited final rule governing small business lending reporting—a plan that would increase the threshold for lending that will mean fewer credit unions will have to file reports with the agency.

In issuing the 888-page final rule, the agency said that lenders making more than 100 covered small business loans per year would be covered—an increase from the 25-loan threshold that was contained in the agency’s proposed rule.

In addition, the final rule deletes a provision that would have pushed financial institution employees to determine the sex, race or ethnic makeup of prospective borrowers if those borrowers declined to make that identification themselves.

Shortly after the rule was issued Thursday, a key Republican said he will begin efforts to block its implementation.

Background

The CFPB received more than 2,100 comments when the rule was first proposed in September 2021. In November 2019, the California Reinvestment Coalition had sued the agency, contending that the bureau had not yet issued the rule, which was required under the Dodd-Frank Act.

The two sides settled that suit, with the CFPB stating that it would issue the final rule by March 31, 2023. The bureau beat that deadline by one day.

Impact on Credit Unions

The agency estimated Thursday that 100 credit unions—or 2% of all credit unions—will be required to file small business reports with the agency, compared with between 1,800 to 2,000 banks.

“Now, for the first time, data on small business lending will give investors and lenders more insights to identify new opportunities that support economic growth, help policymakers measure the effectiveness of any government programs, and provide a data-driven approach to detect potential discrimination,” the CFPB said, in issuing the final rule.

The bureau acknowledged that due to their unique nature, data from credit unions would not be comparable to data collected from banks, but also noted that financial institutions will be required to provide information on financial institution type. “Credit unions thus must self-identify themselves in submitting data to the bureau, and the various limitations on lending by credit unions can be taken into account in analyses of data collected and reported under this rule,” the agency explained.

The CFPB also revealed that some commenters on the proposed rule said that credit unions have not demonstrated a pattern of unfair lending and as a result, they should be exempt from the rule. However, the agency said that exempting any type of financial institution would create significant gaps in the data.

“Inclusion of data from not-for-profit lenders is likely to be particularly helpful in identifying further opportunities for business and community development, including by for-profit creditors,” the CFPB stated.

The Rule’s Requirements and Republican Response

The final rule requires the largest lenders to collect the data earlier than small lenders. Lenders that originate at least 2,500 small business loans a year must start collecting data on Oct. 1, 2024. Lenders that originate at least 500 loans will be required to collect data starting April 1, 2025. And lenders that originate at least 100 loans annually will be required to collect data starting Jan. 1, 2026.

Shortly after the rule was released, House Financial Services Committee Chairman Rep. Patrick McHenry, R-N.C., sharply criticized it.

“By imposing overly burdensome reporting requirements on smaller lenders, Director [Rohit] Chopra is jeopardizing the privacy and security of small business owners’ personal and financial data,” the chairman said. “Yet again, the CFPB under Rohit Chopra is limiting access to credit for small businesses still struggling under the weight of Democrat-induced inflation.”

McHenry added that Republicans on his committee will try to block the rule, including by using the Congressional Review Act, which allows Congress to, by a majority vote, kill an agency rule. However, President Biden most certainly would veto such a resolution and Republicans would be required to obtain a two-thirds vote in each House to override that veto. Democrats, in turn, would have sufficient votes to block that override.

Criticism From Credit Union Groups

Credit union trade groups also criticized the final rule.

“The CFPB continues to pursue misguided policies that will hurt the small businesses and consumers they purport to protect,” NAFCU President/CEO Dan Berger said. “The final rule to implement section 1071 ignores valid concerns raised by credit unions and community development groups. It will add significant compliance costs and burdens to business lending, forcing many small credit unions to stop making these loans all together.”

CUNA officials acknowledged that the agency had made some changes based on criticism from commenters when the plan first was proposed.

“Credit unions fully support efforts to provide all members with fair and equitable financial opportunities, but we believe the size and scope of this rulemaking may have unintended impacts on the small business lending market,” CUNA President/CEO Jim Nussle said. “However, we do appreciate several changes made by the bureau that are intended to ease compliance for the nation’s smallest lenders.”