On March 30, the CFPB issued a final small business lending rule to implement Section 1071 of the Dodd-Frank Act. Under the rule, covered financial institutions will be required to collect and report to the CFPB data on applications for credit for small businesses, including those that are owned by women or minorities.

AFSA has been engaged in this rulemaking since the CFPB began the process in 2017. With our members, we have participated in field hearings, symposiums, and the small-business review panel. We have met with the CFPB, the Federal Reserve, the Small Business Administration’s Office of Advocacy, and key members of Congress. And, we have written comment letters, worked with other trades, and reached out to the press.

Many of AFSA’s comments were incorporated into the final rule, and we appreciate the Bureau’s consideration of our suggestions. At the same time, we still have a number of concerns with the final rule.

Overall, we continue to believe that compliance costs to implement the final rule and to collect and report the data year after year will be substantial. We question whether the cost is worth the benefit. Because the responses to some of the questions are optional, conclusions drawn on the data will likely be unreliable.

We commend the Bureau for following our (and other’s) suggestions to:

• Limit the rulemaking to small businesses. The Dodd-Frank Act directed the Bureau to collect and publish data on loans to small businesses, as well as women- and minority-owned businesses of all sizes, which would have been incredibly difficult for compliance. The Bureau found that the vast majority of women- and minority-owned businesses are small businesses and so limited its rulemaking to only small businesses.
• Use a simple, bright-line approach to defining a small business. The Bureau had considered using SBA’s thresholds for identifying small businesses. Doing so would have been overly complex and made compliance complicated. Instead, the finale rule defines small businesses as those having $5 million or less in gross annual revenue.
• Remove the proposed requirement to guess an applicant’s race, sex, and ethnicity. The proposed rule would have mandated that if an applicant did not provide the information, lenders would have to guess an applicant’s race, sex, and ethnicity.
• Acknowledge the three-party process that is an indirect vehicle finance transaction. AFSA wrote, “Indirect vehicle finance transactions involve two separate, but related transactions,” and explained the role the customer, dealer, and finance source play in the transaction. The final rule mirrors this language.*
• Allow flexibility on the firewall requirement. The final rule implements the statutory requirement to limit certain persons’ access to certain data (e., the firewall). Accordingly, pursuant to the final rule, employees and officers of a covered financial institution or its affiliate are prohibited from accessing some of an applicant’s responses. However, this prohibition does not apply to an employee or officer if the covered financial institution determines that the employee or officer should have access to one or more applicants’ responses to these inquiries.
• Exclude leases.
• Exclude consumer-designated credit. This is crucial. If the Bureau had not made this exception, compliance would have been impossible.
• Increase the originations threshold. The final rule increased the originations threshold from 25 to 100. While an originations threshold of 100 is an improvement, AFSA believes that 500 would have been better.
• Rely on statements by the applicants. The rule does not require financial institutions to verify responses to the section 1071 queries, unless the financial institution already does so.

At the same time, we are concerned with several sections of the final rule, namely:

• Inclusion of additional data points. AFSA continues to believe that including more data points than those outlined by Congress will create an increased compliance burden not justified by potential data collected.
• Lack of clear exclusions. The CFPB did not clearly exempt indirect vehicle finance, floorplan financing, HMDA-reported data, or auctions, despite strong reasons to do so.
• Short implementation period. Some financial institutions have as little as 18 months to comply with the final rule.
• Privacy issues. The final rule places covered financial institutions in an untenable position of asking business customers probing, personal questions that are outside the scope of business necessity. AFSA is concerned that such personal and sensitive questions may violate applicants’ privacy for reasons that have nothing to do with their credit application.
• Compelled speech. The final rule requires lenders to provide information to business credit applicants regarding LGBTQI+, women-owned, and minority-owned statuses. Lenders should not be required to instruct customers about these subjects. If the CFPB is concerned that business credit applicants do not know how to respond to section 1071’s requests for information, the CFPB should deliver relevant information to the public.
• Limited right to refuse. Under Dodd-Frank, businesses have the right to refuse to provide any information requested pursuant to section 1071, but the final rule only allows them to opt out of a few questions.
• Large gross annual revenue trigger. The final rule uses a $5 million gross annual revenue size standard. A $1 million trigger would have been more appropriate.

Several Congressional Republicans have already introduced a resolution introduced a resolution of disapproval, under the authority of the Congressional Review Act, to halt implementation of the final rule. “The Consumer Financial Protection Bureau’s (CFPB) new rule is a continued attack on Main Street America,” said Congressman Roger Williams (R-TX), Chair of the Small Business Committee. “Each day, small businesses struggle with rising costs, increasing interest rates, and ongoing labor shortages, and this new rule only builds on those issues. We cannot allow the CFPB to continue to add burdensome requirements without any consideration of their impact on small businesses and lenders. This resolution furthers my commitment to protect Main Street America from costly over-regulation by unelected bureaucrats.”

AFSA will continue to review the final rule and discuss it with members. Please reach out to Philip Bohi and Celia Winslow with any questions.

* The language in the final rule regarding who is supposed to collect and report data on indirect vehicle finance transactions is still somewhat unclear. AFSA is seeking clarity.